Highlights of Recent Developments in Insolvency Law

Directors Disqualification

Use of Section 236 after commencement of proceedings

In the case of In Re Pantmaenog Timber Co. Ltd (14

November 2000), disqualification proceedings had been

commenced against a former director of the insolvent

company. The former director applied to strike-out the

disqualification proceedings. The Official Receiver (OR),

then issued three applications under Section 236 IA 1986, in

the winding up proceedings, to obtain disclosure of

documents which the OR intended to use in defending the

application to strike-out. The district judge at first instance

made three Orders.

On appeal, the Court stated that the purpose of Section 236

was to enable the liquidators acting in the winding up of a

company to obtain information concerning the trading of the

Company; that their functions in the winding up, pursuant

to Section 143 IA 1986, were to ensure that the assets of the

Company were got in, realised and distributed to the

Company's creditors and did not include a power to act in

disqualification proceedings; that Section 236 could not be

used by the OR to discover evidence with which to defend a

strike-out application in disqualification proceedings; and

that, since that was the express purpose of the OR's

applications, they should be refused.

Miscellaneous

Charge over ìother debts and claimsî - fixed or floating?

In Re ASRS Establishment Limited [2000] 2 BCLC 631,

the Court of Appeal held that a charge purporting to create a

fixed charge over book debts was effective only as a floating

charge because the debenture did not provide for the

chargee to have sufficient control over the debts and claims

and their proceeds.

The Company granted a debenture to a finance company

which purported to grant a fixed charge over book debts and

also a fixed charge over ìother debts and claimsî due to the

Company. The question was whether the charge over ìother

debts and claimsî was upon a true analysis a fixed or floating

charge.

The finance company appointed an administrative receiver

in 1990, and in the following year the Company went into

creditors' voluntary liquidation. Before the receivership, the

Company had paid approximately US$750,000 into an

account with Barclays Bank, under an escrow agreement, in

connection with a purchase by the Company of certain

shares. When the Vendor of the shares defaulted, the escrow

monies were repayable to the Company. The receiver

claimed that the escrow monies were within the fixed charge

created by the debenture over ìbook debts, bank account

credit balances and other debts and claimsî. The liquidators

argued that the fixed charge was ineffective as such and that

the escrow monies were subject only to a floating charge.

The debenture required the Company to get in book debts

and pay the proceeds into an account designated by the

finance company, but the finance company never designated

such an account. Applying Royal Trust Bank v. National

Westminster Bank plc [1996] BCC 613, the Judge had found

that since the debenture permitted the Company to deal with

its book and other debts in the ordinary course of business,

the debenture did not create a fixed charge. That was so

whether the items of property mentioned in the debenture

were considered as a category or separately.

On appeal, the Court of Appeal determined that the escrow

monies came within the residual class of ìother debts and

claimsî and the effect of the debenture, as correctly

construed by the Judge, was that the finance company could

not stop the Company from using the proceeds of the escrow

monies in the ordinary course of its business. Although it

was possible that some items of property of a particular

category might not fulfil the second part of the threefold test

for a floating charge laid down by Romer LJ in Re Yorkshire

Woolcombers Association Ltd [1903] 2 Ch 284, because they

would not be changing from time to time in the ordinary

course of business, most items falling within the residual

class of ìother debts and claimsî would be transient and the

Judge was right to regard the escrow monies as not having

any special quality which took them out of the ordinary

operation of the debenture.

However, although the Judge held that a charge over ìother

debts and claimsî is to be construed on an, in effect, ìall or

nothingî basis (ie if upon a true analysis the charge is a

floating charge over one class of assets, it may well be a

floating charge over all assets), the Court of Appeal declined

to rule on this reasoning. It would therefore appear to be

advisable to list each asset intended to be a fixed charge

asset, in a separate schedule within the debenture.

Application for Removal as Office Holder

In Cork -v- Rolph (13 December 2000), the applicant, a

licensed insolvency practitioner, holding 116 appointments

variously as administrator, supervisor, liquidator or trustee in

bankruptcy, applied for his removal from those offices on the

ground that he had moved to a new firm. In order to

minimise the costs, he also applied for permission to inform

the creditors of the change of office holder through an

advertisement rather than an individual letter.

The Court held, granting both applications, that

notwithstanding the dictum of Chadwick J in Re Sankey

Furniture Ltd [1995] 2 BCLC 594, each application had to

be judged on its own merits and an office holder could be

replaced even if he continued to practice as an insolvency

practitioner. Furthermore, in the circumstances of this case,

it was appropriate to make the Order...