Floating Chargeholders Triumph Over Liquidators

The House of Lords overruled the High Court and the Court of Appeal in the recent case of Re Leyland Daf Ltd (sub nom Buchler v Talbot). In doing so, the House of Lords ruled that liquidators' expenses were not to be paid out of property subject to a floating charge which had crystallised and held that Re Barleycorn Enterprises Ltd (1970) ("Barleycorn") had been wrongly decided in the Court of Appeal.

Leyland Daf Limited ("Leyland Daf ")†granted a mortgage debenture in favour of a†Dutch entity Stichting Ofasec ("Ofasec") in†March 1992. This was to secure money lent†to the group of companies headed by DAF†NV, of which Leyland Daf was a member.†The mortgage debenture contained fixed and†floating charges over Leyland Daf 's assets.†The following year, DAF NV group found†itself in financial difficulty and Ofasec, in†exercise of its powers under the mortgage†debenture, appointed receivers to Leyland†Daf, crystallising its floating charge into a†fixed charge. The receivers realised the assets†subject to the security, paying preferential†creditors, as well as making interim payments†to Ofasec. In 1996, Leyland Daf entered†creditors' voluntary liquidation with a†shortfall of funds to pay the full amount of†liquidation costs and expenses. The question†for the House of Lords was whether these†should be paid out of realisations made by†the receivers from the assets in priority to†amounts owed to the chargeholder, Ofasec.†Lord Millett, Lord Nicholls and Lord†Hoffman gave concurring speeches, with†which Lord Rodger and Lord Walker agreed.

As readers will be aware, on insolvency†creditors of a company are paid out in the†following order of priority: holders of fixed†charges rank first, followed by the so-called†"preferential creditors", then floating†chargeholders and finally unsecured†creditors. However, this was not always the†case: when the category of preferential debts†was created by statute in the late nineteenth†century, they were a category of unsecured†debts which ranked behind the claims of†floating chargeholders. It soon became†apparent that the law needed to change, as†there would often be no surplus to pay†preferential creditors after payment was†made to floating chargeholders. Section 2†of the Preferential Payments in†Bankruptcy (Amendment) Act 1897 (the†"1897 Act") addressed this issue, providing†as follows:

"In the winding up of any company ÖÖÖ.†the debts mentioned in section one of the†Preferential Payments in Bankruptcy Act,†1888...

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