Insolvency Problem Question:
Question: Armstrong, the chief executive, takes almost total responsibility for
the management of Swan Construction Ltd and the Company’s other two
directors, Bewick and Grey, play little part in the affairs of the Company. In
March 2006 Armstrong provided the Company with a loan in order to help with
a liquidity problem. Four months later it was agreed that the loan be made long
term and Swan Construction created a floating charge over all its property real
and personal in favour of Armstrong. In January 2008 the Company raised a
further loan, this time from Grantmore Bank plc. This loan was secured by a
fixed charge on its Newcastle construction depot, together with the plant and
machinery in the depot. The machinery had been supplied by Parsons (Heavy
Contractors) Ltd under a contract which reserved title in the machinery to the
suppliers until payment had been made in full. Payment has not yet been made.
In February 2008 the board of directors decided to distribute a dividend payable
out of the money received from the sale of another of its depots even though
the Company’s trading account showed a large deficit. By April 2008 the
Company was in a serious financial position but, although Armstrong realised
these difficulties, he delayed informing Bewick and Grey of the need to put the
Company into liquidation. At the beginning of May an unsecured creditor
obtained a winding up order from the court on the grounds of the insolvency of
Swan Construction Ltd. The liquidator has discovered that the Company’s assets
appear to be insufficient to pay the secured creditors and that in addition there
are numerous unsecured creditors together with unpaid tax
demands. Moreover, the Company’s employees have not been paid since April.
Advise the liquidator.
This problem question concerns about the Insolvency Law as the company
has obtained a winding up order from the courts. Here, one will advise the
liquidator on the distribution of assets whilst the company has limited monies
to pay off its debts. In an insolvency circumstances, a liquidator’s role is to
secure that the assets are got in, realised and distributed them to the creditors
and if there is a surplus, it goes to the persons entitled to it (s.143(1) Insolvency
, Act 1986 (IA 1986)). Accordingly, the assets must be distributed in a strict order
of priority to the creditors.
First and foremost, the liquidator should identify which securities are
potentially invalid in the run up of insolvency. This is important as it will affect
the priority of the distribution of assets to the creditors.
In relation to the floating charge granted to Armstrong, one may argue
that the liquidator could challenge it under s.245 IA 1986. A liquidator should be
aware that a floating charge secures a borrower’s new indebtedness at the time
the charge is created, the lender is protected if the borrower becomes insolvent.
But if the floating charge is created by a borrower within two years in the case
of connected persons before the start of the borrower’s insolvency, it is invalid
to the extent that it was made to secure an existing debt. It is not conditional
upon the company being unable to pay its debt as the law presumed that this is
the case in a connected person situation. Then, a floating charge will only be
valid if there is consideration given at the time or after the charge was created.
This was illustrated in Re Shoe Lace Ltd that the floating charge was not made
at the same time as the creation of the debts, so it was invalid.
On the facts, one can say that Armstrong is a connected person in s.249
IA 1986 as he is one of the directors of the company. Here, from July 2006 to
May 2008, it was pointed out in the facts that this charge has been created
within 2 years before the insolvency and was made to secure an existing debt in
March 2006. Since the floating charge was made to secure an existing debt, it is
obvious that there will be no consideration given in the present transaction. So,
this section in satisfied for the liquidator to challenge under IA 1986.
Question: Armstrong, the chief executive, takes almost total responsibility for
the management of Swan Construction Ltd and the Company’s other two
directors, Bewick and Grey, play little part in the affairs of the Company. In
March 2006 Armstrong provided the Company with a loan in order to help with
a liquidity problem. Four months later it was agreed that the loan be made long
term and Swan Construction created a floating charge over all its property real
and personal in favour of Armstrong. In January 2008 the Company raised a
further loan, this time from Grantmore Bank plc. This loan was secured by a
fixed charge on its Newcastle construction depot, together with the plant and
machinery in the depot. The machinery had been supplied by Parsons (Heavy
Contractors) Ltd under a contract which reserved title in the machinery to the
suppliers until payment had been made in full. Payment has not yet been made.
In February 2008 the board of directors decided to distribute a dividend payable
out of the money received from the sale of another of its depots even though
the Company’s trading account showed a large deficit. By April 2008 the
Company was in a serious financial position but, although Armstrong realised
these difficulties, he delayed informing Bewick and Grey of the need to put the
Company into liquidation. At the beginning of May an unsecured creditor
obtained a winding up order from the court on the grounds of the insolvency of
Swan Construction Ltd. The liquidator has discovered that the Company’s assets
appear to be insufficient to pay the secured creditors and that in addition there
are numerous unsecured creditors together with unpaid tax
demands. Moreover, the Company’s employees have not been paid since April.
Advise the liquidator.
This problem question concerns about the Insolvency Law as the company
has obtained a winding up order from the courts. Here, one will advise the
liquidator on the distribution of assets whilst the company has limited monies
to pay off its debts. In an insolvency circumstances, a liquidator’s role is to
secure that the assets are got in, realised and distributed them to the creditors
and if there is a surplus, it goes to the persons entitled to it (s.143(1) Insolvency
, Act 1986 (IA 1986)). Accordingly, the assets must be distributed in a strict order
of priority to the creditors.
First and foremost, the liquidator should identify which securities are
potentially invalid in the run up of insolvency. This is important as it will affect
the priority of the distribution of assets to the creditors.
In relation to the floating charge granted to Armstrong, one may argue
that the liquidator could challenge it under s.245 IA 1986. A liquidator should be
aware that a floating charge secures a borrower’s new indebtedness at the time
the charge is created, the lender is protected if the borrower becomes insolvent.
But if the floating charge is created by a borrower within two years in the case
of connected persons before the start of the borrower’s insolvency, it is invalid
to the extent that it was made to secure an existing debt. It is not conditional
upon the company being unable to pay its debt as the law presumed that this is
the case in a connected person situation. Then, a floating charge will only be
valid if there is consideration given at the time or after the charge was created.
This was illustrated in Re Shoe Lace Ltd that the floating charge was not made
at the same time as the creation of the debts, so it was invalid.
On the facts, one can say that Armstrong is a connected person in s.249
IA 1986 as he is one of the directors of the company. Here, from July 2006 to
May 2008, it was pointed out in the facts that this charge has been created
within 2 years before the insolvency and was made to secure an existing debt in
March 2006. Since the floating charge was made to secure an existing debt, it is
obvious that there will be no consideration given in the present transaction. So,
this section in satisfied for the liquidator to challenge under IA 1986.
