Lloyd's Maritime and Commercial Law Quarterly
Liquidation expenses and floating charges—the separate funds fallacy
Rizwaan Jameel Mokal *
In the context of the decision by the House of Lords in
Buchler v.
Talbot, this paper considers the nature of the charge and the mortgage, and asks what effect the creation of such security interests has on the property of the company. It argues that their Lordships appear to have displayed a serious misunderstanding of the nature of the charge, and might have created significant doctrinal confusion in the process. The paper then provides empirical evidence to suggest that floating charges are not taken in order to ensure priority, and explains their true purpose. It also examines the broader role of liquidation proceedings. It concludes that not to require the floating charge holder to pay for these proceedings allows him to take the benefits of these proceedings at the expense of other creditors.
I. INTRODUCTION
What happens to a company’s property when it grants a charge over it? How, if at all, is this different from what happens when a company creates a mortgage over the same assets? What is it to own something beneficially, and how is it different from beneficially holding a proprietary right in it? What role is played by floating charges, and is there really no difference between a fixed charge and a floating charge that has crystallized? And what purpose is served by the proceedings which wind up a company? This paper considers all these questions against the background of the recent decision by the House of Lords in Buchler
v. Talbot
(hereafter, “Re Leyland Daf
”).1
Their Lordships issued a simple ruling dealing with a simple question, whether the expenses incurred by a liquidator in winding-up an insolvent company are payable out of the assets comprised in a crystallized floating charge in priority to the claims of the charge-holder. However, this simple ruling, if taken seriously, has devastating implications for our understanding of ownership and property, of mortgages and charges, and of several important issues in insolvency law.
With great respect, it is submitted that their Lordships’ decision is highly questionable at almost every conceivable level. This paper considers the judgment by examining (a) the
* Reader in Laws, University College London; Research Associate, Centre for Business Research, Cambridge University. I am very grateful to Mr Justice Peter Young, Chief Judge in Equity of the Supreme Court of New South Wales for his help and advice, and to John Armour, Michael Bridge, Alison Clarke, Richard Fisher, Ian Fletcher, Look Chan Ho, Dan Prentice, James Shizley, and Jay Westbrook for very helpful discussions and comments. The views expressed and mistakes made are mine alone.
1. [2004] UKHL 9; [2004] 2 WLR 582 (unless otherwise indicated, all references to paragraphs are to this judgment).
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