Cases on secured debt
In commercial practice the term "debenture" typically refers to the document that evidences a secured debt, although in law the definition may also cover unsecured debts (like any "IOU").[46] The legal definition is relevant for certain tax statutes, so for instance in British India Steam Navigation Co v IRC[47] Lindley J held that a simple "acknowledgement of indebtedness" was a debenture, which meant that a paper on which directors promised to pay the holder £100 in 1882 and 5% interest each half year was enough, and as a result subject to pay duty under the Stamp Act 1870. The definition depends on the purpose of the statutory provision for which it is used. It matters because debenture holders have the right to company accounts and the director's report,[48] because debenture holders must be recorded on a company register which other debenture holders may inspect,[49] and when issued by a company, debentures are not subject to the rule against "clogs on the equity of redemption". This old equitable rule was a form of common law consumer protection, which held that if a person contracted for a mortgage, they must always have the right to pay off the debt and get full title to their property back. The mortgage agreement could not be turned into a sale to the lender,[50] and one could not contract for a perpetual period for interest repayments. However, because the rule limited on contractual freedom to protect borrowers with weaker bargaining power, it was thought to be inappropriate for companies. In Kreglinger v New Patagonia Meat and Cold Storage Co Ltd[51] the House of Lords held that an agreement by New Patagonia to sell sheepskins exclusively to Kreglinger in return for a £10,000 loan secured by a floating charge would persist for five years even after the principal sum was repaid. The contract to keep buying exclusively was construed to not be a clog on redeeming autonomy from the loan because the rule's purpose was to preclude unconscionable bargains. Subsequently, the clog on the equity of redemption rule as a whole was abolished by what is now section 739 of the Companies Act 2006. In Knightsbridge Estates Trust Ltd v Byrne[52] the House of Lords applied this so that when Knightsbridge took a secured loan of £310,000 from Mr Byrne and contracted to repay interest over 40 years, Knightsbridge could not then argue that the contract should be void. The deal created a debenture under the Act, and so this rule of equity was not applied.
Registration
See also: Companies House
In London the main office of Companies House, where all charges against a company need to be registered, is on Bloomsbury Street, just near the British Museum.
Kamis, 19 Desember 2013
difference. The creditor does not have to pay all its debts to the company, and then wait with other unsecured creditors for an unlikely repayment. However, this
The priority system is reinforced by a line of case law, whose principle is to ensure that creditors cannot contract out of the statutory regime:
The general principle, according to the Mellish LJ in Re Jeavons, ex parte Mackay[38] is that "a person cannot make it a part of his contract that, in the event of bankruptcy, he is then to get some additional advantage which prevents the property being distributed under the bankruptcy laws." So in that case, Jeavons made a contract to give Brown & Co an armour plates patent, and in return Jeavons would get royalties. Jeavons also got a loan from Brown & Co. They agreed half the royalties would pay off the loan, but if Jeavons went insolvent, Brown & Co would not have to pay any royalties. The Court of Appeal held half the royalties would still need to be paid, because this was a special right for Brown & Co that only arose upon insolvency.
In a case where a creditor is owed money by an insolvent company, but also the creditor itself owes a sum to the company, Forster v Wilson[39] held that the creditor may set-off the debt, and only needs to pay the difference. The creditor does not have to pay all its debts to the company, and then wait with other unsecured creditors for an unlikely repayment.
However, this depends on the sums for set-off actually being in the creditors' possession. In British Eagle International Air Lines Ltd v Compaigne Nationale Air France,[40] a group of airlines, through the International Air Transport Association had a netting system to deal with all the expenses they incurred to one another efficiently. All paid into a common fund, and then at the end of each month, the sums were settled at once. British Eagle went insolvent and was a debtor overall to the scheme, but Air France owed it money. Air France claimed it should not have to pay British Eagle, was bound to pay into the netting scheme, and have the sums cleared there. The House of Lords said this would have the effect of evading the insolvency regime. It did not matter that the dominant purpose of the IATA scheme was for good business reasons. It was nevertheless void.
Belmont Park Investments Pty Ltd v BNY Corporate Trustee Services Ltd and Lehman Brothers Special Financing Inc observed that the general principle consists of two subrules — the anti-deprivation rule (formerly known as "fraud upon the bankruptcy law") and the pari passu rule, which are addressed to different mischiefs — and held that, in borderline cases, a commercially sensible transaction entered into in good faith should not be held to infringe the first rule.
All these anti-avoidance rules are, however, subject to the very large exception that creditors remain able to jump up the priority queue, through the creation of a security interest.
k
[show]The priority system is reinforced by a line of case law, whose principle is to ensure that creditors cannot contract out of the statutory regime:
The general principle, according to the Mellish LJ in Re Jeavons, ex parte Mackay[38] is that "a person cannot make it a part of his contract that, in the event of bankruptcy, he is then to get some additional advantage which prevents the property being distributed under the bankruptcy laws." So in that case, Jeavons made a contract to give Brown & Co an armour plates patent, and in return Jeavons would get royalties. Jeavons also got a loan from Brown & Co. They agreed half the royalties would pay off the loan, but if Jeavons went insolvent, Brown & Co would not have to pay any royalties. The Court of Appeal held half the royalties would still need to be paid, because this was a special right for Brown & Co that only arose upon insolvency.
In a case where a creditor is owed money by an insolvent company, but also the creditor itself owes a sum to the company, Forster v Wilson[39] held that the creditor may set-off the debt, and only needs to pay the difference. The creditor does not have to pay all its debts to the company, and then wait with other unsecured creditors for an unlikely repayment.
However, this depends on the sums for set-off actually being in the creditors' possession. In British Eagle International Air Lines Ltd v Compaigne Nationale Air France,[40] a group of airlines, through the International Air Transport Association had a netting system to deal with all the expenses they incurred to one another efficiently. All paid into a common fund, and then at the end of each month, the sums were settled at once. British Eagle went insolvent and was a debtor overall to the scheme, but Air France owed it money. Air France claimed it should not have to pay British Eagle, was bound to pay into the netting scheme, and have the sums cleared there. The House of Lords said this would have the effect of evading the insolvency regime. It did not matter that the dominant purpose of the IATA scheme was for good business reasons. It was nevertheless void.
Belmont Park Investments Pty Ltd v BNY Corporate Trustee Services Ltd and Lehman Brothers Special Financing Inc observed that the general principle consists of two subrules — the anti-deprivation rule (formerly known as "fraud upon the bankruptcy law") and the pari passu rule, which are addressed to different mischiefs — and held that, in borderline cases, a commercially sensible transaction entered into in good faith should not be held to infringe the first rule.
All these anti-avoidance rules are, however, subject to the very large exception that creditors remain able to jump up the priority queue, through the creation of a security interest.
k
[show]
The general principle, according to the Mellish LJ in Re Jeavons, ex parte Mackay[38] is that "a person cannot make it a part of his contract that, in the event of bankruptcy, he is then to get some additional advantage which prevents the property being distributed under the bankruptcy laws." So in that case, Jeavons made a contract to give Brown & Co an armour plates patent, and in return Jeavons would get royalties. Jeavons also got a loan from Brown & Co. They agreed half the royalties would pay off the loan, but if Jeavons went insolvent, Brown & Co would not have to pay any royalties. The Court of Appeal held half the royalties would still need to be paid, because this was a special right for Brown & Co that only arose upon insolvency.
In a case where a creditor is owed money by an insolvent company, but also the creditor itself owes a sum to the company, Forster v Wilson[39] held that the creditor may set-off the debt, and only needs to pay the difference. The creditor does not have to pay all its debts to the company, and then wait with other unsecured creditors for an unlikely repayment.
However, this depends on the sums for set-off actually being in the creditors' possession. In British Eagle International Air Lines Ltd v Compaigne Nationale Air France,[40] a group of airlines, through the International Air Transport Association had a netting system to deal with all the expenses they incurred to one another efficiently. All paid into a common fund, and then at the end of each month, the sums were settled at once. British Eagle went insolvent and was a debtor overall to the scheme, but Air France owed it money. Air France claimed it should not have to pay British Eagle, was bound to pay into the netting scheme, and have the sums cleared there. The House of Lords said this would have the effect of evading the insolvency regime. It did not matter that the dominant purpose of the IATA scheme was for good business reasons. It was nevertheless void.
Belmont Park Investments Pty Ltd v BNY Corporate Trustee Services Ltd and Lehman Brothers Special Financing Inc observed that the general principle consists of two subrules — the anti-deprivation rule (formerly known as "fraud upon the bankruptcy law") and the pari passu rule, which are addressed to different mischiefs — and held that, in borderline cases, a commercially sensible transaction entered into in good faith should not be held to infringe the first rule.
All these anti-avoidance rules are, however, subject to the very large exception that creditors remain able to jump up the priority queue, through the creation of a security interest.
k
[show]The priority system is reinforced by a line of case law, whose principle is to ensure that creditors cannot contract out of the statutory regime:
The general principle, according to the Mellish LJ in Re Jeavons, ex parte Mackay[38] is that "a person cannot make it a part of his contract that, in the event of bankruptcy, he is then to get some additional advantage which prevents the property being distributed under the bankruptcy laws." So in that case, Jeavons made a contract to give Brown & Co an armour plates patent, and in return Jeavons would get royalties. Jeavons also got a loan from Brown & Co. They agreed half the royalties would pay off the loan, but if Jeavons went insolvent, Brown & Co would not have to pay any royalties. The Court of Appeal held half the royalties would still need to be paid, because this was a special right for Brown & Co that only arose upon insolvency.
In a case where a creditor is owed money by an insolvent company, but also the creditor itself owes a sum to the company, Forster v Wilson[39] held that the creditor may set-off the debt, and only needs to pay the difference. The creditor does not have to pay all its debts to the company, and then wait with other unsecured creditors for an unlikely repayment.
However, this depends on the sums for set-off actually being in the creditors' possession. In British Eagle International Air Lines Ltd v Compaigne Nationale Air France,[40] a group of airlines, through the International Air Transport Association had a netting system to deal with all the expenses they incurred to one another efficiently. All paid into a common fund, and then at the end of each month, the sums were settled at once. British Eagle went insolvent and was a debtor overall to the scheme, but Air France owed it money. Air France claimed it should not have to pay British Eagle, was bound to pay into the netting scheme, and have the sums cleared there. The House of Lords said this would have the effect of evading the insolvency regime. It did not matter that the dominant purpose of the IATA scheme was for good business reasons. It was nevertheless void.
Belmont Park Investments Pty Ltd v BNY Corporate Trustee Services Ltd and Lehman Brothers Special Financing Inc observed that the general principle consists of two subrules — the anti-deprivation rule (formerly known as "fraud upon the bankruptcy law") and the pari passu rule, which are addressed to different mischiefs — and held that, in borderline cases, a commercially sensible transaction entered into in good faith should not be held to infringe the first rule.
All these anti-avoidance rules are, however, subject to the very large exception that creditors remain able to jump up the priority queue, through the creation of a security interest.
k
[show]
bargaining power.[35] After funds are taken away to pay all preferential groups and the holder of a floating charge, the remaining money
Sources: Insolvency Act 1986 and Companies Act 2006
Since the Bankruptcy Act 1542 a key principle of insolvency law has been that losses are shared among creditors proportionately. Creditors who fall into the same class will share proportionally in the losses (e.g. each creditor gets 50 pence for each £1 she is owed). However, this pari passu principle only operates among creditors within the strict categories of priority set by the law:[32]
The law permits creditors making contracts with a company before insolvency to take a security interest over a company's property. If the security is refers to some specific asset, the holder of this "fixed charge" may take the asset away free from anybody else's interest in order to satisfy the debt. If two charges are created over the same property, the charge holder with the first will have the first access.
The Insolvency Act 1986 section 176ZA gives special priority to all the fees and expenses of the insolvency practitioner, who carries out an administration or winding up. The practitioner's expenses will include the wages due on any employment contract that the practitioner chooses to adopt.[33] But controversially, the Court of Appeal in Krasner v McMath held this would not include the statutory requirement to pay compensation for a management's failure to consult upon collective redundancies.[34]
Even if they are not retained, employees' wages up to £800 and sums due into employees' pensions, are to be paid under section 175.
A certain amount of money must be set aside as a "ring fenced fund" for all creditors without security under section 176A. This is set by statutory instrument as a maximum of £600,000, or 20 per cent of the remaining value, or 50 per cent of the value of anything under £10,000. All these preferential categories (for insolvency practitioners, employees, and a limited amount for unsecured creditors) come in priority to the holder of a floating charge.
Floating charge holders come next. Like a fixed charge, a floating charge can be created by a contract with a company before insolvency. Like with a fixed charge, this is usually done in return for a loan from a bank. But unlike a fixed charge, a floating charge need not refer to a specific asset of the company. It can cover the entire business, including a fluctuating body of assets that is traded with day today, or assets that a company will receive in future. The preferential categories were created by statute to prevent secured creditors taking all assets away. This reflected the view that the power of freedom of contract should be limited to protect employees, small businesses or consumers who have unequal bargaining power.[35]
After funds are taken away to pay all preferential groups and the holder of a floating charge, the remaining money due to unsecured creditors. In 2001 recovery rates were found to be 53% of one's debt for secured lenders, 35% for preferential creditors but only 7% for unsecured creditors on average.[36]
Any money due for interest on debts proven in the winding up process.
Money due to company members under a share redemption contract.
Debts due to members who hold preferential rights.
Ordinary shareholders, who have the right to residual assets.
Aside from pari passu or a priority scheme, historical insolvency laws used many methods for distributing losses. The Talmud (ca 200AD) envisaged that each remaining penny would be dealt out to each creditor in turn, until a creditor received all he was owed, or the money ran out. This meant the small creditors were more likely to be paid in full than large and powerful creditors.[37]
Since the Bankruptcy Act 1542 a key principle of insolvency law has been that losses are shared among creditors proportionately. Creditors who fall into the same class will share proportionally in the losses (e.g. each creditor gets 50 pence for each £1 she is owed). However, this pari passu principle only operates among creditors within the strict categories of priority set by the law:[32]
The law permits creditors making contracts with a company before insolvency to take a security interest over a company's property. If the security is refers to some specific asset, the holder of this "fixed charge" may take the asset away free from anybody else's interest in order to satisfy the debt. If two charges are created over the same property, the charge holder with the first will have the first access.
The Insolvency Act 1986 section 176ZA gives special priority to all the fees and expenses of the insolvency practitioner, who carries out an administration or winding up. The practitioner's expenses will include the wages due on any employment contract that the practitioner chooses to adopt.[33] But controversially, the Court of Appeal in Krasner v McMath held this would not include the statutory requirement to pay compensation for a management's failure to consult upon collective redundancies.[34]
Even if they are not retained, employees' wages up to £800 and sums due into employees' pensions, are to be paid under section 175.
A certain amount of money must be set aside as a "ring fenced fund" for all creditors without security under section 176A. This is set by statutory instrument as a maximum of £600,000, or 20 per cent of the remaining value, or 50 per cent of the value of anything under £10,000. All these preferential categories (for insolvency practitioners, employees, and a limited amount for unsecured creditors) come in priority to the holder of a floating charge.
Floating charge holders come next. Like a fixed charge, a floating charge can be created by a contract with a company before insolvency. Like with a fixed charge, this is usually done in return for a loan from a bank. But unlike a fixed charge, a floating charge need not refer to a specific asset of the company. It can cover the entire business, including a fluctuating body of assets that is traded with day today, or assets that a company will receive in future. The preferential categories were created by statute to prevent secured creditors taking all assets away. This reflected the view that the power of freedom of contract should be limited to protect employees, small businesses or consumers who have unequal bargaining power.[35]
After funds are taken away to pay all preferential groups and the holder of a floating charge, the remaining money due to unsecured creditors. In 2001 recovery rates were found to be 53% of one's debt for secured lenders, 35% for preferential creditors but only 7% for unsecured creditors on average.[36]
Any money due for interest on debts proven in the winding up process.
Money due to company members under a share redemption contract.
Debts due to members who hold preferential rights.
Ordinary shareholders, who have the right to residual assets.
Aside from pari passu or a priority scheme, historical insolvency laws used many methods for distributing losses. The Talmud (ca 200AD) envisaged that each remaining penny would be dealt out to each creditor in turn, until a creditor received all he was owed, or the money ran out. This meant the small creditors were more likely to be paid in full than large and powerful creditors.[37]
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