Amity Bank - Coursework Example

The issue in respect of the question requires an analysis of whether the loan repaid to Bright’s father was legal and the fact of who has priority in respect of Amity Bank or Rescue Finance Ltd.

A charge has been defined as an encumbrance upon the property which is granted to the holder of such charge thereby granting him certain rights in respect of the property, which usually acts as a security for the debt that is owed to such charge holder. If a charge is said to be secured over the company’s assets then the creditor gains priority in respect of payment of his debt out of the assets over which a charge has been created. There are two different types of charges that are existent that is fixed and floating charges.

Under fixed charge, the secure creditor is provided with a way of protection on certain specified assets of the company and if subsequently there is default the creditor can sell the assets so as to cover up the debt that is owed to him. A fixed charge in a situation of liquidation or receivership ranks highest in the order of priority. The most common feature of a fixed charge is that it attaches to the asset which is relevant upon creation. Thus fixed assets that are to be kept by the company for the long run are best suited for the creation of a fixed charge.

On the other hand, a floating charge has been defined by Re Yorkshire Woolcombers Association[1] as “A charge on a class of assets of the company, present and future; which class is, in the ordinary course of the company’s business, changing from time to time; and until the holders enforce the charge the company may carry on business and deal with the assets charged”. Thus it can be seen from the definition that contrary to a fixed charge, a floating charge does not attach to the property unless the charge has crystallized. A floating charge can therefore be applicable to fixed as well as current assets that is if upon ‘the undertaking and assets’ a charge has been created. Crystallization of a floating charge can occur in various ways and one of them is the liquidation of the company.

The identification of a fixed or floating charge is not easily made at times but it is pertinent to mention that if a receiver is appointed the preferential creditors of a company are paid first. (s.40 Insolvency Act 1986). The labeling of a charge is not in itself conclusive. (Street v. Mountford). Thus a charge is not fixed where there the asset that has been charged can be dealt with by the company. (R in Right of British Columbia v. Federal Business Development Bank).

The priority of charges is important when different charges have been created over the same property, if the question of registration of a charge is kept aside then an equitable charge, which has been created before a legal charge will only have priority if the legal charge has notice that there was an equitable charge which was existent.

It is important to mention here that if a property has both a fixed and floating charge over it then the fixed charge will have priority over the floating charge because the floating charge attaches to crystallization. A creditor who has created a floating charge may include a negative pledge clause so as to prevent the creation of a fixed charge over the said property. However, it is important to mention that if the clause is breached and a fixed charge is granted then the fixed charge holder obtains priority unless he had actual knowledge of the prohibition. (Wilson v. Kelland)

On the facts, it can be seen that Amity Bank was granted a floating charge as the company was allowed to use its assets. In respect of Rescue Finance Ltd. a fixed charge on the office had been granted.

The first point to note is that on the facts it is not clear that Rescue had notice of the equitable charge of Amity. The next argument can be that of the negative pledge clause and pari passu. This as seen in Wilson would not restrict Rescue’s claim over the office as it has a fixed charge over the office and on the facts does not have actual knowledge. Thus Rescue would rank in priority in respect of the office in Millington.

As far as preference is given to Bright’s father is concerned, the definition of a company giving preference is said to be that a creditor would be benefitting from the decision of the company if the company goes into insolvent liquidation and such an act is done by the company with the intention of producing the staid result (s.239). If it is found that at the time of such preference, the company was unable to clear its dues and debts or because of the fact that it paid the amount to the creditor the company resulted into liquidation, then upon such liquidation, the company’s liquidator can make an application to the court for an order for restoration of the company to the position that it would have been had the transaction not taken place at all.

There are certain timelines for bringing the said application. If it is a person who was connected with the company whose debts had been paid, within a period of two years prior to the commencement of such liquidation proceedings, then the application would be entertained.

The court has been given powers under s.241 whereby if it finds that preference had been given it can order the return of the property, order payment to the liquidator, etc.

In the current scenario, the father of Bright is a connected person in accordance with the Companies Act and the period is clearly within 2 years of liquidation. Thus the court can use its powers under s.241 and pass an order accordingly.