As we reported last month, the Birmingham High Court held in Re Permacell Finesse Limited (in liquidation) that a floating charge holder is not entitled to participate in the prescribed part, set aside under section 176A, as an unsecured creditor regarding any shortfall under its floating charge. The High Court in London recently reached the same conclusion in Re Airbase and also clarified that the prescribed part is unavailable to meet any shortfall under a creditor’s fixed charge. Therefore, secured creditors – fixed or floating – are not entitled to share in the prescribed part.

Background to Re Airbase

Two companies – Airbase Services (UK) Limited and Airbase Services International Limited – had gone into administration. The administrators asked the court for directions as to whether the prescribed part of the companies’ net property was available to satisfy a secured creditor’s shortfall under its fixed and floating charge. In particular, the question was whether ‘unsecured debts’ in section 176A(2) of the Insolvency Act 1986 (the Act) included the unsecured balance of the debts due to the floating charge holder or any other secured creditor.

This case differs slightly from Re Permacell (see summary ) in that there was a shortfall not only under the secured creditor’s floating charge but also under its fixed charge. The shortfall as a whole came to £5.06m.

The decision

Patten J was made aware of the decision by Purle QC in Re Permacell following the hearing and the preparation of his judgment. He had already reached the same conclusion that a secured creditor – whether floating or fixed – is not entitled to participate in the prescribed part regarding a claim based on any shortfall in its security.

HM Revenue & Customs (the largest unsecured creditor) argued that it was clear that section 176A should be read as excluding secured creditors who have unsecured debts due to a shortfall in the value of their security. In his judgment, Patten J underlined that the intention behind the Enterprise Act 2002 (the Enterprise Act), as clear from the White Paper published in July 2001, was that the prescribed part should benefit unsecured creditors. He also referred to statements made in the House of Lords to this effect. Patten J was clear that the benefits of the prescribed part to the unsecured creditors would be ‘considerably reduced’ if a secured creditor could participate.

Unlike in Re Permacell, Patten J also referred to the 1982 Cork Report’s proposal for the 10 per cent fund. This distinguished between floating charge creditors (who should not be able to share in the fund regarding any shortfall) and fixed charge creditors (who could). However, these proposals had not been taken up by parliament and there was no indication in the White Paper that they had any influence on the changes introduced by the Enterprise Act. There was no distinction in section 176A between the ‘unsecured debts’ of a floating or fixed charge holder. Despite referring to them, he said that the White Paper, ministerial statements and the Cork Report were of limited value.

Instead, Patten J looked at section 248 of the Act, which contains a definition of ‘secured creditor’ (one holding security) and ‘unsecured creditor’ (one without security). Section 176A(3) provides that where an officeholder thinks the costs of making ‘a distribution to unsecured creditors’ would be disproportionate to the benefits, there is no need to set aside the prescribed part. This indicates that the prescribed part is for the benefit of ‘unsecured creditors’ only. On the application of section 248, therefore, the holders of floating or fixed charges should not be included. This emphasises the identity of the creditor rather than the nature of its debt (as Patten J found was the case elsewhere in the insolvency legislation).

The key to the question was the meaning of ‘unsecured debts’ in the context of section 176A(2) as a whole. Although elsewhere in the insolvency legislation it was envisaged that a secured creditor could prove in an administration or liquidation for the unsecured part of its claim, such provisions were inconclusive. They did not indicate whether ‘unsecured debts’ in section 176A(2) should include such amounts.

Patten J said that the ‘most compelling argument’ for excluding a secured creditor’s shortfall from section 176A was that the phrase ‘unsecured debts’ must have the same meaning in sections 176A(2)(a) and (b). If a secured creditor’s shortfall were included in section 176A(2)(b), then 176A(2)(b) would be ‘inoperable’ as the prescribed part would have discharged the ‘unsecured debts’ due to the floating charge holder in accordance with (a). Section 176A(2)(b) could only make sense, he said, if unsecured debts of any type of secured creditor were excluded.

As in Re Permacell, the High Court confirmed that the pari passu rule was necessarily modified to differentiate between unsecured creditors with no form of security and the unsecured claims of secured creditors. Such rule was fundamental, but not immutable – it must be restricted if section 176A is to have its desired economic effect.

Accordingly, both floating charge holders and fixed charge holders are excluded from participating in the prescribed part regarding their unsecured claims. Both fixed and floating charge holders are excluded from participating regarding their shortfall.

Section 176A(2) provides that the liquidator, administrator or eceiver shall:

  1. set aside the prescribed part for the satisfaction a of ‘unsecured debts’; and
  2. not distribute that part to the floating charge holder unless it exceeds the amount required for the satisfaction of ‘unsecured debts’.


To the extent that Re Permacell left open the question of whether fixed charge holders might be able to participate in the prescribed part regarding their shortfall, Re Airbase clarifies the position – they cannot. Both fixed and floating charge holders are excluded from participating regarding their shortfall.

The unsecured portion of a fixed charge holder’s debt has no special priority over the floating charge holder. This was the position before the Enterprise Act amendments and, as this decision clarifies, remains the position afterwards. For fixed charge holders, their exclusion from participation in the prescribed part should therefore be economically neutral.

Unsecured creditors will be grateful for the additional clarification – had the decision been different, they would have seen their returns reduced significantly and the stated purpose of the legislation would have been diminished.

Finally, it is interesting to note the court’s willingness to look at the White Paper, ministerial statements and the Cork Report when interpreting provisions of the Act. This would seem to indicate their importance in providing the backdrop against which the insolvency legislation was enacted. However, it also provides a worthwhile reminder that such resources should not be treated as providing the last word as they were eventually said by Patten J to be inconclusive on the issue. They do not provide a substitute for the insolvency legislation as finally enacted.