20 September 2016

When is a floating company charge accepted? 

In the Cimber case, the Supreme Court must decide when a chargee accepts a floating company charge. This is not defined in detail in Danish law, and the Supreme Court ruling therefore has far-reaching implications. The ruling is expected before the end of the year.

A floating company charge - introduced as from 1 January 2006 - is a security introduced for the purpose of making it easier for companies to obtain financing by charging certain groups of assets. The floating company charge is "floating" and the charged assets may therefore vary. The floating company charge must be registered to have legal effect vis-á-vis a third party.

The legal effects of a floating company charge

The chargee's acceptance of the floating company charge is not essential to the charge's floating function, which will not "freeze" until the issuing of the bankruptcy order or the notification of suspension of payments. When accepting the floating company charge, the chargee can only seek enforcement against the assets covered by the floating company charge within the security limit registered. The chargor's debt will then typically be reduced by way of payments from the receivables covered by the floating company charge combined in combination with the chargee deciding the realisation of the other assets covered by the floating company charge, operating furniture and equipment, stocks, intellectual property rights, etc.

It is not defined in detail in Danish law, when the chargee accepts the floating company charge. The chargee may risk to accept the floating company charge by mistake or fail to to accept it even though the chargee believes it has done so. In both situations, the chargee may risk a loss.

Whether or not a floating company charge has been accepted is of financial importance to the chargees, who must be aware of the precise actions that will be considered an acceptance of the floating company charge. The Eastern High Court ruling of 7 December 2015 in the Cimber case, which has been appealed against to the Supreme Court, contributes to the understanding in this respect.

The general requirements for acceptance of a floating company charge

By accepting a floating company charge, the chargee takes so-called "restrictive" action to secure the charge.

In the High Court ruling in the Cimber case, a distinction is made between acceptance of the floating company charge "in the open" by way of, for instance, bankruptcy, initiation of restructuring, debt rescheduling (freezing of the floating company charge) or enforcement, either "in secret" (implicitly) by way of the chargee's restrictive action, e.g. by restricting the credit facility in a bank.

The Cimber case concerns the chargee's acceptance "in secret" as the bank terminated its commitment with the chargor/the company and gradually restricted the right to draw on the company's credit facility as the company was unable to provide an acceptable payment scheme in time. Subsequently, the company was declared bankrupt. The bankruptcy estate then commenced avoidance proceedings against the bank.

The facts of the Cimber case

The bankruptcy estate's view was that the bank had accepted the floating company charge by terminating the commitment and gradually restricting the right to drawn on the company's credit facility. Withdrawals from the credit facility for salary payments or to other creditors were only to take place with prior approval from the bank. According to the trustee, this was an increasing restriction of action whereby the chargee had de facto secured its charge.

The concept of acceptance should, according to the trustee, be construed expansively as the trustee wished that the reduction of the floating company charge should be calculated based on the gross principle with the effect that the security limit was to be written down on a krone-by-krone basis each time a payment was made after the termination of the commitment without including any withdrawals from the credit - irrespective of the fact that it was undisputed that, formally, the company still controlled and made payments from the credit facility in the period after the termination of the commitment.

After the acceptance of the floating company charge, the bank's security limit was reduced to DKK 0, and the bank was then not entitled to receive any further payments. The bankruptcy estate claimed that all payments received from the time of the acceptance of the floating company charge and onwards were voidable under section 67 and 74 of the Bankruptcy Act.

The bank claimed that the termination of the commitment together with an instalment scheme did not constitute an acceptance of the floating company charge, but was only an indication of the period in which the bank's claim falls due on a continuous basis as agreed with the company.

The bank did not prevent withdrawals from the credit facility and therefore there had been no restriction of action. The company could continue its operations. Further, the bank had not realised any chattels or accepted any other security, In the bank's opinion, the gross principle could not apply as this would mean that chargees would be forced to terminate all credit facilities upon acceptance of the floating company charge with the risk of bankruptcy which is, of course, also not in the interest of the chargor either.

Grounds and conclusion of the High Court

The High Court took into account that the bank had not accepted the floating company charge as the company still had free use of the credit facility with the bank as the company continued its normal operations and made usual payments and withdrawals prior to the commencement of bankruptcy proceedings. There had therefore not been any restriction of action to an extent where it could be considered an acceptance of the floating company charge at the time claimed by the bankruptcy estate.

The importance of the ruling

The High Court ruling in the Cimber case shows that lenders can terminate a commitment covered by a floating company charge by offering a specific instalment scheme at the same time as the debtor can continue its operations by paying the necessary operating expenses from the credit facility covered by the floating company charge.

It must be specifically assessed when the chargee's restrictive action reflects a de facto acceptance of the floating company charge as the restriction of action must be real.

The High Court ruling may be considered too far-reaching and giving chargees of floating company charges an excessive free rein. However, the ruling is in line with general principles of the law of mortgages and pledges as to when a floating company charge is considered accepted - meaning that the acceptance reflects the chargee's restrictive action in relation to the assets covered by the floating company charge. The ruling does not change the limits as to when a floating company charge is considered accepted, but it shows that it is acceptable to currently reduce a secured credit as long as the chargor is free to draw on the credit facility. The ruling has been appealed against to the Supreme Court, and a ruling is expected at the end of 2016.


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