Re Barleycorn Enterprises Ltd ; Mathias and Davies (A Firm) v Down

In August 1967 a company, Barleycorn Enterprises Ltd., was put into compulsory winding-up. The directors asked a firm of chartered accountants in Cardiff - Mathias and Davies - to prepare the statement of affairs, They did so. It showed: -

It also showed that the Bank had a floating charge under a debenture for £5,971. of which £3,000 were the moneys advanced for wages.

It is plain from those figures that the preferential claims exhausted all the assets. So there was nothing left for the general body of creditors. Mow the question arises as to the fees payable to the chartered accountants for preparing the statement of affairs. Their fees came to £202.10s. cd., and were approved by the Official Receiver. The liquidator says that they rank behind the preferential claims and even behind the debenture holders. So the accountants get nothing. But the accountants say that they are entitled to their fees in priority to the preferential claims. They are part of the costs of winding up which, they say, come first.

The Judge (Sir Temple Morris) held that the chartered accountants were entitled to their fees first. The liquidator appeals to this Court.

The Companies Acts contain provisions regulating the order of payment out of the "assets" of the company. The question is;What does the word "assets" mean in this context? Especially when there is a floating charge.

Two of the material sections go back to 1362, but I will read them as they stand, re-enacted in the 1948 Act in the same words as in 1862:-

Section 267 applies in a compulsory winding up:

"The Court may, in the event of the assets being insufficient to satisfy the liabilities, make an order as to the payment out of the assets of the costs, charges and expenses incurred in the winding up in such order or priority as the Court thinks Just.

Section 309 applies in a voluntary winding up:

All costs, charges and expenses properly incurred in the winding up, including the remuneration of the liquidator, shall be payable out of the assets of the company in priority to all other claims."

The word "assets" in these sections in 1862 was used as meaning only those free assets which were not the subject of a floating charge. In those days it was held that, when there was a debenture which gave the creditor a floating charge over the property of toe company, then, as soon as the charge crystallised on a winding up, the property did not belong to the company but to the debenture holder. It was, therefore, not included in the "assets" of the company and was not available for any of the general costs of the winding up. If the floating charge covered all the property, the debenture holder took it all, subject only to the costs of realising it, e. g. the auctioneer's charges: see In re Marine mansions Company (1867) L R. 4 Equity 601; In re Oriental Hotels Company (1871) L. R. 12 Equity Cases 126 at page 133: and In re Regent's canal Ironworks Company, ex parte Grissell (1875) 3 Oh. D. at page 427 by Lord Justice James.

In 1888 and 1397 Parliament began to use the word: "assets" in a different sense. It used the word "assets" so as to include not only the free assets, but also all those assets which were subject to a floating charge. It used the word in this new sense in the statute which created, for the first time, "preferentialpayments". These were rates, taxes and wages. They took priority over a floating charge. This was done by section 1 of the Preferential Payments in Bankruptcy Act, 1888, as amended by section 2 of the Preferential Payments in Bankruptcy Amendment Act, 1987. The sections of the 1888 and 1897 Acts were re- enacted in the Consolidation Acts of 1908, 1929 and 1948. I will read them as they now appear in the 1948 Act and underline the significant words:-

Section 319 (1) to (4):

"In a winding up there shall be paid, in priority to all other debts", rates, taxes, wages and so forth.

(5) The foregoing debts shall

(a) rank equally among themselves and be paid in full, unless the assets are insufficient to meet them, in which case they shall abate in equal proportions;

(b) in the case of a company registered in England or Scotland, so far as the assets of the company available for payment of general creditors are insufficient to meet them, have priority over the claims of holders of debentures under any floating charge created by the company, and be paid accordingly out of any property contained in or subject to that charge;

(c) Subject to the retention of such sums as may be necessary for the costs and expenses of the winding; up, the fore going debts shall be discharged forthwith so far as the assets are sufficient to meet them.

Those sections show quite clearly that since 1897 a debenture holder, who holds a floating charge, can no longer sweep up all the company's property for his own benefit before he takes any of it, there have to be paid:-

(i) "Such sums as may be necessary for the costs and expenses of the winding up", see section 319 (5)(c)

(ii) the preferential claims for rates, taxes, wages, and so forth. They are the "foregoing debts" which are given priority over the floating charge, see section 319(5) (b).

The sections also show that the legislature is using the word "assets" in a different sense from what it did before 1897. When there is a floating charge, the legislature no longer regards the property as belonging wholly to the debenture holder. The property which is subject to the charge forms part of the "assets" of the company which are to be applied first, in payment of the costs and expenses of the (winding up, second, in payment of the preferential claims, and only third in payment of the debenture holder.

The word "assets" in sections 267 and 309, which go back to 1862, must, I think, be now interpreted in this new sense and not in the sense in which it was interpreted by the Courts before 1897. So without changing the word, we have changed its meaning. It bears a different meaning now from what it did in 1862. This is unusual, but necessary in order to make sense of the legislation as a whole. Sections 267 and 309 now mean that, when there is a floating charge, the "assets" include all the property which is subject to the charge. The costs of the winding up take priority, therefore, over the floating charge.

The word "assets" is used in this new sense in the Rule which prescribes the order in which the costs of the binding up are to be borne. The Rule goes back to 1902, but it is now Rule 193 of the Companies Winding Up Rules 1949. It says this: -

"The assets of a company in a winding up by the Court……. shall be liable to the following payment which shall be made in the following order of priority, namely,

First, the...