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#10093 - Insolvency Ii - Business Law and Practice

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Provided they have all been registered properly under s.860 CA:

  1. Fixed charge or a mortgage takes priority over a floating charge over the same asset even if floating charge was created earlier than the fixed.

  2. If more than one fixed charge over same asset, it is priority of creation date

  3. If more than one floating charge over same asset, it is priority of creation date

  4. If a validly registered “floating charge is granted over “N Co.’s” whole undertaking to secure all moneys outstanding to the “X Bank” at any time” and the same X Bank had a failed earlier fixed charge against N Co.’s property then, the posterior floating charge will secure any debts owed to X Bank from the earlier failed fixed charge. This is a trick that can be used by a Bank whose fixed charge has failed due to failure to register it properly. The new floating charge will be a rescue charge which will make recoverable what otherwise would be a failed fixed charge which would have rendered the Bank another unsecured creditor.

Registration

  • A charge must be registered at CH (s.860(7)) within 21 days of creation (s.870(1)) and is available for public inspection (s.869(7)) and kept in company’s registers (s.876)

  • Company’s responsibility to register the charge (s.860(1)), but in practice it is the lender who does it to reflect their interest (s.860(2))

  • The original charging document and particulars of the charge should be sent along with the fee

  • A mortgage or fixed charge over land should also be registered at the LR
Late Registration

  • The court may grant the power for a late registration where the failure to register was accidental or inadvertent (s.873)

  • The charge registered late is valid from date of registration, not creation
No Registration

  • The Charge will be Void against administrator, liquidator or creditor (s.874)

  • Consider a negligence suit against the solicitor (limitation period = 6 years to bring the claim)

  • It is still valid against the company and the debt becomes repayable immediately (s.874(3))

  • It is a contractual promise not to give any more security over the asset without the creditor’s consent

  • It will be entered into Form MG01 when the charge is registered to ensure 3rd Ps have actual knowledge

  • If more security is given anyway: if the new fixed charge holder has actual knowledge of the negative pledge given to a floating charge holder, then he will lose his priority over them

Powers of Secured Creditors

Creditor wants to ensure they are in the best position to recover their money if Co. gets into financial difficulty and therefore they want to secure the debt against the debtor by charging the debtors property by means of:

The Creditor has a… Can APPOINT

Fixed Charge

s.236

A charge that attaches immediately to a fix asset belonging to Co. (premises, machinery)

Created by deed.

LPA Receiver

  • If not in the deed, the power to appoint a receiver is implied by s.101 LPA 1925

  • They act solely for the charge-holder

  • Act as agents of the company (s.109(2))

  • They take possession of the asset and sell it for the charge-holder

  • Any surplus is returned to the company

  • If the asset is not valuable enough, the rest becomes an unsecured creditor

  • It is often followed by liquidation of the Co. as the sale of the asset usually means that the Co. will not have such asset to continue to trade (e.g. sale of the factory).

Floating Charge

s.236

A charge that attaches immediately to a group of assets belonging to Co. which may change from day to day (stock, debtors but usually the whole undertaking i.e. everything Co owns.)

Administrator

  • Sch B1, Para 59-73 IA give them widest statutory powers

  • Act as agents for the company (s.109(2))

  • They will take over the running of the company and try to rescue.

  • They act in the interests of all the creditors equally

Floating Charge

(created pre-15/09/03)

Administrative Receiver or Administrator

  • ss.29-41, 39-49 IA gives them wide statutory powers

  • Act as agents of the company (s.44 IA)

  • Act solely for the charge-holder

  • Take over running the company and sell charged assets to repay the charge-holder

Powers of Unsecured Creditors

  1. Petition for the company’s liquidation by either statutory demand or execution of judgment

  2. Suggest a CVA

  3. Apply to court to put the company into administration

Challenging Antecedent Transactions

Always do a timeline of the transaction!
To protect the public, a liquidator, creditor or secretary of State may apply to disqualify a director.

  1. UNFIT TO RUN A COMPANY

Definitions Trans. that puts creditor, surety or guarantor in better position on insolvency & Co. desired this Any creation of a floating charge where there was no fresh consideration “Old Debt" A Co. transfers asset for no consideration or less than value of asset.
Step

Preferences

s.239

Avoidance of Floating Charge

s.245

Transaction at Undervalue

s.238
Is Company insolvent? When the Transaction was entered into Co. must have been insolvent at the time or become insolvent as a result (IA s.240(s)). This is presumed for a connected person (IA s.249 and s.435(10)) see below.
Is it a suspicious transaction? Either no consideration was given or a creditor has been put in a better position
Who can challenge it? Liquidator or Administrator with the court’s consent (s.239(1) and (2)) None required because the charge is automatically void Liquidator or Administrator with the court’s consent (s.238(1) and (2))
When can it be challenged? After the company has become insolvent
Is it within the definition?

  • The person is one of the Co.’s creditors, a guarantor for the Co.’s debts or liabilities (s.239(a))

  • A transaction that has put a creditor in a better position on liquidation (s.239(b))

  • The company desired this. This is presumed if with a connected person

  • Company was insolvent at the time of the transaction or became insolvent because of it (s.240(2))

  • The company was insolvent at the time of the grant of charge or became insolvent because of it (s.245(4))

  • If charge in favour of a connected person, no need to prove insolvency

  • Company transfers an asset to another party for no consideration (s.238(4)(a)) or significantly less than the asset’s true value (s.238(4)(b))

  • Company was insolvent at the time of the transaction or became insolvent because of it (s.240(2))

  • Insolvency is presumed if a connected person

Is it within the relevant time?

s.240 Relevant time = time when the creditor presented his petition for winding up the Co.

There is a Connected Person

Transactions two years before the onset of insolvency (s.240(1)(a))

No Connected Person

Transactions six months before the onset of insolvency (s.240(1)(b))

There is a Connected Person

Transactions two years before the onset of insolvency (s.240(1)(a))

No Connected Person

Transactions twelve months before the onset of insolvency (s.240(3)(b))

There is a Connected Person

Transactions two years before the onset of insolvency (s.240(1)(c))

No Connected Person

Transactions six months before the onset of insolvency (s.240(1)(d))

Is it with a connected person?

s.249 & s.435

  • s.249 IA: a person is “connected” if:

    1. they are a D or shadow D of the company or an “associate” of such a person

    2. an associate of the company (i.e. if employed by the company)

  • s.435(10) IA: a person is an “associate” of an individual if they are:

    1. The individual’s husband, wife or civil partner; or

    2. A relative (brother, sister, uncle, aunt, nephew, niece, half-blood and step and adopted and illegitimate; former husband or wife) of the individual or (a)

    3. The husband, wife of civil partner of a relative of the individual or (a)
Effect of the connected person? Rebuttable presumption that there was a desire to prefer Rebuttable presumption that the Company was insolvent at the time of the transaction or became insolvent because of it
Defence None None Made in good faith to benefit the Co. for the purpose of carrying on the business(based on reasonable grounds)s238(5)
Court orders The transaction is voidable (s.241(1)) and the court can either (a) return the proceeds to the company or (b) return the property to the company or order a discharge of a security

  1. EXTORIONATE CREDIT TRANSACTION (s.244 IA) – very difficult to prove that it was grossly extortionate

Step

Wrongful Trading

(s.214 IA)

Fraudulent Trading

(s.213 IA & s.993 CA)

Misfeasance

(s.212 IA)
Who can apply? Liquidator with court’s consent

Civil: Liquidator with consent

Criminal: the CPS

 Official Receiver, Liquidator, Creditor or Contributory
When can it be challenged? After liquidation has begun

Civil: after liquidation begun

Criminal: any time

 After liquidation has begun
Who is the claim brought against? Directors and former directors, shadow Ds or anyone participating in management decisions. Anyone knowingly carrying on a business with the intention to defraud Officer, old liquidator, administrative receiver (i.e. anyone managing it)
What must be shown

s.214(2) on B.o.P

(a) company is insolvent

(b) before liquidation, person knew or ought to have known that they were going into liq

(c) he was a D at the time

 The person took the actions with the intention to defraud creditors (very difficult to show) Breach of trust or fiduciary duty to the company (s.212(2))
Defence

s.214(3): D took all the reasonable steps to minimise the loss and was reasonable prospect of liquidation (took professional advice & kept full minutes, etc.

see note WS 1)

Rebut allegation of...
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