Vol 12 (2015) - Issue 6

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Irish Supreme Court Confirms that Crystallised Floating Charges May Leapfrog Preferential Creditors upon Winding Up

1. Summary of the law
In the recent case of In the Matter of JD Brian Limited (In Liquidation) t/a East Coast Print and Publicity and In the Matter of JD Brian Limited (In Liquidation) t/a Belgard Motors and In the Matter of East Coast Car Parts Limited (In Liquidation), the Irish Supreme Court found that the holder of a floating charge in respect of which a notice of crystallisation was properly served in advance of liquidation ranked ahead of preferential creditors in
the order of priorities in the liquidation.

Overview of the case
The three companies (the 'Companies') were members of the Belgard Motors Group. Each of the Companies entered into debentures with the bank (the ‘Bank’) in 2005. Clause 10 in each of the debentures (the 'Conversion Clause') allowed the Bank to serve a notice in writing on the Companies to convert the floating charge contained in each debenture into a first fixed charge if the Bank considered that the assets referred to in the notice were in jeopardy.
The Bank relied on the Conversion Clause in the service of a notice entitled 'Notice of Conversion of Floating Charge' (the 'Crystallisation Notice') on each of the Companies. The notice, dated 28 October 2009, purported to convert the floating charge to a fixed charge over the underlying assets. On 7 December 2009, a month and a half after service of the Crystallisation Notice, the Companies entered court-ordered liquidation. On 23 June 2010 the liquidator applied for directions of the court seeking orders:
(a) confirming that the floating charge had been validly crystallised; and
(b) confirming that the effect of crystallisation was that the assets subject to the charge fell outside the remit of section 285(7) Companies Act 19632 (the 'CA 1963') – which provided for priority in a liquidation for preferential creditors such as certain tax and employee liabilities – and were not available to satisfy preferential creditors, such as the Revenue Commissioners.

The trial judge, Finlay Geoghegan J, delivered two judgments in the High Court. In her initial judgment, on 25 March 2011, she held that the correct construction of section 285(7) CA 1963 meant that preferential creditors ranked in priority to the Bank’s floating charge as debenture holder, regardless of when the floating charge was deemed to have crystallised. By reason of her construction of section 285(7) CA 1963, she concluded that it was not necessary at that juncture to make an order in relation to the second issue in question – the effect of the Crystallisation Notice. The liquidator subsequently sought a determination of this issue on the basis that he intended to appeal the initial judgment to the Supreme Court.
In the second judgment of Finlay Geoghegan J, delivered on 11 July 2011, she concluded that the service of the Crystallisation Notice, pursuant to the Conversion Clause, was not sufficient to convert the floating charge into a fixed charge over the assets.
The liquidator and the Bank were unsuccessful in arguing that the Crystallisation Notice once served, restricted, by implication, the entitlement of the Companies to deal with the assets which were the subject of the Crystallisation Notice. Finlay Geoghegan J examined clause 8 of the debentures, which allowed the Companies to carry on their business, and drawing upon the reasoning of the Supreme Court in Re Keenan Brothers, concluded that as there was no express provision in the debentures which restricted the entitlement of the Companies to deal with or dispose of stock in trade or use the proceeds of book debts or cash at bank following the Crystallisation Notice, the Crystallisation Notice did not effect a conversion of the floating charges into fixed charges.