[2025] EWHC 2674 (Ch)

The Judge took as the jumping off point for the enquiry into the scope of Rule 18.34 the decision of the House of Lords in Re Leyland DAF [2004] UKHL 9. In that case a company was in administrative receivership and liquidation. An administrative receiver had been appointed under a floating charge and realised secured assets, and the issue arose of whether the liquidator could recover some of the expenses of the liquidation from the floating charge assets. The House of Lords held that he could not. In explaining that conclusion, the Court pointed to important features of the insolvency regime which, although discussed in the context of a floating charge in that case, remain relevant to a case such as the present where we are concerned with assets which are subject to a fixed charge:

The strict division between “the company’s fund” and the chargee’s fund has, so far as floating charges are concerned, been subject to certain statutory amendments. The Judge referred to a number of these: s.175(2) (giving preferential debts priority over the claims of the holder of a floating charge), s.176ZA(1), (reversing Re Leyland DAF), and s.176A (introduced by the Enterprise Act 2022 and making a “prescribed part” of assets subject to a floating charge available to meet the claims of general creditors where assets are otherwise insufficient to do so). However, none of those apply to fixed charges.

It is against that background that Palmer’s Company Law (Looseleaf, reviewed September 2020), [15.542] summarises the law as follows:

“Assuming that all the requisite formalities have been fulfilled, including proper registration of the security as a company charge under Pt 25 of the Companies Act 2006 (as amended), it will be perceived that any holder of a valid, fixed charge over company assets is in a position of pre-eminent advantage in the event of the insolvent winding-up of the company. This is because, under the established principles of the law of security applicable both to personal and corporate insolvency, the holder of a valid and subsisting, fixed security over any of his debtor’s property is entitled to enforce his right of realisation of that security, and so may effectively stand outside the insolvency process in satisfying the outstanding liability to such extent as the security is capable of yielding. Thereafter, if any unsatisfied balance remains due to the creditor in question, he may participate in the collective administration of the remainder of the debtor’s estate, by proving for the balance and ranking for dividend according to the nature of the liability itself. Therefore, the assets within the insolvent estate which are comprised within any valid and unimpeachable fixed charge are predestined to remain outside the pool of assets available for distribution through the winding-up process itself, except in so far as they may turn out upon realisation to yield a greater amount than is still outstanding upon the debt or liability in relation to which they serve as security. In that event, the secured creditor must pay over the surplus balance, either to the holder of any subsequent, fixed charge over the same property, or in the absence of such, to the liquidator. The different, but still appreciable, position occupied by the holder of a security which, as created, was a floating charge was explained above.^”

I accept that the status of assets subject to a fixed charge, and in particular the fact that:

I derive some support for this conclusion from the decision of Dame Sarah Worthington QC (Hon) in Re MK Airlines [2018] EWHC 540 (Ch). That case involved an allegation of misfeasance against a former administrator for failing to follow insolvency rules priority rules. To enable MKA to continue trading pending a proposed sale, the putative buyer agreed to provide funding to be used for certain purposes which was paid into MKA’s bank accounts, from which the administrators drew sums to meet their remuneration and disbursements. A declaration was sought that the administrators had been in breach of fiduciary duty and misfeasance in so applying the money, the particular complaints being that the administrators had failed to follow the priority rules in r.2.76(1) of the Insolvency Rules 1986, or had drawn remuneration without approval contrary to r.2.106(3C) or had paid pre-administration costs contrary to r.2.67(1) or without the approval required by r.2.67A. The first and third breaches were upheld by the Registrar, but for present purposes I am only concerned with the first.

I should note that the effect of the decision on issue (ii) was that it was found that the creditors had approved the drawing of remuneration, such that the breach of fiduciary duty arguments on which Mr Harty relied (and which I address next) were not engaged. However, Dame Sarah’s decision attached considerable importance to the source and status of the funds. At [86], Dame Sarah held that the various requirements of the Insolvency Rules 1986 applied “only to the company's assets” and did not “prohibit late investors white knights or late investors providing additional funds on terms, including terms that … give those funders first priority purchase money security interests over those assets, or terms that operate by way of Quistclose trust requiring funds to be used only for nominated purposes and not to be at the free disposal of the company”. At [90], Dame Sarah noted that the administrators “could have agreed to act on terms that their remuneration was paid by third parties rather than out of company funds”, which at [97] she held that they had.