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Prescribed part – second case denies creditors a second
bite at the cherry
6 February 2008
Four weeks ago we reported on the case of Re Permacell
Finesse Limited ("Permacell") (unreported) in which the
High Court in Birmingham ruled on the availability to floating
charge holders of the "prescribed part". Now in a second case, in
the Matter of Airbase (UK) Limited [2008] EWHC 124(Ch)
("Airbase") the High Court in London has reached the same
conclusion.
His Honour Judge Purle QC ruled in
Permacell that section 176A of the Insolvency Act 1986
operated as a departure from the general rule that secured
creditors rank ahead of unsecured creditors. Floating charge
holders were not entitled, the Judge said, to claw back any
shortfall in their security from the fund created by the prescribed
part. This was the quid pro quo for the advantage given to floating
charge holders by the removal of the Crown's preferential
status.
The Judge in Airbase, Mr Justice
Patten, was already preparing his judgment on a similar point when
he was handed a copy of the Permacell decision. Mr Justice
Patten took the same approach as the Judge in Permacell
but he dealt with fixed as well as floating charges because in
Airbase there was a shortfall under both the fixed and
floating charges.
Mr Justice Patten reflected on the 1982
Cork report which proposed that floating and fixed charge holders
should be treated differently, in that the holder of fixed and
floating charges should not participate with the unsecured
creditors in the suggested portion (10%) of net assets secured by
the floating charge which is reserved and made available to them.
The Cork committee recommended, however, that fixed charge holders
should be entitled to participate in that fund to the extent of the
unsecured balance.
This suggestion was not acted on by
Parliament and, observed Mr Justice Patten, it is clear that no
distinction is drawn in section 176A between floating and fixed
charge holders. On the wording of the statute he rejected the
banks' argument that "unsecured debts" included the unsecured
portion of a secured creditor's claim. The prescribed part is held
for the benefit of unsecured creditors alone and neither floating
nor fixed charge holders can participate in respect of the
unsecured portion of their claim.
Similar to the comments made by the Judge in
Permacell, Mr Justice Patten held that the pari passu
principle was fundamental but not immutable and is necessarily
modified by section 176A.
The banks have decided not to appeal the
Airbase decision.
For more information please contact Dominic Offord
or Vicki Dunstall.
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