Fixed and floating charge holders cannot participate in prescribed part for shortfall

The "ring-fencing" of part of the floating charge realisations for the benefit of the ordinary unsecured creditors of a company was introduced by the Enterprise Act 2002. It was introduced partly as the "quid pro quo" for the abolition of preferential creditor status for certain Crown debts.

The first-instance decisions in the cases of Re Permacell Finesse Limited and In the matter of Airbase (UK) Limited turned on the interpretation of subsection (2) of Section 176A. In particular, they focused on the meaning of "unsecured debts" for these purposes.

It was held that although unsecured shortfalls are treated for some purposes under the insolvency legislation as being equivalent to unsecured debts, they were not to be treated as such for these purposes. Any other result might in many cases frustrate the aim of the prescribed part, which is to ensure some return, as the floating charge holder would take all the available assets.

In light of these decisions, we have put together some suggestions for action.