Secured creditors with an unsecured shortfall cannot claim a share of the prescribed part of the floating charge realisations set aside for unsecured creditors under Section 176A of the Insolvency Act 1986. This applies whether the secured creditor is the holder of a fixed or a floating charge (or both).
This is the effect of two first-instance decisions in the cases of Re Permacell Finesse Limited and In the matter of Airbase (UK) Limited. In both cases, the holder of a floating charge sought recovery of its unsecured shortfall out of the prescribed part, in competition with the ordinary unsecured creditors. If successful, this claim would have reduced the dividend available to the other unsecured creditors drastically.
An analysis following these decisions
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.
Some suggestions for action
These cases appear to leave open the question of whether any part of the debt due to the holders of a fixed and/or floating charge which does not form part of the secured obligations under that security, would be treated in the same way as a shortfall caused by an insufficiency of assets.
If the answer is "no", lenders facing an obvious shortfall might consider partitioning part of their debt and excluding it from the ambit of their security.
This might be an unattractive route however, as they would be seen to be competing with the ordinary unsecured creditors.