The Companies (Accounting) Act 2017 (the ‘Act’) provides welcome clarity on the position of crystallised floating charge holders in relation to their priority over preferential creditors.
The Act changes the position following the Supreme Court ruling in what has become known as the Belgard Motors Judgment, where the Supreme Court held that a floating charge which crystallised by notice in advance of the commencement of a liquidation ranks in priority to the claims of preferential creditors. Ms. Justice Laffoy, in handing down her judgment in the Belgard Motors case expressed her dissatisfaction with Section 621 of the Companies Act 2014 as drafted, and suggested that same should be amended to reverse the unsatisfactory outcome of the Belgard Motors decision for preferential creditors.
The Belgard Motors Judgment, while beneficial to lenders undermined the position of preferential creditors, in particular, the Revenue Commissioners. The Company Law Review Group (the ‘CLRG’) reviewed this area of law and recommended that legislation be introduced to amend the Companies Act 2014 to ensure that preferential creditors have priority over floating charge holders on a crystalisation event.
Section 92(b) of the Act, which amends Section 621(7)(b) of the 2014 Act (previously Section 285(7)(b) of the Companies Act 1963), incorporated the recommendations of the CLRG and now provides that preferential creditors will rank above floating charge holders, regardless of whether the charge has crystallised or not.
Implications for Receivers
It is provided at Section 98(d) of the Act (which amends section 440(1)(a) of the Companies Act 2014) that where a receiver is appointed on behalf of the holder of any debenture of a company secured by any charge created as a floating charge (and which subsequently crystallises) he shall ensure that the claims of the preferential creditor are prioritised over the claims of the crystallised floating charge holder.
These changes should be of interest to credit institutions as the Act could potentially undermine the effectiveness of a floating charge when taking security. It may be the case that lenders may have to consider limiting the assets over which they allow a floating charge to be created and protect their interests in so far as they can with fixed charges.