In a recent decision, the Supreme Court has confirmed that a crystallisation notice served prior to the commencement of a winding up can validly crystallise a floating charge and therefore obtain priority for that charge over preferential creditors’ claims during a liquidation.
This case arose from the winding up of a number of companies in the Belgard Motors Group. During the winding up process, the liquidator sought directions from the High Court as to whether a floating charge contained in debentures executed by the companies in favour of the Bank of Ireland had validly crystallised prior to the liquidation. The liquidator queried whether, as a result of crystallisation, the floating charge assets were not available to satisfy preferential creditors, such as the Revenue Commissioners. The terms of the debentures allowed the bank to serve a notice in writing on the companies to convert the floating charge into a first fixed charge if the bank considered that the charged assets were in jeopardy. This provision was invoked by the bank prior to the commencement of the winding up.
In giving the directions sought, the High Court examined the provision of the Companies Acts concerning the treatment of preferential payments in a winding up. It found that the provision meant that the preferential debts (e.g. Revenue debts) ranked in priority to the bank’s claim to the funds realised from the assets that were subject to the floating charge, irrespective of whether the floating charge crystallised prior to the commencement of the winding up.
The liquidator appealed this decision to the Supreme Court. In its judgment, the Supreme Court analysed two issues:
- The effect of the crystallisation notice served by the bank
- The construction of the provision of the Companies Acts concerning the treatment of preferential payments in a winding up
The Supreme Court overturned the decision of the High Court and reached the following conclusions:
- The floating charge created by the debentures was converted into a fixed charge over the property of each of the companies by virtue of the crystallisation notice served by the bank prior to the commencement of the winding up.
- The relevant provision of the Companies Acts affords priority to preferential claims (such as Revenue claims) against assets which are subject to a charge which is a floating charge at the commencement of a liquidation. The earlier crystallisation of the floating charge had the effect of taking those assets outside the remit of the relevant provision.
This is a very welcome finding by the Supreme Court and provides clarity to banks and other financial institutions as to how the courts will deal with such scenarios. It is worth mentioning, however, that the Court expressed dissatisfaction with the underlying legislation and the fact that the provision of the Companies Acts concerning the treatment of preferential payments in a winding up has been carried over into the new Companies Act 2014. The Court noted that an amendment to the law would be necessary “to reverse the undoubtedly unsatisfactory outcome of this decision, which gives rise to a number of concerns.”
Contributed by Barry Cahir and Rosaleen Walsh.
