Case No: B2/2000/3615
Neutral Citation Number: [2002] EWCA Civ 228
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE CHANCERY DIVISION
(Mr Justice Rimer)
Royal Courts of Justice
Strand, 
London, WC2A 2LL

Friday 22 February 2002
Before :

LORD JUSTICE PETER GIBSON
LORD JUSTICE CHADWICK
and 
LORD JUSTICE LONGMORE

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Between :

	BUCHLER & ANOTHER	Respondents	
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	TALBOT & OTHERS	Appellants	

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(Transcript of the Handed Down Judgment of
Smith Bernal Reporting Limited, 190 Fleet Street
London EC4A 2AG
Tel No: 020 7421 4040,  Fax No:  020 7831 8838
Official Shorthand Writers to the Court)
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Mr R. Potts QC & Mr P. Gillyon (instructed by Messrs Freshfields Bruckhaus Deringer) for the Appellants, Stichting Ofasec
Mr R Snowden  (instructed by Messrs Hammond Suddards Edge) for the Respondents
Mr R. McAlpine of Denton Wilde Sapte for the Receivers

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Judgment
As Approved by the Court

Crown Copyright ©

Lord Justice Chadwick  : 

1.	This is an appeal against an order made on 17 November 2000 by Mr Justice Rimer on an application made under the Insolvency Act 1986 by the joint liquidators of Leyland Daf Limited (“LDL”), an English company in voluntary liquidation. The respondents to that application included (i) joint administrative receivers appointed under a mortgage debenture granted by LDL and (ii) Stichting Ofasec (“Ofasec”), a Dutch foundation, to whom that debenture was granted as security agent for certain banks and other lenders. Ofasec was the only respondent to take an active part in the proceedings; although the joint administrative receivers were represented before the judge, as they have been in this Court, by their solicitor. 
2.	Section 115 of the Insolvency Act 1986 provides for the priority of the liquidator’s expenses and remuneration in a voluntary liquidation. The section is in these terms:
“All expenses properly incurred in the winding up, including the remuneration of the liquidator, are payable out of the company’s assets in priority to all other claims.” 

The issue before the judge was whether the assets out of which the joint liquidators were entitled to be paid expenses and remuneration, pursuant to that section, included the proceeds of realisation of those assets which had been subject to a floating charge under the debenture. The issue arises in the circumstances (i) that the floating charge had crystallised before the commencement of the liquidation and (ii) that the effect of a decision that the liquidation expenses are payable out of the floating charge assets is that those expenses may well have to be borne by the persons entitled to the security created by the debenture – there being no unsecured assets available to meet them and insufficient secured assets to satisfy the claims of those who (as things stand) are entitled to share in the security.
3.	The judge decided that issue in favour of the joint liquidators. He granted permission to appeal from his order. Ofasec is the appellant in this Court.
The factual background
4.	The facts are not in dispute. I adopt the summary set out in paragraphs 4 to 10 of the judgment handed down by the judge on 17 November 2000:
“4.	LDL and LDIL [Leyland Daf International Limited] were English subsidiaries of Leyland Daf Holdings Limited, which was itself a subsidiary of a Dutch company called DAF NV. They manufactured commercial vehicles. In May 1988 DAF NV made an unsecured bond issue in Holland governed by Dutch law and guaranteed by two Dutch banks which were the lead banks in a syndicate which financed the DAF NV group. A Dutch company, Nederlandsche Trust-Maatschappij (“NTM”), was trustee for the bondholders.
5.	In 1989 the DAF NV group entered into a refinancing agreement with its banks, but in 1992 it was again in financial difficulty. Its banks made further loans. They were secured by, amongst other things, mortgage debentures dated 25 March 1992. These were granted by LDL and LDIL to Ofasec, a Dutch foundation, which acted as security agent for the banks as well as for various other lenders who had previously also made loans to the group and are referred to in the evidence as “the OFA Grantors”. The debentures granted fixed and floating charges over the assets of the two companies. The respective rights of the banks and the OFA Grantors to participate in such security were governed by a set of conditions. On the face of them, neither NTM nor the Dutch bondholders were entitled to participate in it.
6.	In early 1993 the DAF NV group collapsed. DAF NV was declared bankrupt on 26 February 1993 and trustees in bankruptcy were appointed to it. On 3 and 4 February 1993 Ofasec appointed joint administrative receivers (John Andrew Talbot and Murdoch Lang McKillop) to LDL and LDIL under the debentures. The receivers proceeded to realize the assets charged by the fixed and floating charges created by the debentures. They have discharged receivership preferential creditors of LDL in the sum of about £8m. LDIL had no preferential creditors. By the end of 1994 they had made interim distributions of £110m to Ofasec towards satisfying its indebtedness. These distributions were made before LDL and LDIL went into liquidation. They still hold about £61m derived from the proceeds of the assets that were subject to Ofasec’s floating charge. These derive exclusively from the LDL floating charge, since all the LDIL realizations were of fixed charge assets. The unsecured creditors of LDL and LDIL amount to about £141m.
7.	In December 1994 NTM began proceedings in Holland against (amongst others) Ofasec and DAF NV’s trustees in bankruptcy. It claimed to be entitled, on behalf of the bondholders, to participate pari passu with the banks and the OFA Grantors in the proceeds of the security granted by the debentures. The receivers challenged the jurisdiction of the Dutch court, but that challenge was rejected in March 1996. On 24 July 1996 LDL and LDIL entered creditors’ voluntary liquidation and joint liquidators were appointed. They are David John Buchler and Christopher John Hughes, the applicants.
8.	Following their appointment, the liquidators co-operated with the receivers in their defence of the NTM action. In January 1997, the District Court of Amsterdam dismissed the action, after which the liquidators embarked on agreeing the claims of creditors in the winding up of LDL and LDIL. In October 1998, however, the Dutch Court of Appeal reversed the decision of the District Court and held that NTM was entitled to participate in security granted by the debentures. That decision has been the subject of an appeal to the Dutch Supreme Court in the Hague, but judgement has not yet been given, and the evidence indicates that the final disposal of that litigation might still take several years.
9.	If NTM succeeds in maintaining its claim to share in the security created by the debentures, then that (with other factors) will raise a major question as to whether there would be any assets available to pay a dividend to the unsecured creditors of LDL and LDIL. NTM’s claim has in consequence also triggered the question of principle identified at the beginning of this judgement. The debentures are both governed by English law and, if liquidation expenses do have priority over Ofasec’s claims as chargee, NTM does not claim to be in a better position that Ofasec: it claims no more than to be entitled to share pari passu with the banks and the OFA Grantors in the security [granted] to Ofasec.
10. . . . I should make clear that the liquidators do not suggest that the receivers are accountable to them in respect of any payments made to Ofasec prior to the commencement of the liquidations. All that is claimed is that they have a right of recourse for liquidation expenses to those floating charge realizations still held by the receivers, and that they are so entitled in priority to the claims of Ofasec. Such expenses include a potential tax liability of more than £2m in respect of interest earned by LDL and LDIL as well as liquidators’ unpaid costs to date and their future costs, which are likely to exceed £1m. As at 6 September 1999 the liquidators had realized £1,430,977 and had made payments of £1,232,699, including £810,087 professional costs.”   
The Insolvency Act 1986
5.	I have already set out section 115 of the Insolvency Act 1986. More detailed provisions as to the order in which the expenses of the liquidation are payable out of the assets are found in rule 4.218 of the Insolvency Rules 1986. The provisions of that rule apply, also, in the case of a company being wound up by the court – see rule 4.1(2) of the 1986 Rules and, for the rule-making power, section 411 of the Act. Those provisions are subject to the power of the court, where the assets are insufficient to satisfy the liabilities, to make an order under section 156 of the Act – see rule 4.220(1) and, as to the power to make an order under section 156 in a voluntary winding up, section 112(1) of the Act. In relation to assets to which those provisions apply, and subject to any order made under section 156 of the Act, the effect of those provisions is to require payment of liquidation expenses out of those assets in priority to all other claims.  
6.	The relevant question, in the present context, is whether “the company’s assets” – or (in the context of rule 4.218) “the assets” – includes assets which are, or would otherwise be, required to satisfy the claims of a secured creditor under a floating charge over those assets; and, in particular, the claims of a secured creditor under a charge which, as created, was a floating charge but which has crystallised before the commencement of the winding up. If assets which would otherwise be required to satisfy the claims of a secured creditor are, nevertheless, to be treated as “the company’s assets” – or as “the assets”, as the case may be – then (subject to any order made under section 156 of the Act) the effect of section 115 and rule 4.218 is that the expenses of the winding up are payable out of those assets in priority to the claims of the secured creditor.
7.	The question is one of statutory construction. It is necessary, therefore, to have regard to other provisions in the Act, and in the Companies Act 1985 (which forms part of the same corpus of legislation), which provide for the payment of debts out of assets subject to a floating charge. It is convenient, first, to refer to the provisions which apply where the company is not in the course of winding up. They are found in section 196 of the Companies Act 1985 Act and section 40 of the Insolvency Act 1986. 
8.	Section 196 of the 1985 Act applies where possession of the property subject to the charge is taken by or on behalf of the secured creditor. In the form which it now takes (following substitution by section 439(1) of, and Part I of schedule 13 to, the Insolvency Act 1986) the section is in these terms:
“(1)	The following applies, in the case of a company registered in England and Wales, where debentures of a company are secured by a charge which, as created, was a floating charge.
 (2)	If possession is taken, by or on behalf of the holders of any of the debentures, of any property comprised in or subject to the charge, and the company is not at the time in course of being wound up, the company’s preferential debts shall be paid out of assets coming to the hands of the person taking possession in priority to any claims for principal or interest in respect of the debentures.
 (3) 	“Preferential debts” means the categories of debts listed in Schedule 6 to the Insolvency Act; and for the purposes of that Schedule “the relevant date” is the date of possession being taken as above mentioned.
 (4)  	Payments made under this section shall be recouped, as far as may be, out of the assets of the company available for payment of the general creditors.”   
9.	Section 40 of the 1986 Act applies where a receiver is appointed – whether or not the receiver takes possession of the property. It is otherwise in substantially the same terms as section 196 of the 1985 Act:
“(1)	The following applies, in the case of a company, where a receiver is appointed on behalf of the holders of any of the debentures of the company secured by a charge which, as created, was a floating charge.
 (2)	If the company is not at the time in course of being wound up, its preferential debts (within the meaning given to that expression by section 386 in Part XII) shall be paid out of assets coming to the hands of the receiver in priority to any claims for principal or interest in respect of the debentures.
 (3) 	Payments made under this section shall be recouped, as far as may be, out of the assets of the company available for payment of the general creditors.”   
10.	Section 386 of the 1986 Act defines “preferential debts” as the debts listed in schedule 6. It follows that the expression has the same meaning in both section 196 of the 1985 Act and section 40 of the 1986 Act. It is not, I think, necessary to set out the schedule 6 list in any detail. In short, preferential debts are debts owed to the Revenue for income tax deducted at source, value added tax, certain other taxes and excise duties, social security and pension scheme contributions and employees’ remuneration. The “relevant date” is the date which determines the existence and amount of a preferential debt – see section 387 of the 1986 Act. 
11.	The effect of those provisions is that, in a case where a receiver is appointed under a debenture – or possession of the property subject to the charge is taken – at a time when the company is not in the course of winding up, the preferential debts in existence at the relevant date – that is to say, at the date of the appointment of the receiver or at the date when possession is taken (as the case may be) – are payable out of the property in priority to the claims of the secured creditor. But the secured creditor has the right (for what it may be worth in any particular case) to recoup such payments out of the uncharged assets of the company.
12.	Where the company is in the course of winding up, section 175 of the 1986 Act applies. The section is in these terms:
“(1)	In a winding up the company’s preferential debts (within the meaning given by section 386 in Part XII) shall be paid in priority to all other debts.
 (2)	Preferential debts –
(a)	rank equally among themselves after the expenses of the winding up and shall be paid in full, unless the assets are insufficient to meet them, in which case they abate in equal proportions; and 
(b)	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 secured by, or holders of, any floating charge created by the company, and shall be paid accordingly out of any property comprised in or subject to that charge.”     [emphasis added]
In that context, as in section 40 of the same Act and section 196 of the 1985 Act, “floating charge” means a charge which, as created, was a floating charge – see section 251 of the 1986 Act. 
13.	The importance of the words which I have emphasised – “after the expenses of the winding up” – is, first, that they reflect the provisions in section 115 of the 1986 Act and rule 4.218(1) of the 1986 Rules which require that the expenses properly incurred in the winding up shall be paid in priority to all other claims; and, second, that they provide a foundation for the argument that, so far as the assets available for the payment of general creditors are insufficient to meet those expenses, the expenses of the winding up (as well as the preferential debts) are to be paid out of any property subject to a floating charge, in priority to the claims of the secured creditors. It is said, with obvious force, that if (i) the expenses of the winding up are to be paid in priority to the preferential debts and (ii) the preferential debts are to have priority over the claims of the secured creditors then it must follow that the expenses of the winding up are to be paid in priority to the claims of the secured creditors. Further, if (in so far as the assets of the company available for payment of general creditors are insufficient to meet them) expenses of the winding up are to be paid in priority to the claims of the secured creditors, then it must also follow that those expenses (like the preferential debts) are to be paid “accordingly” out of any property subject to the floating charge. So, it is said, “the company’s assets”, for the purposes of section 115 of the 1986 Act, must be taken to include not only assets available for payment of general creditors but also assets which are available for payment of preferential creditors – that is to say assets comprised in or subject to a charge which, as created, was a floating charge. And, if that is the correct view, then it is immaterial whether the charge has crystallised before the commencement of the winding up; the only relevant question is whether the charge was a floating charge “as created”.
Recent authority
14.	The point is not free from authority. In In re Barleycorn Enterprises Ltd [1970] Ch 465 the Court of Appeal held that:
“Since the coming into force of the Preferential Payments in Bankruptcy Amendment Act 1897, the word “assets” where used without qualification in the Companies Acts, and now in particular in sections 267, 309 and 319 of the Companies Act 1948, includes not only the free assets but all the assets subject to a floating charge.”
The citation is from the headnote, at page 466D-E, but there is no doubt that that the sentence is an accurate synthesis of the judgments of all three members of the Court – see the passages at page 474E-F (in the judgment of Lord Denning, Master of the Rolls), at pages 475F-476D (Lord Justice Sachs) and at pages 476F-477A (Lord Justice Phillimore). 
15.	Section 267 of the Companies Act 1948 has been re-enacted (in terms which are not materially different) as section 156 of the Insolvency Act 1986; section 309 of the 1948 Act has become section 115 in the 1986 Act; and section 319(5) of the 1948 Act has become section 175(2) of the 1986 Act. In In re M C Bacon Ltd [1991] Ch 127, at page 135B-D, Mr Justice Millett, when addressing the question “Were the floating charge assets “the company’s assets” for the purposes of section 115 of the Act of 1986?”, treated the Barleycorn case is direct authority for the proposition that:   
“. . . the word ‘assets’ where it appears without qualification, and even the phrase ‘the company’s assets’ in the present statutory provisions must be given the meaning which they bore in those they replace, and accordingly include the floating charge assets.”
16.	In the Barleycorn case the floating charge crystallised on, or immediately after, the making of the winding up order. The Court did not have to consider the position (which has arisen in the present case) where there had been crystallisation on the appointment of receivers before the commencement of the winding up. But that position had arisen, albeit in relation to the claims of preferential creditors rather than the expenses of winding up, in In re Griffin Hotel Company, Limited  [1941] Ch 129. In that case a receiver was appointed under a debenture secured by a floating charge some three months before an order for winding up was made. During that period the company continued to trade from a second hotel (not subject to the receivership) and incurred debts, of which some were preferential debts. The issue was whether those preferential debts were payable out of the assets formerly subject to the floating charge. Mr Justice Bennett held that they were not. He accepted that the operation of what is now section 175(2)(b) of the Insolvency Act 1986 (then section 264(4)(b) of the Companies Act 1929) was not excluded by the provisions now contained in section 40 of the 1986 Act (then section 78 of the 1929 Act) – see [1941] Ch 129, at page 135; but he went on:
“But that conclusion on the construction and effect of the statutory provisions leaves open the question whether in the supposed events there is, when the winding up takes place, any floating charge or any property subject to that charge. In my judgment, sub-s. 4(b) of s.264 only operates if at the moment of the winding up there is still floating a charge created by the company and it only gives the preferential creditors a priority over the claims of debenture holders in any property which at that moment of time is comprised in or subject to that charge.” 
He held that, on the appointment of the receiver, the charge ceased to float on the property and assets in respect of which the receiver was appointed:
	“The charge on that day crystallized and became fixed on that property and those assets. It remained a floating charge on any other assets of the borrowers.”
It is important, however, to have in mind that the 1929 Act (and its successor, the 1948 Act) contained no definition of floating charge in the terms now found in section 251 of the Insolvency Act 1986. Mr Justice Bennett was not constrained by the definition of “floating charge” as “a charge which, as created, was a floating charge”. If he had been so constrained, he could not have supported the conclusion which he reached by the reasons which he gave.
17.	Some forty years on, in In re Christonette International Ltd [1982] 1 WLR 1245, Mr Justice Vinelott applied the reasoning in the Griffin Hotel case in order to avoid a result to which (as he may have thought) the need to follow the decision of this Court in the Barleycorn case would otherwise have led. A petition to wind up the company had been presented on 13 December 1978. On 19 January 1979 a receiver was appointed under debentures secured by floating charges. On 22 January 1979 the company was wound up by the court. The liquidator commenced proceedings against the receiver which were eventually dismissed with no order as to costs. The liquidator then sought an order that the receiver should pay, out of monies representing assets subject to the floating charges, the liquidator’s costs of the unsuccessful action. Mr Justice Vinelott held that, in the circumstances that the receiver had been appointed a few days before the making of the winding up order, the charges had not been floating at the date at which section 319(5) of the Companies Act 1948 (now section 175(2) of the Insolvency Act 1986) fell to be applied. As he put it, at page 1250G-H:
“To the extent that assets of a company are comprised in a floating charge which has not crystallised at the making of a winding up order those assets are to be treated as assets for the purposes of, amongst other provisions, section 319(5)(a) and (6), and of rule 195 [of the Companies (Winding up) Rules 1949 - now replaced by rule 4.218 of the 1986 Rules]; but if the floating charge has then crystallised the proceeds of realisation of the assets of the company, to the extent that those proceeds are required to meet preferential debts and the claims of the debenture holder, are no longer assets of the company in a subsequent winding up any more than if they had initially been subject to a fixed charge.”
18.	Ten years later the point came before me in In re Portbase Clothing Ltd [1993] Ch 388. In the meantime Parliament had enacted section 251 of the Insolvency Act 1986 which, as I have said, defined “floating charge” as “a charge which, as created, was a floating charge”. At page 408G-H, I said this:
“The effect of that change, as it seems to me, is that the reasoning upon which the decision of the Court of Appeal in In re Barleycorn Enterprises Ltd [1970] Ch 456 is based must now lead to the conclusion that the company’s assets, for the purposes of section 115 of the Act of 1986, do include property comprised in or subject to a charge which, as created, was a floating charge; and that In re Christonette International Ltd [1982] 1 WLR 1245 – which was decided before that change in the relevant statutory provisions – should not now be followed on that point.”
I gave an affirmative answer to the question which I had posed earlier on the same page (at 408C): 
“. . . whether, in the context of section 115, “the company’s assets” include assets which are subject to a charge which, as created, was a floating charge but which has crystallised prior to the commencement of the liquidation.”
That, of course, is the question which arises on the present appeal.
19.	I should, perhaps, add that, although I took the view that the reasoning which led Mr Justice Vinelott to the conclusion that a liquidator’s costs of unsuccessful litigation against a receiver appointed under a debenture secured by floating charge which had crystallised before the making of the winding up order were not payable out of the assets subject to that charge could no longer be followed in the face of section 251 of the 1986 Act, I have no quarrel with the result reached in the Christonette case. The result can be supported on the basis of the reasoning of Mr Justice Millett in In re M C Bacon Ltd [1991] Ch 127. That route was adopted by this Court in Mond v Hammond Suddards [2000] Ch 40 – see at page 52B-C. 
The judgment below
20.	The judge described the position taken on behalf of the joint liquidators as simple:
“Barleycorn is a decision of the Court of Appeal to the effect that the “assets” referred to in sections 115 and 175(2)(a) of the 1986 Act include the assets comprised in the floating charge, and that the true interpretation of those provisions is such as to require liquidation expenses to be paid out of the floating charge assets in priority to the claims of the chargee.”
	He recognised that the decision in the Barleycorn case was not, of itself, determinative; because, in that case, the floating charge had not crystallised before the liquidation. But he accepted that that factor – which had led Mr Justice Vinelott, in Christonette,  to distinguish Barleycorn – was no longer a relevant factor, having regard to the definition of “floating charge” introduced in the 1986 Act. On that point the judge held that he should follow my decision in the Portbase case.
21.	In reaching that conclusion the judge rejected two arguments which had been advanced on behalf of the debenture holders: (i) that, despite the change introduced by the definition in section 251 of the 1986 Act, “even the liquidation preferential creditors in a section 40 case ranked after the holder of the crystallised charge”; and (ii) that “the only purpose of the change introduced by the new definition was to close a so-called loophole identified by the Cork Committee [the Review Committee into Insolvency Law and Practice under the chairmanship of Sir Kenneth Cork]”. The “so-called loophole” was that “in the case of a pre-liquidation automatic crystallisation (i.e. not one triggering either of the regimes provided for by section 40 of the 1986 Act or section 196 of the 1985 Act), there was no machinery by which the charged assets could be applied in satisfaction of preferential creditors”.
22.	In dismissing the second of those propositions as not seriously arguable, the judge said this, at paragraph 39 of his written judgment: 
“Nowhere in the legislation is there to be found even the flimsiest of clues that the new definition was only intended to have this very narrow effect. If this had been Parliament’s intention it is obvious that it would have to spell it out specifically and that it would have done so. Instead, section 175(2) was drafted in terms of sufficient generality to suggest that, read together with the section 251 definition, Parliament’s intention ranged substantially wider than that. I find it impossible to interpret the combined effect of sections 251 and 175(2) as doing other than to bring into play for the purposes of the latter sub-section any charge which, as created, was a floating charge and – if it had crystallised prior to the liquidation – however it may have done so.”
23.	That conclusion led the judge to the further conclusion that “even in a section 40 or a section 196 case the liquidation preferential creditors can have recourse to the floating charge assets in priority to the chargee”; and so to reject the first of the two propositions which he had identified. But he went on to address the further argument that “even accepting this last point – and whatever might be the position where there has been an automatic pre-liquidation crystallization – there is still no question in a section 40 or a section 196 case of liquidation expenses being payable out of floating charge assets in priority to the chargee”. He said this, at paragraph 40 of his judgment: 
“Having regard to (i) the interpretation of sections 115 and 175 provided by the binding decision of the Court of Appeal in Barleycorn and (ii) the widening of the effect of that decision which I consider flows inevitably from the new definition of a floating charge in section 251, I cannot identify any logical basis on which Mr Potts’s somewhat selective approach to the application of section 175(2) can be founded. Ultimately, it appeared to me that it was founded on an essentially visceral assertion that it cannot have been Parliament’s intention, when enacting the new definition of a floating charge, to produce the result against which Mr Potts was arguing. Its intention was, he said, only to effect inroads into the rights of the chargee of the previously crystallized charge so as to benefit the liquidation preferential creditors; it did not go further than that. Thus Parliament’s overall intention was and is to effect inroads into the rights of the holder of a floating charge which vary according to whether its charge crystallized (a) at the moment after liquidation or (b) at the moment before. In case (a) the chargee ranks after liquidation expenses and preferential creditors. In case (b) the chargee ranks only after preferential creditors – unless the charge had crystallized automatically, when Mr Potts was disposed to accept that the case (a) regime applies or may apply. If that really is the legislative scheme, then I think that the ordinary reader would need unusually perceptive vision to identify it. My own is quite inadequate for the task. The statutory language, drafted with a presumed knowledge of the decision in Barleycorn, contains no indication at all that Parliament intended to create such a scheme.”  
Should this Court follow the decision in the Barleycorn case?
24.	Faced with the hurdle presented by the decision of this Court in Barleycorn, Mr Potts QC, on behalf of the appellant, Sofatec, sought to persuade us that that case had been wrongly decided and that we should not follow it. It was said that the decision in that case was inconsistent with – indeed, “directly in conflict with” – the earlier decision of this Court in In re Regent’s Canal Ironworks Company, Ex parte Grissell (1875) 3 Ch D 411. In support of the proposition that this Court was entitled and bound to decide which of two conflicting decisions of its own it will follow, we were referred to the well-known passage in the judgment of Lord Greene, Master of the Rolls, in Young v Bristol Aeroplane Company Ltd [1944] KB 718, at pages 729-730. In Davis v Johnson [1979] AC 264, at pages 323-324, Lord Diplock described the law, as set out in that passage, as “clear and unassailable”. But the freedom to choose which of two earlier decisions of this Court we should now follow is predicated by the requirement that the decisions are, indeed, inconsistent and in conflict. And, in circumstances where (as in the present case) this Court has explained in the later case why it did not think itself bound by the earlier decision, that requirement will not be met unless it can be shown that that explanation is plainly incapable of being upheld.
25.	The facts in the Regent’s Canal Ironworks case may be stated shortly. The company had issued debentures in March 1865. The debentures were secured by a charge over “all the funds, property and effects of what nature and kind soever which the company held or possessed, or should hold or be possessed of”. On 17 December 1866 the company resolved to wind up voluntarily; and shortly thereafter, on 21 December 1866, the voluntary winding up was ordered to be continued under the supervision of the court. In those circumstances the applicable provisions for the payment of the costs and expenses of the liquidation were those contained in section 144 of the Companies Act 1862:
“All Costs, Charges and Expenses properly incurred in the voluntary Winding-up of a Company, including the Remuneration of the Liquidators, shall be payable out of the Assets of the Company in priority to all other Claims.”
The provisions are indistinguishable from those now found in section 115 of the Insolvency Act 1986.
26.	The liquidators expended considerable time, and incurred expense, in protecting and preserving the assets. They sought to have their costs and remuneration out of the assets in priority to the claims of the debenture holders. The Vice-Chancellor, Sir Richard Malins, directed that the costs of realisation should be paid out of the proceeds realised in priority to all other claims; but refused to order payment of other costs and remuneration in priority to the claims of the debenture holders. The Court of Appeal upheld the Vice-Chancellor on that point. The basis for their decision appears from a short passage in the judgment of Lord Justice James, at 3 Ch D 411, 427:
“The debenture holders are the creditors to whom the property belonged; they were creditors of the company independently, but besides being creditors of the company they had a specific right to the property for the purpose of paying their debts.”  
Mr Potts submits – and the submissions are plainly correct – (i) that the charge by which the debentures were secured in the Regent’s Canal Ironworks case was in a form which would now be recognised as a floating charge, and (ii) that this Court did not treat the assets subject to that charge as “assets of the company” for the purposes of section 144 of the 1862 Act (now section 115 of the 1986 Act). So, it is said, the decision of this Court in the Barleycorn case cannot stand with the earlier decision in the Regent’s Canal Ironworks case.
27.	It is important, however, to have in mind, first, that the 1862 Act contained no provision for the payment of preferential creditors in priority to other creditors comparable to that now found in section 175(1) of the 1986 Act; and, second (and inevitably, given the absence of any such provision as that just described), that the 1862 Act contained no provision for the payment of preferential creditors out of assets subject to a floating charge in priority to the claims of creditors secured by that charge comparable to that now found in section 175(2)(b) of the 1986 Act.     
28.	Provision for the payment of a class of preferential creditors in priority to other creditors was extended to corporate insolvencies in 1883 – see, section 4 of the Companies Act 1883.  For comparable provisions in relation to individual insolvencies see section 40 of the Bankruptcy Act 1883. Section 4 of the Companies Act 1883 was in these terms:
“In the distribution of the assets of any company being wound up under the Companies Acts, 1862 and 1867, there shall be paid in priority to all other debts, -
(a)	All wages or salary of any clerk or servant in respect of service rendered to the company during four months before the commencement of the winding up not exceeding fifty pounds; and
(b)	All wages of any labourer or workman in respect of services rendered to the company during two months before the commencement of the winding up.”
Sections 5 and 6 of the Companies Act 1883 were in these terms:
“5.	The foregoing debts [meaning the debts which, under section 4, were to be preferential debts] shall rank equally among themselves, and shall be paid in full, unless the assets of the company are insufficient to meet them, in which case they shall abate in equal proportions among themselves.
6.	Subject to the retention of such sums as may be necessary for costs of administration or otherwise, the liquidator or liquidators or official liquidator shall discharge the foregoing debts forthwith, so far as the assets of the company are and will be sufficient to meet them, as and when such assets come into the hands of such liquidator or liquidators or official liquidator.”
Section 6 of the 1883 Act, when read with section 144 of the 1862 Act (with which 1883 Act was to be construed as one – see section 2 of the later Act), clearly required the liquidation expenses to be paid (or provided for) in priority to the preferential debts. Section 4 of the 1883 Act is now found (in the modern form) in section 175(1) of the 1986 Act; and section 5 of the 1883 Act is now found in section 175(2)(a) of the 1986 Act. Section 6 of the 1883 Act has been subsumed in section 175(2)(a) of the 1986 Act – by the addition to what was formerly section 5 of the 1883 Act of the words “after the expenses of the winding up” immediately after the words “rank equally among themselves”.  
29.	The Companies Act 1883, and sections 40(1) and (2) of the Bankruptcy Act 1883, were repealed and replaced by the Preferential Payments in Bankruptcy Act 1888. Section 1 of the 1888 Act enlarged or extended the class of preferential debts; but did not alter the scheme established, in relation to corporate insolvency, by the Companies Act 1883. But there was no provision in the Companies Act 1883  - or in the 1888 Act - which gave preferential creditors a right to be paid out of assets subject to a floating charge in priority to the creditors secured by that charge. 
30.	The floating charge had gained recognition during the previous decade – see In re Panama, New Zealand and Australian Royal Mail Co (1870) LR 5 Ch App 318 and the other cases mentioned by Lord Millett in Agnew v Commissioner for Inland Revenue, neutral citation [2001] UKPC 28, reported at [2001] 3 WLR 454, at paragraph 5 (page 457). It offered the attraction, described by Lord Millett at paragraph 8 of his speech in the Agnew case, “of affording the creditor, by a single instrument, an effective and comprehensive security upon the entire undertaking of the debtor company and its assets from time to time, while at the same time leaving the company free to deal with its assets and pay its trade creditors in the ordinary course of business without reference to the holder of the charge.” But (ibid, at paragraph 9): “One of its consequences was that it enabled the holder of the charge to withdraw all or most of the assets of an insolvent company from the scope of a liquidation and leave the liquidator with little more than an empty shell and unable to pay preferential creditors.” That had emerged by early 1896. A striking illustration of the effect of a floating charge before 1897 can be seen in Richards v Overseers of Kidderminster [1896] 2 Ch 212. After referring to the 1888 Act, Mr Justice North said this, at page 217:
“That enactment seems to deal simply with preferential payments to be made by the person who holds the funds to be distributed – the official trustee, or whoever it may be – out of the assets in his hands; and it is a direction as to the mode in which payments are to be made – to the effect that out of the sums distributable by him what are to be treated in this section as the preferential debts are to be paid first. The preferred creditors are to be paid out of the assets before any other creditors; but, in my opinion, that does not in any way affect persons who are not claiming as creditors in the winding-up at all, but who hold security upon property which the company has in some way charged in their favour.” 

31.	Parliament acted promptly to amend the law. It enacted the Preferential Payments in Bankruptcy Amendment Act, 1897. Section 2 was in these terms:
“In the winding up of any company under the Companies Act 1862, and the Acts amending the same, the debts mentioned in section one of the Preferential Payments in Bankruptcy Act, 1888, shall, so far as the assets of the company available for payment of general creditors may be insufficient to meet them, have priority over the claims of holders of debenture or debenture stock under any floating charge created by such company, and shall be paid accordingly out of any property comprised in or subject to such charge.”
That provision is now found in section 175(2)(b) of the 1986 Act. 
32.	The scheme established by the 1862 Act and the amending Acts of 1883 and 1888 was clear enough – at least in a case where the company was in voluntary liquidation. Expenses properly incurred in the winding up (including the remuneration of the liquidators) were payable out of the assets of the company in priority to all other claims – see section 144 of the 1862 Act. Preferential debts were payable in priority to all other debts – see section 1(1) of the 1888 Act. But preferential debts were to be paid after retention out of the assets of the company of “such sums as might be necessary for the costs of administration or otherwise” – see section 1(3) of the 1888 Act. So the order of payment was (i) expenses of the winding up, (ii) preferential debts and (iii) other unsecured debts. And the assets out of which those expenses and debts were payable were the assets of the company after the claims of creditors secured on those assets had been discharged – see the Regent’s Canal Ironworks case. The change introduced by section 2 of the 1897 Act had to take its place within that scheme. 

33.	Following the enactment of the 1897 Act preferential debts were payable – “so far as the assets of the company available for the payment of general creditors may be insufficient to meet them” -  in priority to the claims of debenture holders secured by a floating charge and out of any property subject to such a charge. That invited the question: what was to happen if the assets of the company available for the payment of the general creditors were insufficient to meet the expenses of the winding up? Was it the intention of Parliament, when enacting section 2 of the 1897 Act, that – in order to give effect to the requirement, in section 144 of the 1862 Act, that the expenses of the winding up be paid in priority to all other claims – the expenses of the winding up should be payable out of the same property as it had made available for the payment of the preferential debts; that is to say, that, if the free assets were insufficient, the expenses of the winding up should also be payable out of property subject to a floating charge? Or was Parliament content that, in such a case, the preferential debts alone should be paid out of property subject to a floating charge in priority to the debts secured by that charge, notwithstanding that there were no other assets sufficient to meet the expenses of the winding up? And, if so, what effect was then given to the requirement in section 144 of the 1862 Act that the expenses of the winding up be paid in priority to all other claims?

34.	Those were questions which were answered by this Court in the Barleycorn case some seventy years later. But, for my part, I think there was a clear indication, in the 1862 Act read with the amending Acts of 1883, 1888 and 1897, that Parliament intended that the expenses of the winding up should be payable out of the same property as it had made available for the payment of the preferential debts. Section 6 of the 1883 Act, re-enacted as section 1(3) of the 1888 Act, had required that preferential debts be discharged “forthwith so far as . . . the assets of the company . . . are sufficient to meet them”. But that requirement had been made subject to “the retention of such sums as may be necessary for the costs of administration or otherwise”. It seems to me reasonably clear that Parliament had recognised that effect would not be given to the legislative purpose – that local rates, the wages of clerks and servants and the wages of labourers should be paid in priority to all other debts – unless there was some incentive to induce professional men to act as liquidators – see the observations of Lord Justice James (at page 426) and Lord Justice Baggallay (at page 428) in the Regent’s Canal Ironworks case. So, when Parliament enacted, in 1897, that assets of the company which were subject to a floating charge should be available to meet the debts in respect of local rates, salaries and wages to which preference had been given, it is (at the least) likely that it intended that those assets, also, should be available to meet the costs of giving effect to the continuing legislative purpose.     

35.	Further support for that view is found in the enactment consolidating the 1862 Act and its amending Acts. Section 209 of the Companies (Consolidation) Act 1908 brought together the provisions formerly contained in section 1 of the 1888 Act and section 2 of the 1897 Act. It was in these terms, so far as material:
“(1)	In a winding up there shall be paid in priority to all other debts – 
(a)	All parochial or other local rates . . . 
(b)	All wages and salary of any clerk or servant . . . not exceeding fifty pounds 
(c)	All wages of any workman or labourer not exceeding twenty five pounds . . . 
(d)	. . . all amounts (not exceeding in any individual case one hundred pounds) due in respect of compensation under the Workmen’s Compensation Act 1906 . . . 

(2)	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; and
(b)	. . . 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 comprised in or subject to that charge.

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

36.	It is, I think, not open to any real doubt that the sums “necessary for the costs and expenses of the winding up” – which sub-section (3) directed should be retained before discharge of “the foregoing debts” described in sub-section (1) – were to be retained out of the assets which would otherwise have been available for payment of those debts; nor that the effect of sub-section (2) was to include among the assets available for the payment of those debts not only “assets of the company available for payment of general creditors” but also “property comprised in or subject to [any floating charge created by the company]”. The latter point can be tested by asking what was to happen if there were no assets of the company available for payment of general creditors and the property comprised in or subject to any floating charge created by the company was itself insufficient to meet the preferential debts in full. In such a case there can be no reason to think that Parliament did not intend that the preferential debts should abate in equal proportions; nor that it did not give effect to that intention by enacting, in sub-section (2)(a), that there should be abatement if “the assets are insufficient to meet them”. In that context “the assets” referred to in sub-section (2)(a) cannot have meant only “the assets of the company available for payment of general creditors”; the phrase must have been intended to include the other property – that is to say, the property comprised in or subject to any floating charge created by the company – which, by the provisions of sub-section (2)(b) had been made available for the payment of preferential debts. Nor is there any reason, as it seems to me, to think that Parliament intended that the “assets of the company” should not have the same inclusive meaning in the context of section 196 of the 1908 Act (now section 115 of the 1986 Act) as it did in section 209 of that Act.

37.	Section 209 of the 1908 Act was repealed and re-enacted as section 264 of the Companies Act 1929; and that section, in turn, was repealed and re-enacted as section 319 of the Companies Act 1948. Save that the categories of preferential debts were increased and that sub-sections (2) and (3) of section 209 in the 1908 Act appeared as sub-sections (5) and (6) of section 319 in the 1948 Act, the provisions survived in substantially the same form. It was the provisions as they appeared in the 1948 Act that came before this Court in the Barleycorn case 

38.	At the risk of repetition it is, I think, instructive to set out the reasoning which led this Court to reach the conclusion which it did in the Barleycorn case. I take, first, the analysis in the judgment of Lord Denning, Master of the Rolls, at [1970] Ch 465, 473A-474F:
“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 the Companies Act 1862, but I will read them as they stand, re-enacted in the Act of 1948 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 of 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 those 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 the 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 Co (1867) LR 4 Eq 601; In re Oriental Hotels Co (1871) LR 12 Eq 126, 133; and In re Regent’s Canal Ironworks Co (1875) 3 ChD 411, 427, per James LJ.
In 1888 and 1897 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, “preferential payments.” 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 1897. The sections of the Acts of 1888 and 1897 were re-enacted in the Companies (Consolidation) Acts of 1908, 1929 and 1948. I will read them as they now appear in the Act of 1948 and emphasise 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; and (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 comprised in or subject to that charge; (6) Subject to the retention of such sums as may be necessary for the costs and expenses of the winding up, the foregoing debts shall be discharged forthwith so far as the assets are sufficient to meet them . . .”
These 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:
	(1) 	“such sums as may be necessary for the costs and expenses of the winding up”: see section 319(6).
(2)	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 it 1862. This is unusual, but necessary in order to make the sense of the legislation as a whole. Sections 297 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.”    

39.	The other two members of the Court agreed with the Master of the Rolls. Lord Justice Sachs said this, at pages 475H-476B:
“The result of superimposing the Act of 1897 on the Act of 1888 was to make a serious inroad into the rights of debenture holders as previously held to exist by a series of authorities based on a line of reasoning favouring those holders. That line is perhaps best illustrated in the judgments of Jessel MR and James LJ in In re David Lloyd & Co (1877) 6 ChD 339, 343, 345 which make plain that in those days judgments on points such as those in issue before this court today were given on the basis that when a winding-up order took effect the assets of the company changed to being assets of the debenture holders and could not be touched.
When that line of reasoning continued to be followed in judicial decisions after the Act of 1888 and looked like frustrating to some degree the effect of that Act, the legislature stepped in and passed the Act of 1897 . . . .”
Lord Justice Phillimore observed, at page 476F-G, that “it was really only possible to make sense of sections 94, 267, 309 and 319”  of the 1948 Act on the basis that “where the word ‘assets’ occurs without qualification, or even the phrase ‘assets of the company’, that must mean all the assets and not merely the free assets, that is to say, assets free of any floating charge.” He went on, at page 476G-A, to say this:
“The point is emphasised when one looks at section 319(5)(b), which is dealing with the position as between the preferred creditors and the debenture holders where there are no free assets to meet the claims of the preferential claimants; and it is provided that in the case of a company registered in England, so far as the “assets of the company available for payment of general creditors” – now, there is a phrase which clearly means free assets – “are insufficient to meet the foregoing debts, they have priority over claims of holders of debentures” and so on. So there it is manifest that where Parliament means to designate those assets which are free of the floating charge, it uses special words to distinguish the position from that where the simple word “assets” is used, as in the other sections to which I have referred, and in section 319 itself.” 

40.	I have set out those passages at some length because they show, beyond dispute, that this Court, in the Barleycorn case, was well aware that it was departing from a line of authority which preceded the 1897 Act – and, in particular, that it was giving to the word “assets” in the context of what is now section 115 of the 1986 Act a meaning which was wider than that which it could have been thought to bear when this Court decided the Regent’s Canal Ironworks case. But those passages show, also, that the reason why this Court reached the conclusion that it did in Barleycorn was that it was satisfied that the 1897 Act – in conjunction with the 1888 Act - had effected a change in the law. It follows that, unless persuaded that that reason is plainly incapable of being upheld, this is not a case in which the Court, now, can choose to follow the decision in Regent’s Canal Ironworks  rather than the decision in the Barleycorn case. What might have appeared an inconsistency between the two decisions has been the subject of express consideration and decision in the later case; and the Court must now recognise that and follow its later decision.

41.	Mr Potts QC, on behalf of the debenture holder in the present case, has subjected the decision in the Barleycorn case to sustained and trenchant criticism, both in his skeleton argument and in his oral submissions. A flavour of his attack can be found in the first sentence of paragraph 83 of the lengthy “substituted skeleton argument”:
“The decision in Re Barleycorn rested upon an entirely flawed (and perverse) analysis of Section 319 of the 1948 Act stemming from an entirely flawed analysis of the 1888 and 1897 Acts.”
I fear that my own analysis of the effect of the 1888 and 1897 Acts will be similarly condemned; but I hope that I will be forgiven if I do not add to the length of this judgment by addressing each of the points made in this context individually. It is unnecessary for me to do so in the circumstances that, even if I thought there were cumulative force in the points (which I do not), I would be constrained to follow the Barleycorn decision unless satisfied that the reason why the Court, in that case, took the view that the 1897 Act had effected a change in the law was plainly incapable of being upheld. For the reasons which I have sought to give I am far from being satisfied of that. Indeed, so far as my own view of the effect of the 1897 Act is material, I have no doubt that it was intended to, and did, effect a change in the law relating to liquidation expenses. Thereafter what may be described as floating charge assets were available not only to meet the preferential debts but also the costs and expenses of winding up.  

42.	It follows that I would answer the question posed at the head of this section of the judgment in the affirmative. This Court should follow the decision in the Barleycorn case.
The position after the changes enacted in the Insolvency Act 1986
43.	Section 319 of the Companies Act 1948 was repealed and re-enacted as section 614 of the Companies Act 1985. Section 614 of the 1985 Act was repealed by section 438 of, and schedule 12 to, the Insolvency Act 1986. The provisions now found in section 175 of the 1986 Act were enacted as section 89 of the Insolvency Act 1985. In the process of consolidation and re-enactment the direction formerly contained in section 319(6) of the 1948 Act – and which can be traced back to section 6 of the 1883 Act – has been subsumed in what is now section 175(2)(a) of the 1986 Act.
 
44.	The significant change lies in the definition of “floating charge”, first introduced in section 108(3) of the Insolvency Act 1985 and now in force as part of section 251 of the 1986 Act. As I have said, “floating charge” now means “a charge which, as created, was a floating charge”.  In In re Brightlife Ltd [1987] Ch 200, at page 212, Mr Justice Hoffmann explained that the effect of the new definition was to reverse the decisions in In re Griffin Hotel Co Ltd [1941] Ch 129 and in In re Christonette International Ltd [1982] 1 WLR 1245. That was the view that I took (although without the benefit of the citation of Brightlife in that context) in In re Portbase Clothing Limited [1993] Ch 388.  Mr Potts challenges that view. He submits that the reason why the definition was introduced was that there was a lacuna in the statutory scheme; in that (prior to 1985) the scheme made no provision for a case where a floating charge had crystallised “automatically” prior to a liquidation – that is to say, where the charge had crystallised without the appointment of a receiver or the taking of possession of the charged property. In order to explain the point it is convenient to go back to the 1897 Act.

45.	Section 2 of the 1897 Act, which I have set out in a preceding section of this judgment, applied where a company was in the course of being wound up. It enabled preferential creditors to have recourse to what may be described as floating charge assets. Section 3 of the 1897 Act may be seen as a complementary provision; in that it applied where the company was not in the course of being wound up: 
“In case a receiver is appointed on behalf of the holders of any debentures or debenture stock of a company secured by a floating charge, or in case possession is taken by or on behalf of such debenture holders of any property comprised in or subject to such charge, then and in either of such cases, if the company is not at the time in the course of being wound up, the debts mentioned in section one of the said Preferential Payments in Bankruptcy Act shall be paid forthwith out of any assets coming to the hands of the receiver, or other person taking possession as aforesaid, in priority to any claim for principal or interest in respect of such debentures or debenture stock. And the periods of time mentioned in the said Act shall be reckoned from the date of the appointment of the receiver or possession being taken as aforesaid, as the case may be. But any payments made under this section shall be recouped as far as may be out of the assets of the company available for payment of general creditors.” 

46.	Those provisions have been re-enacted, in substantially the same form, in successive Companies Acts. They can be traced through section 107 of the 1908 Act, section 78 of the 1929 Act and section 94 of the 1948 Act. They were found in section 196 of the Companies Act 1985 as originally enacted. Section 196 takes its present form as the result of an amendment made by section 439(1) of, and Part I of schedule 13 to, the Insolvency Act 1986. Two changes may be noted: (i) as amended, the section applies only where possession is taken by or on behalf of debenture holders – it does not apply where a receiver is appointed (at least, not where the receiver does not immediately take possession); and (ii) the section now incorporates the definition (introduced in section 108(3) of the Insolvency Act 1985) of floating charge as a charge which, as created, was a floating charge. What may be described as the other half of the section as originally enacted – that is to say, its application to a case where a receiver is appointed without possession being taken – is now found in section 40 of the Insolvency Act 1986. In that context the new definition of floating charge is applicable by virtue of section 251 of the same Act.

47.	The effect of Mr Justice Bennett’s decision in the Griffin Hotel case was that the provisions which had originated in sections 2 and 3 of the 1897 Act (and which were, by then, contained in sections 78 and 264(2)(b) of the 1929 Act) were, in practice, likely to be mutually exclusive. They were, in terms, mutually exclusive in a case where the liquidation occurred before the appointment of a receiver or the taking of possession on behalf of the debenture holders – because section 3 did not apply if the company was in the course of winding up. They were not, in terms, mutually exclusive where the appointment of a receiver preceded the liquidation – for the reasons explained in the Griffin Hotel case at page 135. But, in such a case, the charge was not still floating at the date at which section 3 fell to be applied; and so, at that date, there was no property comprised in or subject to a floating charge out of which the preferential debts could be paid and the section could have no application in practice. The exceptional case, where both sections 2 and 3 could apply in respect of the same charge, was that in which a receiver was appointed – or possession was taken – of part only of property comprised in the floating charge.

48.	A further effect of the decision in the Griffin Hotel case was that the provisions which had originated in sections 2 and 3 were not fully complementary – in the sense that there were circumstances in which, notwithstanding that assets had been comprised in or subject to a charge which, as created, was a floating charge, neither section would apply. The point was identified by Mr Justice Hoffmann in Brightlife, at page 211E-H:
“Both section 614(2)(b) and section 196 [of the Companies Act 1985] originate in the Preferential Payments in Bankruptcy Amendment Act 1897. One imagines that they were intended to ensure that in all cases preferential debts had priority over the holder of a charge originally created as a floating charge. It would be difficult to think of any reason for making distinctions according to the moment at which the charge crystallised or the event which brought this about. But In re Griffin Hotel Co Ltd [1941] Ch 129 revealed a defect in the drafting. It meant, for example, that if the floating charge crystallised before the winding up, but otherwise than by the appointment of a receiver [or the taking of possession], the preferential debts would have no priority under either section. For example, if crystallisation occurred simply because the company ceased to carry on business before it was wound up, as in In re Woodroffes (Musical Instruments) Ltd, [1986] Ch 366, the preferential debts would have no priority. One could construct other examples of cases which would slip through the net.”

The phrase “or the taking of possession” does not appear in Mr Justice Hoffmann’s judgment. But he cannot have intended to draw a distinction between cases where the floating charge crystallised upon the appointment of a receiver and cases where the charge crystallised upon the taking of possession by or on behalf of the debenture holder without the prior appointment of a receiver. Both cases were within section 196 of the Companies Act 1985 as originally enacted (and as in force at the date of the decision in the Brightlife case). The relevant distinction is between cases where crystallisation occurs by reason of some event within section 196 of the 1985 Act (now read in conjunction with section 40 of the 1986 Act) and cases where crystallisation occurs for some other reason. The latter cases were described in argument as cases of “automatic crystallisation”; but they will include cases where crystallisation follows from the service of a notice – as in the Brightlife case itself.

49.	The point identified in Brightlife could equally have arisen in another context. Suppose a case where automatic crystallisation precedes the appointment of a receiver – for example, where crystallisation of the floating charge occurs on the company ceasing to trade, but where a receiver is not appointed until a few days later. In such a case, the reasoning in the Griffin Hotel case would compel the conclusion that the charge had ceased to float by the date at which section 196 of the 1985 Act (as originally enacted) fell to be applied; so that the property comprised in or subject to the charge was not available to pay the preferential debts. And that would remain the position notwithstanding a subsequent liquidation. 

50.	It is not in dispute that, whatever else may have been the effect of the introduction, by section 108(3) of the Insolvency Act 1985, of a definition of “floating charge” which included a charge which, as created, was a floating charge, it did fill the lacuna identified in the Brightlife case – although not in time to affect the decision in that case. The position, now, is that where liquidation follows the automatic crystallisation of a floating charge the property comprised in or subject to that charge will fall within section 175(2)(b) of the 1986 Act. Further, in a case where a receiver is appointed, or possession is taken by or on behalf of the debenture holder, following automatic crystallisation, the property comprised in or subject to the charge will now fall within section 40 of the 1986 Act or section 196 of the 1985 Act (as the case may be). The question is whether the introduction of the new definition of floating charge has any wider effect; in particular, does it have the effect that property comprised in a floating charge which has already fallen within section 40 of the 1986 Act (or section 196 of the 1985 Act) will, in the event of a subsequent liquidation, also fall within section 175(2)(b) of the 1986 Act?

51.	Mr Potts, on behalf of the debenture holder, submits that that question must be answered in the negative. He submits that what he describes as “the section 40 regime” is both self-contained and exclusive. That regime provides for the claims of those who are preferential creditors at the date of the receivership (“the receivership preferential creditors”) to be satisfied out of the assets comprised in or subject to the charge. Once within that regime there is no place for the operation of provisions which would enable other unsecured creditors – and, in particular, those who become preferential creditors between the date of receivership and the date of liquidation - to have recourse to the same assets. He points out, correctly, that those who will be preferential creditors for the purposes of section 175 of the 1986 Act (“the liquidation preferential creditors”) will not necessarily be the same as those who will be preferential creditors for the purposes of section 40 of that Act, or for the purposes  of section 196 of the 1985 Act. That is because the “relevant date”, by reference to which the existence and amount of a preferential debt falls to be determined, will not, or will not necessarily, be the same – see section 387 of the 1986 Act and section 196(3) of the 1985 Act. 

52.	As I have said, sections 2 and 3 of the 1897 Act and their statutory successors were and are not, in terms, mutually exclusive in a case where the appointment of a receiver (or the taking of possession) precedes the liquidation. It would have been simple, as an exercise in legislative draftmanship, for Parliament to have provided that “assets coming to the hands of the receiver, or other person taking possession” in circumstances to which section 3 of the 1897 Act applied should be excluded from, or be deemed not to be, “property comprised in or subject to such charge” for the purposes of section 2 of that Act. It would have been simple for Parliament to have provided that section 2 of the 1897 Act should have effect subject to the claims of holders of debentures or debenture stock under any floating charge where, before the winding up, a receiver had been appointed or possession taken of property comprised in or subject to such charge. But Parliament took neither of those courses. Unless there is some compelling reason why section 2 of the 1897 Act could not apply, in conjunction with section 3 of the same Act, in cases where the appointment of a receiver (or the taking of possession) preceded the liquidation, Parliament must be taken to have intended that both sections should be given effect in accordance with their terms.

53.	One reason why, in practice, section 2 of the 1897 Act (by then section 264(2)(b) of the 1929 Act) could not apply in conjunction with section 3 of that Act (then section 78 of the 1929 Act) was revealed by the decision in the Griffin Hotel case. Once a receiver had been appointed under the floating charge, the charge had ceased to float in respect of the assets subject to the receivership; so it was no longer a floating charge at the date when the provisions of section 2 fell to be applied. But, as Mr Justice Hoffmann pointed out in Brightlife, that was not the consequence of anything in the provisions of section 3; the position was the same in an automatic crystallisation case to which the section 3 provisions had no application. Further, that reason has not survived the introduction of the definition of floating charge now found in section 251 of the 1986 Act. That reason can now no longer be advanced; and I can see no other reason – and, certainly no compelling reason - why the provisions formerly contained in both sections 2 and 3 of the 1897 Act should not be given effect in a case where receivership precedes liquidation.

54.	The provisions formerly in section 3 of the 1897 Act (now in section 40 of the 1986 Act and section 196 of the 1985 Act) require the receiver or other person who has taken possession of the charged property under the charge to pay the receivership preferential creditors out of the assets coming to his hands. To the extent that he has done so, the assets which he has applied for that purpose will no longer be “property comprised in or subject to that charge” for the purposes of the provisions formerly in section 2 of the 1897 Act (now in section 175(2)(b) of the 1986 Act). Further, to the extent that he has satisfied the claims of the debenture holders out of the assets coming to his hands, the assets which he has applied for that purpose also will no longer be property comprised in or subject to the charge for the purposes of the section 2 provisions. The monies representing the proceeds of realisation of assets formerly comprised in the charge but applied in payment of the receivership preferential debts or of the claims of the debenture holders will have become the property of those creditors or debenture holders (as the case may be). That is why, as it seems to me, the concession referred to by the judge in paragraph 10 of his judgment – that the liquidators do not claim that the receivers are accountable to them in respect of any payments made to Ofasec prior to the commencement of the liquidation – was rightly made. But assets which have not come to the hands of the receiver – or which he has not applied in payment of the receivership preferential creditors or in satisfaction of the claims of the debenture holders – at the date when voluntary winding up commences or a winding up order is made is “property comprised in or subject to that charge” for the purposes of the provisions formerly in section 2 of the 1897 Act. Accordingly, it is property which falls within section 175(2)(b) of the 1986 Act. So far as the assets of the company available for payment of general creditors are insufficient to meet the liquidation preferential debts, those debts “shall be paid” out of that property. 

55.	Mr Potts submitted that a construction of the statutory provisions which led to the result that I have just set out would give rise to insuperable difficulties in practice. I am not persuaded by that submission. It seems to me that in most cases there will be very little difficulty. In cases where the receivership precedes the liquidation by some months, so that the receiver has had time to realise the assets and pay the receivership preferential creditors, there will be no competition between those creditors and the liquidation preferential creditors. The receivership preferential creditors will have been paid, and the liquidation preferential creditors can look only to the assets remaining in the hands of the receiver. If the receiver has also satisfied the claims of the debenture holders out of the assets which have come into his hands, the liquidation preferential creditors can look only to any surplus that remains. In that case the liquidation preferential creditors will be in no better position than they were before the introduction of the new definition of floating charge. In cases where the liquidation follows shortly upon the receivership -  within days or weeks – there is likely to be very substantial overlap – although not complete identity – between the liquidation preferential creditors and the receivership preferential creditors. In paying the receivership preferential creditors the receiver will, in practice, discharge most (if not all) of the debts which are preferential in the liquidation. But to the extent that he does not, the liquidation preferential creditors will be entitled to be paid out of assets remaining in his hands in priority to the claims of the debenture holders. I do not discount the possibility that – in this complex field - problems will arise which need to be resolved by the courts; but I do not share Mr Potts’ prognosis of impending Armageddon.

56.	It follows, therefore, that I reject the submission that what Mr Potts has described as “the section 40 scheme” is self-contained and exclusive; so that, once floating charge assets have come within section 40 of the 1986 Act, there is no place for the operation of section 175(2)(b) of the Act in relation to the same assets. In my view, so long as the assets have not been applied by the receiver in the payment of the receivership preferential creditors, or in satisfaction of the claims of the debenture holders, they remain assets to which section 175(2)(b) of the 1986 Act can apply. And, if they are assets to which section 175(2)(b) can apply, then – for reasons which I have already set out – they are assets which are available for the payment of liquidation expenses.

Conclusion

57.	In my view the judge was correct to reach the conclusion which he did, for the reasons which he gave. I would dismiss this appeal.
Lord Justice Longmore:
58.	I agree.
Lord Justice Peter Gibson:
59.	This appeal has involved the fresh consideration by this court of the correctness of the judgment of Chadwick J. (as my Lord then was) in Re Portbase Clothing Ltd. [1993] Ch 388 in the light of the powerful criticisms made by Mr Potts QC of the decision of this court in Re Barleycorn Enterprises Ltd [1970] Ch 75 on which my Lord’s decision was based.  Having considered those decisions afresh, for the reasons cogently expounded in the judgment of my Lord I have reached the clear conclusion that Portbase was correctly decided and cannot relevantly be distinguished and that we too should apply the reasoning of Barleycorn  to the present case.  There is nothing which I would wish to add to the judgment of my Lord with which I am in entire agreement and I too would dismiss this appeal.

Order: Appeal dismissed; order made in terms of draft minute, save that permission to appeal to House of Lords refused.

(Order does not form part of the approved judgment)