Under IA 1986 section 127 operates to declare every transaction void entered after the presentation of a winding up petition unless it has the approval of the court. In Re Gray’s Inn Construction Co Ltd[162] Buckley LJ held that courts would habitually approve all contracts that were plainly beneficial to a company entered into in good faith and the ordinary course of business. The predominant purpose of the provision is to ensure unsecured creditors are not prejudiced, and the company's assets are not unduly depleted. In this case, however, because a host of transactions honoured by the company's bank, that was in overdraft, between the presentation and the winding up petition being granted meant unprofitable trading, the deals were declared void.[163]
Voidable preferences
The Insolvency Act 1986 section 238 only catches depletion of a company's total assets, rather than simply preferring one creditor at the expense of others.[164] This happens through the creation of security interests, and they may also be unwound on three limited grounds. First, under section 245, any floating charge created up to one year before the onset of insolvency is avoidable at the company's instance if new money was not advanced to the company in return. So a company cannot grant a floating charge to a creditor to secure past advances made by that creditor, unless given at least "at the same time". In Re Shoe Lace Ltd[165] Hoffmann J held that £350,000 advanced in April and May was not close enough to a floating charge created in July to be considered "at the same time". The floating charge could not secure those amounts. Because the context of the legislation was a business one, and in view of the fact that floating charges can be registered up to 21 days after their creation, a few months was far too long. This only rescinds the charge, and not the debt itself, which remains in effect as before but the creditor becomes unsecured.[166] Banks operating accounts for companies in overdraft have an advantage in this respect. Re Yeovil Glove Co Ltd[167] held that if the overall level of debt remains the same, before and after a floating charge is created, and if money turns over by payments of the company in and withdrawals out, the bank's continued extension of credit will continually "harden" their floating charge. Although the Yeovil Glove company was always indebted to the bank before a floating charge was created, and was indebted at the point of insolvency, because it had deposited and withdrawn a greater amount, the bank's floating charge was considered secure.[168]
Apart from floating charges, a second and general ground for avoiding preferences is found under section 239. This avoids preferences that entail a "desire to prefer" one creditor over another. This test is hard to fulfil. In Re MC Bacon Ltd, a company gave a floating charge to Natwest bank in return for a continued overdraft as its business declined. Millett J held the company had not desired to prefer the bank. It had no special affection for its bank, and only agreed to the charge to prolong survival of the business.[169] By contrast, in Re Agriplant Services Ltd[170] Jonathan Parker J held it was an unlawful preference for Agriplant to pay £20,000 due on a leasing contract for earth moving equipment to a company. This was mainly because Agriplant's major shareholder Mr Sagar, had guaranteed that Agriplant's liability, and so repayment absolved Mr Sagar's liabilities above other creditors. Third and finally, CA 2006 section 874 stipulates that any charge, including a floating charge, that is not registered is considered void. This simple provision encourages a transparency of security interests, at least if creditors are in a position to check the register.
Directors' duties
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Voidable preferences
The Insolvency Act 1986 section 238 only catches depletion of a company's total assets, rather than simply preferring one creditor at the expense of others.[164] This happens through the creation of security interests, and they may also be unwound on three limited grounds. First, under section 245, any floating charge created up to one year before the onset of insolvency is avoidable at the company's instance if new money was not advanced to the company in return. So a company cannot grant a floating charge to a creditor to secure past advances made by that creditor, unless given at least "at the same time". In Re Shoe Lace Ltd[165] Hoffmann J held that £350,000 advanced in April and May was not close enough to a floating charge created in July to be considered "at the same time". The floating charge could not secure those amounts. Because the context of the legislation was a business one, and in view of the fact that floating charges can be registered up to 21 days after their creation, a few months was far too long. This only rescinds the charge, and not the debt itself, which remains in effect as before but the creditor becomes unsecured.[166] Banks operating accounts for companies in overdraft have an advantage in this respect. Re Yeovil Glove Co Ltd[167] held that if the overall level of debt remains the same, before and after a floating charge is created, and if money turns over by payments of the company in and withdrawals out, the bank's continued extension of credit will continually "harden" their floating charge. Although the Yeovil Glove company was always indebted to the bank before a floating charge was created, and was indebted at the point of insolvency, because it had deposited and withdrawn a greater amount, the bank's floating charge was considered secure.[168]
Apart from floating charges, a second and general ground for avoiding preferences is found under section 239. This avoids preferences that entail a "desire to prefer" one creditor over another. This test is hard to fulfil. In Re MC Bacon Ltd, a company gave a floating charge to Natwest bank in return for a continued overdraft as its business declined. Millett J held the company had not desired to prefer the bank. It had no special affection for its bank, and only agreed to the charge to prolong survival of the business.[169] By contrast, in Re Agriplant Services Ltd[170] Jonathan Parker J held it was an unlawful preference for Agriplant to pay £20,000 due on a leasing contract for earth moving equipment to a company. This was mainly because Agriplant's major shareholder Mr Sagar, had guaranteed that Agriplant's liability, and so repayment absolved Mr Sagar's liabilities above other creditors. Third and finally, CA 2006 section 874 stipulates that any charge, including a floating charge, that is not registered is considered void. This simple provision encourages a transparency of security interests, at least if creditors are in a position to check the register.
Directors' duties
