Belgard Motors Decision

Floating Charge Holders vs. Preferential Creditors

In what has quickly become known as the Belgard Motors Judgment, the Supreme Court has recently unanimously 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.

Background

To secure the repayment of facilities advanced by Bank of Ireland (the “Bank”) to the Belgard Motor Group, the Bank was granted a number of debentures (constituting floating charges) from companies within the Belgard Motors Group (the “Relevant Companies”). These debentures provided that, on the service of a crystallisation notice by the Bank on the Relevant Companies, the floating charges would convert to first fixed charges over all property, assets and rights of the Relevant Companies secured.

On 28 October 2009, pursuant to the provisions of the debentures, the Bank served crystallisation notices on the Relevant Companies. On 13 November 2009, a petition was presented for the winding up of the Relevant Companies and Mr. Tom Kavanagh was appointed provisional liquidator. On 7 December 2009, an order for the winding up of the Relevant Companies was made and Mr. Kavanagh was appointed official liquidator.

Pursuant to Section 280 of the Companies Act 1963 Mr. Kavanagh brought an application to the High Court seeking certain declarations and directions. Mr. Kavanagh contended that the service of the crystallisation notices on the Relevant Companies validly crystallised the floating charges and that, by reason of the crystallisation of the floating charges prior to the commencement of the winding up of the Relevant Companies, the preferential creditors had no entitlement to be paid in priority to the Bank. The Revenue Commissioners contested this position and argued that their position as preferential creditor was unaffected by the floating charge, crystallised or not.

High Court Ruling

Ms. Justice Finlay Geoghegan considered Section 285 of the Companies Act 1963 (now Section 621 of the Companies Act 2014) (which provides that certain preferential creditors are afforded priority ahead of the claim of the holder of a floating charge) and ruled that the correct interpretation of Section 285(7)(b) of the Companies Act 1963 is that the priority to be given to preferential creditors will prevail even where the floating charge crystallised in advance of the commencement of the winding up of a company.

In reaching this decision, Ms. Justice Finlay Geoghegan concluded that the service of the crystallisation notice did not have the effect of crystallising the floating charge as the crystallisation notice did not expressly prohibit the Relevant Companies from dealing with the relevant assets following the service of the notice.

Mr. Kavanagh appealed this decision to the Supreme Court.

Supreme Court Ruling

The Supreme Court unanimously overturned the High Court ruling and held that, where there was an intention between the parties to the floating charge that it would be crystallised on the service of a crystallisation notice, the effect of same would validly convert the floating charge to a fixed charge and the obligor company would be restricted from dealing with the relevant assets save for with the consent of the charge holder.

Further, where a crystallisation notice was served in advance of the winding up of the obligor company, preferential creditors will rank behind the charge holder.

Conclusion

The Supreme Court judgment reinforces the effectiveness of serving a properly drafted crystallisation notice on a chargee in accordance with the provisions of the relevant security document to crystallise a floating charge and to gain priority over preferential creditors.

As the service of crystallisation notices will often significantly impact the business of a chargee, their use should be carefully considered and used as part of an enforcement strategy.

Ms. Justice Laffoy, in handing down her judgment, expressed her dissatisfaction with the replacement of Section 285 of the Companies Act 1963 with Section 621 of the Companies Act 2014 without amendment and suggested that same should “… be amended to reverse the undoubtedly unsatisfactory outcome of this decision …” for preferential creditors. It is expected that amending legislation will be enacted shortly.

For further information on this topic please contact Eoin Thomas McGuinness (Partner), or your usual AMOSS contact.