View/Open - Research Commons - The University of Waikato

contribution order is made to the ―company‘s assets.‖ These company‘s assets are
sometimes subjected to a floating charge including future assets, and contributions
from directors under both sections are regarded as such. Floating charge holders hold
security on the assets of the company and have the right to appoint a receiver to
realize those assets if the terms of the charge are breached. Their debts are ‗secured‘
to the extent of the value of the property realized and if the property is worth less
than the debts, they will have to prove the balance as unsecured creditors.
Alternatively, the secured creditors can surrender their securities and prove the
whole balance as unsecured creditors.
It is important to determine whether a contribution forms part of the charge because
if it does, the secured creditors will be able to claim the amount to discharge the
debts owed. Consequently, the amounts available for distribution among unsecured
creditors will be less, thus reducing or eliminating their chances of getting paid.
Knox J in Re Produce Marketing Consortium (No 2) 207 indicated that the
contribution sums form part of the assets of the company and are subject to a claim
by the secured creditor. The judge then stated that the judgment must be exercised in
a manner which will benefit the unsecured creditors.
This decision, however, is not consistent with the aim of section 214 to protect the
unsecured creditors by preventing wrongful trading when the company‘s finances are
doubtful. 208 Further, the decision was seen as flimsy; based on ambiguous authorities
whole. The judge went further and mentioned that the court has no jurisdiction to declare
payments to be made to specific creditors or payment made to the company should be applied to a
class of creditors in preference over the others. It was also pointed out that the position of
creditors prior to the wrongful act and those after was similar because everyone suffered to the
extent that the assets of the company were depleted.
207 [1989] BCLC 520 at 554a.
208 See Andrew Keay Company Directors’ Responsibilities to Creditors (Routledge-Cavendish,
London, 2007) at 104-108 [―Company Directors Responsibility‖]; see also Andrew Hicks
―Advising on Wrongful Trading: Part 1‖ (1993) 14 Co Law 16 at 19 Rebecca Parry ―The
Destination of Proceeds of Insolvency Litigation‖ (2002) 23 Co Law 49.
357