Employees could stand to gain from a House of Lords ruling on insolvent companies
(Reported in The Birmingham Post, October 2005)
The Lords passed down a decision ending a long-running dispute in the “Spectrum Plus” case also known as the Brumark case – a decision that will have a major impact on banks.
The long-awaited judgement changes what has been common business practice over many years, ruling that the banks have never had a valid “fixed charge” over a company’s debts, a position which for the past 25 years has given them priority over many other creditors – including workers.
The banks have only ever had a “floating charge” over the debts which puts them down the pecking order when an insolvent company’s affairs are wound up.
Tony Mitchell, managing director of business rescue and insolvency specialist Cranfield Recovery, believes that employees will notice the benefits of the decision. “There are several major implications from this ruling which has been long-awaited by the insolvency industry.
“One of the major outcomes is that employees’ unpaid wages and holiday pay will rank and be paid before the bank debts.
“Previously the banks’ debts were at the top of the pile but they are now behind the employees’ in respect of recent insolvency cases and also the Government for claims such as PAYE, National Insurance and VAT in older cases.
“Banks always had the comfort when they lent money to companies, that if the business failed they could often recover a large proportion of their funds and certainly had first call on what could be salvaged.
“That is no longer the case and the uncertainty over the last few years has resulted in the banks moving their lending to their factoring subsidiaries where there is more security.”
Mr Mitchell is a Licensed Insolvency Practitioner, a fellow of the Association of Chartered Certified Accountants and a member of the Midland ’s Regional Committee of the Association of Business Recovery Professionals.
