Secured creditors will be very familiar with the concept that the floating charge contained in their security can be “crystallised”. Crystallisation of a floating charge, when the company’s ability to deal with certain of its assets freely in the course of its business comes to an end, can be a serious problem for the company while giving the secured creditor greater control over the company’s assets, such as stock.
It is usually the case that a floating charge can be crystallised either upon the occurrence of particular events prescribed as “automatic crystallisation” in the debenture, typically including any steps taken in connection with the insolvency or reorganisation of the company, perhaps involving a moratorium with creditors, or upon the giving of notice by the secured creditor at its discretion.
From time to time, a secured creditor may be asked to give confirmation that its floating charge has not crystallised to another potential creditor of the company as this may signpost that the company is in difficulty.
When Part A1 was introduced to the Insolvency Act 1986 in 2000 to provide for company voluntary arrangements ‘with a moratorium’ for eligible “small companies”, additional protection was given to those companies for the duration of the moratorium: any clause in a debenture that purported to crystallise a floating charge would be void and any secured creditor was prohibited from appointing an administrative receiver (and subsequently an administrator) over the company’s assets.
Whilst the “small companies” moratorium in a CVA context was repealed in June 2020, as part of the changes made to insolvency law by the Corporate Insolvency and Governance Act 2020 (perhaps due to its lack of use), we now have a new moratorium for financially distressed companies set out in the replacement Part A1 of the Insolvency Act 1986.
This Part A1 moratorium has many differences from its predecessor, including the eligible companies, its extended length and the treatment of debts created before and during the moratorium. One feature however remains unchanged:
- Floating charge holders cannot give notice to crystallise their floating charge or restrict the disposal of floating charge assets during the moratorium or seek the consent of the court to crystallise their floating charge
- Any provision in a debenture that provides that obtaining a moratorium is an event causing a floating charge to crystallise, restrict the disposal of assets or is the ground for appointing a receiver is void.