The Court of Appeal has clarified the priorities and duties that apply when receivers continue a company’s business while owing money to preferential creditors. It held that receivership costs and expenses rank ahead of those creditors, but that receivers may be liable in damages if they trade away funds that could have paid them.
The judgment, delivered by Mr Justice Murray with the agreement of President Barniville and Mr Justice Haughton, arose from Revenue Commissioners’ application for directions in the receivership of Beggasa Limited. Revenue challenged the repayment to the Bank of €57,905.67 from assets allocated to a floating charge, arguing that the sum should have been available to meet its preferential claim. Revenue’s claim was €87,317.60 for PAYE/PRSI and VAT.
The receivers, Aengus Burns and Paul McCann, had been appointed in 2011 over the Shannon Oaks Hotel and Country Club. A €293,000 Bank advance in 2012 funded receivership costs, including apartment maintenance and expenses connected with an insurance arbitration claim. The receivers later repaid €208,570 of the loan, allocating part to floating-charge assets and part to fixed-charge assets. The company’s hotel business had continued, including the rental of holiday apartments, until 2016.
The High Court had ruled that the loan repayment was a receivership expense and did not breach the statutory priority given to preferential creditors. Revenue appealed. The Court of Appeal agreed that the loan was properly treated as a receivership cost and that the costs of realising floating-charge assets, along with receivership costs and expenses, rank ahead of preferential claims.
But the court said that priority rules do not settle whether a receiver breached a separate statutory duty. Under section 440 of the Companies Act 2014, a receiver must pay preferential debts, or make provision for them, when sufficient assets are available after deducting the relevant realisation costs and amounts then due for receivership costs, expenses and remuneration. If the receiver instead continues trading and loses those funds, the receiver may be personally liable in damages for the preferential creditors’ resulting loss.
The court did not decide whether these receivers breached that duty or what loss, if any, Revenue suffered. It noted that more than €70,000 in cash was held when the receivership began, and that it was unclear whether realisation costs would have applied to that sum. The parties were given an opportunity to consider their positions before a further hearing, if required. Costs were left to be dealt with later.