Is a second legal charge enforceable?
Many people run their business through the vehicle of a limited company. A common way of raising money to run and develop the business is to borrow from a bank or building society. The lender has the choice of taking a fixed charge over the assets of the company. This is a charge which attaches to a specific asset (e.g. land) and the company cannot deal with or sell that asset without the consent of the lender. An alternative form of security is a floating charge, which covers present or future assets but does not 'attach' to one specific asset. The company is free to sell, deal in or dispose of the asset during the ordinary course of business that is subject to a floating charge, as this charge does not 'bite' until the floating charge 'crystallises' (which is usually the point that an administrator or receiver is appointed).
The Court of Appeal recently considered a case relating to whether a floating charge was enforceable. This is an important case because whether a charge can be enforced is a key consideration for both the borrower and the lender.
The facts of the case are complex but the central argument was that at the time a floating charge crystallised and became enforceable, there were no uncharged assets of the company left for the crystallised floating charge to attach to. The argument went therefore that this rendered the floating charge unenforceable.
The Court was not persuaded by this argument and held that the floating charge was enforceable even though there were no uncharged assets to which it could attach.
It is important therefore for a lender and a borrower to carefully consider the type of charge that may be taken for security of a company loan. This will involve a full consideration of the company's assets at the time of creation of the charge and an assessment of the risk if there are other, earlier charges already affecting the company.
If you need any company or commercial advice, contact us.
Case: Saw (SW) 2010 Ltd and another v Wilson and others [2017] EWCA Civ 1001