Commentary on Sections Administration Section 130: Attachment of floating charges on administration (Scotland)
746.Administration is an insolvency proceeding where the affairs, business and property of the company are managed by an administrator. The primary aim of an administration is to ensure the company’s survival as a going concern, and failing that to achieve a better result for the company’s creditors than would be likely if the company was wound up. An administrator may be appointed by the company, directors or a qualifying floating charge holder by giving notice and filing prescribed documents at court. Alternatively, an administrator may be appointed by the court on application by the company, directors or creditors.
747.This section amends paragraph 115 of Schedule B1 to the Insolvency Act 1986 and like that paragraph forms part of the law of England and Wales and Scotland. The amendment inserts a trigger point for the crystallisation of a floating charge in Scotland which is activated when the court t gives permission to an administrator to make a distribution to a creditor of the company who is neither secured nor preferential.
748.A payment to a floating charge-holder can only be made once the charge has attached or crystallised over the assets covered by the charge. In England and Wales, this ‘crystallisation trigger’ can be contractual but in Scotland the trigger points are provided for in statute, and it is not competent for parties to provide by contract for a floating charge to attach.
749.Currently paragraph 115 provides that in Scotland a floating charge attaches to the property which is subject to the charge at the point when an administrator files a notice at Companies House stating that the company has insufficient property to make a payment to unsecured creditors, thereby crystallising the charge.
750.This works well in cases where only payments to the holder of a floating charge are expected. However, it does not work in cases where there are also likely to be payments to unsecured creditors.
751.This is because the order of priority in insolvency proceedings requires that holders of floating charges be paid in full before any funds are returned to non-preferential unsecured creditors. However, as stated above, for payments to floating charge-holders to be made in Scottish administrations, the charge must have first attached to the assets. This attachment cannot happen in cases where the administrator wishes to distribute to unsecured creditors, as the statutory trigger is the filing of a notice by the administrator stating that there is insufficient property held by the company for such payments to be made. In such cases, it is necessary for the administrator to put the company into liquidation (which is another statutory route to crystallise the charge), before distributing the funds to floating charge-holders and unsecured creditors. This section will avoid the need for such action.