Fact pattern (C)

Graffen Limited is funded by an unsecured bank overdraft facility and a loan made by Chris Parker, one of its directors. Due to the company’s current financial position, the bank is refusing to extend the overdraft. The company has some cash available, as a result of the £10,000 loan Chris Parker provided six months ago. However, to pay existing debts and buy stock to continue trading, the company requires a further £5,000. Chris Parker agrees to provide this on condition he is given security by way of a floating charge over all the company’s assets. Graffen’s board agree to this and the transaction takes place, with the floating charge being expressed to secure all monies due to Chris Parker. Six months later, he lends a further £2,000 to the company. Eight months later, Graffen enters creditors’ voluntary liquidation. At the date of liquidation, Chris Parker is owed £9,000 in respect of his loans made to the company, plus £550 interest accrued over the past year. Consider your advice on the following issues.

Graffen Limited is funded by an unsecured bank overdraft facility and a loan made by Chris Parker, one of its directors. Due to the company’s current financial position, the bank is refusing to extend the overdraft. The company has some cash available, as a result of the £10,000 loan Chris Parker provided six months ago. However, to pay existing debts and buy stock to continue trading, the company requires a further £5,000. Chris Parker agrees to provide this on condition he is given security by way of a floating charge over all the company’s assets. Graffen’s board agree to this and the transaction takes place, with the floating charge being expressed to secure all monies due to Chris Parker. Six months later, he lends a further £2,000 to the company. Eight months later, Graffen enters creditors’ voluntary liquidation. At the date of liquidation, Chris Parker is owed £9,000 in respect of his loans made to the company, plus £550 interest accrued over the past year.

The two most important points to note are: the timing of the provision of security; and that Chris Parker, as a director, is connected to the company. The security was given 14 months before the resolution to wind up the company. Normally, in liquidation, a floating charge is prima facie invalid if made within 12 months of the winding up petition or relevant resolution. In addition, the company must be unable to pay its debts at the time of the provision of security or become unable to do so as a result. However, where the charge is given to a connected person, as is the case here, the charge is prima facie invalid if made within two years of the petition or resolution, and whether or not the company was solvent at the time.

It should be noted that the only other insolvency procedure under which the charge would be prima facie invalid under s.245 IA is administration.