Vol 1 (2004) - Issue 3

Article preview

Liquidators’ Remuneration and Expenses: Redressing the Muddle

Introduction

The House of Lords, in Re Leyland Daf Ltd, Buchler v Talbot, unanimously reversing the courts below,overruled the decision in In re Barleycorn Enterprises Ltd, the reasoning in which, though standing unchallenged for some thirty-four years, was described by one of their Lordships as a ‘complete muddle’. The issue for determination was whether the costs and expenses incurred by a liquidator in winding up an insolvent company could be paid out of the assets of a crystallized floating charge ahead of the claims of the charge holder. The trial judge and the Court of Appeal held that they were so payable. As their Lordships pointed out, the answer turns upon the proper construction of section 175 of the Insolvency Act 1986:

(1) In a winding up the company’s preferential debts (within the meaning given by s. 386 in Part XII) shall be paid in priority to all other debts.
(2) Preferential debts -
(a) rank equally among themselves after the expenses of the winding up and shall be paid in full, unless the assets are insufficient to meet them, in which case they abate in equal proportions; and
(b) so far as the assets of the company available for payment of general creditors are insufficient to meet them, have priority over the claims of holders of debentures secured by, or holders of, any floating charge created by the company, and shall be paid accordingly out of any property comprised in or subject to that charge.

A further material provision is section 40 of the 1986 Act. This provides that where a receiver is appointed by or on behalf of the holders of any debentures secured by a charge which, as created, was a floating charge:

If the company is not at the time in the course of being wound up, the preferential debts ... shall be paid out of the assets coming into the hands of the receiver in priority to any claims for principal and interest in respect of the debentures.

By implication the section draws a distinction between receivership preferential creditors and liquidation preferential creditors. On the facts of Leyland Daf the liquidation followed a receivership and so both sections 40 and 175 came into play.

The facts

In 1992 Leyland Daf Ltd, part of a Dutch group of companies, issued debentures which contained a floating charge over the whole of its undertaking. In 1993 the group’s fortunes collapsed and the charge holder appointed joint administrative receivers, the consequence of which was that the floating charge crystallized into a fixed charge. The company went into creditors’ voluntary liquidation in 1996, by which time the receivers had already made interim distributions of GBP 110 million to the charge holder and had paid GBP 8 million to the receivership preferential creditors.