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Can you please explain me these in simpler words:
1. An alteration is not invalid merely because it causes a breach of contract – but that does not excuse breach. (Chapter Alteration of articles)2. A chargeholder can prohibit the creation of a later charge with the priority, but the prohibition is only effective if a subsequent chargee has notice of the prohibition as well as the charge. (Chapter Priority of Charges)
Please REPLY, Thanks in advance
1 – articles cannot create a contract with an outsider, so where such a “contract” is within the articles, the articles can be changed. However, as in the case Southern Fouundries v Shirlaw, such an alteration had the effect that a director then lost office and was able to sue for breach of an employment contract.
2 – where a floating debenture has been issued in exchange for money received by way of loan, is remains available for the company to borrow more money using the same assets to secure a fixed charge debenture. That later fixed charge debenture will take priority over the earlier floating charge debenture – that’s the rules! So, when the floating lender accepts the debt instrument, they should ensure that there is a “negative pledge” clause requiring the borrowing company to notify the floater of their intentions to borrow using the same assets as security. Then it’s up to the floater whether they want immediate repayment or whether they are prepared to accept the demotion into second place.
But the company must notify the second lender.
This would also apply where a second floater was issued as a priority debenture. The second lender must be notified – otherwise they could claim priority where they did not know of the earlier debt
Hth
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