Introduction
With the commencement of the Companies Accounting Act 2017 (“2017 Act”) on 9 June 2017, the priority of charges in liquidations has been dramatically altered.
Judicial Development
There has always been a lack of judicial clarity as to the priority of a crystallised floating charge in a liquidation. However, the Supreme Court decision in what became known as the Belgard Motors case [i], provided that if a floating charge crystallised in advance of a company ...
Introduction
With the commencement of the Companies Accounting Act 2017 (“2017 Act”) on 9 June 2017, the priority of charges in liquidations has been dramatically altered.
Judicial Development
There has always been a lack of judicial clarity as to the priority of a crystallised floating charge in a liquidation. However, the Supreme Court decision in what became known as the Belgard Motors case [i], provided that if a floating charge crystallised in advance of a company going into liquidation, that charge holder was deemed to be the holder of a fixed charge and therefore had priority over all other unsecured creditors, including preferential creditors.
However the Court made it clear that the crystallisation of a floating charge must result in the creation of a ‘real’ fixed charge. It would not be sufficient to simply issue a Crystallisation Notice and allow the company deal with assets in the same way as had been the case under the floating charge.
The Revenue Commissioners were an unsecured but preferential creditor in the Belgard Motors liquidation. The Bank claimed the benefit of a fixed charge after the timely service of a Crystallisation Notice. A dispute developed between the Revenue and the Bank as to whether the Bank could convert its floating charge into a fixed charge. The Court held that the Bank could rely on its converted floating charge which resulted in no assets remaining to pay preferential and unsecured creditors.
Legislative intervention
As a result of the perceived inequity in this regime and particularly the grievances of the Revenue Commissioners, the 2017 Act has been passed to restore the priority of preferential creditors.
The 2017 Act removes the possibility of a crystallised floating charge being able to “leap frog” preferential creditors as they did in the Belgard Motors case. The 2017 Act provides that preferential creditors and debts “shall have priority over the holders of debenture under any charge created as a floating charge by the company”.
Conclusion
The 2017 Act has been passed into law and it is clear. Security created as a floating charge cannot be converted to a fixed charge so that the holder can claim a priority in a liquidation.
This legislative change materially impacts on the commercial security offered by a floating charge. Accordingly, lenders may have to consider limiting the assets over which they allow a floating charge to be created and protect their interests in so far as they can with fixed charges. In the case of many borrowers, this will not be possible in the operation of their business if they have no fixed premises and their assets are fluid.
The real impact of this legislative change will become clearer in time. In the meantime, lenders will need to be alive to the value of their security in an insolvent situation as liquidators may have access to more assets for distribution than had been the case.
This article does not constitute legal advice and if you require formal legal advice in relation to the subject matter, please contact McDowell Purcell.References[i] Re JD Brian Ltd (No 1) [2012] 1 ILRM 27
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