Introduction to Commercial law
Introduction
Throughout this case, the incorrectly registered floating charge will affect the bank’s priority in the entire case because it will be considered that other creditors did not have constructive notice of the clause at the time they took their charges. On the other hand, Eager’s fixed charge would be re-characterised to floating charge because the special account was not blocked thereby it could not limit the company from accessing it. At the same time, it will be argued that Finance Co did not own Rolls-Royce motor car because the purchase practice was aimed at creating an illusion of ownership whereas the intention was far from this.[1]
Company Plc’s Remaining Assets
- Equipment
In the exception of Rolls-Royce car, the company has equipments worth £125,000. These equipments are subject to a fixed charge in favour of Bunter’s bank limited, which the company owes £50,000. At the same time, the equipments are also subject to a floating charge containing a negative clause in favour of the bank as well. Furthermore, the equipments are also subject to a fixed charge in favour of Dosh ltd, which the company owes £90,000.
Who has priority?
The issue of priority here will depend on two factors. First, it will depend on the nature of the fixed charges that were created by the two creditors. Second, it will also depend on the nature of Dosh ltd’s fixed charge and the bank’s floating charge that contains a negative clause.
With regard to the fixed charges, it is clear that the bank’s fixed charge was created over the equipments that the company had at the time the charge was created. On the other hand, it is clear that Dosh ltd created its fixed charge over the equipments that the company had at the time of creating the charge as well as future equipments. As per the nemo dat rule that states that a person can never give what he/she does not possess, the bank would have priority over Dosh ltd.[2] Basically, this would mean that the company would not assign interest over future equipment that it did not have at the time of creating the charge documents. As a result, it would not create a fixed charge with Dosh ltd over future equipments that were not there at the time of creating the charge. Based on the fact that the bank created its fixed charge before Dosh ltd created its charge, then the bank would have priority over Dosh ltd.
With regard to the second part of the charge documents, the bank has a floating charge over every other equipment that was not covered by the fixed charge. At the same time, Dosh ltd has fixed charge over these equipments. This means that there is a competing interest over the equipments that the company acquired after creating a fixed charge with the bank. As for these equipments, Dosh ltd took its charge without constructive notice of the negative clause because that clause was not contained in the charge documents the lawyers for the two companies created.[3] Therefore, with respect to estoppel, company plc cannot base its argument on the negative clause to win the case.[4] For this reason, Dosh ltd would have priority over the bank on equipments that were acquired after the loan.
In this case, the bank would have priority over Dosh ltd on equipments that were acquired before 15 May 2013 whereas Dosh ltd would have priority over bank on equipments that were acquired after 15 May 2013.
- Rolls-Royce motor car
The company also has Rolls-Royce car worth £60,000. This car was first sold by the company to Finance Co, which the company owes £50,000 and then leased back. This motor car is also subject to a floating charge in favour of the bank.
Who has priority?
This will depend on whether the company really owns the car or Finance Co owns the car. If Finance Co owns the car, then the money that will be obtained once the car is sold should be used to pay Finance Co’s debts. However, this decision will ultimately be affected by the negative clause contained in the bank’s charge documents.[5]
Given that Finance Co bought this car and then leased it to the company, then it would be reasonable to consider this car a property of Finance Co. However, it would be important to evaluate the manner in which the practice took place. With respect to Stoneleigh finance v Phillips, it would appear that both Finance Co and company plc were engaging in speculative business venture that was aimed at securing the loan.[6] Accordingly, the two created an illusion that Finance Co bought the car and then leased it to the company. Ultimately, this raises questions regarding application of s 423 of the 1986 insolvency act as well as the doctrine of sham. Legally, a contract of sale is considered to be an act that involves transfer of property to a person that pays money for it. Looking at the case at hand, it would appear that there was no transfer of property in exchange of money. All that was involved was transfer of money in pretence of selling the car. Consequently, given that the intention of the two on this matter was basically to create an impression that the car was sold to Finance Co and then leased back, then it would be imperative to treat the car as a property of the company.
Under such a circumstance, it would be reasonable to sell the car and settle Finance Co’s loan. However, before doing that it would be reasonable to evaluate whether Finance Co has priority over the bank on this property.
In this case, Finance Co would have priority over the bank not because it bought the car as it may be said, but because the bank has a general floating charge over this property whereas Finance Co has a specific charge over it. The negative clause contained in the bank’s floating charge would be immaterial here under the new online system because it was registered incorrectly.[7] Here it would be reasonable to argue that Finance Co did not have constructive notice of the negative clause because it was registered incorrectly.
- Unpaid receivables from Ovlov plc
The company has unpaid receivables due from Ovlov plc worth £100,000 in favour of Eager, which the company owes £90,000. These receivables are also subject to a floating charge in favour of the bank that secured its overdraft using any other assets that were not covered by fixed charge.
Who has priority?
On one hand, priority will depend on whether the securities used by Eager to secure its loan were really fixed as it was intended right from the beginning. If the securities had fixed charge, then Eager will have priority over the bank. However, this decision will not be automatic because it will be affected by the negative clause contained in the bank’s charge documents. If Eager was aware of the negative clause as it took its charge, then the bank will have priority over Eager. On the contrary, if eager was unaware of the negative clause, then Eager will have priority over the bank.
On the other hand, the decision will depend on whether the charge taken by Eager should be re-characterised to floating because of the transfer arrangements. If this will be the case, then the decision will change automatically and the charge will be treated as floating.[8]
In this case, it will be important to evaluate what case laws say about this issue. With regard to Re Spectrum case, a charge becomes fixed if chargee has control over proceeds and the account is blocked.[9] This means that charged securities would be fixed if the following two conditions would be true. First, the charge would be fixed if the special account was blocked meaning that the company would not have access to that account. Second, the charge would be fixed if Eager had control over the proceeds.[10]
Based on the above argument, it would be reasonable to argue that the charge was not fixed because the account was not blocked even if the bank would intervene in the unblocked account. This notwithstanding, it would also be reasonable to treat the charge as fixed as it was originally intended because the bank had the responsibility of notifying Eager about such transactions and request the company to produce Eager’s consent.[11] However, the fact that Eager was aware of the two transactions that took place without the bank requiring the company to produce consent, then it would appear that the charge should be re-characterised to floating.[12] Following this decision, both employees’ debts and liquidator’s expenses should have priority over Eager’s debt and bank’s loan because the said debts should be settled before settling those secured by floating charges.
- Money in a special account
Following the above argument that Eager’s charge should be re-characterised to floating charge, then the money in the account should be subjected to a floating charge. This means that both Eager and the bank would have a competing interest over this money. Nonetheless, under Re automatic bottle makers’ case law, Eager would be considered to have a specific floating charge whereas the bank would be considered to have a general floating charge.[13] Although the bank would claim a right of set-off, such a right would not be applicable because the special account was created specifically for Eager. At the same time, the bank under s 175 and s 176 of the insolvency act would not have priority over this money because such money would be in favour of preferential creditors.[14] In this case, Eager would have priority over the bank meaning that it would get the money in this account.
- Unpaid receivables
The company also has unpaid receivables worth £5,000. These receivables have a floating charge in favour of the bank. In addition, they are subject to liquidator’s expenses, unsecured creditors as well as employees’ wages. As the case stands right now, the company owes employees £30,000. It also owes £100,000 to other creditors and the bank £50,000. Given that the money cannot cover even a single debt even though we do not know liquidator’s expense, it means that it will not be possible to settle debts using this money. However, employees would have priority over creditors and liquidator.[15] For this reason, the money should be used to pay employees wages and salaries.
Conclusion
The most likely outcome from the above analysis would be that the liquidator should start by settling the debt owed to the bank from the equipments that the company had before 15 May 2013. Then the liquidator should follow by settling Dosh ltd’s debt from the equipments the company had as on 1 October 2015 together with equipments the company acquired later on. This is in relation to the fact that the two loans were secured using fixed charge.
As for Rolls-Royce motor car, Finance Co would have priority over the bank because its charge is specific. Accordingly, after selling this car, the liquidator should settle Finance Co’s debt and use the remaining amount (£10,000) to settle other debts. Given the fact that the bank’s floating charge is general, under s 175 and s 176 insolvency act, the liquidator should utilize the £10,000 from the car to settle employees’ debts who in this case would be treated as preferential creditors. This means that employees’ debts would be reduced to £20,000.
For the unpaid receivables, employees would have priority over this money. Therefore, this money should be used to pay employees their debts.
As for the receivables from Ovlov plc, the liquidator under s 175 and s 176 insolvency act should settle employees’ debts in full and cover his/her expenses before settling Eager’s debt and other debts owed to other debtors.
Finally, for the money in the special account, the liquidator should utilize it to settle part of the money owed to Eager.
Bibliography
Bourne N., Bourne on company law (Routledge 2013) 311
Burrows A., English private law (Oxford university press, 2013) 172
Cooper, R. Legislation for business law. (Oxford university press, 2009) 704
Dorling D., Thomas B., Bankruptcy Britain: an atlas of social change. (Policy press, 2011) 4.
Eales, P. Insolvency: a practical legal handbook for managers. (Gresham book, 1996) 3
Hepburn, S. Australian principles of property law. (Routledge, 2013) 181
Omar, P. International insolvency law: themes and perspectives. (Ashgate Publishing limited, 2013) 145
Re Automatic Bottle Makers Ltd [1926] Ch 412
Re Cimex Tissues Ltd [1994] BCLC 626
Re Spectrum Plus Ltd (in liquidation) [2005] 2 AC 680
Siebe Gorman & Co ltd v Barclay bank ltd [1979] 2 Lloyds rep 142
Stevens, R. & Goode, R. Goode on principles of corporate insolvency law. (Sweet & Maxwell, 2010) 117
Stoneleigh Finance Ltd v Phillips [1965] 2 QB537, CA
[1] Burrows A., English private law (Oxford university press, 2013) 172
[2] Hepburn, S. Australian principles of property law. (Routledge, 2013) 181
[3] Stevens, R. & Goode, R. Goode on principles of corporate insolvency law. (Sweet & Maxwell, 2010) 117
[4] Omar, P. International insolvency law: themes and perspectives. (Ashgate Publishing limited, 2013) 145
[5] Bourne N., Bourne on company law (Routledge 2013) 311
[6] Stoneleigh Finance Ltd v Phillips [1965] 2 QB537, CA
[7] Eales, P. Insolvency: a practical legal handbook for managers. (Gresham book, 1996) 3
[8] Dorling D., Thomas B., Bankruptcy Britain: an atlas of social change. (Policy press, 2011) 4.
[9] Re Spectrum Plus Ltd (in liquidation) [2005] 2 AC 680
[10] Siebe Gorman & Co ltd v Barclay bank ltd [1979] 2 Lloyds rep 142
[11] Omar, P. International insolvency law: themes and perspectives. (Ashgate Publishing limited, 2013) 145
[12] Re Cimex Tissues Ltd [1994] BCLC 626
[13] Re Automatic Bottle Makers Ltd [1926] Ch 412
[14] Stevens, R. & Goode, R. Goode on principles of corporate insolvency law. (Sweet & Maxwell, 2010) 117
[15] Cooper, R. Legislation for business law. (Oxford university press, 2009) 704