Should We Redistribute in Insolvency?

Abstract

The characterisation of a security interest as 'fixed' or 'floating' has generated much litigation in English courts. This is because a floating charge is subordinated by statute to other claims in the debtor's insolvency, whereas a fixed charge is not. This paper uses the example of the floating charge to argue that such statutory redistribution between claimants in corporate insolvency is generally undesirable. If particular types of voluntary transaction are subjected to statutory 'taxation', then parties may be expected to structure their affairs so as to avoid the ambit of the legislation. The paper traces the history of the floating charge, showing how both its use by business, and the litigation that has shaped its juridical 'nature', have been driven by the desire to avoid redistribution in insolvency. This has resulted in relatively little money reaching the intended beneficiaries of the statutory redistribution. It has also engendered significant costs: the direct costs of litigation and the opportunity costs of a constrained choice of financial structures.

Keywords: Corporate insolvency, law and finance, history of floating charge, bankruptcy priorities, secured credit

JEL Classification: G32, G33, H23, K22, N43