Voidable floating charge
Encyclopedia
In law, a voidable floating charge refers to a floating charge
entered into shortly prior to the company going into liquidation
which is void
or unenforceable
in whole or in part under applicable insolvency legislation.
Generally speaking, a floating charge is only potentially vulnerable if it is entered into within the vulnerability period under applicable law. The vulnerability period is a period prescribed by statute immediately preceding the company going into liquidation. Most jurisdictions provide for alternative vulnerability periods: a longer one for parties who are "connected" to the company, and a shorter one for unrelated third parties.
The effect of laws relating to voidable floating charges varies from jurisdiction to jurisdiction. Some countries simply provide that such charge are automatically void or not enforceable, In other jurisdictions, they are only voidable
and an application must be made by a liquidator
or creditor for the floating charge to be set aside.
In most jurisdictions, a floating charge is only vulnerable to the extent that it does not secure new money for the company. So if, for example, a bank has a loan of £100 outstanding to a company, and it advances a further £50 but takes an "all-monies" floating charge as security, and the company goes into liquidation 3 months later, the floating charge will validly secure the £50 advance which was made at the time, but not the earlier £100. Legislation relating to voidable floating charges is intended to prevent abuse of a security interest
which catches literally all of the assets of the company, and could be used by person to strip out all of the assets from a company in difficulty from the unsecured creditor
s. However, if the holder of the floating charge has inserted new money, then giving the holder a valid security up to the amount of the new money injected does not prejudice the position of the unsecured creditors.
Most legislation relating to voidable floating charges is also expressed to apply to charges which, as created, were floating charges but which subsequently crystallised into fixed charges.
Floating charge
A floating charge is a security interest over a fund of changing assets of a company or a limited liability partnership , which 'floats' or 'hovers' until conversion into a fixed charge, at which point the charge attaches to specific assets...
entered into shortly prior to the company going into liquidation
Liquidation
In law, liquidation is the process by which a company is brought to an end, and the assets and property of the company redistributed. Liquidation is also sometimes referred to as winding-up or dissolution, although dissolution technically refers to the last stage of liquidation...
which is void
Void (law)
In law, void means of no legal effect. An action, document or transaction which is void is of no legal effect whatsoever: an absolute nullity - the law treats it as if it had never existed or happened....
or unenforceable
Unenforceable
An unenforceable contract or transaction is one that is valid, but which the court will not enforce. Unenforceable is usually used in contradistinction to void and voidable...
in whole or in part under applicable insolvency legislation.
Generally speaking, a floating charge is only potentially vulnerable if it is entered into within the vulnerability period under applicable law. The vulnerability period is a period prescribed by statute immediately preceding the company going into liquidation. Most jurisdictions provide for alternative vulnerability periods: a longer one for parties who are "connected" to the company, and a shorter one for unrelated third parties.
The effect of laws relating to voidable floating charges varies from jurisdiction to jurisdiction. Some countries simply provide that such charge are automatically void or not enforceable, In other jurisdictions, they are only voidable
Voidable
In law, a transaction or action which is voidable is valid, but may be annulled by one of the parties to the transaction. Voidable is usually used in distinction to void ab initio and unenforceable....
and an application must be made by a liquidator
Liquidator (law)
In law, a liquidator is the officer appointed when a company goes into winding-up or liquidation who has responsibility for collecting in all of the assets of the company and settling all claims against the company before putting the company into dissolution....
or creditor for the floating charge to be set aside.
In most jurisdictions, a floating charge is only vulnerable to the extent that it does not secure new money for the company. So if, for example, a bank has a loan of £100 outstanding to a company, and it advances a further £50 but takes an "all-monies" floating charge as security, and the company goes into liquidation 3 months later, the floating charge will validly secure the £50 advance which was made at the time, but not the earlier £100. Legislation relating to voidable floating charges is intended to prevent abuse of a security interest
Security interest
A security interest is a property interest created by agreement or by operation of law over assets to secure the performance of an obligation, usually the payment of a debt. It gives the beneficiary of the security interest certain preferential rights in the disposition of secured assets...
which catches literally all of the assets of the company, and could be used by person to strip out all of the assets from a company in difficulty from the unsecured creditor
Unsecured creditor
An unsecured creditor is a creditor other than a preferential creditor that does not have the benefit of any security interests in the assets of the debtor....
s. However, if the holder of the floating charge has inserted new money, then giving the holder a valid security up to the amount of the new money injected does not prejudice the position of the unsecured creditors.
Most legislation relating to voidable floating charges is also expressed to apply to charges which, as created, were floating charges but which subsequently crystallised into fixed charges.