Section 231 of the Companies Act 1997 answers the question that matters most when a company fails: who gets paid first out of the charged property.
Section 231(1) — the statutory order
Subject to this section, the provisions of Schedule 15 have effect with respect to the priorities, in relation to each other, of charges to which this Part applies.
So the starting point is a statutory order, not the common law rules of priority. Because section 225(2) requires the Registrar to record the time and date of every entry, and section 222(2) makes an unregistered charge void against the liquidator and any creditor, the register is the primary evidence in any priority contest.
Priority under Schedule 15 presupposes a registered charge. An unregistered registrable charge has no priority to argue about — it is void as security against the liquidator and every creditor.
And note the trap in section 225(8): while an entry is marked “provisional”, the charge is deemed not to have been registered. Only when the word is deleted is it deemed registered from the original time and date.
Section 231(2) — consent and agreement override
(a) any consent (express or implied) that varies the priorities, being a consent given by the holder of a charge that would otherwise be entitled to priority; and
(b) any agreement between those chargees that affects the priorities in relation to each other.
This is what makes deeds of priority and intercreditor agreements effective. Chargees may agree any order they like among themselves, and the Act gives effect to it.
Paragraph (a) requires the consent to come from the chargee who would otherwise have priority — the party giving something up. And the consent may be express or implied, which is what makes subsection (3) work.
Section 231(3) — the deemed consent of a floating chargee
The holder of a registered floating charge is deemed to have consented to that charge being postponed to a subsequent registered fixed charge created before the floating charge becomes fixed, on any of that property — unless:
(a) the creation of the subsequent registered charge contravened a provision of the instrument or resolution creating or evidencing the floating charge; and
(b) a notice in respect of the floating charge indicating the existence of that provision was submitted to the Registrar before the creation of the subsequent registered charge.
A floating charge leaves the company free to deal with its assets in the ordinary course. Section 231(3) reflects that: by default, a later fixed charge takes priority.
Lenders answer this with a negative pledge — a clause forbidding the company from creating later charges. But the clause alone is not enough. Both limbs must be satisfied: the later charge must have contravened the provision, and a notice indicating the existence of that provision must have reached the Registrar before the later charge was created.
That is why section 224(2)(b) makes a variation prohibiting or restricting the creation of subsequent charges separately registrable. A floating chargee who takes a negative pledge and does not register it has no protection against a later fixed chargee.
The deemed consent applies to a fixed charge created before the floating charge becomes fixed — that is, before crystallisation. Once the floating charge has crystallised, it attaches to the property as a fixed charge and the deemed postponement in subsection (3) has no further work to do.
Separately, in a liquidation, section 347 deals with a floating charge created within six months before the commencement of the liquidation, and section 340A with voidable charges generally — so priority is not the only question a floating chargee faces.
Section 231(4) — charges over mixed property
Where a charge relates to property of a kind to which a paragraph of section 222(4) applies, and also to other property, Schedule 15 applies so as to affect the priority of the charge only in so far as it relates to the first-mentioned property, and does not affect the priority of the charge in so far as it relates to the other property.
A general debenture typically catches both registrable property — book debts, goodwill, intellectual property, the undertaking — and property outside section 222(4), most obviously land, which paragraph (a) expressly excludes where the charge is solely on land.
Section 231(4) splits the analysis. Schedule 15 governs the registrable part; the priority of the charge over the other property is determined by the law applicable to that property — the land legislation for land, and the Personal Property Security Act 2011 for personal property within its scope.
Section 231(5) — two Acts unaffected
Schedule 15 does not apply so as to affect the operation of —
(a) the Insurance Act (Chapter 255); or
(b) the Trade Marks Act (Chapter 385).
Both statutes contain their own regimes affecting interests in the relevant property — policyholder protection under the insurance legislation, and the registration of assignments and registered users under Part IX and X of the Trade Marks Act. Section 231(5) preserves them.
Practical points for a secured lender
- Search first. The register of charges under section 225, the land titles register, and the register under the Personal Property Security Act 2011.
- Register within two months, and confirm the entry is not provisional. Under section 230 you may lodge it yourself and recover the fee.
- Obtain the section 225(3) certificate — conclusive evidence that the registration requirements were complied with.
- If taking a floating charge, register the negative pledge under section 224(2)(b) before any later charge is created. Without that notice, section 231(3) postpones you.
- Document any priority arrangement in a deed of priority between chargees — section 231(2)(b) gives it effect.
- Register every variation that increases the secured amount, or your extra advances may rank behind an intervening charge.
- Watch the liquidation provisions — sections 340A and 347 can undo a charge that has perfect priority.
Sources
- Companies Act 1997 — ss 222–231, 340A, 347; Schedule 15
- Trade Marks Act (Chapter 385)
- Personal Property Security Act 2011
Before relying on anything here, read the current text of the Companies Act 1997 and check for later amendments. If a decision matters to you, get advice — start with the Office of the Public Solicitor, or find a firm in the law firms directory.