Twenty months before going into insolvent liquidation, Gannet Ltd granted its managing director, Fen, a floating charge to secure a loan she had made to the company three years earlier. Fen advanced no new money. At the time the charge was granted, Gannet Ltd was able to pay its debts. What is the effect on Fen's security?

Correct answer: B) The charge is invalid except to the extent of any new value given, because it was granted to a connected person within two years before the onset of insolvency, and for a connected person the company's solvency at the time is irrelevant

Explanation

Under s245 Insolvency Act 1986, a floating charge granted to a connected person, such as a director, within two years before the onset of insolvency is invalid except to the extent of new value (money paid, goods or services supplied, or debts discharged) at the same time as or after its creation. For an unconnected person the period is 12 months, and the charge is caught only if the company was then unable to pay its debts or became so as a result; for a connected person that condition does not apply (s245(4)). Fen gave no new value, so the charge is invalid. Her loan still exists, but she is an unsecured creditor.