Judgment by Cregan J of 6 October 2014
This case concerned an application by the official liquidator of RQB Limited (in liquidation) (the Company) pursuant to S280 of Companies Act 1963 to determine the legal status of a floating charge dated 10 September 2008 which entered into by the Company in favour of Danske Bank (the Bank) and which the liquidator believes to be unenforceable.
The "2005 Facility"
In December 2005, National Irish Bank, (the Bank's predecessor) entered into an on-demand overdraft facility arrangement of €12 million with the Company and which facility was secured by a joint and several guarantee of €12 million from Patrick Kelly, Niall McFadden and Paul Pardy (together the Guarantors).
The "2008 Facility"
In early 2008, the company entered into negotiations with the Bank to restructure the overdraft facility by way of a new loan facility of €8 million on the terms as set out in a loan facility agreement (the Loan Agreement) together with an additional overdraft facility of €2 million.
The security for the new facility was a new joint and several guarantee from the Guarantors together with a fixed and floating charge over the assets of the Company. The Loan Agreement included a condition precedent that the Guarantors had to provide personal asset statements satisfactory to the Bank. The Loan Agreement also stated that the offer was to remain open until 30 September 2008 and would be subject to renegotiation if acceptance is not received by that date.
The Loan Agreement was signed and accepted by all parties on 10 September 2008. The guarantees and the floating charge were also entered into on that date – 10 September 2008.
The loan ran into difficulties very quickly and on 17 September 2008, the Bank emailed the Company to the effect that the Bank could not proceed with the new facilities until such time as all preconditions were attended to and personal assets statements were received in an acceptable format.
During 2009, the Bank made formal demands on the Company for repayment of amounts outstanding under the 2005 Facility.
The new loan facility and overdraft facility as per the terms of the Loan Agreement were never actually advanced by the Bank to the Company.
On 24 September 2009, a creditor of the Company presented a petition to wind up the Company and the Company was wound up on 2 November 2009. In November 2010, a letter was sent to the liquidator on behalf of the Bank stating that the Bank had obtained judgment against the Company and was seeking to rely on the floating charge.
The liquidator considered that the floating charge was unenforceable for the following reasons: (i) the 2008 Facility agreement contained a condition precedent that was not fulfilled – therefore that agreement lapsed. There was no obligation on the company to repay the loans and the security provisions in the floating charge are of no legal effect; (ii) alternatively, the liquidator argued that it was an implied term of the floating charge that if no funds were advanced then the floating charge came to an end; and (iii) there was no consideration for the floating charge.
The Bank submitted that the floating charge was enforceable as it was signed by all parties under seal, there was no requirement for consideration and additionally, as the floating charge was registered in the Companies Registration Office, it was valid in law.
The "condition precedent" argument
The Judge gave the meaning of "condition precedent" much consideration and concluded that in order for there to be a condition precedent, an agreement must have been reached between the parties and therefore there was a contract in place. However, the parties may also agree that certain conditions must be fulfilled before the rest of the contractual obligations come into being.
In this case, as the personal asset statements provided to the Bank were not satisfactory, the condition precedent was not fulfilled and no loan was advanced. The Judge noted therefore, as a matter of logic and common sense, that there can be no enforceable security in respect of a non-existent loan. In further support of this decision, it was also noted that the Loan Agreement provided that the "loan facility" was to be secured by the floating charge.
The floating charge was deemed unenforceable by the Bank against the Company.
The liquidator also argued that it was an implied term in the agreement that if the loans were not advanced, the security would not be maintained. This was dismissed as there was no need to imply a term – the contract was clear on its face.
The liquidator also argued that the floating charge was unenforceable for lack of consideration. This too was dismissed as the floating charge was provided by the Company in consideration for the advancement of a loan facility.
Registration in the CRO
The Judge noted that as the floating charge was validly created, it was entirely reasonable to register that charge in the CRO. However, due to the reasons outlined above, that floating charge thereafter lapsed and the question of whether or not the charge is registered in the CRO is not relevant to the issue of enforceability in this case.
The Judge also dismissed all arguments that the floating charge had an independent and standalone existence and covered the obligations under the 2005 Facility – there was no evidence that the Company ever agreed that the floating charge would cover the 2005 Facility. For that to have been the case, there would have to have been clear and unambiguous language to that effect.