press release
Judge ruling leaves floating charge holders with sinking feeling
14 January 2008
Banks and other holders of a floating charge cannot benefit from
sums which have been ring-fenced for the benefit of unsecured
creditors according to a recent decision in the High Court,
Birmingham.
The ruling was handed down in the case of
Permacell Finesse Limited which entered administration in May 2006.
Permacell owed Synseal , a private debenture holder, £2,307,000.
Out of Permacell’s total assets £1,118,150 was distributed to
Synseal, leaving a shortfall of £918,850 under its floating charge.
The amount set aside for unsecured creditors, known as the
prescribed part, totalled £379,000.
The court had to consider whether Synseal
could benefit from the sums set aside for unsecured creditors under
section 176A of the Insolvency Act 1986 in order to reduce its
shortfall of £379,000.
Section 176A of the Insolvency Act states that
holders of a floating charge cannot participate in the distribution
of funds earmarked for unsecured creditors.
Dominic Offord, Business Recovery and
Insolvency Partner at Midlands law firm Browne Jacobson, said:
“On the face of it the answer seems clear
enough. Section 176A was one of the major innovations made by the
Enterprise Act 2002 and was seen by some as a quid pro quo for the
abolition of the Crown’s preferential status in claiming arrears of
PAYE, VAT and National Insurance Contributions from the estate of
an insolvent company ahead of the rights of secured
creditors.
“However, the judge had to balance this
against the general rule that claims of creditors in the same class
should rank equally.
“In the judges opinion section 176A
was a departure from the general rule about creditor status and so
it would be wrong for floating charge holders, who have already
benefited from the abolition of the Crown’s preferential creditor
status, to have another bite of the cherry. The ruling made
it clear that any shortfall resulting from the floating charge
cannot be regarded as an unsecured debt.
“The decision will come as a blow to banks
and other holders of a floating charge and should finally put to
bed the debate about whether holders of a floating charge can
receive payment from the prescribed part to meet any shortfall
under the floating charge.”
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