Lloyd's Maritime and Commercial Law Quarterly
DEBENTURE HOLDERS AND JUDGMENT CREDITORS—PROBLEMS OF PRIORITY
Diane M. Hare and David Milman
The University of Manchester.
Over the past few years the spate of company receiverships and liquidations1 has revived concern about the vulnerability of ordinary trade creditors in cases where the bulk of the company’s assets represents security for debenture holders. The problem is not new. Writing at the end of the last century, Edward Manson expressed the view that the discomfiture of unsecured creditors in the event of winding up,2 or even while the company remained a going concern,3 was an unfortunate but inevitable consequence of the growth of the debenture and floating charge. The inevitability of this result lay in the fact that, despite creditors’ awareness of the widespread use of debentures and despite the proposed introduction of a public registration system for company charges,4
“businessmen will not take the trouble to investigate the solvency of a company they are trusting when the matter is an ordinary trade contract. It is not worth their while to do so”.5
Although this reasoning may adequately justify the postponement of unsecured creditors, including those with an unsatisfied judgment debt, in a liquidation, it does not account for the hardship experienced by a conscientious trade creditor who, while the company remains a going concern, seeks to enforce payment of his debt by ordinary process of law but is then ousted by debenture holders6 asserting that the levying of execution against the company amounts to crystallisation of their floating charge, either automatically7 or on the appointment of a receiver.
Faced with this situation in Re London Pressed Hinge Co. Ltd.,
8 Buckley, J., found that, even though there was no provision in the debenture concerning the levying of execution and no default by the company in complying with the debenture terms, he was nevertheless constrained by precedent to uphold the appointment of a receiver, the effect of which was that
1 The number of liquidations notified to the Department of Trade in the early 1970s averaged 8,500 a year, but showed an increase in 1975 to 9,315, in 1976 to 10,112 and in 1977 to 9,481 before levelling off again to 8,701 in 1978 and 8,567 in 1979. The number of receiverships notified, although much smaller, reflects a comparable trend. (Dept, of Trade report: Companies in 1979).
2 (1895) 11 L.Q.R. 346.
3 (1897) 13 L.Q.R. 418.
4 Report of the Company Law Revision Committee (1894–95), implemented in the Companies Act 1900 s. 14, the forerunner of the present registration scheme in s. 95 of the Companies Act 1948.
5 11 L.Q.R., at p. 352.
6 13 L.Q.R., at p. 424.
7 As in Davey & Co. v. Williamson & Sons [1898] 2 Q.B. 194, although note the continuing uncertainty about automatic crystallisation: Farrar (1976) 40 Conv. 397; Boyle (1979) J.B.L. 231; Milman and Hare (1980) 1 Co. Law 110; Milman and Hare 1981 Sol. Jo. 549.
8 [1905] 1 Ch. 576.
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