The High Court has ruled that a charge granted to two former accountants of a construction company after a winding-up petition was presented was void, rejecting their request to have it validated.
Ms Justice Reynolds held that the charge over Churchboro Building Contractors Limited’s property at 17B Ardmacha, Old Bawn, Tallaght, was a post-liquidation disposition under section 602 of the Companies Act 2014. The petition was presented on 20 November 2017; the charge was executed on 23 November and registered on 30 November.
The respondents, Alan Connolly and Sandra Clarke, were partners in the company’s former auditors and accountants. They had advanced the company €150,000 in September 2016 under a loan agreement that provided for a first charge over the property. The company’s solicitor also undertook to repay the outstanding balance from the property’s sale proceeds. But no charge was put in place at that time.
The respondents argued that the 2016 agreement was an unconditional contract to grant the charge, so executing it after the petition did not amount to a new disposition. Alternatively, they asked the court to validate the charge because the company had agreed to provide security when it received the loan.
The judge rejected the first argument, finding that the loan agreement had not itself legally created a charge. The later debenture was required to do so. She said section 602 freezes a company’s affairs from the date a winding-up petition is presented, preventing directors from improving particular creditors’ positions after that point.
The company had an existing charge in favour of Allied Irish Banks, which was owed €224,749.83. The judgment records that the respondents had been told before their charge was executed that the AIB charge had been discharged, but the liquidator said the respondents knew or should have known about the AIB charge and its restriction on creating another charge without the bank’s written consent. At the resumed hearing, the liquidator conceded that the AIB floating charge had not crystallised upon liquidation. The parties agreed that AIB ranked behind preferential debts, including Revenue’s claim, and ahead of unsecured creditors.
The judge also found that the respondents, who were the company’s accountants and knew of its financial difficulties, had constructive notice of the winding-up petition. She said validating their charge could harm preferential and unsecured creditors, and found no special circumstances to justify doing so.
The court therefore declared the Connolly charge void under section 602(2) and refused to validate it. The judgment addressed the charge’s validity; it did not determine the final distribution of the company’s assets in the liquidation.