The High Court judgment and supplementary judgment of Ms Justice Finlay Geoghegan in the J.D.Brian Limited (In Liquidation) case (also referred to as the Belgard Motors case) has brought the issue of priority of claims in liquidation into the spotlight in Irish law. It will be a cause of some concern for the holders of floating charges, primarily financial institutions.
Priority of Claims in Liquidation
Under Irish law when a company is wound up by reason of insolvency, a ranking system for creditors exists which provides that secured creditors, such as a bank with a fixed legal charge, rank first, then a class known as preferential creditors (which includes creditors such as unpaid employees and the Revenue Commissioners), then creditors holding a floating charge and, finally, unsecured creditors.
Section 285 (7) of the Companies Act 1963 (as amended) provides that preferential creditors have “priority over the claims of holders of debentures under any floating charge created by the company and be paid accordingly out of any property comprised in or subject to that charge”.
A floating charge is a type of security provided by companies to a lender which “hovers” over the assets of the company until a crystallising event occurs at which point the floating charge crystallises and becomes fixed.
Priority of Floating Charges
The Belgard Motor case has now thrown a question mark over the status of a floating charge and indeed the crystallisation of a floating charge. Belgard Motors went into liquidation on the 7th December 2009 with estimated debts of €17 million. The High Court appointed Tom Kavanagh as liquidator of the company. Bank of Ireland had previously served a notice of crystallisation of its floating charge on the company on the 28th October 2009, in accordance with the terms of its debenture. The liquidator sought directions from the court and submitted that the floating charge had been validly crystallised and that Bank of Ireland should be paid in priority to any preferential creditor. The Revenue Commissioners however contested this claim and argued that their claim as a preferential creditor took precedence over the floating charge, crystallised or not.
On the 25th March 2011 Justice Finlay Geoghegan ruled that the correct interpretation of Section 285 (7) of the Companies Act 1963 is that the priority given to preferential creditors applies even where the floating charge crystallised prior to the commencement of the liquidation. In making this order Justice Geoghegan departed from the persuasive UK decision of In re Griffin Hotel Company Limited. Instead the court adopted the approach of a dissenting Australian Judge Barwick CJ in the High Court of Australia case Stein-v- Saywell and the arguments raised in the 1982 Cork Report of Insolvency in the United Kingdom.
In a supplementary decision delivered on the 11th July 2011, the judge dealt with the effect of the notice served on foot of a clause in the debenture which provided that the bank could by notice in writing convert its floating charge to a fixed charge over company assets where the bank considered those assets in jeopardy. She held that the notice was not effective to convert the floating charge to a fixed charge as the debenture was silent as to any rights of the bank with reference to the assets after service of the notice and, more importantly, as to any restrictions on the company with reference to those assets. The judge found that the company was still at liberty to deal freely with the assets. Therefore the conversion to a fixed charge did not happen as it is a central characteristic of a fixed charge that the company should be restricted from dealing with the assets save with the consent of the bank.
The decisions are landmark precedent judgments in the area of law determining priority of floating charges. The impact of the decisions will be significant and far reaching and will lead to far greater concentration by financial institutions on the ongoing status of preferential creditors’ balances.
The judgments are currently the subject of appeal to the Supreme Court. Until the issue of priority of floating charges is decided upon by the Supreme Court it will not be possible to finalise liquidations and receiverships involving such charges.
For further information or advice please contact our Insolvency and Corporate Recovery Unit.
- Landmark precedent judgments in the area of law determining priority of floating charges have been decided in the High Court.
- The judgments are currently the subject of appeal to the Supreme Court. Until the issue of priority of floating charges is decided upon by the Supreme Court it will not be possible to finalise liquidations and receiverships involving such charges.