Part E Guarantees and Security, 39 Avoidance of Security in Insolvency
- Bank resolution and insolvency — Regulation of banks — Credit risk — Security interest
39.01 It often happens that, as a company’s financial circumstances deteriorate, the directors will approach the bank with a view to additional funding or the extension of existing facilities. The bank may be willing to accede to that request, but on the basis that security (or additional security) is provided for that purpose. Not infrequently, the bank will seek security not only from the company itself; it will also seek guarantees and security from affiliated entities.
39.02 As the company nears the abyss, however, the law requires the company and its directors to have regard to the interests of the creditors as a whole. This concern is reflected in various statutory provisions which allow the court to adjust or reverse transactions which are entered into during this period, and which are to the detriment of unsecured creditors.1 At the risk of an over-simplification, these provisions may be seen as an attempt to hold a fair balance between the various categories of creditors involved during the period leading up to the company’s failure. Lenders (such as banks) which are in a position to take security are likely to have more information about the company’s situation than is available to the general body of trade creditors. It is thus appropriate that there should be some effective constraint against the bank’s ability to prop up the company in a manner which, in the final analysis, may be detrimental to the interests of the unsecured creditors.2
39.03 Against this background, it is proposed to consider the following matters:3
(a) transactions at an undervalue;
(c) extortionate credit transactions;
(d) floating charges; and
(e) transactions defrauding creditors.
Transactions at an Undervalue
39.04 Where a company goes into administration or liquidation, the office holder4 may apply to the court for an order to restore the position if ‘…the company has at a relevant time… entered into a transaction with any person at an undervalue…’.5
(a) When does a company ‘enter into a transaction with any person’? There may be cases in which this fundamental requirement is by no means easy to apply. It is true that ‘transaction’ is broadly defined to include ‘…a gift, agreement or arrangement…’ and that references to ‘…entering into a transaction…’ must be construed accordingly.6 It seems to follow that any arrangement—whether or not legally binding—under which the third party derives a benefit may be susceptible to challenge under this provision. Nevertheless, the section requires that the ‘transaction’ be entered into ‘with’ another person. This may have the effect of limiting the scope of the section in certain cases. For example, suppose that a parent company voluntarily instructs its bank to make payment in respect of invoices outstanding to a creditor of one of its subsidiaries. It does so in order to preserve the subsidiary’s access to trade credit, and does so without reference to the creditor.7 When the parent itself becomes insolvent, could the payments be challenged under this section? It is submitted that they could not. The payment is not a ‘gift’, for the parent derives a tangible commercial benefit from the continued availability of trade credit to the subsidiary. Furthermore, the instruction to the parent’s bank to transfer the necessary funds cannot be seen as the conclusion of a ‘transaction’ with the ‘person’ concerned.8 Equally, the expression ‘transaction’ connotes an arrangement pursuant to which a payment is to be made. As a consequence, the mere receipt of a payment itself (without more) cannot therefore amount to a ‘transaction’ within the scope of the section. This view of the subject is supported by the decision in Re Taylor Sinclair (Capital) Ltd9 and, it is submitted, the decision is appropriate. It is not uncommon (p. 673) that an invoice rendered to one group company is paid by another member of the same group, and (without more) there is no obvious reason why a creditor who receives payment in this way should be at the risk of prejudice under section 238 of the Insolvency Act 1986.
(b) If the company is found to have entered into a transaction with a person for these purposes, was that transaction at an ‘undervalue’? The statutory provisions confirm10 that an undervalue transaction involves either (i) a gift or other arrangement under which the company receives no consideration or (ii) a transaction ‘…for a consideration the value of which, in money or money’s worth, is significantly less than the value, in money or money’s worth, of the consideration provided by the company…’. So far as the borrowing company is concerned, this provision should pose no threat to the lending bank which takes security for new funding. The company plainly receives consideration, and the security provided by the company itself will clearly have no greater value than the loan plus funding costs.11 The position becomes more obscure where—as will usually be the case—the bank requires that the security extends to past borrowings or requires new guarantees and security from subsidiaries.12 In such cases, it may well be that the value of the security provided to the bank will be of significantly greater value to it than the injection of new funds received by the company itself.13 Such transactions may, however, be ‘saved’ pursuant to some of the provisions discussed in subparagraphs (e) and (f) below. Furthermore, the court must not take a narrow view in examining the consideration received by the company. Instead, it must take a view of the entire circumstances of the transaction, including the benefit of any collateral arrangements with others who may be involved.14
(c) If the company is found to have entered into a transaction with a person at an undervalue for the purposes of the section, was that transaction entered into at a ‘relevant time’? In the present context, this refers to the period of two years leading up to the (p. 674) onset of insolvency.15 There are various exceptions to this rule but it seemed more convenient to discuss these under the ‘saving’ provisions considered in subparagraphs (e) and (f) below.
(d) There are various important provisions which, in favour of the lender, may save certain guarantees and security transactions which might otherwise be subject to a successful challenge pursuant to the ‘undervalue’ rules.
(e) In particular, a transaction cannot be adjusted under these rules unless either (i) at the time of the transaction, the company was already insolvent16 or (ii) it was rendered insolvent as a result of entering into the transaction concerned.17 This provision may be of particular value to the bank where the company’s insolvency results from a sudden misfortune, rather than a gradual deterioration of its prospects. In effect, the provision is designed to save transactions where insolvency was not believed to be an imminent prospect. It may also be of assistance where the bank takes guarantees and security for a parent’s borrowings where the parent is in difficulty but the subsidiary providing the security is itself solvent.18
(f) Furthermore, a court may not make an order under section 238 if it is satisfied that (i) the company entered into the transaction in good faith19 and for the purpose of carrying on its business and (ii) at the time of the transaction, there were reasonable grounds for believing that the transaction would benefit the company.20
(g) If the court finds that the relevant arrangement was indeed a ‘transaction at an undervalue’ for these purposes, then it must21 make ‘…such order as it thinks fit for restoring the position to what it would have been if the company had not entered into that transaction…’. Without restricting the breadth of this general power, the Act specifically allows the court to order (i) the re-transfer to the company of any property transferred pursuant to the transaction in question, (ii) the release of any security given by the company as part of the transaction, (iii) the payment of compensation by any person who received the benefit of the transaction, and (iv) the revival of any guarantees which were discharged as a result of the transaction concerned.22 An order may be made against any person,23 whether or not he was a party to the relevant transaction, but a party who acted in good faith and provided value is entitled to certain protections.24
39.06 Where a company has gone into administration or liquidation, and has given a preference to any person at any relevant time, the office holder may apply to the court for an order which restores the position to what it would have been had the company not given that preference.25 The provision may be dissected as follows:
(a) The expression ‘preference’ requires explanation. A company gives a preference to a person if (i) that person is one of the company’s creditors, or is a surety or guarantor for any of the company’s obligations and (ii) the company does anything, or permits anything to be done, which has the effect of putting that person into a better position than he would otherwise have enjoyed if the company goes into insolvent liquidation.26
(b) Whether or not a person is a ‘creditor’ will not usually pose particular problems in this type of case. A creditor is any person who would be entitled to prove in the liquidation of the company, and thus includes a guarantor or any other person entitled to a right of indemnity against the company.27 However, the clear consequence is that there must be a pre-existing transaction between the company and the creditor under which the company has incurred a liability. The preference is a subsequent act on behalf of the company which is designed to enhance that creditor’s position.28
(c) Although not specifically defined, the ‘preference’ must therefore connote the making of a payment which reduces the amount owing to the creditor29 or the amount covered by the guarantor,30 or the giving of security which provides the creditor with an enhanced prospect of repayment as compared to the general body of creditors.
(d) It is, however, obvious that, whilst every payment made to a creditor has the effect of discharging a debt (and thus improving the creditor’s position in the event of a later insolvency), not every such payment can constitute a preference. There are, therefore, various limiting factors.
(e) It should be appreciated that the court can only make an order ‘…in respect of a preference given to any person unless the company which gave the preference was influenced in deciding to give it by a desire to produce in relation that person the effect of…’ a preference. It seems that the company’s intention, or one of its intentions,31 must be to improve the creditor’s position in the event of insolvency.32 Thus, (p. 676) if a company pays a particular creditor because it needs him to continue to provide supplies, the payment cannot later be set aside as a preference. Likewise, if security is given to an existing creditor to induce him to provide additional funding,33 or to a bank with a view to ensuring the company’s survival34 then this, likewise may not constitute a preference.
(f) Where the recipient of the preference is a person connected with the company, it is presumed that the requisite intention is present.35 Thus, where the directors sanction the repayment of their own personal loans to the company, it will be presumed that they intended to prefer themselves.36 Likewise, if the company pays off a creditor whose debt had been personally guaranteed by a director, the same presumption will apply.37 Although the bank will not usually be a person connected with the company, it may nevertheless be affected in the type of situation just described.38
(g) Once again, the court cannot make an order under these provisions unless the company is insolvent at the time of the preference or is rendered insolvent as a result of giving it, although this requirement is presumed to be satisfied where the recipient of the preference is connected with the company.39
(h) A transaction can only be set aside as a preference if it was given during the six month period prior to insolvency.40
(i) The orders which the court may make to restore the position mirror those available in the context of a transaction at an undervalue.41
(j) It should be appreciated that, if a transaction is set aside as a preference, this does not invalidate the underlying transaction to which the preferential transaction related. Consequently, the creditor will still be entitled to prove in the liquidation for the monies which are owing to him.42
39.07 Companies encountering financial difficulties may be driven to desperate measures and may borrow from lenders seeking to exploit their situation. Transactions of that type may be detrimental to the unsecured creditors and, although not constituting a preference for the purposes of section 239 of the Insolvency Act 1986,43 the effect is similar.
39.08 As a result, section 244 of the Act allows the administrator or liquidator to apply for an order declaring that the credit transaction was extortionate. The following comments may be made in this regard:
(a) A credit transaction is extortionate44 if, having regard to the risk accepted by the person providing the credit, (i) the terms of the credit required ‘…grossly exorbitant payments to be made in respect of the provision of the credit or (ii) the terms otherwise grossly contravened ordinary principles of fair dealing…’.
(b) If the office holder makes an application with respect to a particular credit transaction, it is presumed to be extortionate unless the creditor proves otherwise.
(c) The court can, however, only make an order with respect to a credit transaction entered into during the three year period prior to the onset of insolvency and, in this respect, the burden of proof appears to rest on the administrator or liquidator.45
(d) If the court finds that the credit transaction was exorbitant, then the court may make a variety of orders to set aside or vary the terms of the transaction, and to require the creditor to refund payments or surrender security.46
Avoidance of Floating Charges
39.09 When it sees that its customer is running into financial difficulty, a bank may be tempted to demand the execution of a general floating charge over the assets of a company and its subsidiaries. The bank may also advance new money at that time, but the security will also cover pre-existing liabilities.
39.10 Once again, arrangements of this kind may run to the disadvantage of the general body of unsecured creditors, and section 245 of the Insolvency Act allows for such security to be challenged in stated circumstances. Where it is clear that the stated security does consist of a floating charge,47 a liquidator is likely to invoke section 245 in priority to the ‘undervalue’ and ‘preference’ provisions which were considered above.48
(a) If a company creates a floating charge49 during the 12 month period prior to the onset of insolvency,50 then it is invalid except to the extent of (i) moneys advanced51 at the same time as, or following, the creation of the charge,52 (ii) the value of consideration that consists of the reduction, at the same time as, or after the creation of the charge of any of the company’s indebtedness, and (iii) interest on the amounts specified in (i) and (ii).
(b) There is a certain amount of case law derived from section 245 and its predecessors. Much of this revolves around the extent to which consideration for the charge may be said to have been advanced at the time of, or following, its creation, and has already been noted in connection with paragraph (a), above. The available authorities have, however, also decided various other points. For example, if the company has created a floating charge which would otherwise be vulnerable to attack under section 245, a payment later made by the company to redeem that charge cannot itself be challenged under section 245 on the basis that the floating charge could have been set aside, had it still subsisted.53 There no longer exists a floating charge to which the section could apply and it is inappropriate to speculate on what the position might have been. The office holder would thus have to challenge the payment itself, on the grounds that it was a preference, if the circumstances of the case entitled him to do so.
(c) The courts have also had to assess whether the consideration provided in particular cases has been sufficient to take the security outside the ambit of section 245. For example, it has been decided that the lender can insist that the funds are applied to a particular purpose (eg in discharging a specified liability of the company), and it is thus not necessary that the new money should be placed at the unconditional disposal of the company.54 But the company must derive some tangible benefit from the transaction (p. 679) since, otherwise, the consideration may effectively be non-existent and will not prevent a challenge to the floating charge under section 243.55
(d) As in the case of undervalue transactions and preferences, a floating charge cannot be invalidated under section 245 if the company was solvent at the time of its creation and is not rendered insolvent as a result of the transaction to which the charge relates.56
(e) Once again, it should be emphasized that the invalidity of a floating charge under section 245 does not lead to the unenforceability of the underlying loan or other credit transaction to which it was intended to relate. The lender or other creditor will thus remain entitled to prove in the liquidation for the sums owing to him.
(f) The application of section 245 is not prejudiced by the fact that the floating charge may have crystallized57 before the onset of insolvency, since the section applies to ‘…a charge which, as created, was a floating charge…’.58
Transactions Defrauding Creditors
39.12 The marginal note to section 423 of the Insolvency Act states that it deals with ‘Transactions Defrauding Creditors’. The section appears immediately under the heading to Part XVI of the Act, ‘Provisions against Debt Avoidance’. In spite of this apparent concern with the evasion of creditors,59 the section bears a number of similarities to the rules on transactions at an undervalue, which have been discussed earlier in this chapter.
39.13 Insofar as it relates to companies,60 the key provisions of the section are as follows:
(a) The section is stated to relate to transactions at an undervalue, and provides that a company enters into such a transaction if (i) it makes a gift to any person, (ii) it enters into a transaction under which it receives no consideration, or (iii) it enters into a transaction where the value of the consideration received by the company is significantly less than the value of the consideration provided by it.61
(b) Where a company has entered into such a transaction, the court may make an order to restore the position including, without limitation, (i) the retransfer of property to the company, (ii) the release of any security given by the company, (iii) the payment of compensation by a party who received a benefit from the transaction, and (iv) the revival of any guarantees discharged as a result of the transaction. There are also provisions for the protection of those who have acquired an interest in the company’s property for value and in good faith.62
(p. 680) (c) Thus far, these provisions are essentially identical to those discussed earlier in relation to a transaction at an undervalue.63 At this point, however, the two sets of provisions begin to diverge, and more emphasis is placed upon the potentially dishonest aspects of the transaction at issue.
(d) An order may only be made if the court is satisfied that the company entered into the transaction for the purpose of putting assets beyond the reach of a person who is making a claim against him or may do so at some future time, or otherwise for the purpose of prejudicing the interests of such a person in relation to any such claim.64 It will not always be easy for the victim or applicant for the order to satisfy this test, because the purpose of the transaction must be to put assets beyond the reach of the creditor, but the debtor may have had a number of different objectives in view.65
(e) Since the emphasis is placed on the (fraudulent) intention of the company, there is no time limit for making a claim under this section.66 Furthermore, there is no explicit saving for transactions effected at a time when the company can be shown to have been solvent.67
(f) Once again, an application under section 423 may be made by an administrator or liquidator of the company. However, and again in contrast to the provisions discussed earlier in this chapter, there is no requirement that the company should have gone into formal insolvency proceedings. Consequently, an application may also be made by the person (referred to as the ‘victim’) whose claim against the company has been impeded by the transaction at issue.68
(g) It is perhaps fair to say that the provisions discussed earlier in this chapter dealing with transactions at an undervalue, preferences, and extortionate credit transactions are most likely to be raised to the detriment of a lending bank with a view to challenging the benefit of transactions entered into shortly before the customer’s insolvency. In contrast, section 423 is perhaps more likely to be invoked on behalf of the bank when it is discovered69 that the customer or its guarantors have attempted to place assets beyond the reach of the bank.70
(p. 681) 39.14 It may be noted that section 423 is not subject to any explicit territorial limitation, with the result that an order may be made against any debtor, regardless of its place of incorporation. It has been decided that the matter or transaction must have at least some nexus with England if an order is to be made under section 423.71 However, the more tenuous the connection with England the more cautious the court should be in exercising its discretion to make an order. A recent illustration of these points is offered by the decision in Donoch Ltd v Westminster International BV,72 where a foreign company which owned a foreign-registered vessel physically situate outside England, sold it to another foreign affiliate for a nominal sum. The vessel had been involved in a collision and suffered considerable damage. This was the subject of a dispute with the insurers, and the vessel had been transferred to the affiliate with a view to preventing the disposal of the vessel by the underwriters in accordance with the terms of the policy. Since the objective of the transaction was to deprive the insurers of their contractual rights, and given that the insurers were based in London, it was appropriate to order the re-transfer of the vessel to preserve the insurer’s position. The court indicated that it would have power to make a section 423 order if the ‘real and substantial purpose’ of the transfer was to place the vessel beyond the reach of the insurers; it did not have to be the sole purpose.(p. 682)
1 These rules are supplemented by provisions for the personal liability of the directors if they have been responsible for fraudulent or wrongful trading: see Insolvency Act 1986, ss 213 and 214. A discussion of these provisions is beyond the scope of the present work.
2 It has already been seen that guarantees and security given by subsidiaries of a borrower on an ‘upstream’ basis are vulnerable to attack on the grounds that they may have been given in breach of fiduciary duty: see the discussion at para 26.60 above.
3 As will be apparent, the discussion is centred on the insolvency of companies. However, it should be appreciated that the statutory provisions applicable to corporate insolvency are also applicable to individuals with appropriate modifications: see Insolvency Act 1986, ss 339–343.
6 Insolvency Act 1986, s 436. It is true that the definition is not exclusive, and that other arrangements could thus constitute a ‘transaction’ for these purposes. Nevertheless, one cannot escape the view that ‘transaction’ (especially when linked with the words ‘with any person’ in s 238(2)) connotes an element of mutual dealing, rather than a merely unilateral and unsolicited act of payment from the company concerned. This view is supported in Clarkson v Clarkson  BCC 921, aff’d by the Court of Appeal but without specific discussion of this point:  BCC 929.
11 For example, if a company borrows £1,000 but provides security over a property worth £10,000, no question of an ‘undervalue’ arises because, after realizing the security, the bank would have to return the surplus funds to the borrower.
12 Viewed in isolation, the issue of a guarantee to a bank will inevitably be a transaction at an undervalue for the purposes of s 239(4)(a). Although the making or continuation of advances to the borrower is sufficient consideration to support the guarantee (see para 26.14 above), this would not constitute consideration which is received by the guarantor company for the purposes of that section. Alternatively, any consideration received by the guarantor company is likely to be significantly less than the value of the guarantee to the bank, with the result that the guarantee would be an undervalue transaction within s 239(4)(b): see Paget, para 20.56.
13 In Re MC Bacon Ltd  BCLC 324, at p 340, the court held that the creation by a company of security for its own borrowings could not be caught by the ‘undervalue’ rules, since the company’s assets were not thereby depleted and the company did not thereby provide consideration which could be measured in money or money’s worth. However, for the reasons given by Paget (para 20.54) this analysis cannot apply where the company is providing security for past borrowings, a view confirmed by Hill (as Trustee in Bankruptcy of Nurkowski) v Spread Trustee Co Ltd  1 BCLC 450. In terms of s 239(4), the security may be an undervalue transaction because the company will ‘receive no consideration’ for the security. If some new money is advanced, then it would be necessary to determine whether the new money is ‘a consideration the value of which, in money…is significantly less than the value, in money or money’s worth of the consideration provided by the company’. For a case which illustrates the circumstances under which consideration received by a person may be ‘significantly less’ than that received by it, see Re Kumar (A Bankrupt)  2 All ER 700. The decisions made under s 423 of the Act (discussed at paras 39.12–39.14 below) may also be of relevance in the present context.
15 Section 240(1) of the Insolvency Act. Broadly speaking, means either (i) the date on which an application for the appointment of an administrator is made or (ii) the date of commencement of the winding up: s 240(3), Insolvency Act.
17 Section 240(2) of the Insolvency Act. If these conditions are not met, then the transaction was not entered into at a ‘relevant time’ for the purposes of s 239(2). Where the beneficiary of the transaction is connected to the company, there is a presumption that the company was indeed insolvent or was rendered insolvent as a result of the transaction at hand. This point is, however, unlikely to be of concern in the context of a banking transaction in the normal course of business.
18 For other possible grounds of challenge to such an arrangement, see para 26.60 above.
20 In practice, the court may be reluctant to find that this test is satisfied where the relevant transactions have been entered into with relatives or close associates: Re Barton Manufacturing Co Ltd  1 BCLC 740.
21 Section 238(3). Note that, if the court is satisfied that the conditions of the section are met, then it must make an order to restore the position; the section is not merely discretionary in that sense, although the type of order to be made in each case will obviously depend on the particular circumstances of each case.
23 Including a person resident overseas: Re Paramount Airways Ltd  Ch 223 and the discussion at para 39.14 below.
28 As a result, a subsidiary which provides a guarantee to cover the overdraft of its troubled parent does not thereby give a ‘preference’, because the bank is not a creditor of the subsidiary until the guarantee is actually given. Of course, the giving of such a guarantee may constitute a transaction at an undervalue on the part of the subsidiary.
32 Re MC Bacon Ltd, n 13 above. Thus, if the transaction is motivated purely by proper commercial considerations, it cannot be set aside as a preference: Re Conegrade Ltd  BIPR 358.
33 Re MC Bacon Ltd, n 13 above; Re Fairway Magazines Ltd  BCLC 643.
34 Re FLE Holdings Ltd  3 All ER 533; Re Fairway Magazines Ltd, n 33 above.
35 Section 239(6). References to persons ‘connected’ with the company will occur frequently in this chapter. They are essentially designed as an anti-avoidance provision. A person is ‘connected’ with the company if he is a director or shadow director of the company, or is an associate of such a director or of the company itself: s 249. The term ‘associate’ is very widely defined in s 435 of the Act, and includes (among others): (i) spouses and certain other relatives, (ii) business partners, (iii) employers and employees, (iv) trustees, and (v) companies under common control.
36 Wills v Corfe Joinery Ltd  2 BCLC 75. For a case in which the connected parties managed, at least to a limited extent, to rebut this presumption, see Re Fairway Magazines Ltd, n 33 above, and contrast Re Stealth Construction Ltd  BCLC 297.
37 Re Agriplant Services Ltd  2 BCLC 598. The presumption may be rebutted if the bank is fully secured by a charge over the assets of the company and could recover its loans in full from that source (or, alternatively, the director would be subrogated to that security: see Re Hawkes Hill Publishing Ltd  BIPR 1305; Re Oxford Pharmaceuticals Ltd  EWHC 1752 (Ch).
41 See s 241 of the Act and the discussion at para 39.05(g) above.
42 Any reader with particular stamina is invited to review the decision of the Supreme Court of Western Australia in The Bell Group Ltd (in liquidation) v Westpac Banking Corporation (No 9)  WASC 239. The judgments—excluding annexes—runs to some 2,500 pages and addresses numerous issues which arose when a large number of banks sought to obtain security as the Bell Group approached insolvency. For further litigation and appeals in the same matter, see Westpac Banking Corp v The Bell Group Ltd (No 3)  WASCA 157.
43 It is, however, clear that a credit transaction could also constitute a transaction at an undervalue for the purposes of s 238. Consequently, orders under ss 238 and 244 may be made in relation to the same transaction: see s 244(5).
47 On the distinction between fixed and floating security, see paras 28.03–28.10 above.
48 The undervalue’ provisions set out in s 238 require the office holder to prove that the transaction was indeed at an undervalue so far as the company is concerned, and the beneficiary of the transaction may have a defence if the company entered into the transaction in good faith and there were reasonable grounds for believing that the transaction would benefit the company. Likewise, in the case of the ‘preference’ rules, the office holder has to prove that the company intended to prefer the particular creditor. These obstacles do not apply if the office holder is able to proceed under s 245.
49 Although the point will only rarely arise in practice, s 245 is only expressed to apply to ‘a floating charge on the company’s undertaking or property’. Although the point is by no means clear, this seems to suggest that the section only applies where the company creates a floating charge over the entirety of its undertaking. On that basis, a floating charge limited to a particular class of assets would not fall within the scope of s 245. Any challenge to such a security would therefore have to be based on the ‘undervalue’ or ‘preference’ rules described earlier in this chapter.
50 Section 245(3). The period is extended to two years if the chargee is a person connected with the company. The ‘onset of insolvency’ is the date of the application or other step leading up to the appointment of an administrator, or the commencement of the winding up, as the case may be: s 245(5) of the 1986 Act. The time which follows the onset of insolvency is accordingly left out of account in calculating the necessary 12 month period: see Power v Sharp Investments Ltd  BCLC 111 (CA).
51 The section also deals with security which has been provided in consideration of the supply of goods and services. However, these will rarely be of direct relevance in the present context, and the discussion is therefore limited to the provision of financial accommodation.
52 The lender needs to take particular care to ensure that the security has been executed by the time the money has been advanced. If the lender makes an advance on the faith of a promise that security will be given, then he takes the risk that his floating charge will be invalidated under s 245: see Power v Sharp Investments Ltd  BCLC 111 (CA). However, where the borrower has undertaken to provide a floating charge, equity may regard the floating charge as given as at the date of the undertaking (ie because equity regards as done that which ought to have been done), with the result that the time delay would not prejudice the lender in such a case: Power v Sharp Investments Ltd (above). But if the circumstances do not create an equitable right to the security (eg because the agreement is insufficiently clear), then the subsequent execution of the security arrangement may be set aside under s 245: see Rehman v Chamberlain  EWHC 2318. The lender must press for the security to be given promptly. If he is complicit in any delay, then equity may no longer assist him: see Re F and E Stanton Ltd  Ch 180.
55 Re Fairway Magazines Ltd, n 33 above, where the floating charge was held to be void in so far as it related to an advance which merely served to reduce a director’s liability under a personal guarantee given to the bank.
57 On crystallization of floating charges, see paras 28.11–28.13 above.
59 This emphasis explains why the section is to be found in an entirely separate part of the Act than the provisions discussed earlier in this chapter. Nevertheless, it was felt convenient to deal with s 423 in the present context.
60 The section also applies to transactions by individuals. This provision may therefore be relevant to a bank when a personal customer or guarantor seeks to place assets beyond the reach of his creditors.
61 The true value of an asset is of course a matter of evidence and it may be necessary to take account of tenancies and other encumbrances affecting the property: see Delaney v Can Chen  EWHC 6 (Ch).
67 Although if it can be shown that the company was financially sound at the time of the transaction, this evidence may presumably be used to negative the necessary intention to defeat creditors. That the insolvency of the company is not a necessary prerequisite for an order under s 423 was confirmed in Dornoch Ltd v Westminster International BV  EWHC 1782 (Admiralty).
69 It appears that the limitation period only begins to run in respect of a claim under s 423 when the creditor discovers the fraudulent transfer or could have done so with reasonable diligence: see Giles v Rhind  Civ 118.
70 There may, however, be exceptions to this observation. If, for example, a bank knew that a husband was in serious financial difficulty but granted facilities which assisted in the transfer of assets to his wife (eg by providing a deposit on a property to be purchased in the wife’s sole name), then it may be that the court could order that the proceeds of sale should be applied firstly in repaying the deposit to the husband’s creditors and thereafter in repayment to the bank. The bank would suffer a loss if the property had fallen in value in the interim period. The bank would be unable to claim the protection afforded to third parties by s 425(2), because its knowledge of the husband’s financial position may be sufficient to show that the bank had not acted in good faith.