Chapter 4 - Legislation

Question 1

How much security does a charge provide for a lender?

Answer 1

• Lenders with any charge rank ahead of unsecured creditors
• Lenders with fixed charges rank ahead of floating charges.
• In practice, lenders aim to have a mix of fixed and floating charges for maximum security.

Question 2

What other factors causes the distinction between fixed and floating charges to be important?

Answer 2

• It may affect whether registration is required under CA 2006, s 860. All floating charges must be registered but fixed charges need only be registered if they are over one of the specified classes of assets in s 860(7) (s 860 actually encompasses practically all charges.. So…)
• It may affect the chargee’s priority as against subsequent charges;
• It may affect the mechanics of enforcement;
• Floating charges only are subject to challenge under IA 1986, s 245 - avoidance of certain floting charges;
• Under IA 1986, s 176A, Floating charges created after 15 Sep 2003 are subject to the ‘prescribed part’

Question 3

What are floating charges?

Answer 3

• It is a charge over a class of assets, present and future
• That class is one which in the ordinary course of business changes from time to time
• By the charge it is contemplated that until some future step is taken by or on behalf of the chargee the company may carry on its business in the ordinary way.

Question 4

What are the registration requirements and consequences of non-registration of a charge?

Answer 4

• Anyone dealing with a company is deemed under the doctrine of constructive notice to have notice of its public documents which includes the memorandum and articles of association and also of the register of charges: Ernest v Nicholls (1857) 6 HL Cas 401. The constructive notice is of the existence of the charge and the registered particulars but not of its terms.
• Under CA 2006, s 870(1), a charge has to be registered within a 21 day period after the date of creation.
• The consequence of non-registration are severe - essentially the lender becomes an unsecured creditor - but the debt remains due and in fact becomes immediately repayable.

Question 5

What is stated under CA 2006, s 873?

Answer 5

• Late registration of a charge is possible but it requires an application to the court for approval.