Re Yeovil Glove Co Ltd [1965] Ch 148 is a leading UK insolvency law

UK insolvency law

United Kingdom insolvency law deals with the insolvency of firms and individuals in the United Kingdom. The important statutes are the Insolvency Act 1986, as amended by the Enterprise Act 2002, as well as the Company Director Disqualification Act 1986 and the Companies Act 2006.Insolvency is a...

 case, concerning voidable floating charges for past value. It holds that a floating charge can harden when it secures a debt in an overdraft account, when the bank keeps the facility open as a company takes money out and puts money in.

Facts

The liquidator of Yeovil Glove Co Ltd, a glove

Glove

A glove is a garment covering the hand. Gloves have separate sheaths or openings for each finger and the thumb; if there is an opening but no covering sheath for each finger they are called "fingerless gloves". Fingerless gloves with one large opening rather than individual openings for each...

 manufacturer in Yeovil

Yeovil

Yeovil is a town and civil parish in south Somerset, England. The parish had a population of 27,949 at the 2001 census, although the wider urban area had a population of 42,140...

, near Bristol

Bristol

Bristol is a city, unitary authority area and ceremonial county in South West England, with an estimated population of 433,100 for the unitary authority in 2009, and a surrounding Larger Urban Zone with an estimated 1,070,000 residents in 2007...

, sued National Provincial Bank Ltd to rescind a floating charge taken within 12 months before insolvency. The bank's floating charge was to secure Yeovil Glove's overdraft, which (on top of debts of £94,000 to other unsecured creditors) had grown to £67,000 when the bank took fixed security and then as money was still unpaid, a floating charge. Over the next year, Yeovil Glove paid £111,000 and drew out (through cheques written to other people that the bank was honouring) £110,000. At the time the Insolvency Act 1986

Insolvency Act 1986

The Insolvency Act 1986 is an Act of the Parliament of the United Kingdom that provides the legal platform for all matters relating to personal and corporate insolvency in the UK.-History:...

 section 245 (formerly Companies Act 1948

Companies Act 1948

The Companies Act 1948 was an Act of the Parliament of the United Kingdom, which regulated UK company law. Its descendent is the Companies Act 2006.-Cases decided under this Act:*Scottish Co-operative Wholesale Society Ltd v Meyer...

 section 322) read that a floating charge was voidable ‘except to the amount of any cash paid to the company at the time of or subsequently to the creation of, and in consideration for, the charge.’ The bank contended that because more money had been paid out of the account than was covered by the charge (albeit that new debts were run up) the charge was not voidable. As in Clayton's case, money going into an account is presumed to discharge the last debt first. So money had been advanced to the company to a greater extent than the charge, and the turnover of money converted the old value given into new value.

Plowman J held that the ability to make drawings after was good consideration for the charge.

Judgment

Harman LJ noted the liquidator’s argument, that because no cash or promise to pay cash was made when the debenture was made, there was no consideration except the bank’s immediate forbearance. But he held that the act of the bank in meeting the company’s cheques was equivalent to money given, relying partly on a decision by Romer J in Re Thomas Mortimer Ltd. By the rule in Clayton’s case, the bank could claim the whole £67,000 was cash advanced subsequently to the creation of the charge, so the security was valid. His judgment went as follows