Thorniley & Anor v HM Revenue & Customs & Anor

Under Insolvency Act 1986, s 176A, the prescribed part is held for unsecured creditors as such. A creditor with fixed or floating security cannot participate in that fund for the unsecured balance of its debt caused by a shortfall in the security. The expression “unsecured debts” in s 176A(2) refers to debts owed to unsecured creditors, rather than unsecured portions of claims held by secured creditors.

This construction is required by the structure of s 176A(2). Otherwise the surplus mechanism in s 176A(2)(b) would have no practical operation. The statutory allocation necessarily modifies the ordinary pari passu rule.

The applicants were administrators of two companies in administration. Harris held fixed and floating charges and was owed substantially more than the value realised from its security. The administrators sought directions concerning the distribution of the prescribed part under s 176A of the Insolvency Act 1986.

The issue was whether Harris could prove against the prescribed part as an unsecured creditor for the shortfall in its security, or whether the fund was available only to creditors who were unsecured creditors in the statutory sense.

1. Declaration. Harris was not entitled to participate in the prescribed part in respect of any claim based on a shortfall in its security.
2. Section 176A(2)(a) requires the prescribed part to be made available for “unsecured debts”. Read in context, that phrase refers to debts owed to unsecured creditors. Section 248 of the Insolvency Act 1986 distinguishes secured and unsecured creditors by reference to the existence of security over company property.
3. The statutory scheme distinguishes the identity of the creditor from the character of the unpaid balance. Although a secured creditor may generally prove for an unsecured balance under the Insolvency Rules, that does not determine entitlement to the prescribed part.
4. The same meaning must be given to “unsecured debts” in s 176A(2)(a) and (b). Section 176A(2)(b) permits the prescribed part to revert to the floating charge holder where it exceeds the amount required to satisfy unsecured debts. That surplus provision could not operate on the applicants’ construction, because the prescribed part would necessarily have discharged the floating charge holder’s unsecured debt in full.
5. The exclusion arises through s 176A(2)(a), rather than solely through the express restriction on distribution to floating charge holders in s 176A(2)(b). It applies equally to fixed charge and floating charge holders.
6. The pari passu rule is fundamental but is necessarily modified by s 176A so that unsecured creditors without security are differentiated from the unsecured claims of secured creditors. The construction was consistent with the legislative purpose of directing the benefit of the prescribed part to unsecured creditors.

First-instance application for directions by the administrators. No appellate history is stated in the judgment.