The Financial Markets Law Committee has called on the Insolvency Service to review its proposals to make liquidation expenses payable in priority to the claims of floating charge-holders.
In a paper published on 24 March 2006, the FMLC says that this would be detrimental to securitisations and project finance transactions. The amount of liquidation expenses can only be calculated towards or at the end of the liquidation so it is not really possible to take them into account when structuring a large-scale securitisation or project finance transaction. This, says the FMLC, may cause secured lenders or rating agencies to insist on structural revisions or additional collateralisation, thus increasing transaction costs, and we would add, would make London a less attractive centre for such transactions.
The FMLC also points out that, where the structured finance exception applies under the Enterprise Act 2002, an administrative receiver and liquidator might both be in office and carrying out their functions concurrently so that floating charge holders would have to bear two sets of costs and expenses.
The Insolvency Service has been asked by various organisations to review its position on this issue but has said it is reluctant to change its policy of making floating charge-holders liable for liquidation expenses.
To read the FMLC paper, click here.
To read the proposed change (in draft clause 868 of the Company Law Reform Bill), click here.
