Priorities United Kingdom insolvency law

re nortel gmbh [2013] uksc 52, [39], lord neuberger

since bankruptcy act 1542 key principle of insolvency law has been losses shared among creditors proportionately. creditors fall same class share proportionally in losses (e.g. each creditor gets 50 pence each £1 owed). however, pari passu principle operates among creditors within strict categories of priority set law. first, law permits creditors making contracts company before insolvency take security interest on company s property. if security refers specific asset, holder of fixed charge may take asset away free else s interest in order satisfy debt. if 2 charges created on same property, charge holder first have first access. second, insolvency act 1986 section 176za gives special priority fees , expenses of insolvency practitioner, carries out administration or winding up. practitioner s expenses include wages due on employment contract practitioner chooses adopt. controversially, court of appeal in krasner v mcmath held not include statutory requirement pay compensation management s failure consult upon collective redundancies. third, if not retained, employees wages £800 , sums due employees pensions, paid under section 175. fourth, amount of money must set aside ring fenced fund creditors without security under section 176a. set statutory instrument maximum of £600,000, or 20 per cent of remaining value, or 50 per cent of value of under £10,000. these preferential categories (for insolvency practitioners, employees, , limited amount unsecured creditors) come in priority holder of floating charge.

fifth, holders of floating charge holders must paid. fixed charge, floating charge can created contract company before insolvency. fixed charge, done in return loan bank. unlike fixed charge, floating charge need not refer specific asset of company. can cover entire business, including fluctuating body of assets traded day today, or assets company receive in future. preferential categories created statute prevent secured creditors taking assets away. reflected view power of freedom of contract should limited protect employees, small businesses or consumers have unequal bargaining power. after funds taken away pay preferential groups , holder of floating charge, remaining money due unsecured creditors. in 2001 recovery rates found 53% of 1 s debt secured lenders, 35% preferential creditors 7% unsecured creditors on average. seventh comes money due interest on debts proven in winding process. in eighth place money due company members under share redemption contract. ninth debts due members hold preferential rights. , tenth, ordinary shareholders, have right residual assets.

aside pari passu or priority scheme, historical insolvency laws used many methods distributing losses. talmud (ca 200ad) envisaged each remaining penny dealt out each creditor in turn, until creditor received owed, or money ran out. meant small creditors more paid in full large , powerful creditors.

the priority system reinforced line of case law, principle ensure creditors cannot contract out of statutory regime. referred anti-deprivation rule . general principle, according mellish lj in re jeavons, ex parte mackay person cannot make part of contract that, in event of bankruptcy, additional advantage prevents property being distributed under bankruptcy laws. in case, jeavons made contract give brown & co armour plates patent, , in return jeavons royalties. jeavons got loan brown & co. agreed half royalties pay off loan, if jeavons went insolvent, brown & co not have pay royalties. court of appeal held half royalties still need paid, because special right brown & co arose upon insolvency. in case creditor owed money insolvent company, creditor owes sum company, forster v wilson held creditor may set-off debt, , needs pay difference. creditor not have pay debts company, , wait other unsecured creditors unlikely repayment. however, depends on sums set-off being in creditors possession. in british eagle international air lines ltd v compaigne nationale air france, group of airlines, through international air transport association had netting system deal expenses incurred 1 efficiently. paid common fund, , @ end of each month, sums settled @ once. british eagle went insolvent , debtor overall scheme, air france owed money. air france claimed should not have pay british eagle, bound pay netting scheme, , have sums cleared there. house of lords said have effect of evading insolvency regime. did not matter dominant purpose of iata scheme business reasons. nevertheless void. belmont park investments pty ltd v bny corporate trustee services ltd , lehman brothers special financing inc observed general principle consists of 2 subrules — anti-deprivation rule (formerly known fraud upon bankruptcy law ) , pari passu rule, addressed different mischiefs — , held that, in borderline cases, commercially sensible transaction entered in faith should not held infringe first rule. these anti-avoidance rules are, however, subject large exception creditors remain able jump priority queue, through creation of security interest.