Welcome clarity on floating charges and the prescribed part
Since the Prescribed Part was introduced by the Enterprise Act 2002 in September 2003 the floating charge holder’s right to make a claim on the Prescribed Part is a matter that has been hotly disputed but until now there has been no court ruling on the point.
The recent judgment in the case of Permacell Limited has provided some welcome clarification on whether a floating charge holder can rank as an unsecured creditor for a share of the prescribed part for a shortfall in its debt.
The law
Section 176A of the Insolvency Act 1986 (inserted by the Enterprise Act 2002) applies where a company has gone into liquidation / administration / receivership and there is a floating charge in place which was created after 15 September 2003.
Section 176A(2) provides:
"(2) The liquidator, administrator or receiver –
(a) shall make a prescribed part of the company’s net property available for the satisfaction of unsecured debts, and
(b) shall not distribute that part to the proprietor of a floating charge except in so far as it exceeds the amount required for the satisfaction of unsecured debts.”
The facts
On 4 November 2005 Permacell Finance Limited (“Permacell”) granted a floating charge in favour of Synseal Holdings Limited (“Synseal”). On 18 March 2006 Permacell went into administration. On 2 March 2007 Permacell went into creditors’ voluntary liquidation.
The debt due to Synseal at the date of the administration was £2,307,000. In the course of the administration, £1,188,150 was paid to Synseal as secured creditor leaving a shortfall of £918,850 due to Synseal under the floating charge.
A sum of approximately £379,000 was set aside as the Prescribed Part. The unsecured creditors claims (not including Synseal’s shortfall) were approximately £3,104,000.
The liquidators of Permacell applied to Birmingham District Registry for directions as to whether Synseal could participate in the Prescribed Part in respect of the shortfall under its floating charge. Synseal was not represented at the hearing and the decision was reached based on the liquidators’ submissions.
Judgment
His Honour Judge Purle QC had no hesitation in finding that the correct interpretation of Section 176A(2)(b) is that the proprietor of a floating charge is not entitled to participate in a distribution of the Prescribed Part until the unsecured debts are satisfied. His Honour Judge Purle QC stated:-
“The prohibition on distributing the prescribed part to a floating chargeholder is in my judgment absolute. It follows from this that Synseal is not entitled to participate in the distribution of the prescribed part for any part of its debt, including the unsecured shortfall.”
In this case since the unsecured creditors only received a small dividend no further sums fell to be paid to Synseal.
FOR FURTHER INFORMATION PLEASE CONTACT: JENNIFER ANTONELLI