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Solicitors’ undertakings regarding payments

AUTHOR(S): GearĂ³id Carey
PRACTICE AREA GROUP: Commercial Litigation and Dispute Resolution
DATE: 22.12.2011

In Response Engineering Limited v Caherconlish Treatment Plant Limited(1) the court was faced with the question of whether a solicitor's undertaking in respect of future payments to be made to a client company constituted a charge over the book debts of that company within the meaning of the Companies Act 1963. Judge Hogan identified that this case raised a difficult question of company law and the interpretation of the relevant provisions of the act. Ultimately, in holding that the undertaking constituted a charge, he found that it was void as against any creditor of the company, since it had not been registered as required under the act.

Facts

In February 2010 the plaintiff was granted judgment against the defendant in the sum of €225,351, together with an order for costs. The defendant was due approximately €220,000 by Limerick County Council for works undertaken in respect of the construction of a water treatment plant. The defendant had no assets amenable to execution, other than its chose in action against Limerick County Council for the €220,000 due. On March 1 2010 the plaintiff obtained a conditional order of garnishee in respect of the sum due by the council. However, when the plaintiff applied to have the order made absolute, a bank, AIB plc, appeared before the court and argued that it had acquired an interest in the sum due to a charge arising from a solicitor's undertaking - this, it argued, took priority over any claim made by the plaintiff.

The bank relied on a letter of undertaking written by the solicitor for the defendant, which stated:

"[m]y client, Caherconlish Treatment Plant Limited, require[s] an overdraft facility in the amount of €305,000.00 and the same will be discharged in two payments namely, €82,342.52 and €222,000.00 as soon as the said payments come in from Limerick County Council. I confirm that I have irrevocable instructions to lodge the said cheques to Caherconlish Treatment Plant's account with AIB and I hereby undertake to do so."

The court acknowledged that since the undertaking preceded the garnishee application, subject to the registration issue, it would otherwise have priority over the plaintiff's garnishee claim. As a consequence, unless the undertaking constituted a security over book debts which required registration for the purposes of Section 99(2)(3) of the act, the bank would be entitled to priority. Therefore, the case turned on whether the undertaking constituted a charge to be registered under Section 99.

Section 99

The relevant provisions of Section 99 are as follows:

"(1) Subject to the provisions of this Part, every charge created after the fixed date by a company, and being a charge to which this section applies, shall, so far as any security on the company's property or undertaking is conferred thereby, be void against the liquidator and any creditor of the company, unless the prescribed particulars of the charge, verified in the prescribed manner, are delivered to or received by the Registrar of Companies for registration in manner required by this Act within 21 days after the date of its creation, but without prejudice to any contract or obligation for repayment of the money thereby secured, and when a charge becomes void under this section, the money secured thereby shall immediately become payable.

(2) This section applies to the following charges…

(e) a charge on book debts of the company."

Issues

The court identified that in order to determine the matter, two questions arose:

•What is the meaning of the phrase "book debts" in Section 99(2)(e), and was the payment from the council a book debt?
•If such payment was a book debt, was the undertaking a security on the company's property?
In respect of the first question, the judge noted that the term 'book debt' refers to no more than future income which will accrue to the company by reason of its provision of goods and services to third parties in the course of its trade or business. He cited Farrell v Equity Bank Ltd(2) to the effect that the term means all debts accruing in the ordinary course of trade, and noted from Byrne v Allied Irish Banks Ltd(3) that the proceeds of sale of a capital asset do not constitute a book debt. In the present case, he held that the payment due by the council classically amounted to a book debt within the meaning of the relevant subsection of the act.

On the second question, the judge considered that he had to decide whether the undertaking created a security interest in the company's property, or whether it properly amounted merely to an assignment of debt. He considered authorities such as Re Kent and Sussex Sawmills(4) and Re Siebe Gorman Ltd,(5) and noted that where the relevant document had the effect of assigning the debt, the question of a security interest was determined by the terms. In the present case, he felt that the undertaking was given in consideration of the provision of additional credit facilities. The real question, he stated, was whether the council's debt had effectively been sold to AIB by way of assignment through the solicitor's undertaking, or whether the plaintiff retained an equity of redemption in those moneys in the (unlikely) event that the AIB debt were to be wholly or partly discharged.

The judge opined that in the absence of a clear indication to the contrary, in an ordinary banker/client relationship it is presumed that the client enjoys the equity of redemption. In this case, he felt that this presumption had not been displaced. Although the solicitor had undertaken to lodge the cheques to the plaintiff's account with the bank, this was not inconsistent with an equity of redemption; nor did it imply that the debt had been effectively sold by way of assignment in consideration of the extension of overdraft facilities. However, if one were to assume that the plaintiff's account had come into surplus, would the undertaking still mean that the moneys would have become the property of the bank by way of windfall? Where that was not the position, the judge could conclude only that the bank wanted security for its debt. Therefore, the solicitor's undertaking was by way of security, not assignment. Since that security had not been formally registered, the undertaking was declared void as against any creditor of the company. Finally, on the basis that it was not inequitable to do so, the court made the conditional garnishee order absolute.

Comment

It is clear that solicitors' undertakings with regard to trade payments which a client may expect to receive from third parties can constitute assignments of book debts. Whether such assignments create a security interest will depend on the circumstances in which the undertaking was given. However, if a party ultimately wishes to assert a security interest, it should take steps to register that charge at the outset.

____________________________________________________________

Endnotes

(1) [2011] IEHC 345.

(2) [1990] 2 IR 549.

(3) [1978] IR 446.

(4) [1947] Ch 177.

(5) [1979] 2 Lloyd's Reports 142.

 

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