The analysis in this section is centred on the lending structures in the UK and the US. This is because of the disparity in how lending is structured in both countries with particular reference to the floating charge, which was one of the reasons given by Lord McIntosh120 during the debates prior to the enactment of the Enterprise Act 2002, as to why DIP financing may not be suitable in the UK. The UK secured lending structure is currently made up of two main devices; the fixed charge and the floating charge. The US structure on the other hand, recognizes and operates a unitary concept of security, which is the fixed charge.121 Nevertheless, the US secured lending structure accommodates a type of security device which mirrors the UK floating charge’s ability to hover over future and existing assets of the debtor,122 therefore giving an outward appearance of similarity.
A closer examination of the functions of the two charges reveals ‘a false similarity’ between the charges. Whilst the UK floating charge hovers over all of the debtor’s uncharged assets and only attaches by agreement, on the debtor’s default or insolvency,123 the US floating
liens is treated as a fixed charge and attaches immediately to a class of assets.124 The key
119 For example where there are no existing assets, expected future assets may be used as collateral. 120 HL Deb 29 July 2002, vol 638 cc763-806 at para 789.
121 See section 4.3 above for discussion on secured lending in the US. 122 UCC 2001, article 9-202.
123 See section 4.2.1 of thesis for discussion on floating charge security. 124 UCC 2001, article 9-203.
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difference in both charges lies in how they operate with regards to available assets after a company becomes insolvent. In the US, future assets acquired after a debtor becomes insolvent do not form part of the assets that are covered by a floating lien held by a creditor.125 Once the company becomes insolvent, the scope of the floating lien does not
extend beyond the point of insolvency; therefore all assets which are not subject to a fixed charge belong to the company free and clear. McCormack sees this as advantageous and suggests that the limitation of the floating lien over after acquired property may be one of the factors which encourage a pre-commencement lender to continue funding the company, thus encouraging post-commencement financing.126
In the UK, once a company becomes insolvent, the floating charge crystallizes and fastens on all existing and future assets of the company,127 most likely leaving the company with virtually no free assets. Arguably, this is likely to result in the company having no uncharged assets to offer as collateral to raise money to fund its rescue. This distinct feature of the UK lending structure gives credence to Lord McIntosh’s view that the UK lending structure may not be suitable to super-priority financing. However it can be argued that US Chapter 11 DIP funding provisions does not necessarily apply to only debtor companies that have collateral to offer potential lenders. There are various financing options128 available under section 364 which insolvent companies can take advantage of, including those with heavily leveraged assets.129
Whilst the presence of the floating charge reduces the likelihood of the company getting potential lenders to raise money, the floating charge can also be a potential source of
125 See 11 U.S.C, s 552 of the Bankruptcy Code There are however exceptions to this. See 11 U.S.C., s
552(b) (1)-(2) for list of exceptions.
126 G McCormack, ‘Super-priority New Financing and Corporate Rescue’ [2007] JBL 701-732.
127 L Gullifer & J Payne, ‘The Characterization of Fixed and Floating Charges in J Getzler & J Payne (eds)
Company Charges Spectrum and Beyond (OUP 2006) at p61.
128 See section 3.2.3 of the thesis for discussion the various financing options available under section 364. 129 See 11 U.S.C, s 364(c) & (d).
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funding corporate rescues. The Insolvency Act gives the administrator the carte blanche to deal with floating charge assets for the benefit of the company.130 This in effect means that all floating charge assets are within the sole control of the administrator. The significance of this is that, while a creditor maintains his interest in the fixed charge due to the restrictions on the ability of an administrator to wilfully trade off secured assets without leave of the court,131 the administrator can make use of funds or assets resulting from the
floating charge to continue to run the business during administration proceedings.132 The Insolvency Act does provide some protection for the floating charge holder by requiring that the floating charge holder shall have the same priority in respect of acquired property of the company which directly or indirectly represents the property disposed of.133
Floating charge assets especially book debts, may be crucial to the administrator’s ability to successful run the business during corporate rescue unless he has access to other external sources of funding, which may be difficult or expensive to find.134 The Review Group, of the former Department of Trade and Industry and HM Treasury in its report published in 2000, recognised this by suggesting that a statutory reversal of the decision in Siebe
Gorman135 could be achieved by doing away with the fixed charge on the class of a
company’s present and future book debts.136 The group said this would mean that at the
commencement of insolvency proceedings, all the book debts due to a company and any
130 Insolvency Act 1986, Sch B1, para 70.
131 Ibid, Sch B1, para 70-72; where the administrator disposes of assets subject to a fixed charge without the
permission of the court, he is liable to be sued personally in tort for conversion, see Hachette UK Ltd v
Borders(UK) Ltd [2009] EWHC 3487 (Ch). However there are exceptions where an administrator can
dispose of secured assets. The court would approve such disposal if it considers that disposal will serve the purpose of the administration, see Sch B1, para 71(2) (b), 72(2)(b). Nevertheless, the priority of secured creditors is still preserved as regards the proceeds of such disposals which must be turned over to the secured creditor.
132 This is analysed in section 3.5 of the thesis. 133 Insolvency Act Sch B1, para 70(2)-(3). 134 L Guillifer & J Payne (n 127).
135 See p158-159 of the thesis for the discussion on Siebe Gorman case.
136 Insolvency Service, ‘A Review of Company Rescue and Business Reconstruction Mechanism, Report by
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arising thereafter would be available to finance continued trading.137 The Review Group added that crystallising the fixed charge on book debts could possibly be an efficient way of ensuring that additional finance is available for financing company rescues. This is because crystallization would function as a means of identifying the book debts that were subject to a fixed charge security138 so that book debts arising after this can be channelled towards funding the rescue process.
Another alternative could be the arrangement suggested by the City of London Law Society. The Society acknowledged the possibility of funding the administration process out of assets subject to security in its consultation on secured transactions.139 The City of
London Society was of the view that to some degree administrations will need to be funded out of secured assets; however the difficulty in relying on this source of funding lay in the identification of what those assets should be.140 The Society came up with at least three possible ways to ascertain what portion or class of the debtor’s assets can be used to fund administrations and these are;141
Clarifying the distinction between fixed and floating charges (especially as it relates to areas not covered by existing case law or where court decisions have introduced ambiguity).
Identifying specific classes of assets which would be available to the administrator.
Allowing the administrators to use a percentage of all of the company’s charged assets up to a fixed limit.
The option of allowing the administrator to use a percentage of the company’s charged assets would mirror the priming lien found in the US and Canada which allows the debtor
137 This has effectively now been done as a result of the decision in Spectrum Plus. 138 Review Report (n 136) at 133 & 134.
139 The City of London Discussion Paper (n 66). 140 Ibid., at para 4.22.
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create another security interest in a charged property.142 There is some advantage to be gained from this, because giving the administrator powers to create another security interest in a charged property would open up an alternative for companies whose assets are fully charged, to raise funds. However it is debateable if this can take root in the UK without some measure of protection143 for the pre-existing security holder as UK is a jurisdiction that upholds the interest of the creditor above others.
Concluding remarks
The issue of security interests and corporate rescue are closely related, as the presence or absence of one (security) may determine the success or failure of the other (corporate rescue). To successfully achieve a rescue, a debtor company may need to have access to ready cash. One way of doing this will be to rely on company assets to raise these funds. In Canada and the US, there are clear provisions in the Bankruptcy Code and CCAA respectively, enabling the debtor to raise funds. The absence or presence of leveraged assets does not stand in the way of the debtor’s ability to raise funds because of the presence of concepts like priming liens. In this, the two jurisdictions clearly stand apart from the UK.
Arguably, the lending structures in these jurisdictions (the US and Canada) facilitate the provision of funding as there are no floating securities to crystallise upon insolvency and this may or may not leave the debtor with some free assets which can then be used to fund the rescue process. A good argument can however be made on behalf of the English
142 See section 3.2.3(US) and section 3.3.5 (Canada) of the thesis.
143 In the US, the Bankruptcy Code provides that where an existing lien is primed, the debtor company must
adequately protect the pre-existing lien holder. See p87-88 of the thesis for discussion on the US position on adequate protection. This is in contrast to Canada which does not offer any protection, but requires that the court in approving a priming lien takes into consideration whether a creditor would be “materially
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jurisdiction that the presence of the floating charge assets is not an impediment to rescue operations in the UK; rather it aids the administrator in raising funds for rescue procedures as the administrator has powers under the Insolvency Act 1986 to dispose of floating charge assets as if it was not the subject of a charge. Arguably, floating charge assets provide a convenient means for funding the rescue process and until statutory alternatives are found, it may provide a useful avenue for funding rescues
On the other hand, the recommendations made by the City of London Law Society suggest that administrators should be given more powers to be able to use charged (secured) assets to raise rescue finance. This would bring the UK in line with the US and Canada where rescue funding can be raised from charged assets by way of priming liens.
On the whole, each jurisdiction has its own distinct lending practice which is supported by enabling laws which gave rise to them. The security interests created within these three jurisdictions by their individual lending practices confer rights which are attached to the debtor’s assets, on creditors. A debtor’s insolvency in more ways than one impacts on these rights. For example the secured creditor’s right to enforce his security is waived when a debtor enters into any of the formal rescue procedures available under US Chapter 11, the CCAA and the Insolvency Act 1986. Conversely, some rights are acquired by creditors at the point of the debtor’s insolvency e.g. the right of a creditor to place a debtor in any of the rescue proceeding or even liquidation. Selected aspects of creditors’ rights are explored in the succeeding chapter.
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