Floating charges normally crystallise (i.e. convert into a fixed charge) under two events, namely the appointment of a Receiver or the appointment of a Liquidator.

In other jurisdictions it has been held that floating charges can crystallise upon the happening of other events, such as the company being in default etc.

The issue of crystallisation had not yet been tested in the Irish courts until the Belgard Motors case (discussed further below).  A leading authority, Ronan Keane, had previously (and correctly!) suggested that "The courts here will probably incline to the view that such automatic crystallisation would present problems for other creditors who would have had no actual notice of the terms of the debenture."

Section 99 of the 1963 Companies Act sets out the steps necessary to register a valid charge. If Form C1 (previously Form 47) does not specify that a floating charge is capable of being converted into  a fixed charge (outside of the two normal crystallisation events of Receivership and Liquidation) then our view is that the purported fixed charge would be void against a Liquidator. Another  leading authority, William Johnston, suggests that notice of automatic crystallisation should be inserted on Form 47 so that the public would be aware of the possibility of crystallisation.

The Belgard Motors Case

In J.D. Brian Ltd. (in Liquidation) and others (“Belgard Motors”) the High Court held, in March 2011, that under Section 285(7) of the Companies Act 1963 (the “Act”) preferential debts must be discharged from funds realised from assets subject to a crystallised floating charge in priority to debts due to the debenture-holder, irrespective of whether the floating charge crystallised prior to the commencement of winding up.

Section 285(7) of the Act provides that preferential debts shall “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”.

The background circumstances were as follows. On 7 December 2009, an order for the winding up of the Company was made and a liquidator, Mr. Tom Kavanagh of Kavanagh Fennell was appointed. Bank of Ireland had served a notice of crystallisation of its floating charge on the Company on 28 October 2009 in accordance with the terms of the Debenture.

The liquidator sought directions from the court and contended that the floating charge had been validly crystallised and that the Bank should be paid out of the assets realised thereunder, and that the preferential creditors had no entitlement to be paid in priority to the Bank. The Revenue Commissioners submitted that priority should be given to its preferential claim, regardless of whether the floating charge had crystallised prior to the commencement of the winding up. Bank of Ireland also made submissions.

Ms. Justice Finlay Geoghegan concluded that the priority afforded to preferential creditors pursuant to Section 285(7) of the Act subsists even in circumstances where the floating charge has crystallised prior to the commencement of the liquidation. She did not deem it necessary in those circumstances to consider whether the Bank had validly crystallised its floating charge in this case.

Construing the words of Section 285(7) in their ordinary and natural sense, Ms. Justice Finlay Geoghegan interpreted the words “holders of debentures under any floating charge created by the company” as meaning those persons holding such security which, at the time of creation, was floating and concluded that the fact that the nature of the security subsequently changed upon crystallisation did not change the ordinary meaning of the words.
In reaching this conclusion she acknowledged that she was not construing the sub-section in accordance with the English decision of In re Griffin Hotel Company Limited.

The second decision of the High Court in the Belgard Motors case was delivered on 11 July 2011.  Ms Justice Finaly Geoghegan held that the notice served on foot of a clause in a debenture which indicated that the bank in question could, by notice in writing, convert a floating charge to a fixed charge over all the property and assets of the company subject to the floating charge if, in the bank’s sole judgment, the property and assets concerned were in jeopardy, was not sufficient to convert the floating charge into a fixed charge. Ms Justice Finlay Geoghegan, drawing upon the reasoning of the Supreme Court in Re Keenan Brothers ([1985] IR 401), concluded that this was the case on the basis that there was nothing in the debenture which restricted the entitlement of the company to deal with or dispose of stock in trade or use the proceeds of book debts or cash at bank following the notice.

Both the Official Liquidator and the bank in question have indicated to the court that they intend to appeal the matter.

Conclusion
The judgement (subject to appeal) means that it is not possible for a bank to improve its position over preferential creditors by crystallising its floating charge into a fixed charge.
 

For further information please contact Jim Stafford or Tom Murray on 01 661 4066 or jim.stafford@frielstafford.ie or tom.murray@frielstafford.ie