This is the working paper for an invited article published in (2008) 20(2) Singapore Academy of Law Journal 495.
When a company becomes subject to winding-up proceedings, it is widely thought to lose beneficial ownership of its property. The property is held, instead, on a ‘statutory trust’ to discharge the company’s liabilities. The attribution of this ‘proprietary’ effect to the commencement of winding-up has, however, created significant confusion. Faring particularly poorly is our understanding of the status of those of the company’s assets in which others held proprietary rights prior to this point, notably, assets the company’s title to which is encumbered by security interests. The confusion takes many forms and infects several areas of analysis. First, the House of Lords has recently ruled that property subject to a floating charge is to be regarded, not as “the company’s assets”, but instead, as part of a ‘fund’ beneficially owned by the secured creditor “to the extent of the amount secured”. Their Lordships’ conclusion appears to be based on the proprietary nature of the floating charge as they understand it. Second, courts and commentators over the last several decades have asserted that encumbered assets do not fall in the statutory trust of the debtor company’s property. This too appears to have been endorsed by the House of Lords decision mentioned above. Third and in what is put forward as a different explanation of their Lordships’ ruling, it has been claimed that, at the point at which the company enters winding-up, the ‘hindsight principle’ of insolvency law causes beneficial ownership of encumbered assets to vest in the secured creditor. Fourth and finally, it has also been contended that the very notion of ‘fund’ as invoked by their Lordships supports the same conclusion.
This paper takes issue with each of these propositions. Firstly, it finds cause to highlight one of the many confusions surrounding insolvency law’s (in)famous pari passu principle. A key reason for the problems that beset our understanding of the status of encumbered assets is the assumption that to distribute pari passu is to pay each claimant the same proportion of their debt as each other claimant. The argument here draws on long established case law and distinguished scholarship to point out that in fact, the principle requires merely that those classified by the general (pre-insolvency) law as being on par with each other be treated equally. This seemingly minor correction to our understanding of the requirement of pari passu distribution has far-reaching implications. Second, it is argued that the very nature of a security interest precludes the possibility that, at one and the same time, an asset would be beneficially owned by the secured creditor and yet be held by that creditor to secure the debtor’s obligations. Third, the paper undertakes a fresh analysis of the origins and nature of the statutory trust to show that, on any reasonable view, assets subject to floating security fall in the statutory trust of the debtor’s property, and further, that it is strongly arguable that the same is true of assets subject to fixed security. The fourth part of the argument demonstrates that, properly understood, insolvency law’s hindsight principle simply cannot move the beneficial ownership of encumbered property to the secured creditor. Fifth and finally, certain elements of the theory of property law are analysed. The aim is to show that, on pain of the fallacy of equivocation, the relevant concept of ‘fund’ must be understood such that the encumbered and unencumbered assets of a company undergoing liquidation form one fund out of which both secured and unsecured claims are met in appropriate order of priority.
- Buchler v Talbot,
- re Leyland Daf,
- John Armour,
- Adrian Walters,
- Separate Funds Fallacy