Rehman v Chamberlain & Anor

An agreement to provide security creates a present equitable security only where, objectively construed, it is expressed to create an immediate security interest. An advance made in anticipation of, and in consideration for, a formal debenture does not itself create such a security. Rectification powers cannot properly be used to register an earlier informal charge after liquidation where doing so would prejudice unsecured creditors’ accrued proprietary interests. Strict registration provisions apply even where their operation produces a hard result.

The claimant had advanced £150,000 to a company in financial difficulty. The advance was intended to be secured by a debenture, which was executed and registered later. The company subsequently entered administration and liquidation.

The liquidator contended that the floating charge was invalid under section 245 of the Insolvency Act 1986. The claimant sought rectification of the register under section 404 of the Companies Act 1985, arguing that an earlier equitable floating charge had arisen when the money was advanced. He alternatively sought an extension of time for registering that alleged charge. The central issues were whether an immediate security had been agreed and whether relief should be granted after liquidation.

1. The claim was dismissed. The evidence did not establish that the claimant had acquired a security interest when the cheque was delivered on 12 February 2009.
2. The distinction drawn in Re Jackson & Bassford Ltd [1906] 2 Ch 467 was material. An agreement may either be expressed to create a present equitable right to security or merely provide that security will be created in the future. The court must determine the category objectively by examining what the parties said and did. The words or conduct need not follow a fixed formula, but the expression of the agreement must be given proper weight.
3. The agreement here fell within the second category. The claimant knew that the loan was to be secured by a debenture, but the money was advanced in anticipation of and in consideration for the security to be created by that debenture. The subjective belief of witnesses that the advance was secured could not establish an objective agreement for immediate security.
4. The reasoning in Re Shoe Lace Ltd, Power v Sharp Investments Ltd [1993] BCC 609 confirmed that money paid before creation of the charge was excluded from the statutory exemption in section 245 of the Insolvency Act 1986. The statutory distinction prevented the advance from being treated as made at the same time as the later debenture.
5. Even if an informal charge had existed, relief under section 404 of the Companies Act 1985 would have been refused. An unregistered charge could not be validated after liquidation without divesting unsecured creditors of accrued interests in the company’s property. The absence of fraud or misconduct meant that no exceptional basis for relief existed.

The court therefore dismissed the claim for rectification and rejected the alternative submission for an extension of time for registration.