Corporate Insolvency 2

Question 1

When a company becomes insolvent, the directors need to be extremely careful in how they act: why is this?

Answer 1

They may be held to be personally liable to compensate the company and its creditors if found guilty of one of the following:

1. Misfeasance (s 212 IA 1986)
2. Fraudulent trading (s 213 / 246ZA IA 1986
3. Wrongful trading (s 214 / 246ZB IA 1986)

Question 2

1. Misfeasance (s 212 IA 1986) - what is it?

Answer 2

Action against directors for breach of fiduciary duties.
Liquidator, not the company, who will bring an action against the directors under s 212 IA 1986 for any breaches of duty committed by them.
s 212 does not create any new liability or rights but simply provides a summary procedure to enable the company (acting by its liquidators) to pursue claims against directors who have breached their duties.
- When liability established - may order them to compensate company.

Question 3

Who can bring a misfeasance claim?

Answer 3

s 212(3) IA 1986:

1. A liquidator (but note, not an administrator);
2. The Official Receiver; or
3. Any creditor or contributory.
   - -> Burden of proof is on the claimants - not for defendant to justify their conduct (Mullarkey v Broad)

Question 4

Against whom may a misfeasance claim be brought?

Answer 4

s 212(1):

1. Any person who is or has been an officer of the company (including present or former directors, managers or secretaries of the company);
2. Any others who acted in the promotion, formation or management of the company; and
3. A liquidator or administrative receiver (a claim for misfeasance can also be brought against an administrator under Schedule B1 to the IA 1986).
   - -> Re Centralcrest Engineering Co Ltd
   - —> Inland Revenue brought proceedings against liquidator under s 212. The liquidator had allowed the company to continue to trade for 27 months after it had gone into compulsory liquidation, resulting in £73,230 being owed to the IR.

Court held two elements to misfeasance;
1) allowing company to trade without the sanction of court or liquidation committee
2) allowing company to trade when it was apparent assets should have been realised.
Liquidator held liable.

Question 5

What amounts to misfeasance?

Answer 5

Whole spectrum of directors’ duties:
1. Misapplication of any money or assets of the company;
2. Breach of a statutory provision or a duty, for example:
• Unlawful loans to a director (s 197 CA 2006);
• A director entering into a contract with his own
company and failing to notify the board (s 177 CA.
2006);
• Failing to seek prior general meeting approval
where a director has entered into a substantial
property transaction (s 190 CA 2006); and
• A director failing to act within his powers (s 171 CA
2006);
3. Directors responsible for transactions at an undervalue as provided in s 238 or preferences as provided in s 239 may thereby commit a misfeasance; and
4. Breach of the duty to exercise reasonable care, skill and diligence, ie negligence (s 174 CA 2006)

Question 6

Remedies for misfeasance?

Answer 6

Broad discretion - remedies it sees fit.

Director may claim relief under s 1157 (where the court is satisfied that the director acted honestly and reasonably and, having regard to all the circumstances of the case, ought fairly to be excused).
A finding of misfeasance is also a relevant factor to which a court shall have regard when considering whether to make a disqualification order against a director for unfitness under s 6 Company Directors’ Disqualification Act 1986 (CDDA 1986).

Question 7

Ratification?

Answer 7

Ratification by the shareholders under s 239 CA 2006 can usually absolve the directors from personal liability for breach of duty. Ratification at a time when the company is solvent should therefore preclude misfeasance proceedings.
However, when a company is facing the prospect of insolvency, case law has established that the duties of directors shift towards the company’s creditors and away from the members as a whole.

Therefore - not possible for shareholders to ratify here - see s 239(7)

Question 8

Why were the provisions on fraudulent and wrongful trading enacted?

Answer 8

To prevent reckless and negligent conduct on the part of those running companies. Concern is that directors may continue to incur further debts at a time when the company is in financial difficulty with no reasonable prospect of turning the company’s prospects around, with the result that losses to creditors are increased.

Question 9

Fraudulent claims are under s 213 (liquidation) / 246ZA (administration) IA 1986 — who can they be brought against?

Answer 9

• any person who is knowingly party to the carrying on of any business of the
company (s 213(2) and s 246ZA(2))
• with intent to defraud creditors or for any fraudulent purpose (s 213(1) and s
246ZA(1)).

Sections 213 (in liquidation) and 246Z (in administration) IA 1986 impose a civil liability to contribute to the funds available to the general body of unsecured creditors suffering loss caused by the carrying on of the company’s business with intent to defraud.
There is also a corresponding criminal claim for fraudulent trading under s 993 CA 2006.
The claim may be brought by a liquidator under s 213 or an administrator under s 246ZA, although court approval is required.

Question 10

What is ‘actual dishonesty’?

Answer 10

Actual dishonesty must be proven for a claim for fraudulent trading to succeed.

Assessed on subjective not objective basis i.e. what the particular person knew/believed. Includes blind-eye knowledge which requires suspicion of the facts together with deliberate decision to avoid confirming that they did exist (Morris v State Bank of India)

The meaning of fraud for the purposes of s 213 has been defined as requiring “real dishonesty involving, according to current notions of fair trading among commercial men at the present day, real moral blame.” (Re Patrick and Lyon Ltd)

Not necessary to show that all of the company’s creditors have been defrauded.

Question 11

Remedies for fraudulent trading?

Answer 11

Again - as the court sees proper. Court does NOT have power to include punitive element in amount of any contribution made. Contribution made should only reflect and compensate for loss caused to creditors (Morphitis v Bernasconi)

Any sums recovered held on trust for unsecured creditors and not for defrauded creditor (Re Esal (Commodities)).

Where the court makes an order against a person under s 213 / 246ZA, and that person is also a director, the court is likely also to make a disqualification order under s 10 CDDA 1986.

In addition, criminal sanctions can be imposed by the court under s 993 CA 2006, to punish a person knowingly party to fraudulent trading, whether or not the company is being wound up. The penalties are imprisonment (of up to 10 years on indictment) and/or fines.

Question 12

Fraudulent trading vs wrongful trading?

Answer 12

In practice, a very high standard of proof is required for a successful claim in fraudulent trading, which is likely to be extremely difficult for a liquidator or an administrator to establish.

It is for this reason that claims for fraudulent trading are RARE and claims for wrongful trading under s 214 / 246ZB IA 1986 are MORE OFTEN brought against directors.

Question 13

What is the claim for wrongful trading s 214 / 246ZB IA 1986?

Answer 13

Liability for fraudulent trading existed long before liability for wrongful trading was introduced - however high bar means claims for fraudulent rarely brought…

Concept of wrongful trading was introduced in order to establish liability for directors who carry on business negligently rather than fraudulently.

A civil claim for wrongful trading can be brought against a director by a liquidator under s 214 or an administrator under s 246ZB IA 1986. There are NO criminal provisions for wrongful trading, in contrast to fraudulent trading which is both a civil and a criminal wrong.

Wrongful trading is now the major risk run by the directors of a company trading on the brink of insolvency. Directors must take the risk of liability for wrongful trading seriously and it is an important part of a lawyer’s job to advise on the risk and how to mitigate it.

Question 14

Wrongful trading – purpose?

Answer 14

To ensure that when directors become aware (or ought to become aware) that an insolvent liquidation (or insolvent administration, as the case may be) is inevitable, they are under a duty to take every step possible to minimise potential losses to creditors.

If they fail - court can (under s 214/246ZB) order directors to contribute to insolvent estate by way of compensation - thereby increase funds available.

THEREFORE imposes personal liability on directors. Very important exception to the principle of limited liability.

Since no requirement to show intent or dishonesty, it is easier for a liquidator or administrator to prove wrongful trading than it is fraudulent trading.

Question 15

Who may bring a claim? - s 214(1) / 246ZB(1)?

Answer 15

A claim for wrongful trading may be brought by:
• Liquidators under s 214(1), and
• Administrators under 246ZB(1).
Administrators and liquidators can also now (under the SBEEA 2015) assign wrongful trading claims to a third party as a way of raising funds for the insolvent estate and thereby, avoid the risk of litigation.

Question 16

Against whom may a claim be brought?

Answer 16

Any person who was at the relevant time a director.

This includes shadow directors as defined in s 251 CA 2006, de facto and non-executive directors - Re Hydrodam (Corby) Ltd [1994] 2 BCLC 180, ChD.

Contrast this with fraudulent trading where a claim can be brought against ANY PERSON who has the intention to commit a fraud.

Question 17

Requirements for liability – s 214(2) / 246ZB(2)?

Answer 17

Court must be satisfied that the company has gone into insolvent liquidation and:

1. at some time before the commencement of the winding up or insolvent administration (for convenience, that time is referred to as the ‘point of no return’)
2. the director knew or ought to have concluded that
3. there was no reasonable prospect that the company would avoid going into insolvent liquidation (or insolvent administration).

Note that a company goes into insolvent liquidation (or as the case may be, an insolvent administration) at a time when its ASSETS ARE INSUFFICIENT FOR THE PAYMENT of its debts and other liabilities and the expenses of winding up or administration (s 214(6) / 246ZB(6)).

Insolvency for wrongful trading purposes is therefore judged solely on the “balance sheet test” and NOT on the “cash flow test” (see s 123).

Question 18

Continued trading?

Answer 18

Must be proven that director the company to continue to trade during the period in which they knew/ought to have known no reasonable prospect that the company would avoid going into insolvent liquidation or administration and that the continued trading made the company’s position worse (Re Continental Assurance Co of London plc).
Note HOWEVER, if the company has NOT reached the point of no return, then wrongful trading liability CANNOT ARISE and there is no need to consider the ‘every step’ defence which we consider below.

Question 19

Importance of Re Produce Marketing Consortium Ltd?

Answer 19

First case under s 214 IA 1986.

Court held 2 directors liable - had to contribute £75,000 to company’s assets. Directors ought to have realised that there was no reasonable prospect of the company avoiding insolvent liquidation.
—> Fact that the directors had not seen the accounts was irrelevant since s 214(4) required them to be judged not only on the facts actually known to them but on the fact that they should have known had the accounts been delivered in accordance with the Companies Act

Question 20

What’s the ‘every step’ defence?? - s 214(3) / 246ZB(3)

Answer 20

Director may be able to escape liability if they can satisfy the court that, after they first knew or ought to have concluded that there was no reasonable prospect of the company avoiding an insolvent administration or liquidation (ie from the ‘point of no return’ onwards), they took every step with a view to minimising the potential loss to the company’s creditors.

Examples of evidence that may be supportive of establishing the every step defence include:
• Voicing concerns at regular board meetings;
• Seeking independent financial and legal advice;
• Ensuring adequate, up-to-date financial information is available;
• Suggesting reductions in overheads/liabilities;
• Not incurring further credit; and
• Consulting a lawyer and/or an insolvency practitioner for advice on continued trading and the different insolvency procedures.

Brooks v Armstrong:
– Court stressed that burden of proof is on directors, and detail of what constitutes ‘every step’ laid out.

Question 21

What’s the ‘reasonably diligent person’ test – s 214(4) / 246ZB(4)???

Answer 21

The court applies the ‘reasonably diligent person’ test in order to determine whether:

1. a liquidator/administrator has established that a director “ought to have concluded that there was no reasonable prospect of avoiding an insolvent liquidation or administration” (the s 214(2) / 246ZB(2) liability), and
2. whether director then took every step to minimise the potential loss to the company’s creditors (the s 214(3) / 246ZB(3) defence).

SUBJECTIVE and OBJECTIVE element
Under that test, the facts which a director ought to have known or ascertained, the conclusions which they ought to have reached and the steps which they ought to have taken, are those which would have been known or ascertained, or reached or taken, by a REASONABLY DILIGENT person having both:
• the general knowledge, skill and experience that may reasonably be expected of a person carrying out the same functions as are carried out by the director in question (an objective test); and
• the actual knowledge, skill and experience of that particular director (a subjective test). The court then applies the higher of the two standards.

Question 22

Advice to directors?

Answer 22

• Should hold board meetings to review company’s financial position - consider whether appropriate to incur new credit and liabilities.
• Write up minutes
• Director cannot escape liability by simply resigning - without taking ‘every step’ - claim for wrongful trading can be brought in this case (Re Purpoint Ltd)

Best course of action - seek professional advice ASAP - (Re Continental Assurance Co of London plc).
However; mportant to note that the absence of warnings from advisers does not relieve directors of the responsibility to review the company’s position critically (Re Brian D Pierson (Contractors) Ltd)

Question 23

Remedies for wrongful trading under s 214(1) / 246ZB(1)?

Answer 23

Again - court can order what sees fit. Contribution to increase assets.

Court has wide discretion. Contribution will ordinarily be based on the additional depletion of the company’s assets caused by the directors’ conduct from the date that the directors ought to have concluded that the company could not have avoided an insolvent administration or liquidation
(ie from the ‘point of no return’).

Order by court for director to contribute to company’s assets under s 214 / 246ZB is compensatory and not penal in nature.

An order to contribute may be made against the directors on a joint and several basis. However, the court has a discretion to apportion liability between directors based on their culpability by ordering the more culpable directors to pay more than the less culpable ones.

Where the court makes a contribution order against a director under s 214 / 246ZB, the court also has a discretion to make a disqualification order against them under s 10 CDDA 1986.

Question 24

No relief under s 1157?

Answer 24

Under s 1157 CA 2006, the court may ordinarily relieve a director from liability in proceedings for negligence, breach of duty or breach of trust, on such terms as it thinks fit, if satisfied that they acted honestly and reasonably and, having regard to all the circumstances of the case, the director ought fairly to be excused. HOWEVER, that relief is NOT available in wrongful trading proceedings (Re Produce Marketing Consortium Ltd [1989] BCLC 513, ChD).

The risk of an action for wrongful trading can be of concern to directors, particularly in a difficult economic climate. It is for this reason that the government suspended the wrongful trading provisions from 1 March 2020 – 30 September 2020
to allow company directors to attempt to keep their businesses going during the coronavirus pandemic without risk of personal liability (see s 12 CIGA 2020).

Question 25

What are ‘voidable transactions’? What’s the aim?

Answer 25

IA 1986 gives both a liquidator and an administrator the ability to challenge certain transactions that have taken place within specified statutory periods prior to the insolvency of a company. These are known as ‘voidable’ or ‘antecedent’ transactions.

Aim of a challenge is to restore the company to the same position it would have been in had the transaction not taken place and thereby, increase the funds available in the insolvent estate for the benefit of creditors.

Often described as ‘clawback’ provisions which can result in an order reversing transactions or more usually, providing for financial restitution to be paid, in order to increase the assets of the insolvent company for the benefit of creditors. It is the beneficiary of the transaction with the insolvent company that is the target of the proceedings, rather than the directors of the company responsible for entering into the transaction.

Question 26

Questions the liquidator or administrator will need to ask when seeking a voidable transaction? (except for a transaction defrauding creditors under s 423)

Answer 26

1. Did the transaction involve a ‘connected person’ or ‘associate’?
2. Did the transaction take place within the ‘relevant time’?
3. Was the company insolvent at the time of the transaction or did it become insolvent as a result of the transaction?
4. Is there a presumption available which shifts the burden of proof from the liquidator/administrator to the other party?

TUVS, TDCS, PREFERENCES BY A COMPANY and AVOIDANCE OF CERTAIN FLOATING CHARGES

Question 27

What do ‘transactions at an undervalue’ TUVS concern and where are they laid out?

Answer 27

s 238: concern loss of value from a company, whether through gifts or a significant inequality in consideration, to the company’s detriment at a time when it is “insolvent”.

Note that “insolvency” has a wider definition for voidable transaction purposes than it has for wrongful trading purposes (in the latter case, “insolvency” is restricted to balance sheet insolvency only).

Question 28

Who can bring a TUV claims under s 238(1)?

Answer 28

A claim may be brought under s 238(1) by:
• A liquidator, or
• An administrator.

Question 29

TUV: can security or a dividend be a TUV?

Answer 29

Was generally thought that the granting of security by a company cannot amount to a transaction at an undervalue on the basis that the security does not itself deplete the assets of the company or diminish their value (Re MC Bacon Ltd).

But in Hill v Spread Trustee Company Limited, court found that granting of security for no consideration (or for consideration significantly less than the value of the charge) can be challenged as a transaction at an undervalue. In Hill, the main purpose for the granting of security was to put assets beyond the reach of HMRC. The law is somewhat uncertain on this point because of the difference in view between the MC Bacon and Hill cases.

Similar uncertainty existed around whether a dividend, lawfully paid, could amount to a transaction at an undervalue. The case of BTI 2014 LLC v Sequana SA & others now suggests that a dividend can be attacked as a transaction at an undervalue.

Question 30

What is a TUV?

Answer 30

• A gift; or
• A transaction for a consideration the value of which, in money or money’s worth, is significantly less in value than the consideration provided by the company.

Involves a comparison in monetary terms between what the company gave away and what it received under the transaction. The comparison to be made is aimed at establishing if there has been an inequality of exchange adverse to the company under the transaction. A simple example would be where a company sells an asset worth £10,000 but only receives £5,000 in payment.

In some situations, the granting of security or payment of a dividend may be held to amount to a transaction at an undervalue.

Question 31

When and how can the TUV be avoided?

Answer 31

Court may set aside a transaction as a transaction at an undervalue if:

1. The company made a gift or otherwise entered into a transaction for a consideration, the value of which in money or money’s worth is significantly less in value than the consideration provided by the company.
2. It took place within the ‘relevant time’ (s 238(2)) - in the two years preceding the onset of insolvency (s 240(1)(a)), which is the commencement of the relevant insolvency procedure (administration or liquidation) (s 240(3)). Note that the relevant time is two years regardless of whether the transaction took place with a connected person or not.
3. It is proven by the applicant that the company was insolvent at the time of the transaction or became so as a result of it (s 240(2)). Where a transaction at an undervalue is entered into with a person connected with the company, insolvency is presumed unless the connected person proves otherwise (s 240(2)).
   Sections 249 and 435 set out the definitions of ‘connected persons’ and ‘associates’ respectively.

Question 32

TUV: Defence?

Answer 32

Even if all of the requirements set out above are satisfied, no order will be made to set aside the transaction if the court is satisfied that:

1. The company entered into the transaction in good faith and for the purpose of carrying on its business; and
2. At the time there were reasonable grounds for believing that the transaction would benefit the company.

This defence is OFTEN relied on in practice and can save many transactions which would otherwise be open to challenge.

One example - company grants new security to stave off a genuine threat made by an unsecured bank to terminate facilities and begin winding up proceedings if the security is not granted, in circumstances where the directors consider on reasonable grounds that the company can turn around its financial difficulties and thereby avoid entering into an insolvency procedure.

Question 33

TUV: Sanctions?

Answer 33

Court has a discretion to make such order as it thinks fit to restore the position as if the company had not entered into the transaction (s 238(3)).

Section 241(1) provides a non-exhaustive list of the types of restoration order that the court might make under s 238 (and also under s 239 in relation to voidable preferences; see below).

Any such order should not prejudice a subsequent purchaser from the party which transacted at an undervalue with (or received a preference from) the company, provided they were acting ‘in good faith and for value’ (s 241(2)).

However, under s 241(2A) there is a rebuttable presumption that an acquisition by a subsequent purchaser was not in good faith where the subsequent purchaser either:

1. Had notice of the relevant surrounding circumstances (ie the transaction at an undervalue or preference) and of the relevant proceedings; or
2. Was connected with or was an associate of either the company or the party which transacted at an undervalue with (or received a preference from) the company. In such circumstances the burden of proof shifts to the subsequent purchaser to show good faith.

Question 34

What are transactions defrauding creditors (TDCs) - s 423 IA 1986?

Answer 34

The requirements for the claim are:

1. There has been a transaction at an undervalue and
2. The intention or purpose of the transaction was to put assets beyond the reach of creditors of the company or otherwise prejudice their interests. “Creditors” in this context includes future creditors who were unknown at the time of the transaction.

**Note: Claims under s 423 do not necessarily relate to insolvency – these claims may also be brought by a victim of the transaction in question where the company is solvent.

Question 35

In practice do insolvency practitioners prefer to bring s238 TUV claims or s423 TDC?

Answer 35

May prefer to bring claims under s 238 (TUV) than under s 423. The reason is that, under s 238, it NEED NOT BE PROVED that the purpose of the transaction was to put the assets beyond the reach of creditors or otherwise prejudice them. Where the challenge is made by an administrator or liquidator, it may therefore be easier to establish the claim under s 238, assuming that the claim satisfies the criteria for challenging an undervalue transaction under the above sections (ie ‘relevant time’ and insolvency).

Question 36

TDC: Who may claim?

Answer 36

An application to the court to set aside the transaction can be made by any of the following (s 424):

1. A liquidator or an administrator;
2. A supervisor of a voluntary arrangement; or 3. A victim of the transaction in question.

There is no ‘relevant time’ or period within which the transaction must have taken place. However, generally speaking, the more recent the transaction, the more likely it is that the applicant will be able to show the necessary intent.

Question 37

TDC: Sanctions?

Answer 37

The court may make such order as it thinks fit to restore the position to what it would have been but for the transaction in question (s 423(2)). A non-exhaustive list of orders is set out in s 425(1).

The main advantage of a claim under s 423 is that it does not face the risk of becoming time-barred in the same way as a claim under s 238.

Question 38

Purpose of Preferences by a company – s 239 IA 1986?

Answer 38

Prevent a creditor obtaining an improper advantage over other creditors of a company at a time when that company is insolvent.

A company gives a preference to a person if:
1. That person is a creditor of the company (or a surety or guarantor of any of the company’s debts or liabilities); and
2. The company does anything or allows anything to be done which has the effect of
putting that person in a better position in the event of the company going into insolvent liquidation than they would otherwise have been in.
An example of a preference would be paying an unsecured creditor in priority to other creditors.

Question 39

Who can bring a clai under s 239(1), preferences by a company?

Answer 39

A claim may be brought under s 239(1) by:
• A liquidator, or
• An administrator.

Question 40

When can a preference be avoided?

Answer 40

1. It was given within the ‘relevant time’ (s 239(2)) - in the 6 months preceding the ‘onset of insolvency’ (s 240(1)(b)), being the commencement of the relevant insolvency procedure (s 240(3)). The relevant time is extended to 2 years for preferences to connected persons and associates (s 240(1)(a)). (See sections 249 and 435 for definitions of ‘connected persons’ and ‘associates’).
2. It is proved that the company was insolvent (on either a cash flow or balance sheet basis) at the time of the transaction or became so as a result of it (s 240(2)).
   In contrast to transactions at an undervalue, there is no statutory presumption of insolvency where the preference is given to a person who is connected with the company.
3. It is proved that the company was ‘influenced … by a desire’ to prefer the creditor (s 239(5)). This is a subjective test. The company must have positively wished to put the party in a better position (see Re MC Bacon Ltd).

Question 41

Preferences: Connected persons?

Answer 41

If the preference is given to a connected person or associate, there is a REBUTTABLE PRESUMPTION that the company was influenced by the desire to prefer the creditor (s 239(6)).

This SHIFTS THE BURDEN OF PROOF from the liquidator or administrator to the preferred person to rebut the statutory presumption.

Connected persons and associates are defined in s 249 and s 435 IA 1986.

Question 42

Preferences: Defence?

Answer 42

“An absence of the desire to prefer required by s 239(5).”

Re MC Bacon Ltd:
Company granted fixed and floating charges to its bank to secure an existing overdraft, as a condition of the bank not calling in the overdraft, at a time when it was insolvent. It was held that this was not a transaction at an undervalue because it had not diminished the value of the company’s assets. In relation to the claim that this was a preference, the court said it is not necessary to prove an intention to prefer (which is objective), but a desire to prefer (which is subjective).

On the facts, the security could not be challenged as a preference because the directors, in granting the security, had not been influenced by a desire to prefer the bank, but only by the desire to continue trading and to avoid the calling in of the company’s overdraft (ie the security was granted as a result of genuine commercial pressure exerted by the lender and the presence of such pressure negated any desire on the debtor’s part to prefer the lender).

Question 43

Sanctions?

Answer 43

Again - discretion to make an order to restore the position as if the company had not given the preference (s 239(3)).

Section 241(1) provides a non exhaustive list of the types of restoration order that the court may make.

Note that s 241(2) and s 241(2A) apply to both preferences and transactions at an undervalue.

Question 44

Purpose of s 245, avoidance of certain floating charges?

Answer 44

Purpose of s 245 is to prevent an unsecured creditor obtaining a floating charge to secure an existing loan for no new consideration, at the expense of other unsecured creditors.

ONLY APPLIES in a liquidation or administration.

Unlike TUVs and preferences, s 245 avoids certain floating charges automatically and without the need for the office-holder to challenge the floating charge by bringing legal proceedings (as set out below). However, if there is a dispute between the putative floating charge holder and the office-holder about the application of s 245, legal proceedings may be necessary to determine the dispute.

Question 45

When can floating charges be avoided?

Answer 45

For the floating charge to be invalid:
1. The floating charge must have been created within the ‘relevant time’. The relevant time is 12 months preceding the onset of insolvency, ie the commencement of administration or liquidation (s 245(2) and 245(3)(b)).

The relevant time is extended to 2 years in the case of a floating charge granted to a connected person (s 245(3)(a)). (See s 249 and 435 for definitions of ‘connected persons’ and ‘associates’).

2. Unless the floating charge was granted to a ‘connected person’ or an ‘associate’ (in which case there is no insolvency requirement), it must be proved that the company was insolvent (on either a cash-flow or balance sheet basis) at the time of the floating charge’s creation or became insolvent in consequence of the transaction under which the charge was created (s 245(4)).

Question 46

When are new floating charges valid?

Answer 46

Even if the above requirements are met, a floating charge will be valid to the extent that ‘new money’ or other fresh consideration (which can include goods or services) is provided to the company (or existing debts of the company are extinguished) in return for the grant of the floating charge on or after its creation (s 245(2)).

The effect of s 245(2) is that if a floating charge is granted to secure the repayment of a new loan made on or after the creation of the charge, then it will be valid.

Question 47

Example of when a floating charge would be void?

Answer 47

An example of when a floating charge would be void is where an existing unsecured creditor is granted a floating charge by a company which is insolvent (as defined above) and the charge purports to secure the repayment of existing monies owed to that creditor. If s 245 did not apply, such an unsecured creditor would thereby improve its position in the order of priority if the company later went into an insolvency procedure, which would be unfair on the company’s other unsecured creditors.

However, if (and to the extent that) an existing unsecured creditor provides further credit to the company (or to the extent that any other new credit is given by a new creditor) then that creditor is entitled to have the protection of a valid floating charge.

Question 48

Avoidance of floating charges?

Answer 48

Where a floating charge is void under s 245, only the security (and its advantage to a floating charge creditor in the order of priority) is void and not the debt itself.
Remember that a floating charge is also void against a liquidator, administrator and other creditors if it is not duly registered with Companies House under s 859H CA 2006.

Note that a floating charge granted to a creditor may also be voidable as a transaction at an undervalue or a preference under s 238 and 239.