The High Court recently considered whether the claim of a secured creditor, on foot of a crystallised floating charge, to the proceeds of assets in a liquidation could rank ahead of the statutory priority afforded to preferential debts such as taxes.  The issue was brought before the Court by the liquidator of a group of motor companies who sought directions as to the appropriate distribution of the assets. The Court addressed the issue by looking at the security instrument entered into by one of the companies within the group.

In that instance, Bank of Ireland was the holder of a debenture under which a floating charge was created by the company over certain of its assets.  The debenture provided that the floating charge would ‘automatically’ crystallise on the occurrence of certain events (including the presentation of a petition to wind-up the company) or expressly by written notice from the bank to the company.  Prior to the commencement of the winding-up of the company, Bank of Ireland gave written notice to the company that the floating charge had crystallised and had become ‘fixed’ over the assets thereby charged.

One argument that was presented was that, by reason of the crystallisation of the floating charge prior to the commencement of the winding-up, Bank of Ireland was entitled to recover all of the monies realised from the assets of the company charged by the floating charge.  If the Court agreed with this argument, Bank of Ireland’s claim would rank ahead of the preferential debts (in this case monies due to the Revenue) in the distribution of those assets.

The Revenue, in turn, asserted that a proper construction of the relevant legislation regarding the ranking of preferential debts meant that priority should be given to preferential debts over any claim arising under a floating charge regardless of whether the floating charge had crystallised prior to the commencement of the winding-up.

The Court concluded that the intention of the legislation was that the preferential debts should rank in priority to the claim of a debenture holder under a floating charge, regardless of whether the crystallisation of the floating charge commenced prior to the winding-up. Accordingly, the Court found in favour of the Revenue’s right to priority as a preferential creditor.

This decision confirms the priority of preferential debts over claims arising from charges which, when created, were floating charges, regardless of when or whether crystallisation occurred. However, it does not impact upon the priority afforded to holders of fixed charges.

Contributed by Craig Sowman.

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