The Genesis Of The Floating Charge
| DOI | http://doi.org/10.1111/j.1468-2230.1960.tb00630.x |
| Date | 01 November 1960 |
| Published date | 01 November 1960 |
THE
GENESIS OF
THE
FLOATING CHARGE
THE floating charge on a company's assets
is
so
familiar a form of
security for a loan today that it is surprising to realise how recently
it
first received legal recognition as the result of a group of
Chancery decisions in the
1870s.'
It
is moreover surprising to
discover that
it
is a form
of
security peculiar to the legal systems
of the British Commonwealth,2 although, as will be shown below,
it
had
a
precursor
in
Roman law. The purpose of this article is to
trace the development of English common law and equity during
the nineteenth century
so
as to segregate the many factors which
ultimately led to the recognition of the floating charge, and to
examine the two conflicting theories which the courts have
expounded as to its nature.
1.
COMMERCIAL
NEEDS
AND
THE
COMMON
LAW
By the third decade of the nineteenth century industrial and com-
mercial expansion had become so rapid that the constant crying
need of companies was for more capital. In the case of the larger
companies incorporated by Act of Parliament to manage railway,
canal and public utility undertakings, much of this need could be
satisfied by offering shares for subscription, but the smaller unin-
corporated companies, which carried most of the burden of the
industrial revolution, either would not
or
could not induce
investors to subscribe for their shares on a large enough scale, and
a large part
of
their capital was consequently raised in the form of
loans.
At
first investors seemed content to take the companies'
bonds for repayment of their loans, and relied for their security on
the priority given to them by law over the shareholders in the event
of a liquidation. The bond was a form of investment which had
been familiar for over a hundred years, and on the whole bond-
holders had in the past recovered their loans in full when companies
foundered. But the much increased tempo of activity of the indus-
trial revolution brought with
it
a vast expansion of credit for
1
Re Panama, New Zealand and Australian Royal Mail Co.
(1870) 5 Ch.App.
318;
Re Florence Land and Public Works Go., ex
p.
Moor
(1878) 10 Ch.D.
630;
Moor
v.
Anglo-Italian Bank
(1878) 10 Ch.D.
681;
Re Hamilton's Wind-
sor Ironworks Go., ex
p.
Pitman and Edwards
(1879) 12 Ch.D.
707;
Re
Colonial Trusts Corporatian, ex
p.
Bradshaw
(1879) 15 Ch.D. 465.
*
Floating charges are not recognised by
Scots
law
(Carse
V.
Coppen,
1951
S.C.
233), nor, until recently, by American law, which adopted the same position
as the common law of this country during the last century
(Benedict
v.
Ratner
(1925) 268 U.S. 353).
In
those states of the
U.S.A.
which have adopted
article 9 of the Uniform Commercial Code, however, it is now possible for
floating charges to be created, but they
do
not yet appear to be widely used.
3
Such companies were often family concerns, and the introduction of outside
shareholders
would
diminish the voting power and control
of
the family.
Non-voting shares were unknown at this time.
630
Nov.
1960
THE GENESIS
OF
THE FLOATING CHARGE
631
current transactions, such as the purchase of raw materials and the
carriage of finished goods,
so
that when a company failed, bond-
holders ofteu found that other creditors had claims to be satisfied
rateably with their own,4 and
if
the company’s assets were
insufficient to pay all the claims in full, the bondholders went
partly unpaid. To overcome this risk, investors who supplied
long-term loan capital
5
came to insist on better security for their
loans, but the problem was, what security could the company
legally give them
?
The forms of security available at common law were the mort-
gage of land
or
goods and the pledge of goods. Under a mortgage
the ownership of the mortgaged property was transferred to the
lender
so
that on default by the borrower he could sell the property
and discharge his loan,6 but until the lender took steps to realise
his security possession of the property was retained by the bor-
rower. Under
a
pledge the ownership of the goods was retained by
the borrower, but the lender took and kept possession of them until
the loan was repaid and had an implied contractual right to sell
them, on default by the borrower.
These forms of security did not meet the needs of companies.
The greater part of a company’s assets would usually comprise raw
materials, manufactured
or
semi-manufactured goods, stock in
trade and trade debts payable to
it,
and its land, buildings and
fixed equipment would often form a mere fraction of the value of
its undertaking. But the forms of security available at common
law permitted
it
to raise money only on the security of these latter
fixed assets, and prevented it from giving an effective security over
its other assets, which commercially were its soundest potential for
raising loans. The reason for this, apart from the fact that the
common law, unlike equity, did not recognise assignments
or
mort-
gages of debts owed to the company, was that the current
or
circulating assets of a company were constantly changing, and the
common law insisted that mortgages
or
pledges should be of land
or
goods owned by the company and identified at the time the mort-
gage
or
pledge was created. Now this was a practical impossibility
in the case of a class of assets the constituent items of which were
constantly changing.
If
the precept of the common law were
4
Until 1856 unincorporated companies and companies formed unaer the first
Joint Stock Companies Act of 1814
(7
&
8
Vict. c. 110) could be wound up
by the Courts
of
Bankruptcy. The rule giving bond creditors priority over
simple contract creditors, which applied in the administration of deceased
persons’ estates until 1869, never applied in bankruptcy, and
so
bondholders
of
a
company enjoyed no preference over trade creditors.
5
At this time loan capital was rarely raised for a period
of
more than five or
six years. It was not until the last quarter
of
the nineteenth century that
debentures redeemable as much as twenty or twenty-five years after issue
began to appear.
8
The mortgagee’s ownership was subject to the mortgagor’s equitable right to
redeem, and
so
an express power of sale was always inserted in the mortgage
to enable the mortgagee to sell the property free from the equity of
redemption.
’
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