Floating free

A recent court ruling has left the door open for parties to dispense with the registration of a floating charge via the use of a security financial collateral arrangement. But its application is likely to be very narrow.

A floating charge on a ­company’s property requires registration under Section 860 of the Companies Act 2006. If it is not registered it will be void under Section 874 against a ­liquidator, administrator or ­creditor of the company. In the case Re F2G Realisations Ltd (in liquidation), Gray & Another v GTP Group Limited (2010) the court considered the effect of the Financial Collateral Arrangements (No.2) Regulations 2003 on these sections, given that under the regulations a charge can now avoid the need for registration if it is a ­security ­financial collateral arrangement (SFCA).

Account cards provider GTP Group ­supplied store card services to F2G on terms that provided for GTP to collect money from the company’s card customers. GTP then paid the cash into a bank account in the name of GTP Group Ltd re Floors-2-Go. Under the terms of the agreement GTP held the balance in the account, transferring the balance to the company on request. In ­certain events, such as insolvency, GTP could withdraw from the account any money it was due from the company.

Mr Justice Vos held that this arrangement created a floating charge on F2G’s property that was unregistered and which would therefore be void against the ­company’s liquidators. He then had to ­consider the effect of the regulations.

Regulation 4(4) says that Sections 860 and 874 do not apply to an SFCA or to any charge arising under an SFCA. Regulation 3 says that an SFCA means an agreement or arrangement evidenced in writing where:

  • (a) the purpose of the agreement or arrangement is to secure the relevant financial obligations owed to the collateral-taker;
  • (b) the collateral-provider creates or there arises a security interest in financial ­collateral to secure those obligations;
  • (c) the financial collateral is delivered, transferred, held, registered or otherwise designated so as to be in the possession or under the control of the collateral-taker or a person acting on its behalf […]
  • (d) the collateral-provider and the ­collateral-taker are both non-natural ­persons;‘security interest’ means any legal or ­equitable interest or any right in security […] created or otherwise arising by way of ­security, including:
  • (d) a charge created as a floating charge where the financial collateral charged is delivered, transferred, held or otherwise designated so as to be in the possession or under the control of the collateral-taker or a person acting on its behalf; any right of the collateral-provider to substitute equivalent financial collateral or withdraw excess ­financial collateral shall not prevent the financial collateral being in the possession or under the control of the collateral-taker.”

In addition, financial collateral is defined as including “money in any currency, ­credited to an account”.

GTP argued that each of (a) to (d) above applied. In particular, it said that the cash in the account was financial collateral subject to a security interest given that GTP had practical control over the account and no payments could be made without its ­direction.

The fact that the judge held that the charge was floating and not fixed was not fatal to this argument, given that Regulation 3 envisaged expressly that the collateral taker might have sufficient control over the collateral for it to amount to an SFCA even where the security interest was floating and not fixed.

Vos J held that the concept of control in Regulation 3 denoted the legal right to ­control the asset having been removed from the collateral provider, and not merely the practical or administrative control. It referred to negative control in the sense that the collateral taker could prevent the collateral provider from dealing with the charged asset. Also, since GTP had no right to remove the asset until an event such as insolvency took place, and had to comply with F2G’s request to transfer the balance to it, GTP did not have control within the meaning of the regulation.

This will be the usual position where a charge is floating and not fixed. It does not entirely rule out the possibility that a ­floating charge could amount to an SFCA and so be exempt from registration. But in light of this judgment it is difficult to ­conceive of circumstances where a charge, which in English law amounted to a floating charge, could give the chargee sufficient control for the purpose of exemption under the regulation.

Linden Ife is a barrister at Enterprise ­Chambers