Liquidation Expenses and Floating Charges - The Separate Funds Fallacy
South Square Chambers; University College London (UCL) - Faculty of Laws
Look Chan Ho
Freshfields Bruckhaus Deringer LLP
What happens to a company's property when it grants a charge over it? How, if at all, is this different from what happens when a company creates a mortgage over the same assets? What is it to own something beneficially, and how is it different from beneficially holding a proprietary right in it? What role is played by floating charges, and is there really no difference between a fixed charge and a floating charge that has crystallised? And what purpose is served by the proceedings which wind up a company? This paper considers all these questions against the background of the recent decision by the House of Lords in 'Buchler v Talbot, Re Leyland Daf'.
Their Lordships issued a simple ruling dealing with a simple question, whether the expenses incurred by a liquidator in winding up an insolvent company are payable out of the assets comprised in a crystallised floating charge in priority to the claims of the charge-holder. However, this simple ruling, if taken seriously, has devastating implications for our understanding of ownership and property, of mortgages and charges, and of several important issues in insolvency law.
This paper argues that their Lordships' decision is highly questionable at almost every conceivable level. It considers the judgment by examining (a) the juridical nature of charges, (b) the functional nature of floating charges and the empirical context in which they operate, and (c) the question whether the chargee derives benefit from a properly conducted winding-up.
The paper considers the implications of their Lordships' judgment, arguing that it cuts huge swathes across property and corporate insolvency law. Without really saying so, have their Lordships abolished the distinction between mortgages and charges? Not only do they seem to assume that there is no such distinction, but the new, unified security interest envisaged by them, in leaving the beneficial ownership of the collateral in the secured creditor, resembles the sort of mortgage that used to exist at law some hundred years ago, before equity intervened to insist that it was the mortgagor's equity of redemption that constituted beneficial ownership. Since the 'chargee' is the beneficial owner of the collateral in the post-Leyland Daf world, he presumably has the right to take possession of the collateral? And should he not be able now to benefit from an increase in the value of the collateral like any (co-)owner, recovering, in the appropriate case, even more than the amount secured? (And if all he gets is what he was owed, no matter how far the value of the collateral might rise, then in what sense is he a (co-)owner, rather than merely the beneficiary of a particular priority position for repayment of a fixed amount with respect to the proceeds of sale of another's property?) If the 'chargor' now only retains an equity of redemption, then the 'chargee' presumably has the right to foreclose? If floating charge holders as a group should not be required to pay for winding-up proceedings because such proceedings only benefit unsecured creditors, then presumably their Lordships were wrong to have held recently that each such proceeding brings benefits to a wider group which nevertheless must be paid for by the creditors of that particular company?
The paper concludes by suggesting how the issues addressed by the House of Lords in Re Leyland Daf might have been more satisfactorily resolved.
Number of Pages in PDF File: 20
Keywords: Transactions at an undervalue, Priority-based and priority-independent security interests, Public functions of liquidation proceedings, Funding of collective insolvency proceedings, Enterprise Act 2002
Date posted: April 21, 2004