The High Court has ruled that preferential debts rank ahead of the Governor and Company of the Bank of Ireland’s claim to funds realised from assets covered by a floating charge, even if the charge crystallised before the winding up began.
In a judgment delivered on 25 March 2011, Ms Justice Finlay Geoghegan made the declaration in the winding up of J.D. Brian Motors Limited. The court interpreted section 285(7) of the Companies Act 1963 as giving preferential debts priority over the claim of a debenture holder under a floating charge created by the company. The priority applies whether or not the charge had already crystallised when winding up commenced.
The dispute arose from a debenture executed by J.D. Brian Motors in December 2005 to secure present and future borrowings. It created a floating charge over certain company assets and provided that the bank could, by written notice, convert that charge into a fixed charge if it considered the assets to be in jeopardy. The bank served such a notice on 28 October 2009. A winding-up petition was presented on 13 November, and the court made a winding-up order on 7 December.
The official liquidator and the bank argued that the notice had crystallised the floating charge before the winding up, entitling the bank to the assets ahead of preferential creditors. The Revenue Commissioners argued that section 285(7) gave preferential debts priority over the bank’s claim regardless of crystallisation, and also disputed whether the notices validly converted the charges into fixed charges.
The judge rejected the bank and liquidator’s interpretation of the statutory priority. She declined to follow an English decision that limited the priority to cases where the charge remained floating at the time of winding up. In her view, the bank’s claim to the assets derived from the floating charge created by the company, and crystallisation changed the nature of that security without creating a new charge.
The judgment also discussed whether a chargee can trigger crystallisation through an expressly agreed contractual event. The judge concluded that Irish law does not prohibit parties from agreeing that a floating charge may crystallise following a specified event or a step taken by the chargee. But she did not decide whether the bank’s notice in this case actually converted the charge into a fixed charge. That question, she said, would require further argument, including submissions from the bank, and might require closer consideration of the assets and the debenture’s terms.
The court declared that preferential debts rank ahead of the bank’s claim to funds realised from assets subject to the floating charge under clause 5 of the debenture, irrespective of when it crystallised. The judge said she would hear the parties on whether further declarations or directions were needed for the liquidations.