Buchler V Talbot [2002] EWCA Civ 228; Twinsectra Ltd V Yardley [2002] UKHL 12, [2002] 2 WLR 802

Receivers and liquidation expenses/Quitclose- further developments Technical Bulletin No: 7 Case Re Leyland Daf Ltd; Buchler v Talbot [2002] EWCA Civ 228; Twinsectra Ltd v Yardley [2002] UKHL 12, [2002] 2 WLR 802 Topics covered: Litigation expenses, disposals, trusts Re Leyland Daf Joint administrative receivers were appointed to the company by Ofasec, a debenture holder. They began realising the assets within the scope of Ofasec's security which naturally included an all-embracing floating charge that had crystallised on their appointment. In accordance with Insolvency Act 1986, s 40, they paid the receivership preferential creditors out of floating charge assets. They then made an interim distribution of several million pounds to Ofasec in partial satisfaction of the company's debt. The company went into creditors' voluntary liquidation. At the time, the receivers held around £61 million of floating charge realisations. The question arising was whether the liquidators were entitled to have recourse to the floating charge assets in the hands of the receivers for the purpose of paying liquidation expenses. Background Section 115 provides that all expenses properly incurred in a voluntary winding up, including the remuneration of the liquidator, "are payable out of the company's assets in priority to all other claims." Section 175(2) provides that preferential debts (a) rank equally among themselves after the expenses of winding up and (b) to the extent that 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". The case turned on whether, in the light of section 175(2), the "company's assets" available for payment of liquidation expenses under section 115 included assets the subject of a floating charge that had crystallised before the commencement of the company's liquidation. There is one point that needs clearing out of the way before the discussion can proceed. It is important to note that the liquidators only sought recourse to the £61 million worth of floating charge realisations still held by the receivers at the commencement of the liquidation. No claim was made in relation to realisations that had already been distributed to Ofasec and it is suggested that no claim can be made in such circumstances. Any realisations lawfully paid by a receiver to a debenture holder before the commencement of liquidation do not form part of the company's assets in liquidation (see para [54] of Chadwick LJ's judgment). Moreover, such payment would not be susceptible to challenge under section 238 or 239. Although the receiver acts as agent for the company, there is no transaction at undervalue or preference because (i) the payment does not diminish the company's net asset position (there being a pound for pound reduction in its indebtedness to the debenture holder) and (ii) the payment does not improve the debenture holder's position as it would be entitled to the realisations in any event in the company's liquidation. Needless to say, receivership preferential creditors would have to be paid in accordance with section 40(2) before any payment could be made to the debenture holder. Decision The Court of Appeal held that liquidation expenses were payable out of the assets in the hands of the receivers in priority to Ofasec under its floating charge. The main points of Chadwick LJ's leading judgment were as follows: Re Barleycorn Enterprises Ltd [1970] Ch 465 was clear authority for the proposition that the "company's assets" includes floating charge assets in circumstances where the floating charge crystallises on, or immediately after the commencement of winding up. In such a case, floating charge assets must be used to pay preferential creditors in accordance with what is now section Law Debenture sponsor of the Insolvency Lawyers’ Association 1 175(2). As the provision requires liquidation expenses to be paid in priority to the claims of preferential creditors, it follows logically that the expenses are payable first, ahead of preferential creditors, out of floating charge assets. Barleycorn Enterprises was distinguished in Re Chrisonette International Ltd [1982] 1 WLR 1245, a decision, like the one it sought to distinguish, on the law as it stood prior to 1986. In Chrisonette, a receiver was appointed crystallising the floating charge before the commencement of the liquidation. It was held (applying Re Griffin Hotel Co [1941] Ch 129) that the assets subject to the charge were not part of the company's assets available to pay liquidation expenses as, on crystallisation, the floating charge became a fixed charge and so was a fixed charge for the purposes of the statutory provisions on the date when the liquidation commenced. However, by virtue of section 251 of the Insolvency Act 1986, a floating charge is defined for the purposes of section 175(2) as "a charge which, as created, was a floating charge". The effect of this was to widen the application of Barleycorn Enterprises so as to produce the same outcome regardless of when the floating charge crystallised. On this point, Chadwick LJ applied his own first instance decision in Re Portbase Clothing Ltd [1993] Ch 388 (Portbase was also followed by Rimer J at first instance in Leyland Daf: see the report of his decision at [2001] 1 BCLC 419). No doubt, the banking community will not welcome the Court of Appeal's decision. However, in the light of the 1986 Act definition of a floating charge and the earlier decision in Portbase, it hardly comes as any great surprise. Legal implications Clearly, an administrative receiver must pay receivership preferential creditors out of floating charge assets coming into his hands where there is no concurrent liquidation under Insolvency Act 1986, s 40. Floating charge assets still remaining in the hands of an administrative receiver at the commencement of liquidation must be used to pay receivership preferential creditors (section 40), liquidation expenses (sections 115 and 175) and liquidation preferential creditors (section 175). The current view is that the receiver is still under an obligation to pay receivership preferential creditors where the company goes into liquidation during the currency of the receivership (see the note on section 40 in the 5th edition of Sealy & Milman). It is implicit from para [55] of Chadwick LJ's judgment that the learned judge shares this view. However, it was unnecessary for the court to resolve the question of priority as between receivership preferential creditors, liquidation expenses and liquidation preferential creditors inter se because the assets in the hands of the receivers were sufficient to meet all these claims (see Pope & Woolard, "The Balance of Power in the Expenses Regime" (2001) 14(2) Insolvency Intelligence 9-12). This point is left open for argument in the future. Practical implications The main practical implications are as follows: There is an incentive for receivers to make early distributions of floating charge realisations to avoid them being caught by section 175 in the event that the company goes into liquidation. The decision may increase the prospect of "hostile" liquidations. The decision further devalues the floating charge as a form of security and is a spur to lenders to maximise the scope of their fixed charge security. Implications of the Enterprise Bill If the Enterprise Bill becomes law in its present form, the impact of Leyland Daf will be reduced because it will only be possible to appoint an administrative receiver in restricted circumstances. However, questions may arise as to the scope of the "company's assets" within section 115, section 175 and the 2 proposed new section 176A (which is designed to redistribute a percentage of floating charge assets to unsecured creditors). For further information on the liquidation expenses rules see Technical Update 5/March 2002. Twinsectra v Yardley Introduction Technical Update 4/February 2002 considered the requirements for and nature of the so-called Quistclose trust. Quistclose trusts are of considerable commercial importance because they enable a lender to advance money for a limited purpose and recover it from the borrower if the money is not applied for the stated purpose. The implication of this sort of arrangement is that the money is held on trust for the lender until such time as it is applied for the stated purpose and therefore never forms part of the borrower's assets, a point of considerable practical significance if the borrower becomes insolvent. The House of Lords ruling in Twinsectra Ltd v Yardley [2002] UKHL 12, [2002] 2 WLR 802 has provided the latest word on the subject. Facts and issue Leach, a solicitor, acted for Yardley in connection with a property transaction. Twinsectra agreed to provide Yardley with a bridging loan of £1million to finance the purchase. The money was paid initially to another solicitor, Sims, who had previously acted for Yardley, in return for Sims undertaking (i) to retain the money until such time as it was used to acquire property on Yardley's behalf and (ii) to use the loan monies solely for that purpose. In breach of the undertaking, Sims paid the money to Leach on Yardley's assurance that it would be used for acquiring properties. Some of the money was used for the stated purpose but Leach simply paid it out on Yardley's instructions with the result that around £360,000 of it was used for other purposes. The full facts and an explanation of the underlying rationale of these somewhat curious arrangements can be found in Lord Millett's speech.

Load more