Office of Public Sector Information

Rule 6

SCHEDULE Form 4.74

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EXPLANATORY NOTE

(This note is not part of the Order)

These Rules amend the Insolvency Rules 1986 (“the principal Rules”). Rule 4.218 of the principal Rules (general rule as to priority) is amended by replacing paragraph (1)(a), with new paragraphs (1), (2) and (3)(a). Additionally, new Rules 4.218A to 4.218E are inserted after Rule 4.218 of the principal Rules. Rule 2 makes transitional provision and Rule 3 provides for the principal Rules to be amended by the Rules in this Order. Rule 4 of these Rules amends Rule 4.218 of the principal Rules so as to provide expressly for the expenses of a liquidation to be payable also out of the proceeds of any legal proceedings which the liquidator has power to bring in his own name or bring or defend in the name of the company and also for the recovery of expenses and costs relating not only to the conduct but also to the preparation of any such legal proceedings. The provision is extended so to apply also to proceeds arising out of any awards made under arbitration or dispute resolution procedures or of any compromise or settlement of any legal action or dispute reached prior to a judgement or award being made. Correspondingly also included as costs or expenses of liquidation are those properly incurred in the preparation or conduct of arbitration or dispute resolution procedures and negotiations leading to a settlement or compromise of any legal action or dispute. Rule 5 inserts new Rules 4.218A to 4.218E into the principal Rules. These new provisions are derived from the power to make exceptions to the amendment made by section 1282(1) of the Companies Act 2006 (c.46) to the Insolvency Act 1986 (c.45).

Section 1282(1) of the Companies Act 2006 inserted section 176ZA into the Insolvency Act 1986. The new section was inserted following the judgment of the House of Lords in Buchler and another (as joint liquidators of Leyland Daf Ltd) v Talbot and another (as joint administrative receivers of Leyland Daf Ltd) and Stichting Ofasec and others [2004] UKHL 9 where the court held, on an interpretation of section 175 of the Insolvency Act 1986, that it could not be relied upon to support the deduction of expenses of a liquidation from property comprised in or subject to a floating charge created by the company. Where the assets of a company available for the payment of general creditors are insufficient to make payments in respect of preferential debts after the expenses of the winding up have been met, section 175 of the Insolvency Act 1986 makes provision for payment of those preferential debts to be made out of property comprised in or subject to a floating charge created by the company and for those debts to have priority over the claims of holders of debentures secured by, or holders of, that floating charge. In the same judgment the court confirmed that liquidation expenses could be paid out of, and had priority as against preferential debts in relation to such assets as were available for the payment of general creditors.

The new section 176ZA (payment of expenses of winding up - England and Wales) provides for expenses of a winding up in England and Wales, so far as the assets of the company available for the payment of general creditors are insufficient to meet them, to have priority over any claims to property comprised in or subject to a floating charge created by the company and to be paid out of such property. This is made expressly subject to any rules restricting the application of the section in such circumstances as may be prescribed, to expenses authorised or approved by the holders of debentures secured by, or holders of, the floating charge or by any preferential creditors entitled to be paid in priority to them or by the court. New Rules 4.218A to 4.218E restrict section 176ZA in its application to litigation expenses, which may not be paid out of property comprised in or subject to a floating charge without the approval or authorisation of the holder of a debenture secured by, or holder, of the floating charge or any preferential creditor or the court, as the case may be. The new Rules set out the scope of the exception and the procedure for obtaining approval or authorisation of litigation expenses for the purpose of deducting them as liquidation expenses from property subject to a floating charge. Rule 6 of these Rules amends Schedule 4 to the principal Rules by providing for Form 4.74 to be inserted into it relating to the approval or authorisation of litigation expenses and Rule 7 makes consequential amendments.

A regulatory impact assessment was prepared for the Companies Act 2006. The relevant extracts may be consulted on the website: www.berr.gov.uk/files/file29937.pdf (at page 44 of the impact assessment).