Solicitors, how secure is your charge?
In Crumpler and another (Liquidators of Peak Hotels and Resorts Ltd) v Candey Ltd , the Court of Appeal considered the extent to which section 245 of the Insolvency Act 1986 may validate a floating charge to secure amounts due under a fixed fee agreement between a company and its solicitors.
Section 245 of the IA 1986 is designed to prevent a company, which subsequently enters into administration or liquidation, benefiting a creditor by giving a floating charge for existing liabilities for no new consideration. A floating charge over a company’s property will be invalid if:
- The floating charge was given in exchange only for prior consideration;
- It was made at a relevant time, that is, usually, within one year before the onset of insolvency; and
- At the time the floating charge was created, the company was unable to pay its debts or became unable to pay its debts as a consequence of the charge (unless the charge was created in favour of a (then) connected person, in which case, there is no insolvency requirement).
In the Crumpler case, the company granted a floating charge to its solicitors to secure fees for future litigation services. The company entered a fixed fee agreement on the day the charge was created, whereby if the company went into liquidation, the fixed fee became contractually due.
Work was undertaken by the solicitors but the company went into liquidation soon after and within the relevant time prescribed by section 245 of the IA 1986. The liquidators disputed that the floating charge validly secured the full fixed fee. The Court of Appeal held that section 245 had the effect that the floating charge secured only the fair value of the services that the solicitors performed after the date of the creation of the charge, valued in accordance with the terms of section 245(6), and not the full amount of the fixed fee.
The exercise of valuing the services was left to the High Court, but the Court of Appeal noted that a valuation of the services performed after the charge was created should exclude the concept of a fixed fee or any special business risks or pricing considerations, and no provision should be made for any further amounts representing compensation for the delay in payment.
The outcome of this case is not entirely contrary to solicitors entering into an arrangement similar to the one in the Crumpler case, as the Court of Appeal also made clear that the excess of the amount of the fixed fee, over the value of the services performed after the date of the charge’s creation, could still be claimed as an unsecured debt in the liquidation. However, the prospect of a substantial dividend in the liquidation on that unsecured amount is certainly always going to be questionable.
This paper is intended to be a brief note for clients and other interested parties. The information is believed to be correct at the date of publication but should not be relied upon as a substitute for professional advice. Please speak to a member of our team.