The Definition of the Prescribed Part & case study

Definition

Section 176A of The Insolvency Act 1986 addresses the topic that they call "Share of assets for unsecured creditors". The term "Prescribed Part" is mentioned for the first time in insolvency legislation in Section 176A. The Section provides that:

- When a company has gone into liquidation or administration

- Then if there is a Qualifying Floating Charge Holder (QFCH) - [Normally a bank who have registered a charge at Companies House] who would otherwise have had first grab on all the assets then if the bank's charge was registered later than the 15 September 2003 then the bank cannot have it all!     Instead the liquidator has to calculate a "Prescribed Part" of the realised assets and make that Prescribed Part available to unsecured creditors instead of paying the money to the bank.

That then takes us to a Statutory Instrument known as The Insolvency Act 1986 (Prescribed Part) Order 2003 - The Order only has three Paragraphs. 

The "Prescribed Part" is defined in that Order as being:

- 50% of the first £10,000 of assets (that would otherwise have gone to the QFCH) and

- 20% of the balance up to a total of £600,000

The Prescribed Part is therefore a ring fenced fund that must be made available to unsecured creditors in a liquidation or administration.

The aim is for us to now to calculate a sum of money which instead of being paid to a bank under its floating charge is instead ring fenced to be paid to unsecured creditors - the Prescribed Part.

The overall sum available for distribution (after paying off secured creditors and the new smaller class of preferential creditors) must be divided into two parts being:

• That prescribed part which must be made available to unsecured creditors.

• The balancing sum which is then available for the floating charge holder.

The "prescribed part" is :

• 50% of the first £10,000 of the sum and
• 20% of the balance.

Case Study - Joe Bloggs (Plymouth) Limited - What is the value of the Prescribed Part

For example if that fictional company were in liquidation and the liquidator:

• held £200,000 (after paying preferential and secured creditors),

• the bank were owed £210,000 and

• the unsecured creditors were owed £370,000,

then the "prescribed part" is a part of the sum of £200,000 which must be made available to the unsecured creditors of Joe Bloggs (Plymouth) Limited

The prescribed part is worth £43,000 and is calculated as follows:

In other words the £200,000 would be shared:

For more FREE advice on The Prescribed Part Order please contact Purnells LIcenced Insolvency Practitioners.