Final distribution and application of assets in company liquidation cases

May 2010

Part 5 Final distribution and application of assets in company liquidation cases

36A.55 Distribution of funds by liquidator

When the liquidator has complied with the necessary procedural steps to declare a dividend, he/she must distribute the funds (after providing for liquidation expenses). Secured creditors (subject to comments below in paragraphs 36A.65 to 36A.75) at this point will have either realised their charged assets in part or full satisfaction of their debts or, if the liquidator has realised the assets, will have been paid out of the proceeds.

 

36A.56 Floating charge secured creditors and the prescribed part

In cases where a floating charge was created on or after 15 September 2003, the payment to the holder of a floating charge (who is a type of secured creditor) will be made, subject to the share of assets secured by that floating charge being made available to ordinary unsecured creditors under the prescribed part, as outlined in paragraphs 36A.75 to 36A.76.

 

36A.57 Priority of payment of unsecured creditors’ debts

After all expenses have been paid in full in a winding up (for more information on expenses see Chapter 36 Part 3 and also refer to paragraphs 36A.66 to 36A.69),  the company’s unsecured preferential debts (see paragraphs 36A.58 to 36A.63) are paid in priority to all other debts [note 1].

Preferential debts rank equally among themselves after the payment of the liquidation expenses and are required to be paid in full, unless the assets are insufficient to meet them, in which case they share the assets between themselves in proportion to their debts [note 2].

When admitting a claim as preferential, or partly preferential, that fact should be noted on the proof.  Non-preferential unsecured debts rank equally between themselves in the winding up and are entitled to be paid in full after the preferential debts where there are sufficient assets; otherwise they share the assets between themselves in proportion to their debts [note 3]. Each class of creditor is paid in full before any distribution can be made to the next class.

 

36A.58 Abolition of Crown Preference

The implementation of the EA2002 reduced the creditors who were previously entitled to preferential ordinary unsecured status. The majority of unsecured creditors now rank equally as non-preferential ordinary secured creditors. This applies to most cases where the petition was presented on or after 15 September 2003 [note 4]. For cases that are the exception to this general rule see paragraph 36A.62

 

36A.59 Debts ranking as preferential where petition presented before 15 September 2003

For those cases where the petition was presented before 15 September 2003, Schedule 6 IA86 (prior to amendment by the EA2002) defined the different categories of preferential debts.  These included debts due to HM Revenue and Customs and social security contributions.  Whilst these categories of preferential debt will not be applicable in cases where the petition was presented on or after 15 September 2003, there may still be cases where the petition was presented before 15 September 2003 and where a distribution is to be made after this date, where the preferential status of these creditors will still need to be considered.

For further information on preferential creditors claims (including a table setting out the categories of creditor and time limits used to define the preferential debt in cases where the petition was presented before 15 September 2003) please refer to the Case Help Manual part on Distributions, Bankruptcy and Company Cases, paragraph x. 

 

36A.60 Debts ranking as preferential where petition presented on or after 15 September 2003

Following the abolition of Crown preference, in cases where the petition was presented on or after 15 September 2003, Schedule 6 to the IA86 (as amended by the EA2002 [note 5]) details the remaining categories of preferential debt,  which are applicable in all types of liquidations and administrative receiverships, voluntary arrangements and bankruptcy, as follows:

a) Any sums owed by the company  which are subject to Schedule 4 of the Pension Schemes Act 1993; these constitute contributions to occupational pension schemes and state scheme premiums;

b) remuneration etc. of employees (where they have been an employee of the company), as defined by Schedule 6 to the Insolvency Act 1986, paragraphs 13 to 15 [note 6], and limited to amounts payable for the whole or any part of the 4 month period immediately prior to the relevant date (as defined by IA86 section 387 [note 7]).  In a compulsory winding up where there have been no prior insolvency proceedings, the relevant date is the date of appointment of a provisional liquidator or,  where no provisional liquidator has been appointed, the date of the winding-up order [note 8].  The claim cannot exceed £800 [note 9]; and

c) levies on coal and steel production [note 5] [note 6].  

 

36A.61 HM Revenue and Customs not a preferential creditor

Following the implementation of EA2002 HM Revenue and Customs (HMRC) is not a preferential creditor and its debt(s) (irrespective of the nature of the tax owed), will rank with all other unsecured creditors [note 4]. See paragraph 36A.62 for the exceptions to the changes to preferential creditor categories introduced by the EA2002.

 

36A.62 Exceptions where the change to preferential status introduced by EA2002 does not apply in company cases

The change introduced by the EA2002 (see paragraphs 36A.58 to 36A.61) does not apply in the following cases where prior to 15 September 2003:

a) A petition for an administration order had been presented;

b) A company voluntary arrangement (CVA) had effect;

c) A receiver or administrative receiver was appointed under the terms of a floating charge;

d) A resolution for the winding up of the company was passed; or

e) A petition for a winding-up order was presented [note 10].

It will also not apply to a company where a CVA has effect after 15 September 2003 which follows a "pre-commencement" liquidation or administration. This applies to a CVA proposal made either before or after 15 September 2003, by a liquidator (following a winding-up order), where the winding-up petition was presented or, where the resolution for winding up was passed, before the 15 September 2003. The same applies where a CVA proposal is made,  either before or after 15 September 2003, following an administration order made on a petition presented before 15 September 2003 [note 11].

For cases where the winding-up petition was presented before 15 September 2003, Schedule 6 of the IA86 (prior to amendment by the EA2002) defined the different categories of preferential debts.  These included debts due to HMRC and social security contributions.  There may still be cases where the petition was presented before 15 September 2003 and where a distribution is to be made after this date, where the preferential status of these creditors will still need to be considered. See paragraph 36A.59 for further information and the Case Help Manual Part Distributions, Bankruptcy and Company Cases, paragraph x.

See Part 6 paragraphs 36A.10336A.110 regarding priority of debts and payment of preferential debts in bankruptcy cases.

 

36A.63 Preferential debts arising from contingent liability for employees’ protective awards (Haine and Secretary of State v Day)

The Court of Appeal in the case of Haine and Secretary of State v Day ([2008] EWCA Civ 626) held that the entitlement of employees to remuneration under a protective award made by an Employment Tribunal is a contingent liability and as such [note 12] is provable in the liquidation.  The contingent liability for the remuneration constitutes a preferential debt in the proceedings.

 

36A.64 Preferential charge on goods distrained

Where any person has distrained upon the goods or effects of the company in the 3 month period before the date of the winding-up order, those goods or effects, or the proceeds of sale, are charged for the benefit of the company’s estate for payment of preferential debts.  The effect is to make the claims of the preferential creditors a first charge on the distrained goods/proceeds, but only to the extent that the other property of the company’s estate is insufficient to meet them [note 13].  Any person surrendering goods distrained, to the priority of preferential creditors in this way, is entitled to share in any dividend to preferential creditors payable out of the other assets but not the surrendered assetsThe following example illustrates this:

Preferential charge on goods distrained

 

£

Distraint assets

10,000

Other assets

10,000

Preferential creditors

40,000

Distraint creditor

15,000

The preferential creditors will receive 25p in the £, (10,000 /40,000 x 100) from the distraint assets.  The balance of the remaining preferential creditors i.e. (£30,000) and the distraint creditors (£15,000) will receive 22.2p in the £ (10,000/(40,000 -10,000 +15,000) x 100) from the other assets. The distraining creditor is entitled to include distraint costs in their claim.

See Chapter 9 paragraph 9.33 for further information concerning distress levied within 3 months of the date of the winding-up order.

 

36A.65 Source of funds available to preferential creditors including claims over floating charge assets

The claims of preferential creditors are payable first out of the assets (if any) that are not subject to the floating charge (the insolvent's general assets). If such assets are insufficient to meet the claims in full, where a company has created a floating charge, recourse is made to the assets subject to a floating charge in priority to the holder of that floating charge. Preferential creditors’ claims take priority over the claims of the holder(s) of the floating charge, or debenture holder whose claim is secured by the floating charge [note 14]. This includes where a floating charge has subsequently crystallised to become a fixed charge. Monies should only be recovered in this way for the benefit of preferential creditors if no other, or insufficient, assets are available and there are preferential claims to pay. This recovery should not be undertaken as an academic exercise. In practice, in view of the nature and extent of a floating charge, it is likely that recourse to floating charge assets will be necessary to pay the preferential creditors.

 

36A.66 Reversal of Leyland Daf ruling by IA86 section 176ZA

In March 2004 the House of Lords gave their judgment in the case of Re Leyland Daf Ltd, Buchler v Talbot [2004] UKHL 9;[2004] 2 A.C. 298;[2004] B.C.C 214 (known as the Leyland DAF case). The question raised by the case was whether the liquidation costs and expenses could be paid from the monies realised from the sale of assets secured by the floating charges. The judgment overruled existing case law governing the way in which liquidators dealing with companies whose assets were subject to a floating charge, could attempt to recover the payment of the liquidation expenses and pay the (liquidation) preferential creditors.  It was held that the liquidator was not entitled to claim his/her expenses in priority to the rights of the holder of a floating charge, and that it was immaterial whether or not the charge had crystallised before the commencement of the liquidation.

The insertion of section 176ZA into the IA86 by the Companies Act 2006 (CA2006) section 1282, reverses the Leyland Daf ruling with effect from 6 April 2008.  This section provides for the expenses of the liquidator to be paid in priority to the claims of the floating charge holder or debenture holder whose claim is secured by the floating charge, to the extent that the assets of the company available to general estate creditors are insufficient to pay those expenses (see also paragraph 36A.67).

 

36A.67 Payment of expenses from floating charge assets

The expenses of the winding up have priority over any claims of the floating charge-holder, or of the debenture holder whose claim is secured by the floating charge, to the extent that the assets of the company available to general estate creditors are insufficient to pay those expenses [note 15][Note 16].   This does not include the assets which have been set aside for the prescribed part available for the payment of unsecured debts [note 17].

See paragraph 36A.75 and 36A.76 for further information regarding setting aside a prescribed part.

 

36A.68 Charging the official receiver’s administration and the secretary of state’s administration fee against floating charge assets

Where the deposit is insufficient to satisfy the official receiver’s administration fee in full, since 6 April 2008 the balance of the administration fee can be recovered from the property comprised in or subject to a floating charge (see paragraph 36A.66).

The payment of monies into the Insolvency Services Account (ISA) as a result of the realisation of floating charge assets will cause the Secretary of State's administration fee to be charged to the general estate account.

 

36A.69 Limitation of section 176ZA limited by Insolvency Rules 1986

The IR86 rules 4.218A to 4.218E limit section 176ZA, by requiring the liquidator to obtain advance authorisation or subsequent approval from  the floating charge-holder and any preferential creditor, for the incurring of expenses in certain categories of litigation (as detailed in those rules).  Failure to obtain this authorisation will result in the loss of entitlement to the priority provided by section 176ZA over any claims to property comprising or subject to a floating charge created by the company, and payment for unauthorised litigation expenses cannot  be paid out of any such property.  The exception to this is where the actual or anticipated litigation expenses do not exceed £5,000 [note 18].

 

36A.70 Company subject to a fixed and floating charge

If the assets of a company are subject to a standard clearing bank security in the form of a fixed and floating charge, it is likely that the official receiver, as liquidator, in the absence of the appointment of an administrative receiver, will have to use three accounts through which to account for the assets realised. They are a secured creditor’s or fixed charge account, a floating charge or debenture account and the (general) estate account. A summary detailing how to account for assets realised and payments made can be found in Annex A.

 

36A.71 Floating charge created before 15 September 2003

Where the floating charge was created before 15 September 2003, the three accounts as detailed in paragraph 36A.70 will be sufficient to separate out the proceeds received in the liquidation.

 

36A.72 Floating charge created after 15 September 2003 (separate account for the prescribed part)

Where the floating charge was created after 15 September 2003, then an additional fourth account may be required to those detailed in paragraph 36A.70. This fourth account is the prescribed part account, to deal with the funds so prescribed under section 176A(2) of the IA86.

 

36A.73  Secured creditor’s or fixed charge account

The secured creditor's or fixed charge account may be used to receive the realisation proceeds of assets subject to fixed charges. Expenses paid from this account can include the costs of preserving and realising the asset(s) and the official receiver’s remuneration (see paragraph 36A.81). Any balance remaining on the account may be remitted to the holder of the fixed charge under the terms of the fixed part of its charge until its debt is paid in full.  The Secretary of State’s administration fee should not be charged to this account as this is not provided for by the FO2004. Where assets are held by more than one secured creditor, separate accounts should be used for each creditor.

 

36A.74 Floating charge or debenture account  

The floating charge or debenture account may be used to receive the proceeds of assets subject to the floating charge. Expenses paid from this account can also include the costs of realising and preserving the assets, the official receiver’s remuneration (see paragraph 36A.81).  Following the insertion of Section 176ZA into the Insolvency Act 1986 (with effect from 6 April 2008), the general expenses of the winding up can also be paid from this account in priority to the floating charge holder and any preferential creditors. After payment of the expenses any balance may be used to pay the preferential creditors, but only in so far as they cannot be paid from the general estate account, and then the debenture holder until its debt is paid in full. See also paragraph 36A.66.

 

36A.75 When to calculate the prescribed part

Once the preferential creditors have been paid in full as detailed in paragraph 36A.74, or if there are no preferential creditors, the balance of the money held in the floating charge/debenture account may be subjected to the calculation of the prescribed part.  The sum of money to use for this purpose is the sum of money which would otherwise be paid to the debenture holder under the terms of its floating charge.  If, in paying the preferential creditors, expenses have been incurred, those expenses should be deducted from the floating charge/debenture account before the calculation of the prescribed part is made. Once the prescribed part calculation is made, the liquidator can transfer the prescribed part monies in to the prescribed part account.

The monies remaining in the floating charge/debenture account may be remitted to the debenture holder, although only to the extent that the debenture holder remains a creditor.

 

36A.76 Prescribed part account

Following the calculation of the prescribed part, the monies set aside in the prescribed part account are then distributed by way of a dividend to the ordinary unsecured creditors, discounting the preferential creditors (as they have already been paid),  and any balance owed to the debenture holder, who is excluded from a claim against this money until the unsecured debts are paid in full [note 17]. The usual distribution expenses may be charged to the prescribed part account. See also paragraphs 36A.86 to 36A.89 for further information on dealing with the prescribed part.

 

36A.77 General estate account

The general estate account may be used to receive the realisation proceeds of any assets not subject to a fixed or floating charge, this could include a fruitless payment (which is treated as an asset),  paid into the main estate account.   In addition, the general estate account may receive any surplus arising from the realisation of an asset subject to a fixed charge not caught by the floating part of the charge, or from the assets secured by the floating charge. Expenses paid from this account include all other liquidation fees, costs and charges, including the costs of realising and preserving the assets credited to the account, and the official receiver’s remuneration (see paragraph 36A.81). A Secretary of State fee should be charged to this account including any charge transferred from the floating charge or debenture account.

Thereafter this account may be used to pay the preferential creditors, the holder of a floating charge to the extent that preferential debts have been paid out of the assets subject to the floating charge,  and then the general body of creditors. It is important to note that on a distribution from this account, the holder of a floating charge will only have priority as described above. There will be no general floating charge-holder's priority. The reason for this is that if the floating charge-holder held security over an asset, it would be accounted for separately.

 

36A.78 Interest accruing on assets

Where remittances are held in a suspense account pending distribution or as payment from a third party, it is likely that interest will accrue on the funds held. An interest credit should follow the remittance to which it relates. So, for example, if the case deposit proves to be an asset of the insolvency case, the interest generated on that credit should also be treated as if it were an asset.

Where funds are deposited by a third party which are returned to the third party, the interest should likewise be paid over to that third party.

 

36A.79 Fees for realisation and distribution charged against accounts

When realising and distributing assets from any of the accounts, time and rate fees can be charged in accordance with existing policy (see Annex C). The costs of realising or distributing the funds should be charged or apportioned to the accounts from which the funds are being paid.

 

36A.80 The Secretary of State’s administration fee charged against main estate account

The Secretary of State’s administration fee should be charged to the main estate only. In addition to discounting the first £2,000 of receipts, monies paid to the secured creditors should also be discounted, so where monies are paid out to the debenture holder from the fixed charge/secured creditor’s account and the floating charge/debenture account, these monies should be discounted in the calculation of the administration fee.  Monies paid from the prescribed part account should not be discounted. There is no authority for any part of the Secretary of State’s administration fee to be paid out of the prescribed part account.

 

36A.81 The charging of the official receiver’s remuneration

The following represents the best view as to the basis on which the official receiver may charge remuneration for realising and distributing assets, any changes will be notified in the usual way by issue of a Technical News Item:

 

No.

Winding-up order date

Secured creditor’s or fixed charge account

Floating charge or debenture account

General estate account

(i)

Winding-up order  and realisation made prior to1 April 2004 (see also the Note at the foot of this table)

Charge remuneration on the basis of regulation 36 of the IRegs94 (on realisation only).

Charge remuneration on the basis of regulation 36 of the IRegs94 (on realisation and distribution).

Charge remuneration on the basis of regulation 33 of the IRegs1994 (effectively on realisation and distribution)

(ii)

Winding-up order made prior to 1 April 2004, realisation made on or after 1 April 2004.

Charge remuneration on the basis of the first amended regulation 35 of the IRegs94 (on realisation and distribution - hourly rates as defined in Tables 2 & 3 of Schedule 2 to the IRegs94 – see Chapter 36 Annex E)

 

(iii)

Winding-up order made on or after 1 April 2004 but before 1 April 2005

Make no charge for remuneration on the realisation of assets but charge remuneration on the basis of the first amended regulation 35 of the IRegs94 for distributing the assets to the creditor(s).

(iv)

Winding-up order made on or after 1 April 2005

Charge remuneration on the basis of the second amended regulation 35 of the IRegs94 for realising and distributing assets to the creditor(s)

Make no charge for remuneration on the realisation of assets,  but charge remuneration on the basis of the second amended regulation 35 of the IRegs94) for distributing the assets to the creditor(s). See

scenario (ii) in this table and paragraph 36A.84.

           

 

NOTE: The information at (i) about cases where both the winding-up order and the realisation and distribution (if any) preceded 1 April 2004 is given if any adjustments to existing accounts are called for. For this purpose, regulations 33 and 36 of the IRegs94 would continue to be applied even though they were repealed on 1 April 2004. In the unlikely event that such an eventuality arises in practice, in cases of difficulty reference may be made to Technical Section.

 

36A.82 Charging remuneration where the winding-up order date is before 1 April 2004 and realisation and distribution after 1 April 2004  

Where the winding-up order date preceded 1 April 2004 but the realisation and distribution (if any) took place after that date (see example at 36A.81(ii) above), regulation 35 of the IRegs94 may be used to calculate a time and rate fee for both the realisation and the distribution as these actions are not covered by the official receiver’s administration fee (and thus a separate charge/separate charges may be made).

 

36A.83 Charging remuneration where the winding-up order date is after 1 April 2004 but before 1 April 2005

Where the winding-up order was made after 1 April 2004 but before 1 April 2005 (see example at 36A.81(iii) above), the provisions of the FO2004 apply. Remuneration should only be charged for distributing assets to creditors. If an asset is realised for a secured creditor or the holder of a floating charge, no claim for remuneration relating to the realisation of the asset can be made by the official receiver.

 

36A.84 Charging remuneration where the winding-up order date is on or after 1 April  2005

Where the winding-up order was made after 1 April 2005 the Insolvency (Amendment) Regulations 2005 (SI 2005 512) and The Insolvency Proceedings (Fees) (Amendment) Order 2005 (SI 2005 544) apply (see example at 36A.81(iv) above). The official receiver is able to charge remuneration on the realisation of assets and also the distributing of assets for secured creditors and the holders of floating charges. The remuneration should be charged at the total hourly rate as laid down in the IRegs94, Schedule 2, Tables 2 and 3 (see Chapter 36 Annex E) [note 19].

 

36A.85 Dealing with existing cases and claims arising in closed cases

Where open cases have had realisations made which have been accounted for under existing authorities, different to that set out at paragraph 36A.81, the asset/estate accounting should be amended to bring it into line with the scheme set out at paragraph 36A.81.  See also paragraph 36A.90 regarding the accounting for funds held where there are fixed charges over book debts and discerning whether the charge is fixed or floating, following the decision of the House of Lords in Re Spectrum Plus Limited [2005] UKHL 41.

 

36A.86 Prescribed part (ring fencing) where floating charge created after 15 September 2003  

Where a company goes into liquidation or administration (including provisional liquidation and receiverships) and has assets or property subject to a floating charge created on or after 15 September 2003,  Section 176A requires the liquidator, receiver or administrator to set aside (“ring fence”) a prescribed part of the company’s net property (including assets realised under the floating charge which would otherwise be available to the floating charge-holder). The prescribed part is set aside for distribution amongst the unsecured creditors before settling the debt to the charge–holder from the floating charge asset(s). Only if the prescribed part is sufficient to settle the unsecured debts in full, may any excess be paid over to the charge-holder.

A company's net property is defined as the amount of its property which would be available for satisfying the claim of the debenture holder,  or holder of a floating charge created by the company,  if this section did not exist [note 20]. This means that where there are preferential creditors, the prescribed part is calculated by reference to the net property available to be paid to the floating charge holder, which is the amount remaining after the claims of the preferential creditors have been satisfied, where the general assets are insufficient to satisfy the preferential creditors’ claims (see 36A.65). 

 

36A.87 Restrictions on “ring fencing” depending on amount of net property

Where the amount of the net property (see paragraph 36A.86) is not in excess of £10,000, 50% of that money is taken and put in to a separate fund, to be used to pay the ordinary unsecured creditors in line with the procedure detailed at paragraph 36A.86. The balance is then available for the floating charge holder.

Where the liquidator, administrator or receiver thinks that the cost of making such a distribution to the unsecured creditors would be disproportionate to the benefits, an application for an order to that effect must be made to the court.

Where the amount of the net property is in excess of £10,000, the prescribed part to be made available to the unsecured creditors is 50% of the first £10,000 in value and 20% of the property in excess of that amount, up to the maximum prescribed part which cannot exceed  £600,000 in total [note 21].

Ring fencing will also not apply to companies that are subject to a CVA.

 

36A.88 Floating charges and application of the prescribed part

The case of Thorniley v Revenue and Customs Commissioners (also known as Airbase (UK) Ltd,  Re Airbase Services International Ltd, Re); [2008] EWHC 124 (Ch);[2008] B.C.C. 213,  clarifies the position regarding the prescribed part of the company’s assets from which unsecured creditors must be paid in priority to floating charge-holders [note 22].  The court confirmed that any remaining unsecured amounts due to any charge-holder (whether floating or fixed) do not constitute “unsecured debts”  within the meaning of  IA86  section 176A(2) and cannot partake of the prescribed part.  Any shortfall relating to a floating charge over the company’s assets should be excluded from distributions from the prescribed part.  In arriving at this conclusion the court considered the construction and wording of section 176A, particularly 176A(2)(b). This provides that the liquidator, administrator or receiver “shall not distribute (the prescribed part) to the proprietor of a floating charge except in so far as it exceeds the amount required for the satisfaction of unsecured debts”.

 

36A.89 Interest accruing on prescribed part funds

Where interest accrues on prescribed part funds, or funds which would constitute a prescribed part, the interest accruing should be attached to the source of the interest (the prescribed part funds) and should be considered to be part of the prescribed part.

36A.90 The Spectrum Plus limited judgment (fixed charge over book debts)

On 30 June 2005 the House of Lords handed down opinions in the case of National Westminster Bank PLC v Spectrum Plus Limited (in voluntary liquidation) and others [2005] UKHL 41.  These opinions concerned the practice of High Street banks in claiming the proceeds of book debts under the terms of a fixed charge whilst allowing the bank’s customer (the company) to collect and then use the book debts collected, without intervention, following long standing practice and in particular, the authority of the decided case of Siebe Gorman & Co. Limited v Barclays Bank Limited [1979] 2 Lloyd’s Rep 142.

 

36A.91 Effectiveness of a fixed charge security over book debts

Whilst it is possible to create a valid fixed charge over book debts, to be effective the fixed charge security depends on the way the security agreement ensures that the charge over the book debts is fixed. It is not easy to reconcile the company’s need to continue to collect and use the proceeds of book debts for its own business purposes with the lender’s wish to subject the book debts to a fixed charge, in order to escape the provisions of section 175(2)(b) which give preferential claims priority over the claims of floating charge debenture holders.  See Chapter 31.1, in particular paragraphs 31.1.44 and 31.1.45 for further information on book debts subject to a fixed charge.

 

36A.92 Ensuring a charge over book debts is fixed

Following on from the decision in Spectrum Plus (see paragraph 36A.90 and also Chapter 31.1, in particular paragraphs 31.4.43, 31.1.44 and 31.4.45) and the need to define the effectiveness of a fixed charge over book debts (see paragraph 36A.90 and 36A.91), it is possible to create a fixed charge over book debts, provided that the bank exercises sufficient control of the collection or proceeds of the debts.  It is suggested that the following are all possible ways for a debenture holder to ensure that a charge over book debts is a fixed charge:

i) The debenture holder may prevent all dealings of the company (customer) with the book debts so that they are preserved for the benefit of the chargee’s security;

ii) The debenture holder may prevent all dealings of the company (customer) with the book debts other than their collection,  and then require the proceeds, when collected, to be paid to the chargee in reduction of the company’s outstanding debt;

iii) The debenture holder may prevent all dealings of the company (customer) with the book debts other than their collection,  and then require the proceeds, when collected, to be paid into an account with the chargee bank which must be blocked for the benefit of the chargee’s security; or

iv) The debenture holder may prevent all dealings of the company (customer) with the book debts other than their collection,  and then require the proceeds of the debt to be paid into an account with a third party bank.

 

36A.93 Situations arising in cases dealt with by the official receiver,  where a fixed charge is claimed over book debts

Most cases encountered by the official receiver where fixed charges are claimed over book debts,  will involve the company collecting the book debts, paying the realisation proceeds into an account operated for the company by the bank debenture holder and then the company drawing on that money for use in its business. These are characteristics of a floating charge, not of a fixed charge, notwithstanding any description of the charge as being a fixed charge security.  As such, the charge should be treated as if it were a floating charge, not a fixed charge, and the proceeds of the collection of book debts, and other assets which the company may have been permitted to deal with in the same way, should be subject to the claims of the preferential creditors following section 175(2)(b).

 

36A.94 Notification of official receiver’s (preliminary) view to the debenture holder.

It is suggested that in cases as outlined at paragraph 36A.93, before applying the proceeds of the book debts in favour of the liquidation expenses and the preferential creditors, the official receiver, when acting as liquidator, should write to the charge-holder notifying them of his/her view,  to establish whether an alternative view is taken by the debenture holder. For further information on the realisation of book debts where there is doubt concerning the validity of a charge, see Chapter 31, paragraph 31.1.44.  In cases of difficulty, reference should be made to Technical Section.

36A.95 Dealing with book debt funds following clarification of charge

Once the position is clear on whether the debts are subject to a fixed and floating charge the funds can be paid into an appropriate account (secured creditor’s or fixed charge account, floating charge or debenture account or the (general) estate account, see paragraphs 36A.70 to 36A.74) and fees charged in accordance with the details set out in paragraph 36A.81.

If the fixed charge is deemed to be invalid, this is likely to result in funds being made available for the preferential creditors (if there are any) and/or for a floating charge-holder where there is a fixed and floating charge. If there is no floating charge then the assets in question will become general assets,  available to pay the unsecured creditors.

For further information on dealing with book debts subject to a charge refer to Chapter 31.1 Part 5 and Part 6, in particular paragraphs 31.1.44 to 31.1.47.

 

36A.96 Unsecured creditors

Debts that are not preferential or secured rank equally amongst themselves in the winding up and, after the preferential debts, shall be paid in full unless the assets are insufficient for meeting them, in which case they abate in equal proportions between themselves [note 3].

 

36A.97 Interest due on debts (for periods up to the date of the liquidation)

(amended June 2010)

Where interest is due on a debt proved in the liquidation,  that interest is provable as part of the debt for the period up to the date of the winding-up order, or, if the liquidation was immediately preceded by an administration, for the period up to the date the company entered into administration [note 23]. In the following circumstances creditors may include interest accumulated on their debts for periods prior to the company entering into liquidation, even where this has not previously been reserved or agreed [note 24]:

i) If the debt is due by written instrument and payable at a certain time, interest may be claimed for the period from that specified time to  the date when the company went into liquidation [note 25].

ii) if the debt is due other than by written instrument, interest may only be claimed if, before the date that the interest was due, a demand for payment of the debt was made in writing by or on behalf of the creditor, giving notice that interest would be payable from the date of the demand to the date of the payment [note 26]. 

iii) interest under (ii) may only be claimed for the period from the date of the payment demand to the date of the company’s going into liquidation [note 27].

iv) The rate of interest to be applied must not exceed the rate specified in section 17 of the Judgments Act 1838 (JA1838) on the date the company went into liquidation (currently 8%)[note 28].

 

36A.98 Rates of judgment interest

The appropriate rates of judgment interest are dependent on the rate prevailing at the date of the insolvency order, and are applicable in both liquidation and bankruptcy. Recent rates are:

 

Statutory Instrument

Date

Interest rate

Judgment Debts (Rate of Interest) Order 1985 [SI 1985/437]

16 April 1985 - 31 March 1993

15%

Judgment Debts (Rate of Interest) Order 1993 [SI 1993/564]

1 April 1993 to date

8%

[note 30][note 31]

Where a creditor is claiming a higher contractual rate, he/she should be asked to supply documentation detailing their rates, contract terms and conditions etc.  Where the contractual interest rate is higher, that  rate should be used, unless such a rate is considered extortionate [note 32]. Where no contractual rate is supplied, the statutory rate according to section 17 of the JA1838 on the date the company went into liquidation should be applied.

 

36A.99 Statutory interest and its application

Statutory interest is applicable on proved debts, from the date of the winding-up order,  even where the debt as proved includes interest already charged as part of the repayment terms of a loan (see paragraph 36A.97). Statutory interest runs from the date of the winding-up order until a final dividend is declared or all the proved debts have been paid in full.  The rate of statutory interest is limited to the greater of either the rate specified in section 17 of the JA1838 at the date of liquidation, or the contractual interest rate applicable had the company not entered into liquidation.  See paragraph 36A.97 and 36A.98 for further information on interest rates. All statutory interest ranks equally for payment, whether or not the debts on which it is payable rank equally [note 33].

 

36A.100 Payment of interest from surplus funds after payment of proved creditors

If all secured, preferential and unsecured creditors have been paid in full, including any creditors whose debts only become due after dividends have been paid (i.e. debts payable at some future time), any surplus funds then remaining become available for the payment of interest on all classes of debts proved, before any money is returned to contributories. Interest is calculated on trade debts from the date of the liquidation and on other debts with a fixed payment date (such as loans, bills of exchange and tax liabilities), from the date payment is due, where this occurs after the date of liquidation.  Where the fixed payment date occurs before the date of liquidation, interest may be claimed for the period from that specified time to the date when the company went into liquidation, see paragraph 36A.97.

 

36A.101 Creditors’ right to waive statutory interest

Where the liquidator has been able to pay creditors in full, and the estate holds sufficient funds to pay statutory interest to the creditors, in some circumstances it may be that the proved creditors decide to waive their right to statutory interest.

Where a creditor cannot be traced at the date of the distribution,  the liquidator cannot waive the right of the untraced creditor to statutory interest, without his/her consent.  The liquidator should reserve the amount of the debt plus statutory interest at the appropriate rate (see paragraph 36A.98 for the interest rate to be applied) for the period until the dividend is paid, pending a claim being made on the monies by the untraced creditor at a later date.

 

36A.102 Postponed claims

The following debts are not provable until all other claims of creditors, and the interest due on those claims (including statutory interest), have been paid in full:

i) claims under s382(1) of the Financial Services and Markets Act 2000 (where profit has been made or one or more investors have suffered a loss as a result of a person contravening a relevant requirement of the Financial Services and Markets Act 2000); and

ii) any other claim which is postponed by the Insolvency Act 1986 or any other enactment.

Note: The Financial Services and Markets Act 2000 (Consequential Amendments and Repeals) Order 2001 came in to force on 1 December 2001, repealing the Banking Act 1987 and making the Financial Services Authority (FSA) responsible for all deposit takers, such as banks and building societies, and a new statutory compensation scheme was established by the FSA, operated by the Financial Services Compensation Scheme (FSCS).  See Chapter 80, paragraphs 80.4 and 80.40 and Chapter 80 Annex E for further information on the compensation scheme.

For information on return of capital to contributories in surplus cases, go to Part 8 of this chapter.

 

[Back to Part 4 Accounting for future debts, interest and unproved creditors] [On to Part 6 Final distribution and application of assets in bankruptcy cases]