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Review Your SQE 1 Practice Records

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TechBuild Ltd, a private limited company, has been ordered by the court to undergo compulsory winding up, and a liquidator has been appointed. Several years ago, the company provided a floating charge to its bank to secure its overdraft, which did not contain a negative pledge clause and was secured over all the company's assets from time to time. Later, TechBuild Ltd secured a mortgage against the freehold property from which it operated its manufacturing business. The property is now worth less than the amount outstanding on the mortgage. 

Which of the following statements best reflects the position?

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Creditors with fixed charges, such as a mortgage lender, are entitled to payment out of the charged assets before those assets are used for any other purposes, taking priority over any earlier floating charge unless the floating charge prohibited the creation of later charges ranking in priority and the holder of the fixed charge was on notice of the prohibition. In the event that a fixed chargeholder does not recover the full amount owed from the realisation of the charged assets, they may claim the balance as an unsecured debt in the liquidation. The costs of realising an asset subject to a fixed charge will be paid out of the amounts realised from the sale, distinct from the costs and expenses of the winding up which will be paid out of the assets of the company available for the payment of general creditors, including floating charge holders, pursuant to s.176ZA of the Insolvency Act 1986. 

Key Point: The priority of payment during a company’s liquidation process gives precedence to creditors with fixed charges over those with floating charges, subject to certain conditions.

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