Corporate Finance and Insolvency Lecture 8

In roman law there were two varieties of charges that applied to immovables
and movables and in English law this concept of security divided them up into
charges with real property charges and movables property but in essence the
characterises of these charges are the same. In the case of the mortgage under
the old system you would convey the house to the creditor and then he would reconvey it back. In the case of immovables, ownership isnt transferred but
possession is through delivery to the creditors hand. In the case of a mortgage,
the debtor remains in occupation of the land but in relation to movables and
immovables only one person can hold onto the property at one time. If it is the
creditor, then it is perfect security, as the asset cannot be damaged, resold etc
but the creditor has obligations in holding the asset. If you gave the assets to the
debtor you ran the risk that the asset was undermined ex by selling it, destroying
it, failing to insure it and by further securing it to other creditors. the problem is
partly resolved by the fact that partial delivery is invented, we say it is held in
the possession of the creditor, but in reality the debtor has it and uses it for the
benefit for their business.( this deals with discrete assets).
The problem comes when businesses become complex, first, business acquire
more and more movables such as the case in manufacturing in bulk companies.
The question here is that can the old ways of security deal with these assets
such as the fixed charge? In theory, yes they can as long as you can identify
each asset and you can create security and register it over thousands of security
instruments but this is really complex due to the issue of costs and costs of
preserving the asset as well. If there is a single identifiable asset then you can
measure the cost of securing and cost of losing it but when there are many
products, when you measure the costs of those assets and costs of securing it
will be imbalanced. The old ways of securing dont deal well with large
collections of assets that are usually found in manufacturing businesses.
Secondly, there is a changing nature of the assets held by businesses such as
tangible movables being offered to creditors as security and they cause
problems. How can we prove they exist as we cannot touch them? In some
instances you may have a deed or share certificate or in case of bank deposit
you may have a bank book etc. but what about a license or process of
manufacturing? As intangible assets become more important there the old forms
of security breaks down. It is being attacked in two ways, in the case of large
assets and as many assets are now intangible assets in nature.
In the 17th and 18th century, equity is initiative and responds to business and we
have seen it in the context of a mortgage. How can it be used here? It takes
advantage between the distinction between legal and equitable charges, it takes
charges that look like they are legal equivalent but are entirely the creation of
equity and can have some disadvantages usually you need to ask the court to
enforce it as you dont have an automatic right and you fall under the maxim he
who comes to equity must come with clean hands. Equity comes along and
uses analogous security using the principles of the courts of chancery and in
creating this equitable security it also offers remedies that are akin to those you

get with legal security. Equitable security deals a bit better with intangible assets
and large numbers of assets.
Floating charge
This isnt a fixed charge and this is the only thing we can say about it. What is a
floating charge itself?
In Agnew v Commissioner of Inland Revenue [2001] all the courts said is
that the floating charge must exhibit three characteristics; 1) that the charge is
on a class of assets whether present and future assets and the courts here say
this isnt a fixed charge dealing with a single assets and even intellectual
assets(we know the common law has no problem with dealing with future
assets); 2) the class of assets may change from time to time, this reflects the
tension between control by the creditor and the need by the debtor to use the
asset because under the old system when you surrendered passion to the
creditor, you could only secure assets that were immediately necessary for your
business and didnt have to use and could surrender. When the class here
changes from time to time, the creditor consent doesnt need to be sought and
there is a complete freedom here for the use by the debtor. But how is the
creditors interest secured here? Normally in the contents the creditor makes and
there are two that are important, the debtors promise not to deal carelessly and
will do anything which will reduce the value of the assets, secondly the negative
pledge clause where the debtor promises not to use the same asset to create
further charges (usually fixed charges as they take priority over floating charges)
but the problem with them is that these are contractual promises and only give a
right in personam. 3) Unless something happens, the debtor remains free to use
the assets.
In this case, there were book debts (debts that arise on supply of goods services
and you issue an invoice stating the terms on which it will be paid) in the interim
this bill creates an enforceable legal obligation and if you want the money now
you can sell it off and basically you are selling off the debt. The problem here,
business was trying to create charges which answered what businesses wanted
to do and they have the lending scenario and needed security to deal with a
particular outcome and here they wanted the charge to be fixed on the invoices
but the creditor doesnt want to deal with the debtors debtor. So here they
wanted to bring back the flexibility when the debts were paid and wanted to offer
the debtor as using this money as a chose, (some for creditor and some for
business.) They wanted a hybrid, some charge for the creditor and some charge
after payment. The problem is that something went wrong and there is a context
between creditor usually secured and other creditor. So they complained and the
courts had to decide what this hybrid charge and said the way it was structured
was inconsistent with the idea of a fixed charge and so they came up with a
distinction between the two. If it is a fixed charge, then it is a charge over a
single asset, the asset doesnt change from time to time and the creditors
consent should always be sought.

In Illingsworth v Houldsoworth [1904] the courts were saying these floating

charges are ambulatory and shifting in nature. So in essence, they dont have
substance before they apply to the debtors assets.
In Evans v British Granite Quarries Ltd [1910] the floating charge was
considered to be a present security affecting present and future assets, so
maximum benefit for the debtor in changing the quantity and quality of these
assets.
In Re Cosslett (Contractors) Ltd [1998] the principle is where the floating
charge can arise even where parties do not contemplate it, if you contract
clauses can be read in that way. There were two clauses here, money was
advanced to a quarry business and the creditor obtained two rights; a step in
right which have been preserved by the Enterprise Act 2002 as one of the
general exceptions to situations of receivership, secondly, they could sell the
plant and use the proceeds in repaying the debt. When the business went into
administration the issue was whether it was fixed or floating. Not all fixed
charges need to be registered; the creditors said it was a fixed charge and avoid
penalties for non-registration. The courts said it was a floating charge (but only
because it couldnt identify it as a fixed charge) and because it wasnt registered
it was effective against the creditor but the step in rights were available.
The problem here is that when we attempt to create security, the debtor agrees
to grant security, we dont say what type and so the courts will say whether it is
fixed or floating, but sometimes things remain unambiguous and until
enforcement is called then it becomes clearer. Equitable charges tend to attract
same remedies are legal charges but there is the element of discretion open to
the court and you still require the permission of the court.
If the creditor to whom youre securing the property is the bank, then this money
cannot be used as the basis for security because it belongs to the bank as it is in
their possession; Fooley v Hill. So it is in the banks possession and so the bank
is the owner you only have a right to claim that amount and so you cannot over
security over the money to someone who owns it but you can offer it as security
for a different creditor as you are offering the right to claim that money.
In Re BCCI SA (No 8) [1998] the issue here was what about other security that
could be created? Like set off rights, and other rights. In this case, where the
bank was trying to offer security to that creditor then effectively the property is
merged and no property that can be created.
Advantages of a floating charge is that it strikes the balance of use and control
and more commonly now because of how and what companies hold as assets, it
might be the only type of security that a company can offer. Can you offer a
floating charge over property which includes real property? Yes but the problem
is in terms of enforcement because if it doesnt appear of the charges register
then third parties arent aware that there is an interest already in that real
property but in many situations there is registration and third parties will now.

In a floating charge, the ability of the debtor to deal with the property
independently of the creditors consent and can use the assets to the benefit of
the business subject to the terms they signed.
In Biggerstaff v Rowatts Wharf Ltd [1896] the question here is what
happens if you have a floating charge and there are other types of security that
purport to apply to the debtors assets? The issue here was a solos agreement,
there was rent owing and a sum for barrels supplied and a receiver was
appointed. The solos creditor claimed to set of the amount owing to it against
claims that there made by the debtor and as a result the full value of what the
debtor owed was available to the creditor. The courts said the creation of the
security in the form of a floating charge doesnt assign the assets that are
subject to it.
This principle needs to be uttered because this happens in the context of the old
mortgage and in relation to fixed charges over movables; the assignment occurs
by delivery to the creditor hands. An assignment is when you give the benefit of
that asset to someone else such as the right to claim a debt etc. a floating
charge cannot be this because an assignment cannot occur over assets that
arent capable of ascertainment until crystallisation. So when the floating charge
is created, there is no assignment and while this assignment is impossible the
debtor may still deal with the property and make other types of security and
thats why we have the negative pledge clause preventing the debtor created
more security but we cannot avoid security that arises by the operation of the
law, set off arises by the law and is a rule. If the creditor has a right against the
debtor and the debtor has a right against the creditor then that creditor can
make a set off.
Have we actually given security or not? Yes an instrument is assigned and a
contract is signed by both parties creating a security but because it deals with
the collection of assets and gives freedom it cannot avoid transaction to those
assets which might have the form of other security.
We need to get enforcement against an in rem right so there needs to be a
trigger to allow the in rem right to be created in relation to those assets. This
requires crystallisation of the charge so that it has an in rem value to it.
Generally, it is default that gives the creditor a right and in mortgage the default
is in paying instalments and interest. Here where the security is created by
contract, the debtor and creditor have to agree on what will be the triggers,
usually there are firstly, failure to repay capital, interest, adhere to a term of a
condition etc. increasingly there is a secondary type of trigger which looks at the
debtor and how the debtor controls the assets its using and it is usually if the
debtor behaves in a manner adverse to the creditors interests such as paying the
directors to much, not insuring the assets etc.
In Re Brightlife Ltd [1987] crystallising events are entirely up to the parties to
determine and they have ultimate contractual freedom.

You can have the converse of the Agnew situation where when the floating
charge crystallises what you will get in relation of the crystallising event is a
conversion of what is a fixed charge. When crystallisation occurs, wheat the
creditor gets is an enforcement right against those assets
In George Barker v Eynon [1974] they wanted to give the creditor the benefit
of security when crystallisation occurs so they said that when crystallisation
occurred, the floating charge descended and from that moment onwards they
got the benefit of what amounted to a fixed charge which could extend into the
future and preserve those assets.
You can get two charges arising from the same event, floating charge first and
when crystallisation occurs then a fixed charge onwards on the identifiable asset.
However in Agnew they wanted a fixed charge to begin with and then a floating
charge over the rest.
All we know from these cases is that fixed charges and floating charges are
designed to work in different conditions.
The disadvantages of a floating charge is that it is only at crystallisation that you
find out what is there because the debtor is completely free to deal with those
assets, doesnt avoid preferences (in the hierarchy it is secured, unsecured,
deferred) so you take priority over assets but cannot avoid the preferential
creditors because the law gives them priority and also the costs of the
proceedings as well and fixed charges have priority too.
In Re Parkes garage Ltd [1929] the principle here applies to all security that is
if charges are created in a relation back period they will be rendered void.