Thursday 16 July 2015

Ireland: floating charges, express crystallisation and preferential debts

The Supreme Court gave judgment earlier this month in In the matter of J.D. Brian Ltd (in Liquidation) t/a East Coast Print and Publicity [2015] IESC 62. This is an important - and, for the time being, leading - decision on the operation of section 285 of the Companies Act 1963 (now section 621 of the Companies Act 2014). It seems, however, likely that it will be overturned by legislative amendment.

Section 285 provides for certain debts to be granted preferential status (and therefore a priority) in a winding-up. It also provides, in subsection 7(b), that such preferential debts, "so far as the assets of the company available for payment of general creditors are insufficient to meet them, have priority over the claims of holders of debentures under any floating charge created by the company, and be paid accordingly out of any property comprised in or subject to that charge" (italics added).

At issue before the Supreme Court was this italicised phrase. The Supreme Court unanimously held that it meant a floating charge that existed at the commencement of the winding up: it did not include a charge that on creation was a floating charge but had been converted into a fixed charge, by virtue of express crystallisation in accordance with the terms of the debenture, prior to the commencement of the winding up. Justice Mary Laffoy (with whom  Justices Clarke and Charleton concurred) stated (at para. 78).
To read s. 285(7)(b) as entitling preferential creditors to priority for the priority debts specified in s. 285 over the claims of a debenture holder whose charge has crystallised into a fixed charge prior to the commencement of the winding up and to have those debts discharged out of property which at the time is subject to the fixed charge, by reason of the fact that the fixed charge evolved from a floating charge, in my view, would be to rewrite s. 285(7)(b). It is clear on the face of subs (7) that the operative time for the assessment of entitlement to priority in accordance with para. (b) is in the winding up, that is to say, after the winding up order is made. If the Oireachtas had intended that the holder of a debenture who, at the time of the assessment, has a fixed charge, but that fixed charge is the result of the crystallisation of a floating charge which occurred prior to the commencement of the winding up, should lose priority for its claims to the priority debts and that the priority debts should be paid out of property comprised in what at the commencement of the winding up was a fixed charge, that should have been provided for in para. (b) of subs. (7). In my view, as it stands, para. (b) cannot be read to achieve that end".

Justice Laffoy was nevertheless not happy with the result of this interpretation, but added that its effect could be rectified by amending legislation (something, she noted, that had been done in other jurisdictions including the United Kingdom: see section 175 of the Insolvency Act 1986 and the definition of floating charge provided by section 251).

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