Administrators seek directions on floating charge

A company’s (BIL) administrators sought directions on the validity of a floating charge granted by BIL. Section 245 of the Insolvency Act 1986 provides that a floating charge will be invalid if granted to a connected party within the two years prior to the charging company’s insolvency where no new consideration is granted at or after charge creation. The consideration needs to be money, goods/services or a discharge/reduction of the chargor’s debt.

The floating charge was granted as part of a share purchase. BIL purchased Mr Farah’s shares in a company (DMCC). The purchase consideration was convertible loan notes secured by a debenture (which included a floating charge). Mr Farah, as BIL’s director, was a connected party.  The sale agreement was signed in November 2019.

BIL subsequently granted three debentures which failed to take effect as legal charges due to various deficiencies. However, the court held that a valid equitable charge was created on 22 January 2020 (subject to satisfying section 245).

The court had to consider whether consideration had been given for the equitable charge as the obligation to transfer the shares pre-dated the charge (though the share transfer took effect on 22 January). The court differentiated between ‘consideration’ for the purposes of contract law compared with section 245. In contract law, the exchange of obligations to do something in the future would constitute consideration. For section 245, it was the performance of said obligation that would create the value and therefore constitute the consideration. Hence the actual transfer of the shares on 22 January 2020 provided consideration at the time of charge creation and satisfied section 245.

Manning v Neste AB (Re Bitumina Industries Ltd) [2022] EWHC 2578 (Ch)

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