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Buchler and another (as joint liquidators of Leyland Daf Ltd) (Respondents) v Talbot and another (as joint administrative receivers of Leyland Daf Ltd) and Stichting Ofasec (Appellants) and others
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OPINIONS OF THE LORDS OF APPEAL FOR JUDGMENT IN THE CAUSE Buchler and another (as joint liquidators of Leyland Daf Limited) (Respondents) v. Talbot and another (as joint administrative receivers of Leyland Daf Limited) and others (Appellants) and others ON THURSDAY 4 MARCH 2004 The Appellate Committee comprised: Lord Nicholls of Birkenhead Lord Hoffmann Lord Millett Lord Rodger of Earlsferry Lord Walker of Gestingthorpe HOUSE OF LORDSOPINIONS OF THE LORDS OF APPEAL FOR JUDGMENTIN THE CAUSEBuchler and another (as joint liquidators of Leyland Daf Limited) (Respondents)v.Talbot and another (as joint administrative receivers of Leyland Daf Limited) and others (Appellants) and others[2004] UKHL 9LORD NICHOLLS OF BIRKENHEAD My Lords, 1. In England and Wales floating charges are a judge-made, or judge-approved, type of security. They originated in the early days of the development of company law in the 1870s. They are a means whereby a financier, typically a bank, provides a company with money on the security of the company's assets which continue to be used and turned over in the ordinary course of business until, when certain events happen, the charge 'crystallises' into a fixed charge on the assets then within its scope. Notable among crystallising events are the appointment of a receiver by the charge holder or the company being wound up. 2. Over the years floating charges have played an invaluable role in the development of business. They bridge a gap between businessmen and financiers. Businessmen need money but may have insufficient fixed assets to offer as security. Financiers have money but want security for any loans they make. They wish to rank ahead of the company's unsecured creditors if the business does not prosper. They wish to minimise their risks by having a charge over whatever assets a company may acquire in the course of carrying on its trade. Floating charges have provided a legal mechanism by which in these circumstances capital and business enterprise can be harnessed. 3. Typically a floating charge extends to substantially all the assets of a company. On its face this gives a charge holder a high degree of control over the assets and fortunes of a company. At times this has been seen to work unsatisfactorily. The security afforded by a floating charge on the assets of a business, and the charge holder's ability to enforce his security, should not always be allowed to prevail. More than once Parliament has intervened to correct perceived imbalance between the rights and interests of charge holders and the rights and interests of other persons. The most recent intervention was in the Enterprise Act 2002. 4. This appeal concerns the proper interpretation of a legislative intervention made in the early days of the history of floating charges. The issue is whether, when a company is being wound up, the costs and expenses incurred by the liquidator rank ahead of the claims of the holder of a charge which at its inception was a floating charge. The answer turns on the proper interpretation of what is now section 175(2)(b) of the Insolvency Act 1986. The failure of the Leyland DAF group 5. The issue arises in the winding up of Leyland Daf Ltd, one of the companies in a group headed by DAF NV. The facts are set out lucidly in the opinion of my noble and learned friend Lord Millett. I need do no more than mention the salient features in the broadest terms. In March 1992 Leyland Daf Ltd granted a mortgage debenture to Stichting Ofasec, a Dutch foundation, to secure money loaned to the group. The debenture created fixed and floating charges over the assets of Leyland Daf Ltd in the accustomed fashion. Early in 1993 the DAF NV group collapsed. Ofasec appointed receivers under the mortgage debenture, whereupon the floating charge crystallised into a fixed charge. 6. The receivers proceeded to realise the assets comprised in the charges. They paid the receivership preferential creditors, totalling £8m. They made substantial interim distributions to Ofasec, the debenture holder. The receivers now hold, from realisations and interest, £72m. Litigation in the Netherlands, which is still continuing, has raised the prospect that these proceeds will be insufficient to meet the claims of those entitled to share in the debenture security. 7. Leyland Daf Ltd went into creditors' voluntary winding up on 24 July 1996. The liquidators estimate that, excluding intra-group claims, the debts owing to unsecured creditors amount to £125m. Liquidators' realisations amount to £1.5m but estimated liquidation costs and expenses far exceed this amount. They total £10m. The question raised by this appeal, stated shortly, is whether the liquidation costs and expenses should be paid out of amounts realised by the charged assets in priority to the claims of the debenture holder. The legislation 8. The relevant law starts with the statutory creation of a class of preferential debts in the 19th century. The Companies Act 1883, section 4, made provision that to a defined extent unpaid wages and salaries of clerks, servants, labourers and workmen should be paid before all other debts in the distribution of the assets of a company being wound up under the Companies Acts 1862 and 1867. They were to rank equally among themselves and be paid in full unless the assets of the company were insufficient to meet them. Then they would abate rateably: section 5. Subject to retaining the amount needed 'for the costs of administration or otherwise' the liquidator was to discharge these preferential debts 'forthwith' as and when assets come into the liquidator's hands: section 6. 9. In 1888 the scope of preferential debts was widened to include rates and taxes falling due, in short, within a period of twelve months preceding the commencement of the winding up: see section 1 of the Preferential Payments in Bankruptcy Act 1888. 10. These successive statutory provisions did not affect the proprietary rights of chargees. The secured claims of debenture holders are pursued, not in the winding up, but by enforcement of the debenture holders' proprietary rights as chargees of the assets in question: In re David Lloyd & Co (1877) 6 Ch D 339. Thus under the Acts of 1883 and 1888 the preferential debts continued to rank behind the claims of debenture holders under a floating charge created by the company. The legislation gave preferential creditors a limited degree of priority in the winding up of a company, but their status remained that of unsecured creditors. As such, along with other unsecured creditors they could lay no claim to assets charged to a debenture holder unless and until all payments secured by the debenture had been made. 11. In practice this meant that unpaid workers, although accorded priority in a winding up, often received nothing. The debenture holder, by virtue of his (crystallised) floating charge, scooped the pool. There was no surplus available for distribution among unsecured creditors, preferential or otherwise. 12. The law in this regard was changed by the Preferential Payments in Bankruptcy (Amendment) Act 1897. Section 2 of this Act, 'the 1897 Act', is of prime importance on this appeal. Section 2 provided:
13. The 1897 Act made corresponding provision for what should happen if a debenture holder appointed a receiver or took possession of property comprised in a floating charge when the company was not being wound up. Section 3 provided that in such a case 'the debts mentioned in section one of the said Preferential Payments Act shall be paid forthwith out of any assets coming to the hands of the receiver, or other person taking possession as aforesaid, in priority to any claim for principal or interest in respect of such debentures'. 14. To my mind the effect of section 2 admits of no doubt or ambiguity in the relevant respect. Thenceforth preferential debts as defined in the 1888 Act were to be paid out of the property comprised in a floating charge so far as the non-charged assets were insufficient to discharge those debts. The proprietary rights of a debenture holder were, to that extent, bitten into. That was the object and effect of the provision. 15. I can see nothing in this provision to suggest that, additionally, liquidation expenses as such were thenceforth to be discharged out of the charged property. These expenses are not mentioned in section 2. The priority accorded by section 2 over the holder of a floating charge was confined to the 'debts' mentioned in section 1 of the 1888 Act. The language is unequivocal. 16. Nor is there any ground for implying such an additional incursion into the debenture holders' rights in respect of their charged property. In distribution of non-charged assets of the company liquidation expenses rank ahead of the claims of preferential creditors. But, unlike the non-charged assets, the charged assets belong to the debenture holders to the extent of the amounts secured. There is nothing inherently surprising in Parliament deciding that in future the proprietary interests of a debenture holder in his fund, that is, the charged assets, shall be eroded to the extent of the claims of preferential creditors without making any similar incursion in respect of liquidation expenses. The fact that liquidation expenses enjoy priority over the claims of preferential creditors in a winding up is not of itself a reason for according to liquidation expenses the like priority in respect of charged assets. As vividly illustrated by the facts in the present case, according a like priority in respect of liquidation expenses would represent a potentially major additional incursion into the proprietary interests of debenture holders. 17. This additional incursion, for which the liquidators contend on this appeal, would not be confined to cases where the company being wound up has preferential creditors. Trading companies usually do have preferential creditors when they go into liquidation. But the argument advanced by the liquidators on this appeal is that section 2 of the 1897 Act, concerned as it is with according priority to preferential creditors, had the additional effect of encroaching upon the proprietary interests of debenture holders in the charged assets in respect of liquidation expenses in all cases, that is, whether or not there existed preferential debts. I can see nothing in the language or context of this section to justify the court so interpreting this section. 18. A prominent feature of Mr Snowden's submissions was that when enacting section 2 of the 1897 Act Parliament must have intended that the liquidator should be paid costs and expenses incurred by him in discharging the statutory obligation imposed by that section. It is implicit in this statutory provision, he submitted, that these costs and expenses, necessarily incurred in achieving the statutory objective, would themselves be payable out of the charged assets ahead of the claims of debenture holders. 19. There is force in this submission. When interpreting statutes courts seek to further the expressed intention of Parliament by having due regard to the practicalities involved in implementing that intention. Thus, costs incurred by liquidators in realising charged assets are payable ahead of the debenture holder's claims: In re Regents Canal Ironworks Co (1875) 3 Ch D 411, 427, per James LJ. Likewise, as it seems to me, if there are no uncharged assets and the liquidator reasonably incurs costs and expenses in identifying preferential creditors and paying them pursuant to the statutory obligation: those administrative costs and expenses, which are likely to be modest in amount, will be payable ahead of the debenture holder, just as much as they would be if the debenture holder himself, or a receiver appointed by him, had incurred costs and expenses in discharging this statutory duty. 20. Building on this base Mr Snowden submitted that section 2 had a wider effect. Although section 2 did not expressly refer to liquidation expenses, the inclusion of charged assets '[i]n the winding up' of a company under section 2 necessarily also had the effect of subjecting the charged assets to payment of the costs and expenses of the liquidator incurred in the winding up. I do not agree. Costs and expenses incurred in discharging the particular duty imposed by section 2 of the 1897 Act, or its modern equivalent, are one matter, the liquidation costs and expenses as a whole are quite another. Mr Snowden's foundation stone does not form an adequate base for the purpose for which he seeks to use it. Later legislation 21. Successive consolidating statutes of 1908, 1929 and 1948 reproduced the effect of these provisions of the Acts of 1888 and 1897 without relevant amendment in intervening amending legislation. There were changes in the definition of preferential debts but these are not material to the purpose in hand. There were also changes in lay-out and minor changes in language. As already noted the 1883 Act, replaced by the 1888 Act, and the 1897 Act effected two separate changes in the law regarding preferential debts when a company was in course of being wound up: preferential debts were given priority over other unsecured debts and, additionally, over debenture holder's claims under a floating charge. In the Companies (Consolidation) Act 1908 these two distinct changes were telescoped into a single section. This format has been retained ever since. The current statutory provision is section 175 of the Insolvency Act 1986:
22. In this Act a floating charge means a charge which 'as created' was a floating charge: section 251. This was a change introduced by the Insolvency Act 1985, section 108(3) and Schedule 6, paragraph 15. This change in the law fills a loophole mentioned by Hoffmann J in In re Brightlife [1987] Ch 200, 211. This change does not affect the point now under consideration. 23. Section 175(1) and (2)(a) of the Insolvency Act 1986 derives indirectly from section 1 of the 1888 Act. The phrase 'after the expenses of the winding up' is the modern equivalent of 'the costs of administration or otherwise' in section 1(3) of the 1888 Act and 'costs and expenses of the winding up' in section 209(3) of the 1908 Act. Section 175(2)(b) derives indirectly from section 2 of the 1897 Act, reproduced as section 209(2)(b) in the 1908 Act. There is no reason to suppose that the change in lay-out from the earlier statutes, or that these and other minor linguistic changes, were intended to achieve a different result from that obtaining under the Acts of 1888 and 1897. On the contrary, in my view the telescoped provisions of section 175 of the Insolvency Act 1986 are, for the purpose in hand, apt to produce the same result as section 2 of the 1897 Act. The Barleycorn decision 24. In the courts below Rimer J and the Court of Appeal, comprising Peter Gibson, Chadwick and Longmore L JJ, reached the contrary decision: see [2001] 1 BCLC 419, [2002] 1 BCLC 511. They were bound to do so, by the decision of the Court of Appeal in In re Barleycorn Enterprises Ltd [1970] Ch 465. In that case the issue now under consideration arose in the context of the relevant section of the Companies Act 1948, section 319. The Court of Appeal, comprising Lord Denning MR and Sachs and Phillimore L JJ, held that from 1897 the property comprised in a floating charge forms part of the 'assets' of a company for the purposes of paying (1) costs and expenses of winding up as well as (2) preferential debts. For the reasons given above I respectfully disagree with limb (1) of this proposition. 25. I would allow this appeal. LORD HOFFMANN My Lords, 26. The reasoning of the Court of Appeal in this case goes as follows. The expenses of winding-up are payable out of an insolvent company's funds in priority to the claims of unsecured creditors, whether preferential or otherwise. The claims of preferential creditors, so far as unpaid out the company's funds, are payable out of the debenture-holder's funds. It therefore follows that the expenses of winding up are payable out of the debenture-holder's funds. 27. I find this hard to follow. If A has priority over B in respect of payment out of the proceeds of Blackacre and B has priority over C in respect of payment out of the proceeds of Whiteacre, why does it follow that A has any right to payment out of Whiteacre? But that was the reasoning of the Court of Appeal in In re Barleycorn Enterprises Ltd [1970] Ch 465, which was not merely followed but endorsed by the Court of Appeal in this case. 28. The winding up of a company is a form of collective execution by all its creditors against all its available assets. The resolution or order for winding up divests the company of the beneficial interest in its assets. They become a fund which the company thereafter holds in trust to discharge its liabilities: Ayerst (Inspector of Taxes) v C & K (Construction) Ltd [1976] AC 167. It is a special kind of trust because neither the creditors nor anyone else have a proprietary beneficial interest in the fund. The creditors have only a right to have the assets administered by the liquidator in accordance with the provisions of the Insolvency Act 1986: see In re Calgary and Edmonton Land Co Ltd (In liquidation) [1975] 1 WLR 355, 359. But the trust applies only to the company's property. It does not affect the proprietary interests of others. 29. When a floating charge crystallises, it becomes a fixed charge attaching to all the assets of the company which fall within its terms. Thereafter the assets subject to the floating charge form a separate fund in which the debenture holder has a proprietary interest. For the purposes of paying off the secured debt, it is his fund. The company has only an equity of redemption; the right to retransfer of the assets when the debt secured by the floating charge has been paid off. It is this equity of redemption which forms part of the fund held on trust for the company's creditors which arises upon a winding up. 30. Putting aside any fixed charges, the position is therefore that if a company is in both administrative receivership and liquidation, its former assets are comprised in two quite separate funds. Those which were subject to the floating charge ("the debenture-holder's fund") belong beneficially to the debenture-holder. The company has only an equity of redemption. Those which were not subject to the floating charge ("the company's fund") are held in trust for unsecured creditors. In the usual case in which the whole of the company's assets and undertaking are subject to the floating charge, the company's fund will consist only of the equity of redemption in the debenture-holder's fund. 31. In principle, each fund bears its own costs. The expenses of the administrative receivership are borne by the debenture-holder's fund. The expenses of winding up are borne by the company's fund. The debenture-holder has no interest in the winding up and the unsecured creditors have no interest in the administrative receivership. So there is no reason why either group should contribute to the expenses of the other. Occasionally (for example, if no receiver has been appointed) a liquidator will realise an asset forming part of the debenture-holder's fund. As the debenture-holder is entitled to the proceeds, it is right that he should pay the cost of realisation: see In re Regent's Canal Ironworks Company (1875) 3 Ch App 411. But the debenture-holder has no liability for the general costs of the winding up. 32. The general rule is that unsecured creditors are entitled to share pari passu in the company's fund. But the Companies Act 1883 introduced (by analogy with the law of bankruptcy) the concept of preferential debts, to be paid out of the company's fund in priority to other unsecured creditors. Section 1 of the Preferential Payments in Bankruptcy Act 1888 listed these claims and said that "in the distribution of the assets of any company being wound up under the Companies Act 1862" they should be paid in priority to all other debts. 33. Section 2 of the Preferential Payments in Bankruptcy (Amendment) Act 1897 extended the rights of preferential creditors by giving them a claim on the debenture-holder's fund:
34. The provisions of the 1888 and 1897 Acts have since been consolidated and reproduced in successive Companies Acts and are now contained in section 175 of the Insolvency Act 1986. But there is nothing to suggest that any of these consolidating Acts was intended to alter the effect of the original Acts. So the question is whether the 1897 Act changed the rule that the costs of winding up are payable out of the company's fund and not out of the debenture-holder's fund. 35. The 1897 Act is not a particularly sophisticated piece of legislation. It says that if preferential creditors have not been paid out of the company's fund, they shall be entitled to resort to the debenture-holder's fund. It has absolutely nothing to say about the costs of the winding up. And there is no reason why it should have impliedly changed the law on this point. 36. The contrary reasoning of the Court of Appeal in In re Barleycorn Enterprises Ltd [1970] Ch 465 is best exemplified by a quotation from the judgment of Phillimore LJ, at p 476:
37. This passage is, with all respect, a complete muddle. It amounts to saying that the judge cannot see the logic of making the question of which fund should bear the costs depend upon whether they were incurred in connection with that fund. It ignores the proprietary interest of the debenture holder in the debenture holder's fund and treats it and the company's fund as a single massed fund in which there is a single order of priorities. But there is nothing in the 1897 Act or any subsequent legislation which can have brought about the radical change of depriving the debenture-holder of his proprietary interest in the debenture-holder's fund and giving him instead a preferential claim (after the expenses of winding up and the preferential creditors but before the unsecured creditors) in a single amalgamated fund. 38. For these reasons and those of my noble and learned friend Lord Millett, I think that In re Barleycorn Enterprises Ltd [1970] Ch 465 was wrongly decided and I would allow the appeal. LORD MILLETTMy Lords, 39. The question in this appeal, as formulated by the parties, is 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. The question assumes importance only where, as is unfortunately often the case, the company has insufficient uncharged (or "free") assets to meet the costs of the winding up. The Judge (Rimer J) and the Court of Appeal (Peter Gibson, Chadwick and Longmore LJJ) held that in such circumstances they are so payable. |
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