Debenture Security
Cases
Response Engineering Ltd -v- Caherconlish Treatment Plant Ltd
[2011] IEHC 345
Hogan J
“Does the sum owed by the Council constitute a “book debt” for the purposes of s. 99(2)(e)?
8. There is no doubt but that the phrase “book debts” has, to the modern ear, something of a musty feel to it. The phrase conjures up images of Victorian bookkeeping and ledger entries, the tales in relation to which form many a sub-plot of the great novels of Dickens and Trollope. Yet the term refers to no more than future income which will accrue to the company by reason of the provision of goods and services to third parties by that company in the course of its trade or business.
9. In Farrell v. Equity Bank Ltd. [1990] 2 I.R. 549, 553-554, Lynch J. quoted with approval the following definition of “book debts” contained in Halsbury’s Laws of England (4th Ed.), Vol. 3 at para. 525:-
“’Book debts’ mean all such debts accruing in the ordinary course of a man’s trade as are usually entered in trade books, but to constitute a book debt it is not necessary that the debt should be entered in a book.”
10. In Farrell Lynch J. held that the return of insurance premia to a bank pursuant to a letter of undertaking did not involve the creation of a book debt, since, as he put it ([1990] 2 I.R. 549 at 554):-
“The mere possibility that future refunds of premiums might become payable in amounts which were wholly unascertained and might never arise at the date of the creation of the charge does not make that transaction a book debt which must be registered pursuant to s. 99 of the Act of 1963.”
11. This conclusion was scarcely surprising since it would hard ever to contend that the (essentially fortuitous) refund of insurance premia constituted a book debt in the sense which I have indicated, not least since such a payment would not have constituted part of the trading income of the company.
12. A similar view was taken by McWilliam J. in Byrne v. Allied Irish Banks Ltd. [1978] I.R. 446, a case where a restaurant company with trading difficulties contracted to sell its business premises. In consideration of the provision by the defendant bank of extra credit facilities to enable it continue trading pending the completion of the sale, the company’s solicitors agreed to hold the documents of title in trust for the bank and to redeem the loan out of the proceeds of sale. McWilliam J. first held that the letter created an equitable charge and proceeded to find (admittedly somewhat tersely) that the proceeds of sale did not constitute book debts of the company. Again, given that the proceeds of sale involved the sale of a capital asset as distinct from, for example, a charge over the future receipt of trading income from the restaurant, this conclusion is again an unsurprising one.
13. The position here is a very different one. Here Caherconlish had provided goods and services to a third party – Limerick County Council – by constructing a water treatment plant and it was awaiting payment by the Council at some future date. Such a payment classically amounts to a book debt within the meaning of this sub-section.
Did the undertaking create a security interest in the book debt?
14. In the present case, the fundamental question is whether, adopting the very language of the sub-section, the undertaking creates a security interest in the company’s property or undertaking or whether in reality it amounts to an assignment of debt. That, in reality, is what emerges from a consideration of the case-law, starting with the well known decision of Wynn Parry J. in Re Kent and Sussex Sawmills [1947] Ch. 177.
15. In that case the company gave a direction to its creditor, the UK Ministry of Fuel and Power, that all payments in respect of the supply of logs were to be paid by the Ministry to its bank. The instructions were held to be irrevocable “unless the said bank should consent to their cancellation.” Wynn Parry J. held that on its true construction the letter of instructions was in the nature of a security. He posed the following question ([1947] Ch. 177 at 182):-
“…if the company’s account had come into credit the company would then have been entitled, in the true view of this letter, to require the bank to give the necessary instructions to the Ministry. The Ministry is in no way concerned with the position as between the bank and the company and as between those two parties I can see no ground either at law or in equity, on which the bank could have resisted a request or a requirement by the company to cancel the instructions. That at once shows that there is discoverable in this latter paragraph a true equity of redemption.”
16. The judge ultimately held that the letters in question amounted to assignments of the books debts by way of security for the overdraft and, in the absence of registration, such security assignments were void as against the liquidator. At the risk of stating the obvious, as a judgment of the English High Court, this decision of course in no way binds me. It is nevertheless a decision of a highly respected Chancery judge and it is a decision which has been applied with approval in this jurisdiction: see, e.g., Re Interview Ltd. [1975] I.R. 382 at 396, per Kenny J.
17. In other cases the courts have held that the instruments in question involved an assignment of the debt. This was the conclusion of Slade J. in Re Siebe Gorman Ltd. [1979] 2 Lloyd’s Reports 142 at 161-163 (a decision to which I shall shortly revert) where a creditor of the company had assigned to that bills of exchange as “security” for the debt. The company then also sent a letter to the company’s bankers directing it to pay the proceeds of the bills of exchange directly to Siebe Gorman and this letter was expressed to be an irrevocable instruction. Slade J. held that, in view of the terms of relevant deed it constituted an effective assignment of the debt and was not a security interest.
18. This was also the view taken by His Honour Judge Paul Baker QC in Re Marwalt Ltd. [1992] BCC 32. In that case another company, BSC, had agreed to supply tinplate to a Chilean company. This, however, was a high risk market and BSC needed to sell the tinplate through a third party which had export credit guarantee insurance. Marwalt was such a company and BSC engaged it to sell on the tinplate to the Chilean company, Corpora, on a commission basis. Any funds payable by the Chilean company were to be paid directly to BSC. BSC was effectively an undisclosed principal so far as these transactions were concerned.
19. Judge Baker held that these arrangements involved an assignment of debt to BSC. Unlike the situation in Kent and Sussex Sawmills – “where there was no correlation between the amount to be paid by the debtor to the creditor…and the amount to due to the bank which took the form of a fluctuating overdraft” – in the present case there was:-
“an exact correlation between the moneys which are to come in from Corpora and the moneys which are due to go out to BSC. Those moneys are not to secure an indebtedness as between Marwalt and BSC; they go out as part of BSC’s own moneys and not as moneys belonging to Marwalt.”
20. Marwalt may, of course, be explained on the basis that there was an exact co-relation between the moneys which came in from the purchaser of the tinplate and the sums which were due to the supplier, BSC. But there is, I think, another explanation for this decision which serves to put the entire matter in context, namely, that Marwalt were acting purely as commission agents for BSC. They never intended to make any profit (commission aside) on these dealings vis-à-vis the moneys received or receivable from Corpora. Those moneys were effectively held by Marwalt as bare trustees and, applying the test of Wynn Parry J., it could never have been said that Marwalt had any equity of redemption in those moneys. It is thus scarcely surprising that Judge Baker held that the moneys had been assigned by way of charge and not by way of debt security.
21. In these cases, of course, the context is highly material. Here the context is that of a banking relationship. Unlike the situation which prevailed in Re Marwalt, here one would normally expect the customer to enjoy an equity of redemption in respect of the debt unless the debt itself had been sold or otherwise assigned, a point recognised by Slade J. in Re Siebe Gorman [1979] 2 Lloyds’ Law Reports 142 at 161. In that case Slade J. held, following a very careful examination of the relevant deed as between Siebe Gorman and its creditor, RH McDonald Ltd., that it effected “an outright assignment of the benefit of the relevant bills” in favour of Siebe Gorman in consideration for an extension of the appropriate credit facilities by the latter company to its trade creditor.
22. It is true that in the present case the undertaking was given in consideration of the provision of additional credit facilities and to that extent the present case roughly parallels the decision in Siebe Gorman, albeit that – and this is not an unimportant consideration in view of a working presumption which I will shortly mention – the assignment in the latter case was to a trading company and not to a bank. The real question, however, is whether the Council’s debt had been effectively sold to AIB by way of assignment via the solicitor’s undertaking or, alternatively, whether Caherconlish retained an equity of redemption in these moneys in (admittedly unlikely) event that the AIB debt were to be discharged, in whole or in part. I use the term “effectively sold” advisedly, because in deference to the views expressed by Slade J. in Siebe Gorman ([1979] 2 Lloyds’s Law Reports 142 at 161), I would regard an assignment of debt for consideration (i.e., the provision of credit facilities by either a trade creditor or a bank) as being tantamount to a sale, even if no formal purchase price is stipulated.
23. Given the presumption which must obtain in the ordinary banker/client relationship that the client enjoys the equity of redemption, absent a clear indication to the contrary, in my view, unlike the situation which was found to prevail on the facts in Siebe Gorman, that working presumption has not been displaced in the present case. It is true that Mr. Potter’s undertaking stated that he had “irrevocable instructions to lodge the said cheques to Caherconlish Treatment Plant’s account with AIB”. But this is in itself is not inconsistent with an equity of redemption. Nor do these words in themselves imply that the debt has actually been effectively sold by way of assignment in consideration of the extension of the overdraft facilities.
24. Again, if we test this proposition in the same manner as in Kent Sawmills and we must then ask ourselves what the situation would have been, if – mirabile dictu – the Caherconclish account had otherwise come into surplus. That question effectively answers itself Even if Mr. Potter’s undertaking still applied in those unlikely but happy circumstances, all it meant was that the payment cheque from the Council had to be lodged in the company’s account. It did not mean that these monies had thereby somehow become the property of the bank by way of windfall since there had, in fact, been no effective sale or assignment or the Council’s payment to bank in return for the credit facilities. Putting this another way, the evidence coerces me to the view that the bank wanted security for its debt and it was not, in this instance at least, in the business of effectively purchasing the debt by providing additional overdraft facilities to Caherconlish.
25. For these reasons, I am of the view that the solicitor’s undertaking was by way of security and not assignment. I will accordingly declare that the undertaking is void as against any creditor of the company for want of the registration of the security over the book debts of the company in the manner required by s. 99(2)(e) of the 1963 Act.”
In re Tullow Engineering (Holdings) Ltd. (In Receivership)
[1990] 1 I.R. 458
Blayney J.
“The nature of a floating charge is very well settled. It is only necessary to cite one passage describing it. In Evans v. Rival Granite Quarries Limited [1910] 2 K.B. 979, Buckley L.J. said in his judgment at p. 999:
“A floating security is not a future security; it is a present security, which presently affects all the assets of the company expressed to be included in it . . . A floating security is not a specific mortgage of the assets, plus a licence to the mortgagor to dispose of them in the course of his business, but is a floating mortgage applying to every item comprised in the security, but not specifically affecting any item until some event occurs . . . which causes it to crystallise into a fixed security.”
The debentureholders had a present security on the shares and in my opinion the granting by Holdings of an option to purchase the shares in no way altered that security. The granting of the option did not constitute a disposal of the shares. They remained the property of Holdings, and being the property of Holdings, they continued to be subject to the floating charge. The only difference effected by the grant of the option, in so far as Holdings was concerned, was that Holdings could not until the 31st May, 1988, withdraw its offer to sell the shares to Investments at par. Subject to that restriction, Holdings remained the owner of the shares and the shares remained subject to the floating charge.
On the appointment of the receiver, the charge crystallised. What takes place on crystallisation was described as follows by Kenny J. in his judgment in In Re Interview Ltd. [1975] I.R. 382 at p. 395:
“The next contention by the applicant was that the effect of the appointment of the receiver under the debenture was a crystallisation of the floating charge and that this operated as an equitable assignment of the goods in the possession of Interview to the Ulster Bank Limited. The applicant relied strongly on the judgment of Russell L.J. in Rother Iron Works Ltd. v. Canterbury Precision Engineers Ltd. [1974] Q.B. 1. In the passage quoted Russell L.J. was summarising the argument for the plaintiff but I think that the appointment of a receiver under a debenture which creates a floating charge on the assets of the company operates as an equitable assignment of the property and goods owned by the company to the debentureholder. A debenture creating a floating charge is, as Lord Macnaghten said in Illingworth v. Houldsworth [1904] A.C. 355, 358, ambulatory and shifting in its nature. The charge floats over the assets of the company until some act is done which causes it to fasten onto the property and goods of the company. The appointment of a receiver has this effect.”
At the date of the appointment of the receiver, Holdings still owned the shares. The effect of the crystallisation of the floating charge which occurred was that there was an immediate equitable assignment of the shares to the debentureholders so that, in equity, they became the owners of the shares. Holdings was divested of its ownership in favour of the debentureholders. Accordingly, it no longer had the capacity to enter into a contract to sell the shares in pursuance of the option which it had granted. Its ownership had been terminated and so its irrevocable offer to sell became a dead letter. No longer having the ownership of the shares, it could not contract to sell them. The only person who could do that was the receiver acting under the powers given to him in the debentures. The purported exercise of the option did not alter the position. The acceptance by Investments of an offer to sell by a party who was not the owner of the shares could not bring into being any contract in respect of the shares. Holdings no longer had the title necessary to enable it to do what it had contracted to do in granting the option.
The following passage from the judgment of Romer J. in Robson v. Smith [1895] 2 Ch. 118 at p. 124 seems to me to support the conclusion at which I have arrived:
“So long as the debentures remain a mere floating security, or, in other words, the licence to the company to carry on its business has not been terminated, the property of the company may be dealt with in the ordinary course of business as if the debentures had not been given, and any such dealing with a particular property will be binding on the debenture-holders, provided that the dealing be completed before the debentures cease to be merely a floating security.”
In the present case the proviso at the end of the quotation was not complied with; the dealing was not completed before the debentures ceased to be merely a floating charge because the option had not been exercised. When it was exercised, it was too late and the debentureholders could not be bound.
Mr. Shanley submitted that Investments were entitled to specific performance of the contract which he said came into existence on the exercise of the option and he relied on Freevale Ltd. v. Metrostore (Holdings) Ltd. [1984] Ch. 199 where it was held by the High Court in England that an order for the specific performance of a contract for the sale of land could be obtained against a receiver. But that case is clearly distinguishable from the present. The contract for the sale of the land had been entered into by the company before the appointment of the receiver. In the present case, at the date of the appointment of the receiver, no contract had been entered into for the sale of the shares. All that had happened was that an option to purchase had been granted in respect of the shares. Before any question of specific performance could arise, Mr. Shanley would have to show that the debentureholders were bound by the purported exercise of the option and, in my opinion, for the reasons I have already given, he could not do that. When the option was exercised, the shares were no longer the subject of a floating charge but of a fixed charge so that Holdings no longer had power to sell them.”
In the matter of J.D. Brian Ltd (in Liquidation)
Finlay Geoghegan J. 2013 3 IR 244 (High Couty)
[1] In this application, brought pursuant to s. 280 of the Companies Act 1963, as amended, the official liquidator of the companies named in the title (“the companies”) and other companies within the Belgard Group, seeks declarations and directions of the court arising out of the purported crystallisation of floating charges created by each of the companies in favour of the Governor and Company of the Bank of Ireland (“the bank”). The application raises important issues relating to the proper construction of s. 285(7) of the Companies Act 1963 and the validity of so-called “automatic crystallisation” of a floating charge in this jurisdiction. Counsel for the applicant and notice parties made detailed submissions and referred me to a significant number of authorities from other common law jurisdictions and, in particular, England and Wales. Their research indicates that there is no written judgment in this jurisdiction on either issue. I am not aware of any such decision.
[2] The background facts giving rise to the application are not in dispute. Whilst a number of the companies in liquidation granted similar debentures in favour of the bank, I only propose referring to that given by J.D. Brian Motors Ltd. (in liquidation) (“the company”).
[3] On the 20th December, 2005, the company executed a debenture (“the debenture”) in favour of the bank as security for present and future borrowings. The debenture provided,inter alia:-
“4. The company, as beneficial owner hereby charges in favour of the bank all its undertaking, property and assets, whatsoever and wheresoever both present and future including goodwill and its uncalled capital for the time being with the payment of all moneys hereby secured including interest as aforesaid.
5. The charge hereby created shall as regards the lands described in the schedule hereto (the ‘Scheduled Premises’) and all estate or interest legal or equitable in all freehold and leasehold property, all profits a prendre, easements, rights of way, rights under covenants, agreements, undertakings and indemnities and rights to compensation, statutory or otherwise, attaching thereto which shall at any time hereafter during the continuance of this security become the property of the company all present and future proceeds of insurance receivable by the company, and its goodwill and uncalled capital for the time being be a specific charge and shall as regards the other property hereby charged be a floating security but so that the company shall not be at liberty to create any mortgage or charge ranking in priority to or pari passu with these presents.
10. The bank, may, at any time, by notice in writing served on the company, convert the floating charge contained in this deed into a first fixed charge over all the property, assets and rights for the time being subject to the said floating charge or over so much of the same as is specified in the notice. A notice under this clause may be served by the bank only if, in the sole judgment of the bank, the bank considers that the property, assets and rights described or referred to in the notice are in any way in jeopardy.
11. The floating charge contained in this deed shall in any event stand converted into a fixed charge automatically upon:- “
(a) the filing of a petition for the winding up of the company;
(b) the passing of a resolution for the winding up of the company;
(c) the appointment of a receiver on behalf of the holders of any debentures of the company secured by a floating charge;
(d) possession being taken of any property by or on behalf of the holders of any debentures of the company secured by a floating charge.”
[4] On the 28th October, 2009, the bank served a notice, pursuant to clause 10 of the debenture, on the company, in which, having referred to the debenture, it stated, in the operative part:-
“We now give you NOTICE that we now consider the property, assets and rights which are subject to the floating charge contained in the debenture are in jeopardy.
We further give you NOTICE that, pursuant to clause 10 of the debenture, we hereby convert the floating charge contained in the debenture into a first fixed charge with respect to all property, assets and rights which are subject to such floating charge.”
[5] On the 13th November, 2009, a petition was presented for the winding up of the company and Mr. Tom Kavanagh was appointed provisional liquidator. On the 7th December, 2009, an order for the winding up of the company was made and Mr. Kavanagh was appointed official liquidator.
[6] Similar notices were served by the bank on the other companies within the group and petitions similarly presented and winding up orders made and Mr. Kavanagh appointed both provisional and official liquidator thereof.
[7] The total indebtedness of the companies to the bank at the date of commencement of the windings up was in the order of EUR16,250,000. The official liquidator, in his grounding affidavit, anticipates realisations in the order of EUR12,500,000 to EUR14,500,000, of which approximately EUR2 million may relate to assets which are the subject of the floating charge provisions of the debentures (“floating charge assets”). All of the assets of the companies are charged in favour of the bank and there are no unsecured assets available for distribution to the creditors of the company. It is anticipated that there will be a shortfall in the monies due to the bank.
[8] The official liquidator, on advice, contends that the floating charge created by the company in the debenture of the 20th December, 2005, was validly crystallised by the service of the notice of the 28th October, 2009. Further, that by reason of the crystallisation of the floating charge prior to the date of commencement of the winding up, the bank is entitled to all of the assets of the company, and the preferential creditors have no entitlement to be paid in priority to the bank out of any portion of the assets realised, pursuant to s. 285(7) of the Act of 1963. He seeks declarations and directions to that effect.
[9] The application is on notice to the Revenue Commissioners. There are preferential debts due to the Revenue Commissioners by some or all of the companies. The Revenue Commissioners submit that on a proper construction of s. 285(7), priority is given to its preferential claim over the claim of the bank to the monies realised from the assets, the subject matter of the floating charge in the debenture, regardless of whether or not the floating charge crystallised prior to the commencement of the winding up. The Revenue Commissioners also submit that there has not been a valid crystallisation of the floating charges created in favour of the bank so as to convert the charges into fixed charges.
[10] By agreement of the official liquidator and the Revenue Commissioners, the bank was also represented at the hearing. Submissions were made on its behalf to the same effect as those of the official liquidator. Insofar as I refer in this judgment to submissions made on behalf of the official liquidator, I am also including submissions made on behalf of the bank.
Section 285 of the Companies Act 1963
[11] Section 285, insofar as is relevant, provides that in a winding up, there shall be paid in priority to all other debts, certain rates, taxes and debts to employees due at the “relevant date”. The relevant date is defined in subs. (1) as meaning:-
“(i) where the company is ordered to be wound up compulsorily, the date of the appointment (or first appointment) of a provisional liquidator or, if no such appointment was made, the date of the winding-up order, unless in either case the company had commenced to be wound up voluntarily before that date.”
The relevant date for the purposes of s. 285 is, accordingly, not necessarily the same date as the date of commencement of the winding up in accordance with s. 220. Section 220 provides:-
“(1) Where, before the presentation of a petition for the winding up of a company by the court, a resolution has been passed by the company for voluntary winding up, the winding up of the company shall be deemed to have commenced at the time of the passing of the resolution, and unless the court, on proof of fraud or mistake, thinks fit to direct otherwise, all proceedings taken in the voluntary winding up shall be deemed to have been validly taken.
(2) In any other case, the winding up of a company by the court shall be deemed to commence at the time of the presentation of the petition for the winding up.”
As appears, in most instances, the date of commencement of a winding up by the court is the date of presentation of the petition. The relevant date, in accordance with s. 285(1) for preferential debts may also be that date where a provisional liquidator is appointed on the same date as the petition is presented, but may also be one or more later dates, including a subsequent appointment of a provisional liquidator or, where no appointment was made, the date of the winding up order.
[12] Section 285(7) provides:-
“The foregoing debts shall –
(a) rank equally among themselves and be paid in full, unless the assets are insufficient to meet them, in which case they shall abate in equal proportions; and
(b) so far as the assets of the company available for payment of general creditors are insufficient to meet them, have priority over the claims of holders of debentures under any floating charge created by the company, and be paid accordingly out of any property comprised in or subject to that charge.”
[13] On the facts herein, there are no assets available for payment to the general creditors of the company. There is a fund likely to be in the order of EUR2 million, realised from the assets which were the subject matter of the floating charge created by the company in the debenture of December, 2005. There are preferential debts. The construction issue on s. 285(7) is whether it should be construed as meaning that the preferential debts rank in priority to the claim of the bank, as debenture holder, to the funds realised from the assets subject to the floating charge in the debenture, irrespective of whether that floating charge crystallised prior to the commencement of winding up, or whether such a priority only exists if the floating charge has not yet crystallised at the date of commencement of the winding up.
[14] It is not in dispute that the court must construe s. 285(7) in accordance with the intention expressed by the Oireachtas by construing the words used in their ordinary and natural sense (and any statutory definition): see, inter alia, Howard v. Commissioners of Public Works [1994] 1 I.R. 101, and Crilly v. T. & J. Farrington Ltd. [2001] 3 I.R. 251. Counsel for the Revenue Commissioners submitted that if the court considered there to be an ambiguity or, as she submitted, an absurdity on the literal interpretation contended for by the official liquidator, then, in accordance with s. 5 of the Interpretation Act 2005, the court should give s. 285(7) a construction which reflects the plain intention of the Oireachtas, as ascertained from the Act of 1963 as a whole.
[15] The only word or term in s. 285(7)(b) which is defined in s. 2 of the Act of 1963, is “debenture”, which is defined to include “debenture stock, bonds and any other securities of a company whether constituting a charge on the assets of the company or not”.
[16] A floating charge is not defined for the purposes of the Companies Act 1963. It appears probable that there is no one definition of a floating charge. Rather, judicial decisions have referred to the “normal characteristics” of a floating charge, as was done by Blayney J. in Re Holidair Ltd. [1994] 1 I.R. 416, where, at pp. 445 and 446, he referred with approval to the well known passage from the judgment of Romer L.J. in the Court of Appeal in In re Yorkshire Woolcombers Association Limited [1903] 2 Ch. 284, at p. 295:-
“I certainly do not intend to attempt to give an exact definition of the term ‘floating charge’, nor am I prepared to say that there will not be a floating charge within the meaning of the Act, which does not contain all the three characteristics that I am about to mention, but I certainly think that if a charge has the three characteristics that I am about to mention it is a floating charge.
(1) If it is a charge on a class of assets of the company present and future;
(2) if that class is one which, in the ordinary course of the business of the company, would be changing from time to time; and
(3) if you find that by the charge it is contemplated that, until some future step is taken by or on behalf of those interested in the charge, the company may carry on its business in the ordinary way as far as concerns the particular class of assets I am dealing with.”
[17] Goode on Legal Problems and Security (4th ed., Sweet and Maxwell, 2008), in considering the nature and characteristics of a floating charge, at p. 126, asserts that it “is now established that a floating charge creates an immediate, albeit, unattached security interest”. The authors state that this idea is most clearly expressed by Buckley L.J. in Evans v. Rival Granite Quarries, Limited [1910] 2 K.B. 979, at p. 999:-
“A floating security is not a future security; it is a present security, which presently affects all the assets of the company expressed to be included in it ¦ A floating security is not a specific mortgage of the assets, plus a licence to the mortgagor to dispose of them in the course of his business, but is a floating mortgage applying to every item comprised in the security, but not specifically affecting any item until some event occurs or some act on the part of the mortgagee is done which causes it to crystallise into a fixed security.”
In my judgment, it is of some importance to the construction of s. 285(7) that it was well established, prior to 1963, that a floating charge creates an immediate, albeit unattached security interest, as explained by Buckley L.J. in the passage cited above. In In re Interview Ltd. [1975] I.R. 382, Kenny J., at p. 395, stated:-
“The charge floats over the assets of the company until some act is done which causes it to fasten on to the property and goods of the company.”
[18] The second relevant concept is that of crystallisation of a floating charge. Upon crystallisation, the charge ceases to float over the assets which are subject to it, and attaches to or becomes fixed on those assets. As is sometimes said, the floating charge upon crystallisation becomes a fixed charge. However, no new charge is created by the company. The existing charge, the floating charge created by the company, changes in nature and becomes a fixed charge. The nature of the security held by the debenture holder under the floating charge created by the company upon crystallisation changes; it ceases to float, and becomes a fixed charge over the charged property. In accordance with the general principles relating to fixed charges, upon the charge becoming fixed, there is an equitable assignment of the relevant assets to the debenture holder. Nevertheless, the right of the debenture holder to the charged assets derives from the floating charge created by the company. It is the nature of the right which is changed by the crystallisation.
[19] If there were no relevant judicial authority on the construction of s. 285(7) or a predecessor or similar section in the United Kingdom Companies Acts, I would have no hesitation in construing the section as giving priority to preferential debts over the claims of holders of debentures
under floating charges which crystallise prior to the commencement of winding up. Further, I would construe the section as meaning that the preferential debts were entitled to be paid out of the realisation of assets subject to a floating charge in the debenture, notwithstanding that such floating charge crystallised prior to the commencement of winding up. My reasons for so construing the section, in accordance with the ordinary and plain meaning of the words used, and the definition of debenture in s. 2 of the Act of 1963, are as follows.
[20] The priority given to preferential debts by s. 285(7) is “over the claims of holders of debentures under any floating charge created by the company”. How does the bank claim an entitlement to the floating charge assets herein? It appears to me the answer is self-evident. The only entitlement of the bank to make a claim to such assets is as the holder of a debenture or security under the floating charge created by the company. It has no other right to such assets. The only charge created by the company over the assets is a floating charge. It is of the essence of a floating charge that it is a charge which will change in nature prior to realisation. It is a charge which “floats” over the assets until the happening of an event which, in accordance with the terms of the debenture, and by law, causes it to attach to or become fixed on the relevant assets. Of course, the nature of the security, which the bank holds, post-crystallisation, is a fixed charge. It is important to note that the section, by its words, gives priority “over the claims of holdersof debentures under any floating charge created by the company”, and not over the claims of holders of any floating charge created by the company. Debentures, as already stated, is defined in s. 2 to include “any other securities of a company, whether constituting a charge on the assets of the company or not”. It appears to me that the phrase “holders of debentures under any floating charge created by the company” is deliberately worded, having regard to the potentiality for a floating charge to crystallise and become a fixed charge so as to include persons who hold security of whatever nature, provided it is held under or by reason of a floating charge created by the company. It is the floating charge created by the company which gives the bank the right to make a claim to the assets. It is only the nature of the claim which changes post-crystallisation. The bank’s claim to the charged assets remains a claim as the holder of a debenture or security under the floating charge created by the company.
[21] Similarly, in my judgment, the word “charge” in the phrase “property comprised in or subject to that charge” refers to the floating charge created by the company, notwithstanding that by reason of crystallisation, such floating charge may have become fixed on such property prior to the commencement of winding up.
[22] A further subsidiary reason on the wording which, in my judgment, supports the above construction, is the absence in s. 285(7) of any specification by the Oireachtas as to the date upon which the nature of the claims of “holders of debentures under any floating charge” is to be ascertained. If it was intended by the Oireachtas that this should be ascertained at the date of commencement of the winding up, as is suggested by certain judicial authorities from other jurisdictions, then it appears to me that such date would have been specified by the Oireachtas, given that in s. 285(1), they have clearly specified a date which is potentially a date other than the commencement of the winding up as the relevant date for the ascertainment of preferential claims. This is not a point which appears to have been adverted to in the decisions of other jurisdictions to which I was referred.
Relevant authorities
[23] There are relevant authorities from other jurisdictions upon which counsel for the official liquidator has relied. He submits that they are persuasive authorities as to the proper construction of s. 285(7) and that I should follow them and give to the section the meaning for which he contends.
[24] The principal decision is that of Bennett J. in the Chancery Division in England in In re Griffin Hotel Co. Ltd. [1941] 1 Ch. 129. Insofar as relevant, that decision concerned the construction of ss. 78 and 264 of the United Kingdom Companies Act 1929. Those sections replaced ss. 107 and 209 of the Companies (Consolidation) Act 1908, as do ss. 98 and 285 of the Companies Act 1963, in this jurisdiction.
[25] The essential facts of the case were that a company owned two hotels, one at Leeds and the other at Buxton. In 1937, it issued a debenture creating a floating charge over all its assets to secure £45,000. In December, 1938 an order was made in a debenture holder’s action, appointing a receiver over all the company’s property except the Buxton Hotel which was subject to a prior mortgage and of no value to the debenture holder. The company continued to operate the Buxton Hotel. In March, 1939 an order was made for the winding up of the company. In the meantime, in operating the Buxton Hotel, the company incurred certain preferential debts within the meaning of s. 264 of the Companies Act 1929. One of the issues in the application was whether those preferential debts were payable in priority to the plaintiff (the debenture holder) out of the proceeds of sales of the assets over which the receiver was appointed in 1938. There were no other assets out of which the preferential debts could be discharged. The first issue related to the relationship between ss. 78 and 264(4)(b) which is not of relevance. The second issue is the same construction issue arising in these proceedings, albeit in relation to s. 264(4)(b). This provided:-
“The foregoing [preferential] debts shall:
(a) rank equally among themselves and be paid in full, unless the assets are insufficient to meet them, in which case they shall abate in equal proportions; and
(b) in the case of a company registered in England, so far as the assets of the company available for payment of general creditors are insufficient to meet them, have priority over the claims of holders of debentures under any floating charge created by the company, and be paid accordingly out of any property comprised in or subject to that charge.”
[26] Bennett J., having expressed his conclusion that s. 78 of the Act of 1929 did not exclude or prevent the operation of s. 264(4)(b), then continued at pp. 135 and 136:-
“But that conclusion on the construction and effect of the statutory provisions leaves open the question whether in the supposed events there is, when the winding up take place, any floating charge or any property subject to that charge. In my judgment, sub-s. 4(b) of s. 264 only operates if at the moment of the winding up there is still a floating charge created by the company and it only gives the preferential creditors a priority over the claims of the debenture holders in any property which at that moment of time is comprised in or subject to that charge.
In the present case the debenture held by the plaintiffs contained a floating charge over all the borrowers’ property. On December 9, 1938, that charge ceased to float on the property and assets of which Mr. Veale was appointed receiver. The charge on that day crystallized and became fixed on that property and those assets. It remained a floating charge on any other assets of the borrowers. At the moment before the winding up order was made, the charge still floated over any other assets of the borrowers and over those other assets, if any, the preferential creditors as defined by sub-s. 1 of s. 264 have a priority over the claims of the plaintiffs by force of the provisions of sub-s. 4 of the same section. This seems to be a corollary of the proposition established by In re Lewis Merthyr Consolidated Collieries Ltd. [[1929] 1 Ch. 498.]”
[27] The wording of s. 264(4)(b) is identical in all material respects to s. 285(7)(b). Respectfully, it appears to me that Bennett J. reached a conclusion on the wording without any consideration of the phrase “the claims of holders of debentures under any floating charge created by the company”. He does not explain why he considered that the section only operated “if, at the moment of the winding up, there is still a floating charge created by the company” save the statement “this seems to be a corollary of the proposition established In re Lewis Merthyr Consolidated Collieries Ltd. ” [1929] 1 Ch. 498.
[28] I have read carefully the judgments in the Court of Appeal and in the Chancery Division in In re Lewis Merthyr Consolidated Collieries Ltd. [1929] 1 Ch. 498, and I have some difficulty in understanding the above view taken by Bennett J. Those decisions concerned the proper construction of s. 107 of the Companies Consolidation Act 1908 (equivalent to s. 98 of the Act of 1963). The facts were that a receiver was appointed under a debenture which created both a first fixed charge over certain property and a floating charge over other property. Section 107 applied when a receiver “is appointed on behalf of the holders of any debentures of the company secured by a floating charge” and then provides that, if the company is not at the time being wound up, preferential debts in a winding up are to be “paid forthwith out of any assets coming into the hands of the receiver”. The construction issue identified by Tomlin J. at p. 504, was whether:-
” ¦ the priority given to this particular category of debts is a priority in respect of the assets subject to the floating charge only, or whether, where the debenture also contains a fixed charge, the creditors are entitled to claim priority in respect of assets subject to either a fixed charge or a floating charge ¦”
Tomlin J. initially examined s. 107 without regard to s. 209 of the Act of 1908, to which he had also been referred, and, having done so, stated his conclusion at p. 507:-
“¦ upon the language of this section, read in vacuo,that on its true construction, the priority given is a priority given in respect of assets derived from the subject of the floating charge, and not in respect of assets which are subject to the fixed charge.”
It must be recalled that this conclusion is expressed in a factual context where the fixed charge and the floating charge were each created by the same debenture and no issue arose about the prior crystallisation of the floating charge.
[29] Tomlin J., following that conclusion, then looked at s. 209 for the purpose, as he put it, of deriving comfort. He concluded that he did derive comfort and, having quoted s. 209, stated, at pp. 507 and 508:-
“So that it is plain in terms in s. 209, that in the case of winding up, the priority is only given in relation to assets which are subject to the floating charge. In the view I take the same result follows in the case of a debenture holders’ action where there is no winding up. Mr. Grant says there are reasons why it should be otherwise. I am not sure that I am satisfied that any such reasons exist at all. I quite understand that in regard to a floating charge there may be a reason for giving the priority, because until the receiver is appointed or possession is taken, the charge does not crystallise, and it may well be said that this particular class of debts, which may perhaps have contributed to produce the very assets upon which the floating charge will crystallise, are proper to be paid out of those assets before the debenture holder takes his principal and interest out of them. That seems to me to be a perfectly intelligible reason for the legislation, and is in accord with the view which I take of the section.”
Again, it must be recalled, Tomlin J. was considering the issue in a context where the claim being made was that the preferential debts were to be paid out of assets coming into the hands of the receiver under a first fixed charge created by the same debenture as created the floating charge.
[30] In the Court of Appeal, three judgments were given and the decision of Tomlin J. was upheld. Lord Hanworth M.R. preferred to decide the matter by the interpretation of s. 107 in accordance with its terms and without its being affected by the terms of s. 209. Whilst Lawrence L.J. made fleeting reference to s. 209, he does not rely on it. Russell L.J. simply agreed and indicated he did not desire to add anything to the judgment of Tomlin J.
[31] Respectfully, it does not appear to me, on my reading of the judgments in In re Lewis Merthyr Consolidated Collieries Ltd. [1929] 1 Ch. 498, that the decision therein on the construction of s. 107 is such that the conclusion of Bennett J. in In re Griffin Hotel Co. [1941] 1 Ch. 129 may be considered a corollary. The corollary would be whether s. 209 of the Act of 1908, or s. 284(4) of the Act of 1929, granted priority over the claim of a debenture holder to assets, the subject of a fixed charge created by a debenture, simply because the company also created a floating charge in the same debenture over different property.
[32] In re Griffin Hotel Co. [1941] 1 Ch. 129 was subsequently referred to and relied upon by Vinelott J. in In re Christonette Ltd. [1982] 1 W.L.R. 1245. That case related to the proper construction of ss. 94(1) and 319(5) of the Companies Act 1948 (equivalent to ss. 98 and 285(8) of the Companies Act 1963). The earlier decision appears to have been relied upon without question and without argument against it by Vinelott J. In the United Kingdom, the Insolvency Act 1985 implemented a recommendation of the 1982 Cork Report referred to below, and defined a “floating charge” as “a charge which, as created, was a floating charge”. This has the effect of altering the construction placed upon the equivalent of s. 285(7) in In re Griffin Hotel Co. [33] Hoffmann J. in the High Court in In re Brightlife Ltd. [1987] 1 Ch. 200, referred to the decision in In Re Griffin Hotel Co. [1941] 1 Ch. 129 in the course of considering the validity of a so-called automatic crystallisation of a floating charge. His observations are relevant. In that case, the facts were that the alleged crystallisation of the floating charge occurred on the 13th December, 1984 and a resolution to wind up was passed on the 20th December, 1984. Hoffmann J. stated at p. 211:-
“The importance of the dates lies in the construction given to what is now section 614(2)(b) of the Companies Act 1985 by Bennett J. in In re Griffin Hotel Co. Ltd . [1941] 1 Ch. 129. He decided in that case that the priority given by the statute to preferential debts applied only if there was a charge still floating at the moment of the winding up and gave the preferential creditors priority in property which at that moment was comprised in the floating charge.
It follows that if the debenture-holder can manage to crystallise his floating charge before the moment of winding up, section 614(2)(b) gives the preferential creditors no priority. On the other hand, in the usual case of crystallisation before winding up, namely by appointment of a receiver, they may still be entitled to priority under another section of the Companies Act 1985. This is section 196, which applies
‘where either a receiver is appointed on behalf of the holders of any debentures of a company secured by a floating charge, or possession is taken by or on behalf of those debenture-holders of any property comprised in or subject to the charge.’
In such a case, subsection (2) provides:
‘If the company is not at the time in course of being wound up, the ¦ [preferential debts] ¦ shall be paid out of assets coming to the hands of the receiver or other person taking possession, in priority to any claims for principal or interest in respect of the debentures.’
Both section 614(2)(b) and section 196 originate in the Preferential Payments in Bankruptcy Amendment Act 1897. One imagines that they were intended to ensure that in all cases preferential debts had priority over the holder of a charge originally created as a floating charge. It would be difficult to think of any reason for making distinctions according to the moment at which the charge crystallised or the event which brought this about. But In re Griffin Hotel Co. Ltd . [1941] 1 Ch. 129 revealed a defect in the drafting. It meant, for example, that if the floating charge crystallised before winding up, but otherwise than by the appointment of a receiver, the preferential debts would have no priority under either section. For example, if crystallisation occurred simply because the company ceased to carry on business before it was wound up, as in In re Woodroffes (Musical Instruments) Ltd . [1986] Ch. 366, the preferential debts would have no priority. One could construct other examples of cases which would slip through the net. Mr. Sheldon submits that this is such a case.”
Counsel in that case conceded, for the purpose of the hearing in the High Court before Hoffmann J., that preferential debts would have no priority in respect of assets over which the floating charge had crystallised before the resolution for winding up, but reserved the point for a higher court. There does not appear to have been an appeal.
[34] I respectfully agree with the observations of Hoffmann J. as to the intent of the legislation, but would question whether or not there was a defect in the drafting. This may have been politeness on the part of Hoffmann J. as the correctness of the earlier decision was not put in issue before him and considering the views expressed in the next case to which I refer.
[35] In re Permanent Houses (Holdings) Limited [1988] B.C.L.C. 563, Hoffmann J., in the Chancery Division, made clear his personal disagreement with the decision in In re Griffin Hotel Co. [1941] 1 Ch. 129, but considered himself bound by it and that he would be failing in his duty to uphold the integrity of the law if he did not apply its reasoning to s. 196 of the Companies Act 1985 (the equivalent of s. 98 of the Act of 1963). Hoffmann J. expressed a personal preference for what he described as “the powerful reasoning of Barwick C.J.” in his dissenting judgment in the High Court of Australia in Stein v. Saywell (1969) 121 C.L.R. 529. In that decision, the majority of the High Court followed in In re Griffin Hotel Co. and applied it to the Australian equivalent of s. 285(7). I respectfully agree with Hoffmann J. My preference is for the reasoning and conclusion of Barwick C.J. in his dissenting judgment. Of the four judgments given in the majority, two simply apply the decision in In re Griffin Hotel Co. (joint judgment of McTiernan and Menzies JJ.); that of Owen J. both applied in In re Griffin Hotel Co. and expressed the view that it would be improbable that the draughtsmen of s. 292(4) of the New South Wales Act would have been unaware of the decision which had stood for many years and had been cited in a number of books dealing with company law. Kitto J. similarly took the view that since In re Griffin Hotel Co. there had been amending and consolidating company legislation in New South Wales, and as no opportunity to displace the decision had been taken, some strong reason would need to be found to justify placing a different construction upon it now, and expressed the view that the decision appeared to be correct. His essential reasoning was that s. 292(4) must be applied as at the date of the winding up order so that a charge, to be affected by the grant of priority to the preferential debts there referred to, must be, at that date, within the description of “floating charge”.
[36] The facts upon which the appeal to the High Court was based required consideration of ss. 196 and 292(4) of the Companies Act 1961 (New South Wales) (equivalent to ss. 98 and 285(7) of the Act of 1963). Barwick C.J., at pp. 543 and 545, stated:-
“This Court is not bound by the decision in that case [ In re Griffin Hotel Co. [1941] 1 Ch. 129]. In my opinion, the proposition that s. 292(4) does not defer the claim of the debenture holder if in any case before the making of the winding-up order, or the commencement of the liquidation, the charge over the assets of the company has crystallized is, in my opinion, insupportable. I can derive neither assistance nor find compulsion from or in the circumstances that subsequent to that decision a legislature has enacted ss. 196 and 292(4). It is quite clear to my mind that the legislature in enacting these sections did not intend that the priority which it accorded to such debts as those due to employees for wages or accrued leave should be defeated by the circumstance that the floating charge had become crystallized before the time had arrived for determining and giving effect to that priority. The policy behind s. 196 and s. 292(4) is, I think, quite plain. A creditor who accepts a floating charge over a company’s assets allows the business of the company to be carried on and the assets of the company which are subject to the floating charge to be altered, perhaps augmented, by the efforts of the company and its employees. The holder of the floating charge is not to be able to displace the priorities which the legislation accords certain debts which accrue during the carrying on of the business; amongst those priorities is certain remuneration of employees of the company. The method of ensuring that the holder of such a charge does not compete with those creditors to whose debts priority of payment is given is best seen, I think, in s. 196. Under that section, in the period prior to the actual commencement of the liquidation of a company, a receiver for the debenture holder, with funds in hand which are the produce of the realization of the charge created initially as a floating charge is bound to pay out of those funds the debts of the preferred creditors. Of course, there will be occasions when the appointment of the receiver is the event which crystallizes the floating charge. Quite clearly the fact that the charge then becomes specific is irrelevant to the operation of the section. But in general the appointment of a receiver follows upon the falling due of the sum charged and the consequential crystallization of the floating charge.
This was so in the present case. The description in the section “on behalf of the holders of any debentures secured by a floating charge” ought to be read as wide enough to include the charges whose rights derive from a floating charge which had become specific. It would be, in my opinion, far too narrow and an unduly literal construction to confine that description to those chargees only so long as the charge remained floating. Indeed, it would in a practical sense denude the section of much, if not the greater part, of its utility. I can find no reason, connected with the evident policy the section is designed to effect, which would support such a construction. Further, the alternative in the section, namely, the taking of possession of any property comprised in or subject to a floating charge, in my opinion, tends against such an interpretation of the section. Possession could only be taken if the amount charged had become due in which event in general the charge becomes specific. I would think it would in every case be specific before the actual taking of possession of a particular asset.
In my opinion, s. 292(4) must be construed in the same sense. It seems to me that the expression ‘the claims of the holders of debentures’ has been chosen to describe the right of the chargee whose charge originated as a floating charge to be paid out of any of the assets or the proceeds of any assets or the proceeds of any assets which in the event come within the charge by reason of the terms of the charge initially created by the company. The two sections are complementary.”
[37] Subsequent to that decision, there was legislative amendment in 1971 in Australia. “Floating charge” was defined for the purposes of the relevant sections as including a charge which was “a floating charge at the date of its creation which has since become a fixed or specific charge”.
[38] It is interesting to note that the 1982 Cork Report on Insolvency Law and Practice in the United Kingdom in the context of considering automatic crystallisation stated, at para. 1578:-
“Automatic crystallisation, however, is not merely inconvenient. In Australia, where it has become firmly established, it has disclosed an unfortunate loophole in the statutory provisions which give priority to preferential creditors. This has been partially corrected by amending legislation, which defines the expression ‘floating charge’ for the purposes of the statutory provisions corresponding to section 94 of the Act of 1948 as including a charge which was ‘a floating charge at the date of its creation which has since become a fixed or specific charge’. This is probably the test in England [emphasis added] but it would be prudent to add a definition to both sections 94 and 319(5) of the Act of 1948 on the lines of the Australian legislation.”
The reference to “unfortunate loophole” appears to be an allusion to the decision in Stein v. Saywell (1969) 121 C.L.R. 529. However, what is of particular interest to the present consideration is the observation that the subsequent Australian legislative definition “is probably the test in England”. It appears that the distinguished Cork Review Committee was unaware of the decision in In re Griffin Hotel Co. [1941] 1 Ch. 129 to the contrary effect. Nevertheless, the recommendation that it would be prudent to add a similar definition in England was followed in the Insolvency Act 1986. This now defines a floating charge for the purposes of the relevant sections as meaning “a charge which, as created, was a floating charge”.
[39] I have concluded that I should not construe s. 285(7) in accordance with the decision in In re Griffin Hotel Co. [1941] 1 Ch. 129. It is not binding on me. The primary obligation of this court is to construe the intention of the Oireachtas from the words used in the section. The fact that the section at issue in In re Griffin Hotel Co. and s. 295(7) both have their legislative origin in similar provisions and most recently s. 209 of the Companies (Consolidation) Act 1908, means that this court should give it careful consideration, which I have done. Nevertheless, I have concluded that I must respectfully decline to follow the decision. In my judgment, s. 287(5) cannot be construed in accordance with the plain meaning of the words used so as to give it the meaning given in In re Griffin Hotel Co. I do not consider the reasoning of the decision persuasive. Insofar as it was followed in England in the decisions to which I have been referred, it appears to have been done so either by reason of precedent or without opposing submission. Hoffman J. was critical of it. Insofar as the High Court of Australia followed the decision for the reasons already explained, I do not find the majority judgments persuasive and prefer the reasoning of the dissenting judgment of Barwick C.J.
[40] I have further concluded that even having regard to the English and Australian decisions, s. 285(7) of the Act of 1963 is not ambiguous in the meaning of s. 5 of the Interpretation Act 2005, and thus, it is not necessary to consider further a construction in accordance with the provisions of that Act.
[41] Accordingly, in my judgment the proper meaning of s. 285(7) is that the preferential debts rank in priority to the claim of the bank, as debenture holder, to the funds realised from the assets subject to the floating charge pursuant to clause 5 of the debenture, irrespective of whether the floating charge crystallised prior to the commencement of winding up.
Automatic crystallisation
[42] Having regard to this conclusion, it is not strictly necessary for me to consider the second issue as to the validity of so-called “automatic crystallisation” of the floating charge in this jurisdiction. However having received detailed submissions and considered the matter in some depth, it appears to me desirable that I should set out, in brief, my conclusions. This is particularly so as there is a further matter which may need to be addressed if this were to become a determinative issue.
[43] Terminology is important to this issue. Gough, in Company Charges (2nd ed., Butterworths, 1996) at p. 232, criticises judicial treatment of the expression “automatic crystallisation” as not being consistent. He states:-
“Sometimes, the court has used the expression clearly referring to an event specifically agreed in the charge contract as causing crystallisation. In other instances, the expression has been used to describe implicit crystallisation events of the traditional kind developed in the older case law.”
Gough identifies such implicit crystallisation events of the traditional kind from the prior case law as being:-
(i) a business cessation event, including winding up and ceasing business operations as a going concern prior to winding up; and
(ii) a chargee intervention event, including appointment of a receiver or manager, taking possession as mortgagee, and obtaining an injunction against company dealings with the charged assets generally.
[44] At issue in this application is an explicitly agreed crystallisation event which requires intervention by the chargee, i.e. the service by the bank of a notice, pursuant to clause 10 of the debenture. It appears preferable to refer to such crystallisation as “express crystallisation”. It is not truly automatic, in the sense that it does require chargee action or intervention i.e. the service of a notice. It does, however, come within the type of crystallisation which, in some of the judicial decisions, has been referred to as “automatic” and is not a traditional implicit crystallisation event.
[45] There is no decision on the validity of a crystallisation effected by such a notice in this jurisdiction. I have been referred to a number of English, New Zealand and Canadian decisions and leading academic texts. The Supreme Court decisions in In re Keenan Bros. Ltd. [1985] I.R. 401 and In re Wogan’s (Drogheda) Ltd. [1993] 1 I.R. 157 are also relevant.
These lead me to an initial conclusion that there are two separate issues which need to be addressed. They are:-
(i) whether, as a matter of principle, Irish law recognises that a chargee may, pursuant to an express contractual term, validly effect crystallisation by or on the occurrence of an expressly specified non-traditional event, and thereby cause the floating charge to become fixed on all or specified assets of the company; and
(ii) if, as a matter of principle, crystallisation may be so effected, whether, on the facts herein, the service by the bank of the notice of the 28th October, 2009, was effective to crystallise the floating charge created by the debenture such that it then became a fixed charge on all the property assets and rights then subject to the floating charge in the debenture.
[46] On the first issue there are essentially two schools of thought: see Sealy, Company Law (7th ed., Oxford University Press, 2007) at p. 422. One is based on the fact that a floating charge is not a legally defined phenomenon but rather has certain characteristics and the freedom of the parties to the contract to agree specific terms. The other looks at the effect of such an arrangement on third parties and contends that it must be against public policy to have a charge crystallised in circumstances which may be unknown to other creditors.
[47] Keane C.J., writing extra-judicially in Company Law (4th ed., Tottel, 2007), at p. 251, states:-
“The proposition that there can be an automatic crystallisation on the default of the company if the debenture is in sufficiently explicit terms to permit of such a construction rests on somedicta in earlier English cases and an express decision to that effect in New Zealand [ Re Manurewa Transport Ltd . [1971] N.Z.L.R. 909]. It is thought, however, that this line of authority is unlikely to be followed in Ireland. The courts here will probably incline to the view that such automatic crystallisation would present problems for other creditors who would have no actual notice of the terms of the debenture and that any such doctrine would need to be the subject of considered legislation and regulation.
¦
It has been held by the Supreme Court in Re Holidair Ltd . that a floating charge which has crystallised will decrystallise on the appointment of an examiner to the company, so that it ceases to be a fixed charge and reverts to being a floating charge. The validity of the concept of ‘decrystallisation’, which emerged for the first time in Ireland in this judgment, has been questioned, but the law appears to have been left unchanged by the 1999 Act.”
[48] As pointed out by Keane C.J. in a footnote to the above passage, Courtney in The Law of Private Companies (2nd ed., Tottel Publishing, 2002) at pp. 1212 and 1213, takes an opposing point of view. He does so mainly in reliance upon the decisions of Hoffmann J. in In re Brightlife Ltd. [1987] 1 Ch. 200 and in In re Permanent Houses (Holdings) Ltd . [1988] B.C.L.C. 563.
[49] The facts in In re Brightlife Ltd . [1987] 1 Ch. 200 were somewhat similar to the facts in the present application insofar as the crystallisation event contended for was the service by the debenture holder, Norandex Inc., of a notice pursuant to an express clause 3(B) of the debenture. Clause 3(B) provided:-
“Norandex may at any time by notice to Brightlife convert the floating charge into a specific charge as regards any assets specified in the notice which Norandex shall consider to be in danger of being seized or sold under any form of distress or execution levied or threatened or to be otherwise in jeopardy and may appoint a receiver thereof.”
The relevant facts were that on the 4th December, 1984, Brightlife sent out notices of a creditors meeting to be held on the 20th December, 1984, for the purposes of considering a resolution to wind up the company. Norandex sent Brightlife four separate notices dated the 10th December, 1984. The first was a demand for payment. The second was a notice pursuant to clause 3(B):-
“Of the conversion with immediate effect of the floating charge created [by the debenture] into a specific charge over all the assets of Brightlife Ltd. the subject of the said floating charge.”
The third was a demand pursuant to clause 13 of the debenture for the execution forthwith of “a legal assignment of all book and other debts currently due to Brightlife Ltd. specifying full details of the said debts therein”. The fourth is not relevant to the issues.
[50] The dispute before Hoffmann J. concerned the competing claims of the Customs and Excise Commissioners for V.A.T. as a preferential creditor, and Norandex as debenture holder, to approximately £40,000, which comprised realisation of book debts, credit at the bank and sale of stock.
[51] The first issue related to whether the debenture had created a fixed charge over the book debts. This is not relevant to the present issues, save that it is of interest to note that Hoffmann J. was referred to the decision of the Supreme Court in In re Keenan Bros. Ltd. [1985] I.R. 401 and distinguished it only on the facts, having regard to the terms of the respective debentures. I only refer to this as it appears to me to confirm my understanding that the law relating to floating charges (and fixed charges) by the Supreme Court in In re Keenan Bros. Ltd. in reliance, in particular, on older decisions, is fundamentally the same law as that considered by Hoffmann J. in his consideration of the validity of the crystallisation effected by notice given by the debenture holder in In re Brightlife Ltd. [1987] 1 Ch. 200.
[52] The objection to the validity, in principle, of the crystallisation effected in In re Brightlife Ltd. [1987] 1 Ch. 200 was fundamental. The primary submission was that events of crystallisation were fixed by law and not by agreement of the parties. Those events were confined to (i) winding up; (ii) appointment of a receiver and (iii) ceasing to carry on business. It was submitted that only those three events would cause crystallisation, notwithstanding any agreement to the contrary. The common features of the events were that, in each case, the business of the company would cease, or at any rate, cease to be conducted by the directors.
[53] Hoffmann J. gave detailed consideration to what he identifies as five distinct submissions in support of the above contention and rejected all five.
[54] I respectfully agree with the analysis by Hoffmann J. of the earlier case law and his conclusion at p. 213:-
“It is true that the commercial inconvenience of automatic crystallisation gives rise to a strong presumption that it was not intended by the parties. Very clear language will be required. But that does not mean that it is excluded by a rule of law.”
[55] As I have already indicated above, it appears probable that there is no one definition of a floating charge. Rather, the earlier judicial decisions have referred to characteristics or offered a description of a floating charge. In addition to the authorities already referred to, these include the well known speech of Lord MacNaghten in Illingworth v. Houldsworth [1904] A.C. 355 at p. 358, referred to with approval, inter alia, by McCarthy J. in In re Keenan Bros. Ltd . [1985] I.R. 401.
[56] On the public policy argument, the position, simply put, is that it is a matter for the Oireachtas and not the courts to intervene in order to avoid an unfair adverse impact on third party creditors from contractual arrangements which may be entered into between a debenture holder and a company. The Oireachtas has, of course, done so by enacting s. 98 (in relation to receivers), s. 99 (in relation to registration of certain charges) and s. 285(7) (in relation to priority for certain debts on a winding up) referred to extensively above. I, again, respectfully agree with Hoffmann J. that, having regard in particular to those interventions by the legislature, it is inappropriate for the courts to impose additional restrictive rules on grounds of public policy. Accordingly, on the first issue, for the very same reason set out by Hoffmann J., I am of the view that there is no rule of law which precludes parties to a debenture creating a floating charge agreeing, as a matter of contract, that the floating charge will crystallise upon the happening of an event or a particular step taken by the chargee. Whether the parties actually achieve their intention is a separate issue by reason, inter alia, of the Supreme Court decision in In re Keenan Bros. Ltd. [1985] I.R. 401.
[57] In In re Keenan Bros. Ltd. [1985] I.R. 401, the issue was whether or not the charge created by the debenture over book debts was a fixed charge or a floating charge. In the debenture, the charge was expressed to be a “fixed charge”. McCarthy J. who gave the judgment with which a majority of the court agreed, states at p. 421:-
“It is not suggested that mere terminology itself, such as using the expression ‘fixed charge’, achieves the purpose; one must look, not within the narrow confines of such term, not to the declared intention of the parties alone, but to the effect of the instruments whereby they purported to carry out that intention; did they achieve what they intended or was the intention defeated by the ancillary requirements?”
[58] Each of the judgments in the Supreme Court in In re Keenan Bros. Ltd. [1985] I.R. 401, notwithstanding the express terms of the debentures, considered whether or not the charges created, having regard to the other terms in the debentures, were, in reality, fixed or floating charges. There were two debentures at issue in the proceedings. Henchy J., at pp. 419 and 420, epitomises what appears to be the proper approach of a court in determining whether or not a debenture, by its terms, creates a fixed or floating charge. In relation to the second debenture, he concluded:-
“As to the debenture deed of the 5th May, 1983, the company professed to charge in favour of the Bank [A.I.I.B. Ltd.] its present and future debts as a first fixed legal charge. The extent to which this was to be in reality a fixed, rather than a floating charge, is shown by the following provisions in the deed:-
1. all moneys which were received by the company in respect of book debts were to be paid into a specified A.I.B. branch and no withdrawals or payments from that account were to be made without the prior consent of the Bank;
2. the company was not, without the consent of the Bank, to carry on its business otherwise than in the ordinary and normal course;
3. the company was not, without the consent in writing of the Bank, to diminish or dispose of its book debts otherwise than by collecting and lodging them in the specified account.
It seems to me that such a degree of sequestration of the book debts when collected made those monies incapable of being used in the ordinary course of business and meant that they were put, specifically and expressly, at the disposal of the Bank. I am satisfied that assets thus withdrawn from ordinary trade use, put in the keeping of the debenture holder, and sterilised and made undisposable save at the absolute discretion of the debenture holder, have the distinguishing features of a fixed charge. The charge was not intended to fasten in the future on the book debts; it was affixed forthwith and without further ado to those debts as they were collected; so it did not in any sense float over those moneys. As I understand the law, assets the subject matter of a floating charge may be disposed of, at least in the ordinary course of business, by the maker of the charge without the consent of the chargee. That was not the case here. I would allow this appeal and declare that the charge created by each of the two instruments of charge was a fixed charge.”
[59] The Supreme Court in In re Wogan’s (Drogheda) Ltd .[1993] 1 I.R. 157 followed In re Keenan Bros. Ltd. [1985] I.R. 401 and made clear that where a court is required to determine whether or not a debenture creates a fixed or floating charge, that it must be done by construction of the debentures concerned and that the subsequent conduct of the parties is not a relevant evidential factor: see Finlay C.J. at p. 169. In that decision, the Supreme Court again construed the relevant debenture and concluded that, having regard to several terms of the debentures, the parties did, in reality, create a fixed charge over the book debts.
[60] It appears to me, similarly, where a debenture expressly provides that a chargee may, by service of a notice, effect a crystallisation of a floating charge over all the assets or specified assets, the mere fact that the debenture so provides does not of itself mean that the service of the notice, has the intended effect, i.e. that the floating charge crystallises. In the words of McCarthy J “mere terminology” used by the parties is not determinative of achieving the stated purpose but rather “one must look, not within the narrow confines of such term, not to the declared intention of the parties alone, but to the effect of the instruments whereby they purported to carry out that intention; did they achieve what they intended or was the intention defeated by the ancillary requirements?”
[61] The issue is not, of course, whether the charge created by the debenture was a fixed or floating charge but, rather, whether the service of the notice provided for in clause 10 of the debenture does, in reality, what it purports to do, namely, “convert the floating charge contained in this deed into a first fixed charge over all the property, assets and rights for the time being, subject to the said floating charge”. Similar to the approach of the Supreme Court in the above decisions, this court must determine whether or not the effect of the service of the notice, pursuant to clause 10, achieved what the parties intended it to achieve, namely, the conversion of the then floating charge into a first fixed charge over all the relevant property, i.e. over all of the property specified in the notice. Further, in accordance with the decision in In re Wogan’s (Drogheda) Ltd . [1993] 1 I.R. 157, it appears that this issue must be determined by a construction of the terms of the debenture and the notice served, rather than any subsequent actions by either party.
[62] In accordance with clause 5 of the debenture, the property subject to the floating charge in October, 2009 appears to have been all the property of the companies other than land and related rights, proceeds from insurance, goodwill and uncalled capital. Certain of the companies were trading companies in the motor business. The assets, therefore, included, inevitably, stock in trade, book debts and possibly monies deposited at the bank.
[63] If the service of the notice, pursuant to clause 10, in reality had the effect of converting the floating charge over the book debts and stock in trade of the companies into a first fixed charge on such assets, then it must also have effected an equitable assignment of such assets to the bank. As a consequence, the companies would have lost the ability to deal in or dispose of those assets, save to the extent permitted by the bank. The court appears obliged, in accordance with the judgments in In re Keenan Bros. Ltd. [1985] I.R. 401, to determine whether, in reality, such was the effect of the service of the notice, pursuant to clause 10 having regard to the other provisions of the debenture and the notice served.
[64] It is not clear to me from the terms of the debenture itself whether the debenture provides that, on the service of a notice pursuant to clause 10, any restrictions come into force on the company’s ability to deal with assets which were formerly subject to the floating charge but which are now intended to be subject to a fixed charge. The notice served did not contain any such requirement.
[65] As I have already indicated, this issue does not have to be resolved in the present application by reason of my conclusion on the construction of s. 285(7) of the Companies Act 1963. If it did in the future become necessary to resolve, it would have to be further argued and in particular the bank given an opportunity of making submissions on the issue. It was not an issue expressly addressed at the hearing before me. It would probably be necessary to consider further the nature of the assets subject to the floating charge created by each of the companies.
Relief
[66] As I have considered the facts in relation to J.D. Brian Motors Ltd. (in liquidation) I propose in the first instance making the following declaration in relation to that winding up:-
That pursuant to s. 285(7) of the Companies Act 1963, as amended, the preferential debts rank in priority to the claim of the Governor and Company of the Bank of Ireland to the funds realised from the assets subject to the floating charge pursuant to clause 5 of the debenture dated the 20th December, 2005, irrespective of whether or not the floating charge crystallised prior to the commencement of winding up.
[67] I will hear the parties as to necessity for and form of any further declarations or directions in relation to the conduct of the liquidations to give effect to the terms of this judgment.
[2015] IESC 62
JD Brian Supreme Court
Laffoy J.
“Authorities
37. The issue in Keenan Bros. arose on an application under s. 280 of the Act of 1963 by the liquidator of that company, which was being wound up by the Court. At a time when it was in serious financial difficulties, the company had executed a charge in favour of Allied Irish Banks Limited and created a debenture in favour of Allied Irish Investment Bank Limited. On each of those securities the company had given the chargee what was described as a first fixed charge on its book debts, present and future. Each contained restrictions on the manner in which the company could deal with book debts. For example, as is quoted in the report (at p. 404), the charge contained the following provisions:
“(ii) The company shall pay into an account with the bank designated for that purpose all moneys which it may receive in respect of the book debts and other debts hereby charged and shall not without the prior consent of the bank in writing make any withdrawals or direct any payment from the said account.
(iii) The company shall, if called upon to do so by the bank –
(a) execute a legal assignment of its book debts and other debts to the bank;
(b) deliver an account to the bank of the particulars of and amounts due in respect of its book debts and other debts at that date.
(iv) The company shall not without the prior consent in writing of the bank purport to charge, waive, assign or otherwise deal with its book debts or other debts in favour of any other person.”
The issues on which the liquidator had sought directions was whether the charge and the debenture from the outset created fixed or floating charges. It was held by this Court that fixed charges were created on the company’s book debts, both present and future from the outset.
38. In his judgment, before analysing the provisions of the charge and the debenture which are quoted above, Henchy J. made the following observations, which I consider to be of particular significance to the issue as to the effect of the service of the Crystallisation Notice, in that he outlined the legal effect in Irish law of a floating charge and a fixed charge and the legal effect of the crystallisation of a floating charge (at p. 418):
“One of the essential differences between a fixed charge and a floating charge given by a company is that a fixed charge takes effect, upon its creation, on the assets that are expressed to be subject to it, so that those assets, as they then exist, or, when the charge applies to future assets, as soon as they come into existence, will stand encumbered by the charge, and the company will be able to deal with those assets only to the extent permitted by the terms of the charge. On the other hand, in the case of a floating charge, while such charge is effective in law from the date of its creation, because it is of its nature, dormant and hovering, it does not attach to the assets expressed to be subject to it so as to prevent the company from continuing to deal with those assets in the ordinary course of business, until the happening of some event, such as the appointment of a liquidator, which shows that the company is no longer in business, or until the chargee intervenes. At that point, the floating charge is said to crystallise and the rights of the chargee become the same as if he had got a fixed charge; thereafter the company cannot deal with the assets in question except subject to the charge. A floating charge, so long as it remains floating, avoids the restricting (and in some cases, paralysing) effect on the use of the assets of the company resulting from a fixed charge. While a charge remains a floating one, the company may, unless there is agreement to the contrary, deal with its assets in the ordinary course of business just as if there were no floating charge.”
39. As regards the provisions contained in the charge, which I have outlined above, Henchy J. stated (at p. 419):
“Since the assets stated to be charged as a fixed charge were ‘the book and other debts present and future’, and since, under the provisions I have quoted, those assets were to be segregated in a special account and there to be virtually frozen and rendered unusable by the company save with the prior consent in writing of the Bank, I consider that the charge, far from being floating or dormant or hovering over those assets, had fixed on them to such an extent that they were unusable in the ordinary course of business save at the discretion of the Bank. The charge therefore was, as it was expressed to be, a fixed charge.”
Henchy J. came to a similar conclusion having considered the charging clause and the restrictions imposed on the company in the debenture, which he considered created such a degree of sequestration of the book debts when collected as made those monies incapable of being used in the ordinary course of business and meant that they were put, specifically and expressly, at the disposal of the bank.
40. McCarthy J. in his judgment came to the same conclusion. However, he made a number of observations which are worth recording. First, he referred to the decision of the High Court of England in Siebe Gorman v Barclays Bank [1979] 2 Lloyds Rep. 142 (Siebe Gorman), stating that there Slade J. “had given a judicial blessing in England to a claim by way of fixed charge on book debts, where this was purported to be created by an instrument with marked similarities to those the subject of this appeal.”. McCarthy J. stated that during the course of the hearing, the Court was informed that the securities were, in fact, modelled on those in Siebe Gorman, although it was emphasised that the monies received in respect of the book debts in the case being considered “were paid into a special account and not, as in Siebe Gorman, into the ordinary account of the mortgagor.” The purpose of adverting to those observations is because they may elucidate later references to Keenan Bros. in the context of subsequent consideration of Siebe Gorman by the United Kingdom courts.
41. In relation to the approach to construction of the security, McCarthy J. stated (at p. 421):
“It is not suggested that mere terminology itself, such as using the expression ‘fixed charge’, achieves the purpose; one must look, not within the narrow confines of such term, not to the declared intention of the parties alone, but to the effect of the instruments whereby they purported to carry out that intention; did they achieve what they intended or was the intention defeated by the ancillary requirements?”
That passage, in my view, bears out the statement of the trial judge that this Court in Keenan Bros. adopted a similar approach to that subsequently adopted by the Privy Council in Agnew.
42. In Re Holidair Limited [1994] 1 IR 416 (Holidair), this Court had to consider, in the context of an examinership, whether a charge, which was expressed to be “by way of first fixed charge” on “all book debts and other debts present now and from time to time due and owing to such company together with all rights and powers of recovery in respect thereof” at the outset created a fixed charge or a floating charge. Blayney J., having stated that the only provision in the debenture which might be relied upon as possibly preventing the companies from carrying on their business in the normal way using their book debts was Clause 3.08, which he had quoted, and which, in his opinion, did not have that effect. He set out his conclusion as follows (at p. 447):
“I am satisfied, accordingly, that the correct construction of the clause is that the trustee had a discretion to determine into what company account, with what bank, the proceeds of book debts should be paid from time to time. But there is no restriction in the clause on the companies drawing the monies out of these accounts. Accordingly, there is nothing in it to prevent the companies from using the proceeds of the book debts in the normal way for the purpose of carrying on their business. By reason of this the charge has also the third characteristic referred to by Romer L.J. in his judgment in In re Yorkshire Woolcombers’ Association Ltd. [1903] 2 Ch. 284 and is accordingly a floating charge and not a fixed charge.”
By way of explanation, the trustee referred to in that passage represented the interest of the debenture-holder banks. The third characteristic of a floating charge identified by Romer L.J. referred to in that passage was formulated as follows (at p. 295):
“. . . if you find that by the charge it is contemplated that, until some future step is taken by or on behalf of those interested in the charge, the company may carry on its business in the ordinary way as far as concerns the particular class of assets I am dealing with.”
43. About a quarter of a century after it was decided, the decision of the English High Court in Siebe Gorman was overruled by the House of Lords in Spectrum Plus. In Spectrum Plus the Law Lords considered the decisions of this Court in both Keenan Bros. and Holidair.
…
48. As noted above, both this Court in Keenan Bros. and the House of Lords in Spectrum Plus were concerned with the proper characterisation and effect of a charge over book debts when created, by reference to the charging clause and the other provisions of the Debenture. The United Kingdom authority in which issues most analogous to the issues on this appeal were considered was the decision of the Chancery Division of the High Court in Re Brightlife Limited [1987] Ch. 200 (Brightlife). There the company (Brightlife) was being wound up in a creditors’ voluntary liquidation. Brightlife owed over £200,000 to an American company, to which I will refer as the lender, and the debt was secured by a debenture. It also owed over £70,000 to the Commissioners of Customs and Excise for Value Added Tax. The issue was whether the lender’s debenture conferred only a floating charge so that the claim for Value Added Tax, being preferential, took priority under the provision in force in the U.K. at the relevant time corresponding to s. 285(7). That provision (s. 614(2)(b) of the Companies Act 1985) was in precisely the same terms as s. 285(7)(b).
56. In embarking on the analysis of the judgment of Hoffman J. in Brightlife, I observed that it is the United Kingdom authority in which issues most analogous to the issues on this appeal were considered. That is because it necessitated a determination as to the effect of Clause 3B of the debenture in issue there, which provided that the debenture holder might by notice to Brightlife convert the floating charge into a specific charge. There is one Irish authority in which a somewhat similar clause was obliquely referred to. That is the decision of this Court in Re Wogan’s (Drogheda) Limited [1993] 1 I.R. 157. In that case, in the context of an examinership, this Court was considering the effect of a debenture given by the company in examinership to a lender and specifically whether a fixed charge or a floating charge was created over the book debts of the company. In the judgment of Finlay C.J., the relevant clauses of the debenture were outlined and these included, in addition to the charging clauses, Clause 8(a) which was quoted as being in the following terms:
“If the lender shall by notice in writing make a demand on the company as provided for in clause 8(a) hereof then the floating charge created by clause 4(e) hereof shall immediately on service of such notice on the company become crystallised and be a specific fixed charge on . . . all book debts and other debts and securities then due to the company . . ..”
Assuming that there is a typographical error in the report, in that the clause quoted is obviously not Clause 8(a) referred to in the body of the report, nonetheless, it is clear that the debenture provided that the lender could by notice effect the crystallisation of the floating charge into a specific fixed charge. The finding of this Court (at p. 170) was that the combined effect of the charging clauses in the debenture and Clause 8, to which express reference was made, was to confer upon the charge created by the debenture the precise characteristics of a fixed charge as set out by McCarthy J. in Keenan Bros. The commentary on that finding in Courtney on The Law of Companies (3rd Ed.) at para. 18.104 to the following effect is very persuasive:
“While the Supreme Court did not specifically comment upon the validity of this clause, Finlay C.J. referred to Clause 8 in the reasoning for his conclusion. It seems inconceivable that the Supreme Court could base its decision, albeit in part, on a clause which the law did not consider to be effective. Moreover, there is no sound policy reason why the giving of notice to that effect ought not effect crystallisation.”
Further, I agree with the views expressed by the trial judge in the First Judgment (at para. 44) that it is preferable to refer to a crystallisation of the type provided for in a clause such as Clause 10 under consideration here as “express crystallisation”, rather than “automatic” crystallisation.
Effect, if any, of Crystallisation Notice: conclusion
70. It will be recalled that in the First Judgment the trial judge concluded that there is no rule of law which precludes parties to a debenture creating a floating charge agreeing, as a matter of contract, that the floating charge will crystallise upon the happening of an event or a particular step taken by the chargee. I agree with that conclusion. However, she stated that whether the parties actually achieve their intention is a separate issue by reason, inter alia, of the Supreme Court decision in Keenan Bros. The line of authority starting with Keenan Bros. in this jurisdiction and ending with the decision of the House of Lords in Spectrum Plus has been examined in considerable detail earlier with a view to identifying the task which the Court had to consider in each of those cases and to comparing it with the task of the Court in this case. As I have stated in addressing the submissions made on behalf of the Revenue Commissioners, they are different tasks. The task in this case is to determine whether, on a once off basis, the service of the Crystallisation Notice under Clause 10 converted the floating charge into a fixed charge. I am satisfied that in applying the principles enunciated in Keenan Bros. in carrying out that task, the proper conclusion is that, as a matter of construction of Clause 10, the intention of the parties was that, on the service of the Crystallisation Notice, the Company would thereafter be restricted in the use of the property and assets and rights which had been the subject of the floating charge and, contrary to the view expressed by the trial judge at para. 19 of the Second Judgment, that the Company would cease to be entitled to use such property in carrying on its business without the consent of the Bank. That conclusion, in my view, is fully in accordance with the principles outlined in the judgments of Henchy J. and McCarthy J. in Keenan Bros.
71. On the plain wording of Clause 10 of the Debenture, the intention of parties is absolutely clear. The situation is identified in which the Bank has the right to serve a notice under Clause 10. That situation is that the Bank, in its sole judgment, considers the property, assets and rights the subject of the floating charge to be in jeopardy. It is assumed that the Bank considered that to be the position on 28th October, 2009. The purpose of the notice which the Bank acquired the right to serve in that situation is also clearly stated in Clause 10. It was to convert the floating charge in the Debenture into a first fixed charge. Accordingly, the clear intention of the parties was that, on the service of the notice, the floating charge would become a fixed charge and the consequences of that occurring, including the obligations flowing from the consequences, would be borne by the Company as chargor. It is true that those consequences were not spelt out in Clause 10, nor were they spelt out in relation to the conversion of a floating charge into a fixed charge by reason of the happening of an event specified in Clause 11. The consequences ensue as a matter of law on the service of the notice under Clause 10. In legal parlance the conversion of the floating charge into a fixed charge is known as crystallisation since the late nineteenth century. As the passage from the judgment of Henchy J. in Keenan Bros., which is quoted at para. 38 above, clearly demonstrates, the consequence of the intervention of a chargee which results in crystallisation, for example express crystallisation, is that –
“. . . the rights of the chargee become the same as if he got a fixed charge; thereafter the company cannot deal with the assets in question except subject to the charge.”
That was what was intended to happen under Clause 10 of the Debenture and it is what actually happened on the service of the Crystallisation Notice on 28th October, 2009.
72. In my view, there is nothing either in the Debenture or in the Crystallisation Notice which precludes that consequence. Once the floating charge crystallises, on whatever basis, the obligation of the Company under Clause 8(a) to carry on and conduct the business in a proper and efficient manner ceases, irrespective of the wording which suggests that the Company’s obligation will continue “at all time during the continuance of this security”. Clause 8(k) has no bearing on the crystallisation of the floating charge. It merely relates to and restricts dealing with property which was the subject of the specific charge provided for in Clause 5 of the Debenture from the outset.
73. In summary, Clause 10 is absolutely clear as to the intention of the parties in conferring the right on the Bank to serve notice on the Company, the intention being to convert the floating charge into a fixed charge. Such conversion, in other words, crystallisation of the floating charge, was intended to have and did have well established consequential effects on the respective obligations and rights of the chargor and the chargee. The effects flowed from the action of service of the notice. This is not a case of putting the cart before the horse.
Construction of s. 285(7): conclusion
95. For the reasons set out above and, in particular at paras. 75 to 78, I conclude that on the application of para. (b) of s. 285(7) of the Act of 1963, which occurs in the winding up of a company, the reference to “the claims of holders of debentures under any floating charge created by the company” means a floating charge which exists at the commencement of the winding up. It does not mean a floating charge which has been converted into a fixed charge by virtue of express crystallisation in accordance with the terms of the debenture prior to the commencement of the winding up. Accordingly, as, in this case, the floating charge of each Company in favour of the Bank had crystallised by service of the Crystallisation Notice on 28th October, 2009 prior to the presentation of the petition to wind up each company, the priority debts of the preferential creditors identified in subs. (1) to (6) of s. 285 do not have priority over the claims of the Bank under each of the Debentures and those priority debts may not be paid out of the property comprised in and subject to the property which was the subject of the floating charge before crystallisation.
96. That conclusion deals only with the specific facts of this case, where there was an express crystallisation under the terms of the contract between each Company and the Bank. No view needs to be, or is, expressed as to whether there would be a similar outcome on what is called an automatic crystallisation. Unfortunately, it does appear that the replacement of s. 285(7), s. 621(7) of the Act of 2014, requires to be amended to reverse the undoubtedly unsatisfactory outcome of this decision, which gives rise to a number of concerns.
97. One concern is the possibility that, absent amending legislation, a form of false crystallisation might be contrived in circumstances where the form of the documentation undoubtedly creates a crystallisation, but where, in substance, the debenture holder allows the business to continue as if the floating charge was still in existence. It is important to reiterate, as stated at para. 10 above, that there is no evidence before this Court as to what happened between the service of the Crystallisation Notice and the presentation of the petition to wind up in this case and there is no suggestion of any lack of genuineness in the crystallisation process. Accordingly, what follows is obiter. In the hypothetical situation envisaged an issue might well arise as to the effectiveness of the creation of a fixed charge by crystallisation on the service of the notice if there was evidence to suggest that, either with the knowledge or at least tacit approval of the debenture holder, things continued on after the service of the notice in a way which was inconsistent with the fact that a crystallisation had taken place. Acknowledging that what happened subsequent to an event cannot normally be used to interpret the legal consequences of the event itself, which must be assessed in the light of the facts at the time when it occurred and the language used in the documents giving effect to it, nonetheless, in such a hypothetical situation an affected preferential creditor could argue that the debenture holder had waived the crystallisation event or, alternatively, that it was estopped from relying on it, if it was clear that the debenture holder permitted the situation to continue more or less as if it were a floating charge after the crystallisation event. Given the current unsatisfactory legislative position on the basis of the finding as to the proper construction of s. 285(7), it is not unreasonable to postulate that a court faced with a hypothetical situation would be reluctant to accept what was in substance a purely nominal crystallisation which the debenture holder did not seek in substance to rely on in any way between the crystallisation event and the winding up.
98. Another concern brings me back to s. 99 of the Act of 1963, which is referred to in outlining the statutory provisions above, where it is noted that under that provision there was no requirement for the registration of the conversion of a floating charge to a fixed charge. The trial judge, as noted earlier, stated that there is no rule of law which precludes parties to a debenture creating a floating charge agreeing, as a matter of contract, that the floating charge will crystallise upon the happening of an event or a particular step taken by the chargee. That proposition, with which I agree, is a fundamental plank in the determination of the effect of the Crystallisation Notice in this case. However, in this connection, one is conscious of the concerns expressed in Lynch-Fannon and Murphy on Corporate Insolvency and Rescue at para. 9.36 on the current state of the law arising from that proposition. There it is stated that it may be necessary to re-visit the questions raised by certain forms of crystallisation in the short term and, in particular, against the backdrop of a consideration of fundamental insolvency law principles, which include the necessity of transparency as between creditors and debtor companies, it being suggested that the occurrence of less than public events is contrary to the principles which underpin the system of registration of company charges and other encumbrances.”
Smith v. Bridgend County Borough Council
[2001] UKHL 58 [2002] 1 AC 336, 80 Con LR 172, [2002] 1 All ER 292, [2002] 1 BCLC 77, [2002] BLR 160, [2001] NPC 161, [2002] AC 336, [2001] BCC 740, [2002] TCLR 7, [2001] 3 WLR 1347
LORD HOFFMANN
My Lords,
3. This appeal raises two questions of general importance. The first is whether a standard condition in the Institution of Civil Engineers form of contract which allows the employer, in various situations of default by the contractor, to sell his plant and equipment and apply the proceeds in discharge of his obligations, is a floating charge which should be registered under section 395 of the Companies Act 1985. The second is the effect of a failure to register when the contractor has gone into administration but the employer has nevertheless purported to exercise the power of sale.
4. The contract, dated 28 January 1991, was for engineering works to rehabilitate an area of 141 hectares of the upper Garw valley which had been disfigured by derelict coal dumps. The employer was the Mid-Glamorgan County Council, which disappeared on a reorganisation of Welsh local government and was succeeded for this purpose by the Bridgend County Borough Council. I shall refer to both as “the council”. The contractor was Cosslett (Contractors) Limited, which I shall call “the company”.
5. The largest items of equipment brought on site by the contractor were two coal washing plants which were used to separate usable coal from residue. The council had advanced about £1.8 million to the company to enable it to buy the washing plants and the contract provided for repayment by way of deduction from the sums which would periodically become payable to the company over the term of the contract, which was expected to last about four years.
6. Condition 53(1) of the standard ICE conditions has a definition of “plant” and 53(2) provides that all plant, goods and materials owned by the contractor “shall when on the site be deemed to be the property of the employer”. In this case, however, the parties had amended the definition of plant to include a specific reference to the coal washing plant:
“For the purpose of this clause…the expression ‘plant’ shall mean any constructional plant coal washing plant temporary works and material for temporary works but shall exclude any vehicles engaged in transporting any labour, plant or material to or from the site.”
“Constructional plant” has its own definition in condition 1(1)(o):
“‘Constructional Plant’ means all appliances or things of whatsoever nature required in or about the construction completion and maintenance of the Works…”
That seems easily wide enough to accommodate the washing plant and so it is not clear why they needed a special mention in condition 53(1). Perhaps the draftsman of the amendments did not notice that constructional plant was a defined expression. In any event, I do not think that it made any difference.
7. Clause 53(2), which, as I have said, provided that the contractor’s plant goods and materials should, when on site, “be deemed to be the property of the employer”, was amended to add “The washing plant must be owned by the contractor or by a company in which the contractor has a controlling interest”. This condition was observed. The washing plant was at all times owned by the company.
8. Also relevant are conditions 53(6) and (7):
“(6) No plant (except hired plant) goods or materials or any part thereof shall be removed from the site without the written consent of the engineer which consent shall not be unreasonably withheld where the same are no longer immediately required for the purposes of the completion of the works…
(7) Upon the removal of any such plant goods or materials as have been deemed to have become the property of the employer under sub-clause (2) of this clause with the consent as aforesaid the property therein shall be deemed to revest in the contractor…”
9. Thus the status of being deemed to be property of the employer attached to plant etc when it was brought onto the site and ceased to attach when, subject to the consent of the engineer, it was removed from the site.
10. The condition which gives rise to the present dispute is 63(1):
“If the contractor shall become bankrupt…or (being a corporation) shall go into liquidation…or if the engineer shall certify in writing to the employer that in his opinion the contractor…has abandoned the contract…then the employer may after giving seven days’ notice in writing to the contractor enter upon the site and the works and expel the contractor therefrom…and may himself complete the works or may employ any other contractor to complete the works and the employer or such other contractor may use for such completion so much of the constructional plant temporary works goods and materials which have been deemed to become the property of the employer under clause…53…as he or they may think proper and the employer may at any time sell any of the said constructional plant temporary works and unused goods and materials and apply the proceeds of sale in or towards the satisfaction of any sums due or which may become due to him from the contractor under the contract.…”
11. After about two years of operating the contract the company found that selling the recovered coal was not as profitable as it had expected. In the summer of 1993 it told the council that it appeared to be heading for insolvency and would not be able to carry on with the contract. On 4 August 1993 it abandoned the site and on 6 August the engineer gave a certificate to that effect in accordance with condition 63. On 12 August the council gave 7 days notice of its intention to enter upon the site. It found another contractor, Burrows Brothers (Sales) Limited (“Burrows”) and entered into a provisional agreement under which they started work at the end of August, using the company’s washing plant.
12. On 8 September 1993 the company went into administration. Mr Ian Clark was appointed administrator. He demanded the immediate return of the plant or payment of a substantial hire fee for its use. When the council replied that it was entitled under condition 63 to use the plant, Mr Clark said that the condition was an unregistered floating charge and void against him under section 395(1) of the Companies Act 1985. On 22 November 1993 he commenced summary proceedings under section 234 of the Insolvency Act 1986 for delivery up of the washing plant.
13. On a date in January 1994, while the proceedings under section 234 were pending, the council replaced the provisional arrangements under which Burrows had been employed with a “continuation contract” for the completion of the works. One of the terms of that agreement was that when the works had been completed, Burrows would become owners of the washing plant and could remove and dispose of it.
14. The administrator’s application came before the court in December 1995, when Burrows was using the plant under the continuation contract. The council’s first line of defence was that the provision in condition 53 by which the plant, when on site, was “deemed to be the property of the employer” meant that it actually became their property. The company lost all title. The judge rejected this argument. He said that condition 63 created a charge over the company’s property. But he held that the charge was fixed, not floating. In his opinion condition 53(6) gave the employer an absolute right to refuse to allow any plant to be removed from site and therefore from the scope of the charge if it was immediately required to complete the works and a right to refuse in any other circumstances if it was not unreasonable to do so. This meant that the contractor did not have that freedom to deal with the assets until crystallisation which was the badge of a floating charge. As a fixed charge, it did not need to be registered. On that ground, he dismissed the application.
15. The administrator appealed. By the time the case got to the Court of Appeal in July 1997, the works had been completed and Burrows had either removed or were just about to remove the washing plants from the site. In fact they sold them to a third party for their own account. The administrator does not appear to have had much information about what was happening and the Court of Appeal was invited to deal with the appeal on the basis that the council was still exercising its right to use the plant but, for the avoidance of further litigation, to express a view about what the position would be if the council exercised the power of sale.
16. The Court of Appeal (Evans and Millett LJJ and Sir Ralph Gibson) said that one had to distinguish between the two rights which condition 63 conferred upon the employer. The right to use the plant to finish the works could not be a charge. It was simply a contractual right which continued to be exercisable whether the company was in administration or not. On that ground, the Court dismissed the appeal. On the other hand, they agreed with the judge that the right to sell the plant and apply the proceeds to discharge any debt from the company to the council was a charge. But they did not agree that it was a fixed charge. Millett LJ, with whom the other two judges agreed, pointed out that power to refuse consent to the removal of the plant, which the judge had treated as vested in the employer, was actually conferred upon the engineer. This suggested that the discretion was to be exercised independently on operational grounds and not as a method of enforcing the employer’s security for the payment of money. It therefore did not give the employer such control over the plant as to create a fixed charge in advance of crystallisation.
17. The result was that the power of sale was void against the administrator under section 395(1). In the course of discussion after judgments had been handed down, counsel told the court that according to their information, the plant had been sold. Millett LJ remarked that “on our judgment, as it stands at the moment, you would be entitled to an Order 14 judgment.”
18. The administrator took the judge at his word and issued a fresh writ claiming damages for conversion of its plant, followed by an application for judgment under Order 14. Judge Toulmin QC gave judgment for damages to be assessed and an interim payment of £389,000. The council appealed and the Court of Appeal (Lord Woolf MR, Ward and Laws LJJ) set aside the judgment on entirely new grounds. Laws LJ (with whom the other judges agreed) said that section 395(1) made the floating charge void against the administrator but not against the company. This meant that in cases in which the administrator had a personal cause of action (such as to recover the company’s property in specie by summary proceedings under section 234 of the 1986 Act) he could disregard the charge. But the right to sue for conversion of its property vested in the company, not the administrator. The power of sale remained valid against the company and was an answer to the claim for conversion. The Court of Appeal therefore allowed the appeal and struck out the action. Against that order the administrator appeals to your Lordships’ House.
19. My Lords, I shall first address the grounds upon which the Court of Appeal decided the case. They are in my view startling and unorthodox. Section 395, which can be traced back to the Companies Act 1900, (63&64 Vict, c 48), was intended for the protection of the creditors of an insolvent company. It was intended to give persons dealing with a company the opportunity to discover, by consulting the register, whether its assets were burdened by floating and certain fixed charges which would reduce the amount available for unsecured creditors in a liquidation. Whether this was a realistic form of protection and whether the choice of registrable charges was entirely logical is not presently relevant. The plain intention of the legislature was that property subject to a registrable but unregistered charge should be available to the general body of creditors (or a secured creditor ranking after the unregistered charge) as if no such charge existed.
20. When a winding-up order is made and a liquidator appointed, there is no divesting of the company’s assets. The liquidator acquires no interest, whether beneficially or as trustee. The assets continue to belong to the company but the liquidator is able to exercise the company’s right to collect them for the purposes of the liquidation.
21. It must in my opinion follow that when section 395 says that the charge shall be “void against the liquidator”, it means void against a company acting by its liquidator, that is to say, a company in liquidation. In In re Monolithic Building Company [1915] 1 Ch 643, 667 Phillimore LJ said of a predecessor of section 395:
“It makes void a security; not the debt, not the cause of action but the security, and not as against everybody, not as against the company grantor, but against the liquidator and against any creditor, and it leaves the security to stand as against the company while it is a going concern. It does not make the security binding on the liquidator as successor of the company.”
The last sentence shows some degree of confusion because of course the liquidator is not a successor of the company. But Phillimore LJ was quite right in saying that section 395 does not invalidate a charge against a company while it is a going concern, that is to say, when it is not in liquidation. On the other hand, once the company is in liquidation and can act only by its liquidator, there seems to me little value in a distinction between whether the charge is void against the liquidator or void against the company. It is void against the company in liquidation.
22. In Independent Automatic Sales Ltd v Knowles & Foster [1962] 1 WLR 974 a company in liquidation which had sold machines on hire-purchase brought an action against a finance company to recover hire-purchase agreements and other securities which it had charged to secure the repayment of advances. When the finance company relied upon the charge, the plaintiff replied that it was void because it should have been registered as a charge over book debts under a predecessor of section 395. The plaintiff named in the writ was the company. Mr Arthur Bagnall QC for the defendant took the preliminary point that as the liquidator was claiming that the charges were void as against him, he should have been the plaintiff. Buckley J agreed but allowed an amendment to join the liquidator as an additional plaintiff and the action proceeded.
23. As everyone knew that the company was in liquidation and suing by its liquidator, it is hard to see what the point of this manoeuvre was, unless the defendants had omitted or been unable to obtain an order for security for costs and hoped to be able to make the liquidator personally liable. (In the event they lost, so it did not matter). But I respectfully think that Buckley J was wrong. The cause of action was vested in the company. It owned the hire-purchase agreements. It should therefore have been the plaintiff. The liquidator was causing it to sue for the purpose of realising assets to be distributed in the liquidation. The fact that he relied upon the statute to invalidate what would otherwise be a defence open to the holder of the assets does not alter the nature of the proceedings or provide a reason why he should have to expose himself to personal liability for costs.
24. I express no view on the related question, which came before Knox J in Re Ayala Holdings Ltd (No 2) [1996] 1 BCLC 467 as to whether a liquidator (or administrator) can assign the company’s right to recover property free from a charge avoided by section 395. Even if I am right in thinking that the proceedings in the Independent Automatic Sales case were properly brought in the name of the company, the decision of Knox J against such an assignment can be upheld on the ground that the right of avoidance under section 395 is not in itself an assignable item of property and can be claimed only by the company acting by its liquidator or administrator.
25. This brings me to section 234 of the 1986 Act, which Laws LJ treated as the only situation in which the administrator would be able to sue in his own name and therefore be able to rely upon the fact that the charge was void against him. This section can be traced back to section 100 of the Companies Act 1862 (25&26 Vict, c 89). Originally it was confined to applications against contributories and “any trustee, receiver, banker, or agent, or officer of the company”. It provided a summary procedure by which they could be required to “pay, deliver, convey, surrender, or transfer” to the liquidator “any sum on balance, on books, papers, estate, on effects, which happen to be in his hands for the time being, and to which the company is prima facie entitled.”
26. In its original form, such an application was not an originating process. It was an application in the liquidation, invoking the summary jurisdiction of the Companies Court against certain persons connected with the company and in possession of its money or property. Its purpose was to enable the liquidator to carry out his statutory functions. It did not necessarily involve a determination of title. If, for example, the liquidator appeared on affidavit evidence to be prima facie entitled to property, books or records which he needed to proceed with the liquidation, the court could in its discretion order the person in possession to hand over the property and argue about ownership later.
27. Plainly, therefore, when the Companies Act 1900 said that an unregistered charge should be void against the liquidator, it was not intending to confine the scope of that provision to cases in which the liquidator was making a summary application under section 100 of the 1862 Act. The registration provisions would have had little value if they applied only to charges in favour of the persons subject to the summary jurisdiction. It is to be observed that Independent Automatic Sales Ltd v Knowles & Foster [1962] 1 WLR 974 was an ordinary action commenced by writ.
28. The scope of the summary procedure was enlarged by provisions of the Insolvency Act 1985 which are now contained in section 234 of the 1986 Act. It is now available against any person who has in his control “any property, books, papers or records to which the company appears to be entitled”. It remains, however, a summary discretionary remedy, obtainable by a liquidator or other office-holder for the purpose of enabling him to carry out his functions and which does not necessarily involve any determination of title.
29. When administration was introduced by the Insolvency Act 1985, section 395 of the Companies Act 1985 was amended simply by adding the words “or administrator” after the word “liquidator”. This seems to me to indicate that the section was to operate in relation to a company in administration exactly as it had in relation to a company in liquidation. An administration order did not vest any of the company’s property in the administrator any more than a winding-up order vested it in the liquidator. Instead, section 14 of the 1986 Act gave the administrator powers in many respects similar to those of a liquidator over the company’s property:
“(1) The administrator of a company-
(a) may do all such things as may be necessary for the management of the affairs, business and property of the company, and
(b) without prejudice to the generality of paragraph (a), has the powers specified in Schedule 1 to this Act.”
30. Paragraph 1 of Schedule 1 gives the administrator power to “take possession of, collect and get in the property of the company and, for that purpose, to take such proceedings as may seem to him expedient” and paragraph 5 confers power to bring any action in the name and on behalf of the company.
31. Ordinarily, therefore, an action brought by an administrator to assert a claim on behalf of the company should be in the name of the company. The title to the claim will be vested in the company. In the present case, for example, section 14(1) and the Schedule gave the administrator ample power to cause the company to bring an action against the council for converting its property. If the defence to such a claim is a charge which is avoided by section 395, the company will be entitled to rely upon the section. As in the case of liquidation, I consider that “void against the administrator” means void against the company in administration or (another way of saying the same thing) against the company when acting by its administrator.
32. In fact, the title given to the writ in the proceedings under appeal was headed “Between Ian Clark, the Administrator of Cosslett (Contractors) Ltd and Bridgend County Borough Council.” In my view, the proper heading should have been “Between Cosslett (Contractors) Ltd (In administration) and Bridgend County Borough Council.” But no one was misled about the nature of the proceedings because the statement of claim endorsed on the writ made it clear that the claim was for loss and damage suffered by the company on account of the conversion of its property. So I do not think that any amendment was necessary. On the other hand, the earlier proceedings under section 234 were at first headed “In the matter of Cosslett (Contractors) Limited and in the matter of the Insolvency Act 1986, between Cosslett (Contractors) Ltd, applicant, and Mid-Glamorgan County Council, respondent.” Later the title was amended to substitute the name of the administrator for that of the company as applicant. In this case I think that second thoughts were correct.
33. Laws LJ described the effect of section 395 as being to confer upon the administrator “a purely adventitious potential claim in specie to recover or retain the plant” and the right to “take advantage” of the ineffectiveness of the floating charge as “nothing but statutory serendipity”. I see no reason to impute such whimsical intentions to the legislature. The purpose of section 395 as originally enacted was to protect the interests of the general body of creditors. The purpose of section 395 as extended to administrators is to protect the interests of the company in administration and, if it should subsequently go into liquidation, the interests of creditors. If, on the other hand, the company emerges solvent from the administration, the secured creditor will by definition obtain payment of his debt without recourse to the avoided security.
34. In giving section 395 a narrow and arbitrary construction, Laws LJ appears to have been influenced by what he regarded as the merits of the case. He thought it was unfair that the council should lose its security over the plant when it had a cross-claim greatly exceeding the value of that security, part of which arose from the advances which had enabled the company to buy the plant in the first place. He said that if there had been no charge created by condition 63, any claim by the company for damages for conversion would “plainly” have been met by a set-off, either in equity or under rule 4.90 of the Insolvency Rules, raising the council’s cross-claim. There would in his judgment have been “no answer” to such a set-off. Why should the council be in a worse position because it had taken an unregistered charge?
35. If there was indeed such a right of set-off, the argument would be a strong one. And, encouraged by the judge’s remarks, Mr Moss QC, who appeared for the council, submitted that even if the charge was void not merely against the administrator personally but against the company in administration, he could still rely upon an equitable set-off. But in my opinion neither equitable set-off nor (if the company were to go into liquidation) set-off under Rule 4.90 would be available. The position under rule 4.90, which provides for a set-off arising out of “mutual credits, mutual debts or other mutual dealings between the company and any creditor”, was expressly considered by Millett LJ in Manson v Smith (liquidator of Thomas Christy Ltd) [1997] 2 BCLC 161. There a director who had been held liable for misappropriating funds belonging to an insolvent company attempted to invoke rule 4.90 to set off his liability against what the company owed him on loan account. Millett LJ said “a misappropriation of assets is not a dealing”. Nor is a conversion of the company’s property.
36. Similarly, equitable set-off depends upon showing some equitable reason for protection against the plaintiff’s demand: see Hanak v Green [1958] 2 QB 9. In my opinion a defendant could not, in the absence of a lien or other security, claim to retain an asset belonging to a plaintiff by way of set-off against a monetary cross-claim. If this were not the case, everyone would in effect have a lien over any property of his debtor which happened to be in his possession. It follows, in my opinion, that he cannot improve his security in equity by wrongfully converting the debtor’s property. As Lord Uthwatt said in Winter Garden Theatre (London) Ltd v Millennium Productions Ltd [1948] A C 173, 203: “In a court of equity, wrongful acts are no passport to favour.” To allow an equitable set-off would be to allow the council to exercise the very right which it could have exercised if the charge had been registered but which section 395 was intended to avoid.
37. Mr Moss next submitted that the council had not done any act which could be regarded as a conversion of the plant. Conversion is a tort against a person entitled to possession and when the council entered into the continuation contract which gave Burrows the right to take away the plant on completion of the works, the company had no right to possession. The council was entitled, as the first Court of Appeal held, to retain possession for the purpose of completing the works. When the works were completed and the company became entitled to possession, the council did not do anything to interfere with that right. Burrows simply removed the plant. If anyone converted the plant, Burrows did.
38. These arguments were presented to the Court of Appeal and tentatively rejected by Laws LJ. He said that if he thought on other grounds that the company should have a remedy, he-
“would have been prepared to hold that as between A, B and C, A converts B’s goods when he (A) gives possession and purported title in the goods to C, notwithstanding that A’s obligation to C to do so had been undertaken at a time when B had no right to immediate possession.”
39. I agree. The council consented to the removal of the plant by Burrows in violation of the company’s right to possession. The fact that they gave such consent in advance, at a time when the company was not entitled to possession, can make no difference. The consent remained effective until the moment when Burrows took the plant. This was sufficient to amount to a conversion.
40. My Lords, in my opinion Millett LJ was therefore right in saying that on the basis of the first Court of Appeal judgment, there could be no answer to the company’s claim for damages for conversion. But, in addition to attempting to support the second Court of Appeal’s grounds for differing from this view, Mr Moss also challenged the original decision that condition 63 created a floating charge. He said that it was not a charge and that if it was, it was fixed and not floating.
41. On these points I can be brief because I agree with Millett LJ for the reasons which he gave. I do not see how a right to sell an asset belonging to a debtor and appropriate the proceeds to payment of the debt can be anything other than a charge. And because the property subject to condition 63 (constructional plant, temporary works, goods and materials on the site) was a fluctuating body of assets which could be consumed or (subject to the approval of the engineer) removed from the site in the ordinary course of the contractor’s business, it was a floating charge: see Agnew v Commissioner of Inland Revenue [2001] 3 WLR 454, 464.
42. Mr Moss submitted that in the many years during which condition 63 had been in use, no one had imagined that it created a floating charge. A requirement of registration might ruin the credit of contractors when a search revealed the existence of such charges or cause them to be in breach of covenants with lenders which prohibited the granting of charges to third parties. The parties cannot therefore be supposed to have intended to create such a charge. But the intentions of the parties, as expressed in the ICE form of contract, are relevant only to establish their mutual rights and obligations. Whether such rights and obligations are characterised as a floating charge is a question of law (see Agnew’s case, at p 457). The answer to this question may come as a surprise to the parties but that is no reason for adopting a different characterisation.
43. I would also observe that the first Court of Appeal decision was reported more than four years ago and we were shown nothing to suggest that it has been the cause of any difficulties in the building or engineering industries.
44. Mr Moss also submitted that while condition 63 might create a floating charge over materials and small items of plant which were more obviously likely to come and go during the course of a four year contract, it should be construed as a fixed charge over the washing plant, which was unlikely to be removed and received a separate mention in condition 53(1) as amended. As I said at the beginning of this speech, it is not easy to guess why the washing plant was treated separately in condition 53(1). But it receives no separate treatment in condition 63, where it falls within the charge simply as an item of constructional plant. It is in my opinion impossible to construe the latter condition as creating a charge over the washing plant different in nature from that which it created over the other plant and materials brought on site. Although the washing plant was very large, it was not inconceivable that during the contract, just as it was found necessary to acquire a second plant, it might be found advantageous to replace one or both by a more efficient machine. In that case the contractor would have been entitled to withdraw the old machine from the site and the charge.
45. Finally, Mr Moss submitted that even if he was not entitled to raise an equitable set-off, any claim for conversion should be stayed pending the determination of its cross-claim. For my part, I can see no reason why there should be such a stay. It is agreed that the company is insolvent. But for the existence of these proceedings, it would no doubt have been wound up long ago. The council will be entitled to prove in the liquidation. But the claim for conversion is an asset which the administrator is entitled now to recover in due course of administration. In my opinion the judgment and interim order of Judge Toulmin QC should be restored.
LORD SCOTT OF FOSCOTE
My Lords,
46. There are, in my opinion, four main issues to be decided on this appeal.
(1) Did the terms of the ICE Conditions of Contract entered into between Cosslett and the council on 28 January 1991 entitle the council, in the events which happened, to a security interest in the two coal washing plants?
(2) If so, did that security constitute a charge that was registrable pursuant to section 395 of the Companies Act 1985?
(3) If so, and having regard to the fact that the charge was never registered but that nevertheless the two plants were sold by the council to Burrows under the continuation contract entered into between them in January 1994, did the terms of the continuation contract constitute the tort of conversion? If so, can Cosslett’s administrator sue on that tort in his own name? And on what basis should the damages for conversion be calculated?
(4) On the footing that the council’s security interest in the coal washing plants was void against Cosslett’s administrator as a result of the failure to register it pursuant to section 395, can the council set-off against the conversion damages for which the council is liable to Cosslett the contractual damages for breach of the 28 January 1991 contract for which Cosslett is liable to the council?
47. The essential background facts relating to these issues have been set out by my noble and learned friend Lord Hoffmann and I gratefully adopt them.
48. It is, in my view, essential to keep in mind that at all material times Cosslett was the legal owner of the coal washing plants. It was so decided by Jonathan Parker J ([1997] Ch 23) and the Court of Appeal ([1998] Ch 495) in the first set of proceedings regarding the coal washing plants.
49. It is also essential to bear in mind the nature of the ICE conditions of contract. The contract between the council and Cosslett was a commercial contract in a form used widely within the construction industry. Mr Moss QC, who appeared for the council before your Lordships, stressed the importance of keeping in mind the commercial character and purpose of the ICE Conditions of Contract when construing their terms and considering their effect. I agree with him about that importance.
(1) Did the council have a security interest in the coal washing plants?
50. In my opinion it plainly did. The coal washing plants were items falling within the definition in the ICE Conditions of “constructional plant”. No one has argued the contrary. Clause 63(1) of the ICE Conditions gave rights and remedies to “the employer” ie in this case, the council, in a number of specified events, one of which was that the “contractor . . . (a) has abandoned the contract . . . ” That is what happened in the present case. Cosslett abandoned the contract on 4 August 1993. The contractual rights and remedies given to the Employer are triggered by the service on the contractor of a 7 day notice. The council, presumably for belt-and-braces reasons, gave two such notices. No one has suggested a valid notice was not given. The rights and remedies that follow the service of a valid 7 day notice fall into three groups.
(i) The employer may enter the site, expel the Contractor from it, and take possession of the “constructional plant” and materials on the site.
(ii) The employer may itself complete the works, or may engage some substitute contractor to do so, and the Employer, or the substitute contractor, may use any items of “constructional plant” and any of the materials for that purpose.
(iii) The employer may “at any time sell any of the constructional plant . . . and unused goods and materials and apply the proceeds of sale in or towards satisfaction of any sums due or which may become due to him from the Contractor under the Contract”.
51. As to (i), the right to enter and expel is a necessary preliminary both to the exercise of the right to use the Constructional Plant, and to the exercise of the right to sell it. As to (ii), the right to use the plant is not a security right. It was so decided by the Court of Appeal. Millett LJ said [1998] Ch 495, 508:
“The right of the council in the present case . . . does not constitute any kind of security interest, since it is not given to the council by way of security. It does not secure the performance of the contract by the company, but merely enables the council to perform the contract in its place” (See also Evans LJ, at p 505).
52. But, as to (iii), the Court of Appeal held that “by contrast the council’s power to sell the plant and apply the proceeds in or towards discharge of whatever sums might be or become due from the company by reason of its failure to complete the works clearly is a security interest” (per Millett LJ at p 508).
53. In the second hearing before the Court of Appeal, which culminated in the judgment now under appeal before your Lordships, the security character of the employer’s clause 63(1) right to sell the plant and apply the proceeds in discharge of sums due to it from the contractor seems to have been accepted (see paragraphs 15 and 16 of Laws LJ’s judgment). But before your Lordships Mr Moss challenged the proposition. He submitted that the purpose of the power of sale was to enable the council to clear the site by disposing of plant and materials when they were no longer needed for completion of the engineering works and that the council’s right to apply the proceeds of sale in or towards satisfaction of any sum owing by Cosslett was simply a contractual right of set-off and not intended to constitute equitable security. I do not agree. The power to sell was not only for the purpose of enabling the council to clear the site of plant and materials no longer needed but was, plainly, also for the purpose of enabling the council to bring into existence a fund that it could appropriate towards any debt owing to it by Cosslett. In my opinion, a contractual right enabling a creditor to sell his debtor’s goods and apply the proceeds in or towards satisfaction of the debt is a right of a security character. The conclusion does not depend on the parties’ intention to create a security. Their intention, objectively ascertained, is relevant to the construction of their contract. But once contractual rights have, by the process of construction, been ascertained, the question whether they constitute security rights is a question of law that is not dependent on their intentions (see Agnew v Commissioner of Inland Revenue [2001] 3 WLR 454, 465-466 per Lord Millett).
54. The classification of the council’s rights under clause 63(1) as a security right is, in my opinion, supported by the decision of the Court of Appeal in In re Garrud, Ex p Newitt (1881) 16 Ch 522. That case arose out of a building agreement between a landowner and a builder. The agreement entitled the landowner, in the event of default by the builder, to re-enter the building site and expel the builder. It provided that:
“. . . on such re-entry all such buildings, erections, constructions, materials, and things then in and about the said premises shall be forfeited to and become the property of the said lessor, as and for liquidated and settled damages; . .”
55. The issue for decision was whether the agreement should have been registered as a bill of sale. The landowner argued that although the agreement did grant “a licence to take possession of personal chattels”, the licence was not granted “as security for a debt” (see section 7, Bills of Exchange Act 1854 (17&18 Vict, c 36)). The court agreed. James LJ said at p 530:
“It was no doubt ‘an authority or licence to take possession of personal chattels’ but not as security for a debt”.
and Brett LJ explained, at p 532:
“the chattels were taken, not as security for, but in discharge of the debt”.
56. Clause 63(1), however, has the features that the Garrud argument lacked. First, despite the Index and the side-heading, which refer to “forfeiture”, the sub-clause is not a forfeiture provision. The employer does not take the proceeds of sale in satisfaction for sums due by the contractor, but on account of sums due. If there were a deficiency, the contractor would still owe the amount of the deficiency. If there were a surplus, the employer would have to account for it to the contractor.
57. Moreover, an employer exercising a clause 63(1) power of sale would, in my opinion, have to take reasonable care to obtain a proper price (c/f Cuckmere Brick Co Ltd v Mutual Finance Ltd [1971] Ch 949 and would not be entitled to sell to himself (c/f Tse Kwong Lam v Wong Chit Sen [1983] 1 WLR 1349). These obligations are not expressed in clause 63(1) but, in my opinion, have to be implied in order to provide proper protection for the contractor’s interest in the items being sold and are all indicia of a security interest.
58. Accordingly, in my opinion, the council’s rights under clause 63(1) included security rights over the plant and materials that were on the site when the council entered into possession after the expiry of the 7 day notice and over the proceeds of sale of any items of plant or materials that were sold.
(2) Did the council’s security rights under clause 63(1) constitute a charge registrable under section 395?
59. Section 396(1) of the Companies Act 1985 specifies the types of charge that are registrable under section 395. Sub-paragraph (f) specifies “a floating charge on the company’s undertaking or property”. Sub-paragraph (c) specifies “a charge created or evidenced by an instrument which, if executed by an individual, would require registration as a bill of sale”. The argument before your Lordships concentrated on the question whether the council’s security constituted a floating, as opposed to a fixed, charge. After argument had concluded the parties were given leave to make supplemental written submissions on the bills of sale point.
60. In the first Court of Appeal hearing the court held that the security constituted a floating charge. The reasons were given by Millett LJ (see [1998] Ch 495, 510). He described the essential difference between a floating charge and a fixed charge in the following passage:
“The essence of a floating charge is that it is a charge, not on any particular asset, but on a fluctuating body of assets which remain under the management and control of the chargor, and which the chargor has the right to withdraw from the security despite the existence of the charge. The essence of a fixed charge is that the charge is on a particular asset or class of assets which the chargor cannot deal with free from the charge without the consent of the chargee. The question is not whether the chargor has complete freedom to carry on his business as he chooses, but whether the chargee is in control of the charged assets.”
He then held that the provisions of clause 53 of the ICE Conditions enabled Cosslett to remove items of plant or materials from the site provided the removal would not prejudice or delay the completion of the works. This ability, he concluded, justified categorising the council’s security as a floating charge. This conclusion does not seem to have been challenged in the second Court of Appeal hearing. Laws LJ described the categorisation of the council’s security as a floating charge as “uncontentious” (see para 16 of the transcript). The conclusion has, however, been firmly challenged before your Lordships by Mr Moss. He submitted that if he was wrong in contending that the ICE Conditions did not create a charge at all, as I in common with all of your Lordships think that he was, the charge did not come into existence until a valid 7 day notice had been given under clause 63(1) and then came into existence as a fixed charge over all the plant and materials then on the site.
61. Up to a point I agree with Mr Moss’ analysis, but I am not sure that it makes any difference. A charge expressed to be granted over all the assets of a company but with liberty for the company until the occurrence of some specified future event to deal with the assets in the ordinary course of its business would be a classic floating charge (see Lord McNaghten in Governments Stock and Other Securities Investment Co v Manila Railway Co Ltd [1897] AC 81, 86). The grant would vest in the grantee an equitable security interest in the assets of the company for the time being; but the interest, although existing, would remain dormant until the requisite event happened. Contrast a charge expressed to come into existence on a specified future event and then to attach to assets then owned by the company. Such a grant would not, in my opinion, vest in the grantee any immediate equitable interest in the company’s assets for the time being. Mr Moss would categorise such a grant as a grant creating a future fixed charge over the assets in question, rather than as a floating charge over the company’s assets for the time being. I agree with Mr Moss that a grant of the sort described would not create a traditional floating charge. And if parties want to create future charges over assets that cannot be identified until the future event happens, I do not see why, unless there be some public policy objection, they should not be free to do so.
62. However, there has never been any statutory definition of “floating charge”. The definitions are all judicial ones and, in most cases, expressed in order to distinguish floating charges from fixed charges. Buckley LJ in Evans v Rival Granite Quarries Ltd [1910] 2 KB 979 said, at p 999:
“A floating security is not a future security; it is a present security, which presently affects all the assets of the company expressed to be included in it.”
This language, I think, assists Mr Moss. It suggests that a future security lacks something of the character of a floating charge. In the present case, over the period between the date of the contract, 28 January 1991, and the date of one or other of the 7 day notices given in August 1993 was there a “present” security that “presently” affected the coal washing plants? To put the point another way, did the council have any equitable interest in the coal washing plants until the service of a 7 day notice? In my opinion, it did not. Its rights over constructional plant and materials during the pre-7 day notice period were contractual operational right, not property rights. Its security rights were dependent on the occurrence of one or other of the future events specified in clause 63(1).
63. I do not think, however, that this analysis bars the clause 63(1) future security rights from constituting a floating charge for section 395 registration purposes. In my opinion, a charge expressed to come into existence on the occurrence of an uncertain future event and then to apply to a class of assets that cannot be identified until the event has happened would, if otherwise valid, qualify for registration as a floating charge. The future charge would have the essential characteristic of floating, remaining dormant, until the occurrence of the specified event. It would, I think, come within the mischief sought to be dealt with by the section 395 requirement of registration of floating charges. For the same reasons, it would also, in my view, constitute a floating charge for Insolvency Act 1986 purposes (see eg section 15(3) and section 245).
64. The conclusion that the Council’s security was registrable as a floating charge makes it unnecessary to decide whether it might also have been registrable as a bill of sale; as to which see sections 4 and 8 of the Bills of Sale Act 1878 (41&42 Vict, c 31)and sections 3,4 and 8 of the 1882 Act. (45&46 Vict, c 43).
(3) In disposing of the coal washing plants to Burrows under the continuation contract of January 1994 did the council commit the tort of conversion?
65. The failure to register the charge under section 395(1) made the charge “void against the liquidator or administrator and any creditor of the company”. It has been suggested that this language leaves an unregistered charge valid against the grantor company, that the clause 63(1) charge was accordingly valid as against Cosslett notwithstanding that it was void against the administrator, and that consequently the disposition by the Council of the coal washing plants did not constitute the tort of conversion. In In re Monolithic Building Company [1915] 1 Ch 643, 667 Lord Cozens Hardy MR said this of an unregistered charge:
“It is a perfectly good deed against the company so long as it is a going concern.”
And Phillimore LJ said:
“We have to construe section 93 of the statute. It makes void a security; not the debt, not the cause of action, but the security, and not as against everybody, not as against the company grantor, but against the liquidator, and against any creditor, and it leaves the security to stand as against the company while it is a going concern.”
66. The words “or administrator” were inserted into section 395(1) by the Insolvency Act 1985 (see section 109(1) Sch 6 para 10). The previous language “void as against the liquidator and any creditor” may have been derived from the Bills of Sale Acts. Under section 8 of the 1878 Act the consequence of failure to register was that the bill of sale became void “as against all trustees or assignees of [the grantor of the bill of sale] and against [any creditor levying execution]”— I have endeavoured to summarise the rather turgid language of the section. Section 8 did not make the unregistered bill of sale void against the grantor. But, on a bankruptcy or assignment for the benefit of creditors, the grantor’s title to his assets would have left the grantor and passed to his trustee or assignee. The references in the Monolithic Building Company case to the unregistered security remaining enforceable while the grantor company was a going concern produce the same effect for companies pre liquidation as section 8 of the 1878 Act produced for individuals pre bankruptcy. Until bankruptcy intervened the unregistered bill of sale was enforceable against the grantor. Thereafter it was not. Until a liquidation or administration intervenes, the unregistered charge is enforceable against the grantor company. Thereafter, or until the liquidation or administration comes to an end, it is not.
67. I am, therefore, in full agreement with my noble and learned friend Lord Hoffmann that for as long as an unregistered charge is void under section 395(1) against a liquidator or administrator the charge is, for the reasons he gives, void against the grantor company in liquidation or in administration.
68. It follows, in my opinion, that the council’s security rights under clause 63(1), being unregistered, have been void against Cosslett since 8 September 1993 when the administration order was made.
69. In Clerk & Lindsell on Torts, 18th ed, (2000), conversion is described as “a wide tort, covering the deliberate taking, receipt, purchase, sale, disposal or consumption of another’s property” (para 14-03). Paragraph 14-08 says that “the essence of the wrong [is] the unauthorised dealing with the claimant’s chattel so as to question or deny his title to it”.
70. Under the continuation contract between the council and Burrows the council purported to dispose of the coal washing plants to Burrows. But since Cosslett was the owner of the plants and the council’s power of sale under clause 63(1) was void as against Cosslett in administration, the disposal was, in my opinion, a clear act of conversion.
71. I would add that even if the clause 63(1) power of sale had been valid as against Cosslett, I do not think the disposal to Burrows would have been franked by the power. A sale is a disposition of property for a price. The obligation of a chargee with a power of sale is to obtain the best price reasonably obtainable. Under the continuation contract, only parts of which were available to your Lordships, it seems that the council disposed of the plants to Burrows on the footing that Burrows would be allowed a credit of £100,000 for each against its tender price for completion of the engineering works. But by a letter to the council dated 13 October 1993 Burrows estimated the residual value of the plants to be £500,000 and stated that “The £200,000 credit quoted in our tender is after making allowance for the cost of expected barren earthworks”. On this evidence it seems to me impossible for the council to contend that it made a proper exercise of its clause 63(1) power of sale. If the clause 63(1) power had been valid as against Cosslett in administration, I think the position would be that the council had become a mortgagee in possession on entry on the site and, accordingly, accountable to Cosslett on the footing of wilful default for the proper value of the coal washing plants.
72. Mr Moss contended that conversion was a wrongful interference with the right of possession, that the council was entitled to retain possession of the coal washing plants in order to complete the engineering works and that the purported disposal to Burrows at a time when the works had not been completed and Cosslett did not have a right to possession could not have constituted a conversion. He argued that the eventual removal of the plants by Burrows after the works had been completed, although done pursuant to the continuation contract, did not constitute a conversion by the council for it was not done by the council.
73. I am unable to accept these submissions. The continuation contract, being a purported disposal of the plants by the council, was a wrongful interference with Cosslett’s title to the plants. It was repudiatory in character and, had it been relied on in the first set of proceedings between the parties, might well have enabled Cosslett to succeed in its claim to immediate possession of the plants. The details of the continuation contract were not, however, then known and the right of the council to retain the plant pending completion of the works became res judicata as between the council and Cosslett.
74. Both the coal washing plants were removed from the site in or about June 1997. By that time they were no longer needed for completion of the works and were removed by Burrows, acting in reliance on the continuation contract.
75. In these circumstances, in my opinion, the fact that at the date of the continuation contract Cosslett did not have an immediate right to possession did not deprive the continuation contract of its effect as constituting a conversion by the council of the coal washing plants. What it did do was to postpone the date at which, for measure of damages purposes, the value of the converted plants had to be assessed. Cosslett was, and in my opinion is, entitled to damages for conversion representing the value of the plants at the date of the conversion, that is to say, January 1994. But the plants were, at that date, subject to the clause 63(1) rights of user that were binding on Cosslett. So the value should be adjusted accordingly. In practice, I imagine that the value of the plants subject to the rights of user will be equivalent to the value of the plants in their used state at the completion of the works.
(4) Set-off
76. Can the council, even if its clause 63(1) rights do constitute a security that was unregistered and therefore void, claim the benefit of equitable set-off so as to set off its contractual damages claim against Cosslett’s conversion damages claim? In my opinion, clearly not. This is a case in which the parties, in clause 63(1) of their contract, have provided the council with a contractual right of set-off that, for failure to comply with applicable statutory provisions, is void against Cosslett in administration. Why should equity intervene and protect the council from its failure to comply with the statutory provisions? Similar questions arose in Orakpo v Manson Investments Ltd [1978] AC 95 and in Dimond v Lovell [2000] 2 WLR 1121 (HL). Orakpo was a moneylending case. The defendants were licensed moneylenders but, in respect of loans to the plaintiff with which the plaintiff had purchased properties, had failed to comply with the requirements of the Moneylenders Act 1927. (17&18 Geo 5, c 21). The consequence was that the loan agreements were unenforceable and so were the mortgages granted by the plaintiff to secure the repayment of the loans. The defendants claimed to be entitled by subrogation to the benefit of the vendors’ liens. This House rejected the claim and Lord Salmon, at p 111, commented that he could not think “that it would be proper to apply an equitable doctrine for the purpose of enabling a moneylender to escape from the consequences of his breach of the statute . . . ” Lord Edmund Davies, in answer to the question whether a court of equity should grant relief to a moneylender who was in breach of the Act, said, at p 115, that he felt compelled to answer in the negative:
“for to answer affirmatively would be to enable the court to express a policy of its own in regard to moneylending transactions which would be in direct conflict with the policy of the 1927 Act itself”.
77. In Dimond v Lovell a regulated consumer credit agreement relating to the hire of a car was unenforceable for failure to comply with the requirements of the Consumer Credit Act 1974. It was argued for the car hire company that it should have an unjust enrichment remedy. The argument was rejected by this House. Lord Hoffmann, citing Orakpo v Manson Investments Ltd, said [2000] 2 WLR 1121, 1131:
“Parliament intended that if a consumer credit agreement was improperly executed, then . . . the debtor should not have to pay. This meant that Parliament contemplated that he might be enriched and I do not see how it is open to the court to say that this consequence is unjust and should be reversed by a remedy at common law”.
78. Similar reasoning applies here. If the council’s clause 63(1) security is barred by section 395(1) from being enforceable against Cosslett in administration, it is no part of equity to provide, via equitable set-off, an alternative security.
(5) Title to sue in conversion
79. I respectfully agree that the plaintiff/claimant in Cosslett’s conversion action ought to have been “Cosslett (Contractors) Ltd (In administration)” and have nothing to add on this point to what Lord Hoffmann has already said.
80. For all these reasons I agree that the appeal should be allowed and the judgment and interim order of Judge Toulmin QC restored.
Moorview Developments Ltd & Ors -v- First Active PLC & Ors
[2009] IEHC 367
Clarke J
3. The Contested Assets
3.1 Three specific assets or interests in assets are said not to be secured in favour of First Active, and, it follows, are in principle available to Kanwell on foot of its judgment mortgages.
3.2 I propose briefly outlining those assets at this stage for the purposes of identifying how it is argued that the interests in question do not fall within First Active’s charge.
3.3 The first such asset became known as Lot C2 which is registered land being comprised in (so far as the freehold interest is concerned) Folio 59867F of County Galway and so far as the leasehold is concerned is comprised in Folio 46L for County Galway. A number of technical arguments were made on behalf of Salthill and Kanwell which, if correct, would, it is said, result in the merger of the freehold and leasehold interests concerned at a time subsequent to when it is argued there had been a crystallisation of First Active’s floating charge over that property of Salthill. Again in somewhat complicated circumstances (including what would appear to be conveyancing errors and an error by Land Registry), it is argued that the execution of a deed in favour of Mr. Duffy which was ultimately not proceeded with and was replaced by a deed in a different form, gives rise to an effect that the relevant interests in Lot C2 remain owned by Salthill and have been cleared of any charge. While First Active contests the basis on which it is argued that the ownership of the relevant interests is Lot C2, passed in such way as to, arguably, give rise to the consequences urged on behalf of Salthill and Kanwell, First Active also takes a more fundamental objection to the case made. It is argued that, even if Salthill and Kanwell are correct in their contention concerning the manner in which the ownership of Lot C2 has devolved, any such interest in the lands in question, as might have passed to Salthill, would have been automatically caught by, alternatively, the provisions of clauses 4.1.5, 4.1.6, or 4.1.14. It is said, under this heading, that the relevant clauses (or any one of them) is sufficient to capture after acquired property (that is to say property acquired after the relevant debentures were entered into) and that this remained so, irrespective of whether there had been a crystallisation of any floating charge.
3.4 A similar question arises in respect of the second area of land in question that is to say Lot A2, otherwise often referred as the M & G Triangle. Again due to a conveyancing error, a deed of rectification was executed on the 17th September, 2004. While there are issues between the parties as to the proper construction to place on the error concerned, coupled with the deed of rectification, it is again argued on behalf of First Active that even if Salthill and Kanwell are correct in the characterisation which they seek to place on that sequence of events, the M & G Triangle is still caught by the provisions of the Debentures concerning after the required property.
3.5 Like arguments arise in relation to the final parcel of land being Lot M.
3.6 It follows that it seems logical to start with a consideration of whether First Active are correct in the contention which they seek to make to the effect that, irrespective of the proper characterisation of the manner in which ownership of the three parcels of land in question devolved at the material time, First Active nonetheless had the benefit of a charge over that property at any material time by virtue of the proper application of the terms of the Debenture.
3.7 I, therefore, turn to that issue.
4. To What Extent does the Debenture Capture are Acquired Property
4.1 Under this heading it seems to me that the first matter to consider is the extent of clause 4.1.6, the text of which has been cited earlier. Under that clause First Active has charged to it “by way of first fixed charge” all other “freehold leasehold and other immovable property now or at any time hereafter” belonging to Salthill. First Active argues that the terms of that clause are clear and unambiguous. By it, it is said, Salthill has charged in favour of First Active any immovable property which it might subsequently acquire. It is said that there is no limitation either express, or by implication, in the use of the term “at any time hereafter”. Thus, it is argued, that for as long as the debenture continues in force, clause 4.1.6 is sufficient to immediately catch and charge any immovable property which is acquired by Salthill and that the charge thereby created is a fixed charge. It is further said that the clause is not dependent on the manner in which any such property interest might be acquired. Thus, it is said, regardless of the technical manner in which it might be said that an interest in immovable property comes into the hands of Salthill, that property is, it is argued, immediately the subject of a fixed charge under clause 4.1.6. Finally, as the charge is said to be a fixed charge, it is argued that the validity of such charge is unaffected by any issues of crystallisation which would, of course, be relevant only to floating charges.
4.2 Counsel for Salthill and Kanwell drew attention to the fact that the clause extends not only to the property concerned and any rights, easements or the like attaching to it but also “buildings, erections, fixtures and fixed plant and machinery”. On that basis it was argued that, on a true construction, the clause is, (despite being otherwise described) a floating rather than a fixed charge.
4.3 Counsel referred to authorities such as Re Holidair Ltd [1994] 1 IR 416 and Re Keenan Brothers Ltd [1985] I.R. 401, which make clear that the mere fact that a charge is described as a fixed charge does not necessarily mean that the charge concerned is, in substance, properly so characterised. The difference between a fixed charge and a floating charge is clear. The difference stems from the ability of the mortgagor or chargor to deal with the property concerned in the ordinary course of business. It is inherent in a floating charge that the assets of the company subject to a floating charge can be deployed in the ordinary course of business. For example stock in trade can be sold, the monies realised by the collection of book debts can be spent in the course of the company’s business and the like. Subject to any specific provision in the relevant debenture documentation, the company is free to deal with such of its assets as are covered by a floating charge in the ordinary course of business and without having to ask for permission from the charge holder. It is only when, in accordance with the terms of the charging document, the floating charge can be said to crystallise by being converted into a fixed charge in respect of whatever assets were, as of the relevant time, covered by the floating charge, that the charge fixes on specific assets to the extent that the company can no longer deal with those assets in the ordinary course of business. On the other hand a fixed charge relates to specific property. Again, subject to the terms of the charging document, the company concerned is not permitted to deal with any assets which are the subject of a fixed charge without the specific permission of the charge holder.
4.4 I did not understand counsel for First Active to disagree with the principle advanced on behalf of Salthill and Kanwell to the effect that a Court must look at all of the terms of a relevant charge for the purposes of determining whether the charge is, in truth, a fixed charge or a floating charge. The point of difference between the parties is as to whether the application of that principle to clause 4.1.6 should lead to that clause being construed as a fixed or a floating charge.
4.5 A starting point for the resolution of that dispute requires me to note that the creation of charges by companies over their assets in favour of lending institutions is fundamentally a matter of contract. The extent and nature of the charge depends on what the parties agree. The reason why it is appropriate to categorise charges as fixed or floating is that the use of those terms carry with them a significant number of characteristics. However that is not to say that there is any necessary legal consequence from the use of the term fixed charge or floating charge. Both are creatures of the document creating them. The document as a whole must be construed to determine the nature of the charge created. As noted earlier it is, of course, open to the parties, subject to any legal restraints which might arise under either company law, property law or the like, to fashion a charge in whatever way they might agree. While a fixed charge will not, ordinarily, allow a company to deal with the property which is the subject of that charge at all, it is open to the parties to agree an appropriate regime that would allow such a party to deal with the asset in a defined way.
4.6 By way of example referable to the business at hand in these proceedings, it is commonly the case that lending institutions hold first legal charges over the assets of development companies. It is normally explicit in the arrangements between those parties that the development company can construct on the development site concerned and enter into sales contracts with third parties for the sale of the units developed. The normal arrangements agreed in those circumstances typically involve a release by the lending institution concerned of its charge over relevant units so as to enable a closing of a sale of the unit concerned to be made to the third party concerned free from encumbrances. In such circumstances there is typically a pre-existing arrangement between the lending institution and the development company which provides for the amount of monies that are to be paid to the lending institution in order to procure such a release. The asset over which the lending institution in such circumstances has security will, therefore, vary significantly over time. The lending institution security will initially lie over the undeveloped site. As units come to be constructed the lending institution’s security will attach to those units. However equally, as units come to be sold, the lending institution’s security will disappear from those units. The mere fact, therefore, that it is contemplated that there will be a rolling shift in the precise property over which the lending institution concerned has security does not, in my view, prevent that security from being a proper fixed charge. It is fixed because the company has no general permission to dispose of the assets concerned without obtaining a specific release of the charge in respect of each unit concerned. Unlike the stock in trade of a manufacturing company which is subject to a floating charge but which can nonetheless be sold without any reference to the chargeholder, the development company needs to obtain a specific release for each unit sold at least prior to the closure of any such sale.
4.7 Likewise, while a floating charge will, ordinarily, entitle the company concerned to deal with the assets which are subject to the floating charge in the ordinary course of business, it is open to that company and its lending institution to agree any restrictions on that entitlement in respect of a specific asset or category of assets as those parties might wish to negotiate.
4.8 It seems to me, therefore, that the use of the terms “fixed” and “floating” in respect of charges gives a strong indication of the nature of the charge which the parties wish to put in place although it will not necessarily be decisive in every case. A charge can remain a fixed charge even though the parties have negotiated circumstances in which it is possible, with specific permission or within pre-agreed parameters, for assets which are the subject of a fixed charge to be disposed of. Likewise the parties may negotiate some limitation on what would otherwise be the entitlement of a company to deal with assets the subject of a floating charge in the ordinary course of business.
4.9 In the absence of other terms it seems to me that the use by parties of the phrase fixed charge will necessarily carry with it an intention on the part of the parties that the asset concerned cannot be dealt with in any way without the permission of the chargeholder. The use of the term floating charge, without any other terms, will likewise carry with it an implication that the intention of the parties was that the assets, the subject of such a charge, can be dealt with in the ordinary course of business without recourse to the chargeholder. However, in either case the parties are free to negotiate their contract with such deviation from what might be described as the “pure” position of a fixed or floating charge as they may be able to agree.
4.10 It is important to note that the reference to “buildings etc.” in clause 4.1.6 simply replicates the use of exactly the same terms in the definition of “secured property” which, it will be recalled, is used for the purposes of defining the property which is undoubtedly the subject of a first legal charge in the form of conveyance, sub-demise or charge (in the case of registered land). It is difficult to see how it can be argued that the use of that terminology in clause 4.1.6 has the effect of turning clause 4.1.6 from a fixed charge into a floating charge while the use of the same terminology (by the inclusion of that terminology in the definition of secured property) in clauses concerned with the creation of what undoubtedly are first fixed legal charges, does not.
4.11 I am not, therefore, satisfied that there is any legitimate basis for regarding clause 4.1.6 as doing anything other than it purports to do, that is to say that it creates a first fixed charge on all after acquired immovable property. There is no limitation on the scope of after acquired property covered by the relevant charge. Therefore, provided that Salthill can be said to have acquired property which is freehold, leasehold or “other immovable” at any time after the execution of a relevant debenture, then it seems to me clear that clause 4.1.6 creates a first fixed charge on that property with immediate effect.
4.12 It is next necessary to turn to the consequences of that finding.
5. The Consequences
5.1 It follows from the construction which I have placed on clause 4.1.6 that, to the extent that it might successfully be argued on behalf of Salthill and Kanwell that a proper construction on the sequence of transactions relating respectively to the three plots in issue, gave rise to a situation where an interest in the plot concerned became vested in Salthill at any material time, then, immediately on that interest becoming vested in Salthill, a charge was created in favour of First Active in respect of that interest in the plot concerned. There is nothing in the text of clause 4.1.6, or the remainder of the relevant debentures, that could be taken, either expressly or by implication, to suggest that clause 4.1.6 could not have effect after a crystallisation of any floating charge. For the reasons which I have sought to analyse I am satisfied that clause 4.1.6 creates a fixed rather than a floating charge. Whatever may have been the effect on the operation of Salthill by reason of the purported crystallisation of the floating charge which it had given in favour of First Active, same could have no effect, in my view, on the proper application of clause 4.1.6 which is concerned solely with the creation of a fixed charge over future acquired assets.
5.2 In those circumstances it seems to me that the issues raised at the hearing before me concerning crystallisation, the possibility of de-crystallisation, and whether, if de-crystallisation is recognised in Irish law, it could be said to have occurred on the facts of this case, are wholly irrelevant. Clause 4.1.6 created a fixed charge over all after acquired immovable assets which is independent of the floating charge and, therefore, not affected by the status of that floating charge. Likewise the alternative argument put forward on behalf of First Active which seeks to rely on Clauses 4.1.5 or 4.1.14 do not require determination.
5.3 Likewise it seems to me that the complex questions raised as to whether the sequence of conveyancing events in relation to the three plots in question (and it does have to be noted that the sequence of undoubted errors which occurred both as and between the parties and involving the Land Registry in that sequence is quite striking) gives rise to the change of ownership contended on behalf of Salthill and Kanwell are irrelevant. Even if Salthill and Kanwell are correct in their contention such that the relevant interests in those parcels of land became vested in Salthill at the time which Salthill and Kanwell contends, then those interests were, for the reasons which I have sought to analyse, immediately subject to a fixed charge in favour of First Active by virtue of the operation of clause 4.1.6.
5.4 In those circumstances it seems to me to be clear that First Active had, at all material times, a charge over all the relevant property and all interests in that property which Salthill owned. It follows that those aspects of the main proceedings which were held over must be dismissed for it is clear that there is no fragility in First Active’s security.
5.5 It also follows that no well charging order should be made in the Kanwell proceedings for to make such an order would be redundant. Kanwell only has a judgment against Salthill. Whatever may be the scope of the judgment mortgages registered against Salthill’s interest in various properties on behalf of Kanwell, the interest of Kanwell can go no further than the interest of Salthill. Any property which Saltlhill owned was, for the reasons which I have analysed, immediately charged in favour of First Active. It follows that the interest of Kanwell under its judgment mortgages must rank behind the interest of First Active for, by definition, at the time when Kanwell caused the respective judgment mortgage affidavits to be registered there was already in existence a fixed charge over all relevant assets in favour of First Active. Any interest which Salthill owned as of the date of registration of a relevant judgment mortgage was already subject to a fixed charge in favour of First Active. Any interest not then owed by Salthill could not have been caught by relevant judgment mortgage.
5.6 I should note in passing that, while the first of the judgment mortgage affidavits filed by Kanwell was the only judgment mortgage in being at the time when the Kanwell well charging proceedings were commenced, Kanwell sought, and, without opposition, obtained an amendment for the purposes of extending the proceedings to cover a claim based on a second judgment mortgage affidavit. First Activesensibly took the point of view that it was prudent to have all issues concerning the validity of any charge which Kanwell might have, determined in these proceedings. Irrespective of which judgment mortgage one is speaking of, however, it is clear that, at the time that judgment mortgage was registered, all of the then property of Salthill was caught, if not by any other provision, then by the provisions of clause 4.1.6. It follows that while Kanwell has a valid judgment mortgage over all of the property of Salthill, that judgment mortgage ranks, in all cases, behind the interests of First Active under the various Debentures. It follows that there would be no point in making a well charging order in favour of Kanwell.
6. Conclusions
6.1 In all those circumstances it seems to me that I should dismiss those aspects of the main proceedings which were expressly deferred in the main judgment.
6.2 I should also dismiss the Kanwell well charging proceedings.
In re Edenfell Holdings Ltd.
I would allow the appeal and substitute for the order of the High Court an order directing the receiver to complete the contract with Astra and directing the liquidator to join in the completion of the contract and to convey to Astra such interest as the liquidator may retain in the strip of land referred to in the receiver’s application.
Welch v. Bowmaker (Ir.) Ltd.
[1980] IR 251
Henchy J.
Henchy J.
9th July 1979
These proceedings have been brought by the liquidator of Central Garage (Cork) Ltd. (the company) to clear up a point arising out of a debenture. The debenture was given by the company to Bowmaker (Ireland) Ltd. (Bowmaker) on the 16th January, 1975. Having recited that the company would pay to Bowmaker on demand all money due to Bowmaker on any current or other account and would discharge all liabilities incurred by the company to Bowmaker together with interest and other charges as specified, the debenture provided at clause 3 as follows:
“The company as beneficial owner hereby charges with such payments as aforesaid its undertaking and all its property and assets present and future including its uncalled capital for the time being and goodwill and also as beneficial owner hereby charges as a specific charge the hereditaments and premises specified in the schedule hereto.”
The hereditaments and premises specified in the schedule are there stated to be situate at Nos. 1, 2, 3 and 4 Patrick’s Quay, Cork, and at No. 29 MacCurtain Street, Cork. The company’s property at Ivy Lawn (otherwise Iveagh Lawn), Douglas Road, Cork, was not included in the schedule. It is the latter property that is the subject of the present dispute. The debenture was duly registered with the registrar of companies pursuant to the Companies Act, 1963. The particulars given by Bowmaker for the purpose of that registration indicated that the debenture created a specific charge over only the properties specified in the schedule, which do not include the Ivy Lawn property.
If the matter rested exclusively on the excerpt I have quoted from the debenture, there would never have been any question of a specific charge having been created over the Ivy Lawn property. The debenture would have created no more than a floating charge or security over that property. This would mean that, until the floating charge over Ivy Lawn crystallised into a specific charge, the company could mortgage that property just as if the floating charge did not exist. In fact, that is what the company did. On the 25th February, 1975, the company gave the Bank of Ireland an equitable mortgage over that property by deposit of title deeds. If the foregoing excerpt from the debenture was exhaustive of Bowmaker’s powers, there would be no question of the bank yielding priority to Bowmaker. However, because there is included in the debenture a qualifying condition, a conflict has arisen between Bowmaker and the bank as to their priorities in regard to
Ivy Lawn. It is to resolve that conflict that the liquidator has sought the help of the court in the present proceedings.
The complicating condition in the debenture is the first; it is in the following terms:
“This debenture is to rank as a second charge on the property within mentioned and such charge is to be as regards the company’s lands and premises for the time being and all its uncalled capital a specific charge and as regards all other the property and assets of the company a floating security but so that the company is not to be at liberty to create any mortgage or charge on its property for the time being in priority to or pari passu with this debenture.”
Read literally and on its own, this condition is in conflict with the charging provision which I have already quoted. The charging provision makes only the properties specified in the schedule subject to a specific charge: all else (including Ivy Lawn) is subject only to a floating charge. If the first condition is to be given prevailing force, it would make “the company’s lands and premises for the time being” (thus including Ivy Lawn) subject to a specific charge.
Relying on the first condition, counsel for Bowmaker contend that, with regard to the Ivy Lawn property, the bank’s equitable mortgage must yield priority to the rights of Bowmaker as holders of a specific charge under the debenture. On the other hand counsel for the bank contend that it is the charging provision that is definitive of Bowmaker’s rights; they claim that Bowmaker had only a floating charge over Ivy Lawn so that, when the bank became equitable mortgagees on deposit of the title deeds without (as is conceded) any actual notice of the prohibition in the debenture of the creation of a mortgage in priority to the debenture, the bank acquired rights over Ivy Lawn as mortgagees in priority to the rights of Bowmaker under the debenture.
In the High Court the judge, in an unreserved judgment, held with Bowmaker. He felt constrained to rule that the condition in the debenture gave Bowmaker a specific charge over Ivy Lawn. For my part, with the benefit of a fuller argument and after more mature consideration, I reach the opposite conclusion. I consider that the primary and dominant words and expressions delineating the extent of the powers and interests vested in Bowmaker by the debenture are to be found in the charging provision rather than in its attendant condition.
The relevant rule of interpretation is that encapsulated in the maxim generalia specialibus non derogant. In plain English, when you find a particular situation dealt with in special terms, and later in the same document you find general words used which could be said to encompass and deal differently with that particular situation, the general words will not, in the absence of an indication of a definite intention to do so, be held to undermine or abrogate the effect of the special words which were used to deal with the particular situation. This is but a commonsense way of giving effect to the true or primary intention of the draftsman, for the general words will usually have been used in inadvertence of the fact that the particular situation has already been specially dealt with.
In this debenture the charging provision limits the creation of a specific charge to the properties specially marked out with particularity in the schedule. If given its full literal meaning the subsequent condition, which provides that the charge created by the debenture is to be a specific charge”as regards the company’s lands and premises for the time being,” would have such a generality of application as to make nonsense of the clear distinction that is drawn in the charging provision between the properties marked out for a specific charge and the company’s other properties. In such a case, in order to effectuate the draftsman’s true intention, it is the special rather than the general words that must prevail. Those special words show that the primary and transcendent intention was that the Ivy Lawn property, since it was not included in the schedule, was not to be subject to a specific charge. Therefore, I would hold that the debenture gave Bowmaker only a floating charge over it.
The words in the condition referring to “the company’s lands and premises for the time being” should be construed as if they read “the company’s lands and premises for the time being as specified in the schedule herein.” In that way the charging provision and the condition are brought into harmony.
I am fortified in this conclusion as to the extent of the specific charge by the fact that, when particulars of the charge created by the debenture were lodged with the registrar of companies for registration, the “short particulars of the property” charged were given (over the signature of Bowmaker’s solicitor) as “the company’s undertaking and all its property and assets present and future including its uncalled capital for the time being goodwill and as a specific charge the following premises . . .” The words after “the following premises” described the properties specified in the schedule to the debenture. It would seem that Bowmaker did not consider (or intend anyone
consulting the statutory register of charges to consider) that the debenture had created a specific charge over the Ivy Lawn property. Bowmaker represented to the registrar of companies, and to the public at large, that the charge over the Ivy Lawn property created by the debenture was only a floating charge. In my view, that was a correct representation of the effect of the debenture.
Counsel for Bowmaker has argued that, even if that be so, the bank should be fixed with constructive notice of the provision in the debenture precluding the company from creating a mortgage (such as the bank got) which would have priority over the debenture. Since such a prohibition is more or less common form in modern debentures, there would be much to be said for applying the doctrine of constructive notice to such a situation were it not that it is settled law that there is no duty on the bank in a situation such as this to seek out the precise terms of the debenture: In re Standard Rotary Machine Co. 2 ; Wilson v. Kelland 3 and G. & T. Earle Ltd. v. Hemsworth R.D.C. 7 Actual or express notice of the prohibition must be shown before the subsequent mortgagee can be said to be deprived of priority.
Whatever attractions there may be in the proposition that priority should be deemed lost because a duty to inquire further was called for but ignored, and that such inquiry would have shown that the company was debarred from entering into a mortgage which would have priority over the debenture, the fact remains that it would be unfair to single out the bank for condemnatory treatment because of their failure to ascertain the full terms of the debenture when what they did was in accord with judicially approved practice and when such a precipitate change in the law would undermine the intended validity of many other such transactions. If the proposed extension of the doctrine of constructive notice is to be made, the necessary change in the law would need to be made prospectively and, therefore, more properly by statute.
I would allow the appeal and rule that the debenture did not give Bowmaker a specific charge over the Ivy Lawn property and that the bank’s equitable mortgage over that property ranks in priority to Bowmaker’s rights as the owners of a floating charge over that property under the debenture.
Kenny J.
This is a summons brought by the liquidator of Central Garage (Cork) Ltd. (the company) to have questions arising in its winding up determined. In November, 1973, the company bought for £60,000 the property Iveagh Lawn, Douglas Road, Cork. On the 16th January, 1975, the company gave a
debenture to Bowmaker (Ireland) Ltd. (Bowmaker) to secure repayment of moneys advanced to them by Bowmaker.
In clause 1 of the debenture the company undertook to pay Bowmaker on demand all moneys which might be due together with interest. (The judge here referred to the terms1 of clause 3). The premises described in the schedule mentioned in clause 3 were three landed properties owned by the company: they did not include Iveagh Lawn. Clause 4 reads: “4. This debenture is issued subject to and with the benefit of the conditions endorsed hereon which are to be deemed part of it.” (The judge here referred to the terms of the first condition).
In the particulars filed with the registrar of companies in relation to this charge, the three properties specified in the schedule are stated to be subject to a specific charge. Iveagh Lawn is not mentioned in the particulars at all. The first charge (which was made in favour of Allied Irish Banks) was subsequently paid off.
The deeds relating to Iveagh Lawn were sent to the Governor and Company of the Bank of Ireland (the bank) in August, 1974, for the purpose of creating an equitable mortgage to secure all sums due to the bank; but the deeds were not deposited with the bank until the 25th February, 1975. The particulars were filed with the registrar in relation to this transaction on the 7th March, 1975. Thus, the deposit with the bank was made after the date of the debenture to Bowmaker.
When the bank took the deposit of the deeds, they had notice of the existence of the debenture in favour of Bowmaker but not of its terms: the bank were not aware of the restriction on the creation of further mortgages contained in it.
On the 4th October, 1976, the company, which was insolvent, passed a winding-up resolution. The question now is whether Bowmaker are to be paid in priority to the bank out of the proceeds of sale of Iveagh Lawn. It is admitted that if Bowmaker’s debenture created a specific charge on Iveagh Lawn, they are entitled to be paid in priority to the bank. In my opinion they are so entitled because the debenture created a specific charge on Iveagh Lawn.
What are the characteristics of a specific charge and of a floating charge? If Bowmaker’s debenture created a floating charge only over Iveagh Lawn, then the bank are entitled to priority: ( Wheatley v. Silkstone & Haigh Moor Coal Co. 1 That great Irish judge Lord Macnaghten dealt with this matter with his usual lucidity in Illingworth v. Houldsworth 8 at p. 358 of the report:
“I should have thought there was not much difficulty in defining what a floating charge is in contrast to what is called a specific charge. A specific charge, I think, is one that without more fastens on ascertained and definite property or property capable of being ascertained and defined; a floating charge, on the other hand, is ambulatory and shifting in its nature, hovering over and so to speak floating with the property which it is intended to affect until some event occurs or some act is done which causes it to settle and fasten on the subject of the charge within its reach and grasp.”
In that case the House of Lords affirmed the decision of the Court of Appeal, which is reported under the name of In re Yorkshire Woolcombers Association Ltd. 9 In the course of his judgment in the Court of Appeal Romer L.J. (a great authority on all chancery matters) said at p. 295 of the report:
“I certainly do not intend to attempt to give an exact definition of the term ‘floating charge,’ nor am I prepared to say that there will not be a floating charge within the meaning of the Act, which does not contain all the three characteristics that I am about to mention, but I certainly think that if a charge has the three characteristics that I am about to mention it is a floating charge. (1) If it is a charge on a class of assets of a company present and future; (2) if that class is one which, in the ordinary course of the business of the company, would be changing from time to time; and (3) if you find that by the charge it is contemplated that, until some future step is taken by or on behalf of those interested in the charge, the company may carry on its business in the ordinary way as far as concerns the particular class of assets I am dealing with.”
In the first condition it is stated that the charge is to be as regards the company’s lands and premises for the time being a specific charge. The purpose of this is primarily to capture property in land acquired in the future, but there is no reason why it should not extend to other landed property owned by the company at the date of the debenture. The land owned by the company is capable of being ascertained and defined and this satisfies Lord Macnaghten’s definition of a specific charge. It certainly is not a class of asset which would be changing from time to time. I have no doubt that the debenture given to Bowmaker created a specific charge on the lands at Iveagh Lawn.
Accordingly, I would affirm the order made by Mr. Justice Costello..
Gray & Ors v GTP Group Ltd, Re F2g Realisations Ltd
[2010] EWHC 1772 (Ch
MR JUSTICE VOS
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The Issues
There are the following issues that have arisen in the course of argument between the parties. First, what is the nature of the rights and obligations that the parties intended to grant each other in respect of the account? This first issue appears from the speech of Lord Millett in the well known Privy Council decision of Agnew & Ors v Commissioner of Inland Revenue [2001] 2 AC 710 at paragraph 32 where he said the following:
“Their Lordships consider this approach to be fundamentally mistaken. The question is not merely one of construction. In deciding whether a charge is a fixed charge or a floating charge, the court is engaged in a two stage process. At the first stage, it must construe the instrument of the charge and seek to gather the intentions of the parties from the language they have used. The object at this stage of the process is not to discover whether the parties intended to create a fixed or floating charge. It is to ascertain the nature of the rights and obligations which the parties intended to grant each other in respect of the charged assets.
Once these have been ascertained, the court can then embark on the second stage of the process which is one of categorisation. This is a matter of law. It does not depend on the intention of the parties. If their intention properly gathered from the language of the instrument is to grant the company rights in respect of the charged assets which are inconsistent with the nature of a fixed charge, then the charge cannot be a fixed charge however the may have chosen to describe it. A similar process is involved in construing a document to see whether it creates a licence or a tendency. The court must construe the ground to ascertain the intention of the parties but the only intention which is relevant is the intention to grant exclusive possession: see Street v Mountford [1985] AC 809, 826 per Lord Templeman.
So here in construing a debenture to see whether it creates a fixed or floating charge the only intention which is relevant is the intention that the company should be free to deal with the charged assets and withdraw them from the security without the consent of the holder of the charge, or to put the question another way, whether the charged assets were intended to be under the control of the company or of the charge holder”.
I shall return to the matters explained by Lord Millett in due course.
The second issue is: what is the correct legal categorisation as a matter of law to describe the rights and obligations identified under issue 1? In this case, the choice is between a fixed charge and a floating charge. The suggestion made by G-T-P that it was a lien with a right of set-off has now been dropped.
The third issue between the parties is whether the arrangement in the Declaration of Trust constituted a security financial collateral arrangement under the Financial Collateral Arrangements (No 2) Regulations 2003 so as to be exempt from the registration requirements under section 395.
The fourth issue is whether there was an agreement binding on the liquidators in September 2008 whereby the administrators agreed to pay £17,525 in respect of a termination fee.
Issue 1: what is the nature of the rights and obligations that the parties intended to grant each other in respect of the account?
The account is simply a trust account held for F2G in the name of G-T-P at the Royal Bank of Scotland. It was agreed expressly in clause 2 of the Declaration of Trust that F2G should be entitled to call for the monies in the account and that G-T-P should have no right to set-off or withhold the monies in any circumstances save those described in clause 3.
In effect, the account was a conduit through which the monies recovered from sales of flooring, through the cards provided by G-T-P, passed on a day-to-day basis to F2G. Ms Linden Ife, counsel for G-T-P, has suggested that the whole essence of the account was that G-T-P was to have control of it to secure the sums due to them. I do not think, however, that that was the substance of the normal day-to-day commercial relationship intended between the parties. In reality, as I have said, the account was simply a way in which G-T-P could, in accordance with its obligations under the services agreement, collect the monies that came from F2G’s customers through the usage of trade cards and then pass the monies to the retail supplier.
The charge that is now admitted was only contained in clause 3 of the Declaration of Trust. Clause 2 simply created the trust and made clear in reality how little control G-T-P was to have over those monies. Moreover, it is not right for Ms Ife to submit, as she did in this context and in another, that the potential for crystallisation begs the question of the nature of the relationship. The fact that clause 3 only bites when there is one of the listed events of default defined in that clause, defines the relationship the parties were creating. When clause 3 is triggered, G-T-P becomes a creditor for sums due under the services agreement but not under the Declaration of Trust itself. In essence, clause 3 secures the sums that may in the future become due to G-T-P from F2G. As such, it is of course a charge on the assets of F2G, which is now accepted between the parties.
The answer then to the first question that Lord Millett suggests must be asked, namely the nature of the rights and obligations that the parties intended to grant to each other in respect of the account, is as I have indicated, namely that the account shall be used as the conduit through which monies recovered from the sale of flooring will pass from the customers to G-T-P and on to F2G together with a charge over those monies in the event that the events in clause 3 come to pass.
Issue 2: what is the correct legal characterisation as a matter of law to describe the rights and obligations identified under issue 1?
To answer this question, it is necessary to have regard to the extensive authority on this point which culminated in the seven judge House of Lords’s decision in the case of In Re Spectrum Plus Limited (in liquidation) [2005] 2 AC 680 (‘Spectrum’). First, however, I shall deal with the much earlier case of In Re Cosslett (Contractors) Limited in the Court of Appeal. In that case, there was an issue as to whether a particular clause in a contract between a contractor and its client constituted a fixed or floating charge. The clauses in question were put briefly as follows:
“Conditions:
“53(6) No plant (except hired plant) goods or materials or any part thereof shall be removed from the site without the written consent of the engineer which consent shall not be unreasonably withheld where the same and no longer immediately required for the purposes of the completion of the works. …
63(1) If the contractor shall become bankrupt … or (being a corporation) shall go into liquidation … or if the engineer shall certify in writing to the employer that in his opinion the contractor … has abandoned the contract … then the employer may after giving seven days’ notice in writing to the contractor enter upon the site and the works and expel the contractor therefrom … and may himself complete the works or may employ any other contractor to complete the works and the employer or such other contractor may use for such completion so much of the constructional plant temporary works goods and materials which have been deemed to become the property of the employer under the contract”.
In the Court of Appeal, Millett LJ (as he then was), with whom Evans LJ and Sir Ralph Gibson agreed, said this at page 509:
“The administrator submits that, until the council takes steps under clause 63(1) to enter upon the site and expel the company therefrom, the company is free to carry on its business in the ordinary way with the plant and materials on the site. The judge accepted the council’s submission that this was not so because of the council’s absolute right under clause 63(6) to refuse to permit the company to remove from the site plant and materials immediately required to complete the works, and its qualified right to refuse permission for the removal of plant and materials not immediately required for this purpose provided only that it acts reasonably. I am unable to agree with him”.
Then at paragraph 510, Millett LJ said this:
“The essence of a floating charge is that it is a charge, not only any particular asset, but on a fluctuating body of assets which remain under the management and control of the chargor, and which the chargor has the right to withdraw from the security despite the existence of the charge …
Where I part company from [the judge] is that I do not regard this restriction as having any relation to the council’s security. The council’s purpose in imposing the restriction was not to protect its security but to ensure that the company would give proper priority to the completion of the works. A similar restriction would have been appropriate even if the council had not taken any security interest. In this case, where the plant or materials are not immediately required, the engineer’s consent is not to be unreasonably withheld. As Evans LJ pointed out in argument, the fact that the decision is left to the engineer shows that it is to be made on operational grounds …”
When the case came to the House of Lords on appeal from a different Court of Appeal in relation to a different point in Smith (Administrator of Cosslett (Contractors) Ltd v. Bridgend County Borough Council, Lord Hoffmann said the following at paragraph 16:
“The Court of Appeal (Evans, Millett LJJ and Sir Ralph Gibson) [1998 Ch 495] said that one had to distinguish between the two rights which condition 63 conferred upon the employer. The right to use the plant to finish the works could not be a charge. It was simply a contractual right which continued to be exercisable whether the company was in administration or not. On that ground, the Court dismissed the appeal. On the other hand, they agreed with the judge that the right to sell the plant and apply the proceeds to discharge any debt from the company to the council was a charge. But they did not agree that it was a fixed charge. Millett LJ, with whom the other two judges agreed, pointed out that power to refuse consent to the removal of the plant, which the judge had treated as vested in the employer, was actually conferred upon the engineer. This suggested that the discretion was to be exercised independently on operational grounds and not as a method of enforcing the employer’s security for the payment of money. It therefore did not give the employer such control over the plant as to create a fixed charge in advance of crystallisation”.
At paragraph 40 and 41 Lord Hoffmann said:
“40. … Mr Moss also challenged the original decision that condition 63 created a floating charge. He said that it was not a charge and that if it was, it was fixed and not floating.
41. On these points I can be brief because I agree with Millett LJ for the reasons which he gave. I do not see how a right to sell an asset belonging to a debtor and appropriate the proceeds to payment of the debt can be anything other than a charge. And because the property is subject to condition 63 … was a fluctuating body of assets which could be consumed or (subject to the approval of the engineer) removed from the site in the ordinary course of the contractor’s business, it was a floating charge: see Agnew v Commissioners of Inland Revenue [2001] 3 WLR 454, 464″.
In Spectrum itself, their Lordships considered again the nature of the floating charge and the difference between a floating charge and the fixed charge. I can confine my citation from this case to a very few paragraphs. Lord Scott said the following, with whom the remainder of their Lordships agreed, at paragraph 111:
“In my opinion the essential characteristic of a floating charge, the characteristic that distinguishes it from a fixed charge, is that the asset subject to the charge is not finally appropriated as a security for the payment of the debt until the occurrence of some future event. In the meantime the chargor is left free to use the charged asset and to remove it from the security”.
At paragraph 117, Lord Scott said:
“The bank’s debenture placed no restrictions on the use that Spectrum could make of the balance on the account available to be drawn by Spectrum. Slade J in the Siebe Gorman case … thought it might make a difference whether the accounts were in credit or in debit. I must respectfully disagree. The critical question in my opinion is whether the chargor can draw on the account. If the chargor’s bank account were in debit and the chargor had no right to draw on it, the account would have become, and would remain until the drawing rights were restored, a blocked account. The situation would be as it was In re Keenan Bros Ltd [1986] BCL C242. But so long as the chargor can draw on the account, and whether the account is in credit or debit, the money paid in is not being appropriated to the repayment of the debt owing to the debenture holder but is being made available for drawings on the account by the chargor”.
At paragraph 139 Lord Walker of Gestingthorpe said as follows:
“139. Under a floating charge, by contrast, the chargee does not have the same power to control the security for its own benefit. The chargee has a proprietary interest, but its interest is in a fund of circulating capital, and unless and until the chargee intervenes (on crystallisation of the charge) it is for the trader, and not the bank, to decide how to run its business. There is a detailed and helpful analysis of the matter, with full citation of authority, in Sarah Worthington’s Proprietary Interests in Commercial Transactions (1996) at pages 74 to 77; see also her incisive comment on this case (‘An Unsatisfactory Area of the Law – Fixed and Floating Charges Yet Again’) in (2004) 1 International Corporate Rescue 175 …
140. … But if the terms of the debenture were such as to require the trader to pay all its collected debts into the bank and to prohibit the trader from drawing on the account (so that the account is blocked), a charge on debts, described as a fixed or specific charge, would indeed take effect as such …”
I should refer also, but without citing the passages at length, to Lord Hope’s concurring judgment at paragraphs 55 to 56.
Finally, by way of authority, in Queen’s Moat Houses Plc v. Capita IRG Trustees Limited, a case upon which Ms Ife placed particular reliance, Lightman J said after the Agnew decision but before the Spectrum decision, the following at page 207:
“There is a critical difference between the right of a corporate chargor to deal with and dispose of the property free from charge without reference to the chargee and the right of a corporate chargor to require the chargee to release the charged property from the charge. The right of a corporate chargor in the course of its business to deal with or dispose of charged property without reference to the chargee (save in exceptional circumstances) is inconsistent with the existence of a fixed charge: it is consistent only with the existence of a floating charge. But there is no inconsistency between the existence of a fixed charge and a contractual right on the part of the chargor to require the chargee to release property from the charge. This must a fortiori be the case where the right to require the release (as in the present case) ceases on the security becoming enforceable and the chargee determining or becoming bound to enforce it”.
It should be noted, however, that the Queen’s Moat Houses decision concerned the construction of a charge over a portfolio of properties, and the question was whether, as a matter of construction of the Deed of Charge, one of the properties to which no value was attached in the charge could be removed from the security without the value being paid to the chargee.
As Ms Ife said herself in her Skeleton Argument at paragraph 13, the essential element in determining the difference between a fixed and floating charge is the chargor’s ability without the chargee’s consent to control and manage the charged assets. That ability is present in this case. Ms Ife is wrong to say that G-T-P kept control of the account in the necessary sense.
It is true, of course, that no money could be moved out of the account without G-T-P taking an administrative step to transfer the money to F2G but until crystallisation had occurred under clause 3 of the Declaration of Trust, G-T-P had no right whatever to use the money for any purpose other than in accordance with clause 2 of the Declaration of Trust. Of course, there were provisions for it to, in certain circumstances, take money from the account as an administrative act when that money was due from F2G. That does not mean that F2G did not have the ability without the chargee’s consent to control and manage the assets. G-T-P held the money on trust for F2G. G-T-P was obliged without set-off or deduction or withholding to transfer the money to F2G at any time it was asked to do so. In making such transfers G-T-P was acting purely in an administrative capacity.
In reality, the position as between G-T-P and F2G was indistinguishable from the position as between a chargor and a bank, where the bank has a floating charge over the bank account. In that case too, the money in the account is, in formal legal terms, a debt owed by the bank to the customer, namely the chargor. When the chargor presents a cheque for payment out of that account to a third party, the bank has, in theory, a decision to take as to whether to pay the cheque or not to pay the cheque. That is precisely the same as the position in which G-T-P found itself when F2G presented a request for payments to be made pursuant to clause 2 of the Declaration of Trust. Neither the bank in the example that I have given, nor G-T-P under the Declaration of Trust, had any legal right whatsoever to prevent the payment being made.
In these circumstances it would be a corruption of the words to suggest that the chargor did not have the ability without the chargee’s consent to control and manage the charged assets. Also, the contractual relationship that I have described under issue 1 above is precisely the kind of relationship that their Lordships in Agnew, in Cosslett, and in Spectrum have described as constituting as a matter of law a floating charge. The key question, as Lord Scott put it in the passage that I have cited above, was that the asset, subject to the charge, is not finally appropriated as a security for the payment of the debt until the occurrence of some future event.
That is precisely the position under the Declaration of Trust. Until one of the events under clause 3 occurs then the monies in the bank account can be used freely by F2G. That is precisely how Lord Scott put it in paragraph 117 of the citation that I made earlier namely:
“The critical question in my opinion is whether the chargor can draw on the account.”
In realistic terms in this case F2G could at any stage require G-T-P to transfer monies from the account; that is, drawing on the account within the terms that Lord Scott was speaking about in Spectrum.
Likewise, the argument that Ms Ife advanced based upon the case of Cosslett to which I have referred in some detail above does not change the position. There, as Lord Hoffmann made clear in the House of Lords, because the property, subject to the condition, was a fluctuating body of assets which could be consumed or removed from the site in the ordinary course of the contractor’s business, it was a floating charge. Again, that is precisely the same in respect of the monies in the account in this case. Those monies could be removed and consumed by F2G in the ordinary course of its business and the fact that F2G had to ask G-T-P rather than having to ask a banker for those monies to be handed over does not affect the reality of the commercial position that I have described.
Likewise, Queen’s Moat Houses does not assist Ms Ife’s argument because in that case what was being considered was a proper fixed charge over particular properties and the question of whether, on a proper construction of the terms of the charge, it was possible for the chargor to replace one property with another, with or without paying its value to the chargee. What Lightman J was saying did not have a bearing on the situation in this case. Indeed, even if it did, the very clear dicta of their Lordships in Spectrum came after that case and must take precedence over it.
Finally, Ms Ife suggests that the account in this case is in the nature of a blocked account and therefore it is not right, she says, that F2G had free access to it in the ordinary course of business without G-T-P’s consent. The concept of a blocked account as described in the passages that I have cited from Spectrum make it clear that this account was far from it. Until, as I have said, there was an event of default within clause 3 of the Declaration of Trust there was nothing blocked about this account at all; G-T-P had no right to prevent F2G exhausting and emptying the account by requiring payment to it of the entirety of it. In those circumstances and for the reasons that I have tried shortly to express, I have reached the clear view that clause 3 constituted a floating charge over the account within the terms of the authorities that I have mentioned.
Mr Goldring sought in his skeleton argument to argue that, if he was wrong about the charge being a floating charge, then it was a charge over book debts because the monies in the account were, he said, the proceeds of book debts. In argument he did not pursue this contention, at least not particularly vigorously, but had he done so I would have been against him. This is a charge over monies that may previously have been book debts but were not book debts when the charge was granted. In any event, the charge is, as I have said, a floating charge, so he did not need the second string to his bow.
Issue 3: Did the arrangements in the Declaration of Trust constitute a security financial collateral arrangement under the 2003 Regulations so as to be exempt from the registration requirements under section 395?
I turn now to the third, and possibly the most difficult, issue before the court.
Ms Ife contends that the charge is caught by the Directive on Financial Collateral Arrangements 2002/47/EC (the “Directive”) which was given effect in the Financial Collateral Arrangements (No 2) Regulations 2003 (the “Regulations”). For that reason, Ms Ife says that the charge is exempt from the registration requirements under section 395, because of the provisions of Regulation 4(4) to that effect. Mr Goldring submits that this is not so because he says, in essence, the account is not, under the Declaration of Trust, “in possession or under the control” of G-T-P for the purposes of Article 2.2 of the Directive or paragraphs 3(c) and (d) of the Regulations.
I should start by setting out some of the more important parts of the Directive as follows:
(1) Recital 10 provided: “…This Directive must however provide a balance between market efficiency and the safety of the parties to the arrangement and third parties, thereby avoiding inter alia the risk of fraud. This balance should be achieved through the scope of this Directive covering only those financial collateral arrangements which provide for some form of dispossession, i.e. the provision of the financial collateral, and where the provision of the financial collateral can be evidenced in writing or in a durable medium, ensuring thereby the traceability of that collateral …”
(2) Article 2 provided:
“1. For the purpose of this Directive:
(a) ‘financial collateral arrangement’ means a title transfer financial collateral arrangement or a security financial collateral arrangement whether or not these are covered by a master agreement or general terms and conditions …
(c) ‘security financial collateral arrangement’ means an arrangement under which a collateral provider provides financial collateral by way of security in favour of, or to, a collateral taker, and where the full ownership of the financial collateral remains with the collateral provider when the security right is established”.
(3) Article 2.2 provided:
“2. References in this Directive to financial collateral being ‘provided’, or to the ‘provision’ of financial collateral, are to the financial collateral being delivered, transferred, held, registered or otherwise designated so as to be in the possession or under the control of the collateral taker or of a person acting on the collateral taker’s behalf. Any right of substitution or to withdraw excess financial collateral in favour of the collateral provider shall not prejudice the financial collateral having been provided to the collateral taker as mentioned in this Directive”.
The 2003 Regulations reflected in terms of the Directive but it is accepted by both parties that in fact the Regulations went further than the Directive itself. For present purposes, however, that may not be of any particular significance. Paragraph 3 contained the definitions used in the Regulations. The important definitions are as follows:
“‘security financial collateral arrangement’ means an agreement or arrangement, evidenced in writing, where:
(a) the purpose of the agreement or arrangement is to secure the relevant financial obligations owed to the collateral-taker;
(b) the collateral-provider creates or there arises a security interest in financial collateral to secure those obligations;
(c) the financial collateral is delivered, transferred, held, registered or otherwise designated so as to be in the possession or under the control of the collateral-taker or a person acting on its behalf; any right of the collateral-provider to substitute equivalent financial collateral or withdraw excess financial collateral shall not prevent the financial collateral being in the possession or under the control of the collateral-taker; and
(d) the collateral-provider and the collateral-taker are both non-natural persons;
‘security interest’ means any legal or equitable interest or any right in security, other than a title transfer financial collateral arrangement, created or otherwise arising by way of security including:
(a) a pledge;
(b) a mortgage;
(c) a fixed charge;
(d) a charge created as a floating charge where the financial collateral charged is delivered, transferred, held, registered or otherwise designated so as to be in the possession or under the control of the collateral-taker or a person acting on its behalf; any right of the collateral provider to substitute equivalent financial collateral or withdraw excess financial collateral shall not prevent the financial collateral being in the possession or under the control of the collateral-taker; or
(e) a lien”.
Paragraph 4 of the Regulations provided that certain legislation requiring formalities should not apply to financial collateral arrangements as defined by the Directive and the Regulations. For our purposes the important provision is in paragraph 4(4) which provides:
“Section 395 of the Companies Act 1985 (certain charges void if not registered) shall not apply (if it would otherwise do so) in relation to a security financial collateral arrangement or any charge created or otherwise arising under a security financial collateral arrangement”.
Paragraph 10 of the Regulations provides that certain insolvency legislation on avoidance of contracts and floating charges also should not apply to financial collateral arrangements including section 127 of the Insolvency Act 1986, section 176A of the Insolvency Act 1986 and section 196 of the Companies Act 1985.
There has been a remarkable sparsity of authority on the meaning and effect of the Directive and the Regulations considering that they came into force now some seven years ago. It appears that this is the first case in which it has been argued that a floating charge is caught by the terms of the Regulations so as to avoid the need for it to have been registered under section 395 of the Companies Act 1985.
The Regulations have, however, been the subject of a lengthy chapter in an academic work by Professor Beale, Bridge, Gullifer and Lomnicka on the Law of Personal Property Security 2007: chapter 10. It is impossible for me to set out the entirety of that chapter in this judgment but there are certain passages in it which gave an insight into the intended meaning of both the Directive and the Regulations and it is therefore important that I cite briefly from it:
“10.02 Special treatment in insolvency. The FCD [the Directive] is just the latest in a series of legislative measures that gives special treatment to charges granted as part of operations in financial markets. These include the Companies Act 1989, Part VII, the Financial Markets and Insolvency Regulations 1996; and the Financial Markets and Insolvency (Settlement Finality) Regulations 1999. The earlier measures give charges that fall within their terms special treatment in the insolvency of the chargor. They are not relevant to perfection of the charge. The FCAR [the Regulations], equally, primarily affects the position of financial collateral arrangements in insolvency; they also ensure the validity of rights of use and appropriation agreed in the arrangement. However, they also exempt, or purport to exempt, certain types of charge (or ‘security financial collateral arrangements’) from registration under the Companies Act 1985. To qualify as a ‘security financial collateral arrangement’ the financial collateral must be ‘in the possession or under the control of the collateral taker’. Thus, it may appear that possession or control is an alternative to registration as a method of perfecting the security over financial collateral.
10.24 Possession or control. ‘Possession or control’ is not defined in the FCD or the FCAR. In the case of indirectly held investments (book entry securities collateral) the ‘requirements for perfecting a financial collateral arrangement’ are to be governed by ‘the law of the country in which the relevant account is maintained’ – in other words by national law and there is no provision for the case of directly held investment property, presumably because it was assumed that the traditional lex situs rule was adequate.
10.25 Autonomous meaning of ‘control’. The provision that the requirements are to be governed by national law does not mean that it is simply up to national law or the lex situs to define ‘possession or control’ – though since in English law possession has no meaning in relation to intangible property, it may be the meaning of control that is critical, it would be wise to bear in mind the full phrase ‘possession or control’ and we have to assume that the phrase has an autonomous meaning in European law – in other words must depend on the interpretation of the Directive and the general principles accepted in Community law; and that national law must comply with that meaning. We believe that the terms of the Directive itself show what is meant.
First Recital 10 states … ‘Dispossession’ seems to suggest that, for the collateral to be in the possession or control of the ‘collateral provider’, at least the latter must be prevented (whether legally or practically) from dealing with the collateral. This is what is sometimes called ‘negative’ control”.
Professor Beale goes on to explain negative control in somewhat mercurial terms. It seems clear, however, that what he describes as negative control means that the collateral taker can prevent the collateral provider from dealing with the charged assets. He continues at paragraph 10.29 as follows:
“Positive and negative control. There are a number of situations in which negative and positive control simply cannot be separated. One is with the bearer of security and no one but the bearer can dispose of it. More important cases are: (1) when the securities are simply transferred into the name of the collateral taker. This case is at the heart of the definition of ‘provided’ in Article 2(2) ‘being delivered, transferred, registered or otherwise designated so as to be in the possession or under the control of the collateral taker’. This necessarily gives the collateral taker positive control over the investments securities and at the same time prevents the collateral giver dealing with the securities”.
In paragraph 10.33 there is the passage that Mr Goldring places the greatest reliance upon. Professor Beale said this:
“… We think the words ‘possession or control’ have to be interpreted in the light of Recital 10, which says that the Directive should apply only to arrangements that ‘provide for some form of dispossession’. We consider that if the debtor retains the right to deal it is not ‘dispossessed’. Therefore, a chargee who does not have negative control will not obtain the advantages of the FCAR. This, as we shall see, has implications for floating charges over the financial collateral”.
Finally, in paragraphs 10.48 and 10.49 the learned authors say as follows:
“10.48 Thus, it seems that the FCAR will apply if a third party chargee under a floating charge has taken steps to crystallise the charge and has then notified the bank or other debtor of its assignment by way of (now) fixed charge; or has made some previous arrangement with the bank that on receipt of notification the bank will only pay money from the account on the directions of the chargee. When the chargee is the bank itself, it seems to suffice that the bank has blocked the account before the onset of insolvency.
10.49 Position before the charge is crystallised. As we saw when we considered floating charges over investment securities, it is possible that the chargor will benefit from the advantages of the FCAR and that it will be valid against the company’s administrator or liquidator, if the chargee has obtained possession or control by the onset of insolvency even if the charge was not registered within 21 days of its creation as a floating charge; but this may not protect it against other secured creditors”.
It has not been suggested in this case that the charge crystallised before the onset of insolvency. Thus, the question is whether the account here was in the possession or control of G-T-P within the meaning of the Directive. Ms Ife has argued that floating charges are expressly mentioned in the Regulations themselves so that it may be assumed from that that the Regulations are to have some application to them. Perhaps more importantly, she submits, it stands to reason that the account is in G-T-P’s possession and control because nothing can happen to the money without its say so. She says that the possessor of the account is obviously the account holder G-T-P, and therefore the Regulations apply. She says that the issue that the court should look at in deciding whether G-T-P has possession or control of the account is simply in whose name the monies are held.
Conversely, Mr Goldring has argued, as Professor Beale says in the passages that I have cited, that what matters is dispossession of the collateral. He places substantial reliance on the second sentence of Article 2.2 of the Directive and says that from that second sentence it is possible to see what is meant by the term ‘possession or control’. The second sentence, of course, makes it clear that any right of substitution of collateral or any right to withdraw excess financial collateral should not prejudice the fact that the financial collateral is covered by the Directive. He said it is to be implied from that that there needs to be something over which there can be a right of substitution and there must be something over which the charge can bite for the Regulations to apply. The second paragraph of Article 2.2 would be meaningless, he argues, if the collateral provider could simply remove the collateral from the collateral taker without his consent. Therefore, one can infer from that that possession or control must mean something more and must be directed at the legal rights under which that collateral is held.
In effect, as I put to Mr Goldring in the course of argument, he suggests that the Regulations are addressing what I termed ‘real legal control’ as opposed to simply administrative control. ‘Real legal control’ means that the collateral taker must be able to prevent the collateral provider from using or dissipating the assets in the ordinary course of business. Moreover, as Professor Beale says, since possession has no meaning in English law as regards intangible property, the real question here is whether the collateral taker, namely G-T-P, has control over the collateral, that is the monies over which the Declaration of Trust bites, to use the money itself.
Moreover, Mr Goldring argues that if Ms Ife’s construction of ‘possession or control’ in the Directive in the Regulations was correct it would drive a coach and horses through section 395 of the Companies Act 1985 and its legislative successors which nobody has yet noticed. It would mean that floating charges would not need to be registered any longer and creditors of companies would not get notice from the Register that significant assets of trading companies which were subject to floating charges were so subject.
Conversely, of course, one might think that the mischief of the registration requirements is that the unsecured creditor can get to know that assets within the apparent control of the company are subject to a floating charge. It could be argued, and indeed it was argued by Ms Ife, that here where the assets are held in the name of another party there is no need for registration because a third party is unlikely to be misled into thinking that such assets are the property of the company, when they are in fact the subject of a Declaration of Trust.
As I say, I have not been assisted here by a plethora of authority on this point. It is a point which is obviously of some complexity and difficulty. It requires also an understanding of the legislative intent behind the Directive and the Regulations. First of all, in reaching my conclusion, I have had regard to the fact that the Directive is the dominant piece of legislation and the Directive is intended to take effect throughout the EU. It would therefore not be right to construe it according to English law principles or to understand it as being specifically and only applicable to any one national law.
It is for that reason that I am not persuaded simply because there is a reference to floating charges in the definitions to which I have referred in paragraph 3(d) of the Regulations that it was intended that the Directive should automatically apply to any floating charge as that term is understood in English law. It was, however, notable that Mr Goldring was unable to give me any example of a floating charge which would be covered by the Regulations if his submission was right. I do not discount the possibility that in the course of the brief argument in this case he was not able to think of any such example but such an example may exist of a floating charge as that term is understood in English law.
There is much to be said for the argument advanced by Professor Beale that really three factors point towards the requirement for control being a requirement that the collateral taker has the legal right to deal with the collateral.
The first is the provision of the second paragraph of Article 2.2 of the Directive which is reflected in the definition in the Regulations. It would be at least surprising if the commission had thought it necessary to include that paragraph if control simply meant administrative control over the collateral rather than the legal right to control the collateral. One might ask rhetorically why one would want to state specifically that a right to withdraw excess financial collateral would not prevent the Regulations applying if the Regulations applied anyway when one could withdraw the entirety of the collateral as a matter of legal right.
The second point that I find compelling is the tenth Recital in the Directive which makes clear that the Directive is only intended to cover those financial collateral arrangements which provide for some form of dispossession. Whilst one might have some difficulty with the term “dispossession” as a matter of English law, it is relatively clear from the usage in the Directive that it is talking about a situation in which the legal right to the charged asset is removed from the collateral provider. That is not the case here since, as I have already pointed out in my treatment of the question of whether there is a floating charge at all, G-T-P has no legal right to use the money in the account at all until one of the events in clause 3 takes place.
Thirdly, I accept Professor Beale’s contention that “control” in the Directive is referring to negative control in the sense that the collateral taker can prevent the collateral provider from dealing with the charged assets. If the collateral taker cannot prevent the collateral provider from dealing with the charged assets, then he does not in any legal sense have control. He only has control in an administrative or practical sense which is insufficient for the application of the Regulations.
For the reasons then that I have sought shortly to express, this is a classic case in which the floating charge created by clause 3 of the Declaration of Trust cannot be regarded as falling within the definition of either a “security interest” or a “security financial collateral arrangement” as defined in the Regulations.
Issue 4: Whether there was an agreement binding on the liquidators in September 2008 whereby the administrators agreed to pay £17,525 in respect of the termination fee
This issue turns on a series of four emails exchanged between the administrators and G-T-P between 1 and 3 September 2008. In the very briefest of outline the emails were as follows.
On 1 September 2008 Daniel Timms of the administrators emailed Roger Fieldhouse of G-T-P referring to a telephone conversation and saying:
“As discussed, I confirm that a payment of £15,000 plus VAT will be made to you in respect of all post-appointment operational and closure tasks … Please remit £102,060 (representing 90 per cent of funds currently held) to the following bank account by return …”
An hour or so later Mr Timms emailed Mr Fieldhouse again referring to a further conversation and saying:
“I confirm that you may take your fees of £15,000 plus VAT prior to remitting the funds to the company on condition that you provide me with an invoice for VAT purposes”.
On 2 September 2008 Mr Fieldhouse of G-T-P emailed the administrators saying:
“In general terms we confirm that we will arrange for you to receive the following on Thursday, 4 September the following (sic) …
6. VAT invoice for £15,000 plus VAT in respect of total fees for all activity on behalf of the administrators. This invoice will be dated 31 August 2008 and apart from the ongoing actions referred to below relating to direct debit indemnity refunds and forwarding any further amounts received plus answering queries relating to the information now provided, we will not expect to carry out further work or reporting other than as specifically requested by and agreed with the administrators for a pre-agreed additional charge …
8. Payment of balance owing on funds held per (5) above after deducting the above fee invoice in the amount of £11,340 refunds held against potential direct debit reimbursements. This payment will be made by same-day payment to your bank account as notified per your email 1 September 2008 below …”.
Finally, on 3 September 2008 Mr Timms of the administrators emailed Mr Fieldhouse of G-T-P saying:
“I confirm our acceptance to the proposals set out below”.
(Quote unchecked)
which was the email proposal to which I have just referred.
Against this background, Mr Goldring argues that the agreement to pay the termination fee of £17,525 including VAT was conditional upon the immediate payment of the balance of the account.
However, the contract between the parties was fairly clear and included several terms which I have not mentioned in my brief resumé of the emails, but it was agreed at first that the administrators would pay a sum of £15,000 plus VAT in respect of fees for the activities that G-T-P had undertaken on behalf of the administrators (presumably after the administration had taken place) and that the balance of the funds would be remitted by same-day payment to their bank account as notified in the email of 1 September 2008.
It has not been argued by Mr Goldring (probably because it could not be said on the face of the emails) that the timing of the payment of the balance was of the essence of the contract. Nor has it been argued that at any stage the administrators sought to accept the breach by G-T-P of that contract in failing to make the payment in accordance with paragraph 8 of the 2 September 2008 email as a repudiation, bringing the contract to an end.
Therefore, it does not seem to me that there is a real argument for the proposition that the contract has come to an end. It is true, however, that the administrators have not yet performed the contract but I have just decided the only legal issue that remained between the parties so that, no doubt, they will now perform the contract by making the payment envisaged by paragraph 8 of 2 September 2008 email.
It does not seem to me that one can infer or imply in this agreement what is unstated, namely that if the money was not paid immediately the obligation to make the payment of the £15,000 plus VAT by way of termination fee would cease absolutely. That seems to me to have been an obligation that was agreed between the parties and could only have been brought to an end in one of the recognised ways in which contracts can be terminated, none of which Mr Goldring has been able to rely on. In those circumstances, I will resolve this fourth issue in favour of the respondent G-T-P.
Conclusion
For the reasons that I have given, therefore, the answer to the questions in the original application are that I will make a declaration that the Declaration of Trust entered into between the company and G-T-P concerning the account is void against the administrators as an unregistered floating charge on the company’s undertaking of property.
I will order that G-T-P, the respondent, pay the sum standing to the credit of the bank account in the amount of £89,218 less £17,625. No doubt, counsel will be able to undertake the mathematical calculation necessary to determine the precise sum that needs to be paid. The sum will also be paid together with interest accrued thereon since the administration.
United Bars Ltd. (In Receivership) v. Revenue Commissioners
[1991] IR 396
Although the facts of this case have been fully set out in the affidavit sworn by Mr. Raymond Jackson herein on the 20th January, 1988, and furthermore those facts have been fully explored and analysed in the arguments addressed to me by counsel earlier today, it may be helpful if I summarise the material facts as follows: United Bars Ltd. and Walkinstown Inns Ltd. are two companies within what is known as the Belton Group. That group of companies was apparently engaged in the licensed trade. On the 6th October, 1981, three documents were executed. The first was a mortgage debenture given by the United Bars Ltd. in favour of Irish International Bank Ltd. to whom I shall refer as the bank, whereby United Bars Ltd. charged by way of a floating security all its undertaking and assets with the payment of certain monies to the bank. It further charged and mortgaged to the bank certain lands and hereditaments consisting of licensed premises by way of further security for its indebtedness to the bank. The second of the documents executed in October, 1981, was a guarantee for the payment of United Bars Ltd.’s indebtedness to the bank by other members of the Belton Group, including, in particular, Walkinstown Inns Ltd. The third material document was a mortgage debenture given by Walkinstown Inns Ltd. in support of the guarantee already referred to. That mortgage debenture, like the one given by United Bars Ltd., comprised both a floating security and a fixed charge. A subsequent document was executed on the 17th October, 1983, but its provisions do not affect any matter of principle involved in these proceedings.
Subsequently United Bars Ltd. defaulted in the payment of monies due and owing by it to the bank. As a consequence the bank, on the 3rd December, 1986, appointed Mr. Jackson as receiver and manager of the properties of United Bars Ltd. comprised in the debenture already referred to, and a similar appointment was made on the same day of Mr. Jackson in respect of the properties of Walkinstown Inns Ltd. comprised in the debenture granted by that company. After his appointment Mr. Jackson proceeded to realise the property over which he had been appointed and happily, from the bank’s point of view at any rate, the realisation appears to have been very successful. The total amount received as a result of the sale of the premises charged by United Bars Ltd., amounted to £991,125. The amount realised by the sale of the licensed premises charged by Walkinstown Inn Ltd. in favour of the bank amounted to £127,876. Thus, the total amount received by Mr. Jackson by the realisation of the licensed premises which were subject to fixed charges amounted to £1,119,001. As the total due to the bank was £1,033,584 this left Mr. Jackson with a surplus of £85,417.
The question posed for the consideration of the court in these proceedings is whether the receiver is hound, having regard to provisions of s. 98, sub-s. 1 of the Companies Act, 1963, to use all or any part of the said sum of £85,417 in payment of the persons who are or would be preferential creditors of the company if and when those companies are wound up. It is necessary, therefore, to turn to section 98. Sub-section 1 of that section provides:
“Where either a receiver is appointed on behalf of the holders of any debentures of a company secured by a floating charge, or possession is taken by or on behalf of those debenture holders of any property comprised in or subject to the charge, then, if the company is not at the time in course of being wound up, the debts which in every winding up are, under the provisions of Part VI relating to preferential payments to be paid in priority to all other debts, shall be paid out of any assets coming to the hands of the receiver or other person taking possession as aforesaid in priority to any claim for principal or interest in respect of the debentures.”
Counsel on behalf of the receiver relied principally and primarily and indeed understandably on the decision of Nourse J. in In re G.L. Saunders Ltd. (in liquidation) [1986] 1 W.L.R. 215. That case has, to say the least of it, considerable similarity with the facts of the present case. The company, G.L. Saunders Ltd., executed two debentures, by which it created fixed and floating charges over its assets. A receiver was appointed and after paying the debts due to the bank, by whom he was appointed, the receiver was left with a surplus of £444,000 from the sale of the assets, subject to the fixed charges. The question arose whether all or part of that money should be used for the payment of preferential creditors or should be paid to the mortgagor, that is to say, the company. Nourse J. held that the money should be repaid to the company and not applied in payment of the preferential creditors. In essence, the decision of Nourse J. regarding s. 94 of the English Companies Act, 1948, which is similar to our s. 98, was based on an ex tempore judgment in In re Lewis Merthyr Consolidated Collieries [1929] 1 Ch. 498. In that case Tomlin J. held that s. 107 of the Companies Consolidation Act, 1908,which was the predecessor of s. 94 of the English Act of 1948 and s. 98 of the Act of 1963, applied only in respect of accounts coming into the hands of the receiver which were the subject of a floating charge and not to assets subject to a fixed charge. That decision was confirmed by the Court of Appeal.
That effectively disposed of the matter before Nourse J. in In re G.L. Saunders Ltd. (in liquidation) [1986] 1 W.L.R. 215 but he went on, having regard to the fact, as he said, that the issue was a vexed question on which different leading counsel were said to have expressed differing views, to express further views in an analysis which I find more difficult to follow. He explained that if debenture holders’ debts or the particular debt had been extinguished there was no principal or interest owing to the debenture holder and accordingly the section would have no application. As I say, I find that analysis difficult to follow. But the main part of the decision is simply the application of the long-standing decision in In re Lewis Merthyr Consolidated Collieries Ltd. [1929] 1 Ch. 498 and that is the primary basis of his decision.
In those circumstances counsel on behalf of the Revenue Commissioners, who are named as defendants in the proceedings, makes two points. First of all he draws attention to the form and content of the mortgage debenture given by United Bars Ltd. to the bank and points out that the charge is, in the first instance, and primarily, a charge by way of floating security, and it is only in the secondary phase that the document goes on to provide for further securing the monies aforesaid.
So that there was, as counsel pointed out, a floating charge on all of the assets of the company, necessarily including its fixed premises and there was an additional or secondary security in the form of the fixed charge. Accordingly it could be said in considering the rights of the bank or the nature of its security, that it had a floating charge, and indeed primarily had a floating charge on these in respect of which there was also an undoubted fixed charge.
That is the first distinction which is drawn. Secondly, counsel on behalf of the defendants courageously contend that the decision in In re Lewis Merthyr Consolidated Collieries [1929] 1 Ch. 498 was wrong and should not be followed. Counsel has analysed that decision and in particular the passage from the judgment of Tomlin J., starting at page 506:
“It is said by Mr. Grant that that language, if it is read literally and without importing into it any word which is not actually there, means this, and means this only, and I think he goes so far as to say cannot mean anything else, that is, that ‘any assets coming to the hands of the receiver’ covers all assets that may come to the hands of the receiver or other person taking possession derived from the debenture, whether in respect of the fixed charge or whether in respect of the floating charge.”
Mr. Grant had presented an argument apparently based on a literal interpretation, which it seems to me, and which counsel on behalf of the defendants contend, is an argument of substance and merit. That argument is then dealt with by Tomlin J. in the following paragraph as follows:
“. . . if you are bound to introduce some limitation, the question is whether that is the proper limitation, and reading the section as a whole, I feel no doubtmyself that the limitation which ought to be introduced is the limitation of ‘assets coming to the hands of the receiver or other person taking possession subject to the floating charge,’ or some such words as that. The words, ‘or other person taking possession as aforesaid,’ refer back to the words ‘or possession is taken by or on behalf of those debenture holders of any property comprised in or subject to the charge,’ and if I am right in saying that ‘the charge’ must mean ‘the floating charge,’ because the floating charge is the only antecedent in the sentence to which ‘the charge’ can refer, then the words ‘other person taking possession as aforesaid’ must mean ‘other person taking possession as aforesaid, of assets comprised in the floating charge,’ and ‘assets’ there, in the direction for payment, must mean ‘assets representing assets comprised in the floating charge.’ It seems to me to follow inevitably from that.”
That analysis of the section is severely criticised by counsel on behalf of the defendants and I have considerable sympathy with that criticism. It seems to me that the learned judge was not inferring that the legislature intended to include a complex qualification on the word “assets”, not merely as to what it would include or what it would infer, but what would be excluded from it and no such words expressly appear in the section.
It is always a difficult task to read in a complex qualification to a section, indeed a qualification which the learned trial judge did not himself find it easy to draft or express. Nonetheless the judge has so decided and his decision on appeal was confirmed briefly and firmly in the words of Lawrence L.J. at page 512 of the report:
“In my judgment the fact that the debenture in the present case is one which combines with the floating charge, a fixed charge does not bring the section into operation as against the assets comprised in the fixed charge. Such assets are outside the scope and purview of the section.”
If the matter came before me de novo and I was untrammelled by any authorities either binding or persuasive, I might accede to the submissions made on behalf of the defendants. I do not know whether I would necessarily agree with the submission. There are, undoubtedly, ambiguities and difficulties in the interpretation of section 98. It is clear and rightly and necessarily agreed by both parties that assets subject to a fixed charge may and can be realised by a variety of procedures under which no question of payment of preferential creditors would arise. It may even be that where a receiver is appointed that the monies representing the proceeds of sales of some assets did not reach his hands. But perhaps the strongest point is one made by counsel on behalf of the receiver in saying that if s. 98 was to be interpreted in such a way that the proceeds of sale of fixed assets by a receiver were to be made available in whole or in part for preferential creditors, this would confer upon them a benefit or entitlement which they would not have in the event of a liquidation because in a liquidation their right would be to a priority over creditors who had a floating charge, not over those who had a fixed charge. If s. 98 were to be assessed as giving them priority over a fixed charge this would be an inexplicable and unwarranted additional benefit to the preferential creditors. The scheme of the Act of 1963 was to give a particular right to preferential creditors in a winding up whereas the function of s. 98 and its predecessors was to prevent that right being gained, either intentionally or accidentally, bar the appointment where no liquidation took place and the only purpose of s. 98 should be to equate the rights of preferential creditors in a receivership with those in a liquidation, not to improve on those rights.
These are factors which undoubtedly have to be taken into account in considering whether the literal interpretation or the teleological interpretation of the section is to be adopted. But at the end of the day it seems to me that predominant in In re Lewis Merthyr Consolidated Collieries Ltd. [1929] 1 Ch. 498 is neither a literal interpretation nor a teleological interpretation of the section. The fact that must influence me most is the fact that In re Lewis Merthyr Consolidated Collieries Ltd. has stood the test of time. That has been, although an English decision, part of the corpus of our law for nearly sixty years, and whilst it has not been referred to, so far as I am aware, in many cases it is known and existed in the authorities and I think one must presume was known to the legislature and its legal advisors at the time of the enactment of the Companies Act, 1963.
Furthermore, it seems to me of the utmost importance in dealing with commercial matters to maintain some measure of consistency, and to proceed on the footing that parties to commercial transactions have organised their affairs on the basis of the law as they understand and believe it to be for many years, and any change to or any revision or correction of that law should be made preferably by the Oireachtas or at any rate by the final court of appeal in this country. In the circumstances, it seems to me that I must apply the law as it was interpreted in In re Lewis Merthyr Consolidated Collieries [1929] 1 Ch. 498 originally and more recently in In re G.L. Saunders Ltd. (in liquidation) [1986] 1 W.L.R. 215 notwithstanding any reservations that I might have had based on the strength of the arguments brought forward by counsel on behalf of the defendants.
In the circumstances it seems to me that the question raised by the receiver should be answered to the effect that the surplus monies in his hands representing the proceeds of sales of assets subject to fixed charges should be paid by him to the company.