Office holders Powers part 19

Last week we looked at extortionate credit transactions. This week we look at avoidance of floating charges. This is dealt with by the Insolvency Act 1986 section 245. The section applies in the same circumstances as section 238 does regarding transactions at undervalue.

Floating charge is defined in section 251 as a charge which as created was a floating charge. Charges are an entire topic in themselves, but in broad terms there are fixed charges (which relate to a specific item of property) or floating charges which companies use to secure funding by having the charge essentially "float" against their various assets which charge can then be crystallised and enforced by the lender. This is a means of obtaining borrowing which is "secured" which would not otherwise be available. This has obvious implications in insolvency because it can mean that those assets are not available to creditors generally. If the charge has crystallised before insolvency then payments made to the charge holder could be challenged by way of attack as a preference under section 239, but this section looks at the status of the charges themselves.

The basis of attack of section 245 is in respect of floating charges created at a relevant time. Relevant time for this purpose differs depending on whether a floating charge is in favour of a person connected with the company or any other person. The criteria are also defined by reference to the onset of insolvency. Previous articles in this series have dealt with the question of who are connected persons for the purpose of these provisions and also with defining the meaning of onset of insolvency (see Office holders Powers part 13). If it is a connected person then the relevant time is the two years ending with the onset of insolvency. If it is not a connected person then the relevant period is 12 months ending with the onset of insolvency. However there is an additional hurdle in respect of the non-connected person in that even if the floating charge is created within the 12 months, time is not a relevant time for the purpose of the section unless at the time the company is unable to pay its debts within the meaning of section 123 of Insolvency Act 1986, or within the meaning of that section becomes unable to do so in consequence of the transaction under which the floating charge was created. (For section 123 and inability to pay debts, see Insolvency procedures: winding up part 10, and previous articles in the same series regarding statutory demands). Therefore to someone who is not connected, the time cannot be relevant if it is more than 12 months before the onset of insolvency, but unless on the basis specified there was inability to pay debts as they fell due within section 123 at the time of the charge it will not be a relevant time anyway.

Whether in respect of connected or a unconnected persons it is a relevant time if it is a time between either the making of an administration application or the filing with the court of a copy of notice of intention to appoint an administrator, and the administration itself. There are also certain ancillary provisions regarding onset of insolvency and administration.

If a floating charge is created at a relevant time then it is invalid except to the extent of the following things added together. The first is the value of the consideration (i.e. the benefit provided) being money paid for goods or services supplied at the same time as or after the creation of the charge. (The timing provision is important, because obviously one concern will be a charge created just to give a benefit to someone who had previously made a supply). The relevant amount for this purpose is the amount which at the time of the supply could reasonably been expected be obtained for supplying the goods or services in the ordinary course of business and on the same terms (obviously other than as to amount) as those on which those goods or services were supplied to the company. The next amount to be added is the value of the discharge or reduction, at the same time as or after the creation of a charge, of any debts of the company. The third is interest on those amounts.

To the extent that a charge does not comply with the section, the debt still remains a debt, but will be an unsecured debt along with debts of other unsecured parties.