secured creditor’s rights will, in certain circumstances, be contrary to such principles. Although fairness is of limited importance in property law, the principle applies in any event to the parties on the basis of their contract of credit.73

Variation

The granting of security for antecedent debt can in further circumstances be set aside as a fraudulent or preferential transfer reducing the assets available to C’s other creditors: the actio Pauliana.74

Creditors are protected against detrimental acts of their debtor by the actio Pauliana. The protection is similar in and out of insolvency proceedings. Fraudulent or preferential transfers may be avoided under specific circumstances. The avoidance operates only to the extent the individual creditor outside insolvency proceedings or the debtor’s estate in insolvency proceedings has been detrimentally affected.

The general requirements to avoid a transfer are:

a juridical act (transaction);

without an obligation out of law or contract; causing detriment to one or more creditors;

while the debtor knew or should have known that the transaction would result in detriment to his or her creditors;

and, if the transaction was for value, also the other party knew or should have known that the act would result in detriment to the creditors.

In principle the burden of proof is with the creditor or, during insolvency proceedings, the insolvency administrator. Even though no intent to defraud is required, in practice the showing of knowledge is considered to be the main obstacle for a successful action for avoidance. However, if the transaction took place within a year of the action of avoidance or the opening of insolvency proceedings, a statutory presumption that knowledge is present on both sides may arise in specific situations. In particular, the burden of proof is shifted where the transaction was at (manifest) undervalue; where it concerned payment of debts not due or the granting of a security interest for those debts; or the transaction was with parties having family or corporate ties with the debtor.75

508 s e c u r i t y r i g h t s i n m o va b l e p r o p e r t y

If in the above case the grant of security in the stock was included in the original credit agreement, the pledge would not have been without a legal obligation, placing the transfer in principle beyond a challenge on grounds of the actio Pauliana.76 If it was not, because the pledge was granted for antecedent debt, the transfer is non-obligatory. Security for antecedent debt is not necessarily gratuitous: granting a deferment for payment would be valid consideration. If the security was gratuitous, avoidance would require that only the debtor knew that the pledge would be detrimental to his or her other creditors. If it was for value, the pledgee must have the same knowledge.

e n g l a n d

(a)A security over stock-in-trade is perfectly possible in English law. The nature and incidents of a fixed charge and of a f loating charge (enterprise charge) have been discussed in previous cases, as have the means of perfecting a charge by registration. There is no requirement that the charged stock be isolated.77

(b)Once again, the executing creditor takes subject to A’s real interests so long as, in the case of the f loating charge, that charge crystallises before the execution is completed, as discussed previously.

As for C’s liquidation or bankruptcy (insolvency proceedings against companies and individuals, respectively), again as discussed previously, A’s real rights may be asserted in the event of C’s insolvency. In this respect, C’s insolvency administrator (whether liquidator or trustee-in-bankruptcy) is bound to respect equities and equitable proprietary interests (forms of limited real rights) in favour of A (and not just legal proprietary interests). The reason is that the insolvency administrator is considered to stand in the shoes of the insolvent.78 A’s interest may be in the nature of a f loating charge at the date of its creation. It was stated previously that this placed A at a disadvantage as regards C’s statutory preference creditors. The reason is that an administrative receiver acting on behalf of A, and a liquidator winding up C’s estate, are bound to distribute to preference creditors before distributing to A.79 This further relegates A

76In bankruptcy, avoidance may still be possible if both parties had the intention to defraud the other creditors, article 47 Fw.

77See the reference to field warehousing, English report, case 10.

78McEntire v Crossley Bros. [1895] AC 457, 461; Madell v Thomas [1891] 2 QB 230, 238; Re Eastgate [1905] 1 KB 465; Bower/Turner, The Law of Actionable Misrepresentation § 278.

79Insolvency Act 1986, ss. 40 and 175.

behind the expenses of the insolvency proceedings since these expenses rank ahead of preference creditors.80 It should also be added that A’s security does not prevent A from proving as an unsecured creditor in the event of C’s insolvency to the extent that the security is insufficient to satisfy A’s claim in full.81

(c)The taking of security over stock-in-trade is very common indeed, particularly when the trader is a company. Difficulties concerning the Bills of Sale Acts 1878--91 and future property -- an important matter since stock turns over from time to time -- make it impracticable for a sole trader to grant security over present and future stock.

(d)Unlike German law, English law places no limits on the amount of security that may be taken, either as to total amount or as to ratio of security to the amount owed. In particular, there are no penalties attaching to a creditor who is over-secured. Conventional wisdom has it, anyway, that no matter how extensive the security, the creditor is only rarely over-secured.

Variation

According to section 245 of the Insolvency Act 1986, f loating (but not fixed) charges granted by a company in the twelve months82 preceding the onset of insolvency are valid83 only to the extent of the value given by the secured creditor in return for the charge84 ‘at the same time as, or after, the creation of the charge’. The purpose of the section is to protect the position of unsecured creditors on the occasion of the future insolvency distribution. Within the limits of the section, no individual unsecured creditor can break ranks by obtaining a security in return for value previously given. Departing from an earlier, more relaxed view of the matter, the current position is that even a minimal time gap between the giving of value and the grant of the charge, will be fatal.85 In the case of current accounts, where the rule in Clayton’s Case86 applies, value

80For liquidation see Insolvency Act 1986, s. 175(2)(a); also ss. 107, 115 and 156, Schedule 8 para. 17 and rules 4.218--20 and 12.2. For bankruptcy, see Insolvency Act 1986, s. 328(2) and Schedule 9 para. 22 and rules 6.202, 6.224 and 12.2.

81Insolvency Rules 4.95-99.

82Two years for those connected with the company.

83S. 245 invalidates only the charge: see Re Mace Builders (Glasgow) Ltd [1985] BCLC 154.

84The phrase ‘in consideration for’ means ‘as a result of’, so that a bank’s later factual forbearance from calling in a loan will suffice: Re Yeovil Glove Co. Ltd [1965] Ch 148.

85Power v Sharp Instruments Ltd (Re Shoe Lace Ltd) [1994] 1 BCLC 111.

86[1816] 1 Mer 572.

various given fact situations. It does not matter that the stock-in-trade is mixed with other goods of the same type nor that the stocks are regularly substituted by other stocks of the same kind or a different kind provided that the coverage of the charge is sufficiently extensive. It has been held that a f loating charge on a company’s undertaking will cover its entire business operations.

Section 99 Companies Act 1963 requires a f loating charge granted by a company to be registered. Generally speaking, it is not possible for individuals or partnerships to create floating charges but the Agricultural Credit Act 1978 brings into existence a specific statutory creation -- the floating agricultural chattel mortgage. Such mortgages must be registered with the local Circuit Court. The purpose of this legislation is to facilitate lending to the farming sector. A floating chattel mortgage is over the stock from time to time of the borrower given to secure money owing to the Agricultural Credit Corporation or a recognised bank. Registration of such a mortgage is effective to create an ambulatory and shifting charge on all stock described in the charge which from time to time is on the mortgagor’s land. A mortgagor is not allowed to sell any stock other than in the ordinary course of business and is required to maintain his stock on his lands at the same level of value as they were when the charge was granted.

(b)As explained above, a f loating charge will crystallise, i.e. become fixed, in the event of C’s insolvency. In that scenario A then has a fixed charge on assets that are still in the possession of B and that come within the subject matter covered by the charge. According to the relevant insolvency legislation, A is entitled to be paid out of such assets in priority to the claims of unsecured creditors, though his entitlement ranks after that of statutory preference creditors. The categories of statutory preference are set out in s. 285 Companies Act 1963 as amended and basically encompass unpaid taxes and certain employee claims. It should be noted that if an unsecured creditor completes the execution process prior to the completion of the f loating charge, then the creditor can keep the proceeds of the execution, but if the process is incomplete at the time of crystallisation, then the creditor’s claim comes after that of the f loating chargeholder.

(c)Floating charges are a standard feature of bank lending practice.

(d)There are no limits with respect to the value the collateral might have in relation to the amount of the secured loan.