In the Matter of J.D. Brian Limited (In Liquidation) t/a East Coast Print and Publicity, In the Matter of J.D. Brian Motors Limited (In Liquidation) t/a Belgard Motors, In the Matter of East Coast Car Parts Limited (In Liquidation) and in the Matter of the Companies Acts 1963 - 2009
The three companies (the “Companies”) referenced in the title of the proceedings were part of the Belgard Motors Group and are being wound up by the Court. The Official Liquidator applied to the High Court for directions in respect of debentures (the “Debentures”) entered into by each of the Companies in 2005 with the Bank of Ireland (the “Bank”). The directions sought were whether the floating charge contained with the Debentures had validly crystallised prior to the liquidation and whether, as a result of crystallisation, the floating charge assets were not available to satisfy preferential creditors, such as the Revenue Commissioners. The terms of each of the Debentures allowed the Bank to serve a notice in writing on the Companies to convert the floating charge contained in the Debentures into a first fixed charge if the Bank considered that the assets referred to in the notice were in jeopardy. This provision was invoked by the Bank in October 2009 (prior to the commencement of the winding up in November 2009).
The High Court ruled that the proper meaning of section 285(7) of the Companies Act 1963, which concerns the treatment of preferential payments in a winding up, is that the preferential debts rank in priority to the Bank’s claim, as debenture holder, to the funds realised from the assets the subject of the floating charge, irrespective of whether the floating charge crystallised prior to the commencement of the winding up.
On the appeal of the Official Liquidator, the Supreme Court analysed two issues:
- The effect of the crystallisation notice served by the Bank; and
- The construction of section 285(7) of the Companies Act 1963.
The Supreme Court overturned the decision of the High Court and reached the following conclusion:
- The floating charge created by the Debentures was converted into a fixed charge over the property of each of the Companies by virtue of the crystallisation notice served by the Bank prior to the commencement of the winding up of the Companies.
- Section 285(7) affords priority to preferential claims (such as Revenue claims) against assets which are subject to a charge which is a floating charge at the commencement of a liquidation. The earlier crystallisation of the floating charge had the effect of taking those assets outside the remit of the section.
This is a very welcome finding by the Supreme Court and provides clarity to banks and other financial institutions going forward as to how the courts will deal with such scenarios. It is worth mentioning, however, that the Court expressed dissatisfaction with the underlying legislation and the fact that the old section 285(7) had been transposed into the new Companies Act 2014. It noted that “Unfortunately, it does appear that the replacement of section 285(7), section 621(7) of the Act of 2014, requires to be amended to reverse the undoubtedly unsatisfactory outcome of this decision, which gives rise to a number of concerns."