Order of Distribution of Assets

Question 1

Barlow Clowes International Ltd v Vaughan [1992] 4 All Er 22 (CA)

Answer 1

Case: Concerned the distribution of assets among beneficiaries.

Rule: In general the rule in Clayton’s Case (first-in first-out) applies to the distribution of trust funds, unless the application would be impractical or would result in injustice between the parties.

Reasoning: This is as first-in first-out rule is a convenient method of competing claims but would be contrary to the presumed intention of the beneficiaries.

Question 2

Cox v Bankside [1995] 2 Lloyds Rep 437 (CA)

Answer 2

Case: Insurance broker in liquidation faced negligence claims in respect of which it was insured; claimants entitled to insurance proceeds under TP(RAI)A 1930 but proceeds likely to be insufficient; how should proceeds be distributed amongst claimants?

Decision: First-in first-out, which seems illogical…

Question 3

Insolvency Act 1986, s.324(1) and Insolvency Rules 1986, r.6.224

Answer 3

Costs and expenses of insolvency in bankruptcy

Question 4

Insolvency Act 1986, ss.115, 156 and Insolvency Rules 1986, r.4.218

Answer 4

Costs and expenses of insolvency in winding up

Question 5

Insolvency Act 1986, s.176ZA(1)

Answer 5

Expenses of liquidation rank in priority to floating charge

Question 6

Insolvency Act 1986, ss.328(1); 175(1)

Answer 6

Debts listed in Sch. 6 have priority

Question 7

Insolvency Act 1986, ss.328(1A)(1B); 175(1A)(1B)

Answer 7

Preferential debts rank pari passu inter se

Question 8

Insolvency Act 1986, s.175(2)(b)

Answer 8

Preferential debts rank ahead of floating charge in liquidation

Question 9

Insolvency Act 1986, s.40

Answer 9

Preferential debts rank ahead of floating charge in receivership

Question 10

Insolvency Act 1986, Sch 6 Para 8

Answer 10

Contributions to occupational and state pension schemes are preferential debts

Question 11

Pensions Schemes Act 1993, ss.123-7

Answer 11

Provide for government to pay unpaid contributions to occupational and personal pension schemes where employer is insolvent and for subrogation to schemes’ rights against employer

Question 12

Insolvency Act 1986, Sch 6 Para 9

Answer 12

Remuneration of employees is preferential debt

(i) maximum per employee £800 or 4 months
(ii) accrued holiday remuneration (para 10)
(iii) subrogation to employees’ preferential status for lender of money advanced to pay wages which has been so used (para 11)

Question 13

Employment Rights Act 1996

Answer 13

Where employer involvent (s.183) arrears of up to 8 weeks pay (s.184) not exceeding £475 per week (s.186) are payable by the SoS (s.182); SoS is then subrogated to employee’s claim against employed (s.189)

Question 14

Insolvency Act 1986, Sch 6 Para 15A

Answer 14

Levies on coal and steel production preferential debt

Question 15

Insolvency Act 1986, Sch 6 Para 15AA and 15B

Answer 15

Debts owed to FSCS and deposits cover by FSCS made preferential

N.B. deposits exceeding FSCS limit made “secondary preferential debts” (s.386(1B) and Sch 6 paras 15BA and 15BB); these rank after all other preferential debts (now called “ordinary preferential debts”: s.386(1A)): s.175(1B)

Question 16

Re Unit 2 Windows Ltd [1985] 3 All ER 647

Answer 16

Case: Where in voluntary liquidation of a company, a creditor proving in his bankruptcy/where in a voluntary liquidation of a company a creditor would but for a set off claim against the company that would be partly preferential and partly non-preferential, claim the set off due to the company be set off rateably against the non-preferential and the preferential debts in proportions to the respective amounts of the debt

Question 17

Insolvency Act 1986, ss.328(4); 189(2)

Answer 17

Interest payable on all proved debts during insolvency is a deferred debt

Question 18

Insolvency Act 1986, ss.328(4); 189(3)

Answer 18

Claims to interest rank pari passu

Question 19

Insolvency Act 1986, ss.328(5); 189(4)

Answer 19

Rate of interest

Question 20

Partnership Act 1980 s.44(b) rule 2

Answer 20

“In settling accounts between the partners after a dissolution of partnership, the following rules shall, subject to agreement, be observed:
….
(b) the assets of the firm… shall be applied in the following manner and order:
1. in paying the debts and liabilities of the firm to persons who are not partners therein:
2. in paying to each partner rateably what is due from the firm to him for advances as distinguished from capital:
3. in paying to each partner rateably what is due from the firm to him in respect of capital.”

Question 21

Re Lonergan ex p Sheil (1877) 4 Ch D 789

Answer 21

Case: L borrowed money to acquire business and promised to pay lender a share of profits in lieu of interest; L also mortgaged lease and goodwill of business as security for loan.

Decision: The rights of the mortgage where not effected by the Partnership Act

Question 22

Partnership Act 1890 s.3

Answer 22

Loans by a non-partner for use in a business for a rate of interest varying with the profit:

“In the event of any person to whom money has been advanced [by way of loan to a person engaged in any business on a contract with that person that the lender shall receive a rate of interest varying with the profits, or shall receive a share of the profits arising from carrying on the business: s.2(3)(d)] being adjudged a bankrupt… the lender of the loan shall not be entitled to recover anything in respect of the loan… until the claims of the other creditors of the borrower… have been satisfied.”

Question 23

Re Beale (1876) 4 Ch D 246

Answer 23

Case: In 1857 B went through ceremony of marriage with deceased wife’s sister, M, and thereafter lived with M and his wife. In 1857 M received a £2,000 legacy from her father which she directed be paid to B for use in his business. In 1876 B bankrupt and M submitted proof for £2,000

Held: Was not entitled to prove in the liquidation for the £2000 in competition with the creditors of the business

cf Re Meade [1951] Ch 774

Question 24

Re Meade [1951] Ch 774

Answer 24

Case: Miss H lived with Major M and lent him £7,218 to set up a riding academy, described in brochures as being run by Major and Mrs M. Major M went bankrupt and Miss H submitted proof for £7,218.

Held: Claim to repayment ranked last as Miss H’s repayment dependent on profits. (Not clear if Mrs H business partner [last] or “married” [last] - neither necessarily true)

Rule: A person who authorizes the use of his money for the purpose of a business cannot subsequently, on the failure of the business, prove in competition with the creditors of the business for the money so lent.

Question 25

Insolvency Act 1986, s.329

Answer 25

Debts due to bankrupt’s spouse rank after interest paid during bankruptcy, therefore are postponed

Question 26

Insolvency Act 1986, s.72(2)(f)

Answer 26

Debts due to members of the company in their capacity as members are postponed deferred debts

Question 27

Re L B Holliday & Co Ltd [1986] 2 All ER 367

Answer 27

Case: Wholly owned subsidiary declared dividends to its holding company between 1974-1981; there were never paid but instead retained by subsidiary in insolvent liquidation; holding company claimed unpaid dividends had been lent back to subsidiary and it could therefore prove as a creditor

Decision: In order to prove not in capacity as member, the burden was on holding company to prove that the retention of these funds was due to some kind of express/implied agreement. On the facts there was no evidence of this. Also striking that when dividends declared, the company did not have the case to pay them. Moreover, it could not be said that with the passage of time the unpaid dividends had been recognised by the company and the holding company as being left on loan.

Question 28

Cork paras 1958-65

Answer 28

“We recommend that, on a winding up of a company, those of its liabilities whether secured or unsecured which are owed to connected persons or companies, and which appear to the Court to represent all or part of the long-term capital structure of the company, shall be deferred to the claims of other creditors and be paid only after all such claims have been met in full.” (not enacted)

Question 29

Insolvency Act 1986, s.215(4)

Answer 29

“Where the court makes a declaration under either section (wrongful or fraudulent trading) in relation to a person who is a creditor of the company, it may direct that the whole or any part of any debt owed by the company to that person and any interest thereon shall rank in priority after all other debts owed by the company and after any interest on those debts.”

Question 30

Insolvency Rules 1986, r.13.4(2A)(c)

Answer 30

Loans at a rate varying with the profits are postponed deferred debts

Question 31

Re Maxwell Communications Corp plc (no.3) [1993] 1 WLR 1402

Answer 31

No policy reasons not to allow a creditor to agree to defer its claim to those of other creditors