Tutorial on charges

Company Law – Tutorial on Charges

1. X Co. Ltd. approaches Thrifty Bank to apply for a €100,000 loan for a new line of business it wishes to start up in conjunction with an existing successful business. The company has land and buildings worth €50,000 and suggests to the bank that they issue a debenture (the company acknowledges a debt given to them in a debenture document and the debenturecan be secured or not secured but in most cases they are secured) containing a fixed charge on the land and buildings (the specific items will be named in the contractual arrangement) and a floating charge on the company's book debts.

Advise the bank on the suitability of this type of security.

The big advantage with a fixed debenture is that if the debtor can’t pay then thecompany can appoint a receiver to recover the money that was lent out in the first place. All charges must be registered under S 99 in order to be valid.

A floating charge on the company’s book debts: a record of the money owed to the company and this money can also be used as security. Floating charges are for items that are subject to constant change e.g. raw materials. There are ways togo around this.

I would advise the bank to take the fixed charge instead of the floating charge because: S 285 of the 1963 Act: floating charges ran below the debts of the… and S 285 (b) of the same Act: if there are insufficient funds to satisfy preferential creditors then all assets subject to floating charge will be used to pay preferential creditors. S 288 of the 1963 Act: providesthat floating charges that are created within 12 months of the company winding up are invalid with the exception that the company was still solvent when the loan was granted. S 136 of the 1990 Act: provides that charges created in favour of directors or other connected persons with two years of winding up can be set aside.

If there is a floating charge on an asset and then there is afloating charge and the floating charge owner appoints a receiver then the receiver has to get the consent of the fixed charge holder before he does anything with the property.

A floating charge on the company's book debts.

Keenan Brothers [1985] and National Westminster bank plc [2005] – the access of the borrowing company to the account must be restricted. Re Wogan’s Droheda Ltd –the court held that it would constitute…

Re Holidiar Ltd – That decision was reversed and the court said in that case that if there is no restriction and the company has no access to the account then that would be regarded as a floating charge.

2. In April 2008, Moneybank Ltd. advanced money to Soda Exports
Ltd., a soft drink manufacturer, on the security of a properlyregistered floating charge over the entire stock of the company and the company’s factory building. The debenture creating the charge included an undertaking by Soda Exports Ltd. not to create any mortgage or charge on the property subject to the charge which would rank either pari passu or in priority to the floating charge.

That is a negative pledge clause.

In breach of thisundertaking, the company created a fixed charge on its factory building on August 5, 2008 to secure a loan from Easi Finance Ltd. This charge was not registered.

A negative pledge clause is merely a promise between the lending institution and the borrower. The test in this country depends on notice; if he has notice then he may not be able to take priority even though he has a fixed charge and sothe question is what constitutes notice? Welsh v Bo Maker Ireland Ltd – the judge said there should be actual notice of the negative pledge in the debenture before the subsequent lender would be bound by it and not able to take priority over the person with the floating charge. Re Sot Hill Properties Ltd. The big problem here is that the charge was not registered! What is the consequence/...