Law paper

Answer #4 The given question may be analyzed as follows – Material Facts – Craftco was incorporated in the year 2002. At the time of incorporation, it borrowed $10,000 from Warwick. The loan was secured by means of a floating charge over Craftco’s property. Craftco failed to register the charge with ASIC. Later, in 2004, Craftco borrowed $50,000 from Large Bank. Large Bank took a floating charge over Craftco’s property. It also obtained a personal guarantee of the loan from Sue. Large Bank did not know about the loan from Warwick. Finally, Large Bank has registered its charge with ASIC within the required period in contrast to Warwick.

Issues Involved –

The following legal issues need to be determined in the instant case –

Which charge viz. Warwick’s charge or Large Bank’s charge would have priority i.e. who would be paid out first? Would Warwick’s charge be enforceable against a liquidator of Craftco? Reference –

The Australian position on floating charges largely follows the English common law position. While the American system declared that allowing such a freedom to the company would be incompatible with the creation of a genuine security interest and be a fraud upon the creditors, the English courts were more accommodating to the needs of the company.

They construed the effect of the provision allowing the company to deal with the charged assets in the ordinary course of business as not negating the security interest but merely postponing its attachment so long as the debtor’s power of management continued. On crystallization, the charge fastened in specie on the property specified in the charge instrument in which the debtor had had or had subsequently acquired interest.

This is when a non proprietary “hovering charge” on a shifting pool of assets was created. This was the genesis of the floating charge which left the chargor free to acquire, reinvest and dispose of certain assets (such as future receivables, property, residual cash flows and inventory) in the ordinary course of his business but nonetheless make such assets available as security to the chargee in priority to other creditors, should it cease to trade. This was the basis of the birth of the floating charge. The main characteristics of a floating charge have been held to be –

(l) If it is a charge on a class of assets of a company present and future (2) If that class is one which in the ordinary course of, the business of the company would be changing from time to time; and

(3) If you find that by the charge it is contemplated that, until some future step is taken by or on behalf of those interested in the charge, the company may carry on its business in the ordinary way so far as concerns the particular class of assets I am dealing with.

Application –

On the first issue, it is submitted that although Warwick’s charge is prior to Bank’s charge, it being a floating charge, it will crystallize into a liability only upon bankruptcy proceedings. Thus, it should be the Bank’s charge which gets preference.

Under Australian Securities & Investments Commission Act, 2001, a floating charge does not become void simply due to want to registration. It is therefore submitted that even though Warwick failed to register the charge, it would not affect Warwick’s claim against Craftco’s liquidator.

Conclusion –

Bank’s charge has priority over Warwick’s charge and therefore the former would be paid out first. Non-registration of Warwick’s charge would not affect his claim against Craftco’s liquidator.