Buchler and another (as joint liquidators of Leyland Daf Limited) (Respondents) v. Talbot and another (as joint administrative receivers of Leyland Daf Limited) and Stichting Ofasec (Appellants) and others

Property subject to a crystallised floating charge is, to the extent of the secured debt, a separate fund belonging beneficially to the charge-holder. The general costs and expenses of a winding up are borne by the company's free assets, not by that charged fund.

Section 175(2)(b) of the Insolvency Act 1986 gives preferential debts, where free assets are insufficient, priority over a floating charge. It does not give all liquidation expenses that priority. A liquidator may recover the costs of preserving or realising charged assets, and reasonable costs of performing the statutory duty to pay preferential creditors, from the charged fund. In re Barleycorn Enterprises Ltd [1970] Ch 465, which treated winding-up costs as payable from that fund generally, was overruled.

Leyland Daf Ltd granted a debenture containing fixed and floating charges over its assets. After the group collapsed, the charge-holder appointed administrative receivers and the floating charge crystallised. The receivers realised the charged assets, paid the preferential debts arising in the receivership, and retained substantial proceeds for the secured creditors.

The company later entered creditors' voluntary liquidation. Its free assets were inadequate to meet liquidation expenses estimated at about £10 million. The liquidators sought a declaration that those expenses were payable from assets subject to the crystallised floating charge before payment of the secured debt.

Rimer J granted that relief, and the Court of Appeal upheld it by following In re Barleycorn Enterprises Ltd [1970] Ch 465: [2001] 1 BCLC 419; [2002] EWCA Civ 228; [2002] 1 BCLC 511. The House considered whether the statutory priority for preferential debts also made the general expenses of a subsequent winding up payable out of charged assets.

1. The appeal was allowed unanimously. Lord Nicholls held that section 175(2)(b) of the Insolvency Act 1986 makes only preferential debts payable from property subject to a floating charge when the company’s free assets are insufficient. Its language contains no provision for the general costs and expenses of the winding up.

2. Lord Hoffmann explained that a crystallised floating charge creates a separate debenture-holder’s fund. The company retains only an equity of redemption in that fund. The winding-up trust concerns the company’s property and does not displace the charge-holder’s proprietary interest. Each fund therefore bears its own costs of administration.

3. Lord Millett held that the legislation creates two distinct priority regimes. Under section 40, the charged fund bears the costs of its preservation and realisation, the receivership expenses, preferential debts in the receivership, and then the secured debt. Under section 175, free assets bear the costs and expenses of the winding up before preferential debts. The charged fund is not a source for the general expenses of administering the free-assets fund.

4. The House accepted the limited qualification identified by Lord Nicholls. A liquidator may recover from charged assets the costs of preserving or realising those assets. Reasonable costs incurred in identifying and paying preferential creditors under the statutory scheme may likewise rank ahead of the charge-holder. Those limited costs do not convert the whole liquidation expense into a charge on the secured fund.

5. Lord Millett concluded that In re Barleycorn Enterprises Ltd [1970] Ch 465 had confused priorities within a fund with the prior question whether a claim was payable from that fund at all. It was wrongly decided and was overruled. The orders below were set aside and replaced by a declaration that no winding-up costs or expenses were payable from the charged assets until all secured principal and interest had been paid.

• House of Lords — allowed the appeal, set aside the orders below, and substituted a declaration in favour of the administrative receivers and charge-holder: [2004] UKHL 9.
• Court of Appeal — upheld the declaration that liquidation expenses were payable from the charged assets in priority to the secured debt, following In re Barleycorn Enterprises Ltd: [2002] EWCA Civ 228; [2002] 1 BCLC 511.
• High Court — Rimer J granted the liquidators’ declaration: [2001] 1 BCLC 419.