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Administrative Receivership and the Floating Charge

RIZWAAN JAMEEL MOKAL

in Corporate Insolvency Law: Theory and Application

This chapter considers the twin institutions of the floating charge and administrative receivership. It explains the distinctive role played by the floating charge by examining the empirical context ... More

This chapter considers the twin institutions of the floating charge and administrative receivership. It explains the distinctive role played by the floating charge by examining the empirical context in which it operates and by comparing the recoveries made by different classes of creditor in corporate liquidation. The analysis suggests that whereas the fixed charge in included in debentures so as to provide its holder with priority, the floating charge is a residual management displacement device. Its dominant role is to ensure the integrity of the debtor's estate when the latter becomes distressed and its management is displaced in favour of a specialist distress-oriented manager. This is where administrative receivership (‘receivership’) comes in. Traditionally, the replacement of the distressed company's management has been brought about by the appointment of a receiver (formerly, a receiver and manager). However, the chapter harnesses theory and evidence in favour of the argument that receivership is significantly destructive of social value, and that it is unfair and oppressive. Its virtual abolition by the Enterprise Act 2002 is therefore welcomed. However, the substitution of receivership with administration also, it is argued, signals the end of the usefulness of the floating charge. The chapter concludes by sketching out a case for the abolition of this type of charge.Less

Secured Debt

Eilís Ferran and Look Chan Ho

in Principles of Corporate Finance Law

This chapter discusses the forms of real security that companies can give to lenders. Topics covered include the advantages of being a secured creditor; economic perspectives on secured debt; freedom ... More

This chapter discusses the forms of real security that companies can give to lenders. Topics covered include the advantages of being a secured creditor; economic perspectives on secured debt; freedom of contract; consensual security interests; forms of property that can be used as security; forms of consensual real security; comparison of fixed and floating charges; establishing whether a charge is fixed or floating; implications of Agnew and Spectrum for other asset classes; the crystallization of a floating charge; priority rules for competing interests in the same property; registration of company charges; and reforming the law on company charges.Less

Company Charges

Lord Neuberger

in Sham Transactions

This chapter examines the relevance of the sham doctrine in cases dealing with company charges. It argues that if sham plays any role in determining whether a company charge is fixed or floating, it ... More

This chapter examines the relevance of the sham doctrine in cases dealing with company charges. It argues that if sham plays any role in determining whether a company charge is fixed or floating, it is in the first stage of the test set out by Lord Millet in Agnew v Commissioner of Inland Revenue, where a court must ascertain the nature of the rights and obligations which the parties intended when creating the charge.Less

Avoidance of Floating Charges (Insolvency Act 1986, Section 245: Corporate Insolvency Only)

Rebecca Parry

in Transaction Avoidance in Insolvencies

A floating charge, of course, increases the likelihood upon the winding up of the debtor that a creditor will receive payment for sums that the creditor has advanced. Conversely, the existence of a ... More

A floating charge, of course, increases the likelihood upon the winding up of the debtor that a creditor will receive payment for sums that the creditor has advanced. Conversely, the existence of a charge over property reduces the likelihood of payment for creditors, such as those who supplied the property in the first place. Limitations have accordingly been placed on the availability of such charges in order to ensure that any creditor obtaining the advantage of this method of security has earned the priority that it confers. Section 245, which applies only in the context of liquidation and administration, provides that any floating charge that is created within a specified period of the onset of insolvency is void except to the extent that the charge holder advanced value to the debtor at the same time as, or after, the creation of the charge. Unlike many of the other avoidance provisions, the operation of section 245 is automatic and does not depend on an application being made by the liquidator or administrator. An exception to the operation of section 245 applies in the context of financial collateral arrangements. Less

Ranking of Claims, Pari Passu Distribution, and Contracting Out

Hamish Anderson

in The Framework of Corporate Insolvency Law

The order in which claims on the insolvent estate are discharged was summarized by Lord Neuberger PSC in Re Nortel GmbH where he said:

Creditors

Paul Davies

in Introduction to Company Law

Because of limited liability, creditor protection has always been a feature of company law. Large creditors can contract ex ante for customised protection and the law facilitates this in various ... More

Because of limited liability, creditor protection has always been a feature of company law. Large creditors can contract ex ante for customised protection and the law facilitates this in various ways, notably by the creation of the floating charge. Non-adjusting creditors require the protection of mandatory rules, at least in some situations. Creditor protection in relation to companies in the vicinity of insolvency is now well established, not only through ‘wrongful trading’ but also via transaction invalidity rules and directors’ disqualification. For going-concern companies the emphasis is on rules restricting the shifting assets to shareholders via distributions and associated rules relating to the maintenance of capital.Less

Post-Petition Dispositions (Insolvency Act 1986, Sections 127 and 284)

Rebecca Parry and Sharif Shivji

in Title Pages

The timing of a transaction is fundamental to many of the avoidance provisions: none more so than sections 127 and 284, which operate in the period following, respectively, the presentation of a ... More

The timing of a transaction is fundamental to many of the avoidance provisions: none more so than sections 127 and 284, which operate in the period following, respectively, the presentation of a winding-up petition against a company and the presentation of a bankruptcy petition against an individual. These are times of great potential for detrimental transactions and the sections reflect this. Upon the debtor entering liquidation or bankruptcy, these sections retrospectively make any post-petition disposition automatically void regardless of whether it was a transaction that was of benefit to the debtor. Thus, beneficial transactions, such as payments to employees and sales of assets for full market value, are affected just the same as detrimental, asset-stripping, transactions. The simplicity, and harshness, of these provisions is therefore to be contrasted with most of the other avoidance provisions, which tend to be discretionary and often require some enquiry to be made regarding the debtor’s motivations. Less

Transaction Avoidance

Hamish Anderson

in The Framework of Corporate Insolvency Law

Laws dealing with the problem of debt avoidance were a feature of English law long before the enactment of laws providing for insolvency proceedings. Thus an enactment in 1376, during the reign of ... More

Laws dealing with the problem of debt avoidance were a feature of English law long before the enactment of laws providing for insolvency proceedings. Thus an enactment in 1376, during the reign of Edward III, provided that property given by debtors to friendly third parties remained available to be taken in execution by the debtor’s creditors, whereas the founding statute providing for a bankruptcy law was not enacted until 1542, during the reign of Henry VIII. This illustrates a point which remains equally true today, namely that transaction avoidance overlaps with insolvency law but can go wider. For example section 423, dealing with transactions defrauding creditors, can be invoked by a victim of the transaction even though no insolvency proceedings are taking place. Less

The Rise of Secured Credit

Sarah Paterson

in Corporate Reorganization Law and Forces of Change

This chapter explores the way in which the shifts in the fields of finance and non-financial corporates discussed in Chapters 3 and 4 have led to changes in US secured transactions law. It examines ... More

This chapter explores the way in which the shifts in the fields of finance and non-financial corporates discussed in Chapters 3 and 4 have led to changes in US secured transactions law. It examines the way in which these changes have, in turn, shifted bargaining power towards secured creditors when a debtor attempts to reorganize its debt and equity finance. However, the argument is made that this gives rise to different issues from the traditional concern for secured creditor liquidation bias when it is set in the wider organizational and institutional environment which the book has begun to examine. Turning to England, the chapter explores how the English courts have generally supported the allocation of control rights in distress to senior financial creditors. It reveals why this has, once again, made English corporate reorganization law particularly well adapted to the demands of the past decade.Less

The Rationale of the Transaction Avoidance Provisions of the Insolvency Act 1986

Rebecca Parry

in Transaction Avoidance in Insolvencies

It is important to examine the rationale of the transaction avoidance provisions of the Insolvency Act 1986, as this will assist in interpreting such laws and will also enable an assessment of ... More

It is important to examine the rationale of the transaction avoidance provisions of the Insolvency Act 1986, as this will assist in interpreting such laws and will also enable an assessment of whether these laws are structured in an optimal manner. Often, legislative travaux préparatoires are useful in ascertaining legislative intent. However, the rationale of the transaction avoidance provisions of England and Wales is not something that can be easily detected from the government reviews of insolvency law that influenced the format of the Insolvency Act 1986. The tone of such reviews is largely pragmatic as far as transaction avoidance is concerned: the focus of the reviewers appears to have been on areas that were causing problems in practice at the time. This may have been because of a need to focus on bigger issues such as corporate rescue and the accountability of company directors. It may be that the reviewers did consider the rationale of the transaction avoidance provisions, and the manner in which they complement the objectives of insolvency law, but excluded such issues from the reports for economy of space in what was a thorough and wide-ranging report. Less