Avoiding invalid floating charges under section 245 of the Insolvency Act 1986


Published by a UUÂãÁÄÖ±²¥ Restructuring & Insolvency expert
Practice notes

Avoiding invalid floating charges under section 245 of the Insolvency Act 1986


Published by a UUÂãÁÄÖ±²¥ Restructuring & Insolvency expert

Practice notes
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Under section 245 of the Insolvency Act 1986 (IA 1986), liquidators and administrators can avoid certain floating charges if:

  1. •

    the floating charge was created at the relevant time

  2. •

    in certain circumstances, the company was either insolvent at the time or as a cause of the transaction under which the floating charge was created

  3. •

    the value or so much of the consideration for the creation of the charge was not provided at the same time as, or after, the creation of the charge

The overall aim of the section is to prevent creditors from obtaining an unfair advantage over other creditors (like trade creditors) at a time when the company's ability to repay its debts is in doubt. It is therefore similar to a preference claim, although it is the security over the debts that will be avoided as opposed to the actual repayment of the debt. In Re Comet Group Limited (in liquidation), the judge described its purpose as ‘to prevent a company that

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Jurisdiction(s):
United Kingdom
Key definition:
Insolvency definition
What does Insolvency mean?

This can be defined by two alternative tests (Insolvency Act 1986, s 123):

• cash flow test: a company is solvent if it can pay its debts as they fall due, no matter what the state of its balance sheet (Re Patrick & Lyon Ltd [1933] Ch 786);

• balance sheet test: a company which can pay its debts as they fall due may be insolvent if, according to its balance sheet, liabilities (including contingent liabilities) exceed assets.

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