Floating charge granted to secure an existing overdraft before liquidation (IA 1986 s.245)
Larchfield Ltd owed £150,000 to Norbury Bank plc on an unsecured overdraft. The bank is not connected with the company. Worried about the company's finances, the bank froze the account and demanded security. Eight months before the company went into insolvent liquidation, the company granted the bank a floating charge over all its assets to secure the existing overdraft. The bank provided no further money, goods or services after the charge was created, and there were no further payments into or out of the account. The company was unable to pay its debts at the time the charge was created. The charge was registered within 21 days.
What is the status of the floating charge in the liquidation?
Choose one answer to see the reasoning.
Worked answer
Correct answer D: It is invalid except to the extent of new value provided at or after its creation; as there was none, it secures nothing and the bank is unsecured.
THE RULE TO REMEMBER
A floating charge to an unconnected person within 12 months before insolvency, while the company is unable to pay its debts, is invalid except for new value given at or after its creation (IA 1986 s.245).
Floating charge granted to secure an existing overdraft before liquidation (IA 1986 s.245)
Section 245 IA 1986 invalidates a floating charge created at a relevant time, except to the extent of the value of money paid, or goods or services supplied, to the company at the same time as or after its creation (plus any reduction of debt then, and interest) (s.245(2)). For a charge in favour of an unconnected person, the relevant time is the 12 months ending with the onset of insolvency (s.245(3)(b)), but only if the company was then unable to pay its debts or became so as a result (s.245(4)). Here the charge was created eight months before liquidation, in favour of an unconnected bank, while the company was unable to pay its debts. It is therefore caught. Because the bank provided no new value after the charge was created, the charge secures nothing. The bank's £150,000 claim remains, but only as an unsecured debt.
Why A is wrong: For an unconnected chargeholder the period is 12 months, not six, provided the company was then unable to pay its debts (s.245(3)(b), (4)).
Why B is wrong: Registration under s.859A does not protect a charge from avoidance under s.245.
Why C is wrong: Section 245 invalidates the charge; it does not itself require the chargeholder to repay earlier receipts.
Why E is wrong: Section 245 does not require any desire to prefer; that is a requirement of a preference claim under s.239.
A little more practice done.
Related questions
Order of payment from floating charge realisations in a liquidation (IA 1986 ss.175, 176A)
In what order will the liquidator apply the floating charge realisations?
Repaying a director's loan before liquidation: preference to a connected person (IA 1986 ss.239-240)
Can the liquidator challenge the repayment to Felix?
Failure to register a company charge within 21 days (CA 2006 ss.859A, 859H)
What is the bank's position in the liquidation?
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