In many insolvencies it is the secured creditors who take the action that results in a company entering administration, liquidation or receivership, and assets are often only sufficient to meet the debts due to those secured creditors, leaving the unsecured creditors with nothing.
The Enterprise Act 2002 introduced a requirement, in cases where a floating charge has been granted over all the company's assets, for the liquidator, administrator or receiver to make the "prescribed part" of the company's net property available for the satisfaction of unsecured debts.
Where the company's net property does not exceed £10,000 in value, the prescribed part is 50% of that property.
Where the company's net property exceeds £10,000 the prescribed part is the sum of -
- 50% of the first £10,000 in value; and
- 20% of that part of the company's net property that exceeds £10,000 in value, subject to a maximum of £600,000.
However, the prescribed part need not be set aside and distributed when the liquidator, administrator or receiver successfully applies to the Court for an order on the ground that the cost of making a distribution to unsecured creditors would be disproportionate to the benefits. A couple of recent cases have illustrated the Courts' attitude to this.
In February 2009 in the case of International Sections Limited (In Liquidation), the net property was just over £18,000 and the prescribed part was around £6,500. The cost of distribution was estimated at around £3,000 and the dividend to the 66 unsecured creditors would be around 1.5p per £1. Most creditors would be due less than £20, and even the largest unsecured creditors only a few hundred pounds each. The liquidator applied to Court for an order that the distribution need not be made.
The Court decided that the proper approach was to look at the benefit to creditors as a body. The Court should not be too ready to disapply the section because the dividend would be small. The Court considered that a significant (albeit relatively small) sum would remain for distribution once the costs were catered for, and did not consider it was right to deprive the unsecured creditors of what remained. Disapplication should be the exception, and not the rule. The application was refused.
In the case of Courts plc in October 2008 the prescribed part was the maximum £600,000. The liquidator calculated that after costs a dividend of 0.6p in the pound would be payable. With a cost of distribution of an estimated £168 per creditor, the liquidator sought an order diapplying the need to distribute to any creditor whose claim was less than £28,000 when the dividend would be less than the cost of distribution. Again the Court declined the order. The Court did not consider it had the power to make an order disapplying the section only for some creditors, as this was not provided for by the Act and went against the principle of equal treatment of creditors. Again the question of benefit had to be looked at in relation to the creditors as a group and the application was refused.
Another case that highlights the attitude of the Courts to the rights of unsecured creditors is the decision in Permacell Finesse Limited of January 2007. In that case, it was decided that the floating charge holder could not rank along with the unsecured creditors to claim in the prescribed part in respect of the part of his debt that was unsecured as a result of a shortfall in realisations.
The Courts would appear to be supporting the right which Parliament has given for the unsecured creditors to receive something out of the assets which would otherwise be payable to floating charge holders, no matter how small that return may be.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.