Avoidance of Floating Charges:
Under s.314 liquidation automatically renders void any floating charge created within the period of 12 months before commencement of liquidation subject to the following exceptions:
(a) valid if the company was solvent at the time when the charge was created. A company is not solvent unless it can pay its debts in full as they fall due;
(b) if the company was not solvent the floating charge is still valid as security for cash paid to the company (with interest at six per cent per annum) after the charge was created and in consideration of the loan.
The general purpose of the rule is to prevent an unsecured creditor of an insolvent company from getting advantage over other creditors by obtaining a floating charge to secure an existing debt at a time when the company is heading towards insolvent liquidation. It is only the charge (as security) not the debt itself which becomes void.