INSOLVENCY AND CORPORATE RESTRUCTURING Jones Day Fixed and floating IN MY BRIEFING IN IHL 157 (p73), COMMENTING ON the amount required for the satisfaction of the advantages and disadvantages of fixed and unsecured debts. charge holders floating charges, I noted that one of the disadvantages of being the proprietor of a floating The term ‘net property’ is defined in s176A(6) as: cannot have their charge is that you take subject to the prescribed part set aside in accordance with s176A of the ‘… the amount of its property which would, but for cake and eat it Insolvency Act 1986 (the 1986 Act). [s176A] be available for the satisfaction of claims of holders of debentures secured by, or holders of, This article examines two recent cases where it has any floating charge created by the company.’ been held that the holder of a fixed and/or floating charge is unable to participate in the prescribed part A prescribed part need only be set aside when a in respect of any shortfall under its security, floating charge was created on or after 15 September BY CLAIRE notwithstanding that in other situations the shortfall 2003. If the company’s net property is less than the MARTIN- may be treated and classed as an unsecured claim. prescribed minimum (currently £10,000) and the ROYLE liquidator, administrator or receiver thinks that the RE AIRBASE SERVICES (UK) LTD cost of making a distribution to unsecured creditors barrister, AND RE PERMACELL FINESSE LTD would be disproportionate to the benefit, the section Jones Day Patten J gave judgment in the matter of Re Airbase does not apply. If the net property is greater than the Services (UK) Ltd; In re Airbase International prescribed minimum, but the liquidator, administrator Services Ltd (both in administration) [2008] on or receiver thinks that the cost of making a 5 February 2008. The case was heard in the London distribution to unsecured creditors would be High Court on 17 December 2007, with both the disproportionate to the benefit, the officeholder must secured creditor, Harris NA (the Bank) (as successor seek a court order (see Re Hydroserve [2007], where by merger to Harris Trust & Savings Bank) and HM such an order was granted). Revenue & Customs (HMRC) (on behalf of itself and the unsecured creditors) making full submissions. THE ISSUE The issue to be determined in both cases was At the time of the hearing none of parties were whether the prescribed part of the relevant aware of the 30 November decision of HHJ Purle QC companies’ net property was available to satisfy any in the Birmingham District Registry in Re Permacell part of the debts due to a creditor that held security Finesse Ltd [2007]. Unlike the Re Airbase case, only by way of fixed and floating charges, where the the liquidators’ counsel appeared at the Re creditor had a shortfall in the value of its security. Permacell hearing before HHJ Purle QC, but the judge commented that he was ‘extremely grateful The arguments put forward in each of the cases and to [counsel] for the fair and balanced way in which the judge’s ruling on those arguments are he undertook that task’. considered below in detail. Following the discovery of the decision in Re UNSECURED DEBT Permacell , counsel for the Bank and HMRC in Re The central argument advanced by the Bank in Airbase filed further written submissions to Patten J. Re Airbase was that the secured creditor’s shortfall However, as the decision in Re Permacell was not should be treated as an unsecured debt. As an dissimilar to his own conclusions, Patten J did not unsecured debt it should be treated as all other make any comment in his judgment as to whether Re unsecured debts, such that the secured creditor can Permacell was binding or could be distinguished. participate in the prescribed part pari passu (on an equal footing) to the other unsecured creditors. PRESCRIBED PART The ‘prescribed part’ was introduced by the Enterprise In forwarding this argument, the Bank submitted Act 2002 by inserting a new s176A into the 1986 Act. that a shortfall could be regarded as an unsecured debt in the following circumstances: Pursuant to s176A(2) of the 1986 Act, a liquidator, administrator, provisional liquidator or receiver: in an administration a secured creditor may ■ prove for the balance of its debt after deducting a) shall make a prescribed part of the company’s the amount it has realised under its security net property available for the satisfaction of (Insolvency Rules 1986, Rule 2.83(1)); or unsecured debts, and voluntarily surrender its security for the general ■ b) shall not distribute that part to the proprietor of benefit of creditors and prove for the whole of its a floating charge except in so far as it exceeds debt as if it were unsecured (Rule 2.83(2)); or > April 2008 The In-House Lawyer 73
INSOLVENCY AND CORPORATE RESTRUCTURING Jones Day it may vote in respect of the unsecured balance creditors. However, he concluded that on the ■ of its debt or the entire amount of the debt if specific wording of s176A the term ‘unsecured there is insufficient property to enable a debts’ could not have been intended to include distribution to unsecured creditors apart from debts owed to creditors that hold security. He held the prescribed part (Rule 2.40(1) and (2)); and that s176A distinguished between debts owed to unsecured creditors with no security and debts it may receive a dividend calculated on the basis owed to secured creditors with a shortfall. ■ that the amount proved is to be treated as an unsecured claim (Rule 2.102). In Re Permacell , HHJ Purle QC also commented that s176A was a departure from the general rule that The prescribed part was available for the satisfaction secured creditors rank ahead of unsecured creditors of unsecured debts and therefore the Bank should be and stated that the issue was to be determined by able to share in it for its unsecured debt along with reference to the specific provisions of s176A. the other unsecured creditors – unless there was express provision in s176A to the contrary, which PRINCIPLE OF PARI PASSU there is not. In both Re Airbase and Re Permacell the argument was put that to treat the floating-charge holder’s HMRC argued in contrast that the Bank was not owed shortfall as an unsecured debt was in line with the an ‘unsecured debt’ because an unsecured debt is a policy of pari passu – that all unsecured debts of an debt owed to an ‘unsecured creditor’ (ie, one that has insolvent debtor should rank equally. Both judges never held security). The Bank, HMRC argued, was not held, however, that their conclusion that the an unsecured creditor because it was the proprietor secured creditor’s debt was not to be treated as an of fixed and floating charges. The term ‘unsecured unsecured debt for the purposes of s176A did not creditor’ is defined in s248(1)(a) of the 1986 Act, offend the fundamental principle of pari passu . along with the term ‘secured creditor’, as: HHJ Purle QC considered the principle of pari passu ‘“Secured creditor”, in relation to a company, means to be one of statute, which did not operate as a a creditor of the company who holds in respect of freestanding principle against which specific his debt a security over property of the company; statutory provisions fall to be construed. He held and “unsecured creditor” is to be read accordingly.’ that the question before him was to be determined by particular reference to the specific provisions of HMRC argued that the Bank’s shortfall arose in s176A, rather than by reference to the generalities respect of a liability within the scope of its security of the statutory scheme of pari passu . rather than as a separate unsecured debt, and so should not be treated as an unsecured debt in the Patten J similarly concluded in Re Airbase that the context of s176A. pari passu principle was not immutable and its application had to be restricted and modified to give In Re Airbase , Patten J acknowledged that: s176A ‘its desired economic effect’. He therefore did not consider it to breach the principle if a distinction ‘There is no doubt that a secured creditor is was made between unsecured creditors with no entitled to prove as an unsecured creditor for any form of security and the unsecured claims of part of the debt not covered by the value of the secured creditors. security and in relation to that part of its claim a secured creditor… stands at the end of the queue RELEVANCE OF THE SECTION 176A(2)(b) EXCEPTION in the same way as any other unsecured creditor.’ Both HHJ Purle QC and Patten J were of the view that the wording in s176A(2)(b) – which provides He also accepted that the term ‘unsecured debts’ that a distribution may be made to a floating-charge could in isolation include debts due to secured holder where the prescribed part exceeds the amount required for the satisfaction of the unsecured debts – was a compelling reason that their conclusion that the term ‘unsecured debts’ ‘Patten J concluded in Re Airbase that on the specific wording of should not include a charge holder’s shortfall was correct. s176A the term “unsecured debts” could not have been Patten J concluded that subsection 176A(2)(b) intended to include debts owed to creditors that hold security.’ would be inoperable if he had reached the opposite view, because if the charge holder was participating then there is no purpose to a provision that the 74 The In-House Lawyer April 2008
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