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Belgard Motors Case - Priority To Preferential Creditors Regardless Of Crystallisation Of Floating C

AUTHOR(S): Tony O’Grady, Julie Murphy-O’Connor, Niamh Counihan
PRACTICE AREA GROUP: Corporate Restructuring and Insolvency
DATE: 30.03.2011

In an insolvent winding up, preferential creditors are entitled to be paid first from assets subject to a charge which at the time of creation was floating, regardless of whether the floating charge has crystallised at the commencement of the winding up.

Ms Justice Finlay Geoghegan has ruled that under section 285(7) of the Companies Act 1963 (the “Act”) preferential debts must be discharged from funds realised from assets subject to a (crystallised) floating charge in priority to debts due to the debenture-holder, irrespective of whether the floating charge crystallised prior to the commencement of winding up.

BACKGROUND

Section 285(7) of the Act provides that preferential debts shall “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”.

On 7 December 2009, an order for the winding up of the Company was made and a liquidator, Mr Tom Kavanagh of KavanaghFennell was appointed. A bank had served a notice of crystallisation of its floating charge on the Company on 28 October 2009 in accordance with the terms of the Debenture.

The liquidator applied to court for declarations that the floating charge had been validly crystallised and that Bank should be paid out of the assets realised thereunder, and that the preferential creditors had no entitlement to be paid in priority to the Bank. The Revenue Commissioners submitted that priority should be given to its preferential claim, regardless of whether the floating charge had crystallised prior to the commencement of the winding up.

HIGH COURT DECISION

Ms Justice Finlay Geoghegan concluded that the priority afforded to preferential creditors pursuant to section 285(7) of the Act subsists even in circumstances where the floating charge has crystallised prior to the commencement of the liquidation. She did not deem it necessary in those circumstances to consider whether the Bank had validly crystallised its floating charge in this case.

Construing the words of section 285(7) in their ordinary and natural sense, Ms Justice Finlay Geoghegan interpreted the words "holders of debentures under any floating charge created by the company" as meaning those persons holding such security which, at the time of creation, was floating and concluded that the fact that the nature of the security subsequently changed upon crystallisation did not change the ordinary meaning of the words.

In reaching this conclusion she acknowledged that she was not construing the sub-section in accordance with the English decision of In re Griffin Hotel Company Limited [1940] 1 Ch.129 which had been followed in subsequent English judgments. The Griffin Hotel decision was also followed in an Australian case of Stein -v- Saywell. Ms. Justice Finlay Geoghegan was not, of course, bound by the decisions of the courts of other jurisdictions, which decisions are of persuasive authority only and was therefore entitled to decline to follow them. She indicated that she preferred the reasoning of a dissenting judge in the Stein -v- Saywell decision, who was of the view that the holder of a floating charge should not be in a position to displace the legislative priorities afforded to preferential creditors. She also derived support for her view from the 1982 Cork Report on Insolvency Law and Practice in the United Kingdom.

CONCLUSION

Failing a successful appeal, the position in light of the Belgard Motors Case is that debts secured by way of a floating charge which has crystallised in advance of a liquidation will not gain priority over preferential debts. It must be at least likely, however, that even in the event of a successful appeal, the legislature would close off the loophole (which is what happened in the UK).

 

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