Judgments - 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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    75.  Subsection (6) was also ancillary to subsection (1) and was purely procedural. It was concerned with timing of payment and proof of debt. It was in the following terms:

    "(6) Subject to the retention of such sums as may be necessary for the costs and expenses of the winding up, the foregoing debts shall be discharged forthwith so far as the assets are sufficient to meet them, and in the case of the debts to which priority is given by paragraph (e) of subsection (1) of this section formal proof thereof shall not be required except in so far as is otherwise provided by general rules."

The first part of the subsection down to the words "so far as the assets are sufficient to meet them" provided for immediate payment of the preferential debts. It was taken almost verbatim from section 6 of the 1883 Act, which did not authorise payment of such debts out of assets comprised in a floating charge, and where, as Lord Denning accepted, at p 473, the words "the assets" meant the company's free assets. The last part of the subsection, which dispensed with the need for formal proof of certain preferential debts, was added by the Companies Act 1929. The subsection was re-enacted by section 614 of the Companies Act 1985 and then repealed and replaced by the insertion of the words "after the expenses of the winding up" in section 175(2)(a) of the 1986 Act which, it will be remembered, is the current re-enactment of the 1883 Act which gave the preferential debts priority in the distribution of the company's free assets.

    76.  The statutory history alone is sufficient to demonstrate that "the assets" in section 319(6) meant the company's free assets and did not include the assets comprised in a floating charge. But this is also borne out by the language of the subsection itself. The "foregoing debts" which are to be discharged forthwith "so far as the assets are sufficient to meet them" are the preferential debts which subsection (1) has directed shall be payable "in priority to all other debts". The "other debts" are the debts of the company as at the date of the winding up which are payable out of the company's free assets alone. They do not include the costs and expenses of the winding up itself, which retain their priority over the debts whether preferential or not. In directing that the preferential debts should be paid "forthwith", therefore, it was necessary to preserve the priority of the costs and expenses of the winding up by authorising the liquidator to retain sufficient sums to meet the anticipated costs and expenses of the winding up before paying the preferential debts.

    77.  Accordingly section 319 provided that preferential debts should (i) be paid in priority to (and therefore out of the same fund as) all other debts (which were payable out of the company's free assets alone) but only after the costs and expenses of the winding up had been paid or provided for; and (ii) be paid (so far as "the assets" were sufficient to meet them) "forthwith" subject to the retention of sufficient funds to meet such costs and expenses. In this context "the assets" must mean the assets out of which the preferential and other debts both were payable, that is to say the company's free assets. The liquidator was not authorised to retain any part of the assets comprised in a floating charge, which would have to bear the costs and expenses of any receivership, to meet the additional costs of a winding up in which the charge holder did not participate and from which he derived no benefit.

    78.  Subsection (5)(b), re-enacting section 2 of the 1897 Amendment Act, preserves the priority of the expenses of the winding up and gives the preferential debts priority over the claims of the charge holder but only in the distribution of "the assets of the company available for payment of general creditors". This expression confirms the priority of the liquidation expenses but only out of the company's free assets, and it is used, not (as Lord Denning seems to have assumed) in contrast to the term "the assets" in subsections (5)(b) and (6), but in contrast to "any property comprised in or subject to that charge".

    79.  The decision in Barleycorn was clearly contrary to the understanding of the profession at the time. Lord Denning dismissed the statements to the contrary in all the standard text books (Buckley, Gore-Browne, Palmer, Pennington, Halsbury) as simply erroneous. He preferred instead a comment in the 1938 10th edition of "the little book by Mr. Topham on Company Law" which was written for students (see p 475). I think that Lord Denning misunderstood the passage in question. Mr. Topham wrote, at p 280, that the preferential payments must be paid before the debenture holders "but not before the costs of liquidation": In re Glyncorrwg Colliery Co Ltd [1926] Ch 951. That was a receivership case; it established that the costs of the receivership (including the cost of realising the property comprised in the charge) had priority to the claims of the charge holder. Mr. Topham cannot have meant that the liquidation expenses also had priority over the claims of the charge holder. He was also the joint author of the 1933 15th edition of a standard practitioner's book, Palmer's Company Law, which stated, at p 457 that the costs and expenses of the winding up were payable in priority to all other claims; but that

    "this does not give priority over secured creditors of the company except so far as the liquidator's costs are costs of preservation or realisation, of which the secured creditor has had the benefit … "

    It seems likely that in his students' handbook Mr. Topham used the word "liquidation", not as meaning "winding up", but as meaning "realisation".

    80.  I think that Lord Denning may have trapped himself by his own formulation of the question. By describing the case as one which involved a question of priorities, he may have made the unarticulated assumption that the claims in question were payable out of the same fund in competition with one another. They were not. There were no free assets to be administered in the winding up, and nothing out of which the costs and expenses of the liquidation could be paid. The assets in the liquidator's hands were all subject to a floating charge which had crystallised on the winding up, and subject to the costs of realising and distributing them (which did not include the preparation of a statement of affairs for the Official Receiver) they were payable to the preferential creditors and (had the funds been sufficient) to the bank as holder of the floating charge.

    81.  Phillimore LJ said that he found it very difficult to defend the logic which would make the order of priority as between costs and preferential debts dependent upon whether or not there was a floating charge. The same unarticulated assumption is present here. Questions of priority arise only between interests which compete with each other for payment out of the same fund. It would certainly be difficult to defend the logic which made such a question depend upon whether or not there was a floating charge. The significance of the floating charge is, not that it alters priorities for payment out of a single fund, but that it brings a second fund into existence with its own set of priorities.

    82.  In my opinion Barleycorn was wrongly decided and should be overruled.

    The meaning of "floating charge"

    83.  Even before the decision in Barleycorn a possible defect had been revealed in the drafting of the legislation. In In re Griffin Hotel Co Ltd [1941] Ch. 129 Bennett J had construed the expression "floating charge" in the relevant statute to mean a charge which was still floating at the date of the winding up. If the charge holder succeeded in appointing a receiver, or the charge automatically crystallised, before the moment at which the company was put into liquidation, the preferential creditors would have no priority. This was corrected in Australia, where the expression "floating charge" was defined to mean a charge which was "a floating charge at the date of its creation". Once a floating charge, always a floating charge for the purpose of the priority of the preferential debts. The Cork Committee thought that this was probably the test in England also, but considered that it would be prudent to add a definition on the lines of the Australian legislation; "Insolvency Law and Practice" (June 1982) (Cmnd 8558) p 356, para 1578; and this was done in the 1986 Act.

    84.  Such a change would not have affected the position in Barleycorn, where no receiver was appointed and the charge was still floating at the moment of the winding up. But it does affect the position in the present case, where the receiver was appointed and the charge crystallised long before the date of the winding up order. But for the change in the definition of "floating charge" the preferential debts (let alone the costs and expenses of the winding up) would not have enjoyed priority over the claims of the charge holder under Section 40 (which is in fact the relevant Section) or Section 175.

    Later developments

    85.  The decision in Barleycorn caused no difficulty in the great majority of cases before the 1986 Act, because the floating charge normally extended to the whole or substantially the whole of the company's assets and the receiver was usually appointed and the charge crystallised before the winding up. (In the case of a compulsory liquidation the relevant date was the date on which the winding up order was made and not the date on which the winding up petition was presented: see In re Christonette International Ltd. [1982] 1 W.L.R. 1245). This may serve to explain why the decision in Barleycorn seems to have escaped the notice of the Cork Committee.

    86.  After the 1986 Act, however, the decision acquired greater significance. Its history since has been one in which judges, bound by the decision, have wrestled with the problem of avoiding the absurdities to which it could lead. In MC Bacon Ltd. [1991] Ch. 127 a liquidator claimed that the costs of an unsuccessful attempt to set a floating charge aside should be paid out of the assets subject to the charge in priority to the claims of the charge holder. But for the decision in Barleycorn the claim could not have got off the ground. A more absurd and unjust outcome could hardly be imagined. The court was able to avoid it only by finding a way to disallow the costs of the action as recoverable expenses of the liquidation.

    The decision below

    87.  The Court of Appeal were bound by Barleycorn and were right to apply it. But they went out of their way to endorse it. It is not necessary to deal at length with their reasoning. It is sufficient to say that it is marred by the same misconstruction of the statutory provisions and the same confusion between priority and property as vitiates the decision in Barleycorn itself.

    The correct order of priorities in the present case

    88.  Since there are two distinct funds which have not been pooled, which belong to different parties, which are actually or potentially administered by different office holders and which are subject to different statutory regimes (and with different definitions of preferential debts) there are two different sets of priorities. They are as follows:

    (1)  Assets subject to a floating charge: (Section 40 of the 1986 Act):

    (i)  the costs of preserving and realising the assets;

    (ii)  the receiver's remuneration and the proper costs and expenses of the receivership;

    (iii)  the debts which are preferential in the receivership;

    (iv)  the principal and interest secured by the floating charge;

    (v)  the company.

    (2)  The company's free assets: (Section 175 of the 1986 Act):

    (i)  the costs of preserving and realising the assets;

    (ii)  the liquidator's remuneration and the proper costs and expenses of the winding up;

    (iii)  the debts which are preferential in the winding up;

    (iv)  the charge holder to the extent that the preferential debts have been paid out of assets subject to the floating charge;

    (v)  the general body of creditors.

    89.  Each fund thus bears its own costs of administration, as one might expect; neither is required to bear the costs of administering the other; and in particular the assets comprised in the floating charge are not required to bear the costs and expenses of the winding up as well as those of the receivership.

    Conclusion

    90.  I would overrule Barleycorn, allow the appeal, set aside the orders made by the Court of Appeal, and substitute a declaration that none of the costs and expenses of winding up the company are payable out of the assets subject to the floating charge until the whole of the principal and interest charged thereon have been paid.

LORD RODGER OF EARLSFERRY

My Lords,

    91.  I have had the privilege of reading in draft the speeches of my noble and learned friends Lord Nicholls of Birkenhead, Lord Hoffmann and Lord Millett. I agree with them and for the reasons which they give I too would allow this appeal.

LORD WALKER OF GESTINGTHORPE

My Lords,

    92.  I have had the advantage of reading in draft the speeches of my noble and learned friends Lord Nicholls of Birkenhead, Lord Hoffmann and Lord Millett. I agree with them and for the reasons which they give I too would allow this appeal.

 
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