Buchler and another (as joint liquidators of Leyland Daf Limited) (Respondents) v. Talbot and another (as joint administrative receivers of Leyland Daf Limited) and Stichting Ofasec (Appellants) and others, (2004)



SESSION 2003-04

[2004] UKHL 9

on appeal from: [2002] EWCA Civ 228




Buchler and another (as joint liquidators of Leyland Daf Limited) (Respondents)


Talbot and another (as joint administrative receivers of Leyland Daf Limited) and others (Appellants) and others



The Appellate Committee comprised:

Lord Nicholls of Birkenhead

Lord Hoffmann

Lord Millett

Lord Rodger of Earlsferry

Lord Walker of Gestingthorpe




Buchler and another (as joint liquidators of Leyland Daf Limited) (Respondents)


Talbot and another (as joint administrative receivers of Leyland Daf Limited) and others (Appellants) and others

[2004] UKHL 9


My Lords,

1. In England and Wales floating charges are a judge-made, or judge-approved, type of security. They originated in the early days of the development of company law in the 1870s. They are a means whereby a financier, typically a bank, provides a company with money on the security of the company's assets which continue to be used and turned over in the ordinary course of business until, when certain events happen, the charge 'crystallises' into a fixed charge on the assets then within its scope. Notable among crystallising events are the appointment of a receiver by the charge holder or the company being wound up.

2. Over the years floating charges have played an invaluable role in the development of business. They bridge a gap between businessmen and financiers. Businessmen need money but may have insufficient fixed assets to offer as security. Financiers have money but want security for any loans they make. They wish to rank ahead of the company's unsecured creditors if the business does not prosper. They wish to minimise their risks by having a charge over whatever assets a company may acquire in the course of carrying on its trade. Floating charges have provided a legal mechanism by which in these circumstances capital and business enterprise can be harnessed.

3. Typically a floating charge extends to substantially all the assets of a company. On its face this gives a charge holder a high degree of control over the assets and fortunes of a company. At times this has been seen to work unsatisfactorily. The security afforded by a floating charge on the assets of a business, and the charge holder's ability to enforce his security, should not always be allowed to prevail. More than once Parliament has intervened to correct perceived imbalance between the rights and interests of charge holders and the rights and interests of other persons. The most recent intervention was in the Enterprise Act 2002.

4. This appeal concerns the proper interpretation of a legislative intervention made in the early days of the history of floating charges. The issue is whether, when a company is being wound up, the costs and expenses incurred by the liquidator rank ahead of the claims of the holder of a charge which at its inception was a floating charge. The answer turns on the proper interpretation of what is now section 175(2)(b) of the Insolvency Act 1986.

The failure of the Leyland DAF group

5. The issue arises in the winding up of Leyland Daf Ltd, one of the companies in a group headed by DAF NV. The facts are set out lucidly in the opinion of my noble and learned friend Lord Millett. I need do no more than mention the salient features in the broadest terms. In March 1992 Leyland Daf Ltd granted a mortgage debenture to Stichting Ofasec, a Dutch foundation, to secure money loaned to the group. The debenture created fixed and floating charges over the assets of Leyland Daf Ltd in the accustomed fashion. Early in 1993 the DAF NV group collapsed. Ofasec appointed receivers under the mortgage debenture, whereupon the floating charge crystallised into a fixed charge.

6. The receivers proceeded to realise the assets comprised in the charges. They paid the receivership preferential creditors, totalling £8m. They made substantial interim distributions to Ofasec, the debenture holder. The receivers now hold, from realisations and interest, £72m. Litigation in the Netherlands, which is still continuing, has raised the prospect that these proceeds will be insufficient to meet the claims of those entitled to share in the debenture security.

7. Leyland Daf Ltd went into creditors' voluntary winding up on 24 July 1996. The liquidators estimate that, excluding intra-group claims, the debts owing to unsecured creditors amount to £125m. Liquidators' realisations amount to £1.5m but estimated liquidation costs and expenses far exceed this amount. They total £10m. The question raised by this appeal, stated shortly, is whether the liquidation costs and expenses should be paid out of amounts realised by the charged assets in priority to the claims of the debenture holder.

The legislation

8. The relevant law starts with the statutory creation of a class of preferential debts in the 19th century. The Companies Act 1883, section 4, made provision that to a defined extent unpaid wages and salaries of clerks, servants, labourers and workmen should be paid before all other debts in the distribution of the assets of a company being wound up under the Companies Acts 1862 and 1867. They were to rank equally among themselves and be paid in full unless the assets of the company were insufficient to meet them. Then they would abate rateably: section 5. Subject to retaining the amount needed 'for the costs of administration or otherwise' the liquidator was to discharge these preferential debts 'forthwith' as and when assets come into the liquidator's hands: section 6.

9. In 1888 the scope of preferential debts was widened to include rates and taxes falling due, in short, within a period of twelve months preceding the commencement of the winding up: see section 1 of the Preferential Payments in Bankruptcy Act 1888.

10. These successive statutory provisions did not affect the proprietary rights of chargees. The secured claims of debenture holders are pursued, not in the winding up, but by enforcement of the debenture holders' proprietary rights as chargees of the assets in question: In re David Lloyd & Co (1877) 6 Ch D 339. Thus under the Acts of 1883 and 1888 the preferential debts continued to rank behind the claims of debenture holders under a floating charge created by the company. The legislation gave preferential creditors a limited degree of priority in the winding up of a company, but their status remained that of unsecured creditors. As such, along with other unsecured creditors they could lay no claim to assets charged to a debenture holder unless and until all payments secured by the debenture had been made.

11. In practice this meant that unpaid workers, although accorded priority in a winding up, often received nothing. The debenture holder, by virtue of his (crystallised) floating charge, scooped the pool. There was no surplus available for distribution among unsecured creditors, preferential or otherwise.

12. The law in this regard was changed by the Preferential Payments in Bankruptcy (Amendment) Act 1897. Section 2 of this Act, 'the 1897 Act', is of prime importance on this appeal. Section 2 provided:

'In the winding up of any company under the Companies Act, 1862, and the Acts amending the same, the debts mentioned in section one of the Preferential Payments in Bankruptcy Act, 1888, shall, so far as the assets of the company available for payment of general creditors may be insufficient to meet them, have priority over the claims of holders of debentures or debenture stock under any floating charge created by such company, and shall be paid accordingly out of any property comprised in or subject to such charge.'

13. The 1897 Act made corresponding provision for what should happen if a debenture holder appointed a receiver or took possession of property comprised in a floating charge when the company was not being wound up. Section 3 provided that in such a case 'the debts mentioned in section one of the said Preferential Payments Act shall be paid forthwith out of any assets coming to the hands of the receiver, or other person taking possession as aforesaid, in priority to any claim for principal or interest in respect of such debentures'.

14. To my mind the effect of section 2 admits of no doubt or ambiguity in the relevant respect. Thenceforth preferential debts as defined in the 1888 Act were to be paid out of the property comprised in a floating charge so far as the non-charged assets were insufficient to discharge those debts. The proprietary rights of a debenture holder were, to that extent, bitten into. That was the object and effect of the provision.

15. I can see nothing in this provision to suggest that, additionally, liquidation expenses as such were thenceforth to be discharged out of the charged property. These expenses are not mentioned in section 2. The priority accorded by section 2 over the holder of a floating charge was confined to the 'debts' mentioned in section 1 of the 1888 Act. The language is unequivocal.

16. Nor is there any ground for implying such an additional incursion into the debenture holders' rights in respect of their charged property. In distribution of non-charged assets of the company liquidation expenses rank ahead of the claims of preferential creditors. But, unlike the non-charged assets, the charged assets belong to the debenture holders to the extent of the amounts secured. There is nothing inherently surprising in Parliament deciding that in future the proprietary interests of a debenture holder in his fund, that is, the charged assets, shall be eroded to the extent of the claims of preferential creditors without making any similar incursion in respect of liquidation expenses. The fact that liquidation...

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