The High Court ruled that a debenture granted by Cognotec Ltd. to Barclays Bank Ireland plc in 2006 was valid, finding the bank lacked actual notice that a statutory declaration had not been filed on time. The court also upheld receiver Kieran Wallace’s appointment and ruled that the company could not use a 2010 board decision to void the security.
Mr Justice Brian J. McGovern delivered the judgment on July 30, 2010, on an application by Wallace for directions under section 316 of the Companies Act 1963. Cognotec was in receivership and had ceased trading. It had designed and produced software used by banks and other financial institutions.
The debenture, created on March 7, 2006, secured a US$12.5 million loan facility. US$10 million was drawn down that day to provide financial assistance connected with the purchase of Cognotec’s own shares. A further US$2.5 million was drawn down on July 18, 2006, for repayment of a loan; the parties accepted it was not for the share purchase. The debenture granted fixed and floating charges over company assets, including intellectual property.
The statutory declaration required for the financial assistance was sworn on March 7, but a copy was not delivered to the Companies Registration Office within the 21-day period. Cognotec’s solicitors had undertaken to file it. The bank said it did not know of the late filing at the time and learned of it in October 2007 during a review of its security.
The judge said the relevant test under section 60(14) was whether the bank had actual notice of the facts constituting the breach before or when the transaction occurred. Knowing that the loan was connected with a share purchase was not, by itself, notice that the validation procedure had been breached. The party seeking to avoid the transaction had to establish actual notice; constructive notice was insufficient.
Cognotec’s directors purported to void the security at a board meeting held in Jerusalem on March 19, 2010. Evidence about the meeting was described as unsatisfactory and incomplete. The judge accepted the bank’s evidence that it had no actual notice of the late filing. He therefore did not decide broader questions about the effect of the filing failure or the meeting’s other circumstances.
The court directed that the debenture and Wallace’s appointment were valid, and that neither was invalidated by a breach of section 60. It declared the board’s purported decision to void the security null and void, and said it would not affect the debenture. Wallace was entitled to pay the bank proceeds from property realised in accordance with the debenture.