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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A share of the assets subject to a floating charge is reserved for distribution to unsecured creditors in priority to the chargeholder in an administration, liquidation or receivership (s176A Insolvency Act 1986 - see below).

This share is known as the "prescribed part" or sometimes the "ring-fenced fund" and was designed to prevent floating charge holders from benefitting from the abolition of government preferential creditors by the Enterprise Act 2002. The share is quantified in accordance with the Insolvency Act 1986 (Prescribed Part) Order 2003.

The requirement to make this distribution to unsecured creditors is disapplied if, inter alia, the administrator, liquidator or receiver either

• "thinks that the cost of making a distribution to unsecured creditors would be disproportionate to the benefits" (s176A(3)(b)); or
• applies to the court for an order on such grounds and the court so orders (s176A(5)).

The first known case of the court making an order under s176A(5) is Re Hydroserve Ltd [2007] All ER (D) 184 (Jun) Chancery Division Rimer J 19 June 2007, the facts of which are reported by Bank Law Blog here and by Law-Now here.

In summary, the court agreed that it was disproportionate to distribute a net £2,000 amongst 122 creditors at a cost of £3,000.

There is nothing startling in this decision but it makes clear that costs need not be wasted on trvial distributions.

s176A Insolvency Act

Property subject to floating charge

176A Share of assets for unsecured creditors

(1) This section applies where a floating charge relates to property of a company—

(a) which has gone into liquidation,

(b) which is in administration,

(c) of which there is a provisional liquidator, or

(d) of which there is a receiver.

(2) The liquidator, administrator or receiver—

(a) shall make a prescribed part of the company’s net property available for the satisfaction of unsecured debts, and

(b) shall not distribute that part to the proprietor of a floating charge except in so far as it exceeds the amount required for the satisfaction of unsecured debts.

(3) Subsection (2) shall not apply to a company if—

(a) the company’s net property is less than the prescribed minimum, and

(b) the liquidator, administrator or receiver thinks that the cost of making a distribution to unsecured creditors would be disproportionate to the benefits.

(4) Subsection (2) shall also not apply to a company if or in so far as it is disapplied by—

(a) a voluntary arrangement in respect of the company, or

(b) a compromise or arrangement agreed under section 425 of the Companies Act (compromise with creditors and members).

(5) Subsection (2) shall also not apply to a company if—

(a) the liquidator, administrator or receiver applies to the court for an order under this subsection on the ground that the cost of making a distribution to unsecured creditors would be disproportionate to the benefits, and

(b) the court orders that subsection (2) shall not apply.

(6) In subsections (2) and (3) a company’s net property is the amount of its property which would, but for this section, be available for satisfaction of claims of holders of debentures secured by, or holders of, any floating charge created by the company.

(7) An order under subsection (2) prescribing part of a company’s net property may, in particular, provide for its calculation—

(a) as a percentage of the company’s net property, or
(b) as an aggregate of different percentages of different parts of the company’s net property.

(8) An order under this section—

(a) must be made by statutory instrument, and
(b) shall be subject to annulment pursuant to a resolution of either House of Parliament.

(9) In this section— “floating charge” means a charge which is a floating charge on its creation and which is created after the first order under subsection (2)(a) comes into force, and “prescribed” means prescribed by order by the Secretary of State.

(10) An order under this section may include transitional or incidental provision.

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