The Leyland Daf decision: Good news for floating chargeholders

In a judgment handed down on 4th March, the House of Lords overturned the Court of Appeal's decision in the Leyland Daf case. The result is that liquidators will no longer be able to take their general costs and expenses out of assets which are subject to a floating charge, but must rather now look just to the "free assets" which are not subject to the charge. In giving their judgment, the House of Lords expressly overruled the decision in re: Barleycorn Enterprises Ltd, an authority for the last 30 years.

The history

In re. Barleycorn Enterprises Limited [1970]1 the Court of Appeal had to determine where general winding up expenses ranked in relation to preferential debts and floating charge claims of the company's bankers. The Court ruled that the order of payment was: (1) the costs and expenses of the winding-up; (2) the preferential claims; and (3) the bank as holder of the floating charge. Crucially, Lord Denning had reasoned that where the legislation referred to the costs and expenses of the winding up being payable out of the "assets" ahead of preferential creditors, this referred to all of the company's assets, as opposed to just those which were not subject to a floating charge.

In Barleycorn, the floating charge in question had not crystallised prior to the liquidation of the company. The case was distinguished on this basis in re. Christonette International Limited2 in 1982, a case where a receiver had already been appointed by the time the winding-up order was made. There it was held that where a floating charge had already crystallised prior to the liquidation, which would invariably occur where the receiver was appointed first, the proceeds of realisation of that floating charge were not available to meet the expenses of the winding-up.

However, since the introduction of the Insolvency Act 1986, the term "floating charge" has meant a charge which, as created, was a floating charge. In re: Portbase Clothing Limited4 , it was therefore held that the question of whether the floating charge had already crystallised was no longer relevant. Thus in the present Leyland Daf case, notwithstanding that the receiverships of the relevant Leyland Daf companies had commenced some time before the liquidations of those companies, both the Judge at first instance and the Court of Appeal followed the Barleycorn decision and ordered that the expenses of the winding up ranked in priority to the floating charge.

The present decision

The House of Lords re-examined the approach which Lord Denning had taken in the Barleycorn case and found it to have been wrong. They made it clear that, where there is a floating charge, there is no single fund of assets, but rather two distinct funds, being those assets which are subject to the floating charge and those which are not, the latter being the company's "free" assets. (The free assets will include any surplus once the holder of the floating charge has been repaid in full.) These two funds were not to be pooled together for the purposes of paying a liquidator's costs and expenses.

Lord Millett said that a separate principle did exist where the costs of preserving or realising a particular asset were deductible from the proceeds of the asset realised, and this should continue to be recognised. Thus the costs of preserving or realising assets contained in the floating charge, if incurred by the liquidator, may still be recouped by him out of the assets in question in priority to the claims of the chargeholder. However, this was not to be confused with the issue here, which was to identify the source for payment of a liquidator's general costs and expenses.

Comment

The Court of Appeal decision in Leyland Daf had been a particularly favourable one for liquidators when considered together with other recent developments. First, amendments to the Insolvency Rules in 2003 have extended the category of expenses of a liquidation which are "payable out of the assets" to include those which a liquidator incurs in pursuing actions such as wrongful trading or preference claims (thus overruling a line of cases running from MC Bacon5 to Re Floor Fourteen6 ). Secondly, decisions in cases such as Brumark7 and Re Spectrum Plus8 , which outlined the circumstances in which charges would be categorised as floating rather than fixed, have potentially caused the pool of floating charge assets in any insolvency to be expanded significantly.

Lenders entitled to appoint an administrative receiver have been justifiably apprehensive of late that the pool of assets over which they hold security would be eroded considerably on the appointment of a liquidator. This decision goes some way to resolving those concerns.

The impact of the decision has been mitigated by the fact that, following the Enterprise Act 2002, many floating chargeholders will choose, or indeed be obliged, to enforce their security through administration rather than receivership. Here there is a specific statutory power for the administrator to take his costs and expenses from the floating charge assets. Nevertheless, for lenders who remain entitled to appoint an administrative receiver, the House of Lords' decision in Leyland Daf is a welcome one.

For further information on this subject please contact Simon Beale on + 44 (0)20 7367 2822 or at simon.beale@cms-cmck.com or Ashley Smith on + 44 (0)20 7367 2154 or at ashley.smith@cms-cmck.com

1

Re Barleycorn Enterprises Ltd, Mathias and Davies (a firm) -v- Down (liquidator of Barleycorn Enterprises Ltd) [1970] Ch 465

2

In re Christonette International Ltd [1982] 1 WLR 1245

 Section 40 of the Insolvency Act 1986

4

Re Portbase Clothing Limited [1993] Ch 388

5

Re MC Bacon Ltd (No. 2) [1991] Ch 127

6

Re Floor Fourteen Ltd, Lewis v IRC [2001] 3 All ER 499

7

Re Brumark, Agnew v Commissioner of Inland Revenue [2001] 2 AC 710

8

Re Spectrum Plus Limited [2004] EWHC 9 (Ch)