ACCA LW · Chapter 11 · Question 10 of 10
A company created a floating charge in favour of an unconnected lender to secure an existing unsecured loan, eight months before going into insolvent liquidation. No new money was provided. At the time the charge was created the company was unable to pay its debts. Under s245 Insolvency Act 1986, what is the status of the charge?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: B) It is invalid, because it was created within 12 months before the onset of insolvency to secure existing debt, and the company was insolvent at the time
Explanation
Section 245 invalidates a floating charge created within 12 months before the onset of insolvency in favour of an unconnected person (two years for a connected person), except to the extent of new value such as money paid or goods supplied at or after its creation. For an unconnected person, the company must have been unable to pay its debts at the time or have become so as a result. Here the charge secured only pre-existing debt and the company was insolvent, so it is invalid. The lender's knowledge is irrelevant.
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