Principle of floating charges, Business Law and Ethics

Principle of floating charges:

The general purpose of the rule is to prevent an unsecured creditor of an insolvent company from getting advantage over other creditors by obtaining a floating charge to secure an existing debt at a time when the company is heading towards insolvent liquidation.  It is only the charge (as security) not the debt itself which becomes void.

If the charge is created to secure a loan of new money the rule is generously interpreted.

                                      Case: RE F AND E STANTON (1929)

A lender agreed to lend money to a company on the security of a floating charge.  The money was lent but the charge was not created until afterwards.  A few days after the creation of the charge the company went into liquidation.

Held:

The charge was valid since the loan was made in consideration of the promise of security.  It was not material that the money was lent before the charge was created.

On the other hand if money is lent after a floating charge is created but is used (as was intended) to pay off an unsecured debt (of the same creditor) existing when the charge was created, this will not be treated as a new loan and the charge will be void (as security for the later loan).

In determining the date when money is lent through transactions on running account the rule in Clayton's Case is applied, ie. any repayment is applied to pay off the earliest advance.

                                      Case: RE YEOVIL GLOVE CO (1965)

At the time when the floating charge was created the company had a bank overdraft of about 68,000 pounds.  Over the next few months it paid in cheques totalling 111,000 pounds and drew cheques totalling 110,000 pounds.  At the commencement of liquidation (within 12 months of creating the charge) the debt balance on the account was 67,000 pounds, ie. Nearly through the same as when the charge was created.

Posted Date: 1/15/2013 5:39:12 AM | Location : United States







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