{{Insolvency
In law, a voidable floating charge refers to a
floating charge
A floating charge is a security interest over a fund of changing assets of a company or other legal person. Unlike a fixed charge, which is created over ascertained and definite property, a floating charge is created over property of an ambulat ...
entered into shortly prior to the company going into
liquidation
Liquidation is the process in accounting by which a company is brought to an end in Canada, United Kingdom, United States, Ireland, Australia, New Zealand, Italy, and many other countries. The assets and property of the company are redistr ...
which is
void
Void may refer to:
Science, engineering, and technology
* Void (astronomy), the spaces between galaxy filaments that contain no galaxies
* Void (composites), a pore that remains unoccupied in a composite material
* Void, synonym for vacuum, a ...
or
unenforceable
An unenforceable contract or transaction is one that is valid but one the court will not enforce. Unenforceable is usually used in contradiction to void (or ''void ab initio'') and voidable. If the parties perform the agreement, it will be valid ...
in whole or in part under applicable insolvency legislation.
Generally speaking, a floating charge is only potentially vulnerable if it is entered into within the vulnerability period under applicable law. The vulnerability period is a period prescribed by statute immediately preceding the company going into liquidation. Most jurisdictions provide for alternative vulnerability periods: a longer one for parties who are "connected" to the company, and a shorter one for unrelated third parties.
The effect of laws relating to voidable floating charges varies from jurisdiction to jurisdiction. Some countries simply provide that such charge are automatically void or not enforceable, In other jurisdictions, they are only
voidable
Voidable, in law, is a transaction or action that is valid but may be annulled by one of the parties to the transaction. Voidable is usually used in distinction to void ''ab initio'' (or void from the outset) and unenforceable.
Definition
The a ...
and an application must be made by a liquidator or creditor for the floating charge to be set aside.
In most jurisdictions, a floating charge is only vulnerable to the extent that it does not secure new money for the company.See for example section 245(2) of the Insolvency Act 1986 So if a bank has a loan of £100 outstanding to a company, and it advances a further £50 but takes an "all-monies" floating charge as security, and the company goes into liquidation three months later, the floating charge will validly secure the £50 advance which was made at the time, but not the earlier £100. Legislation relating to voidable floating charges is intended to prevent abuse of a
security interest
In finance, a security interest is a legal right granted by a debtor to a creditor over the debtor's property (usually referred to as the ''collateral'') which enables the creditor to have recourse to the property if the debtor defaults in maki ...
which catches literally all of the assets of the company, and could be used by person to strip out all of the assets from a company in difficulty from the
unsecured creditor
An unsecured creditor is a creditor other than a preferential creditor that does not have the benefit of any security interests in the assets of the debtor.
In the event of the bankruptcy of the debtor, the unsecured creditors usually obtain a ...
s. However, if the holder of the floating charge has inserted new money, then giving the holder a valid security up to the amount of the new money injected does not prejudice the position of the unsecured creditors.
Most legislation relating to voidable floating charges is also expressed to apply to charges which, as created, were floating charges but which subsequently crystallised into fixed charges.