Costs and expenses of winding up

Buchler and another v Talbot and others [2004] UKHL 9; NLJ 12 March

The House of Lords overruled the Court of Appeal and held that none of the costs and expenses of winding up a company are payable out of assets subject to a floating charge until the whole of the principal and interest charged thereon has been paid. The decision in Re Barleycorn Enterprises Ltd [1970] 2 All ER 155, based on the unarticulated assumption that the claims in question were payable out of the same fund in competition with one another, was overruled. The significance of a floating charge was not that it altered priorities of payment out of a single fund, but that it brought a second fund into existence with its own set of priorities. With regard to the assets subject to a floating charge pursuant to s40 of the Insolvency Act 1986, the correct order of priorities was: (i) the costs of preserving and realising the assets; (ii) the receiver’s remuneration and the proper costs and expenses of the receivership; (iii) the debts which were preferential in the receivership; (iv) the principal and interest secured by the floating charge; and (v) the company. As to the company’s free assets pursuant to s175 of the Insolvency Act 1986, the correct order of priorities was: (i) the cost of preserving and realising the assets; (ii) the liquidator’s remuneration and the proper costs and expenses of the winding up; (iii) the debts which were preferential in the winding up; (iv) the charge holder to the extent that the preferential debts had been paid out of assets subject to the floating charge; and (v) the general body of creditors.