Liquidators' costs


Buchler and another (as joint liquidators of Leyland Daf Ltd) v Talbot and another (as joint administrative receivers of Leyland Daf Ltd) and others [2004] UKHL 9, [2004] 2 WLR 582



The issue for the House of Lords in this case was whether the costs and expenses incurred by a liquidator in winding up an insolvent company were payable out of the assets subject to a crystallised floating charge in priority to the claims of the charge holder. In determining this point, the House of Lords had to decide whether In re Barleycorn Enterprises Ltd [1970] Ch 465 was correctly decided.



Leyland Daf Ltd was a member of a Dutch group of companies, DAF NV. In 1992 Leyland Daf granted a mortgage debenture to Stichting Ofasec to secure money loaned to the DAF NV Group. The debenture created a fixed and floating charge over the assets of Leyland Daf. In 1993 the DAF NV group collapsed and Stichting Ofasec appointed receivers under the mortgage debenture, thereby crystallising the floating charge.



The receivers proceeded to realise the assets comprised in the charge. Preferential creditors were paid and the debenture holder received a substantial interim distribution. The receivers held a sum in the region of £72 million representing the proceeds of realisation and interest.



In 1996 Leyland Daf went into creditors' voluntary liquidation and liquidators were appointed. The liquidators made realisations of around £1.5 million. The debts due to unsecured creditors were estimated to be in the region of £125 million. The estimated costs and expenses of the liquidation ran to approximately £10 million. Unless the liquidators were able to recover their costs and expenses out of the charged assets of the debenture holder the greater part of their costs would not be paid.



The liquidators therefore sought and obtained both at first instance and in the Court of Appeal, a declaration that that their expenses were payable out of the charged assets in the hands of the receiver. In granting the liquidator's application, both Mr Justice Rimer and the Court of Appeal were required to follow In re Barleycorn Enterprises. In so doing they held that the liquidators' costs and expenses were recoverable out of the funds charged to the debenture holder and held by the receiver. The receivers and the debenture holder appealed to the House of Lords.



The House of Lords unanimously allowed the appeal and overruled In re Barleycorn. Their decision turned on the premise (ignoring fixed charges) that if a company is both in receivership and liquidation, the former assets of the company are held in two separate funds. The assets subject to the floating charge comprise one fund ('the debenture holder's fund'), normally administrated by receivers, in which the debenture holder has a beneficial interest and the company only an equity of redemption (namely the right to the re-transfer of any remaining assets when the debt secured by the floating charge has been paid off). The remaining assets not subject to the floating charge are held in trust for unsecured creditors and administrated by liquidators ('the company's fund'). In principle each fund bears its own costs.



After dealing with these initial concepts it became necessary for their Lordships to decide whether the Insolvency Act 1986 and section 175(2)(b) in particular made any inroads into the basic principle that each fund bears its own costs. Section 175(2)(b) is the product of the consolidation and reproduction in successive Acts of section 2 of the Preferential Payments in Bankruptcy (Amendment) Act 1897. So the question before the House became whether the 1897 Act changed the rule that the costs of winding up are payable out of the company's fund and not out of the debenture holder's fund.



The Lords held that the effect of section 2 was that preferential debts as defined (which did not include liquidators' costs and expenses) were to be paid out of the property comprised in a floating charge in so far as the non-charged assets were insufficient to discharge those debts. There was nothing in the section to suggest that additionally liquidation costs and expenses were also to be discharged out of the debenture holders' fund.



Furthermore, based upon the two funds concept, there was no justification for implying a requirement that the costs of liquidation ought to be satisfied out of the funds in which the debenture holder has a beneficial interest. The costs of administering the two funds remained separate and the liquidators were accordingly unable to recover their costs from the debenture holders' fund.



It was noted that where a liquidator incurred any costs in preserving or realising an asset subject to a floating charge, the liquidator could recoup those costs out of the charged assets in priority to the claims of the charge holder. The reasoning appeared based on the premise that the liquidator is in essence performing the duties of the receiver and did not provide a justification for implying a wider obligation allowing the costs and expenses of the liquidation to be discharged out of charged assets.



The decision in this case makes welcome reading for banks. In reversing In re Barleycorn the Lords have reasserted the primacy of the proprietary rights of a debenture holder. Where banks hold floating charges they can now rest assured that the costs and expenses of liquidation will not ultimately reduce the sums that they will receive in satisfaction of their charge.



Liquidators may now be forced to take a more circumspect approach to their functions, since they will no longer be able to look to the charged assets of the debenture holder to satisfy their costs and expenses.



Lord Millett confirmed that where a company is both in receivership and liquidation there are two different sets of priorities and then helpfully proceeded to list them. For assets subject to a floating charge, the priorities are: the costs of preserving and realising the assets; the receivers remuneration and proper costs and expenses of the receivership; the debts which are preferential in the receivership; the principal and interest secured by the floating charge; the company. The company's free assets are subject to the following priorities: the costs of preserving and realising the assets; the liquidator's remuneration and the proper costs and expenses of the winding up; the debts which are preferential in the winding up; the charge holder to the extent that the preferential debts have been paid out of assets subject to the floating charge; and the general body of creditors.



By Simon Sugar, barrister, 36 Bedford Row, London