Floating Charges vs. Preferential Creditors – Belgard Motors

In what has become widely known as the Belgard Motors case, relating to competing priorities between claims under floating charges which have crystallised and preferential creditors in insolvency, the High Court has held that a floating charge that has crystallised (i.e. become fixed) prior to a liquidation will not rank in priority to the claim of a preferential creditor. The court also considered the validity of automatic crystallisation of a floating charge.

In the matter of JD Brian Limited (In Liquidation) and Others [2011] IEHC and [2011] IEHC 283 (“Belgard Motors”) Bank of Ireland’s security contained a clause which entitled the bank to, at any time, by notice in writing convert the floating charge into a fixed charge if in the bank’s judgement the assets secured by the floating charge were in any way in jeopardy. The bank served just such a notice on the company notifying them that the floating charge had crystallised prior to the initiation of wind up proceedings against the company. The bank was owed in the region of €16.25 million and the projected realisation of assets in liquidation was in the region of €12.5 to €14.5 million. It was estimated that the available floating charge assets were in the region of €2 million.

The Revenue Commissioners had a substantial preferential claim in relation to unpaid taxes and the question then arose as to whether the floating charge assets should go to the bank as the holder of a floating charge that had crystallised or to the Revenue Commissioners as a preferential creditor.

Under Section 285 of the Companies Act, 1963 (“Section 285”) certain preferential creditors are afforded priority ahead of the claims of the holders of a floating charge. The court considered the proper interpretation of Section 285 and concluded that the claim of a floating charge holder is as the holder of a floating charge albeit that the charge has become a fixed charge. Therefore a claim arising on foot of a floating charge even where the floating charge had crystallised prior to liquidation does not rank ahead of the preferential claim.

The Court also concluded that there was no rule of law which precludes parties to a debenture creating a floating charge agreeing that, as a matter of contract, the floating charge will crystallise upon the happening of an event or a particular step taken by the floating charge holder. Whether the parties actually achieve their intention is a separate issue by reason of among other things the reasoning of the Supreme Court laid down in Re Keenan Brothers [1985] IR 401.

In a supplementary judgement the Court, following the reasoning of the Supreme Court in Re Keenan Brothers, concluded that the service of the notice by the Bank did not have the effect of converting the floating charge to a fixed charge as the debenture contained no restriction on the company’s use of the property after service of the notice. In effect just because it was labelled as a fixed charge did not mean that it was a fixed charge.

The determination in the Belgard Motors Case is under appeal to the Supreme Court.