Company law revision question and answer

The Board of Borrowers Company Ltd. has applied for a loan from Uchumi Commercial Bank. The Bank has advised that any loan will be conditional upon the bank being granted security in the form of a combination of fixed and floating charges on the companies assets. The bank has also advised Borrowers Company Ltd. that the charges will be contained in the bank‟s standard form debenture document. This contains a “negative pledge clause” and a term which enables the bank to place the company in administrative receivership in the event of default the company.

(a) (i)In numbered paragraphs distinguish between a fixed and a floating charger
(ii) What are the disadvantages of a floating charge to the bank?
(b) Explain the meaning of a “negative pledge” clause.
(c) Explain how administrative receivership differs from liquidation.

answer

The locus classicus distinction between the fixed and floating charge was enunciated the Lord MacNaghten in Illingworth V. Holdsworth.
Fixed charge:
• This is a legal or specific charge.
• It is a charge securing a debenture on a specific asset or an asset capable of being ascertained or defined.
• The security is identifiable and its value is ascertainable.
Floating charge:
• This is an equitable charge
• In the words of the Learned Judge it is “ambulatory and shifting in its nature.”
• It is a charge securing a debenture on the assets of a going concern but which remain dormant until crystallization.
• It secures a debenture on a class of assets of the company both present and future the assets must belong to class which keep on changing from time to time in the ordinary course of business of the Company.
• The value of the security remain uncertain as the Company is free to dispose off and acquire new stock.

(ii)
• A fixed charge created after a floating charge has priority in the satisfaction of claims.
• Other interests for example landlords distress for rent have priority over floating charges.
• Under section 312 of the Companies Act, a floating charge created within 6 months before the commencement of winding up is deemed to be fraudulent preference and is void.
• Under section 314 of the Companies Act, a floating charge created within 12 months before the commencement of winding up is invalid unless it provided that the Company was solvent immediately after its creation.

(b)

This is a clause or paragraph in a debenture to the effect that the Company shall not create a charge in priority to the current one. It ensures that the charge retains priority in the satisfaction of claims.

(c)
Although administrative receivership and winding up are similar in certain many respects, they differ in that:
• Whereas a receiver takes possession of the property of the company over which he is appointed and realizes is for the benefit of the holder(s) a liquidator is appointed to wind up the Company and terminate its existence.
• An administrative receiver may be appointed to enforce a charge given a debenture or trust deed under a power contained in the debenture or the trust deed or the court. A liquidator may be appointed the court, members or creditors or both.
• A receiver may be appointed when the Company is being wound up.
• Administrative receivership permits the appointment of a receiver and manager to carry on the business of the Company for the purposes of selling it as a going concern.
• A receiver appointed under a power in a debenture or a trust deed, the debenture usually provides that he is the agent of the Company.
• A receiver appointed the Court is personally liable on the contracts made him in the course of receivership while a liquidator is not.
• The terms of appointment may require a receiver to render accounts to debenture holders.

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