Changes Under The Bill
The Companies Bill 2012 (the "Bill") stipulates that the Companies Registration Office ("CRO") will not be permitted to record details of a negative pledge when recording particulars of a charge created by a company and that delivering details of a negative pledge to the CRO will have no legal effect except where the charge holder is the Central Bank and the charge is a floating charge to provide or secure collateral.
The Companies Acts 1963 to 2013 do not require companies and charge holders to include particulars of a negative pledge (typically, agreements by the company not to borrow from, or create security in favour of, any person other than the charge holder) with the particulars of registerable charges that are required to be delivered to the CRO. Nonetheless, solicitors have developed a practice of including negative pledge particulars whenever notifying the CRO of a floating charge created in favour of a client. This practice has resulted from court decisions that the granting of security should be considered to be within the ordinary course of business of a company. As a result, a company may create a fixed charge even after giving a floating charge unless the floating charge prohibits the company from doing so. Where the floating charge contains a prohibition (negative pledge), which is usual, the solicitor's objective in delivering particulars of it for registration by the CRO is to put potential lenders on notice that the company is not permitted to create further security. If the potential lender has notice that there is no permission to create further security and proceeds to take a fixed charge from the company, that lender cannot use the fixed charge taken by it to cause loss to the holder of the prior floating charge. Without notice, the lender will take the fixed charge free of the claims of the floating charge holder because the lender is entitled to rely on the apparent authority of the company to deal by way of creating fixed charges.
Section 412(5) of the Bill specifically provides that the CRO will not register particulars of the creation of a negative pledge where such particulars are delivered to it. It also provides that if a charge holder elects to deliver particulars of such a negative pledge to the CRO, doing so will have no legal effect. Section 412 (6) excepts the Central Bank from these provisions and particulars of a negative pledge on a floating charge given to the Central Bank for the purpose of providing or securing collateral must be registered by the CRO if delivered to it.
Section 412(7) defines a negative pledge as any agreement entered into by the company and any other person that provides that the company shall not, or shall not otherwise than in specified circumstances:
- borrow moneys or otherwise obtain credit from any person other than the person who is party to the agreement with the company; or
- create or permit to subsist any charge, lien or other encumbrance or any pledge over the whole or any part of the property or undertaking of the company.
This change has been introduced in the context of a move from judicial based priority rules for company security to the statutory priority rules set out in Section 412 of the Bill. Broadly, the statutory rules stipulate that the priority of one charge created by a company over another will be determined by the date of receipt of charge particulars by the CRO. This rule does not distinguish between floating charges and fixed charges. Therefore, it would seem that a floating charge will have priority over a fixed charge if particulars of it are delivered to the CRO before particulars of the fixed charge. Against that background, the drafters of the Bill may have concluded that the floating charge holder should no longer need to take steps to put potential lenders on notice that there is no ongoing permission to deal by way of creating security given that the floating charge has a statutory priority. Arguably, however, the floating charge holder does not have an inferior claim to company assets to that of the subsequent fixed charge holder under the current rules because of priority; rather it is a characteristic of the floating charge that the security given by it will not attach to particular assets (rather it floats over changing classes of company assets) until a crystallising event occurs. The floating charge holder is only entitled by way of security to whatever assets and property interests the company continues to hold when the floating charge crystallises, which would only be an equity of redemption (or what is left to the company after a fixed charge holder has been paid in full) where a fixed charge is granted before the floating charge crystallises.
If the Bill drafters considered charge claim strength to be determined by priority, it is not clear why they considered it necessary to except the Central Bank from the prohibition on notifying the CRO of negative pledge provisions in floating charges. Indeed, that exception is also peculiar given that most categories of assets over which the Central Bank would be likely to take a floating charge will be excluded from the "charge" definition that will trigger application of the Bill's priority and registration rules.
Because of concerns about the strength of a fixed charge as against a floating one, it is common practice for a floating charge holder to stipulate in the floating charge that it will crystallise into a fixed charge immediately before any other security interest is granted over assets within the ambit of that floating charge (an "automatic crystallisation provision"). Particulars of these automatic crystallisation provisions are also delivered to the CRO though, again, there is no obligation under the Companies Acts 1963 to 2013 to deliver them. The prohibition on delivering particulars of negative pledges does not extend to these automatic crystallisation provisions. Until the courts determine conclusively the extent of the entitlements of a floating charge holder as against a subsequent fixed charge holder under the Bill priority provisions, it is likely that the practice of filing particulars of automatic crystallisation provisions will continue. While it is doubtful that these provisions are effective generally, a court could well decide that they should be effective as against a subsequent fixed charge holder who takes the fixed charge when on notice of the automatic crystallisation provisions because it would be unfair to the floating charge holder in those circumstances to allow the fixed charge holder to benefit at the floating charge holder's expense from ignoring the floating charge holder's claim to a crystallised floating charge.
Where a lender proposes to take a fixed charge when that lender knows that the company giving that fixed charge has already created a floating charge, it is usual for the lender to look for a letter from the floating charge holder confirming that that floating charge has not crystallised as part of the arrangements for taking the fixed charge. Lenders will likely now go further and seek confirmation that their fixed charge has priority over the floating charge to the extent of the assets covered by the fixed charge or that those assets are released from the floating charge.