Charge-holder barred from participating in the 'prescribed part'

In a recent High Court application by the administrators of Airbase Services (UK) Limited ("Services") and Airbase Services International Limited ("International"), it was confirmed that a liquidator, administrator or receiver of a company shall not distribute the ‘prescribed part’ of a company’s net property available for the satisfaction of unsecured debts to fixed and floating chargeholders where a shortfall exists under their fixed or floating charge.

Background

Section 176A of the Insolvency Act 1986 applies only to floating charges created on or after 15th September 2003, and provides that a liquidator, administrator or receiver of a company shall make a proportion of the proceeds of sale of assets subject to floating charges available for the satisfaction of unsecured debts. The amount available under the prescribed part is subject to a maximum of £600,000 and is calculated as a percentage of the value of the company’s net property (50% of the first £10,000 and 20% of anything above £10,000).

Both Services and International went into administration on 28th April 2006. Harris N.A. had a fixed and floating charge over the assets of both companies, and was owed £6.35m. HMRC were owed £621,000. The claims of unsecured creditors amounted to around £1.7m. The Administrators realised £243,000 from the sale of the fixed charge assets and a further £1.312m from floating charge realisations.

The Administrators calculated the prescribed part to be £265,000, leaving £1.047m available to meet the liabilities under the floating charge. On these figures there was a deficiency in both Harris’ fixed and floating charges of £5.06m.

It was calculated that if Harris participated in the prescribed part for the entirety of its shortfall, then it would receive £198,352, HMRC about £24,343 and the other unsecured creditors about £42,414 between them. If Harris did not participate in the prescribed part, HMRC would receive £96,628 and the remaining unsecured creditors £168,360.

The Administrators sought directions from the High Court as to whether Harris could participate in the prescribed part by claiming as an unsecured creditor in respect of its shortfall under its fixed and floating charge.

The decision

As the above example illustrates, if a chargeholder is allowed to participate in the prescribed part by claiming as an unsecured creditor, its shortfall can swamp the claims of the unsecured creditors, effectively depriving them of a substantial part of their (already capped) benefit.

According to Mr Justice Patten, however, the most compelling argument for excluding the floating chargeholder can be found in the provisions of s.176A of the Act itself.

The phrase "unsecured debt" must have the same meaning in both s.176A(2)(a) and (b). Section 176A(2)(a) of the Act states that "the liquidator, administrator or receiver shall make a prescribed part of the company’s assets available for the satisfaction of unsecured debts." Section 176A(2)(b), however, deals with the case where the prescribed part of the company’s net property exceeds the amount required to discharge the unsecured debts in full and therefore leaves a surplus. In such cases, the surplus is paid to the holder of the floating charge.

Therefore, if the floating chargeholder was allowed to participate in the prescribed part, s.176(2)(b) would be meaningless because by definition the whole amount due to the floating chargeholder would already have been paid out of the prescribed part. For s.176(2)(b) to have any possible application, therefore, "unsecured debts" cannot include the floating chargeholder’s shortfall.

As for the fixed charge shortfall, Patten J did not see any reason to treat this differently from the floating charge shortfall. He said that the fixed chargeholder was a "secured creditor" for the purposes of s.248 of the Insolvency Act, as it has security (albeit not complete security) over the company’s property. Therefore, it should not be treated as an unsecured creditor simply because it suffers a shortfall.

Conclusion

It was declared that Harris was not entitled to participate in the prescribed part in respect of any claims based on any shortfall in its security.

The above judgment follows the unreported decision dated 30 November 2007 of HHJ Purle QC (sitting as High Court Judge) in the case of Re Permacell Finance Limited (in liquidation) (wrongly cited as Re Permacell Finesse Limited). Patten J said that HHJ Purle QC had already reached the same conclusion about s.176A(2) for similar reasons. Therefore, he did not need to add to his judgment.