By Matteo Clarkson-Maciel (Willkie Farr & Gallagher) and Paul Fradley (South Square Chambers)
Will the proceeds of the sale of an asset, excluded from the scope of a floating charge governed by English law, be captured by that charge when sold after the crystallization of that charge? The answer turns upon the “Excluded Asset” definition found in the floating charge debenture and poses a key question with practical consequences for lenders, insolvency officeholders and other creditors. If the proceeds from the realization of an excluded asset are captured by the floating charge and distributed to the debenture-holder, the value of their security will be significantly enhanced, and the effect of the exclusion of assets from the charge will be reduced considerably in insolvency. A floating charge captures assets within a class of assets (both present and future) and allows the security provider to use those assets in the ordinary course of business. A floating charge will cover property within a specified class even if assets within the class are acquired after the appointment of an administrator or where the charge has crystallized.
There is a poorly understood lacuna which, in principle, could entitle debenture-holders to the proceeds of assets, even where excluded from the scope of a floating charge, when sold by insolvency practitioners. We call this the “Excluded Asset Gap”. Professional advisers in England need to consider the Excluded Asset Gap when designing and drafting security packages under English law. The crux of the Excluded Asset Gap is the law of floating charges and the interaction between floating charges and company assets following (i) crystallization of that floating charge and (ii) an insolvency process in England & Wales.
An Excluded Assets clause, limiting the assets over which a floating charge applies, will not exclude the proceeds of a realization of assets from becoming subject to a floating charge unless specifically contemplated. This is the case regardless of whether the realizations were made before or after the initiation of an English administration process. When charged assets are realized by the insolvency practitioner, they are not necessarily treated in the same way in the security package perimeter as was their progenitor. An asset not subject to a floating charge (because it falls outside the class of assets to which the charge applies) will, when converted or exchanged so that the new asset falls within the class of assets, fall within the scope of the floating charge. The initiation of administration does not change the nature of the sale of assets being realized.
Some ways of addressing the Excluded Asset Gap include specifying that Excluded Assets include: (i) the excluded assets specifically and their proceeds; and (ii) any Excluded Asset realizations are paid into a specific, designated bank account which is itself defined as an Excluded Asset.
Insolvency practitioners will need to make an assessment before the distribution of the estate. If an insolvency practitioner incorrectly assumes that the proceeds of an Excluded Asset remain excluded, their decision may give rise to a claim by secured creditors regarding the loss incurred by their actions. Lenders, too, should be weary of insolvency practitioners intuitively believing that proceeds of Excluded Assets remain excluded. This will likely result in material losses in recovery by the lenders.
Click here to read the full article, which first appeared in the September 2022 edition of Butterworth’s Journal of International Banking and Financial Law.
 Re Yorkshire Woolcombers  2 Ch 284
 See Holroyd v Marshall (1862) 10 H.L. Cas. 191 for floating charges over future property.
 See Ashborder BV v Green Gas Power Ltd  EWHC 1517 (Ch).
 Ferrier & Australian Factors (Qld) Pty v Bottomor (1972) 126 CLR 597