Substance over form in debenture funding: a conduit payment to an insolvent company did not validate the floating charge.

For the statutory exception to apply, the court looks to the substance of the debenture transaction and not its form. Where the money was provided by a third party, the company's bank account operated only as a conduit, and the arrangement was designed to prefer selected creditors rather than confer a genuine commercial benefit on the company, the cash is not treated as paid to the company within section 266 of the Companies Act 1929. On those facts, the floating charge was invalid.

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Issues: Whether the cash ostensibly paid into the company's account in connection with the debenture transaction amounted in substance to cash paid to the company so as to bring the floating charge within the exception in section 266 of the Companies Act, 1929, and validate the charge.

Analysis: The transaction was examined in its real character, not merely in its form. The money used for the debenture was found to have been provided by Davis, with Zimmerman acting only as nominee or trustee. The company was hopelessly insolvent, and the arrangement merely enabled selected creditors and Davis to obtain payment in priority to other unsecured creditors. On the facts, the company's bank account was used as a conduit and no genuine commercial benefit accrued to the company. The determining question was whether the transaction was bona fide for the company's benefit or merely a device to secure an advantage for particular creditors.

Conclusion: The cash was not, in substance, paid to the company within section 266, and the floating charge was wholly invalid.

Final Conclusion: The appeal failed and the order invalidating the floating charge and granting relief against the respondent was affirmed.

Ratio Decidendi: For the purpose of the statutory exception, the Court will look to the substance of the transaction and not its form; a sham or conduit arrangement does not amount to cash paid to the company.

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