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Floating Charges—An Alternative Theory

Published online by Cambridge University Press:  16 January 2009

Sarah Worthington
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Floating charges have been an integral part of company financing for over 100 years, and yet their most fundamental characteristic remains the subject of debate: what interest does the floating chargee have prior to crystallisation? The answer to this question is not academic: disputes between the chargee and interested third parties depend for their resolution on the view taken. Moreover, it is becoming increasingly difficult to rely upon precedent or statutory provisions for simple rules to resolve these disputes: the complexity of modern commercial transactions and the ingenuity of advisers now give rise to rights which cannot always be equated with more traditional security devices and which may not need to be registered. This makes resort to fundamental principles necessary, and the elucidation of those principles crucial.

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The Cambridge Law Journal , Volume 53 , Issue 1 , March 1994, pp. 81 - 103
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Copyright © Cambridge Law Journal and Contributors 1994

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References

1 See Section II.

2 These theories are outlined below, but for a full discussion see Gough, W.J., Company Charges (London 1978);Google ScholarGough, W.J., “The Floating Charge: Traditional Themes and New Directions” in Finn, P.D. (ed.), Equity and Commercial Relationships (Sydney 1987), p. 239;Google ScholarPennington, R.R., “The Genesis of the Floating Charge” (1960) 23 M.L.R. 630;Google ScholarFarrar, J.H., “Floating Charges and Priorities” (1974) 38 Conv. 315;Google ScholarFarrar, J.H., “The Crystallisation of a Floating Charge” (1976) 40 Conv. 397;Google ScholarFarrar, J.H., “World Economic Stagnation Puts the Floating Charge on Trial” (1980) 1 Company Lawyer 83;Google Scholar and Ferran, E., “Floating Charges—The Nature of the Security” [1988] C.L.J. 213.Google Scholar A third theory, the “contingent charge” theory, has been suggested but not subjected to comment or analysis: McLelland, M.H., “Commentary” in Finn, P.D., op, cit. , p. 278, at pp. 282–283.Google Scholar This is also true of a fourth theory, the “revised licence” theory, which proposes that the chargee has an exceedingly limited proprietary interest before crystallisation and that the licence need not be rigorously analysed: Calnan, R.J., “Priorities Between Execution Creditors and Floating Chargees” (1982) 10 New Zealand Universities Law Review 111, 122–123.Google Scholar

3 The inference is not that the assets will be dealt with, but that they may be dealt with. Accordingly, a company owning only a single asset, such as real estate or shares, could grant a floating charge over its undertaking. The charge would permit the company to deal with the asset, and would encompass any assets subsequently acquired by the company: Re Home and Hellard (1885) 29 Ch.D. 736; Re Croftbell Ltd. [1990] B.C.C. 781.

4 Illingworth v. Houldsworth [1904] A.C. 355, 358 per Lord Macnaghten; Evans v. Rival Granite Quarries Ltd. [1910] 2 K.B. 979, 999–1000 per Buckley L.J.

5 Evans v. Rival Granite Quarries Ltd. [1910] 2 K.B. 979, 999 per Buckley L.J.; Cretanor Maritime Co. Ltd. v. Irish Marine Management Ltd. [1978] 1 W.L.R. 966, 978 per Buckley L.J.: Re Manurewa Transport Ltd. [1971] N.Z.L.R. 909, 915 per Speight J.; Re Margart Pty. Ltd. (in liq.) (1984) 9 A.C.L.R. 269, 272 per Helsham C.J. in Eq.; Relwood Pty. Ltd. v. Manning Homes Pty. Ltd. (No. 2) [19921 2 Qd.R. 197, 203 per Derrington J. Notably, not one of these statements is inconsistent with the proposition that the chargee's interest is simply a defeasible charge.

6 Espoused and explained by W.J. Gough (see note 2 above). Also see Reynolds Bros. (Motors) Pty. Ltd. v. Esanda Ltd. (1983) 8 A.C.L.R. 422, 431 per Priestley J.A.

7 That is, a procedural right ancillary to some right of property: for example, the right to have a document rectified for mistake. See National Provincial Bank Ltd. v. Ainsworth [1965] A.C. 1175; Latec Investments Ltd. v. Hotel Terrigal Pry. Ltd. (in liq.) (1965) 113 C.L.R. 265; Everton, A.R., “‘Equitable Interests’ and ‘Equities’—In Search of a Pattern” (1976) 40 Conv. 209.Google Scholar

8 [1903] 2 Ch. 284, 295.

9 [1904] A.C. 355, 358. Also see Governments Stock & Other Securities Investment Co. Ltd. v. Manila Railway Co. Ltd. [1897] A.C. 81, 86 per Lord Macnaghten.

10 Or the happening of an event such as liquidation, regardless of the terms of the instrument: this might be viewed as an implied term of the agreement.

11 Holroyd v. Marshall (1862) 10 H.L.C. 191; 11 E.R. 999.

12 Re New Bullets Trading Ltd. [1993] B.C.C. 251; on appeal [1994] B.C.C. 36.

13 Or, alternatively, whether the chargee is estopped from denying the apparent position, namely that the chargor had a right to deal with the asset.

14 See Section IV Part C.

15 Although one early garnishee case made the point that garnishment was not a dealing by the chargor at all: Davey & Co. v. Williamson & Sons Ltd. [1898] 2 Q.B. 194.

16 See Section IV.

17 Re Panama, New Zealand, and Australian Royal Mail Co. (1870) 5 L.R. Ch. App. 318; Re Yorkshire Woolcombers' Association Ltd. [1903] 2 Ch. 284, 298 per Cozens-Hardy L.J.; Illingworth v. Houldsworth [1904] A.C. 355, 358 per Earl of Halsbury L.C.; Biggerstaff v. Rowatt's Wharf Ltd. [1896] 2 Ch. 93, 101 per Lindley L.J.

18 See the cases cited in Section IV.

19 Reynolds Bros. (Motors) Pty. Ltd. v. Esanda Ltd. (1983) 8 A.C.L.R. 422.

20 Re Vivian & Co. Ltd. [1900] 2 Ch. 654; also see Re Borax Co. [1901] 1 Ch. 326.

21 Hubbuck v. Helms (1887) 56 L.J. Ch. 536.

22 Re Benjamin Cope & Sons Ltd. [1914] 1 Ch. 800; Re Household Products Co. Ltd. et al. and Federal Business Development Bank (1981) 124 D.L.R. (3d) 325.

23 Torzillu Pty. Ltd. v. Brynac Pty. Ltd. (1983) 8 A.C.L.R. 52.

24 See Section IV Part C.

25 Note that all these restrictions might be included effectively but less directly simply by providing that the charge will become enforceable if the chargor deals in the prohibited manner: such a provision says something about the agreed licence, as well as about crystallisation.

26 Although there are differing views on the efficacy of automatic cystallisation clauses, several recent cases provide support for the concept: Stein v. Saywell (1969) 121 C.L.R. 529; Re Manurewa Transport Ltd. [1971] N.Z.L.R. 909; Re Brightlife [1987] 1 Ch. 200 (obiter); Re Permanent Houses (Holdings) Ltd. (1989) 5 B.C.C. 151; Fire Nymph Products Pty. Ltd. v. Heating Centre Pty. Ltd. (1988) 14 N.S.W.L.R. 460; cf. R. v. Consolidated Churchill Copper Corpn. Ltd. [1978] 5 W.W.R. 652.

27 This does not cause automatic crystallisation: Governments Stock & Other Securities Investment Co. Ltd. v. Manila Railway Co. Ltd. [1897] A.C. 81; Evans v. Rival Granite Quarries Ltd. [1910] 2 K.B. 979.

28 In Evans v. Rival Granite Quarries Ltd. [1910] 2 K.B. 979, at pp. 1000–1001, Buckley L.J. seems to interpret Davey & Co. v. Williamson & Sons Ltd. [1898] 2 Q.B. 194 as just such a case.

29 Re Woodroffes (Musical Instruments) Ltd. (in liq.) [1986] Ch. 366.

30 Re Crompton & Co. Ltd. [1914] 1 Ch. 954.

31 Hubbuck v. Helms (1887) 56 L.J. Ch. 536.

32 Re Woodroffes (Musical Instruments) Ltd. (in liq.) [1986] Ch. 366.

33 Stein v. Saywell (1969) 121 C.L.R. 529; Re Manurewa Transport Ltd. [1971] N.Z.L.R. 909; Re Permanent Houses (Holdings) Ltd. (1989) 5 B.C.C. 151. It can also happen semi-automatically, when the chargee gives notice to convert the floating charge to a fixed charge, if the agreement so provides: Re Woodroffes (Musical Instruments) Ltd. (in liq.) [1986] Ch. 366.

34 Biggerstaff v. Rowan's Wharf Ltd. [1896] 2 Ch. 93.

35 George Barker (Transport) Ltd. v. Eynon [1974] 1 W.L.R. 462; Stein v. Saywell (1969) 121 C.L.R. 529.

36 Re London Pressed Hinge Co. Ltd. [1905] 1 Ch. 576.

37 Or unless the statutory registration system determines a different order of priorities. This qualification applies throughout the discussion which follows.

38 See Section 11.

39 This problem can only be resolved using the rules according to which all unclear contracts are construed.

40 Governments Stock & Other Securities Investment Co. Ltd. v. Manila Railway Co. Ltd. [1897] A.C. 81.

41 By analogy with the permission to create fixed charges. An express permission to create subsequent charges includes floating as well as fixed charges: Re Automatic Bottle Makers Ltd. [1926] 1 Ch. 412. However, such a general permission does not extend to the creation of subsequent floating charges over all the assets comprised in the first charge: Re Benjamin Cope & Sons Ltd. [1914] 1 Ch. 800; Re Household Products Co. Ltd. et al. and Federal Business Development Bank (1981) 124 D.L.R. (3d) 325. Although the first case is regarded as inconsistent with the latter cases by Farrar, J.H., Fury, N.E. and Hannigan, B.M., Farrar's Company Law (3rd. ed., London, Dublin and Edinburgh 1991), p. 277, necessary implied limitations on the express permission can satisfactorily account for the results: see Section III.Google Scholar

42 Biggerstaff v. Rowan's Wharf Ltd. [1896] 2 Ch. 93.

43 George Barker (Transport) Ltd. v. Eynon [1974] 1 W.L.R. 462.

44 Channel Airways Ltd. v. City of Manchester [1974] 1 Lloyd's Rep. 456; Tricontinental Corporation Ltd. v. Commissioner of Taxation [1988] 1 Qd.R. 474.

45 See Section IV Part C.

46 Landaul Holdings Ltd. v. Caratti [1979] W.A.R. 97.

47 Biggerstaff v. Rowatt's Wharf Ltd. [1896] 2 Ch. 93.

48 George Barker (Transport) Ltd. v. Eynon [1974] 1 W.L.R. 462.

49 Although it may perhaps be defeated by trading which will inevitably be unlicensed: see Section IV Part C.

50 Contrast with a Mareva injunction, for example, which requires the chargor to deal with assets in a particular way, but not so as to give third parties rights to those assets: Cretanor Maritime Co. Ltd. v. Irish Marine Management Ltd. [1978] 1 W.L.R. 966.

51 Holroyd v. Marshall (1862) 10 H.L.C. 191; 11 E.R. 999. There are some exceptions, notably where the contract is for the sale of goods: see Re Wait [1927] 1 Ch. 606, a decision which has been severely criticised but not overruled, e.g. Meagher, R.P., Gummow, W.M.C. and Lehane, J.R.F., Equity Doctrines and Remedies (3rd. ed., Sydney 1992), paras. [673]–[682]. which also cites other critical commentary.Google Scholar

52 E.g., Landau Holdings Ltd. v. Caratti [1979] W.A.R. 97.

53 Biggerstaff v. Rowan's Wharf Ltd. [1896] 2 Ch. 93.

54 Despite cases to the contrary: e.g. Biggerstaff v. Rowan's Wharf Ltd. [1896] 2 Ch. 93, 105–106 per Kay L.J., cf. p. 103 per Lopes L.J.; Business Computers Ltd. v. Anglo-African Leasing Ltd. [1977] 1 W.L.R. 578.

55 Biggerstaff v. Rowan's Wharf Ltd. [1896] 2 Ch. 93.

56 In Cox v. Dublin City Distillery Co. [1906] 1 I.R. 446, the floating charge prohibited the creation of prior-ranking charges or mortgages. A contract with the sole object of pledging goods was held to be prohibited by the clause. The possibility of this construction does not seem to have been considered when contractual liens arise in the context of wider transactions: e.g. George Barker (Transport) Ltd. v. Eynon [1974] 1 W.L.R. 462.

57 Although the chargor may also have a right to claim damages against the chargee or receiver if the action is in breach of duties owed to the chargor: Gaskell v. Gosling [1896] 1 O.B. 669; Expo International Pty. Ltd. v. Chant [1979] 2 N.S.W.L.R. 820.

58 George Barker (Transport) Ltd. v. Eynon [1974] 1 W.L.R. 462; Re Diesels & Components Pty. Ltd. (Rec. & Man. apptd.) (1985) 9 A.C.L.R. 825. For statutory liens, see Channel Airways Ltd. v. City of Manchester [1974] 1 Lloyd's Rep. 456.

59 It is sometimes said that the chargee cannot take the benefits of the contract without accepting its burdens: George Barker (Transport) Ltd. v. Eynon [1974] 1 W.L.R. 462; Re Diesels & Components Pty. Ltd. (Rec. & Man. apptd.) (1985) 9 A.C.L.R. 825.

60 George Barker (Transport) Ltd. v. Eynon [1974] 1 W.L.R. 462; Re Diesels & Components Pty. Ltd. (Rec. & Man. apptd.) (1985) 9 A.C.L.R. 825. Third parties with statutory liens arc in the same position: Channel Airways Ltd. v. City of Manchester [1974] 1 Lloyd's Rep. 456.

61 As a permitted effect of the chargor's trading power, rather than a permitted activity.

62 Evans v. Rival Granite Quarries Ltd. [1910] 2 K.B. 979, 990 per Vaughan Williams L.J., p. 995 per Fletcher Moulton L.J., and p. 1000 per Buckley L.J.; Tricontinental Corporation Ltd. v. Commissioner of Taxation [1988] 1 Qd.R. 474, 480 per Connolly J. (with the Australian High Court agreeing: see Editor's Note at p. 486); cf. Davey & Co. v. Williamson & Sons Ltd. [1898] 2 Q.B. 194, 200.

63 Re Combined Weighing and Advertising Machine Company (1889) 43 Ch.D. 99, 105–106; Relwood Pty. Ltd. v. Manning Homes Pty. Ltd. (No. 2) [1992] 2 Qd.R. 197, 204 per Derrington J., cf. p. 201 per McPherson J., although the authorities he cites seem to be directed at the more specific issue of whether the order or seizure effect an assignment of the property to the garnishor or execution creditor, which clearly they do not. The view assumed in this article is consistent with the rule that after either seizure or an order nisi the judgment debtor (the chargor) can no longer assign the property free from liability to execution: see Chatterton v. Watney (1881) 17 Ch.D. 259 and the two cases cited above.

64 Badeley v. Consolidated Bank (1886) 34 Ch.D. 536; Evans, Coleman & Evans Ltd. v. R.A. Nelson Construction Ltd. (1959) 16 D.L.R. (2d) 123; Luckins v. Highway Motel (Carnarvon) Pty. Ltd. (1975) 133 C.L.R. 164.

65 Cf. Davey & Co. v. Williamson & Sons Ltd. [1898] 2 Q.B. 194, although this case is said to be either wrong or an example of automatic crystallisation: see Evans v. Rival Granite Quarries Ltd. [1910] 2 K.B. 979, 997 per Fletcher Moulton L.J. and p. 1001 per Buckley L.J.

66 Robson v. Smith [1895] 2 Ch. 118; Evans v. Rival Granite Quarries Ltd. [1910] 2 K.B. 979.

67 Re Standard Manufacturing Co. [1891] 1 Ch. 627; Re Opera Ltd. [1891] 3 Ch. 260; Taunton v. Sheriff of Warwickshire [1895] 2 Ch. 319; Norton v. Yates [1906] 1 K.B. 112; Cairney v. Back [1906] 2 K.B. 746; Charles Rich Antiques Ltd. v. Rudyard Developments Ltd. [1979] 2 N.Z.L.R. 724; Relwood Pty. Ltd. v. Manning Homes Pty. Ltd. (No. 2) [1992] 2 Qd.R. 197; cf. Tricontinental Corporation Ltd. v. Commissioner of Taxation [1988] 1 Qd.R. 474, a case dealing with a statutory order similar to a garnishee order. Also see Ford, H.A.J. and Austin, R.P., Ford's Principles of Corporations Law (6th ed., Sydney 1992), para. [1223].Google Scholar

68 For then the licensed garnishment proceedings would create no rights which might operate in defeasance of the chargee's interest.

69 For then the garnishor, who can only take the assets subject to any equities against the chargor. would be bound by the restriction prohibiting execution contained in the licence: see Section IV Part C.

70 Calnan, R.J., “Priorities Between Execution Creditors and Floating Chargees” (1982) 10 New Zealand Universities Law Review III.Google Scholar

71 Hamilton v. Hunter (1982) 7 A.C.L.R. 295; Torzillu Pty. Ltd. v. Brynac Pty. Ltd. (1983) 8 A.C.L.R. 52. On the other hand, Re Bartlett Estates Pty. Ltd. (in liq.) (1988) 14 A.C.L.R. 512 is not an example of this. There, the charge contained an express provision giving the chargee the right to crystallise the charge if the chargor dealt otherwise than in the ordinary course of business: the effect of this is concurrently and expressly to restrict the chargor's licence to deal.

72 For the resolution of these disputes, see Section IV Part A.

73 English & Scottish Mercantile Investment Co. Ltd. v. Brunton [1892] 2 Q.B. 700: there was an effective legal assignment of the debt once the third party gave notice to the debtor, and the third party had no notice of the restrictive clause. However, the judgment itself seems to consider the matter as one of competing equitable interests.

74 Cox v. Dublin City Distillery Co. [1906] 1 I.R. 446; Torzillu Pty. Ltd. v. Brynac Pty. Ltd. (1983) 8 A.C.L.R. 52; Hamilton v. Hunter (1982) 7 A.C.L. R. 295; Re Bartlett Estates Pty. Ltd. (in liq.) (1988) 14 A.C.L.R. 512.

75 Latec Investments Ltd. v. Hotel Terrigal Pty. Ltd. (in liq.) (1965) 113 C.L.R. 265.

76 Cox v. Dublin City Distillery Co. [1906] 1 I.R. 446 (knowledge); Re Manurewa Transport Ltd. [1971] N.Z.L.R. 909 (notice;) Deputy Commissioner of Taxation v. Horsburgh [1984] V.R. 773 (knowledge).

77 In Re Benjamin Cope & Sons Ltd. [1914] 1 Ch. 800 and Re Household Products Co. Ltd. et al. and Federal Business Development Bank (1981) 124 D.L. R. (3d) 325 there is no reference to knowledge or notice; both found in favour of the chargee. In Torzillu Pty. Ltd. v. Brynac Pty. Ltd. (1983) 8 A.C.L.R. 52, the third party knew of the floating charge and its contents; the chargee's interest prevailed.

78 English & Scottish Mercantile Investment Co. Ltd. v. Brunton [1892] 2 Q.B. 700.

79 Sykes, E.I. and Walker, S., The Law of Securities (5th ed., Sydney 1993), p. 963;Google Scholar cf. alternative explanations based on fraud on the power or agency: Ford, H.A.J. and Austin, R.P.. Ford's Principles of Corporations Law (6th ed., Sydney 1992), para. [1222];Google ScholarGoode, R.M., Legal Problems of Credit and Security (2nd ed., London 1988), pp. 59, 90.Google Scholar

80 However, this will change if the Companies Act 1989, s. 103 is brought into effect, introducing section 415(2)(a) to the 1985 Act. The new section would require the compulsory registration of floating charges and their particulars and would presumably mean that third parties would have constructive notice of restrictive clauses. This favours the chargee in any priority dispute, although the intention of the law was presumably to assist third parties. This is probably already the position in Australia.

81 Siebe Gorman & Co. Ltd. v. Barclays Bank Ltd. [1979] 2 Lloyd's Rep. 142.

82 See Section IV Part A.

83 Then Latec Investments Ltd. v. Hotel Terrigal Pty. Ltd. (in liq.) (1965) 113 C.L.R. 265 will assist in resolving any priority disputes, and the third party's interest will not always prevail. However, the theory remains unable to account for the chargee's priority, regardless of notice, when implied restrictions are breached; nor can it account for the results where the third party has notice, rather than knowledge, of the chargee's interest.

84 Latec Investments Ltd. v. Hotel Terrigal Pty. Ltd. (in liq.) (1965) 113 C.L.R. 265 does not assist: according to the “licence” theory, the chargee's interest is not as “weak” as a mere equity, which requires the intervention of the court before it can be asserted.

85 Rice v. Rice (1853) 2 Drew. 73, 85; 61 E.R. 646, 651.

86 Driver v. Broad [1893] 1 Q.B. 744; Wallace v. Evershed [1899] 1 Ch. 891; Re Dawson [1915] 1 Ch. 626.

87 Re Benjamin Cope & Sons Ltd. [1914] 1 Ch. 800; Re Household Products Co. Ltd. et al. and Federal Business Development Bank (1981) 124 D.L.R. (3d) 325.

88 See the cases cited in Section IV Part B (especially those relating to incomplete transactions) and Section IV Part C. Editor's note: the decision of the Court of Appeal in Re New Bullas Trading Ltd. [1994] B.C.C. 36 was reported after this article went to press.