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Permacell Finesse: judgements affecting floating charge holders

Date: 24th January, 2008   |   Author: Peter Godfrey-Evans   |   Comments: 7

In 2003 the Enterprise Act made several major changes to insolvency law, including dropping the preferential status of the main government departments and the creation, through Section 176A of the Insolvency Act 1986, of a 'prescribed part'. This was done in an attempt to improve the chances of unsecured creditors receiving some return in 'larger' liquidations. It has taken until now to answer the question of whether a floating charge holder who experiences a shortfall on their secured debt, which would fall to be unsecured, can share in the 'prescribed part', discussed in a previous post here.

In a judgement handed down by the Birmingham High Court recently in the Permacell Finesse case, HHJ Purle QC decided that floating charge holders should not have a further crack of the whip by sharing in the prescribed part.

The Judge made his views abundantly clear, saying:

'The prohibition on distributing the prescribed part to a floating charge holder is in my judgment absolute'.

The Judge seems to have given effect to what he believes was parliament's intention at the time, namely to give banks and other floating charge holders the benefit of increased realisations through the abolition of Crown preference without having a detrimental effect on the unsecured creditors' distribution prospects.

The case will probably come as no surprise to bankers and other institutional floating charge holders as it is a case of quid pro quo.

However, the decision presumably comes as another blow to the charge holder in Permacell, coming soon after the Employment Appeals Tribunal made a 'protective award' of 90 days pay to employees because the employees were not properly consulted about their proposed redundancies under the Trade Union and Labour Relations (Consolidation) Act 1992.

The Act requires that employees be consulted even in an insolvency situation where there can be only one outcome. And claims under a protective award rank preferentially, i.e. before the floating charge. Follow this link to the EAT decision: Evans & Others -v- Permacell Finesse Limited (In Administration).

 

Discussion and Comments

By Paul C on Sunday 27th January, 2008

I thought protective awards for lack of consultation on collective redundancies post-insolvency were unsecured?

http://www.freshfields.com/publications/pdfs/practices/12652.pdf

By Chris Laughton on Tuesday 29th January, 2008

Paul (C),

I think you’ll find protective awards are preferential (para 13(2)(d), Schedule 6, Insolvency Act 1986).

By Paul Sidle on Thursday 31st January, 2008

Paul/Chris,

Protective awards MAY be preferential, as Chris points out, BUT only if they are payable before the ‘relevant date’ (i.e. entry into administration or date of the winding up order/resolution - see s387 IA 1986 for the exact definition).  Protective awards made AFTER this date are not preferential (Mann v SoS for Employment [1999]), are not administration expenses (Krasner) (nor liquidation expenses) and are not provable debts in a liquidation (recent case of Day v Haine). That leaves employees with such awards having to claim on the indemnity provided by the SoS for BERR under s182 ERA 1996.

 

Thanks,

Paul (S).

By Chris Laughton on Friday 1st February, 2008

Paul (S)

Thanks for the finer analysis!

By Paul Sidle on Saturday 2nd February, 2008

Thanks Chris - I’ve not heard re any appeal yet. I agree the position is somewhat odd and counter intuitive!

By Paul C on Saturday 2nd February, 2008

Thanks Paul S.  Thought I was going mad! 

I guess I’ve never been involved in a case with inherited pre-insolvency protective awards, but I’ve seen a few worthless ones created post-appointment.

By Chris Laughton on Sunday 3rd February, 2008

Reflecting on Day v Haine, it does of course make sense from the IP’s perspective that a post-appointment protective award is not a provable debt.

The award is designed to encourage employers to consult, but insolvent estates should not be penalised when the officeholder is not in a position to consult.

One could argue that this should be the outcome if the tribunal’s discretion were exercised appropriately, but in the real world that discretion is often fettered.

Whilst the legislature almost undoubtedly had not anticipated the impact of Rule 12.3(i) Insolvency Rules 1986 on s189 Trade Union and Labour Relations (Consolidation) Act 1992, it certainly makes life easier for IPs if post-appointment awards are neither unsecured nor preferential, nor an expense of the estate.

 

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