[T]he retention of the floating charge creates a mechanism for preferences to be obtained in some insolvencies which are every

bit as objectionable, as a matter of principle, as any caught and avoided by [the actio Pauliana]

R. J. Mokal, Corporate Insolvency law: theory and application (2005) p 223

Critically discuss.

Exam Number: B001257 Word Count: 4.842 Program: LLM in Commercial Law

Introduction

Choosing which creditor should be paid out before the others, after the insolvency of the same debtor, has always caused several disputes. Notably, in England, the floating charge has often been at the centre of clashes as it creates, after the granting of a loan, a mechanism of priorities in favour of the financier-floating charge holder extremely prejudicial to unsecured creditors (in particular, trade creditors). Unsurprisingly, not long after its recognition by the Courts of Equity, 1 two lines of thinking on the admissibility of the floating charge could be identified. On the one hand, the floating charge has been cheered by both the entrepreneurial world 2 and by financiers (often banks) as it represented a flexible instrument to raise money that catered to the needs of both parties. Thus, that approach was openly in favour of the retention of the floating charge. On the other hand, it was fiercely opposed by some scholars and eminent judges as it unfairly swept off insolvency value from unsecured creditors to secured ones.3 Consequently, some of those authors even averred its abolition as it was not an efficient charge. Nowadays, those contrasting views still face each other. 4 More specifically, the approach against the floating charge has inspired some reforms of its regulation in order to mitigate its
1

Holroyd v Marshall (1862) 10 HL Cas 191; In Re Panama, New Zealand and Australian Royal Mail Co (1870)LR 5 Ch App 318; Evans v Rival Grantie Quarries Ltd [1910] 2 K.B. 979; Re Yorkshire Woolcombers Association [1904] AC 355
2

The floating charge can be granted by a company and by a limited liability partnership. See Salamon v A. Salamon & Co Ltd [1897] AC 22 ff, at 53 per Lord Macnaghten

For a positive approach see L Gullifer, "The Reforms of the Enterprise Act 2002 and the Floating Charge as a security device", 2008 Can. Bus. L.J 46, 399 and 429 (henceforward, L Gullifer, The Reforms of the Enterprise Act); M Simmons, Some reflections on administrations, crown preference and ring-fenced sums in the Enterprise Act, 2004 J.B.L. 423ff; V Finch, Security, Insolvency and Risk: Who Pays the Price? in 1999 M.L.R. 62 (5) 633, at pages 640 and 659 (henceforth V Finch, Security, Insolvency and Risk). For a partial different approach see H Sevenoaks, Financing requirements in the 21st century and the (in)adequacy of the floating charge 2

effects. However, the following paper will advocate against the outright abolition of that legal instrument. To establish if the priority of the floating chargee over unsecured creditors must be retained, it must be assessed if the floating charge satisfies the requirements of admissibility generally set out for secured credit. In fact, it must be remembered that the floating charge creates a mechanism that derogates from a basic principle of insolvency law: there must be an equality of misery or equality of treatment of creditors.5 Therefore, there must be a pari passu distribution of available assets amongst creditors.6 Broadly speaking, there are two different views on the admissibility of secured credit. According to the economic efficiency theory, secured credit can be recognized only if it is economically efficient. In other words, it must produce an overall advantage to the secured creditor and the debtor that outweighs its disadvantage to unsecured creditors.7 On the contrary, the distributive efficiency approach recognizes secured credit as long as it causes economic efficiency coupled with a fair distribution of the insolvency value towards the weaker creditors of the company (for instance, its employees or trade creditors).8

in 2009 I.C.C.L.R., 20(1), 17 . For a negative approach see R J Mokal, Corporate Insolvency Law, Theory and Application (2005) at pages 190 and 221 and R. Goode, The Exodus of the Floating Charge in Feldman & Miesel (Eds), Corporate and Commercial Law: Modern Developments, 1996, at 202 and R Goode, The Case for the Abolition of the Floating Charge, in in J. Getzler and J. Payne (eds) Company Charges Spectrum and Beyond, 15, 22 and 23

G Mc Cormack, The priority of secured credit: an Anglo-American perspective (2003) J.B.L. 389 ff. at 393
6

s.107 Insolvency Act 1986 which applies to voluntary liquidations and r.4.181(1) Insolvency Rules 1986 applicable to compulsory liquidations.
7

T H Jackson and A T Kronman, Secured Financing and Priority Among Creditors (1979) 88 Yale L.J. 1143 ff
8

E. Warren, Making Policy with Imperfect Information: the Art.9 Full Priority Debates (1997) 82 Cornell L. Rev. 1373 ff.

The following paper will adopt the first approach. In fact, in the opinion of the present writer, firstly, the entrepreneurial world is not a country for old men and, thus, every party should be aware of the risks it can incur dealing with others businesses. Secondly, an excessive seek for a redistribution of insolvency value could prevent the major lenders from granting loans and, accordingly, globally prejudice private enterprise. As regards the floating charge, it will be maintained that its advantages still outweigh its disadvantages and also unsecured creditors can obtain some benefits from it granting. Particularly, it will be shown that the priority of the floating charge holder can be justified for two different reasons. On the one hand, the floating charge holder provides the company with funds that will be used to pay its trade creditors in the ordinary course of business. 9 On the other hand, it will be maintained that the reformed leading role of the floating charge holder, through the appointment of an administration out of court, will increase the overall insolvency value of the company in favour of all the its creditors. In fact, the floating charge holder could not purse its individual interests anymore, but it has to take into account also the ones of the other creditors of the company. This essay will be structured in the following way. The first part will be dedicated to a brief overview of definition, function and regulation of the floating charge. In succession, the arguments against the priority of the floating charge holder over the unsecured creditors will be provided. Finally, the retention of the floating charge will be justified for the two reasons above mentioned. However, the need for some modification of its regulation will be advised. In particular, the recognition of a legal instrument similar to the Purchase Money Security Interest, as in the United States of America, will be advised.

See Cork Report, para 1526 and P R Wood, Comparative law of Security Interest and Title Finance (2nd ed. ) para 6.007

Chapter I

Definition, function and regulation of the floating charge.

Before analysing the arguments in favour and against the abolition of the floating charge, it must be explained how that legal instrument works. In England, the floating charge was devised by a series of Chancery decisions, during the 19th Century, in order to cater to the needs of small unincorporated companies that wanted to expand their business.10 Notably, according to the regulation in force by that period, they were not allowed to obtain loans through the greater part of their assets. 11 Namely, those goods consisted in raw materials, manufactured or semi-manufactured goods, stock in trade and trade debts payable to the companies. The point to be remembered is that those assets were qualified as circulating assets due to the fact that they were replaced in the normal course of business and constantly changing. 12 For that reason, those assets were held to be not consistent with the securities commonly used: the mortgage of land or goods and the pledge of goods. In fact, those securities could only be granted over specified assets and not over goods whose constituent items were constantly changing and, least of all, over future assets. 13 Furthermore, after the granting of a mortgage or a pledge, the power of the companies to dispose of the item would have been subjected, by and large, to the consent of the secured creditor. Therefore, the regime of the above mentioned securities would have hugely constrained the transactions of the firms that wanted to expand their business.

10

R Pennington , The Genesis of the Floating charge, (1960) 23 Mod.L.Rev. 630 (henceforth R Pennington, The Genesis). For a different view see J. Getzler. The Role of Security over Future and Circulating Capital: Evidence from the British Economy circa 1850 1920, 248 in J. Getzler and J. Payne (eds) Company Charges Spectrum and Beyond, 227 ff 11 R Pennington, The Genesis, 631
12

In re Spectrum Plus Ltd [2005] 2 AC 680 Para 95 R Pennington, The Genesis, 632 and f.

13

Anyway, Courts understood their needs and recognized them through equity. The pivotal decision was Holroyd v Marshall,14 in which the House of Lords upheld the power of a debtor to grant a mortgage not only over its existing machinery, but also over the new machinery which, during the continuance of the security, should be placed in its mill. In particular, it was submitted that, by the moment in which they come into existence, the new assets would be subjected to the mortgage and passed in equity to the mortgagees.15 By the 1870s, Court recognized the power to grant securities over any class of circulating assets that the chargor might possess. In fact, in In Re Panama, New Zealand and Australian Royal Mail Co16 it was held that the company can charge its undertaking and all sums of money arising therefrom. In particular, Gifford LJ clarified, on the one hand, that undertaking meant all the property of the company, not only which existed at the date of the debenture, but which might afterwards become the property of the company. 17 On the other hand, he added that the word undertaking, necessarily infers that the company will go on, and that the debenture holder could not interfere until either the interest which was due was unpaid, or until the period had arrived for the payment of his principal and that principal was unpaid. That decision is very important, and it is cited in the recent case In re Spectrum Plus Ltd (in liquidation) as it firstly identified the two main features of the floating charge: 1) a charge on the chargor companys asset or a specified class of assets, present and future and 2) the right of the chargor company to continue to use the charged assets for the time being owned by it and to dispose of them for its normal business purposes until the occurrence of some particular future event.18 Overall, the floating charge can be defined as a present security that floats over a fund of assets, generally identified in the debenture (the undertaking, all the asset present and future

14

(1862) 10 HL Cas 191

(1862) 10 HL Cas 211 per Lord Westbury and at p. 220 per Lord Chelmsford (1870)LR 5 Ch App 318 At p. 322 [2005] 2 AC 680 at page 717 per Lord Scott of Foscate

15

16

17

18

and such like), whose items are constantly changing and that allows the chargor to dispose of them, until the charge crystallizes.19 The events of crystallization are defined in the debenture and they usually refer to the cessation of trading by the company as a going concern, or to the loss of the power to manage the business due to the intervention of the debenture holder or to other specifics acts or events.20 Following the crystallization of the charge, the charges becomes fixed over the specific assets comprised in the fund and, even, if subsequently acquired by the company. 21 The company loses its power to manage its assets. Notably, until the enactment of the 2002 Enterprise Act, the debenture holder could step in and, before the start of the liquidation process, appoint a receiver or an administrative receiver (if the charge floated on all the assets of the company). The latter was entitled to take every step to purse the selfish interest of the floating chargee. More specifically, the administrative receiver could manage the entire business of the company, continue trading, sell the business as a whole so as to realise the credits of the debenture holder in the best way. In addition, the floating chargee could block the appointment of an administrator by other parties (for instance, other creditors or the debtor). In fact, the administrators task of rescuing the all business could not match with its interests.22 As it has already mentioned, the power of the company to dispose of its assets is not curtailed before the crystallization of the floating charge. Consequently, the floating chargee is not entitled of an absolute priority. As a matter of fact, on the one hand, it ranks after other secured creditors whose fixed charges were granted before the crystallizing event. On the other hand, the claims of the debenture holder comes after the execution creditors of the company who completed the execution or obtained payment prior to the crystallisation of the charge.23Thus, the floating chargee has priority only towards the creditors that did not fall into

19

See the Yorkshire Woolcombers Associations case[1903] 2 Ch 284, at page 295 per Romer LJ

20

L.Gullifer, Goode on Legal Problems of Credit and Security,(2008) (4 th ed.) para 4-30 (henceforward L.Gullifer, Legal Problems)
21

L.Gullifer, Legal Problems, para 4-07 L.Gullifer, Legal Problems, para 4-09 L.Gullifer, Legal Problems, para 4-09 and 5-43

22

23

those two classes, namely unsecured creditors, unless the floating charge is coupled with a negative pledge.24 Nonetheless, there was a twofold move to restrict the priority of the debenture holder. First of all, it was deemed that its effects were unfairly prejudicial to particular creditors of the company. That was the case of the employees of the company and of the Crown in relation with some tax claims. The former, could not levy the very goods (raw materials and manufactured goods of the company) that were subjected to the their efforts.25 Therefore, in 1897, they were given priority over the floating chargee. 26 The latter, was considered an involuntary creditors and, thus, not capable to redress its claims towards the company.27 Finally, the liquidation expenses were given priority over the floating chargee too. 28 In addition, it was established that the floating charge must be registered in the Register of Company Charges so as to identify the main creditor of the company.29 However, those measures were still considered insufficient to police the interests of another important class of the companys creditors: the trade creditors. As a result, the regulation of the floating charge was again reformed by the 2002 Enterprise Act. In particular, several provisions have been inserted into the 1986 Insolvency Act. Not only did the Enterprise Act abolish the Crowns preference, but also created a ringfenced fund in favour of all the unsecured creditors of the company. Consequently, now their claims must be satisfied, within the value of that fund, before the ones of the floating chargee. However, the unsecured creditors still rank after the secured ones and the

24

According to R. Craston, Principles of Banking law, (1997), 342 the negative pledge is, in its basic form, a promise by a borrower that it will not grant security to a third party. Nonetheless, that covenant cannot be registered and it does not have effect with regard to further chargees that do not know its existence.
25 26

L Gullifer, The Reforms of the Enterprise Act, 400 See Preferential Payments in Bankruptcy Amendment Act (U.K.), 1897, c. 19, s. 10 L Gullifer, The Reforms of the Enterprise Act, 400

27

28

Barleycorn Enterprises Lts. (Re) [1970] Ch. 465 (C.A.). But see the controversial decision of Buchler v Talboyt [2004] UKHL 9, [2004] 2 AC 298
29

Companies Act (U.K.) 1900, c. 48, s. 14.

preferential creditors. In fact, the ring-fenced fund is solely made up of the assets available for satisfaction of claims of the floating charge holder.30 Notably, a section 176 A has been inserted in the 1986 Insolvency Act. It provides that, when the value of companys net asset is more than 10,000, the liquidator, administrator or receiver must make a prescribed part of the company's net property available for the satisfaction of unsecured debts. Furthermore, they are precluded from distributing that part to the floating charge holder except in so far as it exceeds the amount required for the satisfaction of unsecured debts. Particularly, it must be remembered that the prescribed part has been set at 50 per cent of the first 10,000 and 20 per cent thereafter, up to a maximum prescribed part of 600,000.31 Moreover, the 2002 Enterprise Act has substantially abolished the floating chargees powers to appoint a receiver and to block the appointment of an administrator by other parties .32 Nonetheless, the debenture holder can now appoint an administrator to seek the rescue of the company and who has, in any case, to take into account the interests of all its creditors. 33 Notably, Gullifer underlined that the reform introduced by the Enterprise Act, by increasing the function of administration, fosters not only the rescue of more businesses but also the creation of a more level playing field between creditors in the course of insolvency proceedings.34 Despite all those reforms of the floating charge regulation, that legal instrument still comes under heavy criticism. That brings me to analyse the arguments against it.

30

Insolvency Act 1986, s.176A(6) Insolvency Act 1986 (Prescribed Part) Order 2003 (SI 2003/2097). Insolvency Act 1986, s.72A

31

32 33

Insolvency Act 1986, Sch.B1, paras 2,3 and 14

L Gullifer, The Reforms of the Enterprise Act, 404

34

Chapter II

Arguments against the retention of the floating charge

Since its creation, several authors have been fiercely against the retention of the floating charge for various reasons. As it has been already mentioned, that legal instrument has been criticized mainly because it allows the debenture holder to sweep off insolvency value from unsecured creditors. However, it must be remembered that, until the enactment of the 2002 Enterprise Act, the floating charge was also cast doubt on because it generally gave the power to appoint an administrative receiver over all the assets of the debtor. As regards that second ground, it was outlined that the receivership was an inefficient device. In particular, Goode maintained that the receivers work could hugely damage the company and, in the meantime, its creditors.35 In fact, as it has been already noted, the receiver had only to purse the interest of the floating chargee. Therefore, he was totally free in determining the timing of the sale of the company despite the fact that the market was at rock bottom and there was no chance of getting a fair price for the benefit of all creditors. In addition, Goode added that the receiver could choose to dispose of the assets on a breakup basis even though more could be obtained by carrying on the business and disposing of it as a going concern. Further, he is, it seems, entitled to realise any asset of his choosing, even if it is equipment crucial to the companys business and there are other assets available which would realise sufficient to cover the amount due.36 Also a part of the judiciary was openly against the floating chargee and the receiver selfish attitude. Notably, in Palk v Mortgage Services Funding plc, 37 Sir Donald Nicholls V-C could not see the point of narrowing the mortgagees duties. In fact, in the opinion of the above mentioned judge, when more than one course of actions could be followed by the floating chargee and they both do not affect its interests, it should choose the one that
35

R Goode, Proprietary Rights, 192 f. R Goode, Proprietary Rights, 192

36

37

[1993] Ch 330 10

minimises the damage to the company. In other words, it should act along the light of a duty of reasonable care to the company. Finally, the receiverships inefficiency has been noted by the legislative power and now, that device has been drastically curtailed.38 However, that does not mean that every objection to the floating charge has been met. As a matter of fact, the main criticism of the floating charge has always been centred on another ground: the mechanism of priority that it operates. In fact, it has been considered unfairly prejudicial to unsecured creditors for two different reasons. Firstly, the floating charge is challenged because it usually operates as a global security that unfairly allows a charge upon all future assets of the debtor. Consequently, even though new assets are acquired by the chargor due to further advances made by other parties (in particular, other financiers or trade creditors), the floating chargee ranks before them. Therefore, as remarked by Lord Hoffman, it could be potentially prejudicial to the general body of creditors who might know nothing of the floating charge but find that all the company's assets, including the very goods which they had just delivered on credit, had been swept up by the debenture holder.39 In other words, the floating charge has been criticized because, on the one hand, it shifts insolvency value from unsecured creditors to the floating chargee. On the other hand, no fresh value is injected in the company by the latter for the benefit of the former. As a result, unsecured creditors are prejudiced against as the debenture holder is withdrawing from the company more than it paid in. Thus, the floating charge is cast doubt on as, through it, the debenture holder enjoys the windfall benefit of diminishing risks of default. In addition, the existing interest rate proves increasingly advantageous to it.40 That argument has been supported by recent statistics. According to the study of Franks and Sussman, 41 recovery rates for banks (that generally hold the floating charge together with
38

See Insolvency Act 1986, s.72B- 72 GA Re Brightlife Ltd [1987] Ch. 200 at 209.
V Finch, Security, Insolvency and Risk at p 662

39

40

41

The Cycle of Corporate Distress, Rescue and Dissolution (IFA Working Paper 306, 2000)cited in R J Mokal, Corporate Insolvency Law, Theory and Application(2005) at page 191 11

fixed charges on the key assets of the debtor) are 77 per cent compared with close to zero for trade creditors and 27 per cent for preferential creditors. In addition, according to the Association of Business Recovery Professionals (ABRP)s, overall recoveries were 35 per cent for preferential creditors, 53 per cent for secured ones, and 7 per cent for unsecured ones. 42 Secondly, it has been held that the priority of the debenture holder cannot be justified under the notice argument. According to that thesis, a security can be recognized as long as it has been given sufficient publicity of the charge in favor of the (existing and, above all, future) creditors of the debtor.43 The critics of the floating charge have averred that its registration in the Registrar of the Company Charges only apparently satisfies that requirement. In particular, Finch has underlined that the floating charge is often granted to secure bank overdraft. Consequently, as the amounts outstanding on the overdraft might fluctuate daily, it is, accordingly, impossible to tell from the register how much the floating charges secured. That scholar goes on stating that even the latest company balance sheet offers little further assistance on this front. 44 In fact, it is usually out of date by some months and will be unlikely to disclose contingent liabilities such as guarantees of the overdraft of associate company, which may also be secured by the floating charge.45 In addition, Finch has outlined that even English law on registration of the charges can mislead unsecured creditors. In fact, a (floating) charge is valid provided that it is registered within twenty one days after the creation of the charge. 46Therefore, further financiers and trade creditors could grant credit to the debtor without knowing that another creditor has already taken a floating charge.

42

ABRP, 9th Survey of Business Recovery in the UK (22 November 2001), 18 cited in R J Mokal, ibidem
43 S

ee R Goode, Proprietary Rights and Unsecured Creditors, in B A K Rider (ed), The Realm of Company Law (1998) , 183 at p. 186 (henceforth, R Goode, Proprietary Rights)
44

V Finch, Security, Insolvency and Risk, 662

45

V Finch ibidem V Finch ibidem 12

46

Finally, Mokal stated that, after the substantial limitation of the power to appoint the receiver, the floating charge has only an exploitative function: it shifts insolvency value from secured creditors to the floating chargee.47 As it has already noted, the criticism of the floating charge has not stopped even after the creation of the ring-fenced fund. In fact, it has been shown that that fund will make little difference for unsecured creditors: according to the Government's own figures, at best it will yield about 100 million extra for unsecured creditors each year and, thus, there will be an increase of their recovery of less than 1 per cent.48 Further, it is added that the Crown is now an unsecured creditor and so debt owed to its claims will be paid out of the ring-fenced fund. 49 Therefore, it will compete with other unsecured creditors. As a result, several eminent authors still underline that the risk of default is still to shouldered on them.50

47

R J Mokal, Corporate Insolvency Law, Theory and Application, 190 R J Mokal, Corporate Insolvency Law, Theory and Application, 129 f. L Gullifer, The Reforms of the Enterprise Act, 411

48

49

50

L Gullifer, The Reforms of the Enterprise Act, 402 and 411; V Finch, Security, Insolvency and Risk, 633

13

Chapter III Arguments in favour of the retention of the floating charge

Even though the exploitative nature of the floating charge, during the insolvency of the debtor, cannot be cast doubt on, in the opinion of the present writer the floating charge must not be abolished for the following reasons. Firstly, both the academic literature and the case law on the floating charge recognize the extreme flexibility of that legal instrument. In fact, contrary to fixed charges, it allows the debtor to use its circulating assets to fund its economic activities. Moreover, the debtor can dispose of those assets without needing the consent of the chargor. Therefore, abolishing the floating charge would, in first place, prejudice the businesses entitled to grant that charge. Secondly, in the opinion of the present writer, the admissibility of the floating charge must be scrutinized taking into account not only its effects during the insolvency of the debtor but also before that period. As a matter of fact, the floating charge fosters the raising of money that will be normally used by the debtor in the ordinary course of its business. Consequently, that money will be also deployed to pay its trade creditors. 51 Otherwise, their trust in the debtors credit worthiness, namely its ability to meet its obligations, will be undermined and none of them will decide to go on trading with it on standard terms in the future.52 As a result, in my view, it is not totally true that the floating charge operates as an unfairly mechanism of preference in favour of the floating chargee and against the unsecured creditors. In fact, the latter benefit, in the ordinary course of business of the debtor, from the injection of money obtained through the loan of the floating chargee. Therefore, in that phase, the unsecured creditors are better off at the floating chargees expenses. In fact, the estate of the latter is, accordingly, depleted. On the contrary, during the insolvency of the debtor, the insolvency value moves in the opposite way round and the floating chargee is paid before the
51

See Insolvency law and practice: report of the Review Committee/ Chairman Sir K Cork, 1982, para 1526

52

B Cheffins, Company law: theory, structure and operation, Oxford (1997), 79

14

unsecured creditors. Thus, in my opinion, the preference accorded to the floating chargee can be (partly) justified: it aims at redressing the benefit that unsecured creditors have got during the solvency period of the debtor. Hence, it is submitted that the idea of a total abolition of the floating charge cannot be sustained. Otherwise, as the risk of non-payment will increase for the financiers-floating chargee, they could not be prone to granting loans on circulating assets whatsoever or they could grant them at an higher price for the debtors. Therefore, private enterprise could be seriously curtailed. As regards trade creditors, diversification of their contractual relationships appears as the main remedy for them. In fact, neither do the majority of them have the financial resources to acquire adequate information so as to determine the probability of the default of the debtor. Nor do they have the contractual strength to bargain an higher yield. 53 Therefore, it is submitted that even if the Registrar of the Charges provided more accurate information on the floating charge, that would be of little use for unsecured trade creditors. Finally, it is submitted that, after the reform of receivership, the unsecured creditors position during the insolvency of the debtor has improved a lot. 54 In fact, the power to appoint a receiver has been curtailed and even if the floating charge appoints an administrator, the latter has to pursue the interests of all the creditors of the debtor. Therefore, the administrator has to realise the assets of the debtor seeking the highest insolvency value so as to benefit not only the floating charge, but also all the creditors of the company.

53

B Cheffins, Company law: theory, structure and operation, Oxford (1997), 74 and 82. See also V Finch, Security, Insolvency and Risk, 638 and 665
54

Cf. V Finch, The Recasting of Insolvency Law, in (2005) M.L.R. 68, 713 at page. 735

15

Chapter 4 The need of the recognition of the purchase money security interest in England
As it has already mentioned, although this paper generally recognizes the efficiency of the floating charge it does not exclude that, in some cases, that legal instrument could unfairly affect unsecured creditors. For instance, take a case in which a debtor has granted a floating charge that extends over its future property. If a further creditor advances money to fund the acquisition of new property in the debtors hands, that creditor will be outranked by the floating chargee in respect of the collateral represented by the new property. That case is known as the one of the purchase-money security interest (PMSI), and it is characterized by the extending of credit on the understanding that the debtor will use it to acquire the collateral.55 Alternatively, the purchase money secured creditor can be the seller of a product who has retained a security interest to secure its purchase price.56 The priority of the purchase money-money security interest over a pre-existing all-assets security is expressly recognized in the United States of America, through Article 9-324 of the Uniform Commercial Code.57 In particular, for each kind of asset specific procedural requirements are necessary for the perfection of the PMSI.58 Notably, according to some eminent scholars, that interest is policed as it has a neutral effect on the estate of the debtor: he acquires new assets at the same time he acquires new

55

G. McCormack, Secured credit under English and American Law (2004), 85. See article 9:107 UCC J. White - R. Summers, Uniform Commercial Code (6th ed. 2010), 1285

56

57

In particular, that interest is policed provided that special perfection requirements are met. See G. Mc Cormack, Secured credit under English and American Law, 86 f.
58

For a PMSI in inventory see art. 9:312 (3)

16

liabilities.59 Moreover, McCormack adds that if an earlier creditor could rely on an afteracquired property clause to the prejudice of a PMSI holder, the earlier creditor would obtain an unjustified windfall at the expense of the later creditor whose money enabled the additional property to be acquired.60 As regards England, the recognition of the PMSI has been limited and it has mainly involved cases involving land.61 Initially, Courts stated that the purchaser only acquired an equity of redemption subject to the paramount equitable charge of purchase-money lender.62 Therefore, the purchaser never acquired the full ownership of the premise and the floating charge could not cover that asset. Nonetheless, those decisions did not exclude that a short period of time (scintilla temporis) could be identified in which the borrower had become the unencumbered owner of the property.63 Thus, in that case, the after-acquired asset could fall in the scope of the floating charge. In succession, in Abbey National Building Society v. Cann, the House of Lord has maintained that, in the vast majority of cases, the acquisition of the legal estate and the charge were indissolubly bound up together.64 Consequently, the purchaser is generally not entitled of the full ownership of the asset. Nonetheless, the law on the purchase money security interest is still unclear and the present author agrees with McCormack and Gullifer on the necessity of a statutory reform on that point.65In fact, in my view, in the case of the PMSI the priority of the floating charge does not
59S

ee D. G. Baird and T. H. Jackson, Security Interests in Personal Property (2nd ed. 1987) at p. 401 cited in G. McCormack, Secured credit under English and American La, 86 f.
60

G McCormack, ibidem. See also L Gullifer, Goode on Legal Problems of Credit and Security (3rd ed) para 5-63 and I. Davies, The Trade Debtor and the Quest for Security, 57 in H. Rajak (ed), Insolvency Law: Theory and Practise, (1993), 43 ff.. See also V Finch, Security, Insolvency and Risk, 667
61

G. Mc Cormack, Secured credit under English and American Law, 89 and L Gullifer See Re Connolly Bros (No) 2 [1912] 2 Ch 25 at 31 and Wilson v Kelland [1910] 2 Ch 306 See G. Mc Cormack, Secured credit under English and American Law, 90 [1991] 1 AC 56

62

63

64

65

G. Mc Cormack, Secured credit under English and American Law, 92 and L Gullifer, Goode on Legal Problems of Credit and Security (3rd ed) para 5-64 17

have an offsetting function but only an exploitative one. Notably, the purchase money security creditor obtains no advantage from the loan given by the floating charge to the debtor. Instead, the enrichment only operates in the opposite way round.

Conclusion

In this paper it has been strived to show that the floating charge is, generally speaking, an efficient mechanism. Firstly, it caters to the needs of firms and the floating chargee. On the one hand, it allows the former to raise money using their circulating assets and without needing the consent of the floating chargee. On the other hand, the latter benefits from a global charge covering both present and future assets of the debtor. Secondly, it also produces positive effects for the trade creditors, the weakest class of unsecured creditors of the debtor . In fact, through the loan obtained by the floating chargee, they are paid during the ordinary course of business of the debtor. Moreover, with the enactment of the 2002 Enterprise Act, the power to appoint an administrative receiver has been curtailed and, thus, there is less chance that insolvency value will be siphoned in favour of the floating chargee. On the contrary, the strengthening of administration will produce positive effects for all the creditors as the administrator has to purse their interest and not only the one of the floating chargee. Nonetheless, it has not been negated that the floating charge can also have an exploitative function. Notably, the case of the purchase money security interest has been given. In that case, the priority of the floating chargee cannot be justified as an offset of a previous benefit gained by the purchase money security creditor. In fact, in that case, the latter is not enriched by the former granting of a loan made by the floating chargee. Consequently, the floating chargee gets a windfall as its chargee usually covers the after-acquired assets of the debtor and, even, the ones bought using the money of the purchase money security creditor.

18

Therefore, in the case of the purchase money security interest it has been advised a statutory reform of the floating charge, along the light of the art. 9 of the Uniform Commercial Code, so as to forbid that unreasonable shift of insolvency value from the purchase money security creditor to the floating chargee.

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