BusinessBusiness RecoveryComfort for the creditors

Comfort for the creditors

Should the average FD of a company in distress frankly care that recent cases decided by the highest courts in the land might make his company's creditors lighten up a little?

In fact FDs may have some cause for celebration. In March, the Law Lords decided the liquidators of Leyland DAF – which went bust in 1996 – can’t recover all their costs and expenses out of a lender’s floating charge before the lender, or bank, gets paid.

In doing so, the Law Lords overruled a 30-year-old precedent made by the Court of Appeal which gave liquidators first pick of the floating charge assets – ahead of the lenders.

The Law Lords’ ruling means that liquidators will now have to wait for payment of their expenses out of the general assets of the company.

Let’s go back to our distressed FD, whose company has given security in a floating charge to its main bank lender. It may be useful for him to know that the Leyland case now gives some comfort to lenders because the value of their floating charge security will no longer be diminished by liquidator’s costs.

He should remember that lenders who can still appoint an administrative receiver under their floating charge may be relieved that the assets over which that receiver has been appointed may no longer be eaten up by a liquidator.

But there is a catch. Many lenders with floating charges will not benefit from the change in the law from the Leyland ruling.

This is because, following the Enterprise Act, many lenders will only be able to appoint an ‘administrator’ and the administrators have a statutory power to take his costs and expenses from the floating charge assets.

In practice the FD of a company that is looking down the barrel of a threatened insolvency proceeding is stuffed anyway. But at least knowing about the Leyland case might help the FD better understand some of the drivers behind decisions of banks and insolvency practitioners.

It should also help him understand what may happen to some of his company’s assets when the trigger is finally pulled.

  • Ian Caplin, a solicitor advocate and producer at the Law Channel.

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