In 2003 the Enterprise Act made several major changes to insolvency law, including dropping the preferential status of the main government departments and the creation, through Section 176A of the Insolvency Act 1986, of a 'prescribed part'. This was done in an attempt to improve the chances of unsecured creditors receiving some return in 'larger' liquidations. It has taken until now to answer the question of whether a floating charge holder who experiences a shortfall on their secured debt, which would fall to be unsecured, can share in the 'prescribed part', discussed in a previous post here.

In a judgement handed down by the Birmingham High Court recently in the Permacell Finesse case, HHJ Purle QC decided that floating charge holders should not have a further crack of the whip by sharing in the prescribed part.

The Judge made his views abundantly clear, saying:

'The prohibition on distributing the prescribed part to a floating charge holder is in my judgment absolute'.

The Judge seems to have given effect to what he believes was parliament's intention at the time, namely to give banks and other floating charge holders the benefit of increased realisations through the abolition of Crown preference without having a detrimental effect on the unsecured creditors' distribution prospects.

The case will probably come as no surprise to bankers and other institutional floating charge holders as it is a case of quid pro quo.

However, the decision presumably comes as another blow to the charge holder in Permacell, coming soon after the Employment Appeals Tribunal made a 'protective award' of 90 days pay to employees because the employees were not properly consulted about their proposed redundancies under the Trade Union and Labour Relations (Consolidation) Act 1992.

The Act requires that employees be consulted even in an insolvency situation where there can be only one outcome. And claims under a protective award rank preferentially, i.e. before the floating charge. Follow this link to the EAT decision: Evans & Others -v- Permacell Finesse Limited (In Administration).

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When an insolvency practitioner applies to the court for directions, the estate may be at risk of an adverse costs order.

Mike Pavitt and Nick Keitley's article on the Beam Tube Products case (Fanshawe & Adshead v Amav Industries Limited and others: All ER (D) 246 (Feb); (2006) EWHC 486 (Ch)), which followed Spectrum Plus, carries a footnote illustrating that risk.

The joint administrative receivers applied for directions about the proper characterisation of purported fixed charges. The court accepted the joint administrative receivers' views that:

• a floating charge over the proceeds of book debts was inconsistent with the charge over the book debts being fixed; and
• a purported fixed charge over plant, machinery and equipment was too wide and was properly characterised as floating.

The respondent debenture holder, whose arguments were unsuccessful, was awarded his costs as an expense of the receivership.

This is not a unique case. Insolvency officeholders should be aware of the risk of adverse costs on a directions application and should consider insuring that risk. (See an earlier post on insolvency litigation insurance here.)

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