Ireland’s Supreme Court Confirms Priority of Floating Chargeholders

Insolvency and Corporate Restructuring

22 July 2015 by Andrew Clarke, Solicitor
Ireland’s Supreme Court Confirms Priority of Floating Chargeholders

The Irish Supreme Court recently handed down a landmark judgment in the case of J. D. Brian Ltd [in liquidation] & Ors – v – Companies Acts 1 (the Belgard Motors Case). The case concerned whether a crystallisation notice had validly crystallised a floating charge, thus gaining priority over preferential creditors’ claims during liquidation. This overturns the previous High Court Decision.

Prior to the High Court decision the rules of distribution of assets in liquidation proceedings were considered long established by way of Statute and case law. Traditionally, secured creditors (i.e. fixed chargeholders), the costs and expenses of liquidation 2 and preferential creditors have been reimbursed before floating chargeholders and unsecured creditors 3. However, if a floating charge had crystallised the secured assets would be excluded from the assets to be liquidated.

In the High Court, Judge Finlay-Geoghegan focussed on section 285(7) of the Companies Act 1963 which states that where the ‘assets of the company available for payment of general creditors are insufficient to meet them, [they] have priority over the claims of holders of debentures under any floating charge created by the company’. Accordingly the Court found that the preferential debts would rank in priority to the chargeholder’s claim ‘irrespective of whether or not the floating charge crystallised prior to the commencement of winding up’. The Court also held that the crystallisation notice did not have the effect of crystallising the floating charge as the debenture was silent as to the rights and obligations of the Bank and/or company after its service.

However, the Supreme Court interpreted section 285(7) differently and overturned the High Court’s decision. The Court held that the section does not refer to a ‘floating charge which has been converted into a fixed charge by virtue of express crystallisation’ 4 prior to winding up, as per the terms of the debenture. The Court was of the view that section 285(7)(b) would be effectively rewritten if preferential creditors could claim priority over debenture holders whose charges had crystallised prior to the commencement of winding up. Accordingly the Supreme Court found that floating chargeholders can gain priority over other creditors, including preferential creditors such as the Revenue. This can occur in cases where (1) there is an express crystallisation under the terms of the contract and (2) the chargeholders have provided notice of the crystallisation of the charge in writing to the chargee prior to the winding up of the company.

The Supreme Court also addressed the effect of the crystallisation notice. They applied the principles laid out in Re: Keenan Brothers Limited 5 to determine that it had been the parties’ intention to restrict the Company’s use of the property and assets, which had been the subject of the floating charge, following the service of the crystallisation notice. This notice allowed the charge to crystallise over the company’s assets, thus enabling the creditor benefit from a fixed charge that provides debenture holders with proprietary interests which cannot be affected by liquidation.

Banks of course will greatly welcome this decision and it should encourage them to provide capital in the knowledge that their credit may be secured by serving a crystallisation notice on the chargee in cases where they believe the assets are in jeopardy. It must be noted that Justice Laffoy highlighted a number of concerns associated with the ‘undoubtedly unsatisfactory outcome of this decision’ stemming from the wording of the Companies Act 1963, which the legislator failed to address in the Companies Act 2014. She indicated that legislative action may be required to rectify this oversight, but until then credit providers will benefit greatly.

For further information please contact Andrew Clarke, Associate, McKeever Rowan at aclarke@mckr.ie

Key Contacts

Andrew Clarke
Solicitor

IFSC, Dublin
Andrew also advises on corporate structures, mergers and acquisitions, particularly in the Charity sector, company law compliance and corporate governance.

T: +353 (0) 1 670 2990

F: +353 (0) 1 670 2988

E: aclarke@mckr.ie