Re Yeovil Glove Company Ltd

I will ask Lord Justice Harman to deliver the first judgment.

This is an appeal by the liquidator of the Yeovil Glove Company Limited from an Order of Mr Justice Plowman made on the 18th July 1962 on the liquidator's application in the winding up to set aside, wholly or in part, a floating charge created by an instrument of the 24th January 1958 made by the company in favour of the respondent bank. The liquidator's attack was based upon section 332 of the Companies Act 1948, which is in these terms: "(1) Where acompany Is being wound up, a floating charge on the undertaking or property of the company created within twelve months of the conmencoment of the winding shall, unless it is proved that the company immediately after the creation of the charge was solvent, be Invalid, except to the amount of any cash paid to the company at the time offer subsequently to the creation of, and in consideration for, the charge, together with interest", and so forth. The liquidator's case was that no cash was paid to the company either at the time of the execution of the charge or thereafter In consideration for the charge. The facts are clearly stated in the judgment of the learned judge, and I shall only repeat such of then as are necessary to make what follows intelligible.

This was a family business with a capital of rather over £40,000 which had throughout its career banked with the respondents having a No. 1 account and a No. 2 account and from it and of no importance in this case. When the relevant events happened the company was evidently already in financial straits, having an overdraft on its No. 1 account of about £65,000 guaranteed in part by the directors, but otherwise unsecured.

In February 1957, at the instance of the bank, the company opened two further accounts with a view to giving the bank by subrogation the statutory preference existing under section 319 (l) (b) and section 319 (4) of the Act. The arrangement in each case was, as is shown by letters passing between the company and the bank, that the latter should month by month transfer from the No. 1 account to the No. 5 or No. 4 account, as the case might be, the exact amount of the wages or salaries paid in the week or the month eighteen weeks or four months earlier. There was thus provided a method by Which the bank's preferential rights in a winding-up in respect of moneys advanced by it for the payment of "ages and salaries could at any time be ascertained. These accounts served no other purpose.

As the year 1957 went on the company's trading position did not improve, and on the bank's demand the company, on the 19th June 1957, executed a legal charge on certain of its properties andplant and machinery. By that instrument the company covenanted to pay on demand to the bank all such sums of money "as now are or as shall from time to time be owing" by the company to the bank-By the end of 1957 the position was even worse. The overdraft was up to or beyond the limit prescribed by the bank, gamely, £67,500, and the bank threatened to call in the overdraft and foreclose unless further security was provided. As a result the floating charge which is the subject of this appeal was created on the 24th January 1958. By this instrument the company, by way of further securing payment of the moneys already covenanted to be paid by the charge of the 19th June, charged to the bank further properties, its uncalled capital, and "(c) by way of floating security all the undertaking and goodwill of the company and all its property… assets and rights whatsoever and where so ever both present and future".

It is agreed that upon the taking of that security no cash was either paid or promised by the bank to the company. The company simply obtained temporary forbearance, and its accounts continued to be operated in exactly the same way as before, the overdraft being maintained at or about the same level. This went on till the 28th August 1958 when the bank appointed a receiver and manager under both charges and the accounts were closed. The receiver wound up the business and sold the stock and other assets.

On the 12th January 1959 a petition was presented by creditors for the winding up of the company, and an order was made on the 26th January 1959. On the 13th March 1959 the appellant was appointed liquidator. As things stand at present not enough has been realised to satisfy the secured creditors, and unsecured creditors for over £94,000 will get nothing. It is in these circumstances that this attack is being made on the bank's floating security.

Turning back to section 322, the only question which arises is whether there was cash paid to the company at the time of, or subsequent to the creation of, and In consideration for the charge. It was admittedly created within twelve months of the winding-upat a time when the company was insolvent. It Is further agreed that so far as the overdraft was incurred before the date of the floating charge the charge would not be a valid security for it. The liquidator's claim is a simple one, namely, that as neither sash nor a covenant to pay cash was made at the time of the execution of the document, there was no consideration for it in the legal sense of that term except the bank's immediate forbearance. This seemed to me, I confess, an attractive argument, and it appeared to receive some support from the well-known pronouncement of Mr Justice Parker (as he then was) in ( Orleans Motor Company 1911 volume 2 Chancery Division, page 41), where he said of the corresponding section 212 of the Companies Act 1948: "The section was designed apparently to prevent companies on their last legs from creating floating charges to secure past debts or for moneys which do not go to swell their assets and become available for creditors". So here no money, it is said, swelled the company's assets or became available to creditors.

It was argued that consideration in law is a well-known term and ought to receive its ordinary meaning, and that subsequent payments provided by the bank to defray the company's day-to-day outgoings or wages or salaries or indebtedness to its suppliers by cheque would not be consideration in law for the execution of the charge bearing an earlier date unless those payments were made in pursuance of a promise contained in, or made at or before the date of, the charge itself. It was, however, pointed out that such subsequent payments would in fact not be made in consideration for the charge, but In consideration for the promise.

Now it is apparent on the face of the section that cash subsequently paid to the company may be within the exception if so paid in consideration for the anterior charge, and the argument Is that the words "In consideration for" in this section cannot, therefore, be used in the technical sense, but mean "by reason of" or "having regard to the existence of" the charge. Oddly enough, there la no reported decision on these words, nor are they discussed in any of the well-known textbooks. There has, however,come to light a decision of Lord Romer, when a judge of first instance in a case of re Mortimer In 1925, a decision on the corresponding section of the Companies Act 1908, which was in the sane terms as the present section except that the period was three instead of twelve months. A transcript of this judgment was before us. The facts of that case were, I think, indistinguishable from, those of the present one, and the learned judge held that payments by the bank after the date of the charge were made in consideration for the charge. "It is said", the learned judge said, "that granting that there was a payment in cash by the bankers after the date of the debentures-was not made in consideration of the debenture. In my opinion it was made in consideration of the debenture, and I think so for this reason: It is true that the bank had not entered into any binding arrangement with the company to make further advances, but when a cheque of the company is presented to the bank for payment I think it must be taken that the banker goes through the following process of thought or reasoning: 'I am under no obligation to make this payment; I will, however, make the payment because you have given me this debenture'. That is assented to by the company. The company ask the bank to make the payment because they have given the debenture, and the bank makes the payment because the debenture has been given. I think that, if not technically payment in consideration of the debenture, is a payment in consideration for the charge as that phrase Is used in the section".

That decision, if right, is enough to cover the present question, and the learned judge so held in these words: "In my judgment that case is authority for the proposition that the words of exception in section 322 are capable of applying to a floating charge given by a company to secure its current account with its bankers even though the bank is under no obligation to make any further advances". This decision is noticed In the third edition of Sir Arthur Stiebel's well-known bock published In 1929. No doubt the case was known to...