In re Bitumina Industries Ltd (in administration)

The court considered whether a floating charge granted to a connected person was saved from invalidity under section 245 of the Insolvency Act 1986 by consideration given at the same time as, or after, the creation of the charge. The court held that an equitable floating charge came into existence on the date agreed by the parties (22 January 2020) despite defects in the formal deed, and that the transfer to the company of shares in a cash-box subsidiary (DMCC) constituted value for the purposes of s.245(2)(a).

The court construed "consideration" in s.245 in a non-technical sense as value actually supplied (money, goods or services) and held that "goods" should include assets received in the ordinary course of trading that have a readily ascertainable value, such as the shares in DMCC in the factual context. The valuation of that consideration was left to be determined if parties cannot agree.

The court further held that the subsequent renegotiation (including the Deed of Amendment and the Note Exchange) did not constitute new "money paid, goods or services supplied" for the purposes of s.245(2)(a), that the Note Exchange did not amount to a discharge of debt within s.245(2)(b) so as to validate the charge, and that release of DMCC funds under the renegotiation did not swell assets available to creditors and so did not constitute consideration under s.245. The court therefore directed that the Charge was valid and effective to the extent of the value derived by the Company from its acquisition of the DMCC shares.

Background and procedural posture: The joint administrators of Bitumina Industries Limited applied for directions under paragraph 63 of Schedule B1 to the Insolvency Act 1986 as to the validity and enforceability of a floating charge given to a connected person (the second respondent) in January 2020. The charge arose from a complex transaction by which the company acquired a Dubai company (Bitumina International DMCC) whose sole asset was approximately US$2.35m in cash, in consideration for convertible secured loan notes. The documentation included multiple attempted debentures, some defective; the parties accept that a valid equitable floating charge (the Charge) arose by the parties' conduct and agreement to create security on 22 January 2020.

Nature of the application: Directions were sought whether section 245 of the Insolvency Act 1986 invalidated the Charge and, if so, whether subsequent conduct (a renegotiation recorded in a deed of amendment, a Note Exchange and releases of DMCC funds) supplied consideration at or after creation of the Charge so as to validate it.

Issues framed:

• What was the date of creation of the Charge?
• Did the transfer of DMCC shares or other acts constitute "money paid, goods or services supplied" under s.245(2)(a) at the same time as or after creation of the Charge?
• Did the Renegotiation / Note Exchange effect a discharge or reduction of debt within s.245(2)(b) so as to validate the Charge?
• Did the release of DMCC funds after the Renegotiation constitute money paid to the Company for s.245(2)(a)?

Court's reasoning and conclusions: The judge analysed the legal nature of charges, prior authority on contractual and equitable charges and the purpose of s.245. The court concluded that the parties agreed a date (22 January 2020) on which a contractual obligation to create a floating charge took effect and that the Charge thus arose on that date; the registrar's certificate filed in respect of the defective deed was held to cover the Charge given the instruments were part of a single design. The court treated the word "consideration" in s.245 as a non-technical reference to value actually supplied and held that the transfer of the DMCC shares should be capable of being treated as "goods" (in a statutory sense extended to assets received in ordinary trading with readily ascertainable value) for s.245 purposes.

On the evidence, the judge held that the Renegotiation produced value for the company in practical terms but did not measurably swell assets available to creditors and therefore did not constitute a supply of goods or services under s.245(2)(a). The Note Exchange was treated as documentation of an amendment to the existing notes rather than a cancellation and replacement creating new value; and, following authority and purposive analysis, the court held that exchanges which merely substitute one debt of the company for another to the same creditor do not provide consideration under s.245(2)(b). Finally, the release of funds from DMCC did not increase the assets available to the company's creditors on insolvency and therefore did not constitute consideration under s.245.

Disposition: The court directed that the Charge was valid and effective against the joint administrators and was not invalidated by s.245(2)(a) at its creation; there was no discharge or reduction of existing debts by subsequent conduct within s.245(2)(b). The valuation of the shares (amount of value preserved) was left to be agreed or determined at a further hearing if necessary.

At first instance the court directed that the equitable floating Charge came into existence on 22 January 2020 and is valid and effective against the Joint Administrators. The Charge was not invalidated by section 245(2)(a) of the Insolvency Act 1986 at the date of its creation to the extent of the value derived by the Company from its acquisition of the DMCC shares. The court held that subsequent renegotiation, the Note Exchange and the release of DMCC funds did not constitute sufficient new consideration or the discharge of debt to validate any otherwise invalid security under section 245(2)(a) or (b). The rationale rested on a purposive construction of s.245, an assessment that "consideration" in the section means value actually supplied (money, goods or services) and that only value which swells assets available to creditors counts for these purposes; valuation of that value was left for further agreement or determination.