Buchler & Anor v. Talbot & Anor

The House of Lords held that assets subject to a crystallised floating charge form a separate proprietary fund belonging beneficially to the charge holder and that the general costs and expenses of winding up do not rank ahead of the charge holder's secured claim. The court interpreted section 175(2)(b) of the Insolvency Act 1986 (and its predecessors in 1897 and earlier statutes) as giving preferential creditors a right to resort to charged assets only for the payment of preferential debts, not to meet the liquidator's general costs and expenses. Costs incurred in preserving or realising particular charged assets are recoverable from those assets, but general liquidation expenses are payable only from the company's free assets. The Court therefore overruled In re Barleycorn Enterprises Ltd [1970] Ch 465 to the extent that it held otherwise.

Background and facts:

• In 1992 Leyland Daf Ltd granted a debenture creating fixed and floating charges in favour of Stichting Ofasec. In 1993 receivers were appointed and the floating charge crystallised; the receivers realised charged assets, paid preferential creditors in the receivership and made substantial interim distributions to the debenture holder, retaining proceeds of realisation.
• The company entered creditors' voluntary liquidation in July 1996. The liquidators estimated large unpaid unsecured and preferential liabilities and substantial liquidation costs exceeding realised free assets. The liquidators applied for a declaration that liquidation costs and expenses should be paid out of the charged assets in priority to the debenture holder's claims.

Procedural posture:

• The liquidators succeeded in the court below; the Court of Appeal followed In re Barleycorn Enterprises Ltd [1970] Ch 465. The matter came to the House of Lords by way of appeal from the Court of Appeal ([2002] EWCA Civ 228), Rimer J having given the first instance judgment reported at [2001] BCLC 419.

Issues framed:

• Whether, when a company is being wound up, liquidation costs and expenses rank ahead of the claims of a holder of a charge which as created was a floating charge.
• How to construe section 175(2)(b) of the Insolvency Act 1986 (and the historical provisions from 1883–1897) in relation to the proprietary rights of charge holders and the priority of preferential debts and liquidation expenses.
• Whether the decision in In re Barleycorn should be followed or overruled.

Court's reasoning and disposition:

• The Lords analysed the statutory history: preferential debts were given priority in a winding up (Companies Act 1883 and Preferential Payments in Bankruptcy Act 1888) and in 1897 preferential debts were permitted, where company free assets were insufficient, to be paid out of assets subject to a floating charge. The court emphasised that the 1897 Act addressed preferential debts and did not extend to general liquidation expenses.
• The court affirmed the two-fund principle: (i) the debenture-holder's fund (proceeds of assets subject to the floating charge) and (ii) the company's free-asset fund in the winding up. In principle each fund bears its own administration costs; only costs of preserving or realising particular assets are deductible from those assets.
• The House held that Barleycorn had misread the statutory language and blurred the distinction between priority and proprietary rights; Barleycorn was therefore wrongly decided and was overruled. The House allowed the appeal and declared that liquidation expenses are not payable out of assets subject to the floating charge until the secured debt (principal and interest) has been paid in full.

Appeal allowed. The House of Lords held that assets subject to a crystallised floating charge constitute a separate proprietary fund; general liquidation costs and expenses do not rank ahead of the secured claims under a floating charge. Section 175(2)(b) (and its predecessors) gives preferential creditors a right to resort to charged assets only for payment of preferential debts, not for general winding-up expenses. In re Barleycorn Enterprises Ltd [1970] Ch 465 was overruled on this point.

Appeal from the Court of Appeal ([2002] EWCA Civ 228), following the first instance judgment of Rimer J reported at [2001] BCLC 419. The Court of Appeal had applied In re Barleycorn Enterprises Ltd [1970] Ch 465.