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In Other Words A Chargee's Rights Were Of A Proprietary Nature And Were ...

In other words a chargee's rights were of a proprietary nature and were outwith the winding-up process. This had the practical effect of rendering the preferential status virtually impotent a situation which, as we will recall, Lord Macnaghten called ‘a great scandal'. The law was thus modified by the Preferential Payments in Bankruptcy (Amendment) Act 1897 which provided that these preferential creditors would ‘have priority over the claims of holders of debentures or debenture stock under any floating charge created by such company'. The overall effect of this change to the law was that ‘thenceforth preferential debts were to be paid out of the property comprised in a floating charge so far as the non-charged assets were insufficient to discharge those debts. The proprietary rights of a debenture holder were, to that extent, bitten into'.
The 1897 and 1888 Acts were consolidated by the Companies (Consolidation) Act 1908 but there has been little-to no substantive change to these provisions since that date and they are largely reproduced in the current s.175 Insolvency Act 1986. The definition of preferential debts in that time didn't change much however there were significant changes to the whole of corporate rescue and insolvency law by the Enterprise Act 2002 which have changed the complexion of floating charges. The main changes are as follows:
Administrative Receivership for most purposes was abolished. This was largely done because the procedure was seen as giving too much power to floating charge holders who lacked the incentive to rescue companies. However, they did gain a power to appoint an administrator without a court's permission. However, the administrator cannot be completely partial as they must act in accordance with a set of objectives set out in the Act. This seen as marrying the best of the Receivership mechanism with accountability to all creditors. The floating charge holder will have a relationship with the bank in administration but the administrator will be statutorily required to take account of all creditors interests.
The operation of preferential debt has changed. Firstly, the Enterprise Act abolished the Crown's preferential status. Secondly, a proportion of floating charge recoveries must be set aside for general unsecured creditors. Whether this means they are giving with one-hand and taking with another remains to be seen.
These changes are some of the more radical since this system's inception in the Companies Act 1883. Fundamental to its aim was to enhance the position of unsecured creditors and inevitably this has, to use Lord Nicholl's phrase, ‘bitten into' the rights of secured creditors but more particularly floating charge holders.

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