A Past Distribution of Book Debts – Can an Office Holder Bring a Challenge?

By David Allen, Ian McDonald and David Morrison
Originally published March 2004

The issue

Until such time as the decision in Re Spectrum Plus Limited¹ is successfully appealed, it will remain the case that, in many corporate insolvencies, the proceeds of a company’s book debts may have been incorrectly distributed to its fixed chargeholders (as opposed to its preferential creditors and/or floating chargeholders). This raises the question of challenging such distributions.

In circumstances in which book debt realisations were distributed to the holder of a Siebe Gorman² style debenture prior to the Privy Council’s 2001 decision in Re Brumark³, those with reason to challenge the distribution include preferential creditors, floating chargeholders and office holders.

However, the Inland Revenue, HM Customs and Excise and the Redundancy Payments Service have already indicated that do not propose to challenge distributions made to chargeholders before the Privy Council decision in Re Brumark. Therefore, it would seem likely that it may be left to the office holder in any given case to commence an action. However, the recent decision in Re BHT (UK) Limited⁴ should be considered by any office holder who is contemplating doing so.

In this case a liquidator failed in his claim against the holder of a debenture, which included a charge over book debts, who had received distributions (including book debt realisations) made by a receiver acting on the understanding that the charge in question was fixed. The distributions were made in 1997 and 2000, prior to the decision in Re Brumark.

The Court distilled the liquidator’s claim to one of unjust enrichment – that is, if the charge was a floating charge then the holder (Natwest Finance Limited ("NFL")) had not been entitled to receive the book debt realisations from the receivers because they were only paid to NFL on the basis of the mistaken view of the law held by the receivers. Hence NFL had been unjustly enriched and the realisations should be returned to the company.

The liquidator’s action failed because it could not be shown that the company would have been entitled to receive any part of the book debt realisations as they would have been paid to the preferential creditors. The company had suffered no loss and hence the liquidator did not have the necessary standing to bring the claim.

In Re BHT (UK) Limited there were no outstanding costs and expenses of the winding up and thus, considering the judgment when it was first published, it seemed arguable that a liquidator with such sums remaining unpaid might have had necessary standing to bring the claim. However, last week’s decision in Re Leyland Daf⁵ seems to cast doubt on this approach.

Whilst the challenge in Re BHT (UK) Limited ultimately failed this is not the end of the story. A liquidator with outstanding costs and expenses incurred in realising a specific asset (as opposed to costs and expenses of the winding up) or in identifying a preferential creditor might be in a position to bring an action for unjust enrichment. However, careful consideration needs to be given to the available defences, for instance, a change of position (being a commonly raised restitutionary defence) on the part of the chargeholder might be sufficient to defeat such an action.

Copyright © 2004 Mayer, Brown, Rowe & Maw. This Mayer, Brown, Rowe & Maw publication provides information and comments on legal issues and developments of interest to our clients and contacts. It is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed in this publication.

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