Flashcards in Live Session 3 - Charges Deck (38)
What is a charge
Interest in a company's property created in favour of a creditor
What is a fixed charge
Charge over assets of a company which are:
1. Ascertained and definite
2. Capable of being ascertained and definite
It attaches to property on creation providing that it is validly registered
What will a fixed charge usually cover
1. Land and Buildings
2. Fixed Plant - i.e affixed to fabric of building, such as central heating system
3. IP rights - i.e patents
4. Uncalled share capital
What are the effects of a fixed charge
1. That the company is no longer free to dispose of the charged property
2. Will need to seek authorisation of the charge holder before realising the charged property
What are the characteristics of a floating charge
1. A charge over a class of assets - present and future
2. Changing from time to time in ordinary course of business
3. Company remains free to carry on business in usual way in relation to assets until crystallisation
What type of assets are usually covered by floating charge
2. Non fixed plant & machinery
3. Debtors/ Receivables
When can a charge holder appoint an Admin Receiver
If the charge was registered prior to 15 September 2003. If charge was registered after do not have that option and must appoint an administrator
What is the distinction between "legal" and "equitable" charges
1. Legal charges are "good against the world"
2. Only legal charge has statutory right to appoint a receiver as set out by Law of Property Act 1925
3. Legal charge will be executed formally in a deed
4. Fixed charges may be legal or equitable
5. Floating charges are always equitable
6. Equitable charges are not good against a bona fide purchaser for value without notice of charge
7. Holders of equitable charges will only be able to appoint receiver where their charge gives them a contractual right to do so
8. Equitable charge will be executed in a less formal way, i.e signed contract or by deposit of title deed.
What charge holder owes a duty to preferential creditors
Holders of fixed charge has no duty to pay prefs in priority to itself.
A receiver appointed by floating charge holder does have a duty to pay preferential creditors in priority to appointer.
Does an administrator need to apply to Court to pay prefs in priority to floating charge holders
No - preferential debts have priority to floating charge debts and administrator is authorised to pay these in without needing to obtain court approval
When is a floating charge invalid
1. When it was created within 12 months of application for administrator or date of commencement of liquidation. AND
2. Created at a time the company was insolvent, except to the extent that fresh consideration is provided for it.
Fresh consideration will often have been provided by the bank merely by turnover of the company's bank account.
Is a floating charge valid if it is given to a connected party
If charge is given to a connected party, it is considered to be invalid if it was granted in a two year and there is no requirement that the company should be insolvent at the time the charge was granted.
Note that this only applies in administration and liquidation, not administrative receivership.
What advantages are there for a lender by taking a fixed charge over book debts
1. Book debts may be only assets that are readily realisable by a receiver - provide a good source of liquidity for early distribution.
2. Fixed charge assets are not subject to:
- Claims of prefs
- Prescribed part deductions
Note: In exam should assume that debenture creates a floating charge over book debts
Why are book debts typically given a floating charge
They are constantly changing
How is a fixed charge given to book debts
Company can assign book debts to fixed charge holder which prevents debtor company from dealing with book debts so that they are preserved for the benefit of security holder
What is a Negative Pledge
Companies can issue fixed and floating charges, it is important to know how they rank.
Banks may make it a condition that company does not create charges ranking in priority to its own.
Negative pledge therefore is that a floating charge holder requires that no subsequent fixed charges are created in priority to its own floating charge.
How is a negative pledge validly created
Negative pledge should be provided to Companies House as the registration of a floating charge does not constitute proper notice of the terms and conditions of security.
Exam point: State the administrator/ charge holder should check whether any deed of priority or negative pledge has been registered.
When is a charge validly created
Fixed and floating charges must be registered at Companies House within 21 days of creation for them to be valid.
If not, they are void against:
- Any creditor
What constitutes a floating charge when informally drawn up
Court will look at wording. ROT clauses that purport to attach to the proceeds of sale will be void if not registered.
Whose responsibility is it for the charge to be registered
In theory obligation of the company (via directors) to register charge.
In practice, the banks/ lenders solicitor will do so.
When could a fixed charge be challenged as a preference
If it has been registered within 6 months of commencement of insolvency proceedings it could be challenged as a preference.
What conditions must exist to challenge a fixed charge as a preference.
1. Company was insolvent at the time charge granted
2. There was a desire to improve the lenders position.
Note: if charge granted to prevent bank from calling debt or taking enforcement actions, the desire to improve the banks position is not present.
If the directors motive in granting the charge was to reduce their exposure under personal guarantees, desire to improve the banks position is present
How do fixed charges rank in priority to each other
1. Fixed charges over land rank in order of registration at the LAND REGISTRY - NOT Companies House.
2. Fixed charges over other assets rank in order of CREATION - NOT in order of registration at Companies House.
What do fixed charge holders receive from realisation of assets?
Fixed charge holders receive realisations after deductions of costs, expenses & remuneration properly attributable to the fixed charge assets.
Prefs do not have any priority over fixed charge assets and will not be entitled to any surplus, remember, fixed charge receivers high of court determined market value and net sales proceeds.
How do floating charges rank in priority to each other
In the absence of a deed of priority, floating charges rank in order of their creation - NOT date of registration at Companies House.
Remember: Preferential creditors rank ahead of floating charge holders
What is the order of priority of payments made from floating charge assets
In order of priority:
1. Cost of preserving & realising floating charge assets
2. Office holders fees and expenses attributable to floating charge assets - subject to restriction of entitlement to draw fees on time cost basis which exceed fee estimate.
3. Preferential creditors
4. If floating charge created on or after 15 September 2003, prescribed part for unsecured creditors
5. Principal and interest of floating charge holder
6. Any surplus paid to company acting through directors/ liquidators.
What are the categories of preferential claims (6)
Remember Prefs = PREPHW (image: Administrator can't speak properly will gag).
1. P = Protective awards for failure to consult prior to redundancy
2. R = Redundancy Payment Service to the extent that they have met employees pref claims. They are subrogated to (assume legal rights of) employees
3. E = European Coal & Steel levies
4. P = Contributions to Occupational Pension Scheme
5. H = Holiday Pay
6. W = Unpaid Wages
Note: Redundancy Pay is not a pref claim
What are the limits for contractual employment claims
- PHW - Pension, Holiday Pay, Wages
1. Contributions to occupational pension scheme by employees & employer - Goes back 12 months. Max pref claim is 10% of salary during that 12 month period.
2. All holiday pay accrued during past 12 months, up to a maximum of 6 weeks.
3. Remuneration payable to employee for 4 month period to relevant date. Restricted to £800.
What is the relevant date for preferential claims
In administration - date on which company enters administration
In receivership - date on which receiver is appointed
In CVA - date the proposal is approved - unless director filed for a small company moratorium in which cast the relevant date is the date filed for moratorium.