1964 (6) TMI 29 - DSC - Companies Law

Court affirms floating charge validity based on cash paid by bank, applying Clayton's case rule. Appeal dismissed, assets insufficient.

The court upheld the validity of the floating charge to the extent of the cash paid by the bank in consideration for the charge. The court applied the ... Winding up - validity of floating charge Issues Involved:1. Validity of the floating charge under Section 322 of the Companies Act, 1948.2. Consideration for the floating charge.3. Application of the rule in Clayton's case.4. Calculation of payments made by the bank post-charge creation.Issue-wise Detailed Analysis:1. Validity of the Floating Charge under Section 322 of the Companies Act, 1948:The liquidator of the company challenged the validity of a floating charge created on January 24, 1958, in favor of the bank, based on Section 322 of the Companies Act, 1948. This section states that a floating charge created within 12 months of the commencement of winding up is invalid unless it is proven that the company was solvent immediately after the creation of the charge or cash was paid to the company in consideration for the charge. The company was insolvent at the time of the charge creation, and the liquidator argued that no cash was paid in consideration for the charge.2. Consideration for the Floating Charge:The liquidator contended that the bank did not provide any cash or covenant to pay cash at the time of the execution of the floating charge, making the charge invalid. The argument was supported by the pronouncement of Parker J. in In re Orleans Motor Co. Ltd., where it was stated that the section aims to prevent companies from creating floating charges to secure past debts or for moneys that do not enhance their assets. However, the court found that subsequent payments by the bank to the company were made in consideration for the charge, as held in In re Thomas Mortimer Ltd. Romer J. had stated that payments made by the bank after the date of the charge were made in consideration for the charge, even if the bank had no binding agreement to make further advances.3. Application of the Rule in Clayton's Case:The court considered the rule in Clayton's case, which presumes that payments into an account are applied to discharge the earliest debits. The liquidator argued that the bank's application of this rule allowed it to treat payments received after the charge as satisfying pre-charge indebtedness, thus nullifying the effect of Section 322. However, the court upheld Romer J.'s decision in In re Thomas Mortimer Ltd., which applied Clayton's case, and found no reason to compel the bank to treat post-charge payments as devoted to post-charge indebtedness.4. Calculation of Payments Made by the Bank Post-Charge Creation:The court analyzed the accounts to determine the amount of cash paid by the bank subsequent to the creation of the floating charge. The analysis showed that the bank paid out substantial sums, which were treated as new money provided to the company. The court found that the total of unrequited cash paid subsequently to January 24, 1958, was lb41,126. This included payments from various accounts, with the majority being from the No. 1 account. The court concluded that the floating charge was valid for the amount of cash paid by the bank post-charge creation, and the assets were insufficient to satisfy the secured creditors, leaving nothing for the unsecured creditors.Conclusion:The court dismissed the appeal, upholding the validity of the floating charge to the extent of the cash paid by the bank in consideration for the charge. The decision in In re Thomas Mortimer Ltd. was followed, and the rule in Clayton's case was applied to determine the allocation of payments. The court found that the payments made by the bank post-charge creation were in consideration for the charge, and the liquidator's arguments were rejected.