Introduction

The Supreme Court, in a judgment delivered today, in J.D. Brian Motors Limited, trading as Belgard Motors, (In Liquidation) (and related companies) allowed the appeal of the Official Liquidator, Tom Kavanagh of Deloitte, to set aside two declarations made by Ms Justice Finlay Geoghegan in the High Court in two separate judgments in 2011.

Belgard Motors March 2011
Belgard Motors July 2011

Background

Ms Justice Finlay Geoghegan had ruled that, under s.285(7)(b) of the Companies Acts 1963, preferential debts must be discharged from funds realised from assets subject to a floating charge in priority to debts due to the beneficiary of that floating charge, irrespective of whether or not the floating charge crystallised by virtue of a notice of crystallisation served prior to the commencement of winding up.  She had also found that the notice served was not sufficient to convert the floating charge into a fixed charge as the relevant security document did not expressly provide for a restriction on dealing with the relevant assets consequent on notice being served.

Supreme Court decision

The Supreme Court ruled that the intention of the parties to the security document was that, by serving the notice, the companies would be restricted from using the assets, previously the subject of the floating charge, and that it was, therefore, converted into a fixed charge.

The Supreme Court concluded, contrary to the reasoning employed by the High Court, that a clause in the security document whereby the company covenanted to carry on the business in a proper and efficient manner was not incompatible with the interpretation of the provisions in relation to crystallisation.

The Supreme Court also found, based on a decision of the English High Court (Re Griffin Hotel 1941), that on a straightforward reading of s.285(7)(b) of the Companies Acts 1963, because a floating charge which crystallised prior to the commencement of winding up became a fixed charge, preferential creditors did not have priority over such charge.  The Supreme Court indicated that if the Oireachtas had intended otherwise, s.285(7)(b) of the Companies Acts 1963 would have been drafted differently.

Significance of the Decision

This decision is significant as it is now clear that, in the absence of a change to the relevant legislation, if a floating charge has crystallised prior to the winding up of the debtor on foot of a properly drafted crystallisation notice served in accordance with the security document, the debenture holder will take priority over preferential creditors.  It further clarifies that the service of a notice of crystallisation in accordance with the terms of the security document does in fact have the intended effect of crystallising a floating charge.

However, there is still some uncertainty as to the consequences of any flexibility given to the company to deal with the assets subject to the crystallisation notice.