One of the significant changes to distributions in insolvency made by the Enterprise Act 2002 was the abolition of the preferential status of debts owed to the Crown and the introduction of a provision for the creation of a ‘ring-fenced fund’ (also known as the “prescribed part”, an amount currently capped at £600,000) from the proceeds of floating charges created after 15 September 2003 to be applied in distribution to unsecured creditors.

Section 176A Insolvency Act 1986, which provides for the prescribed part, does not define who are unsecured creditors for the purpose of claims against the fund. For secured creditors the question has been whether they could have recourse to the prescribed part to meet any shortfall in the realisations from their security. This question recently came before the courts in two separate cases, one concerning a creditor secured under a fixed charge and the other a creditor secured under a floating charge.

In the matter of Permacell Finesse (in liquidation) unreported November 2007

In this case the liquidators were seeking directions whether the holder of a floating charge could participate in the prescribed part in respect of the shortfall under its security.

In the matter of Airbase Services (UK) Limited and In the matter of Airbase International Services Limited [2008] EWHC 124 (Ch)

In this application by administrators as to whether a secured creditor could participate in the prescribed part by claiming as an unsecured creditor, the court was also asked to consider whether the shortfalls being under a fixed charge would entitle the security holder to participate.

The argument put forward by the secured creditors in each case was that a shortfall in security has always been treated as an unsecured debt and, therefore, they were unsecured creditors to the extent of their outstanding debts and entitled to share in the prescribed part.

  • Unsecured creditor: In both cases however the judges found that the correct interpretation of unsecured creditor is that given in section 248 Insolvency Act 1986 being a creditor who does not hold security over the property of the company in respect of his debt. The emphasis is on the identity of the creditor not the nature of the debt. The reference to unsecured creditors in section 176A Insolvency Act 1986 is, therefore, to those creditors with no security for any part of their debts.
  • Purpose of the prescribed part: The other reason the judges gave for excluding the secured creditors’ shortfall from the prescribed part was that to do so would be contrary to the purpose of section 176A Insolvency Act 1986. It was also held that both fixed charge and floating charge holders were equally excluded from participating in the prescribed part, unless or until all unsecured creditors had first been paid in full.

The reasoning on both cases, which did not have reference to each other, is consistent and the conclusions are the same. As it is not thought that these decisions will be appealed, it now appears conclusive that secured creditors cannot participate in the prescribed part.