Friday 8 March 2019

UK: England and Wales: the avoidance of floating charges under section 245 of the Insolvency Act 1986

Judgment was given earlier today in Crumpler & Anor (Liquidators of Peak Hotels And Resorts Ltd) v Candey Ltd [2019] EWCA Civ 345, on appeal from [2017] EWHC 3388 (Ch). The case is an important one on the operation of section 245 ("Avoidance of certain floating charges") of the Insolvency Act 1986.

In broad outline, section 245 invalidates floating charges (but not the underlying debt) where created in a relevant period prior to the onset of insolvency; but the charge (or part thereof) remains valid in several circumstances, including (under section 245(2)(a)) in respect of "the value of so much of the consideration for the creation of the charge as consists of money paid, or goods or services supplied, to the company at the same time as, or after, the creation of the charge". The value of goods or services so supplied is fixed by section 245(6) as "the amount in money which at the time they were supplied could reasonably have been expected to be obtained for supplying the goods or services in the ordinary course of business and on the same terms (apart from the consideration) as those on which they were supplied to the company" (emphasis added).

In the case before the court, a fixed fee agreement was agreed whereby Candey would supply legal services to PHRL. Candey received a floating charge as security; the charge had been created at a time when PHRL was unable to pay its debts (within the meaning found in section 123 of the 1986 Act). PHRL later entered liquidation. Amongst the issues to arise was the extent of the floating charge's validity and how to value the services.

Lord Justice Henderson (with whom Underhill and Moylan LJJ agreed) held that for the purposes of section 245, the question was not what sum was contractually due between the parties but what was the value of the services actually supplied as calculated in accordance with section 245(6). This was, Hendersen LJ stated, "...the measure laid down by Parliament to ensure a fair balance between the interests of Candey as the holder of a floating charge, on the one hand, and the interests of the general body of unsecured creditors (including Candey, to the extent that the charge is invalid) on the other hand. It has nothing whatever to do with the commercial fairness, as between Candey and PHRL, of the contractual terms of the Fixed Fee Agreement" (para. 36).

This valuation process in section 245(6) required, Henderson LJ stated, the obligation to pay the fixed fee to be ignored because this was a term relating to "the consideration" (para. 38). Indeed, his Lordship added that "the whole concept of the provision of the services in return for a fixed fee has to be disregarded, because such a concept is incompatible with the exercise which section 245(6) requires to be performed ... the exercise required by section 245 ... is retrospective, and requires a valuation with the benefit of hindsight of the work which has actually been done. Only to that extent may Candey be regarded as a validly secured creditor" (para. 39).

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