Summary

In the circumstances a debenture holder did "take possession" of property subject to a charge which as created was a floating charge for the purposes of the Companies Act 1985 s.196.

Facts

The appellant bank (R) appealed against a decision ((2006) EWHC 2813 (Ch), (2007) Bus LR 474) on a preliminary issue in proceedings brought by liquidators to determine questions arising in the winding-up of a company (C), and the respondent commissioners cross-appealed. R was the holder of a debenture containing a charge over C's book debts which as created was a floating charge. The commissioners were preferential creditors of C in respect of unpaid VAT. Before C ceased to trade and went into winding-up it hived down its business and assets to two subsidiaries which were then sold to a third party purchaser. Under the hive down agreements part of the consideration was payable immediately and part was payable as and when book debts and work in progress transferred by C were collected. When C's solicitors received the consideration and deferred consideration they made payments to R pursuant to undertakings given by the solicitors. In return R had executed a deed releasing the assets transferred to the subsidiaries from the charges under the debenture. Later, in accordance with the agreements, the subsidiaries assigned to R their interests in the book debts which then remained uncollected and R received a further sum from the collection of those debts. The judge held that receipt by R of the non-deferred and deferred consideration before the winding-up of C amounted to the taking of possession of property subject to the floating charge for the purposes of the Companies Act 1985 s.196 and that the Insolvency Act 1986 s.175 was applicable to the deferred consideration paid after C went into winding-up, but that the latter section did not apply to the sums received by R under the assignments. R submitted that, as a consequence of the judge's misinterpretation of the relevant facts, she had failed to recognise the true legal effect of the basis upon which R was paid the moneys that it received, in that she failed to recognise that those moneys were not paid to it or received by it by reference to the security interest over the assets of C as created by the debenture.

Held

(1) The correct analysis of the hive down arrangements was that the moneys received by C's solicitors on completion and by way of deferred consideration were received by them on behalf of C. Plainly the moneys were held by the solicitors upon trust, in that they were to be held on client account. But the client, throughout, was C, not R. (2) The hive down agreements imposed obligations on the new subsidiaries, which included the payment of moneys to C by way of consideration for the transfer of assets. The effect of the agreements was that new debts became owing from the subsidiaries to C. The new debts fell within the description "all book debts and other debts of the Company present and future" in clause 1.9 of the debenture. The assumption to be made for the purposes of the preliminary issue was that the charge created by that clause was, as created, a floating charge. The solicitors received the non-deferred consideration as trustees for C. The interest of C in those moneys was itself subject to the charge in favour of R. On that basis the moneys then paid by the solicitors to R were paid to R out of moneys that were subject to a charge which as created was a floating charge. In the same way the deferred consideration received by the solicitors and paid to R was paid out of moneys that were subject to a charge which as created was a floating charge. (3) R did take possession, for the purposes of s.196 of the 1985 Act, of the consideration paid to it by the solicitors before the winding-up. Looking at the substance of the transaction, the payments of money to R by the solicitors were in substance acts by which R realised its security over moneys held by the solicitors subject to that security; they were not acts that were in substance no more than the ordinary discharge of C's liability. (4) The deferred consideration paid after the company went into winding-up fell within s.175(2)(b) of the 1986 Act. (5) The moneys received from the realisation of the uncollected book debts pursuant to the assignment by the subsidiaries to R could not be moneys realised from assets that were subject to a charge immediately before the assignment, since the uncollected book debts were debts that had been released from R's charge under the debenture by the deed of release.

Appeal dismissed, cross-appeal dismissed