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the end of Leyland DAF

27 March 2008

It is well known by liquidators and funders that in 2004 the House of Lords decided that the general costs of winding up a company are not payable out of floating charge proceeds. This was the result of the decision in re Buchler and another v Talbot [2004] 2 W.L.R.582 ("Leyland DAF").

Currently, a liquidator can only deduct the costs of preserving and realising a floating charge asset from the sale proceeds. The general costs of winding up will be paid after preferential creditors, the prescribed part and the amount owing to floating charge holders including interest.

However, the Government has taken the opportunity to reverse the Leyland DAF decision by virtue of Section 1282 of the Companies Act 2006. Sub-section 1 inserts a new section 176ZA into the Insolvency Act 1986 under which property subject to a floating charge may, where necessary, be used to fund the general expenses of winding up in priority to the floating charge holder and to any preferential creditors entitled to be paid out of that property. The sub-section will state: "The expenses of winding up in England and Wales so far as the assets of the company available for payment of general creditors are insufficient to meet them, have priority over any claims to property comprised in or subject to any floating charge created by the company and shall be paid out of such property accordingly." Sub-section 2 makes it clear that this will not affect the prescribed part.

The order of distribution in liquidation will now be as follows:

  1. The cost of preserving and realising the floating charge assets
  2. General costs of winding up including the liquidators remuneration
  3. Preferential creditors
  4. Prescribed part
  5. Unsecured creditors
  6. Shareholders

This legislation will put liquidators in a similar position to administrators in relation to expenses.

It is worth noting that the Insolvency (Amendment) Rules 2008 will also come into force on 6 April 2008. These restrict the application of section 176ZA in respect of litigation expenses that exceed or are likely to exceed a cumulative value of £5,000. These expenses will not have the priority provided by section 176ZA. They will only be paid from the sale proceeds of a floating charge asset if this is approved or authorised by the preferential creditors and the floating charge holder or the court, in accordance with the conditions set out in rules 4.218B to 4.218E. An application may be made to the court where the preferential creditors or floating charge holder has declined to authorise the amount requested, or in circumstances where the liquidator forms the view that the approval or authorisation is urgent and there is not enough time to seek this from the creditors.

This new law will apply to compulsory liquidation where an order is made on or after 6 April 2008 and voluntary liquidations where a resolution is passed on or after that date.

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The content on this page is provided for the purposes of general interest and information. It contains only brief summaries of aspects of the subject matter and does not provide comprehensive statements of the law. It does not constitute legal advice and does not provide a substitute for it.

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