A recent Court of Appeal decision held that receivers are statutorily obliged to discharge preferential costs from assets available after deducting costs and and expenses of a receiver.
The Court of Appeal (Court) judgment In the matter of Beggasa Limited (In Receivership): Revenue Commissioners v Burns and McCann  (Judgment), arose out of an application for directions brought by the Revenue Commissioners (Revenue) under section 438 of the Companies Act 2014 (2014 Act). Revenue sought a declaration that the receivers failed to comply with section 440 of the 2014 Act on priority of payments to preferential creditors where receivers were appointed over assets secured by a floating charge.
The issue was whether the receivers could lawfully repay monies to a bank out of floating charge realisations, or whether Revenue enjoyed priority in respect of some of those monies as a preferential creditor. As noted by the Court, the application brought into focus the relationship between costs incurred by receivers appointed to a company under a floating charge who continue to carry on the business of that company and claims of preferential creditors who may be adversely affected by that continuation of trading.
Receivers were appointed on foot of two debentures; a fixed and floating charge debenture between Beggasa Limited (Company) and the Bank, and a fixed charge mortgage between the Property developer, Mr Flood, and the Bank to receive and manage the Shannon Oaks Hotel and Country Club (Property) by Zurich Bank (Bank) on 9 September 2011.
The receivers borrowed €293,000 from the Bank in February 2012 (receivership loan). The receivership loan was used to fund ongoing maintenance of the Property and to finance an arbitration claim in relation to a fire that had damaged the hotel premises. The receivership loan was secured against the fixed charge mortgage between Mr Flood and the Bank. After selling the Property in 2016, the receivers paid back c€208k of the receivership loan. The receivers assigned c€150k towards the fixed charge and the balance of c€58k towards the floating charge. Revenue’s argument was that it should have been paid in priority to the repayment of the loan relating to the floating charge.
The High Court held the receivership loan was an expense of the receivership and that the Receivers were entitled to repay it in priority to Revenue’s preferential debt. Revenue appealed to the Court of Appeal (COA).
On appeal, Revenue took issue with the borrowed costs incurred in the “trading receivership” and argued that the High Court made an error in failing to distinguish the proper costs and expenses in realising assets subject of the floating charge from the costs and expenses of a trading receivership.
Section 440 of the 2014 Act governs the application of the proceeds of a floating charge realisation. It obliges a receiver appointed under a floating charge, to pay preferential debts in priority to any claim for principal or interest in respect of the debentures. Revenue accepted that the costs incurred in realising assets secured by floating charges must be paid in priority to preferential debts. However, it argued that payment of monies to the Bank in respect of a loan to fund the costs and expenses of a “trading receivership” in priority to preferential claims breached section 440 of the 2014 Act.
The Court distinguished between priorities where a receiver is appointed over assets the subject of a floating charge; and the duties to pay preferential creditors imposed under section 440 of the 2014 Act. Murray J, giving judgment for the Court made two findings of law:
- On priorities, the Court held that a receiver is entitled to be paid, in priority to the claims of preferential creditors or the debenture holder, the costs of realisation of assets subject to a floating charge, and the costs and expenses of the receivership.
- On the duty owed by receivers to preferential creditors, the Court found that section 440 of the 2014 Act imposes a duty on a receiver to preferential creditors. This duty requires the receivers to pay the preferential creditors out of any available assets, to which the debenture holder would otherwise have been entitled. It found that this duty is triggered at any point when the receivers, after taking into account the costs of realisation, the costs and expenses of the receivership, and their remuneration, have sufficient assets to discharge the preferential debts, either in whole or in part.
The Court summarised that in effect, this means that if the receivers continues to trade, they do so at their own risk. Should they lose money whilst trading, they will be personally liable to the extent that preferential creditors have lost money they would otherwise have received had they not decided to continue to trade.
The Court accepted that the receivership loan was a proper cost and expense of the receivership. However, this did not resolve the potential liability of the receivers to the Revenue (as preferential creditors). As noted by the Court, any such liability would depend on the assets available to the receivers at given points in time having regard to the costs and expenses of the receivership then deductible.
As the application before the Court was simply one for directions under section 440 of the 2014 Act, it was unnecessary for any potential personal liability on the part of the receivers to be determined at this time.
The importance of this decision is the fact that the Court identified that the requirement for receivers appointed over floating charge assets to discharge preferential debts arises at any point in the receivership when there are sufficient assets to discharge the preferential debt. Accordingly, if a receiver appointed over floating charge assets decides to continue to trade that floating charge asset/business, which ultimately diminishes the recovery of funds which would otherwise be available to preferential debtors at one point they may be held personally liable for the loss.
Contributed by Simona Mulligan & Ronan Holohan