All Assets Charge
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)
[2015] IESC 62
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.”
Farrell v. Equity Bank Ltd.
[1990] 2IR 553
Lynch J. 553
H.C.
Submissions
Counsel for the plaintiff submitted that when the advance had been paid over to the insurers as premiums the policies of insurance became the property of the company. If the business had continued there would have been no refunds: because the business terminated there are refunds and the company property in the policies has been converted to monetary refunds. The prohibition of assignment in the conditions of the application for credit emphasises that the policies are the property of the company. Counsel submitted that there was no charge on the policies of insurance themselves and there therefore could be no charge on the pecuniary refunds representing such policies.
Counsel further submitted that if a charge did arise it was a charge on book debts and was void because it had not been registered as required by s. 99, sub-s.2 (e) of the Companies Act, 1963. Counsel pointed out that there was no question of the documents constituting an absolute assignment of the refunds of premiums which would be outside the terms of s. 99 because the defendant had to account with the company for the refunds in case that there should be any surplus over and above the amount outstanding on their advance to the company. The termination or cancellation of the policies of insurance creates debts due by the insurers to the company and these are now payable to the plaintiff for disbursement in accordance with section 275.
Counsel for the defendant submitted that the terms of para. 4 of the application for credit incorporated the irrevocable letter of authority to the insurance brokers and furthermore that condition 3 of the application for credit conferred a preferential status on Equity. Counsel further submitted that the letter of authority to the brokers by para. 3 creates a trust in favour of the defendant for any refunded premiums or part premiums and acknowledges the defendant’s priority. Counsel submitted that the wording “to hold to the order of Equity”amounted to the same thing as “on trust for Equity”.
If the documents create a charge rather than a trust then counsel submitted such a charge is not registrable because the refunds of part premiums are not book debts. At the time when the charge was created in June, 1986, it could not be anticipated that refunds of part premiums would ever become payable. That being so they could not be a book debt at the date of the advance or at any time such as either were required to be or could be registered within 21 days as required by sub-s. 1 of s. 99 of the Companies Act, 1963.
Conclusions
First it is quite clear that it was the intention of the parties in June, 1986, when they executed the application for credit and the irrevocable letter of authority to the broker that the defendant should have priority over the company to receive refunds of premiums in the event of policies being cancelled until such time as the defendant’s advance of the monies to pay such premiums should have been fully discharged. I have come to the conclusion that the terms of the application for credit and especially condition 3 thereof are such as to create a charge on the refunds if and when they might become payable. The question then arises as to whether such a charge is void on the basis that it is a book debt and was not registered as required by s. 99, sub-s. 2 (e) of the Act of 1963.
There is no definition of the term “book debt” in the Act of 1963 or so far as I could find in any other Act either. The term is however defined for bankruptcy purposes in Halsbury’s Laws of England, (4th edition), Vol. 3 at para. 525 footnote 4, as follows:
“”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.”
See also Palmer’s Company Law (1987) Vol. I, p. 739, para. 46-06.
A number of authorities are referred to in the foregoing paragraphs of Halsbury and I was referred to a number of them in the course of argument. I think the most helpful is the decision in Paul & Frank Limited v. Discount Bank (Overseas) Limited [1967] Ch. 348 and in particular the passage commencing at the bottom of p. 362 to the following effect in the judgment of Pennycuick J:
“Section 95” (of the Companies Act, 1948; which corresponds to section 99 of our Companies Act, 1963) “requires registration of a charge on book-debts within 21 days of creation. It seems to me that, in order to ascertain whether any particular charge is a charge on book-debts within the meaning of the section, one must look at the items of property which form the subject-matter of the charge at the date of its creation and consider whether any of those items is a book-debt. In the case of an existing item of property, this question can only be answered by reference to its character at the date of creation. Where the item of property is the benefit of a contract and at the date of the charge the benefit of the contract does not comprehend any book-debt, I do not see how that contract can be brought within the section as being a book-debt merely by reason that the contract may ultimately result in a book-debt. Here the E.C.G. policy admittedly did not comprehend any book-debt at the date of the letter of authority, and that seems to me to be an end of the matter.”
I agree with the foregoing reasoning and it seems to me to be applicable to the circumstances of this case. The mere possibility that future refunds of premiums might become payable in amounts that 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.
In addition to the foregoing conclusion, however, it seems to me that the terms of condition 3 of the application for credit and para. 3 of the irrevocable letter of authority to the insurance brokers makes the brokers trustees for the defendant of the refunds of premiums received by them until such time as the whole of the defendant’s advance for the payment of such premiums has been repaid.
For the foregoing reasons therefore I find that the refunds from the company’s insurance policies presently held by the insurance brokers in the sum of £14,167.37 are payable to the defendant in priority to the plaintiff until such time as the whole of the advance by the defendant to the company for the payment of the premiums has been discharged.
Michael Hanley v. ICC Finance Ltd;
No. D8233
Court: High Court
Kinlen J
Date: 24 February 1995
Sale of Goods—Passing of title—Car subject to lease agreement sold by dealer to purchaser who was unaware of lease—Car repossessed by lessor—Whether purchaser had acquired a good title—Factors Act 1889 (No. 52 & 53 Vic., c.45) , s. 2(1) —Sale of Goods Act 1893 (No. 56 & 57 Vic., c.71) , s. 25(1)
Facts
S. 25(1) of the Sale of Goods Act 1893 states that if a person sells goods but remains in possession only to dispose of them to another person who receives the same in good faith and without notice of the previous sale, the subsequent disposition shall have the same effect as if the true owner of the goods has authorised the disposition. In May 1992 the plaintiff purchased a motor vehicle from Huet Motors (Dublin) Ltd (‘Huet’ ). On the morning of 27 August 1993 the plaintiff received a telephone call from a garda in Donnybrook Garda Station informing him that the defendant intended to repossess the car. On checking the plaintiff found that the car had already been removed. During the fifteen months when the car was in the plaintiff’s possession nobody had either claimed ownership or contacted the plaintiff in relation to it. The Circuit Court granted an interim injunction restraining the defendant from disposing of the car. In a letter dated 27 August 1993 the defendant asserted that the car in question was the subject of a lease agreement and that in accordance with the terms thereof the title was vested in the defendant. It transpired that the defendant bought the car from Huet in May 1991 and then leased it for a fixed three month term to Tipperary Rent-a-Car Ltd. It was agreed that Huet would then repurchase it at a fixed price. At the end of the three month period the vehicle was not in fact repurchased. Instead, a new lease agreement was entered into between the defendant and Fleetlink Ltd, a company which was wholly owned by Huet. The agreement was for twelve months from January 1992 after which time Huet would repurchase the car at a fixed price. Although the tax book for the car was initially retained by the defendant, it was given to a Mr McCarthy, who was a director of both Huet and Fleetlink, for the purpose of taxing the car. The defendant did not consent to Fleetlink parting with possession of the car, especially not for the purpose of selling it.
On 29 July 1992 a receiver was appointed to Huet and this was followed by the appointment of a liquidator on 17 August 1992. The liquidator advised the defendant of the names and addresses of persons whom he believed to be in possession of vehicles which were the property of the defendant. It was on this basis that the defendant repossessed the car. The plaintiff instituted proceedings in the Circuit Court seeking the return of the car and damages. The Circuit Court held that the plaintiff had obtained a good title to the car and ordered its return. The defendant appealed.
by Kinlen J in dismissing the appeal:
(1) The vehicle was openly for sale at Huet’s premises, but the defendant made no effort to assert its ownership of the vehicle or to prohibit its sale.
(2) Both parties acted in good faith and were innocent of any wrongdoing, although the defendant might be regarded as having acted in a fairly cavalier manner.
(3) A series of cheques to the defendant drawn on the account of Huet Motors (Dublin) Ltd and not on the account of Fleetlink Ltd meant that it was reasonable to assume that the defendant knew that the vehicle was in the possession of or leased to Huet which was a mercantile agent.
(4) Although Huet did not have legal title, by virtue of s. 25 of the Sale of Goods Act 1893 and s. 2(1) of the Factors Act 1889 , it could and did give a good title to the car.
(5) The civil bill should have set out clearly the basis upon which damages were claimed. Given that it was alleged that the defendant had converted the car to its own use the case should be treated as a claim for conversion and not a claim in detinue, which would entitle the plaintiff to return of the car and damages, and not a claim in negligence. Here it was unnecessary to consider the matter further as the claim for damages had been settled.
Cases referred to in judgment
Astley Industrial Trust Ltd v. Miller [1968] 2 All ER 36
C.V. Stacks v. Mikloo [1948] 2 KB 23
Rosenthal v. Alderton & Sons Ltd [1946] 1 KB 274
Staffs Motor Guarantee Ltd v. British Wagon Co. Ltd [1934] 2 KB 305 ; [1934] All ER 322
Worcester Works Finance Ltd v. Cooden Engineering Co. Ltd [1972] 1 QB 210 ; [1971] 3 WLR 661 ; [1971] 3 All ER 708
Representation
KINLEN J delivered his judgment on 24 February 1995 saying: This matter had been dealt with by His Honour Judge Lynch on 12 November 1993.
The plaintiff is a senior agricultural specialist and is working at the premises of the American Embassy at Ballsbridge, Dublin. In May 1992 he purchased a Volvo 440 motor vehicle, registration number 91 D 20565, from Huet Motors (Dublin) Ltd for the price of £10,250. He arranged his own financing and as far as Huet Motors (Dublin) Ltd were concerned it was in fact a cash transaction.
A receiver was appointed to Huet Motors (Dublin) Ltd on 29 July 1992 and a liquidator was appointed to that company on 17 August 1992.
The plaintiff, on the date of purchase was the only person in possession of the vehicle, registered it in his name and comprehensively insured it in his own name with the New PMPA Insurance Co. On purchasing the car, he registered his address at that time on the registration book. However, on retaxing the car in July/August 1992, he was in the process of moving house and in the circumstances he requested that the book be returned to him c/o the American Embassy, as he feared it might be lost. The embassy address was entered on the registration book.
Early on the morning of Friday, 27 August 1993, he received a telephone call at the embassy of the United States of America, from a Garda Andy Keegan, of Donnybrook Garda Station, who advised him that he, the guard, had been informed by the defendant that it was its intention to repossess the said vehicle from where it was parked, on the corner of Eglington Road and Clyde Road, adjacent to the embassy. The plaintiff looked out the window and found that the car had already been removed. He had no knowledge whatsoever that the defendant claimed ownership of the vehicle and during the 15 months when the vehicle was in his possession at no time did the defendant, its servants or agents or the receiver, or liquidator of Huet Motors (Dublin) Ltd contact him in relation to the motor vehicle.
The Circuit Court granted an interim injunction in the particular circumstances of this case to restrain the defendant from disposing of the vehicle. The plaintiff says that the repossession from adjacent to his place of work, was in a manner which brought it to the attention of his superiors, and that he was anxious to be in a position to show his workmates and his superiors that he had the same car. The defendant made no effort to contact the plaintiff. Prior to his purchasing it, it was openly for sale at the premises of Huet Motors (Dublin) Ltd. That company was registered as the previous owners but the defendant made no effort at that time to assert its ownership of the vehicle or to prohibit the sale of same by the said Huet Motors (Dublin) Ltd. The registration book and the certificate of motor insurance were produced to the court. The defendant, by a letter of 27 August 1993, states:
The car in question is subject to a lease agreement in favour of ICC Finance Ltd and in accordance with the terms thereof the title vests in ICC Finance Ltd. Accordingly your client is not entitled to the return of the vehicle. The vendor to him, Huet Motors (Dublin) Ltd, had no authority or title to sell.
There is also a receipt dated 22 May 1992 stating that the sum of £10,250 was received from Mr Michael Hanley by Huet Motors. The plaintiff’s case is based on two affidavits by the plaintiff, with exhibits and the defendant’s case is dependant on two affidavits sworn by its credit control manager, Edward Kingston, together with exhibits.
It would appear that ICC Finance Ltd purchased the Volvo 440 motor vehicle from Huet Motors (Dublin) Ltd for the sum of £12,260, inclusive of VAT on 23 May 1991. It was then leased for a fixed three month period from 24 May 1991 to Tipperary Rent-a-Car Ltd. That purchase and lease were entered into with a further agreement between ICC Finance and Huet Motors (Dublin) Ltd that at the end of the aforesaid three month lease period, Huet Motors (Dublin) Ltd would repurchase the vehicle at an agreed price of £9,305.78 exclusive of VAT. This arrangement was one of 17 similar company arrangements in respect of other vehicles which ICC Finance Ltd and Huet Motors (Dublin) Ltd entered into in or about the month of May 1991. These lease/rental agreements were registered with the Irish Credit Bureau.
At the end of the three month leasing period with Tipperary Rent-a-Car Ltd, the vehicle was not bought back as agreed by Huet Motors (Dublin) Ltd. Instead a new contract was entered into between ICC Finance Ltd and another company by the name of Fleetlink Ltd, which was an associate company of, and wholly owned by, Huet Motors (Dublin) Ltd. The agreement with Fleetlink Ltd was for a lease of the aforesaid vehicle for a fixed period of twelve months from 28 January 1992 and again there was an agreement with Huet Motors (Dublin) Ltd that it would buy back the aforesaid vehicle at a fixed price of £6,665.20 exclusive of VAT at the end of the lease period.
The tax book of the vehicle was initially retained by ICC Finance. However, a Mr McCarthy, who was both a director of Huet Motors (Dublin) Ltd and Fleetlink Ltd, requested the tax book so as to tax the vehicle. The tax book was given to him for the purpose of having the vehicle taxed. Fleetlink Ltd is a company which leased vehicles and hired vehicles for short periods to third parties. It was not in the business of retailing cars to the public. Huet Motors (Dublin) Ltd went into liquidation and the liquidator advised the defendant company of the names and addresses of the persons whom he believed were in possession of the various vehicles, the property of the defendant company. Appropriate enquiries were made and it was discovered that the persons whose names were furnished either were not in possession of the vehicle or were not resident at the address given and supplied by the liquidator. It has been the experience of the defendant company that where a person is notified that the defendant company wants the vehicle in question returned because of failure to pay the rentals, or for some other breach of the agreement between the defendant company and a lessee, invariably the vehicle is not returned and it becomes very difficult for the defendant company to obtain possession of the vehicle. Because of this experience the defendant company has adopted the practice of repossessing the vehicles which it owns and at the same time advising the local gardaí, where the vehicle is repossessed, of such repossession. That was the practice adopted in this case. The defendant company did not consent to Fleetlink Ltd parting with possession of the said vehicles to anyone, not alone Huet Motors (Dublin) Ltd, for the purpose of selling same to an innocent third party. The defendant says it did not intend to cause any embarrassment to the plaintiff and if in fact it did, it is prepared to write to his employers or superiors advising them of the circumstances surrounding the matter and the reason for the defendant company repossessing the vehicle. It is accepted by the defendant company totally, that the plaintiff herein was, and is, an unfortunate and innocent party, and a party who acted in good faith in the purchase of the vehicle in question from Huet Motors (Dublin) Ltd.
It seems clear that both parties here acted in good faith and were innocent of any wrongdoing, although the defendant with its experience, might be regarded as acting in a fairly cavalier manner. As a result of discovery it would appear that there was a series of post-dated cheques paid to the defendant that were drawn on the account of Huet Motors (Dublin) Ltd, and not on the account of Fleetlink Ltd, during the time when the alleged lease to it was in existence. It is reasonable to assume that the defendant knew that the vehicle was in the possession of Huet Motors (Dublin) Ltd or leased to them. When I said that the behaviour of the defendant was a little cavalier, I do think that it might have checked the corporation file. The court is satisfied that the vehicle was at all relevant times in the possession of Huet Motors (Dublin) Ltd, who was a mercantile agent. It would appear that it was indulging in leasing, at least on one occasion, to a wholly owned subsidiary to provide a system of cash flow. Huet Motors (Dublin) Ltd was in possession of the vehicle and in possession of the tax book. Although in fact it did not have a legal title by virtue of the provisions of s. 25 of the Sale of Goods Act 1893 and of the Factors Acts (and particularly s. 2(1) of the Factors Act 1889 ), it could and did give a good title to the vehicle.
S. 25(1) of the Sale of Goods Act 1893 provides:
Where a person having sold continues or is in possession of the goods … the delivery or transfer by that person … of the goods … under any sale, pledge or other disposition thereof to any person receiving the same in good faith and without notice of the previous sale shall have the same effect as if the person making the delivery or transfer were expressly authorised by the owner of the goods to make the same.
I am impressed by the reasoning of the English Court of Appeal in Worcester Works Finance Ltd v. Cooden Engineering Co. Ltd [1971] 3 All ER 708 .
In the circumstances I am satisfied that the learned Circuit Court judge was correct in the decision he reached. It does seem to me that the defendant here could have retained the tax book and indeed been registered. I assume that it was not registered, because, it does not like to admit to an ultimate purchaser that there have been several registered owners.
I was referred to Staffs Motor Guarantee Ltd v. British Wagon Co. Ltd [1934] 2 KB 305 and Astley Industrial Trusts Ltd v. Miller [1968] 2 All ER 36 and Chalmers, Sale of Goods , 18th ed., p. 295. While clearly the ICC Finance was not involved in any fraudulent transaction, it was, as I have found, cavalier in its approach and it, I have no doubt, has caused much strain and distress to the plaintiff.
While Staffs Motor Guarantee Ltd v. British Wagon Co. Ltd would seem to support some of the defendant’s submissions, I would prefer the reasoning in the Worcester Works Finance Ltd v. Cooden Engineering Co. Ltd [1971] 3 All ER 708 .
The civil bill claims, inter alia , a mandatory injunction directing the defendant to deliver up possession of the said motor vehicle to the plaintiff.
The plaintiff makes a bald claim for damages but does not indicate whether this should be negligence, conversion or detinue. Each of these would be a separate head of damage and should be specifically pleaded. What is one to make of the bald claim for ‘damages’ ? The only plea in the endorsement of claim which would help to answer this question is in paragraph 5. It sets out that the defendant has converted the said motor vehicle to its own use. Therefore, this case should be decided on the basis of a claim for conversion, not a claim in detinue (which entitles one to the return of the vehicle and damages) or a claim in negligence.
I would wish to be addressed on what losses, if any, should be awarded as damages in a claim based on the tort of conversion. I would refer to McGregor on Damages , 14th ed., paras. 1087–1089 and particularly to the quotation from Denning LJ (as he then was) where he says:
It is an action against him because he has had the benefit of the goods. It resembles, therefore, an action for restitution rather than an action of tort. But it is unnecessary to place it in any formal category.
The author goes on to say that:
Looked at from this angle the plaintiff could always recover beyond his proved loss to the extent of the benefit conferred on the defendant by his use of the goods and it would seem that for Denning LJ this same result could have been arrived at in an action of conversion as much as in one of detinue.
In England detinue is gone by statute.
Detinue can include damages from the moment of detention to return of the chattel and special damages (Bullen and Leake, 10th ed., p. 317). Damages must be assessed at the date of judgment, not at the date of refusal which is a normal proof of detinue (see Rosenthal v. Alderton & Sons Ltd [1946] 1 KB 274 ; C.V. Stacks v. Mikloo [1948] 2 KB 23 and McMahon and Binchy, Irish Law of Torts , 2nd ed. p. 531).
I find the proposition by Denning LJ of subsuming these two distinct torts into a claim for restitution very attractive. It seems to me that the trial judge should look at all aspects of the case and decide the relevant periods and the nature of damage having regard to all the particular circumstances of each individual case. The matter should be clarified by statute.
Proceedings had been instituted by the plaintiff against the defendant for defamation. I was asked to postpone making any order until that matter had been determined. I had indicated that I would not make any order until I had been fully addressed on the nature of the claim mentioned in the civil bill and what were the appropriate parameters of such a claim which I believed to be based on conversion. I was open, of course, to argument because in fact detinue constitutes negligence. When the defamation action came to court it was settled. And that included damages arising in the present case. The plaintiff is in fact in possession of the vehicle. In the circumstances and by consent I am dismissing the appeal and awarding the plaintiff costs in both courts, with a certificate for senior counsel for the appeal.
(e) a charge on book debts of the company.”
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 Caherconlishretained 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.
Whether a garnishee order is a discretionary remedy
26. There remains for consideration an entirely separate argument advanced by Mr. Rutherdale for AIB to the effect that the making of a garnishee order under Ord. 45 is a discretionary order. He contends that as his client advanced the moneys to Caherconlish and as those moneys were dispersed by Caherconlish in its dealings with Response, it would be unfair and inequitable that Response should also be able to obtain the advantage of moneys from the Council which the Bank had sought as security for the debt.
27. While it is true that the making of an order under O. 45 remains in the discretion of the court, it would generally require special circumstances before the court would decline on discretionary grounds to make an order in favour of a judgment creditor who had otherwise satisfied the necessary proofs. It is probably fair to say that the approach of the court in relation to such orders is more direct and somewhat less nuanced than might obtain in the cases, for example, of an application for an injunction or an application for judicial review.
28. It is also true that there is authority for the proposition which suggests that the court would not make an order of garnishee where the effect of that order would be to direct a bank “to pay the money to an execution creditor when that payment would leave them still liable to an action to recover the same debt brought in a competent court at the foreign place where the parties reside”: Martin v. Nadel [1906] 2 K.B. 26 at 30, per Vaughan Williams L.J.
29. But I cannot think that this principle can serve to justify me refusing to make absolute the order of garnishee. In the first place, the bank could have protected its position by registering the solicitor’s undertaking as a charge. It was different in Martin v. Nadel where, through no fault of the bank in question, it remained liable to be sued for the debt in both England and Germany.
30. Secondly, while mindful of the fact that AIB’s advances were vital to enable Caherconlish to continue trading and while this clearly benefited Response, there was no contractual or quasi-contractual nexus between the parties such as would make it inherently inequitable for Response to apply for a garnishee order in respect of these moneys.
Conclusions
31. In conclusion, therefore, I will make absolute the order of garnishee sought by Response.
In re Keenan Bros. Ltd.
[1985] IR 401
Walsh J.
Walsh J.
The facts of this case are so adequately set out in the judgment of Keane J. in the High Court that it is unnecessary for me to repeat them. This appeal was taken against his judgment to the effect that a deed of charge made the 3rd May, 1983, and a debenture deed of 5th May, 1983, both in favour of Allied Irish Banks and purporting to create fixed charges on present and future book debts of Keenan Brothers Limited were in law and in fact floating charges on the book debts.
The company was in serious financial difficulties on the dates already mentioned and the banks were willing to give it financial assistance provided their loans could be so secured as to give them priority over other creditors including the Revenue Commissioners. In an endeavour to achieve that
result the deed and debenture already mentioned were executed. They are described in greater detail in the High Court judgment. The deed charged all the book debts and other debts present and future of the company and was expressed to constitute a first fixed charge. The debenture charged, by way of a first fixed legal charge, the present and future book debts of the company and all rights and powers in respect thereof.
The difference between floating and fixed charges are so fully explained in the judgments of Henchy J. and McCarthy J. which are to follow that I do not need to deal with that topic save to say that I agree with those explanations. I also agree that a fixed charge may be created in respect of book debts and other debts, both present and future.
Book debts and other debts cease to be such the moment they are discharged by the debtors, irrespective of whether the payment is made directly to the creditor or, on his order, to some other party on his account.
From the dates of the execution of the charges until the 4th October, 1983, all monies received by the company, whether from book debts or other sources, were lodged to the company’s No. 1 current account with the bank. During that period all these accounts were operated in the ordinary way and without any special restriction on any of them imposed by the bank.
On the 4th October, 1983, a new bank account was opened by the company with the bank under the name “Keenan Brothers Limited Allied Irish Banks Limited Book Debts RAC”, the letters RAC standing for Receivable Account. From that date until the commencement of the liquidation on 29th November, 1983, all receipts of the company whether from debtors or otherwise were lodged to the receivable account. The total receipts from debts lodged amounted to £665,948.53 and a further sum of £11,184.85 and £14,944.76 in respect of cash sales and sundries respectively were also lodged. No withdrawals or transfers or payments could be made from that account without the counter signature of the bank manager, who had in fact the sole discretion to permit withdrawals or transfers from that account. Some book debts paid into the No. 1 account were immediately transferred into the receivable account.
The company’s day to day expenses and payments due by the company to its business creditors were paid out of the No. 1 account which was in effect an overdraft account and which from time to time received transfers of funds from the receivable account. These payments were of course only possible with the consent of the bank.
At all relevant times the receivable account was in credit. As the relationship between banker and customer is one of debtor and creditor all sums from time to time standing to credit in that account were owed by the Bank to the company and were not book debts due to the company or debts in the contemplation of the deed of charge or the debenture, even though the account was opened to receive the collected book and other debts due to the company, which of course ceased to be debts from the moment they were collected. According to the copy of the bank’s statement of the receivable account exhibited in this case, the highest credit balance was £34,395.97 which stood to credit on the 24th November, 1983. On the 25th November £42,000 was transferred to the No. 1 account. On the 28th November the credit balance was £22,375.14. On the 29th November, 1983, £20,137 was transferred to the No. 1 account leaving a balance of £2,238.14. The 29th November was the date of the order of the High Court for the liquidation of the company. The material before the court does not disclose whether this was effected before or after the order for liquidation. If it was the latter then it is for the Examiner to examine the legal effects of the transaction. No monies in that account are, or ever were, subject to the fixed charge. That is also a matter for the Examiner to look into. For the moment I am content to answer in the affirmative the questions numbered 1 and 2 in the notice of motion of the official liquidator. I do not find it necessary to identify what particular monies were or are the subject of the fixed charge beyond repeating my opinion that none of the monies in the receivable account were ever so subject after they were lodged to that account.
Henchy J.
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.
Those conclusions would seem to be supported by the cases referred to in the judgment under appeal.
Apart from the fact that both of the instruments of charge in this case refer to a “fixed charge”, thereby showing that such was the type of charge intended, I consider that the restricted use permitted to the company of the assets charged was incompatible with the essence of a floating charge.
The deed of charge of the 3rd May, 1983, purported to give the Bank (A.I.B. Ltd.) a first fixed charge on the book debts, present and future, of the company. The deed went on to provide that, amongst other things:
“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.”
and
“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.”
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.
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.
Hederman J.
I agree with the judgment delivered by Walsh J. that the questions numbered 1 and 2 in the notice of motion of the official liquidator should be answered in the affirmative.
I also agree with the judgment delivered by Henchy J. and with the judgment about to be delivered by McCarthy J. and I would accordingly allow the appeal.
McCarthy J.
The Banks appealed against the decision of the High Court which held that the charges which had been created by the instruments of the 3rd May and 5th May, 1983, were floating charges rather than fixed charges over the present and future book debts of the company. The result of that decision is that monies due to the Revenue have priority over the claims of the banks on foot of the instruments of May, 1983; the claim by the banks is in respect of advances made between May, 1983 and November, 1983 when the company went into liquidation. It is unnecessary to detail the sequence of events or to recite the provisions of the instruments, all of which are set out in detail in the elaborate judgment of Keane J. The underlying basis was that the company, in May, 1983 was in serious financial difficulties and the banks, if they could secure the advances, were prepared to lend financial assistance. Because of the Companies Act, 1963, a floating charge would not secure the required priority, but a fixed charge would. In Siebe Gorman v.Barclays Bank [1979] 2 Lloyds Rep. 142, 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. During the course of the hearing, we were informed that they were, in fact, modelled on those in Siebe Gorman,although it was emphasised that monies received in respect of the book debts in the instant case were paid into a special account and not, as in Siebe Gorman, into the ordinary account of the mortgagor.
In In re Armagh Shoes Ltd. [1982] N.I. 59, Hutton J. in the High Court of Northern Ireland identified an apparent divergence of judicial view and legal precedent in a series of decisions:Tailby v. The Official Receiver (1883) 13 App. Cas. 523; In re Yorkshire Woolcombers’ Association Ltd. [1903] 2 Ch. 284; National Provincial Bank of England v. United Electric Theatres Ltd. [1916] 1 Ch. 132; Stave Falls Lumber Company v. Westminster Trust Company (1940) 4 D.L.R. 382; Evans v. Rival Granite Quarries Ltd. [1910] 2 K.B. 979; Evans Coleman and Evans Ltd. v. R.A. Nelson Construction Ltd. 16 D.L.R. 123 and Siebe Gorman [1979] 2 Lloyds Rep. 142.
It may well be that there are factual differences in the several cases but I think it desirable to identify some common ground so as to isolate the underlying principle and thereby resolve the two legal issues raised in this appeal, that is, (a) can a fixed charge be validly created in respect of future book debts? and (b) did the relevant instruments in this case do so?
Clearly, the parties wanted to secure the bank’s advances in priority to all other claims and wanted to achieve this by a fixed charge, whilst enabling the company to avail of advances from the bank covered, so to speak, by amounts received by the company in discharge of book debts and lodged to the special account; and wanted to achieve this result by using the Siebe Gorman scheme. 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?
I turn, firstly, to the second issue, to determine the nature of the charge created by the instruments. In his judgment, Keane J. refers to the development of the floating charge in contrast to the fixed or specific charge.”I think that one has to bear in mind at the outset that this form of charge made its first appearance in England as a by-product of the joint stock companies which began to flourish after the enactment of the Joint Stock Companies Act, 1844. In order to borrow money, such companies offered as security not merely their fixed assets, but also assets which were regularly turned over in the course of business such as the companies’ stock in trade. It was obviously cumbersome and impractical to charge such assets specifically with the repayment of advances, since it would mean the constant execution and release of securities as the assets were disposed of and replaced. Hence the concept developed of a charge which did not attach to any specific assets of the company, remained dormant until the mortgagee intervened and in the interim did not prevent the mortgagor from using the assets in question in the ordinary course of his business.” (see p. 407, supra)
It appears that what is now called a “floating charge” on all the property (the “undertaking” of a company) was first recognised in In re Panama, New Zealand and Australian Royal Mail Company (1870) L.R. 5 Ch. 318, where it was held that the word “undertaking” meant all the property, present and future of the company, and that the charge thereon was effective and was to operate by way of floating security. In In re Yorkshire Woolcombers Association Ltd. [1903] 2 Ch. 284; sub. nom. Illingworth v. Houldsworth [1904] A.C. 355, there are a number of judicial analyses, if not definitions, of the term “floating charge” or of the distinction between a floating charge and a specific or fixed charge. Citations from these judgments are to be found in Armagh Shoes and in the judgment of Keane J. in the instant appeal. I am content to cite the relevant extract from the speech of enviable brevity of Lord Macnaghten at p. 358:
“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(emphasis added) 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.”
I do not overlook the fact that Lord Macnaghten expressly agreed with the judgment of Farwell J. in the court of first instance.
I emphasise the phrase “without more” because it seems to me to be the badge that identifies the specific charge. The other side of the coin, when one looks at the characteristics of a floating charge, is that before what is called crystallisation of the floating charge the company has power to create legal mortgages and equitable charges in priority to the floating charge. (See In re Florence Land Company (1878) 10 Ch. D. 530; In re Colonial Trust (1879) 15 Ch. D. 465 and Wheatley v. Silkstone and Haigh Moor Coal Company (1885) 29 Ch. D. 715, where North J. said at p. 724:
“but it (the equitable charge by deposit of title deeds) is not intended to prevent and has not the effect of in any way preventing the carrying on of the business in all or any of the ways in which it is carried on in the ordinary course; and, in as much as I find that in the ordinary course of business and for the purpose of the business this mortgage was made, it is a good mortgage upon and a good charge upon the property comprised in it, and is not subject to the claim created by the debentures.”
The breadth of the company’s powers in this regard may be limited by the terms of the floating charge but such a qualification is strictly construed and a legal mortgagee without notice would be entitled to his priority (see Coveney v. Persse (1910) 1 I.R. 194).
The learned trial judge laid particular emphasis on two clauses of the charging instruments:
Charge dated 3rd May, 1983, in favour of Allied Irish Banks Limited: clause 3(ii):
“The company shall pay into an account with the Bank designated for that purpose all monies 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.”
In the instrument of 5th May, 1983, with Allied Irish Investment Bank Limited clause 7.3 provided that the company:
“shall not without the consent in writing of the Bank carry on its business other than in the ordinary and normal course.”
Clause 7.1 contains a provision to the same effect as that quoted from the instrument of the 3rd May, in respect of which Keane J. commented, “it is patent that the parties intended the company to carry on its business so far as these assets were concerned . . . to collect the book debts, lodge them to its bank account and use them in the business in the ordinary way.” Mr. Cooke, for the banks, contends that this was a misconstruction of that clause, that its purpose was to give the bank a degree of control over exceptional transactions, but was far from directing the company to carry on its normal business, rather it was allowing the company to trade subject to the express terms of the debenture with a provision for a cash flow set up by the bank in which the inflow of cash would go directly to the bank. In my view, this is the correct construction of that clause. As to the earlier quoted clause (in respect of the bank account) Keane J. said:
“Subject to the possible necessity to give notice in the case of the existing debts, the effect of the deeds was to vest the debts in the banks the moment they came into existence and to give the banks the right to collect them (on giving notice to the debtors); and the company, at the date of the execution of the deeds, ceased to have any interest in the deeds whatever. If this indeed is what the parties intended, it is not easy to understand why it was thought necessary to provide that (and he quotes clause 3(ii) of the first instrument).
On this view of the transaction, the company had no business collecting any debts once the securities had been executed. If the charge in each case was intended to be a specific or fixed charge, such a provision was wholly unnecessary and indeed virtually meaningless.” (see p. 409, supra.)
In my view, it is because it was described as a specific or fixed charge and was intended to be such, that the requirement of a special bank account was necessary; if it were a floating charge payment into such an account would be entirely inappropriate and, indeed, would conflict with the ambulatory nature of the floating charge to which Lord Macnaghten refers. In In re Yorkshire Woolcombers Association Ltd. [1903] 2 Ch. 284, Romer L.J. postulated three characteristics of a floating charge, the third being that “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.” Mr. Cooke has argued that this latter characteristic is essential to a floating charge and that the banking provision in the instruments here negatives such a characteristic. I would uphold this view. I have sought to identify from the speech of Lord Macnaghten the badge of a specific or fixed charge; that of the floating charge seems to me to be the absence of immediate effect or possible ultimate effect, in short, it may never happen; if the advances made or the debts incurred are repaid or discharged, then the cloud is dispersed never to return in that exact form. Towards the end of his judgment, Keane J. said: “What the banks have sought to do in the present instance is to create a hybrid form of charge which incorporates all the advantages of a floating charge with none of the statutory limitations on its operation. The borrower continues to use the assets in the course of his business to his own benefit, and to the benefit of the lender who continues to earn interest on his loan, in the knowledge that he can at any time realise his security if his prospects of ultimate repayment appear in peril. At the same time, he is protected from the consequences that would normally ensue for a lender who offers money on the security of the floating charge within twelve months of a winding-up or in circumstances where the preferential creditors are owed substantial sums.” (see p. 415, supra) The charge, whatever its nature, for its validity had to be registered under the Companies Act, 1963, and its existence would have been known to anyone upon casual enquiry – its existence as what was described as a fixed charge. Whilst acknowledging that the charge is somewhat hybrid in form because of the concession in respect of the collection of debts and lodgment to a special account, I do not recognise in it the ordinary characteristics of a floating charge, i.e., that it may crystallise on the happening of some future event. If the borrower, the company, is driven to such financial straits that it is prepared to effect an immediate charge upon its book debts, the existence of which charge is, in effect, published to the commercial and financial world, I do not accept that an elaborate system set up to enable the company to benefit by the collection of such debts detracts from its qualifying as a specific or fixed charge.
The remaining question, as raised by the Revenue Commissioners, is whether or not it is possible in law to create a fixed charge on future book
debts. There appears to be ample authority in England in support of this contention going back to Tailby v. The Official Receiver (1883) 13 App. Cas. 523, and asserted in Canada in Evans Coleman and Evans Ltd. 16 D.L.R. 123. I am content to adopt the observations of Davey J.A. at p. 127 of the report and hold that there is no legal bar to there being a fixed charge on future book debts. To echo Lord Watson in Tailby v. The Official Receiver at p. 536:
“I cannot understand upon what principle an assignment of all legacies which may be bequeathed by any person to the assignor is to stand good, and effect is to be denied to a general assignment of all future book debts. As Cotton L.J. said in In re Clarke . . .;”vagueness comes to nothing if the property is definite at the time when the Court is asked to enforce the contract.” A future book debt is quite as capable of being identified as a legacy; and in this case the identity of the debt, with the subjects assigned, is not a matter of dispute.”
Each book debt is a separate entity; granted, that even though it has been assigned to the banks, it may be altered in whole or in part by, for example, a contra account. That may go to the amount payable but it does not affect the transaction; there is no logic in seeking to distinguish between an accepted validity of a floating charge on future book debts and an alleged invalidity in a fixed charge on such debts.
In my judgment, the instruments executed between the company and the banks did effect what they were intended to effect and constituted fixed charges on all the book debts present and future of the company. I would allow the appeal accordingly.
Ulster Investment Bank Ltd v Euro Estates Ltd and Drumkill Ltd
1979 No. 750Sp
High Court
30 July 1981
[1982] 2 I.L.R.M. 57
CARROLL J
having recited the facts of the case delivered her judgment on 30 July 1981 saying: … In this action Mr Donnolly as liquidator of Euro Estates has raised issues concerning the validity of two of the Euro Estates’ mortgages. He does not challenge the calculation of the amounts claimed due by UIB on foot of the mortgages. His claim relates solely to their validity and is based on a consideration of the Articles of Association and relevant correspondence and minutes. Mr Donnolly has not been able to obtain or trace the minute books of Euro Estates but there are copy extracts from the minutes available.
The relevant provisions in the Articles of Association of Euro Estates relate to ‘A’ and ‘B’ directors.
The articles provide as follows:
Art. 7
(ii). No business shall be transacted at any general meeting unless a quorum of members is present at the time when the meeting proceeds to business. Two members shall be sufficient to form a quorum provided that a quorum shall contain a member holding ‘A’ ordinary shares and a member holding ‘B’ ordinary shares. Such members may be present in person or by proxy or being a corporation represented in accordance with Regulation 74 of Part 1 of Table A.
Art. 8
(ii) The number of directors shall not be less than three and no more than six of whom not more than three shall be ‘A’ directors and not more than three shall be “B’ directors.
Art. 9
(i) The holders of a majority in nominal value of the issued ‘A’ ordinary shares shall be entitled at any time and from time to time to appoint any person as a ‘A’ director (but so that the maximum number of ‘A’ directors fixed in accordance with these regulations is not exceeded) to determine the period for which such person is to hold office and to remove any ‘A’ director from office.
(ii) The holders of a majority in nominal value of the issued ‘B’ ordinary shares shall *59 be entitled at any time and from time to time to appoint any person a ‘B’ director (but so that the maximum number of ‘B’ directors fixed in accordance with these regulations is not exceeded) to determine the period for which such person is to hold office and to remove any ‘B’ director from office.
Art. 10
(iii) Two directors shall be sufficient to form a quorum provided that a quorum shall contain at least one ‘A’ director and one ‘B’ director.
Art. 11 The Chairman of the directors shall be chosen by the ‘A’ directors from among the ‘A’ directors.
11
(a) The directors may exercise all the powers of the company to borrow and secure money without any limit as to amount and regulation. 79 of Part I of Table A shall be modified accordingly.
Another relevant provision concerns the affixing of the seal of the company. The articles incorporate regulation 115 of Part 1 of Table A which provides as follows:
The seal shall be used only by the authority of the directors or of a committee of directors authorised by the directors in that behalf, and every instrument to which the seal shall be affixed shall be signed by a director and shall be countersigned by the secretary or by a second director or by some other person appointed by the directors for the purpose.
Shortly after the incorporation of Euro Estates there was a shareholders agreement dated 11 (9?) August 1973 between Lane Fox of the one part and Messrs Clarke Flynn and Brady on the other part. This made several provisions in relation to an increase in the authorised share capital and amending the articles so that there would be four ‘A’ directors and four ‘B’ directors and providing that the number of ‘B’ directors entitled to vote at a meeting should not exceed the number of ‘A’ directors. These proposals were never implemented but the shareholders agreement shows that the ‘A’ ordinary shares were to be allocated to Lane Fox and the ‘B’ ordinary shares to Messrs Flynn Clarke and Brady. A copy of this shareholders agreement was sent to UIB by Euro Estates with a letter dated 5 February 1974.
Following preliminary negotiations, an offer of loan facilities to Euro Estates by UIB was made by letter dated 17 April 1974. This specifies that the amount of the loan is to be £450,000 and that its purpose is as a revolving facility to be used for property investment. It also specifies a list of the properties on which a first legal charge is to be given as security for the loan.
These are:
(1) Haddington Road ( phase two )
(a) First legal charge on 63, 65, 67 and 69 Percy Place
(b) First legal charge on 26 Haddington Road.
(c) Solicitors undertaking to lodge deeds of 20, 22 and 24 Haddington Road on completion of contracts. A first legal charge will be taken when the deeds have been lodged.
(2) Haddington Road ( phase three )
(a) First legal charge on the H. F. Murray Ltd property.
(b) Solicitors’ undertaking to lodge deeds of Powerpak Ltd. property (73 Percy Place) and also 73a Percy Place. A first legal charge will be taken when the deeds have been lodged.
*60
(3) Pearse Street
(a) First legal charge over 55, 56, 57 and 58 Pearse Street.
(b) Solicitors’ undertaking to lodge deeds of S.A. Roantree Ltd property in Pearse Street, Sandwith Street. A first legal charge will be taken when the deeds have been lodged.
It is stated to be a condition precedent that UIB’s solicitors shall have received and approved Euro Estates memorandum and articles of association and certificate of incorporation and copies of various board resolutions authorising the borrowing thereunder.
Following a letter of clarification dated 2 May 1974 from UIB to Euro Estates, the letter of offer dated 17 April 1974 was accepted by Euro Estates by indorsement dated 3 May 1974 signed by Edward Lawlor and Brendan Flynn.
On 7 May 1974 a meeting of Euro Estates Ltd was held in London attended by Brendan Flynn (a ‘B’ director) and E. L. Lawlor and A. J. A. Helme (both ‘A’ directors). The minutes show that the letter of 17 April 1974 (as clarified) from UIB was considered and it was agreed that the terms should be accepted and that Mr Flynn and Mr Helme should be empowered to sign and act on behalf of Euro Estates in the matter. It was also agreed that they should be empowered to sign separate copies of the letter of agreement due to possible difficulties arising from the locations of the principal parties. (The minutes are not headed as a directors’ meeting but is indentified as such by Mr Lawlor in his affidavit sworn on 27 May 1980).
Another directors’ meeting of Euro Estates was also held in London on 20 May 1974. Those who attended were Messrs Gredley, Lawlor, Helme (all ‘A’ directors) and Brady, Flynn and Clarke (all ‘B’ directors). The minutes record as follows:
It was agreed by the board of Euro Estates to accept the facility loan of £450,000 from Ulster Investment Bank secured against Haddington Road phase two and three properties as owned by Euro Estates at present; and the existing contract on Pearse Street plus the Lane Fox guarantee. The loan of £450,000 to be remitted to Barclays Bank who in turn will release the deeds of the above.
The rest of the minutes are not relevant.
It should be noted that the minutes of these two meetings were not available to Mr Donnolly when he made his replying affidavit.
A meeting of Euro Estates was held in Dublin on 7 June 1974. (Here again the minutes are simply headed Euro Estates Ltd not a directors’ meeting though it appears probable that this is in fact what it was, even though Mr Lawlor identifies it as a company meeting in his affidavit of 27 May 1980). Those present were Brendan Flynn and Francis Clarke (both ‘B’ directors) and in attendance Mr Hugh O’Donnell, a member of the firm of Messrs Gerard Scallan and O’Brien, solicitors to Euro Estates.
The minutes record as follows:
A form of mortgage made between the Ulster Investment Bank Ltd, of the one part and Euro Estates Ltd of the other part was presented to the meeting and approved and it was resolved that the seal of the company be affixed thereto.
*61
A form of letter authorising Messrs Gerrard Scallan and O’Brien to deposit documents of title of premises Haddington Road and Percy Place and to give understakings, etc., in connection therewith was produced and approved and it was resolved that the seal of the company be affixed thereto.
A form of letter authorising Messrs Gerrard Scallan and O’Brien and/or Messrs Arthur Cox and Co. to deposit title deeds of premises Pearse Street Sandwith Street with Messrs Hickey Beauchamp Kirwan and O’Reilly was produced and approved and it was resolved that the seal of the company be affixed thereto.
It was resolved that Frank Clarke and Brendan Flynn be authorised to sign any necessary banking forms or documents in relation to the advance from the Ulster Investment Bank.
A letter of authority dated 7 June 1974 from Euro Estates to Messrs Gerrard Scallan and O’Brien, irrevocably authorised them to undertake to Messrs Hickey Beauchamp Kirwan and O’Reilly, solicitors of UIB, to furnish to them all documents of title related to all freehold and leasehold interests soon to be acquired by Euro Estate Ltd. in premises at Haddington Road and Percy Place known as phase three.
Messrs Gerrard Scallan and O’Brien in pursuance of that authority wrote to Messrs Hickey Beauchamp Kirwan and O’Reilly on 7 June 1974 undertaking to lodge all original documents of title to any properties to be charged in future with UIB duly stamped and registered as and when the sales of the said properties had been completed.
The first mortgage was executed on 7 June 1974. There was a further letter of facility dated 4 November 1974 from UIB to Euro Estates. The amount of the loan was to be £150,000 and the purpose of the loan was that the facility was to be applied towards the acquisition costs of Haddington Road (phases two and three) site. The security to be given concerned property other than the Haddington Road/Percy Place property.
The conditions precedent to this loan are stated to be:
(1) Payment on or before 8 November 1974 of the outstanding interest amounting to £20,700 on the existing loan facility and
(2) UIB’s prior agreement to (a) the payments to be made on the Haddington Road contracts (b) the contractual basis on which payments are made which is to be approved by UIB’s legal advisers and (c) where applicable the extension dates of contracts which are to be for a minimum period of twelve months from 1 November, 1974.
The offer contained in that letter was accepted on behalf of Euro Estates by an indorsement thereon signed by Edward Lawlor and Francis A. Clarke dated 8 November 1974.
On 6 November 1974 a meeting of the directors of Euro Estates Ltd was held attended by Edward Lawlor (an ‘A’ director) and Francis Clarke and Eugene Brady (both ‘B’ directors). The minutes record as follows: ‘It was resolved that the company approve of the form of mortgage in favour of Ulster Investment Bank Ltd affecting the company’s property at Swords Road, Santry and that the seal of the company be impressed on the said mortgage and a duplicate thereof and on the relative memorial’. The second mortgage was executed on 6 November 1974.
*62
A letter dated 28 November 1974 from UIB to Euro Estates is headed ‘Loan Facility £150,000’ and the text is as follows:
I refer to your letter dated 19 inst. enclosing cheques totalling £110,000 for lodgment to a deposit account in the name of Euro Estates Ltd. The sums have been placed on deposit as per the attached advice.
As agreed these funds are to be utilized in whole or in part in payment of any short-fall on the contract payment for purchase of the Haddington Road phase two and three site which are not covered by the loan facility of £150,000 which this bank has agreed to advance as per facility letter dated 4 November 1974. The sum of £10,000 is to be applied to any shortfall directly relating to contract payments and/or legal or other expenses payable by you in completing or extending contracts. Any balance remaining after disbursement of funds to meet the above obligations are to be applied in further payment of contracts at their maturity or alternatively in meeting payments to tenants on the Haddington Road site who have agreed to vacate.
Please sign and return the attached copy of this letter as confirmation of your acceptance of the terms contained in this letter.
The letter was returned having been signed by Messrs Brady and Clarke dated 23 December 1974.
On 23 December 1974 a meeting of Euro Estates Ltd was held at which were present Messrs Brady Clarke and Flynn (all ‘B’ directors) and in attendance, Hugh O’Donnell (solicitor to Euro Estates) and Mr Jonathan Brooks (solicitor to UIB).
The minutes record as follows:
A. A form of letter authorising Messrs Gerrard Scallan and O’Brien to deposit the documents of title of premises at Haddington Road and Percy Place and to give undertakings etc. in connection therewith was produced and approved and it was resolved that the seal of the company be affixed thereto.
B. A form of letter undertaking to Ulster Investment Bank Ltd to complete the purchase of certain premises at Haddington Road and Percy Place was produced and approved and it was resolved that the seal of the company be affixed thereto.
C. It was resolved that Francis A. Clarke is authorised to deposit the documents of title relating to the purchase from Mr Liddy with the bank as security.
The two letters approved by that meeting do not appear among the papers made available to the court, but as counsel have not referred to them nothing appears to turn on these.
A further letter of facility dated 11 June 1975 was sent to Euro Estates by UIB but was not accepted.
In or around the end of August 1975 a balance of £34,500 was due on foot of a contract for the purchase of a leasehold interest in 73A Percy Place from Powerpak Ltd. No extension of time would be granted by the vendors. Euro Estates had previously purchased the fee simple in this property by a conveyance dated 16 December 1974 made between Charles S. Reddy of the one part and Euro Estates of the other part. This conveyance comprised the dwellinghouse and premises known as 73 Percy Place and including the ground used or formerly used in connection therewith as a coach builders yard as more particularly shown on the map annexed thereto and thereon edged red. It is quite clear that the *63 premises known as No. 73A are comprised in this conveyance.
A meeting of directors of Euro Estates was held on 10 October 1975 between E. J. Brady (a ‘B’ director) and E. L. Lawlor (an ‘A’ director) on telephone connection from London. The minutes show as follows:
It was resolved: That in consideration of Ulster Investment Bank Ltd advancing to Euro Estates Ltd monies to complete on the Powerpak contract, to give to Ulster Investment Bank Ltd a legal mortgage on the property known as 73 Percy Place. It was further resolved that E. J. Brady and F. A. Clarke should be empowered to sign the contract on behalf of Euro Estates Limited.
A copy of these minutes was sent to UIB as an enclosure with a letter dated 10 October 1975. Following that letter, a telex was sent by Edward Lawlor from London. The telex itself is undated but in his affidavit sworn on 4 July 1980 Mr Lawlor identifies it is a telex sent by him on 13 October 1975. The text of the telex is as follows:
Following our telephone conversation of 10 October, 1975 I wish to confirm that in my capacity as managing director of Euro Estates Ltd that I authorise two Irish based directors of the said company, Eugene Brady and Frank Clarke to complete the contract relating to:
(a) Purchase of the Powerpak premises known as 73a Percy Place.
(b) Completion of a legal mortgage over the freehold interest in the name CIE (phase three).
(c) Completion of legal mortgage over the Reddy freehold interest (phase three) in accordance with a properly constituted board meeting of the company.
I would also confirm that I authorise the Irish directors to give a first legal charge on the said Powerpak and Reddy and CIE interests in accordance with the form of legal mortgage drawn up by Ulster Bank Ltd. I also authorise the said Irish based directors to provide copies of the requisite resolutions to give effect to the above transactions.
The third Euro Estates mortgage dated 13 October 1975 in fact comprises:
1. The fee simple interest acquired by conveyance dated 24 April 1975 made between CIE of the one part and Euro Estates Ltd of the other part.
2. The fee simple interest in the property comprised in the Reddy conveyance dated 16 December 1974 to Euro Estates.
3. A leasehold interest in Nos. 79 and 79a Percy Place and No. 14 Haddington Road (which premises were also comprised in the CIE conveyance).
4. A leasehold interest in No. 81 Percy Place (also portion of the CIE conveyance).
The CIE conveyance comprised the entire of phase four and all of phase three excluding the Reddy property. It included the fee simple in all the leasehold properties comprised in the first Euro Estates mortgage. A different leasehold interest in No. 14 Haddington Road was also included in the first mortgage.
The leasehold interests comprised in the third mortgage appear from the descriptions in the parcels to have been acquired by Euro Estates by Indenture of Assignment dated 20 September 1973 made between Arthur C. Taylor of the one part and Euro Estates of the other part. Thus their acquisition appears to have pre-dated the first mortgage of 7 June 1974.
*64
Mr Donnolly as liquidator of Euro Estates seeks to have the first Euro Estates mortgage of 7 June 1974 declared invalid on the grounds that there was no valid directors’ meeting to approve the contents of the mortgage and to authorise the affixing of the seal because there was not a valid quorum present. There were only two ‘B’ directors present, namely Brendan Flynn and Francis Clarke. He says that UIB ought to have been aware that it was an invalid meeting because they had a copy of the shareholders agreement and of the memorandum and articles of association of Euro Estates. Also it was a condition precedent to the loan mentioned in the letters of 17 April 1974 that they should have received and approved copies of the various board resolutions authorising the borrowing. He says that UIB could not rely on the meetings of 7 May 1974 and 20 May 1974 (both of which were validly constituted meetings and which agreed to accept the terms of the loan set out in the letter of facility of 17 April 1974) because the mortgage as drafted varied in certain particulars from the terms of the loan. Lastly he says that at neither of these meetings of 7 May or 20 May 1974 was there a resolution authorising the affixing of the seal.
The liquidator does not make any claim that the second mortgage dated 6 November 1974 was invalid.
In relation to the third mortgage dated 13 October 1975 the liquidator says that the only resolution of the company in relation to this was at the meeting on 10 October 1975. No point was taken on the fact that this meeting took place over the telephone. The liquidator says that the only property which could have been validly comprised in this mortgage was No. 73 Percy Place, but not including No. 73a Percy Place. He claims that the telex message from Mr Lawlor which purported to authorise a mortgage of the CIE Powerpak and Reddy interests was not a valid authorisation for the inclusion of these properties in the mortgage. Further he says that there is no mention of Nos 79, 79a and 81 Percy Place or 14 Haddington Road in either the minutes of the meeting of 10 October 1975 or in the telex. No. 14 Haddington Road was identified as part of the H. F. Murray Limited property specified in the facility letter of 17 April 1974 (see affidavit of Patrick McMahon sworn on 16 February 1981) but Nos 79, 79a and 81 Percy Place are not specifically mentioned anywhere neither in correspondence not in minutes nor in the telex. Lastly in relation to this mortgage the liquidator says that there is no resolution authorising the affixing of the seal.
As a corollary to his argument that 73 Percy Place does not include 73a Percy Place, the liquidator claims that the sum of £34,500 paid to complete the Powerpak contract was not a salvage payment because UIB had no interest n the premises No. 73a Percy Place. To protect property which might otherwise be lost it must be made by a person with an interest in or carved out of the property and must be for his own advantage. He says the bank had no interests in the property therefore they were not entitled to make salvage payments.
There were a number of other matters raised in Mr Donnolly’s affidavit but these were not pursued at the hearing of the action.
The arguments made on behalf of Mr Crowley, the liquidator for Drumkill, are based on the grounds that the first mortgage was given to secure monies due on foot of the first Euro Estates mortgage, the validity of which is in question, *65 and that the second and third Drumkill mortgages are expressed to be supplemental to the first. If the first Euro Estates mortgage is declared to be invalid then he claims that it taints the Drumkill mortgages and they too should be declared invalid. No case is made on behalf of the liquidator of Drumkill that the Drumkill mortgages were not authorised and executed in pursuance of valid resolutions of the directors to that effect.
According to the rule in Royal British Bank v Turquand (1855) 5EL & and BL 248), while persons dealing with a company are assumed to have read the public documents of the company and to have ascertained that the proposed transaction is not inconsistent therewith, they are not required to do more. They need not inquire into the regularity of the internal proceedings and may assume that all is being done regularly.
In County of Gloucester Bank v Rudry Merthyr Steam and House Coal Colliery Co [1895] 1 Ch 629 the directors of the joint stock company had power under their articles to fix the number of directors which should form a quorum. By resolution they fixed three as a quorum. A meeting of directors, at which two only were present, authorised the secretary to affix the company’s seal to a mortgage, which was accordingly done by the secretary in the presence of the same two directors. It was held that as between the company and the mortgagees who had no notice of the irregularity, the execution of the deed was valid. Lindley LJ says (at 636):
Here the directors may make any quorum they like — it may be two, or it may be three. They did apparently appoint three. The mortgage in question is under the seal of the company, signed by two directors and countersigned by the secretary. Now what could anybody think of that? What is there to put them upon inquiry? What is there to give them notice of anything irregular, if there was anything irregular. If a person looked at the deed and looked at the articles he would not see anything irregular at all; he would be at liberty to infer, and any one in the ordinary course of business would infer, that if the directors had appointed a quorum they appointed the two who signed that deed. But supposing that three were wanted, he is not bound to go and look at the directors’ minutes; he has no right to look at them except as a matter of bargain. The directors’ minutes, unless he knows what they are, do not affect him at all. There is nothing irregular on the face of the deed even taken with the articles — there is nothing illegal in it. As to a plea of non est factum, that could not be sustained for a moment and I have not the slightest doubt myself that that deed is as good as any deed that ever was sealed.
This passage appears to me to be relevant. In this case both deeds dated 7 June 1974 and 13 October 1975 on the face of them have been executed in accordance with the provisions of the articles in that the affixing of the seal has been signed and countersigned by two directors.
In the ordinary way a mortgagee dealing with a company is entitled to rely on the rule in the Royal British Bank v Turquand and is not obliged to call for copies of resolutions appointing directors or authorising the borrowing (where it is within the directors powers) or approving the form of the mortgage or authorising the affixing of the seal. All of these matters are matters of internal management.
What we are dealing with here is the question whether UIB having required *66 as a condition precedent to the first loan the right to receive and approve copies of the various board resolutions authorising the borrowing, have in some way disentitled themselves to rely on the rule in the Royal British Bank v Turquand in respect of matters of internal management relating to both mortgages.
As a result of their ‘bargain’, UIB got the right to call for and approve resolutions authorising the borrowing under the first letter of facility. They did in fact get details of the resolution of 7 May 1974 which agreed to accept the terms of the facility letter.
The affidavit of Jonathan Brooks, solicitor to UIB, sworn on 15 June 1980 sets out what happened on 7 June 1974 when the legal formalities in connection with the first mortgage were completed. The documents of title were handed over together with a copy of the resolution dated 7 June 1974 authorising the affixing of the company’s seal to the mortgage. Mr Brooks says he believed the resolution was properly passed at a duly and properly convened and constituted meeting of the directors of the company which was also attended by the company’s solicitor, Mr Hugh O’Donnell. He further says that he was aware at that time that the company had passed a resolution on 7 May 1974 agreeing to the terms of the facility letter issued by UIB to Euro Estates.
I am completely satisfied that UIB acted bona fide throughout. In my opinion they had no reason to believe that the resolution furnished to them as having been passed at a directors meeting on 7 June 1974, was passed at a meeting at which there was no valid quorum present. UIB were entitled to assume where there were two directors present that one was an ‘A’ director and one was a ‘B’ director.
It was suggested that because UIB were given a copy of the shareholders agreement they must be assumed to know that the two directors present at the meeting of 7 June 1974, that is Messrs Flynn and Clarke, were ‘B’ directors. The shareholders agreement was dated August 1973 and in paragraph three it provided that Lane Fox were to get all the ‘A’ ordinary shares and Messrs Flynn Clarke and Brady were to get all the ‘B’ ordinary shares. But because such an agreement was made in August 1973 does not fix some one in June 1974 with a notice that the shareholding had not changed. Alternatively there was nothing to prevent the ‘A’ ordinary shareholders agreeing that either Mr Flynn or Mr Clarke would become an ‘A’ Director. There was no particular shareholding qualification required for directors in the articles.
UIB had already satisfied themselves that there was a resolution passed on 7 May 1974 accepting the terms of the facility letter dated 17 April 1974, or in other words ‘authorising the borrowing’.
UIB were further entitled to assume that the form of mortgage prepared by them, which differed in certain details from the terms of the letter of facility, was approved by the company. There was in fact a resolution to this effect passed at the meeting on 7 June 1974 which was combined with the resolution authorising the affixing of the seal. It is not clear from Mr Brooks’ affidavit whether a copy of the full resolution was handed over or merely the part of it dealing with the affixing of the seal. If UIB knew of the full resolution they were entitled to rely on it as a valid resolution for the same reasons as they were entitled to rely *67 on the resolution authorising the affixing of the seal. If they did not know of this resolution, they were entitled to assume that because the seal was affixed, the form of mortgage was also approved.
I am reinforced in my views by a consideration of the following cases: Mahony v The Liquidator of the East Holyford Mining Co Ltd LR 7 HL 869; Duck v Tower Galvanising Co [1901] 2 KB 314; In Re Bank of Syria [1901] 1 Ch 115.
In relation to the third mortgage dated 13 October 1975, it is my opinion that UIB are similarly entitled to rely on the rule in the Royal British Bank v Turquand and to assume that the mortgage prepared by it and which on its face is duly executed in accordance with the articles, is the deed of the company.
UIB were aware that a resolution was passed on 10 October 1975 agreeing to give a legal mortgage on 73 Percy Place in consideration of their advancing monies to complete the Powerpak contract. This was sent to them by letter dated 10 October 1975. They also received a telex from Mr Lawlor on 13 October 1975 representing that the requisite resolutions to give effect to a legal mortgage over the Powerpak, Reddy and CIE interests would be provided.
In fact the Powerpak interest was not included in the mortgage. But the Reddy freehold interest comprised the fee simple reversion on the Powerpak interest. Therefore it is a matter of title which remains to be proved, and with which we are not concerned here, whether the Powerpak interest merged in the reversion prior to the granting of the mortgage.
UIB in drafting the mortgage also included a leasehold interest in Nos. 79 and 79a Percy Place and 14 Haddington Road and a leasehold interest in No. 81 Percy Place. From the description in the parcels to the mortgage these interests appear to have been acquired by Euro Estates by assignment dated 20 September 1973. If so, these interests would have been covered by the resolution of 20 May 1974 and should have been included in the mortgage of 7 June 1974.
However be that as it may, what is clear is that UIB knew of the existence of these leasehold interests. They may have held the title deeds or they may have been informed of the ownership of the leasehold interests by the solicitors for Euro Estates. When the third mortgage was being drafted to include the Reddy and CIE interests, these two leasehold interests were also included.
In my opinion UIB were entitled to assume that Euro Estates approved the form of mortgage submitted by UIB and that it authorised the affixing of the seal to that mortgage. The single resolution of which UIB had notice was followed by the telex which represented that further resolutions would be provided. In my opinion UIB were not obliged to call for production of any resolution but were entitled to assume that all these matters had been duly and properly looked after in accordance with the articles. If such resolutions were not passed by Euro Estates, that cannot operate to the detriment of UIB.
The question of the completion of the Powerpak contract not being a salvage payment does not arise. It is based on the proposition that the Reddy freehold described as No. 73 Percy Place does not include the property comprised in the Powerpak interest i.e. No. 73a Percy Place. This is clearly not the case. The map annexed to the Reddy conveyance shows that No. 73a was included in the *68 conveyance of the freehold interest.
I will conclude therefore in the words of Lindley LJ — I have not the slightest doubt myself that these deeds are as good as any deeds that ever were sealed.
The same applies to the Drumkill mortgages. There is no basis for holding that these mortgages are invalid in any way.
In re Interview Ltd.
[1975] IR 386
Kenny J.
Kenny J.
7th March 1975
There are five companies involved in this complicated story. The first is Interview Limited (“Interview”), a company incorporated in the State which carried on the retail trade of selling refrigerators and other similar domestic electrical goods (called “white goods” in the trade) and television, radio sets and other similar goods (called “brown goods” in the trade). Mr. Martin McCourt was the chairman of Interview which had a total authorised share capital of £1,500,000 divided into 1,500,000 ordinary shares of £1 each, of which £1,150,000 had been issued. On the 17th September, 1971, Interview had given a debenture to Ulster Bank Ltd. as security for its debts and on the 29th June, 1972, the bank appointed the applicant as receiver of the undertaking, property and assets of Interview. On the 11th April, 1973, Interview resolved that by reason of its liabilities it could not continue its business and that it be wound up voluntarily.
The second company is Electrical Industries of Ireland Ltd. (“EII”) which, at all relevant times to the questions in issue in this matter, manufactured and imported electrical goods of all descriptions. Interview owned one third of the issued share capital in EII and Mr. McCourt was chairman and managing director of it. EII owned a factory and warehouses at Dunleer, County Louth.
The third company is Irish Electronic and Appliances Co. Ltd. (“IEAC”) which was incorporated in February, 1972, and which had an issued share capital of £2; it was a wholly-owned subsidiary of Interview and was formed for the purposes of carrying on a wholesale business in electrical goods which would be sold by it to Interview for the purposes of resale in their retail outlets and to other companies and traders unconnected with Interview which were dealing in such goods. It was registered for wholesale-tax purposes while Interview was not. Mr. McCourt was connected with IEAC and was a director of it. The three Irish companies carried on business on a large scale and had many employees, but the effective management of all three was conducted by Mr. McCourt.
The fourth company is incorporated in the Federal Republic of Germany as Allgemeine Elektricitaets Gesellschaft A.E.G. Telefunken (“AEG”) which manufactures and exports refrigerators and other electrical goods on a very large scale and which sells goods outside Germany on printed conditions of sale referred to as “terms for deliveries abroad.”
The fifth company is Telefunken Fernsch und Rundfunk G.m.b.h. (“Telefunken”) which is also incorporated in the Federal Republic of Germany and is a wholly-owned subsidiary of AEG. It carries on the business of manufacturing and exporting television and radio sets and other similar electrical goods. The two German companies are under separate managements at Nurnberg and Hanover and are financially controlled from offices at Frankfurt.
In June, 1970, negotiations took place in Hanover between representatives of AEG and of EII in relation to the wish of EII to be appointed sole agents in the Republic of Ireland by AEG for the import and distribution of brown goods; the terms of the agreement reached between the parties are to be found in a letter of the 28th October, 1970, written by AEG to EII. Under the agreement EII were to use their best endeavours to promote the sale of radio receivers, black-and-white television receivers, palcolor television receivers, tape recorders for magnetic sound recording, and record players and record changers intended for private entertainment and exported under the trade mark “Telefunken.”
Clause 4 of this letter read:”4. Unless otherwise agreed upon (a) all our deliveries are subject to our terms for deliveries abroad which in their present form (edition April 1969) are annexed to this letter agreement . . .” Clause 5 of the letter read:”This letter agreement will be effective upon signature by both parties and continue until June 30, 1971. Thereafter it will automatically be extended unless notice of termination is given by either party hereto at least three months prior to the end of any calendar quarter.” The letter concluded:”In case you agree to the aforementioned provisions we would appreciate your confirming this letter agreement by duly signing and returning to us the attached copy thereof.” This letter was signed by Mr. McCourt under the words “accepted and agreed upon.” The terms were varied by a letter of the 9th November, 1970, but the changes are not relevant to any of the issues in this summons.
It is significant that though AEG deal in white goods, the contract made related to brown goods which were to be sold under the mark “Telefunken” and so goods manufactured by Telefunken were being sold on terms negotiated by AEG.
The terms for deliveries abroad (April, 1969, edition) is a lengthy document, but the relevant clauses of it are the only ones which have to be set out. Clause 18 of this document provided:”Reservation of ownership 18. The product supplied shall, unless otherwise agreed, remain the property of the supplier until all debts owing to the supplier or to be created in the future and arising from the business connection with the purchaser have been paid in full. With respect to a case of resale of the goods . . . in any condition whatsoever . . . the purchaser agrees to assign and assigns to the supplier, at the conclusion of the supply contract and effective up to the time of payment of all debts owing by the purchaser to the supplier, any claims against the purchaser’s customers which may have arisen or arise in future from the resale, by way of security, and undertakes to notify the supplier at his request of the names of third-party debtors and of the amount of the debts owing by these to the purchaser. So long as the purchaser complies with his payment obligation and no detrimental change occurs in his financial standing, the supplier will not collect the debts assigned. If the reservation of ownership in the foregoing form is not effective under the law of the country of destination, the purchaser must co-operate in establishing a similar security right complying with the provisions of his country. in favour of the supplier.” Clause 37 of this document read:”All contractual relations shall be governed by German law.” In an earlier part of the agreement AEG are defined as the supplier. and the terms for deliveries abroad also provided that all export business transacted by AEG is governed by the terms for deliveries abroad unless otherwise stated in the offer or in the confirmation of the order.
On the 10th February. 1972, discussions between representatives of Telefunken, Mr. McCourt as chairman and managing director of EII, and representatives of Interview took place in Hanover; these discussions resulted in an agreement of the 11th February, 1972, which was signed by Telefunken, Mr. McCourt and representatives of Interview.
The letter agreement read:”This is in reference to the conversation we had with your esteemed chairman and managing director Mr. McCourt on February 10, 1972, in Hanover in which he informed us of several changes in the organisation of Electrical Industries of Ireland. We learned that there are considerable changes in the management, especially as far as the distribution of Telefunken branded products coming under the letter agreement dated October 28, 1970, and its amendment under November 9, 1970, and the agreement concerning use of the Telefunken trade mark on locally assembled supplies from A.E.G. Telefunken is concerned. We understood that the sales manager for brown goods will leave the company and will be employed by Interview Limited. In consideration of the stocks you have . . . partly taken over before increase of import duties . . . and taking into consideration the close connections between Electrical Industries of Ireland and Interview by the personality of Mr. McCourt as well as by the capital links between the both companies we should like to ask you whether it would be advisable that Interview might enter into the existing letter agreement dated October 28, 1970, concerning distribution of Telefunken branded consumer electronic products along with Electrical Industries of Ireland. After the discussions with Mr. McCourt we came to the conclusion that this might be in the interest of all parties concerned allowing us to supply also Interview directly. If Interview enters into the agreement along with Electrical Industries of Ireland, all rights and obligations thereof would be extended also to this company. If you are in agreement with the above proposal, please let us know by signing and returning the attached two copies hereof duly signed for Electrical Industries of Ireland Limited as well as for and on behalf of Interview Limited. After having received the information that Electrical Industries of Ireland as well as Interview agree to the above proposal, we will write a letter to Merchants Warehousing Co. Limited allowing them to release T.V. receivers stored with them also to Interview according to conditions to be agreed upon.”
The effect of this letter was that Interview became (with EII) agents for the distribution of brown goods, and that Interview could be supplied directly by Telefunken.
On the 22nd February Telefunken wrote to Interview to summarise a verbal agreement reached on the 10th February, 1972, with Mr. McCourt, this letter stated:”Under cover of our letter agreement of February 11, 1972, mutually signed by Electrical Industries of Ireland Limited, Interview Limited and Telefunken G.m.b.h. we wished to confirm the following additional terms and conditions as agreed upon:1. Interview Limited will assist Electrical Industries of Ireland Limited in selling the T.V. inventory as covered by the original agreement of August 26, 1971. 2. Electrical Industries of Ireland Limited and Interview Limited will jointly safeguard . . . under the terms of the original contract and the to-days addendum . . . the withdrawal until April 30, 1972, of the inventory balance still held at Merchants Warehousing Co. Limited. 3. Merchandise will be released from the warehouse to Interview Limited against promissory notes due 45 days after date of withdrawal. All future direct deliveries from Telefunken G.m.b.h. to the contract parties will be effected against promissory notes due 90 days after end of month of delivery. Merchants Warehousing Company Limited will be instructed by us separately. Please oblige by returning one copy of this letter duly signed by you.” This letter was signed by a representative of Interview and returned to Telefunken.
In March. 1972, a representative of the two German companies visited Dublin and further discussions took place. As a result of the letters of the 11th and 22nd February. 1972, and the discussions in Ireland, EII transferred the stock of goods originally sold and delivered by AEG to them, and a purchase price of £105,935.50 was debited to the current account between Interview and EII in the books of Interview and EII. I use the term “transferred” as a neutral one at this stage of the judgment because one of the matters which has to be decided is whether this transaction was a sale by EII to Interview. There are three invoices in respect of this transaction. Each invoice was issued by EII and was addressed to Interview; all three invoices related to AEG white goods. Written on the invoices is:”I.E.A.C. stock at Dunleer. Paid in bills of £135,840.” The three invoices are for amounts of £90,916.33; £12,367.86 and £2,651.31. As Interview and IEAC had, without the consent of the German companies, arranged that the agency for white and brown goods should be handled by IEAC, it was agreed that the goods transferred by EII to Interview should then be transferred by Interview to IEAC who would then transfer them back to Interview at an increased price. This is why the words “I.E.A.C. stock at Dunleer” were written in ink on the invoices. The amount due by EII to AEG and Telefunken at this stage was £134,445 and this sum included the goods invoiced at £105,935.50. At the discussions in Germany and Ireland, Interview had agreed to make eight promissory notes in favour of AEG payable on different dates amounting in all to £134,445 in discharge of the current account of EII. Three of these notes (payable on 30th April, 15th May and 30th May, 1972) were paid but the remaining five were not.
The goods transferred by EII to Interview had been stored by EII at their warehouse at Dunleer. For the purpose of giving effect to the arrangements about the transfer of these goods, an agreement had been reached between EII and Interview that the warehouse belonging to EII at Dunleer would be leased by EII to Interview from the 1st May, 1972, at a rent of £5,268 p.a. The lease was made on the 17th May, 1972, and was for a term of 21 years.
On the 28th April, 1972, Telefunken wrote to Interview:”Confirming our various telephone conversations following the visit of the writer in March 1972 we wish to state the following:As per letters of February the 11th and February 22, 1972, Interview Limited has joined the agreement of October 28, 1970, between Electrical Industries of Ireland Limited and A.E.G. Telefunken. Under the terms of this agreement Interview Limited will sell Telefunken merchandise to be withdrawn from the T.V. inventory as covered by the agreement of August 26, 1971. Furthermore, direct deliveries to Interview Limited by Telefunken G.m.b.h. will be effected in accordance with the requirement specification as agreed upon on the occasion of the visit of the writer in Dublin on March 15, 1972, and confirmed by your letter of March 29, 1972. It is understood that according to statements by members of the board of Electrical Industries of Ireland Limited on the occasion of the aforementioned visit, E.I.I. Limited will be re-organised in such a way that there will be an industrial wholesale division and a manufacturing division. Neither division will continue to handle Telefunken brown goods after the present inventory will have been sold and all obligations will be settled. This will leave Interview Limited as active partner in importing and distributing Telefunken products within the existing agreement. As to the question of exclusiveness stipulations 2 and 3 of the aforementioned letter agreement of October 28, 1970, will apply. As you informed us, merchandise shipped to you will be imported and distributed by Irish Electronic and Appliance Co. Limited, a wholly owned subsidiary of Interview Limited. Following your instructions we will invoice our shipments accordingly, but for good order sake we would like to receive your statement to the effect that since Interview Limited is partner of our agreement it will fully guarantee the performance of Irish Electronic Appliance Co. Limited within the agreement valid between Interview Limited and Telefunken G.m.b.h. as well as settlement of all obligations towards us resulting from future business transactions. With reference to your letter of March 29, 1972, and the attached delivery specification we would appreciate to receive your official call off orders.”
A draft agreement to give effect to the introduction of IEAC was prepared in May, 1972; it was altered by Mr. McCourt but the alterations were not approved by AEG. The result was that the contractual relations between AEG and Interview were governed by the letters of the 11th and 22nd February, 1972. Although the invoices were addressed and sent to IEAC by the German companies after the 13th March, 1972, the sales which these represented were sales to Interviewbecause IEAC were only importing agents for Interview and were not purchasers. This conclusion, based upon the absence of any agreement between AEG or Telefunken and Interview and IEAC is supported by the affidavit of Mr. Michael Brady who was sales manager of EII from 1966 to February. 1972, and who in paragraph 5 of his affidavit says:”I say that I this deponent, as marketing and sales director of IEAC was aware that all goods invoiced and dispatched to IEAC by AEG and Telefunken pursuant to the said verbal arrangements and discussions were subject to the said terms for delivery abroad. and that these goods were ordered by Interview and were to be paid for by Interview.”
Evidence about German law was given by Dr. Joachim Michael and I accept all his evidence. German law distinguishes between a contractual relationship to sell goods and the property relationship involved in the sale. There is a contract for sale and a contract for the transfer of the title to the merchandise, though these two contracts may be in one document. If a person makes an unconditional agreement for sale he may agree that the passing of title will take place only on payment and that until that date, the ownership of or title to the goods remains in the vendor. He said that clause 18 of the terms for deliveries abroad which is headed “Reservation of ownership” is a very common clause in contracts in Germany where it is known as a “current account clause.” The first part of the clause is a reservation of title and the effect of it under German law is that the vendor or supplier remains the owner though possession has passed to the purchaser. His evidence was that when goods are sold outside Germany, the German law about reservation of ownership or title prevails. The purchaser is entitled to retain the goods until the vendor can prove delay in payment, and then the vendor may serve a notice of rescission. The vendor cannot take the goods back until he has served the notice of rescission but until he does this, the goods remain his and the purchaser has possession or custody only. The notice of rescission brings about a change in the legal relationship in that the vendor is entitled to take the goods back. However, when the goods are in the custody of a purchaser but the title to them is in the vendor, the effect of a sale by the purchaser is governed, under German law, by the lex loci rei sitae which in this case is Irish law. Therefore, the validity of a sale by the purchaser would be governed by Irish law. Similarly, an assignment of the debt arising out of a sale by the purchaser to another person of the goods would be governed by Irish law and not by German law. Dr. Michael said that if Irish law required the registration of the terms for delivery abroad as a condition of the validity of assignments of debts owing to the purchaser and arising out of a sale by him of goods sold under those terms, then the terms, in so far as they related to the assignment of the debt, would be invalid if they were not registered. Any assignment of a claim by the purchaser arising in Ireland would under German law be governed by Irish law if any question of its validity arose.
It is now necessary to consider the effect of clause 18 dealing with the reservation of ownership in the terms for deliveries abroad. The terms apply to the sale because they were part of the contract for sale which provided that German law was to apply. As between EII and AEG and Telefunken, the effect was that the two German companies remained owners of the goods and that EII had custody and possession of them for the purposes of the Factors Act, 1889, and the Sale of Goods Act, 1893. I have no doubt that Interview knew that the goods held by EII in March, 1972, had been delivered to EII on the terms for deliveries abroad. As I have already said, I think that IEAC never purchased any of the goods invoiced to them by the German companies and that they were importing agents only, and that the goods invoiced to them were in fact purchased by Interview. However, the effect of clause 18 was that the ownership and property in the goods remained in the German companies until the goods had been paid for. Thus EII and Interview could transfer the property and ownership in the goods to any person who bought them in good faith and without notice of the claim and right of the German companies.
Section 9 of the Factors Act, 1889, reads:
“9. Where a person, having bought or agreed to buy goods, obtains with the consent of the seller possession of the goods or the documents of title to the goods, the delivery or transfer, by that person or by a mercantile agent acting for him of the goods or documents of title, under any sale, pledge, or other disposition thereof, or under any agreement for sale, pledge, or other disposition thereof, to any person receiving the same in good faith and without notice of any lien or other right of the original seller in respect of the goods, shall have the same effect as if the person making the delivery or transfer were a mercantile agent in possession of the goods or documents of title with the consent of the owner.”
Section 2 of the Act of 1889 provides that where a mercantile agent is in possession of goods with the consent of the owner, any sale, pledge, or other disposition of the goods made by him when acting in the ordinary course of business of a mercantile agent shall be as valid as if he were expressly authorised by the owner of the goods to make the same, provided that the person taking under the disposition acts in good faith.
Section 25, sub s. 2, of the Sale of Goods Act, 1893, provides:
“(2) Where a person having bought or agreed to buy goods obtains, with the consent of the seller, possession of the goods or the documents of title to the goods, the delivery or transfer by that person, or by a mercantile agent acting for him, of the goods or documents of title, under any sale, pledge, or other disposition thereof. to any person receiving the same in good faith and without notice of any lien or other right of the original seller in respect of the goods, shall have the same effect as if the person making the delivery or transfer were a mercantile agent in possession of the goods or documents of title with the consent of the owner.”
The effect of either or both these provisions is that a purchaser in good faith from EII or Interview of the goods which they had in their possession acquired the property in them. It is not necessary to consider whether s. 9 of the Act of 1889 and s. 25, sub s. 2, of the Act of 1893 have the same effect. I confess that I have never been able to understand why s. 9 of the Act of 1889 was not repealed by the Act of 1893 when s. 25, sub s. 2, of the latter Act was inserted. It must be assumed that the draftsman saw some difference between them but fortunately it is not necessary to deal with that puzzling problem.
The next question for decision is whether there was a sale in March, 1972, by EII to Interview of goods valued at £105,935 so that, when the receiver was appointed, Interview were the owners and had the property in the goods. The view that there was a sale gets support from the fact that the goods were originally purchased by EII from AEG and Telefunken even though they were undoubtedly sold under the terms for deliveries abroad. The argument that there was a sale is also supported by the fact that the goods were stored in a warehouse owned by EII and that after the transfer there was a lease by EII to Interview made on the 17th May, 1972, of this warehouse and so possession of the goods passed from EII. The last argument in favour of a sale was that the goods were invoiced by EII to Interview by three invoices, that Interview were debited in the books of EII and of Interview with £105,935.
Against the view that there was a sale, it has been urged that the goods were paid for not by EII but by Interview who drew eight promissory notes in favour of AEG. If the goods were being purchased by Interview from EII, one would expect a payment by Interview to EII who would then have paid the German companies. However, in my view, the decisive argument against a sale is that the goods were never the property of EII or of IEAC. They had possession and custody of them but not property or ownership because the goods were sold under the AEG terms for deliveries abroadand Interview knew this. The transfer by EII of the goods to Interview did not transfer the property in the goods which remained in the German companies. Section 1 of the Act of 1893 provides that a contract of sale of goods is “a contract whereby the seller transfers or agrees to transfer the property in goods to the buyer for a money consideration, called the price.” EII could not agree to transfer the property in the goods delivered by the German companies because EII did not have it. Interview cannot rely on the Act of 1889 or the Act of 1893 to validate the transaction as a sale because they did not receive the goods in good faith and they had notice of the rights of the original sellers, the German companies, in respect of the goods.
It follows, in my opinion, that there was not a sale in March, 1972, by EII to Interview of the goods valued at £105,935. There was a transfer of possession and custody of the goods which were always the property of the German companies. This conclusion is not in any way a reflection on the applicant who has said in his affidavit that there was a sale; his reasoning is that there were three invoices showing a sale and that the entries I have described were made in the books of EII and of Interview. Both these statements are correct but, for the reasons I have indicated. it does not follow that there was a sale.
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 .7 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 debenture holder. A debenture creating a floating charge is, as Lord Macnaghten said in Illingworth v. Houldsworth 8, 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 on to the property and goods of the company. The appointment of a receiver has this effect. But it is an equitable assignment only of what the company owns: it is not a sale. If goods are in the possession of the company under a hire-purchase agreement under which they are to remain the property of the supplier until payment, the rights of the supplier prevail over a person claiming under the floating charge created by the company: see In re Samuel Allen & Sons Ltd. 9; In re Morrison, Jones & Taylor Ltd. 10 As the goods were not the property of Interview who had possession and custody only but not ownership, the debenture holder cannot be in a better position than the company were. It is a fallacy to say that the appointment of a receiver under a debenture creating a floating charge is a sale by the company to the debenture holder: it is an equitable assignment of the interest which the company had in the property and goods which it owned.
The next argument by the applicant related to the validity of the assignment of the debt created by a sale by EII or Interview of goods purchased under the terms for deliveries abroad. The effect of this clause was that if the goods were sold by the purchaser from the German companies, the purchaser agreed to assign and assigned to AEG any claims against the purchaser’s customers which might have arisen or would arise in the future from the resale by way of security.
Section 99, sub-ss. 1 and 2. of the Companies Act, 1963, so far as relevant, provides:
“99.(1) Subject to the provisions of this Part, every charge created after the fixed date by a company, and being a charge to which this section applies, shall, so far as any security on the company’s property or undertaking is conferred thereby, be void against the liquidator and any creditor of the company, unless the prescribed particulars of the charge, verified in the prescribed manner, are delivered to or received by the registrar of companies for registration in manner required by this Act within 21 days after the date of its creation . . .
(2) This section applies to the following charges . . .
(e) A charge on book debts of the company;”
The terms for deliveries abroad were not registered under this section. The first question is whether the clause in the terms for deliveries abroad in relation to debts created an absolute assignment (in which event it would not require registration) or was an assignment by way of security. I think it was an assignment by way of security. It was not an absolute assignment for if the purchaser had paid for the goods immediately, there would have been no assignment of the debt created by a sale by the purchaser. In addition the clause itself states that the assignment is “by way of security.” This conclusion that the assignment was not an absolute assignment but an assignment by way of security gets support from the decision of the High Court in England in In re Kent and Sussex Sawmills. 11 The debenture given by Interview to Ulster Bank Ltd. was registered and therefore it is irrelevant whether the bank had notice of the terms for deliveries abroad because an unregistered mortgage issued by a company is void against the creditor who registers his mortgage subsequently although he had notice of the unregistered mortgage: see In re Monolithic Building Co. 12 which is a decision of the Court of Appeal in England that is cited with approval in all the text-books on company law. In my opinion, it follows that, as the terms for deliveries abroad were not registered under s. 99 of the Act of1963, they are void against any creditor in so far as they created an obligation to assign or gave a charge on the debts owing to Interview and arising out of sales of goods delivered by AEG or Telefunken.
In paragraph 11 of the applicant’s affidavit the claim of AEG is divided into a number of heads. The amount due on the five promissory notes is a simple contract debt and does not rank before the debenture holder’s claim, nor does the additional loss caused by non-payment of the notes. The unpaid price of goods sold by AEG and invoiced in the first instance to Interview is not, because it is unpaid, a claim ranking before the debenture holder. It is however a claim if it is regarded as being a claim against the proceeds of the sale of goods which were in the possession of Interview when the receiver was appointed. If the receiver sold the goods, then the amount realised by the sale ranks before the claim of the debenture holder. The same considerations apply to the unpaid price of goods sold by AEG and invoiced to IEAC and to the claim by Telefunken.
I think it is now possible to answer the numerous questions raised by the receiver. The answers were not discussed in argument as counsel said that the general principles should be decided first.
In re Daniel Murphy Ltd.
[1964] IR 1
Kenny J. 1
KENNY J. :
15 Dec.
Daniel Murphy, Limited (which I shall call “the Company”), was incorporated in Dublin in 1905. Its objects included powers to carry on the business of wholesale grocers and to borrow monies and to secure their repayment by the issue of debentures charged upon all or any of the assets of the Company. The Company owned the premises, 25 and 26 Mary’s Abbey in Dublin, and on the 2nd May, 1962, the title deeds relating to 26 Mary’s Abbey were deposited with the National Bank Limited (which I shall call “the Bank”) as security for advances to be made to the Company. On the 23rd May, 1957, the title deeds relating to 25 Mary’s Abbey were deposited with the Bank as security, and on the 23rd December, 1960, those relating to the cellars and vaults under 26 Mary’s Abbey were deposited for the same purpose. All these deposits were registered under s. 93 of the Companies (Consolidation) Act, 1908. For many years the Bank had allowed the Company to overdraw its account up to a limit of £10,000. The Company had two current accounts, a no. 1 account and a no. 2 account, with the Bank, but almost all the lodgments made and almost all the cheques drawn by the Company were on the no. 1 account. The repayment by the Company of the monies advanced was secured by the three equitable mortgages which I have mentioned and by personal guarantees given by the three directors of the Company. There were no other mortgages or charges affecting the property of the Company. At all times there were large amounts due to the Company by its customers and the Company usually had a stock-in-trade of grocery goods worth about £15,000.
For some years before 1961 the Company had been losing money in its trading and in April, 1961, Mr. Michael F. Boyne was appointed its general manager. On the 31st May, he wrote to the Bank stating that the business of the Company was extremely sound and asking that the limit of £10,000 on the Bank’s advances to the Company should be raised to £15,000. In this letter he also stated that the stock and debtors of the Company would never fall below a minimum of £30,000. On the 1st June, the Manager of the Westland Row branch of the Bank acknowledged receipt of this letter and stated that he was submitting the application to his Board. On the 7th June, the Manager wrote to the Company; his letter included this paragraph:With regard to the request for a temporary increase up to £15,000 in the overdraft facility of the Company I submitted a copy of your letter of the 31st ult. to my Board who have given careful consideration to the application in the light of the Company’s present circumstances. They are appreciative of the circumstances accounting for the increased facilities required but they have pointed out that the feature of the Company’s advance from the Bank which has always given reason for concern is the weak security position. As you are probably aware, the Bank’s security consists of the simple deposit of the deeds of the premises in Mary’s Abbey and a letter of guarantee for £15,000 from the directors which, however, is unsupported. They have in mind that the balance sheet as at 30th September last showed stock and debtors to a value of £37,800 and they have noted your statement that this total is unlikely ever to fall below £30,000. In these circumstances they would be favourably disposed towards the application but to strengthen the Bank’s security would require a floating charge over the stocks and debtors in addition to the deeds of the premises and properties to be made available in the Bank’s usual form. It would also have to be understood that the limit of £15,000 would be only an occasional facility and that agreed annual reductions in that limit would be effected after say twelve months. The advance would, of course, at all times be subject to usual banking conditions, i.e. it would be repayable on demand.” On the 8th June, Mr. Boyne wrote to the Bank, acknowledging receipt of the letter of the 7th, and stating:I confirm that the Company will give the Bank a floating charge on the lines suggested in your letter and I hope that under these circumstances it may be possible for the Bank to grant the required temporary facilities as soon as possible.”
On the 8th June, the Company’s no. 1 account was overdrawn by £9,759 and there was £15 to the credit of its no. 2 account. The amount of the overdraft began to increase immediately after the 8th June. On the 15th June, it was £12,224; on the 23rd June, £14,245; while on the 30th June it was £13,670. Throughout the month of July the amount overdrawn was always more than £13,000; on the 15th July, it reached £15,138, and on the 21st August, when a resolution for the voluntary winding-up of the Company was passed, it was £14,475.
It is now necessary to give an account of the events between the 8th June when the Company agreed to give a charge on some of its assets and the 2nd August when the deed of charge was executed. The Manager of the Bank forwarded the papers to the Bank’s solicitor who prepared a draft deed of charge, and on the 24th June, 1961, the Manager sent the draft to the secretary of the Company for the approval of its solicitors. Mr. Boyne sent the draft to Mr. Russell Murphy who was acting as the Company’s financial adviser, and on the 30th June Mr. Murphy sent the draft to the Company’s solicitors.
The member of the firm who was dealing with the matter was away when the draft arrived, but another member of the firm returned the draft approved to Mr. Murphy on the 10th July. On the 11th July Mr. Boyne had written to the Bank acknowledging receipt of the draft and stating that this had been sent to the Company’s solicitors. On the 26th July the Company returned the approved draft to the Bank and on the 28th July an engrossment of the charge was sent by the Bank to Mr. Boyne. On the 2nd August the Company executed the charge. The charge contained a recital that the Company had agreed with the Bank to charge by way of first floating security in favour of the Bank all their undertaking and assets both present and future “with the payment to the Bank of all monies due or to become due to the Bank by the Company on any account or accounts between the Company and the Bank” and a clause by which the Company charged “by way of first floating security in favour of the Bank all the Company’s undertaking and assets whatsoever both present and future with payment of all monies hereby secured”. The charge was registered in the Companies Registration Office on the 4th August.
The financial position of the Company got rapidly worse. The amount overdrawn had increased from £9,760 on the 8th June, 1961, to £14,135 on the 2nd August, and to £14,475 on the 21st August. In April some of the creditors had been pressing for payment of their debts but had been persuaded not to take proceedings. At the end of July some creditors threatened to bring actions and on the 28th July the Company called a meeting of its creditors to be held on the 3rd August. At this meeting the representatives of the Company asked the creditors not to take proceedings and gave an undertaking that the Company would be put into liquidation if any creditor sued. Three creditors took proceedings and a meeting of the Company was held on the 21st August, 1961, at which a resolution to wind up was passed. The applicant, who was appointed liquidator, has prepared a Statement of Affairs which shows that the Company was insolvent on the 21st August. I am satisfied that the Company was insolvent at all times during 1961.
Between the 8th June and the 21st August, lodgments amounting to £30,887 were made by the Company to the credit of the no. 1 account, while cheques amounting to £36,003 were debited to that account during the same period. Between the 2nd and the 21st August, lodgments amounting to £4,764 were made to the credit of that account while cheques and other payments amounting to £4,950 were debited to it during the same period. The Bank did not close or rule the no. 1 account on the 8th June or 2nd August or on any day before the 21st August.
Sect. 212 of the Companies (Consolidation) Act, 1908, provides:
“Where a company is being wound up, a floating charge on the undertaking or property of the company created within three months of the commencement of the winding up shall, unless it is proved that the company immediately after the creation of the charge was solvent, be invalid, except to the amount of any cash paid to the company at the time of or subsequently to the creation of, and in consideration for, the charge, together with interest on that amount at the rate of five per cent per annum.”
The liquidator has now brought these proceedings under s. 193 of the Act of 1908 to obtain a decision whether the floating charge created by the Company by the deed of the 2nd August, 1961, is wholly or partially invalid in respect of the debt due by the Company to the Bank. I appointed the liquidator to represent the interests of all the unsecured creditors and I have had the advantage of a full argument.
The correspondence shows that on the 8th June the Company had agreed to give a floating charge on “their stocks and debtors” and I am satisfied that the Bank allowed the Company to increase the amount of its overdraft because this promise to create the charge had been given. The charge was not, however, sealed by the Company until the 2nd August, and the Company went into voluntary liquidation on the 21st August. There was thus an interval of fifty-five days between the date when the Company agreed to give the charge and the date when it was sealed. The preparation, approval, engrossment and execution of a charge require some time: it has to be considered by the board of directors of the company and by their solicitors and accountants, and I do not think that the delay between the agreement to give the charge and its execution was unreasonable or culpable. The explanation given for the Company’s delay in dealing with the charge is convincing and the Bank acted with all possible expedition. The delay was not intended to, and did not, deceive or mislead other creditors. Moreover, it is desirable that lenders should be encouraged to advance money when a promise to create a charge has been given, for that is usually the time when the money is urgently needed. It has been argued that the monies advanced to the Company between the 8th June and the 2nd August were not advanced”at the time of the charge” and that the sum secured by the charge is that advanced after the 2nd August. The Companies (Consolidation) Act, 1908, shows that the words,”at the time of the creation” of the charge, do not mean”at the date of its creation,” for s. 93 (which deals with the registration of charges) provides that a charge of the kind described in that section is to be void unless it is registered within 21 days “after the date of its creation”, while the words in s. 212 are:at the time of or subsequently to the creation of.” It seems to me that monies advanced after an agreement (not registered in the Companies Registration Office) to give a charge but before its execution are advanced at the time of the charge provided that the delay in having the charge completed was not intended to deceive creditors and was not unreasonable or culpable. This view is supported by all the reported cases.
In In re Columbian Fireproofing Co., Limited (1) the company was in need of funds, and on the 25th November, 1909, the directors accepted an offer by one of the board to advance £1,000 upon the security of all the property of the company, and passed a resolution that a debenture to be prepared by the company’s solicitor should be executed at the next meeting of the board. The director, relying on this resolution paid two sums of £350 each to the company on account of the £1,000. At the next meeting of the board on the 8th December the debenture was executed and the director then paid £300, the balance of the £1,000, and registered the debenture on the 23rd December. The company went into liquidation in the following January and the liquidator disputed the validity of the debenture. In the course of his judgment, Neville J. said:It is argued that neither of these sums were [sic]paid ‘at the time of the creation of’ the security or subsequently thereto. The question is, what is the meaning in this section of the words ‘at the time of the creation of the charge’? I think whether any particular payment comes within these words must always be a question of fact depending upon the circumstances of the particular case. The word ‘time’ in this connection must always be to some extent indefinite, for the creation of the security and the payment of the money cannot be simultaneous, and I think that a payment made on account of the consideration for the security, in anticipation of its creation and in reliance on a promise to execute it, although made some days before its execution, is made at the time of its creation within the meaning of the section.”
“Here I think the two payments of £350 were made in reliance solely upon the promise to execute the debenture at the next meeting and on account of the £1,000 which was to be advanced upon it, the payments being made in anticipation of the execution of the debenture to meet the exigencies of the company. I think, therefore, that the whole £1,000 was advanced at the time of the creation of the security. Time in this connection is not, I think, a matter to be decided by the clock, but in accordance with the substance of the transaction and upon the determination of the question of whether the advance was or was not a present advance.”
The liquidator appealed (1) and the judgment of Cozens-Hardy M.R. contains this passage:We are asked to say that these transactions, all of which took place in the interval of time between November 25, when the resolution was passed that Mr. Sankey should have a debenture, and December 6, when he got the debenture, are altogether void as to the earlier advance because the registration, although within twenty-one days from the giving of the debenture, was not within twenty-one days from the date of the first advance. I fail to find anything in the Act of Parliament which can justify such a conclusion. This is simply an ordinary case in which there is an agreement for a mortgage, which takes some time to prepare, and the preparation of which may involve considerations of title and so on, and in a case like this, where the formal instrument is executed within twenty-one days from the date of the prior agreement and where that formal instrument necessarily supersedes and gives the go-by to the prior agreement, I think it would be shocking to hold that the transaction could be impeached on the ground that the security was created at the time when the money was advanced, that is to say, more than twenty-one days before the registration not of the agreement but of the security itself. I think that to lend any countenance to such a suggestion as to the meaning of s. 93 would be disastrous. Then it is said that under s. 212 the security can only be good to the extent of any cash paid to the company ‘at the time or subsequent to the creation’ of the charge. It was conceded by counsel for the appellant that the word ‘at’ does not mean contemporaneously with or immediately in exchange for the security or at the same moment as the security itself is created. It is a question of fact under all the circumstances of the case, Was this sum, paid, as in the present case it is proved to have been paid, a few days before the actual preparation of the debenture which was being prepared in due course by the solicitor, cash paid to the company, within the language of s. 212, at the time of the creation of the security? In my opinion it clearly was”; and Farwell L.J. said:In my opinion it would be disastrous if we were to strain the words of a provision like this in order to invalidatebona fide honest transactions carried out in accordance with the usual course of business. It is plain to my mind that any cash paid to the company ‘at the time’ cannot mean on the stroke of the clock or even within the same twenty-four hours. As Neville J. has justly remarked, it is not a question of the clock; it is a question of what are the circumstances of each particular case and what is the real substance of the transaction.”
In In re Olderfleet Shipbuilding and Engineering Company Limited (1), Powell J. approved of the decision in In re Columbian Fireproofing Company Limited (2). In that case the articles of association of the company provided that the directors should not borrow more than £6,000 without the sanction of a general meeting. The Belfast Banking Company were the company’s bankers and in October, 1920, when they were owed £24,500, they informed the company that they would not honour any further cheques of the company. On the 10th November, 1920, an extraordinary general meeting of the company was held at which a committee was appointed to negotiate a secured overdraft of £50,000 from a bank and at which the limit of £6,000 on the directors’ borrowing powers was removed. Another extraordinary general meeting of the company was held on the 9th December, 1920, at which the members of the committee reported that the Ulster Bank were prepared to advance £50,000 to the company on the security of debentures charged on the property of the company and a deposit of title deeds and the meeting resolved that this offer should be accepted. A meeting of the directors of the company was held immediately after the meeting of 9th December and the Ulster Bank were appointed to be the company’s bankers. Another meeting of the directors of the company was held on the 14th January, 1921, at which it was resolved to issue 60 debentures of £1,000 each charged upon all the property of the company and on the 26th January these debentures were issued and on the 18th February were registered. On the 9th December, 1920, the Ulster Bank began to advance monies to the company and on 31st December, 1920, the total amounts so advanced were £49,641. A resolution to wind up the company was passed on the 23rd February, 1921. It will be seen that there was an interval of 48 days between the date when the directors resolved to issue the debentures and the date when they were issued. Mr. Justice Powell decided that the amounts advanced by the bank between the 9th December, 1920, and the 12th February, 1921 (when a receiver was appointed by the bank), were cash paid to the company at the time of the creation of the charge.
In In re F. and E. Stanton, Ltd. (1) Maugham J. (as he then was) had to consider the effect of a delay of 54 days between the date of the first advance and the execution of the debentures and he held that the monies advanced on the promise to give the charge were advanced at the time of the charge. He referred to In re Columbian Fireproofing Co., Ltd. (2), and said:I have not a doubt here, as I have already said, that the payments were made on account of the consideration and in anticipation of its creation and in reliance on a promise to execute, and the real difficulty is whether the lapse of time which took place between that promise and between the payments made on reliance on that promise and the actual date of the issue of the debentures is so long that I ought to hold that the exception in the section does not apply. In that matter I have two other cases which seem to help me to some extent. One is an Irish case of In re Olderfleet Shipbuilding Co. (3) and the other is an unreported case of In re Nathan, Hope and Son, Ltd. , where the judgment of Romer J. was delivered on June 5, 1924. I have had the advantage of reading a shorthand note of the judgment in that case. In both of those cases there was a substantial delay between the dates of the payment in reliance on the promise to issue debentures and the date upon which the debentures were secured, and, in fact, in the case before Romer J., there was a delay of not less than sixty-seven days after the first advance and fifteen days after the last advance, before the issue of the debentures. In the present case, the delay is serious, but not so serious as that. There were fifty-four days after the first advance and five days after the last advance before the issue of the debentures.”
“Now I am myself strongly of opinion that the exception in s. 212 in regard to cash advances at the time will not avail the debenture holder if the delay in the issue of the debenture is one which he has himself procured or suggested, or if the delay is one in which he has in any true sense acquiesced. I am not thinking of a delay such as would ordinarily be necessary for the passing of the resolution and the consideration of the form of the debenture and its actual execution, because the four or five days necessary in most cases to do those things is clearly not a delay which, according to the authority of the first case I have mentioned, the Columbian Fireproofing Case (4) would be sufficient to invalidate the debentures if the cash had been or was being paid. But I think a delay greater than that requires explanation. . . . The question is, as the Master of the Rolls has said in the Columbian Fireproofing Case (1), a question of fact, and I come to the conclusion as a fact that the sums in question were paid within the true meaning of s. 212 at the time of the creation of the charge and in consideration for the charge.”
In this case the Bank did not suggest or acquiesce in the delay in giving the charge: they acted with all possible expedition. A satisfactory explanation for the delay has been given and I am of opinion that the sums advanced by the Bank from the 9th June until the Company went into liquidation were paid to the Company at the time of or subsequently to the creation of the charge.
The next argument was that the amount secured by the charge was not £14,860 and interest but that sum less £9,760, the amount due to the Bank on the 8th June, 1961, and I was invited to look at the substance and reality of the transaction. It was said that the purpose of the charge was to enable the Company to get more accommodation than they had already, and that the substance of the transaction was that the increased accommodation only was secured by the charge. For the Bank it was said that the rule in Clayton’s Case (2)applied so that payments made to the credit of the no. 1 account after the 8th June must be regarded as having been first appropriated to discharge the liability of £9,759 due on that date. If the rule in Clayton’s Case (2) applies, the effect would be that the entire sum of £14,860 due on the 21st August, 1961, would have been advanced after the 9th June, 1961. It is not necessary for me to deal with the many authorities in which the rule in Clayton’s Case (2) has been discussed; it is sufficient to refer to a passage in the speech of the Earl of Selborne L.C. in In re Sherry . London and County Banking Co. v. Terry (3):The principle of Clayton’s Case (2) and of the other cases which deal with the same subject, is this, that where a creditor having a right to appropriate monies paid to him generally, and not specifically appropriated by the person paying them, carries them into a particular account kept in his books, he prima facie appropriates them to that account, and the effect of that is, that the payments are de facto appropriated according to the priority in order of the entries on the one side and on the other of that account.”
“It is, of course, absolutely necessary for the application of those authorities that there should be one unbroken account and entries made in that account by the person having a right to appropriate the payment to that account; and the way to avoid the application of Clayton’s Case (1),where there is no other principle in question, is to break the account and open a new and distinct account. When that is done, and the payment is entered to that new and distinct account, whatever other rule may govern the case, it certainly is not the rule of Clayton’s Case (1) or of Bodenham v. Purchase (2) and other authorities of that class.”
The only authority on the application of the rule in Clayton’s Case (1) to monies advanced by a bank to a customer who has given a charge to the bank when there was at the date when the charge was given sums due by that customer to the bank is Re Thomas Mortimer Limited, reported only in volume 4 of the series of reports called Legal Decisions Affecting Bankers, and in 46 Journal of the Institute of Bankers. In that case, the company owed their bankers £58,180 at the date when the floating charge was given: subsequently lodgments amounting to £41,311 were made to the credit of the account. In that case, as in this, the liquidator contended that the amount secured by the charge was the difference between the amount due at the date of the commencement of the winding-up and the amount due at the date when the floating charge was granted, while the bank contended that the lodgments made to the credit of the account after the charge was given should, on the authority of Clayton’s Case (1) be regarded as having partly discharged the amount due at the date of the floating charge. Romer J. held that the rule in Clayton’s Case (1) applied and in the course of his judgment said:Now I come to the last point of all; that is, as to whether this cash which was paid to the company by the bank to the amount of £51,000 has ever been repaid by the company to the bank. It is said that it has to the extent of £41,311 because admittedly the company has paid to the bank by way of cheques, and perhaps of cash, and so forth, that sum of money after the date of the debenture. Now if nothing else had been owing by the company but the sums from time to time advanced and paid by the bank on behalf of the company in cash after the date of the debenture, then, of course, this £41,000 would have been applied in reduction of that amount and as repayment of that amount, but this seems to me a case of payment by a debtor to his creditor to whom either two debts are owing or to whom one debt is owing, part of which is secured and part of which is unsecured. Now that being so, as I understand the general law, it is open to the creditor to appropriate the payment made by his debtor to any part of the debt he likes, or to whichever of two debts, if there were two debts, that he prefers, if the debtor himself in making the payment has not directed an appropriation; furthermore, as I understand the law, in cases between bankers and customers, or where there is a current account between parties into which monies are from time to time paid, and from which monies are from time to time withdrawn, in the absence of any express appropriation the creditor is presumed to appropriate payments into the accounts made by his customer in discharge of the earliest entries on the other side of the account . . . In this case, applying that rule, the £41,000 paid in by the company to the bank after the date when the debenture was issued, must be deemed to have been appropriated by the bank in discharge of the debt of £58,180 which was owing to them before ever they began to make the cash advances which ultimately totalled the sum of £51,000. Now I can see nothing in s. 212 of the Companies (Consolidation) Act, 1908, which prevents operation being given in that way to the general power of appropriation by a creditor. I can well see, as is pointed out by Mr. Roope Reeve, in his argument, that it may be, in the hands of dishonest people, a means of escaping from the provisions of s. 212. Mr. Roope Reeve said that a creditor of a company, knowing that a company was shortly going into liquidation, might arrange with the company that he will advance to the company the amount of his own debt, and the company might then apply that in paying off his debt and give him a debenture for the present advance; that debenture would be a floating charge and would be said by him to be a good and valid security notwithstanding s. 212. All I can say is that in that case, and any other case where the parties are not honest, the Court can always look into the real transaction and see whether in substance there was or was not a payment in cash; and in the case which Mr. Roope Reeve put to me, no Court would hesitate to come to the conclusion that there was not any payment in cash and there was never intended to be any payment in cash . . . For these reasons I come to the conclusion that the £51,000 paid out by the bank to the creditors of the company in honouring the cheques of the company drawn on the bank were payments in cash made since the date the debenture was issued and in consideration of the charge and that no part of that £51,000 had been by the date of the liquidation, or any other time, repaid to the bank.”
In this case the Company’s no. 1 account with the Bank was not ruled or closed when the promise to give the charge had been made or when the floating charge was executed, and I do not see any reason why the rule in Clayton’s Case (1)should not apply. If it does, the monies due to the Bank by the Company on the 8th June must be regarded as having been discharged by the monies subsequently lodged and the total sum due on the 21st August is now due to the Bank on the security of the floating charge.
I gave judgment in this case immediately after the arguments had concluded as I was informed that the matter was urgent. Some time afterwards, the decision of Plowman J. in Re Yeovil Glove Co., Ltd. (2) was reported. In that case Plowman J. had to consider circumstances similar to those in this case, and in particular, the application of the rule in Clayton’s Case (1) when at the date of a charge there is a sum due by a customer of a bank to which the charge had been given. I am glad that the conclusion which I reached was the same as that of Plowman J. in the case before him.
The next argument was that the entire sum of £14,475, the amount due to the Bank on the day when the Company passed a resolution to wind up, had not been advanced in consideration of the charge and, again, I was invited to look at the substance of the transaction. The reality of the position, it was said, was that the charge was given to secure advances in excess of £9,759, the amount due when the Company agreed to give the charge, and, therefore, the amount advanced in consideration for the charge was, it was said, the difference between £14,475 and £9,759. There is no reported case on the meaning of “in consideration for the charge” in s. 212. The section gives priority to cash advanced after a promise to grant a charge or after a charge has been given if the cash was advanced “in consideration for the charge.” If the word, “consideration,” in the section be given the meaning which it has in the law of contract, the charge, having already been given and being therefore past consideration, could not be consideration for cash advanced after the charge had been promised or given. This would lead to the conclusion that cash advanced after a charge had been promised or given could never have priority if the company went into liquidation within three months after the advance. But this is absurd for s. 212 contemplates that sums of cash will get priority if that happens. It follows, I think, that the word, “consideration,” in s. 212 cannot be given the meaning which it has in the law of contract. The only possible solution is that s. 212 makes the past consideration the giving of the chargeeffective consideration for cash subsequently advanced in reliance on it and I think that this is what is meant by the words, “in consideration for the charge,” in the section.
[s the rule in Clayton’s Case (1) applies to the no. 1 account, the entire sum of £14,475 was advanced after the 8th June and I have no doubt that it was advanced in reliance on and is secured by the charge.
It was also argued that the Bank could not claim priority if they relied on the promise made on the 8th June to give a charge because the documents constituting the promise had not been registered within twenty-one days aftethe promise was given. This argument is disposed of by the passage in the judgment of Cozens-Hardy M.R. in In re Columbian Fireproofing Co., Ltd. (2) which I have quoted.
During the argument the decision of the Court of Appeal in Northern Ireland in Revere Trust Ltd. v. Wellington Handkerchief Works Ltd. (3) was cited. The reasoning of the Judges in that case and of O’Connor M.R. in In re M’Cleave & Co., Ltd. (4) cannot be reconciled with that in the judgments of the English Court of Appeal in In re Matthew Ellis, Ltd. (5).These dealt with the meaning of “cash paid” in s. 212: it is not necessary in this case to express any opinion on the correctness of any of these decisions.
It was not argued that the floating charge or any payments made by the Company to the Bank were a fraudulent preference. There is, however, in the endorsement on the summons a request for directions as to whether the floating charge and the payments made by the Company to the Bank were a fraudulent preference of the Bank. In my opinion, they were not.
I shall answer the other questions by declaring that the sum of £14,860 with interest thereon at five per cent from the 21st August, 1961, is secured by the floating charge of the 2nd August, 1961
In re Egan Electric Co. Ltd. (In Liq.)
[1987] IR 398
Costello J. 398
H.C.
Costello J.
27th January 1987
Egan Electric Company Ltd. was hopelessly insolvent when on the 2nd November, 1982, it was resolved that it be wound up. Mr. Kevin Daly the applicant herein was appointed its liquidator. The only fixed asset of the company was an office and factory premises at 99 O’Connell Street, Limerick, but this was subject to a fixed charge in favour of Allied Irish Banks under a debenture of the 25th September, 1974, and at the date of the winding-up the company owed the bank about £175,000. A sale of the premises proved difficult and the liquidator entered into a sub-letting agreement from the 10th November, 1982, to the 10th September, 1984, which produced a net rental of £11,000. It is this sum that is the subject matter of a dispute leading to the present application.
The liquidator entered into a contract for the sale of the premises on the 16th September, 1983, for £65,000, subject to the approval of the Court. He applied for approval, serving notice of the application on the bank. The bank accepted as reasonable the price agreed and by order of the 9th April, 1984, the sale was approved. It was completed on the 14th September and produced a net balance (to which, of course, the bank was entitled) of £58,071.54.
In addition to this sum the bank claims that it is entitled to the post-liquidation net rental income of £11,000 received by the liquidator. It asserts (a) that had it appointed a receiver and manager after the winding-up (as it was entitled to do under its debenture) it could have claimed in the winding-up for the interest due on its debenture since the date of winding-up and have set off this rental against such a claim and (b) that the liquidator, when letting the premises was acting on behalf of the bank and was, in effect, its receiver and manager so that it is now entitled to claim the rental income and set it off against its claim for post-liquidation interest.
It has long been established that in the case of an insolvent company which is being wound up creditors whose debts carry interest are entitled to dividends only upon what was due for principal and interest at the commencement of winding-up and interest ceases to run from that date ( In re Humber Ironworks and Shipbuilders Company (1868) 4 L.R. Ch. App. 643). But the bank relies on the later case of In re London Windsor and Greenwich Hotels Ltd. [1892] 1 Ch. 639. In that case a mortgagee had appointed a receiver and manager over the business of an insolvent companywho successfully carried it on for a while. He later sold the property and claimed to be entitled to prove in the winding-up for the balance of the sums due to him. It was held (i) that the proceeds of sale could not be applied to payment of interest which had accrued after the commencement of the winding-up but (ii) that the mortgagee was entitled to set-off the profits which had been realised from carrying on the company’s business against such interest.
Stirling J. obviously felt that there was an inconsistency between the principle that post-liquidation interest on a creditor’s debt is not payable and a decision which would allow a creditor to set-off post-liquidation income earned by a receiver against such interest, but he felt constrained by authority so to hold (see p. 149 of the London Hotels Case [1892] 1 Ch. 639). I share his doubts but I do not have to decide the point now as the mortgagee in the London Hotels Case had appointed a receiver who had actually carried on the mortgagor’s business whilst here the debenture holder did not do so. Nor did it enter into possession of the mortgaged premises. Whilst there may have been discussions between the bank and the liquidator about what was to be done with the premises and whilst undoubtedly at a later date the liquidator was under the impression that the bank was entitled to at least some portion of the rental income, the bank did not exercise its powers under the debenture and the liquidator retained possession of the premises. He cannot, in my view, be regarded as a receiver or manager acting on behalf of the bank when he made the sub-letting. He must administer the assets in accordance with law, and it seems to me that he received the rental income on behalf of the general body of creditors, and not on behalf of the debenture holder. The £11,000 does not therefore constitute income in the hands of the bank which it is entitled to set off against the interest arising on its debt since the date of liquidation.
I propose to answer the questions raised in the summons by answering (1) and (2) in the negative. If required I will make an order under (4) directing the bank to execute the deed of release referred to in this paragraph.
Re David Wright & Co., Ltd.
High Court of Justice.
Chancery Division.
8 May 1905
[1905] 39 I.L.T.R 204
Sir A. M. Porter, Bart M.R.
Sir A. M. Porter, Bart. M.R.
I have not been referred to any Act that requires that a company shall have a secretary. It is assumed in many Acts that there is a secretary, and directors are required, but there is no similar provision as to a secretary. Reading Article 95, in the case of a small company, the directors might appoint one of themselves. David Wright says that he acted in the dual capacity as director and secretary. The real difficulty is that instead of three persons only two signed. I leave out of consideration the argument that, though not correct, the debentures would give a valid equitable discharge. But, apart from that question, I am of opinion that these debentures are legal and right; that is, they are legal and valid so far as the circumstances permitted. There is no clause in the articles that the person acting as secretary shall be different from the directors. Alfred and David Wright constituted the board, and, being a competent board, were authorised to use the seal. It was impossible to get any other person to sign as secretary, if there was at the time no person acting as secretary, other than David Wright. I hold that the impeached debentures were executed within the powers of the company, and are valid. It is to be regretted that, when the Bank of Ireland debentures were re-executed, the impeached debentures were not dealt with in the same way. All parties must have their costs in the matter.
Highland Finance (Ireland) Ltd formerly Barclays Mercantile Highland Finance (Ireland) Ltd formerly
Highland Leasing (Ireland) Ltd v Sacred Heart College of Agriculture Ltd (in receivership),
Edward McEllin and the Governor and Company of the Bank of Ireland
1992 No. 283
Supreme Court
27 November 1996
[1997] 2 I.L.R.M. 87
(Nem. Diss.) (Blayney, Denham and Barrington JJ)
ant
BLAYNEY J
(Denham and Barrington JJ concurring) delivered his judgment on 27 November 1996 saying: By an indenture dated 15 November 1984 the first named defendant/respondent Sacred Heart College of Agriculture Ltd (hereinafter referred to as ‘the college’) charged in favour of the third named defendant/respondent, the Governor and Company of the Bank of Ireland (hereinafter called ‘the bank’) all its undertaking, property and assets present and future with the payment of all monies thereby secured and gave the bank power to appoint a receiver and manager of the property and assets thereby charged in any of the events therein specified.
On 2 October 1990 the bank appointed the second named defendant/respondent Edward McEllin (hereinafter called ‘the receiver’) to be the receiver and manager of the property and assets charged by the debenture.
In April 1988 the college bought from the North Connaught Farmers Co-Operative Society (hereinafter called the co-operative) a milk quota of 30,000 gallons for the sum of £30,000, and in September 1988 the college bought from the co-operative another milk quota of 28,731 gallons for the sum of £28,731. In the case of each purchase the entire amount of the purchase money was advanced to the college by the plaintiff/appellant Highland Finance Ireland Ltd (hereinafter called ‘Highland’).
Since the commencement of the receivership both milk quotas have been sold by the receiver and the proceeds lodged on deposit to await the outcome of these proceedings.
Highland’s claim in these proceedings is that it has a charge on the proceeds of the sale of the quotas which is entitled to priority over the bank’s debenture. The basis of its claim is that by reason of having advanced to the college the entire amount of the purchase money for the acquisition of the milk quotas it is entitled by subrogation to the vendor’s lien which it says the co-operative would have had prior to the sale of the quotas being completed.
Murphy J dismissed Highland’s claim ([1993] ILRM 260). He held that the terms of the loan made by Highland to the college were inconsistent with Highland becoming entitled by subrogation to the co-operative’s vendor’s lien. Highland now appeals against that decision.
The notice of appeal contains three grounds but in reality the first ground is the sole ground relied on and is as follows:
1. That the learned trial judge erred in holding that the provisions for the *91 repayment of the debt and interest over a lengthy period by a party who would or should have in his hands monies of the borrower derived from the property acquired with the loan was inconsistent with the security which could have been realised forthwith and that accordingly there was an inference that this transaction did not intend the preservation of the vendor’s lien.
The bank did not file any cross-appeal. There is no issue, accordingly, as to whether the co-operative had a vendor’s lien on the milk quotas or as to whether prima facie Highland became entitled to such lien by subrogation. The sole issue on the appeal is whether the learned trial judge was correct in deciding that Highland’s prima facie right to be subrogated to the co-operative’s vendor’s lien was nullified by reason of the repayment terms of Highland’s loan being inconsistent with the terms for the payment to the co-operative of the purchase price. But, while this was the sole issue, it requires an examination of all the authorities with a view to ascertaining the principles on which equity will permit subrogation to a vendor’s lien to take place.
The case is unusual in that no evidence was given in the High Court. No witness was called; no affidavits were filed. All that the learned trial judge had before him was the pleadings; the debenture of 15 November 1984; the deed of appointment of the receiver, and the two forms of application by the college to Highland for the respective advances of £30,000 and £28,731. The learned trial judge said in his judgment that it was not necessary to call oral evidence: that the material facts appeared from the admitted documents. He noted that it was not disputed that the purchase price was payable and was paid by the college to the co-operative.
As the ground on which the learned trial judge decided against Highland was the nature of the relevant provisions of the loans made by Highland to the college, it is necessary to set out these in detail. I start with the loan of £30,000, the form of application for which is dated 18 April 1988. The form is headed ‘Application for loan for milk quota purchase’. The loan required is stated to be £30,000, the interest £14,100, and the total debt £44,100. It is provided that the total debt shall be repaid by five monthly payments of £1,260 from May to September each year for seven years. There is then an irrevocable authority from the college to the co-operative to deduct from the college’s milk account, or from any other accounts of the college with the co-operative, the relevant five monthly payments of £1,260 for seven years. Finally, one of the conditions of loan printed on the back of the application form is that ‘the borrower shall only use the loan for the purpose specified overleaf’.
The application for the loan of £28,371 was in similar form except for the following differences: the interest was £13,503.57 and the total debt £42,234.57. It was repayable by three instalments in 1988 and thereafter by five monthly instalments of £1,206.70 from May to September each year for six years.
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The performance and observance by the college of the terms and provisions of both loan agreements was guaranteed by Balla Co-Operative Mart but it turned out subsequently that the execution of the guarantees by the mart was invalid. Neither party submitted that the failure of the guarantees had any relevance to the issue to be determined on this appeal.
It is clear from the terms on which the loans were made by Highland to the college that the latter was bound to use them for the purchase of the milk quotas. The learned trial judge held, following the decision of McMahon J in Bank of Ireland Finance Ltd v. Daly [1978] IR 79 that the principle of law applicable was the following:
Prima facie a lender who advances money for the express purpose of those monies being applied in payment of the purchase price of property is entitled to the lien to which the vendor would have been entitled if the purchase price or the balance thereof had not been paid unless there is a bargain between the lender and the borrower which is inconsistent with an intention of the parties that the lender should acquire that right.
The learned trial judge then went on to consider whether the arrangement for the repayment of the loans was inconsistent with the parties having intended that the college should be subrogated to the co-operative’s vendor’s lien and he held that it was. He held that the appropriate inference was that the parties did not intend the preservation of a vendor’s lien and on that ground he dismissed Highland’s claim.
The Court had the benefit of very full written and oral submissions from counsel for Highland and counsel for the bank. It would be impossible to set these out in full. What follows is a summary of the principal aspects on which they relied.
On behalf of Highland Mr Finnegan SC, adopted as correct the statement of law which I cited earlier from the judgment of the learned trial judge. He submitted that where money was advanced for the purpose of purchasing property the lender was subrogated to the vendor’s lien unless there was some circumstance which excluded this happening. He said that the learned trial judge was wrong in following the reasoning of Lord Salmon in his opinion in the case of Orakpo v. Manson Investments Ltd [1977] 3 All ER 1 and in taking the view that the difference between the terms of payment for the milk quotas and the terms of repayment of Highland’s loan excluded Highland from being subrogated to the co-operative’s vendor’s lien.
Mr Finnegan relied on the decision of the High Court in England in Boodle, Hatfield & Co. v. British Films Ltd [1986] PCC 176 where a firm of solicitors who had paid by bank draft part of the purchase price of a property being bought by a client was held entitled to the vendor’s lien on the property when the client’s cheque, reimbursing the firm, was dishonoured. The principle on which the case *93 was decided was that in the particular circumstances the plaintiffs were entitled to be subrogated to the vendor’s lien unless there were circumstances which would exclude this happening and it was held that there were none such.
Mr Finnegan further submitted that the college never became entitled to an unencumbered asset: the milk quotas were at all times subject to the vendor’s lien to which Highland had become subrogated.
Finally, Mr Finnegan submitted that a vendor has two separate rights, a right in personam for the purchase money, and a right in rem, being the unpaid vendor’s lien to secure the purchase money. The subrogated lender does not acquire the right in personam but only the right in rem, and accordingly, it was immaterial that there should be any difference between the terms on which the purchase price was due to the vendor and the terms on which the purchasers borrowed the purchase money from the lender.
On behalf of the bank Mr McDowell SC accepted that it is possible for a vendor’s lien to exist on a chose in action , such as the right to a milk quota, but he submitted that in the present case the money advanced by Highland was an ordinary commercial loan in respect of which Highland sought no security on the asset itself. Furthermore, because of the debenture, it could not have obtained any security on the quotas without the consent of the bank. Highland’s claim was a flagrant attempt by an unsecured creditor to walk to the top of the queue simply by reason of the fact that it could identify the asset which was purchased with its loan.
Mr McDowell submitted that the case was very different from Bank of Ireland Finance Ltd v. Daly, which was concerned with the sale of land, and where it was clear on the facts that it was at all times agreed that the bank would have security on the land for its advance.
He submitted further that the doctrine of subrogation was an equitable remedy to prevent unjust enrichment. Mr Finnegan claimed that the bank would be unjustly enriched if Highland was held not to be entitled to a lien on the milk quotas, but it was in fact irrelevant that the bank was a party to the proceedings. Highland’s claim was really against the unsecured creditors claiming priority over them.
Mr McDowell also relied on the case of Paul v. Speirway Ltd [1976] 2 All ER 587 and in particular on the following passage in the judgment of Oliver J at p. 598 where he says:
It seems to me, where a court, on a review of the facts, comes to the conclusion that what was intended between the parties was really an unsecured borrowing, there is no room for the doctrine of subrogation.
He submitted that this was the conclusion to which the court should come on the facts of the instant case.
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The law
Where a party advances money for the express purpose of the purchase of property, it is well-settled that prima facie he is entitled by subrogation to the unpaid vendor’s lien on the property for the amount of the advance. Nottingham Permanent Building Society v. Thurstan [1903] AC 6: Bank of Ireland Finance Ltd v. Daly [1978] IR 79: Boodle, Hatfield & Co. v. British Films Ltd [1986] PCC 176.
This right is an instance of a general right which exists in equity where money is advanced for the purposes of paying off an encumbrance. It was expressed as follows by Lord Jenkins in the decision of the Privy Council in Ghana Commercial Bank v. Chandiram [1960] 2 All ER 865 at p. 871:
It is not open to doubt that, where a third party pays off a mortgage, he is presumed, unless the contrary appears, to intend that the mortgage shall be kept alive for his own benefit.
But while it is clear that prima facie the doctrine of subrogation applies in favour of a lender who advances money for the purchase of property, it is equally clear that there may be circumstances which preclude or prevent the application of the doctrine. In Burston Finance Ltd v. Speirway Ltd [1974] 3 All ER 735 and Paul v. Speirway Ltd [1976] 2 All ER 587 it was held that there were such circumstances and accordingly in neither case was the lender entitled to have the doctrine applied in his favour.
The circumstances which preclude or prevent the application of the doctrine have been expressed in a number of different ways in the authorities. In the House of Lords case, Orakpo v. Manson Investments Lord Diplock said in his speech at p. 7:
The mere fact that money lent has been expended on discharging a secured liability of the borrower does not give rise to any implication of subrogation unless the contract under which the money was borrowed provides that the money is to be applied for this purpose: Wylie v. Carlyon [1922] 1 Ch 51. Furthermore, even where the contract does so provide, the implication may be displaced by the presence in the contract of express terms which are inconsistent with the acquisition or retention by the lender of a right of subrogation.
In Bank of Ireland Finance Ltd v. Daly McMahon J cited this passage in his judgment and then went on to say at p. 83:
In my opinion the bank’s claim to subrogation after completion of the sale depends on whether the express term of the contract of loan (that the title deeds were to be deposited with the bank on completion of the sale) is inconsistent with the retention of a right of subrogation by the bank after completion. The security by subrogation is not inconsistent with the security by deposit of title *95 deeds. Each is an equitable security of the same rank, but the deposit of title deeds, if implemented, would enable the bank to impede or prevent any dealing with the legal estate in the property without the bank’s consent. I think that the security by deposit of title deeds can be regarded as a security which is additional to the security by subrogation rather than as a substitute for it.
For these reasons I have come to the conclusion that the right of subrogation after completion of the sale was not excluded by the agreement for a deposit of the title deeds.
In Paul v. Speirway Ltd Oliver J expressed the relevant test in somewhat wider terms. He said in his judgment at p. 597:
I think respectfully that the wide general formulation in Coote and in the Ghana case is the right one, and that where the given circumstances exist subrogation applies unless the contrary appears. The real divergence here, as it seems to me, is on the strength of the evidence which is required to demonstrate a contrary intention. It is always dangerous to try to lay down general principles unnecessarily, but it does seem to me to be safe to say that where on all the facts the court is satisfied that the true nature of the transaction between the payer of the money and the person at whose instigation it is paid is simply the creation of an unsecured loan, this in itself will be sufficient to dispose of any question of subrogation.
And at p. 598 he reiterated this in more succinct form:
As it seems to me, where a court, on a review of the facts, comes to the conclusion that what was intended between the parties was really unsecured borrowing, there is no room for the doctrine of subrogation.
In his speech in the Orakpo case, Lord Salmon also adopted a very broad test. He said in his speech at p. 12:
The test whether the courts will apply the doctrine of subrogation is entirely empirical. It is I think impossible to formulate any narrower principle than that the doctrine will be applied only where reason and justice demand that it should be.
Finally, in Boodle, Hatfield & Co. v. British Films Ltd, Nicholls J, having cited the relevant parts of the speeches of the Law Lords in the Orakpo case, drew the following conclusions from them (at p. 182):
From these speeches three guidelines relevant to the present case can be drawn with regard to subrogation arising from a lender paying part of the purchase price at the request of the purchaser. First, one of the ways (because I do not think that Lord Diplock meant that this was the only way) in which the *96 implication of subrogation to the existing security rights of the vendor may be displaced is by the express terms in the contract made between the lender and the borrower being inconsistent with the acquisition by the lender of the security rights. Secondly, the failure of the lender and the borrower to address themselves to the question of whether the lender will acquire the security rights of the vendor will not of itself negative the application of the doctrine of subrogation. A lender who advances money to enable a borrower to complete and who stipulates for a legal charge to be given when his loan is made is unlikely to consider what his security position will be if the legal charge produced is invalid; that is, whether in that event he will acquire a lien by subrogation. But the view of both Lord Diplock and Lord Keith was that such a lender may acquire the pre-existing security rights by subrogation. Thirdly, and of overriding importance, the equitable doctrine of subrogation will not be applied when its application would produce an unjust result. One of the circumstances in which subrogation may lead to an unjust result is if, without the implication of subrogation, the lender obtained all that he bargained for.
I would adopt the statements of principle in the cases I have cited as indicating the manner in which this Court should approach the issue in this appeal, and in the light of such principles I now go on to consider the facts.
It seems to me that the first matter to be taken into account is that the terms of the loan being made by Highland did not make any provision for Highland having any security on the milk quotas themselves. The application forms signed by the college, which contain all the terms of the contract, contain no reference to any such security. The clear inference is, accordingly, that it was not the intention of the parties that Highland should have a charge on the quotas themselves. This does not necessarily exclude the possibility of the doctrine of subrogation being applied, but it is a relevant factor in considering whether ‘a contrary intention appears’.
The next consideration is that Highland stipulated in the contract that the college should give the co-operative an irrevocable authority to deduct from its milk account and pay over to Highland the monthly instalments due each year during the term of the agreements. While this was not an actual security, it had an equivalent effect, and the fact that it was part of the agreement for the loan is an indication that it was not the intention of the parties that there should be any security on the actual milk quotas themselves. A further indication is that the loan application forms included an ‘indemnity and guarantee by limited company’ addressed to Highland whereby Balla Co-Operative Mart, in consideration of Highland entering into or having entered into the loan agreements, covenanted and undertook with Highland to keep it indemnified against all losses of every kind which it might sustain by reason of the failure of the college to perform and observe the terms and provisions of the loan agreements. Earlier in this judgment I referred to the fact that, by reason of some irregularity in the *97 execution of these guarantees, they turned out to be invalid, and that neither party had made any submission in regard to them. It seems to me, however, that the fact that Highland had stipulated for a security in this form is another indication that it was not its intention to look for any other security.
A further factor is that the amount due by the college to Highland under the loan agreements was different from the amount due by the college to the co-operative. Under the loan agreements, the amount due for interest over the seven year term of the loans was immediately added to the amounts actually advanced, and the aggregate is referred to in the application forms as ‘the total debt’, and it was this amount which became immediately due by the college, to be paid by the instalments stipulated. So, if Highland were subrogated to the co-operative’s vendor’s lien, it would be in respect of the capital amounts advanced, and not in respect of the ‘total debts’ which became due on the signing of the application forms. Highland could not be subrogated in respect of the total debts since these were never due by the college to the co-operative.
Apart from this, there is the fact which weighed with the learned trial judge, namely, that if Highland were subrogated to the co-operative’s unpaid vendor’s lien, it would become entitled to immediate repayment of its loans which would be wholly inconsistent with its right under the loan agreements which was to be repaid the capital and interest by instalments over seven years. Finally, I consider that the court has to take into account that what was being sold was two milk quotas and not immovable property. It is normal in the case of the latter that a person who advances money for its purchase should have security on the property for the repayment of the advance. In the absence of any evidence, and the case was tried without any evidence, I do not think that the same could be said in regard to the purchase of a chose in action. It seems to me that this is also relevant in considering the party’s intention.
In my opinion, irrespective of which test one applies to the facts, the conclusion is the same. It is not a case in which the doctrine of subrogation should be applied. I would start by endorsing the ground on which the learned trial judge decided the case. He expressed it as follows:
It may be that where a loan is advanced by way of bridging finance or where the loan is made by bankers on terms that it is repayable on demand that one would not necessarily conclude that the bargain between the lender and the borrower is inconsistent with the right of subrogation but in the present case it seems to me that the unique and complex provisions for the repayment of the debt plus interest over a lengthy period by a third party who will or should have in his hands monies of the borrower derived indeed from the very property which was acquired with the loan that this arrangement in any event is inconsistent with a security which could have been realised forthwith. Accordingly, the appropriate inference is that the parties did not intend the preservation of the vendor’s lien.
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I am also satisfied that in this case a clear contrary intention appears. It is to be inferred from the special arrangements incorporated in the contract for the payment of the instalments by the co-operative out of the college’s milk account in pursuance of an irrevocable authority. This was how Highland intended that it should be paid and it was inconsistent with it having a lien on the milk quotas limited to the actual amount of its advances.
I am also of the opinion that on the facts the only conclusion open is that this was intended to be an unsecured borrowing, that is to say, a borrowing which was not secured on the quotas themselves. Apart from the fact that there was nothing to suggest that the question of Highland having security on the quotas ever entered the mind of either party, it is clear that Highland were satisfied with the standard requirement in the application form that the instalments would be paid by the co-operative out of the college’s milk account.
Finally, to apply Lord Salmon’s test, I consider that justice and reason do not require that the doctrine of subrogation should be applied in this case. Highland did not seek any security on the quotas in its arrangement with the college, so there is no injustice in it not having any. If it had made a search against the college when it made the loans to it, it would have ascertained that the bank had a floating security on the entire undertaking of the college, and accordingly, that the quotas would become subject to this floating charge unless it got a fixed charge which would take priority to it. Mr McDowell submitted that any such charge would have required the bank’s consent. I do not think it would since a company is free to deal with its assets which are subject to a floating charge until the charge becomes fixed. Highland could, accordingly, have sought to have a security on the quotas. As it did not do so, justice does not require that equity should now give them a charge.
It seems to me that the concluding words in the judgment of Oliver J in Paul v. Speirway Ltd apply equally to this case: he said at p. 599:
And so here, too, as it seems to me, if I am right in the inference which I draw from the facts before me, the plaintiff obtained all that he bargained for and it would not, I think, be equitable that he should now assert some further right for which he did not bargain.
For these reasons I would affirm the decision of the learned trial judge and dismiss this appeal.
RM Hotels Ltd & ors & Companies Acts: Hughes & anor -v- Moran & anor
[2013] IEHC 521 (19 November 2013)
Judgment of Ms. Justice Laffoy delivered on 19th day of November, 2013.
The application
1. This application brought by the applicants (the Receivers) as receivers of the companies named in the title hereof (the Companies) under s. 316 of the Companies Act 1963 (the Act of 1963) against the respondents, who are the directors of the Companies, was heard following the hearing of an application by the first named respondent (Mr. Moran) against the Receivers (Record No. 2012/204 COS). The judgment on that application (the earlier judgment) delivered immediately before this judgment gives context to this judgment.
2. This application was initiated by the Receivers by an originating notice of motion dated 30th October, 2012 in which they sought the directions of the Court pursuant to s. 316 of the Act of 1963 (as amended) compelling the respondents to deliver to the Receivers “the books and records” of each of the Companies. The application was grounded on the affidavit of the second named applicant (Mr. Charleton) sworn on 26th October, 2012. The basis on which the Receivers’ entitlement to the books and records in issue was asserted in that affidavit was that they are entitled thereto pursuant to the security documents under which they were appointed. The reason advanced for seeking the order was that, in the course of proceedings on petitions brought by them to wind up two companies controlled by Mr. Moran, Clapin Limited and Open Minds Centre Limited, on foot of debts which the Receivers considered to be owing to two of the Companies of which they are receivers, the petitions were defended “on the basis of documents purporting to be books and records of the [petitioning] Companies, which did not form part of the books and records of the [petitioning] Companies available to” the Receivers. As a result, the Receivers sought confirmation in correspondence with the respondents’ solicitors, P. B. Cunningham & Co., that the respondents did not retain any books and records, indicating the intention to bring a motion to seek such confirmation. Not having obtained the confirmation sought, the application was brought. In his grounding affidavit Mr. Charleton averred that the position adopted by the respondents is wholly unsatisfactory and “amounts to an attempt to frustrate” the Receivers in their work.
3. Mr. Moran responded to the application in his first replying affidavit sworn on 12th December, 2012. This gave rise to Mr. Charleton’s second affidavit sworn on 11th January, 2013 which, in turn, led to Mr. Moran’s second affidavit of 4th February, 2013.
4. Unlike the earlier application, on the hearing of which Mr. Moran appeared in person, on this application both respondents were represented by counsel instructed by B. P. Cunningham & Co.
Grounds on which Receivers claim entitlement to books and records
5. The Receivers do not rely on any particular statutory provision other than s. 316. There was mention of s. 202 of the Companies Act 1990 (the Act of 1990) at the hearing. That reference arose from a letter dated 13th December, 2012 issued by the Receivers’ solicitors, Arthur Cox, in response to a letter from the respondents’ solicitors dated 5th December, 2012 asking the Receivers’ solicitors to describe in either broad or specific terms the nature of the documentation required from the respondents. In that letter, the Receivers’ solicitors confirmed, for the avoidance of doubt, that the books and records of the Companies that the Receivers require are “(per Section 202 of the Companies Act, 1963) any books and records within the below categories which have not already been provided to [the Receivers] or which are not in the books and records left at the hotel premises on Pearse Street when the Receivers took possession of the premises”. That the reference in that letter should have been to s. 202 of the Act of 1990 is obvious because the categories of documents outlined in the letter effectively paraphrase subs. (1) and (3) of s. 202. In broad terms, that is the section which imposes on every company an obligation to keep proper books of account. Notwithstanding the obvious mistake in their solicitors’ letter of 13th December, 2012, which was highlighted by Mr. Moran in his second affidavit, what is clear is that what the Receivers were and are seeking were and are documents which each of the Companies had a statutory obligation to generate, although, having regard to the basis on which the Receivers claim entitlement, what they require are the physical or electronic books and records.
6. In fact, the Receivers based their entitlement to the books and records, as Mr. Charleton outlined in his grounding affidavit, on the provisions of the security documents under which they were appointed. In particular, the Receivers are relying on the floating charges in the security documents under which they were appointed. There were three security documents in all given by the Companies to Anglo Irish Bank Corporation plc (the Bank) which appointed the Receivers.
7. Two of the security documents are in the same format. Counsel for the Receivers referred to one of them and, in particular, to Clause 3.5 of the Composite Debenture dated 30th June, 2005 given by the first three named Companies to the Bank. As one would expect, the various provisions in the charging clause, Clause 3, were drafted with a view to capturing everything, to use a colloquialism, “including the kitchen sink”. The provision which created the floating charge, however, was Clause 3.1(r) which charged by way of first floating charge in favour of the Bank the undertakings of the chargor companies and all their other property, assets and rights whatsoever and wheresoever both present and future including property not captured by the specific or fixed charges in Clauses 3.1(a) to (q). Clause 3.5 dealt with the crystallisation of the floating charge. I am satisfied that the books and records of the relevant chargor companies were captured by the provisions of Clause 3.1(r) and Clause 3.5.
8. I am also satisfied that the books and records of the relevant chargor company were captured by the charging provisions of the security document which was in a different format, namely, the Mortgage Debenture dated 16th June, 2008 made between the fifth Company of the one part and the Bank of the other part, the relevant clause being Clause 4.5.
9. As to the necessity for an order in the terms sought by the Receivers, Mr. Charleton, in his second affidavit, has exhibited letters dated 30th March, 2012 from Arthur Cox to the respondents’ solicitors summarising the petition proceedings in relation to Clapin Limited and Open Minds Centre Limited and he has pointed to the fact that the defence advanced to those petitions was based on documents “which purported to form part of the books and records of the companies” but which were not furnished to the Receivers as part of the Companies’ books and records following their appointment. I have considered the exhibits and I must profess to not fully understanding the nature of the defences advanced to the two petitions.
10. However, I note from the letter of 30th March, 2012 in relation to the petition to wind up Clapin Limited that the petition arose from the debt recorded in the books and records of Citywide Leisure Limited (Citywide) and that a statutory demand under s. 214(a) of the Act of 1963 had been served on Clapin Limited on 6th December, 2011. I also note that the letter states that the affidavit of Mr. Moran sworn on 2nd March, 2012 “exhibited a loan agreement which purports to defer repayment of the debt the subject of the petition to 2017” and that it was commented that this was the first reference to the loan agreement and that it was raised as a defence to the petition debt some ten months after the first demand for that debt was raised. I also note that it is recorded in the letter that, by a letter dated 9th March, 2012, Arthur Cox sought:
(a) an inspection of the original purported loan agreement;
(b) copies of the board minutes of Citywide and Clapin Limited in relation to the entry into the loan agreement; and
(c) an explanation why the debt due by Clapin Limited to Citywide was included as a current asset of Citywide, if it was not repayable within twelve months.
No substantive response was received to those queries. Finally, the letter recorded that, following extensive searches, “it does not appear that the original of the purported loan agreement is held by [the Bank] nor does it appear that they would have had any cause to hold the same”.
11. Mr. Moran in his second affidavit sworn on 4th February, 2013 did not explain why the loan agreement, a copy of which was exhibited by him in his affidavit sworn on 2nd March, 2012 in response to the petition to wind up Clapin Limited, had not been handed over to the Receivers as receivers of Citywide. No explanation was given at the hearing of the application either. Both in Mr. Moran’s affidavits and in the submissions made by counsel on behalf of the respondents certain assertions were made in relation to the withdrawal of the petitions to wind up Clapin Limited and Open Minds Centre Limited. Those proceedings terminated by the withdrawal of the petitions and it would be entirely inappropriate for the Court to form or express any view on their outcome on this application.
12. However, on the evidence adduced by the Receivers, I am satisfied that, as regards the indebtedness of Clapin Limited and Open Minds Centre Limited to some of the Companies, a genuine question arises as to whether all of the books and records of those Companies to which the Receivers are entitled have been furnished to them.
The response of the respondents to the application
13. Counsel for the respondents asserted that the application was a “pincer movement” by the Bank against companies of limited resources and that it was an abuse of process. In this connection, he outlined other related proceedings which were pending. First, he referred to proceedings against Mr. Moran personally by the Bank on foot of a guarantee (Record No. 2011/3213S) to which a full defence and counterclaim had been delivered and which were pending in the Commercial Court. Secondly, he referred to proceedings by Mr. Moran against the Bank (Record No. 2011/7023P) in which Mr. Moran was challenging the validity of the appointment of the Receivers, which were also pending in the Commercial Court, although an order for security for costs made against Mr. Moran was the subject of an appeal to the Supreme Court. Thirdly, he referred to matters in relation to each of the respondents which were pending in the Employment Appeals Tribunal. Fourthly, he referred to the Mr. Moran’s application under s. 316 (Record No. 2012/204 COS) referred to at the outset. Finally, he referred to proceedings by the Bank against the Companies seeking to vacate a lis pendens, also pending in the Commercial Court, of which this Court has no knowledge. While it was emphasised that the Receivers have all the relevant documents and that the respondents are not wilfully holding back any documents, it was submitted that to make the order sought it would be prejudicial to Mr. Moran and that this application should be stayed or adjourned generally pending the outcome of the related proceedings. It would be wholly inappropriate for this Court to form or express any view on the related proceedings. However, in my view, the existence of the related proceedings cannot be an answer to the Receivers’ application.
14. It was also submitted that the Receivers had acted in an aggressive manner in taking possession of the premises and assets of the Companies. Reference was made to proceedings initiated by the Receivers against the respondents seeking injunctive relief (Record No. 2011/1285P). In his first replying affidavit Mr. Moran raises issues in relation to those proceedings. Again, those proceedings have terminated, as outlined in my earlier judgment on Mr. Moran’s s. 316 application, and are of no relevance to the issue now before the Court.
15. It was contended by Mr. Moran on affidavit and reiterated by his counsel at the hearing that, if an order is granted in the terms sought, Mr. Moran would have to undertake “a significant trawl through extensive quantities” of the respondents’ personal documentation, both electronic and hard copy, in order to determine whether any documentation relating to the Companies exists and, if such documentation exists, whether the same could be said to be “books and records” of the Companies. The respondents would also be required to carry out an extensive scheduling exercise. It would be necessary for Mr. Moran to contact all accountants, auditors and solicitors who previously represented the Companies. Further, if the documentation exists, it would be necessary to carry out a comparative exercise with the documentation already in the Receivers’ possession “in order to determine whether the documentation in question is an original or merely a copy of a book and/or record of the Companies which is already in the [Receivers’ possession]”. However, Mr. Moran does not have access to the documentation, books and records of the Companies of which the Receivers have taken control. It was submitted by counsel for the respondents that in the context where it is the respondents’ belief that the Receivers have access to all original books and records of the Companies and are aware of all of the Companies’ transactions and that any accounting documentation in respect of the Companies is within their power of possession or procurement from third parties or financial institutions, this application is tantamount to oppression.
16. Counsel for the respondents referred to two authorities in support of his argument that the application should be refused.
17. One was the decision of this Court in Re Old Court Holiday Hostel Ltd. [2006] IEHC 424, where it was suggested that, where a liquidator is applying to the Court for directions under s. 280 or, indeed, where a receiver is applying for directions under s. 316, of the Act of 1963, it would be helpful if the Court had some overview of the winding up from the liquidator or the receivership from the receiver. It was further suggested that the type of report furnished to the Court in compulsory winding up matters would be useful template. However, it was made clear in that judgment that the detail required in any case would depend on the case, on the stage which the winding up had reached and the issues which the Court had to address on the application for directions. As counsel for the Receivers stated in reply, this Court knows the state of the receivership of the Companies.
18. The other authority relied on by counsel for the respondents was a decision of the Chancery Division of the High Court of England and Wales in Green v. BDO Stoy Hayward LLP [2005] EWHC 2413. That case concerned an application by the liquidator of a company, which went into compulsory liquidation in 1998, for an order against the company’s former auditors, BDO, for production of documents, the request for information having been made in 2005. The statutory provision in question was s. 236 of the Insolvency Act 1986, which is in similar terms to s. 245 of the Act of 1963, in that the context of such an order is a compulsory winding up, and the target is either an officer of the company, or a person known or suspected to have in his possession any property of the company or supposed to be indebted to the company, or any person whom the Court thinks capable of giving information concerning the promotion, formation, business, dealings, affairs or property of the company, whom the Court may summon before it (subs. (1)) and examine on oath (subs. (2)). Further, in both jurisdictions under subs. (3) of both provisions the Court may require such a person to produce books, papers or records in his possession or under his control.
19. Counsel for the respondents referred the Court to the outline of the relevant legal principles set out in the judgment of Kitchin J. (at paras. 27 et seq.), where it is stated:
“27. It is well established that the powers conferred by s.236 are powers directed to enabling the court to help a liquidator discover the truth of the circumstances connected with the affairs of the company in order that the liquidator may be able, as effectively and cheaply as possible, to complete his function and put the affairs of the company in order, including the getting in of any assets of the company available in the liquidation. When the liquidator thinks he may be under a duty to recover something from some person concerned with the affairs of the company then it is appropriate for the liquidator to be able to discover, with as little expense as possible and with as much ease as possible, the facts surrounding any such possible claim. Normally the court should seek to assist the liquidator to carry out his duties in this way.
28. The scope of s.236 has always been understood to extend to reconstituting the state of the company’s knowledge, however it is now well recognised that the scope of the jurisdiction also extends to all documents which the liquidator may reasonably require to see to carry out his functions: British and Commonwealth Holdings (No. 2) [1992] AC 426.
29. Nevertheless, it is for the liquidator to establish his case under s.236. He must show that he reasonably requires the documents sought. In this connection the view of the liquidator is normally entitled to a good deal of weight: Sasea Finance Ltd (Joint Liquidators) v KPMG [1998] BCC 216 at 220. It is also recognised that the liquidator is required to establish only a ‘reasonable requirement’ for information, not an absolute need and that he is under no duty to make out the requirement in detail. The court ultimately has an unfettered discretion which it will seek to exercise in the interests of the winding up without being oppressive to the party the subject of the application. As Lord Slynn explained in British and Commonwealth Holdings at 439, the proper case is one where the liquidator reasonably requires to see the documents to carry out his functions and the production does not impose an unnecessary and unreasonable burden on the person required to produce them in the light of the liquidator’s requirements.”
20. The commentary on s. 245 in MacCann & Courtney on Companies Acts 1963 – 2012 is in similar terms and is instructive. On the discretion of the Court to make an order for examination under s. 245, the editors state (at p. 513):
“The Court has an inherent discretion to grant or refuse an order for examination. The primary function of the section is to enable the Liquidator or the ODCE, as the case may be, to complete his functions as effectively as possible and with as little expense and as much expedition as possible. An application under this section is subject to the overriding requirement that the examination must be necessary in the interests of the winding up or of the performance of the ODCE’s functions, as the case may be, and must not be oppressive, unfair or unjust to the respondent. If the object of the Liquidator is simply to obtain information, which will enable him to assist to decide whether or not the company has a valid claim against a third party, the Court will normally grant the application. However, if the evidence shows that the purpose of the Liquidator or the ODCE in seeking the examination is to achieve an advantage beyond the ordinary litigant in proceedings which he has already commenced or which he has definitely decided to commence, the pre-disposition of the Court will normally be to refuse the application as being tantamount to an abuse of process, unless of course the applicant can show special grounds to the contrary (as where the proposed line of questioning goes not to the merits of the case, but simply to understand the affairs of the company or to identify the whereabouts of assets owned by the company). The case for making an order against an officer or former officer of the company would usually be stronger than against a third party who has no duty to operate with the Liquidator and that oral examination is likely to be more oppressive than an order for production of documents. The order will be made even though its stated purpose is to gather information to be used against a director in restriction or disqualification proceedings. Nevertheless an order for the production of documents may be oppressive where the person against whom the order is directed is being required to produce documents which do not belong to him but which belong to some other party, such as his employer.”
21. Counsel on behalf of the Receivers submitted that the decision in Green v. BDO Stoy Hayward LLP is not in point, on the basis that it was an application by a liquidator which was targeted at auditors. He also submitted that, in any event, the Receivers’ case is that the books and records sought are assets of the Companies, which are captured by the security documents under which they were appointed. I do not accept those submissions as being determinative. I consider that the judicial decisions on provisions such as s. 245 of the Act of 1963 should guide the Court when the Court is asked to make an order under s. 316 at the suit of a receiver seeking an order analogous to subs. (3) of s. 245. If anything, I think the Court should take a stricter line in adjudicating on such an application made by a receiver under s. 316, because the receiver, unlike a liquidator, is protecting the interests of the security holder which appointed him and his functions are largely regulated by the security documents.
22. It was submitted on behalf of the respondents that in this case the Receivers have failed to discharge the onus identified in Green v. BDO Stoy Hayward LLP and that what they are doing is embarking on a “fishing expedition” and that the oppressive nature of what the respondents are being asked to do in the search to find the documents outweighs the Receivers’ requirements.
Conclusion
23. I do not think it would be a proper exercise of the Court’s discretion under s. 316 to make an order against the respondents for blanket delivery of the books and records of the Companies for a number of reasons. First, while, as I have already found, the position in relation to the debt which the Receivers understood to be due by Clapin Limited to Citywide as outlined earlier does establish a necessity or a “reasonable requirement” on the part of the Receivers for information and documentation in relation to that matter, the evidence does not suggest a necessity for an all embracing order of the type sought. Secondly, it appears that the respondents have not complied with their statutory obligations under s. 319(1)(b) and s. 320 of the Act of 1963 in relation to the submission of a statement of affairs in relation to any of the Companies to the Receivers, a fact from which, wrongly and absurdly, Mr. Moran seems to profess an entitlement to merit in his second replying affidavit. I say wrongly because it is absolutely clear on the evidence that, in relation to each of the Companies, by letter dated 17th January, 2011 each of the respondents were notified that the Receivers had been appointed and of their obligations under ss. 319(1)(b) and 320 of the Act of 1963 and the fact that failure to comply with those requirements would render them liable to penalties. Having said that, it would make more sense for the Receivers to pursue compliance with ss. 319 and 320 than the approach adopted on this application, which seems to be focused on obtaining physical and electronic books and records. Thirdly, if the Court were to make an order in the terms sought and the respondents failed to comply with it, I have no doubt that enforcement would give rise to huge difficulties, if the Court was asked to enforce the order because of the wide scope of the order sought.
24. For all of the foregoing reasons I consider that the proper exercise of the Court’s discretion is to make a limited order at this juncture, which will meet the Receivers’ reasonable requirements, having regard to the evidence before the Court, but which will not be unduly oppressive to the respondents. The order I propose making is an order directing the respondents to deliver to the Receivers within six weeks of the date of this judgment all documents and records in their possession in relation to –
(a) any indebtedness by Clapin Limited to Citywide and
(b) any indebtedness of Open Minds Centre Limited to the fourth named company, Blarney Inn Limited,
in relation to a debt which existed at any time on or after 1st January, 2007.
25. I propose adjourning the application generally with liberty to the Receivers to re-enter it, if the Receivers consider it necessary to have further recourse to the Court.
RM Hotels Ltd & ors & Companies Acts:
Hughes & anor -v- Moran & anor
[2013] IEHC 521 (19 November 2013)
Judgment of Ms. Justice Laffoy delivered on 19th day of November, 2013.
The application
1. This application brought by the applicants (the Receivers) as receivers of the companies named in the title hereof (the Companies) under s. 316 of the Companies Act 1963 (the Act of 1963) against the respondents, who are the directors of the Companies, was heard following the hearing of an application by the first named respondent (Mr. Moran) against the Receivers (Record No. 2012/204 COS). The judgment on that application (the earlier judgment) delivered immediately before this judgment gives context to this judgment.
2. This application was initiated by the Receivers by an originating notice of motion dated 30th October, 2012 in which they sought the directions of the Court pursuant to s. 316 of the Act of 1963 (as amended) compelling the respondents to deliver to the Receivers “the books and records” of each of the Companies. The application was grounded on the affidavit of the second named applicant (Mr. Charleton) sworn on 26th October, 2012. The basis on which the Receivers’ entitlement to the books and records in issue was asserted in that affidavit was that they are entitled thereto pursuant to the security documents under which they were appointed. The reason advanced for seeking the order was that, in the course of proceedings on petitions brought by them to wind up two companies controlled by Mr. Moran, Clapin Limited and Open Minds Centre Limited, on foot of debts which the Receivers considered to be owing to two of the Companies of which they are receivers, the petitions were defended “on the basis of documents purporting to be books and records of the [petitioning] Companies, which did not form part of the books and records of the [petitioning] Companies available to” the Receivers. As a result, the Receivers sought confirmation in correspondence with the respondents’ solicitors, P. B. Cunningham & Co., that the respondents did not retain any books and records, indicating the intention to bring a motion to seek such confirmation. Not having obtained the confirmation sought, the application was brought. In his grounding affidavit Mr. Charleton averred that the position adopted by the respondents is wholly unsatisfactory and “amounts to an attempt to frustrate” the Receivers in their work.
3. Mr. Moran responded to the application in his first replying affidavit sworn on 12th December, 2012. This gave rise to Mr. Charleton’s second affidavit sworn on 11th January, 2013 which, in turn, led to Mr. Moran’s second affidavit of 4th February, 2013.
4. Unlike the earlier application, on the hearing of which Mr. Moran appeared in person, on this application both respondents were represented by counsel instructed by B. P. Cunningham & Co.
Grounds on which Receivers claim entitlement to books and records
5. The Receivers do not rely on any particular statutory provision other than s. 316. There was mention of s. 202 of the Companies Act 1990 (the Act of 1990) at the hearing. That reference arose from a letter dated 13th December, 2012 issued by the Receivers’ solicitors, Arthur Cox, in response to a letter from the respondents’ solicitors dated 5th December, 2012 asking the Receivers’ solicitors to describe in either broad or specific terms the nature of the documentation required from the respondents. In that letter, the Receivers’ solicitors confirmed, for the avoidance of doubt, that the books and records of the Companies that the Receivers require are “(per Section 202 of the Companies Act, 1963) any books and records within the below categories which have not already been provided to [the Receivers] or which are not in the books and records left at the hotel premises on Pearse Street when the Receivers took possession of the premises”. That the reference in that letter should have been to s. 202 of the Act of 1990 is obvious because the categories of documents outlined in the letter effectively paraphrase subs. (1) and (3) of s. 202. In broad terms, that is the section which imposes on every company an obligation to keep proper books of account. Notwithstanding the obvious mistake in their solicitors’ letter of 13th December, 2012, which was highlighted by Mr. Moran in his second affidavit, what is clear is that what the Receivers were and are seeking were and are documents which each of the Companies had a statutory obligation to generate, although, having regard to the basis on which the Receivers claim entitlement, what they require are the physical or electronic books and records.
6. In fact, the Receivers based their entitlement to the books and records, as Mr. Charleton outlined in his grounding affidavit, on the provisions of the security documents under which they were appointed. In particular, the Receivers are relying on the floating charges in the security documents under which they were appointed. There were three security documents in all given by the Companies to Anglo Irish Bank Corporation plc (the Bank) which appointed the Receivers.
7. Two of the security documents are in the same format. Counsel for the Receivers referred to one of them and, in particular, to Clause 3.5 of the Composite Debenture dated 30th June, 2005 given by the first three named Companies to the Bank. As one would expect, the various provisions in the charging clause, Clause 3, were drafted with a view to capturing everything, to use a colloquialism, “including the kitchen sink”. The provision which created the floating charge, however, was Clause 3.1(r) which charged by way of first floating charge in favour of the Bank the undertakings of the chargor companies and all their other property, assets and rights whatsoever and wheresoever both present and future including property not captured by the specific or fixed charges in Clauses 3.1(a) to (q). Clause 3.5 dealt with the crystallisation of the floating charge. I am satisfied that the books and records of the relevant chargor companies were captured by the provisions of Clause 3.1(r) and Clause 3.5.
8. I am also satisfied that the books and records of the relevant chargor company were captured by the charging provisions of the security document which was in a different format, namely, the Mortgage Debenture dated 16th June, 2008 made between the fifth Company of the one part and the Bank of the other part, the relevant clause being Clause 4.5.
9. As to the necessity for an order in the terms sought by the Receivers, Mr. Charleton, in his second affidavit, has exhibited letters dated 30th March, 2012 from Arthur Cox to the respondents’ solicitors summarising the petition proceedings in relation to Clapin Limited and Open Minds Centre Limited and he has pointed to the fact that the defence advanced to those petitions was based on documents “which purported to form part of the books and records of the companies” but which were not furnished to the Receivers as part of the Companies’ books and records following their appointment. I have considered the exhibits and I must profess to not fully understanding the nature of the defences advanced to the two petitions.
10. However, I note from the letter of 30th March, 2012 in relation to the petition to wind up Clapin Limited that the petition arose from the debt recorded in the books and records of Citywide Leisure Limited (Citywide) and that a statutory demand under s. 214(a) of the Act of 1963 had been served on Clapin Limited on 6th December, 2011. I also note that the letter states that the affidavit of Mr. Moran sworn on 2nd March, 2012 “exhibited a loan agreement which purports to defer repayment of the debt the subject of the petition to 2017” and that it was commented that this was the first reference to the loan agreement and that it was raised as a defence to the petition debt some ten months after the first demand for that debt was raised. I also note that it is recorded in the letter that, by a letter dated 9th March, 2012, Arthur Cox sought:
(a) an inspection of the original purported loan agreement;
(b) copies of the board minutes of Citywide and Clapin Limited in relation to the entry into the loan agreement; and
(c) an explanation why the debt due by Clapin Limited to Citywide was included as a current asset of Citywide, if it was not repayable within twelve months.
No substantive response was received to those queries. Finally, the letter recorded that, following extensive searches, “it does not appear that the original of the purported loan agreement is held by [the Bank] nor does it appear that they would have had any cause to hold the same”.
11. Mr. Moran in his second affidavit sworn on 4th February, 2013 did not explain why the loan agreement, a copy of which was exhibited by him in his affidavit sworn on 2nd March, 2012 in response to the petition to wind up Clapin Limited, had not been handed over to the Receivers as receivers of Citywide. No explanation was given at the hearing of the application either. Both in Mr. Moran’s affidavits and in the submissions made by counsel on behalf of the respondents certain assertions were made in relation to the withdrawal of the petitions to wind up Clapin Limited and Open Minds Centre Limited. Those proceedings terminated by the withdrawal of the petitions and it would be entirely inappropriate for the Court to form or express any view on their outcome on this application.
12. However, on the evidence adduced by the Receivers, I am satisfied that, as regards the indebtedness of Clapin Limited and Open Minds Centre Limited to some of the Companies, a genuine question arises as to whether all of the books and records of those Companies to which the Receivers are entitled have been furnished to them.
The response of the respondents to the application
13. Counsel for the respondents asserted that the application was a “pincer movement” by the Bank against companies of limited resources and that it was an abuse of process. In this connection, he outlined other related proceedings which were pending. First, he referred to proceedings against Mr. Moran personally by the Bank on foot of a guarantee (Record No. 2011/3213S) to which a full defence and counterclaim had been delivered and which were pending in the Commercial Court. Secondly, he referred to proceedings by Mr. Moran against the Bank (Record No. 2011/7023P) in which Mr. Moran was challenging the validity of the appointment of the Receivers, which were also pending in the Commercial Court, although an order for security for costs made against Mr. Moran was the subject of an appeal to the Supreme Court. Thirdly, he referred to matters in relation to each of the respondents which were pending in the Employment Appeals Tribunal. Fourthly, he referred to the Mr. Moran’s application under s. 316 (Record No. 2012/204 COS) referred to at the outset. Finally, he referred to proceedings by the Bank against the Companies seeking to vacate a lis pendens, also pending in the Commercial Court, of which this Court has no knowledge. While it was emphasised that the Receivers have all the relevant documents and that the respondents are not wilfully holding back any documents, it was submitted that to make the order sought it would be prejudicial to Mr. Moran and that this application should be stayed or adjourned generally pending the outcome of the related proceedings. It would be wholly inappropriate for this Court to form or express any view on the related proceedings. However, in my view, the existence of the related proceedings cannot be an answer to the Receivers’ application.
14. It was also submitted that the Receivers had acted in an aggressive manner in taking possession of the premises and assets of the Companies. Reference was made to proceedings initiated by the Receivers against the respondents seeking injunctive relief (Record No. 2011/1285P). In his first replying affidavit Mr. Moran raises issues in relation to those proceedings. Again, those proceedings have terminated, as outlined in my earlier judgment on Mr. Moran’s s. 316 application, and are of no relevance to the issue now before the Court.
15. It was contended by Mr. Moran on affidavit and reiterated by his counsel at the hearing that, if an order is granted in the terms sought, Mr. Moran would have to undertake “a significant trawl through extensive quantities” of the respondents’ personal documentation, both electronic and hard copy, in order to determine whether any documentation relating to the Companies exists and, if such documentation exists, whether the same could be said to be “books and records” of the Companies. The respondents would also be required to carry out an extensive scheduling exercise. It would be necessary for Mr. Moran to contact all accountants, auditors and solicitors who previously represented the Companies. Further, if the documentation exists, it would be necessary to carry out a comparative exercise with the documentation already in the Receivers’ possession “in order to determine whether the documentation in question is an original or merely a copy of a book and/or record of the Companies which is already in the [Receivers’ possession]”. However, Mr. Moran does not have access to the documentation, books and records of the Companies of which the Receivers have taken control. It was submitted by counsel for the respondents that in the context where it is the respondents’ belief that the Receivers have access to all original books and records of the Companies and are aware of all of the Companies’ transactions and that any accounting documentation in respect of the Companies is within their power of possession or procurement from third parties or financial institutions, this application is tantamount to oppression.
16. Counsel for the respondents referred to two authorities in support of his argument that the application should be refused.
17. One was the decision of this Court in Re Old Court Holiday Hostel Ltd. [2006] IEHC 424, where it was suggested that, where a liquidator is applying to the Court for directions under s. 280 or, indeed, where a receiver is applying for directions under s. 316, of the Act of 1963, it would be helpful if the Court had some overview of the winding up from the liquidator or the receivership from the receiver. It was further suggested that the type of report furnished to the Court in compulsory winding up matters would be useful template. However, it was made clear in that judgment that the detail required in any case would depend on the case, on the stage which the winding up had reached and the issues which the Court had to address on the application for directions. As counsel for the Receivers stated in reply, this Court knows the state of the receivership of the Companies.
18. The other authority relied on by counsel for the respondents was a decision of the Chancery Division of the High Court of England and Wales in Green v. BDO Stoy Hayward LLP [2005] EWHC 2413. That case concerned an application by the liquidator of a company, which went into compulsory liquidation in 1998, for an order against the company’s former auditors, BDO, for production of documents, the request for information having been made in 2005. The statutory provision in question was s. 236 of the Insolvency Act 1986, which is in similar terms to s. 245 of the Act of 1963, in that the context of such an order is a compulsory winding up, and the target is either an officer of the company, or a person known or suspected to have in his possession any property of the company or supposed to be indebted to the company, or any person whom the Court thinks capable of giving information concerning the promotion, formation, business, dealings, affairs or property of the company, whom the Court may summon before it (subs. (1)) and examine on oath (subs. (2)). Further, in both jurisdictions under subs. (3) of both provisions the Court may require such a person to produce books, papers or records in his possession or under his control.
19. Counsel for the respondents referred the Court to the outline of the relevant legal principles set out in the judgment of Kitchin J. (at paras. 27 et seq.), where it is stated:
“27. It is well established that the powers conferred by s.236 are powers directed to enabling the court to help a liquidator discover the truth of the circumstances connected with the affairs of the company in order that the liquidator may be able, as effectively and cheaply as possible, to complete his function and put the affairs of the company in order, including the getting in of any assets of the company available in the liquidation. When the liquidator thinks he may be under a duty to recover something from some person concerned with the affairs of the company then it is appropriate for the liquidator to be able to discover, with as little expense as possible and with as much ease as possible, the facts surrounding any such possible claim. Normally the court should seek to assist the liquidator to carry out his duties in this way.
28. The scope of s.236 has always been understood to extend to reconstituting the state of the company’s knowledge, however it is now well recognised that the scope of the jurisdiction also extends to all documents which the liquidator may reasonably require to see to carry out his functions: British and Commonwealth Holdings (No. 2) [1992] AC 426.
29. Nevertheless, it is for the liquidator to establish his case under s.236. He must show that he reasonably requires the documents sought. In this connection the view of the liquidator is normally entitled to a good deal of weight: Sasea Finance Ltd (Joint Liquidators) v KPMG [1998] BCC 216 at 220. It is also recognised that the liquidator is required to establish only a ‘reasonable requirement’ for information, not an absolute need and that he is under no duty to make out the requirement in detail. The court ultimately has an unfettered discretion which it will seek to exercise in the interests of the winding up without being oppressive to the party the subject of the application. As Lord Slynn explained in British and Commonwealth Holdings at 439, the proper case is one where the liquidator reasonably requires to see the documents to carry out his functions and the production does not impose an unnecessary and unreasonable burden on the person required to produce them in the light of the liquidator’s requirements.”
20. The commentary on s. 245 in MacCann & Courtney on Companies Acts 1963 – 2012 is in similar terms and is instructive. On the discretion of the Court to make an order for examination under s. 245, the editors state (at p. 513):
“The Court has an inherent discretion to grant or refuse an order for examination. The primary function of the section is to enable the Liquidator or the ODCE, as the case may be, to complete his functions as effectively as possible and with as little expense and as much expedition as possible. An application under this section is subject to the overriding requirement that the examination must be necessary in the interests of the winding up or of the performance of the ODCE’s functions, as the case may be, and must not be oppressive, unfair or unjust to the respondent. If the object of the Liquidator is simply to obtain information, which will enable him to assist to decide whether or not the company has a valid claim against a third party, the Court will normally grant the application. However, if the evidence shows that the purpose of the Liquidator or the ODCE in seeking the examination is to achieve an advantage beyond the ordinary litigant in proceedings which he has already commenced or which he has definitely decided to commence, the pre-disposition of the Court will normally be to refuse the application as being tantamount to an abuse of process, unless of course the applicant can show special grounds to the contrary (as where the proposed line of questioning goes not to the merits of the case, but simply to understand the affairs of the company or to identify the whereabouts of assets owned by the company). The case for making an order against an officer or former officer of the company would usually be stronger than against a third party who has no duty to operate with the Liquidator and that oral examination is likely to be more oppressive than an order for production of documents. The order will be made even though its stated purpose is to gather information to be used against a director in restriction or disqualification proceedings. Nevertheless an order for the production of documents may be oppressive where the person against whom the order is directed is being required to produce documents which do not belong to him but which belong to some other party, such as his employer.”
21. Counsel on behalf of the Receivers submitted that the decision in Green v. BDO Stoy Hayward LLP is not in point, on the basis that it was an application by a liquidator which was targeted at auditors. He also submitted that, in any event, the Receivers’ case is that the books and records sought are assets of the Companies, which are captured by the security documents under which they were appointed. I do not accept those submissions as being determinative. I consider that the judicial decisions on provisions such as s. 245 of the Act of 1963 should guide the Court when the Court is asked to make an order under s. 316 at the suit of a receiver seeking an order analogous to subs. (3) of s. 245. If anything, I think the Court should take a stricter line in adjudicating on such an application made by a receiver under s. 316, because the receiver, unlike a liquidator, is protecting the interests of the security holder which appointed him and his functions are largely regulated by the security documents.
22. It was submitted on behalf of the respondents that in this case the Receivers have failed to discharge the onus identified in Green v. BDO Stoy Hayward LLP and that what they are doing is embarking on a “fishing expedition” and that the oppressive nature of what the respondents are being asked to do in the search to find the documents outweighs the Receivers’ requirements.
Conclusion
23. I do not think it would be a proper exercise of the Court’s discretion under s. 316 to make an order against the respondents for blanket delivery of the books and records of the Companies for a number of reasons. First, while, as I have already found, the position in relation to the debt which the Receivers understood to be due by Clapin Limited to Citywide as outlined earlier does establish a necessity or a “reasonable requirement” on the part of the Receivers for information and documentation in relation to that matter, the evidence does not suggest a necessity for an all embracing order of the type sought. Secondly, it appears that the respondents have not complied with their statutory obligations under s. 319(1)(b) and s. 320 of the Act of 1963 in relation to the submission of a statement of affairs in relation to any of the Companies to the Receivers, a fact from which, wrongly and absurdly, Mr. Moran seems to profess an entitlement to merit in his second replying affidavit. I say wrongly because it is absolutely clear on the evidence that, in relation to each of the Companies, by letter dated 17th January, 2011 each of the respondents were notified that the Receivers had been appointed and of their obligations under ss. 319(1)(b) and 320 of the Act of 1963 and the fact that failure to comply with those requirements would render them liable to penalties. Having said that, it would make more sense for the Receivers to pursue compliance with ss. 319 and 320 than the approach adopted on this application, which seems to be focused on obtaining physical and electronic books and records. Thirdly, if the Court were to make an order in the terms sought and the respondents failed to comply with it, I have no doubt that enforcement would give rise to huge difficulties, if the Court was asked to enforce the order because of the wide scope of the order sought.
24. For all of the foregoing reasons I consider that the proper exercise of the Court’s discretion is to make a limited order at this juncture, which will meet the Receivers’ reasonable requirements, having regard to the evidence before the Court, but which will not be unduly oppressive to the respondents. The order I propose making is an order directing the respondents to deliver to the Receivers within six weeks of the date of this judgment all documents and records in their possession in relation to –
(a) any indebtedness by Clapin Limited to Citywide and
(b) any indebtedness of Open Minds Centre Limited to the fourth named company, Blarney Inn Limited,
in relation to a debt which existed at any time on or after 1st January, 2007.
25. I propose adjourning the application generally with liberty to the Receivers to re-enter it, if the Receivers consider it necessary to have further recourse to the Court.
A-Wear Ltd (In Receivership) & Cos Acts: Revenue Commissioners -v- Taite
[2016] IEHC 141 (18 March 2016)
JUDGMENT of Mr. Justice Tony O’Connor delivered on the 18th day of March, 2016
Introduction
1. The notice of motion for this application sought directions pursuant to s.316 of the Companies Act 1963 (“CA 1963”) to direct the respondent receiver to categorise as a floating charge assets described under eleven separate headings. The final affidavit for this application was filed in July, 2015, while written and oral submissions were completed in February, 2016.
Background
2. By composite debenture dated the 3rd June, 2007 (“the debenture”), A-Wear Ltd. (“A-Wear”), its parent and group companies of the parent charged and assigned their assets to Ulster Bank Ireland Ltd (“Ulster”) as fixed or floating charges.
3. The respondent was appointed as receiver and manager over the then property and assets of A-Wear on the 13th February, 2013, after an earlier receiver (“the first receiver”) had been discharged. The Court is not aware of any controversy about the discharge of that receiver.
4. By email dated the 16th April, 2014, the respondent’s solicitor sent a schedule of realisations (“the April, 2014 schedule”) to an officer of the applicants. The applicants responded to the effect that the April, 2014 schedule did not provide information to a sufficient degree for the applicants to agree or disagree with the categorisation of each asset being the subject of a fixed or floating charge.
5. A determination that an asset is the subject of a floating charge as opposed to a fixed charge is relevant to the applicants because s.98 of CA 1963 grants to the applicants priority to the assets over which a receiver is appointed pursuant to a floating charge provided the company is not in the course of being wound up.
6. Paragraph (i) of the notice of motion listed eleven categories of assets (“the described assets”) in subparagraphs a – k which became the subject of the application ultimately and they are listed later in this judgment.
The relevant charging sub-clauses
7. The following extract and sub-clauses of the debenture are the provisions which are most relevant to the Court’s determination:-
“3.1 Each Company as beneficial owner… as continuing security for the payment, performance and discharge of the “Secured Obligations”, hereby:-
(n) charges, assigns and agrees to assign to the Security Trustee as trustee for the Secured Parties all book and other debts, revenues and claims both present and future now or at any time hereafter due or owing or purchased or enjoyed by such Company (excluding for the purposes of this clause 3.1 (n) only, any debts or claims referred by, or in respect of, any monies standing to the credit of such Company’s bank accounts) and the full benefit of all rights and remedies relating thereto, including, without limitation, all negotiable and non-negotiable instruments, guarantees, indemnities, rights of tracing and security interests, all things in action which may give rise to a debt, revenue or claim and all other rights and remedies of whatever nature in respect of the same;
(o)…
(p) charges, assigns and agrees to assign to the Security Trustee the Special Accounts and all other bank accounts of such Company (other than those referred to in paragraph (q) below) and all monies now or at any time hereafter standing to the credit thereof and all entitlements to interest and other rights and benefits accruing thereto or arising in connection with such monies;
(q) charges, assigns and agrees to assign to the Security Trustee all present and future trading and operational bank accounts of such Company (howsoever designated) with any bank or other financial institutions (including the Security Trustee), but excluding for the avoidance of doubt any account referred to in paragraph (p) above) and all monies now or at any time hereafter standing to the credit thereof and all entitlements to interest and other rights and benefits accruing thereto or arising in connection with any such monies, and;
(r) charges to the Security Trustee as trustee for the Secured Parties all of such Company’s stock-in-trade, inventory and raw materials together with the whole of such Company’s undertaking and property, assets and rights whatsoever and wheresoever both present and future other than any assets for the time being effectively charged to the Security Trustee as trustee for the Secured Parties by way of fixed charge or effectively assigned (whether at law or in equity) to the Security Trustee as trustee for Secured Parties or otherwise subject to an effective fixed security in favour of the Security Trustee as trustee for the Secured Parties”.
For ease of understanding the applicants accept that 3.1(n) and (p) appear to be fixed charges and that 3.1(q) and (r) are floating charges.
Negative pledge
8. Clause 8 of the debenture provided as follows and was relied upon by each of the parties when making submissions:-
“8.1 Each company undertakes that at no time during the Security Period will such Company otherwise than:-
(i) as permitted under the Finance Documents,
(ii) in the Security Trustee’s favour; or
(iii) with the Security Trustees prior written consent
create, grant, extend or permit to subsist or arise any encumbrance on or over all or any part of the Charged Property.
“8.2 Each company undertakes that at no time during the Security Period will such Company except:-
(i) with the prior written consent of the Security Trustee; or
(ii) to the extent permitted under the Finance Documents
sell, convey, transfer, assign or otherwise dispose of all or any part of the Charged Property or agree to do any of the foregoing.
“8.3 Notwithstanding Clause 8.2 but subject always to Clause 8.1, each company may sell, transfer or otherwise dispose of or deal with all or any part of its undertaking and assets for the time being subject to the Floating Charge in the ordinary and usual course of, and for the purposes of, such Company’s business”.
Section 316 (1A) of CA 1963
9. The applicants, not being receivers, have a limited right to apply for directions by virtue of the operation of s.316(1A) of CA 1963. Clarke J. clarified In Re: HSS [2011] IEHC 497 that the Court does not have “general jurisdiction to consider whether things are fair or unfair” in this type of application, and added:-
“The court enjoys a wide discretion under s.316. It is true that the court is entitled to give directions or make orders declaring the rights of persons, as the court thinks just. However, it does not seem to me that that section confers on the court any entitlement to change the proper implementation of the regime for dealing with the assets of insolvent companies as set out in the Companies Acts. The reason why the court has been given a wide discretion is that the types of directions or orders that might be required may vary enormously depending on the facts with which the court is faced. The court is, therefore, given a very wide discretion as to the type of intervention which may be appropriate.
However, it does not seem to me that s.316 confers on the court any discretion to alter the legal rights of parties as determined by corporate insolvency law. The Companies Acts contain very many measures designed to determine who gets what out of the assets of insolvent companies. The court can, in an application under s.316, decide issues that arise as to who is to get what and make whatever directions or orders are appropriate to ensure that parties get what they are entitled to. The section does not, however, give the court carte blanche to reassess whether the carefully crafted provisions of corporate insolvency law ought to apply”.
10. This Court elaborates by stating that the burden is on the applicants to prove that there is an injustice, that that injustice stems from the misapplication of insolvency law and that the injustice is specific to an established right. In short, the burden is on the applicants to establish that actions or inactions of the receiver were incorrect.
Hilco
11. Ulster novated its rights and obligations under the debenture to Hilco Capital Ireland Ltd. (“Hilco”) in October, 2011 and was appointed the Security Trustee in lieu of Ulster. In that way, Hilco became a notice party at the hearing of this application.
Process for categorisation
12. Laffoy J. in JD Brian Ltd (in liquidation) [2015] IESC 62 at para.31 referred to the approach of Henchy J. and McCarthy J. in In Re Keenan Brothers [1985] I.R. 401 and reiterated that “the approach to determining whether or not a charge created by a debenture was or was not a fixed charge was stated to be a two stage process, the first stage being to construe the debenture and seek to gather the intention of the parties from the language they used, that is to say, to ascertain the nature of the rights and obligations which they intended to grant each other in respect of the charged assets. Thereafter, it was open to the Court to embark on the second stage of the process, categorisation, which is a matter of law and does not depend on the intention of the parties. The final sentence in the passage from the decision of the Privy Council (in Agnew v. Commissioners of Inland Revenue [2011] 2 A.C. 710) quoted stated:-
‘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 they have chosen to describe it.’”
Floating charge
13. This Court relies upon the description of Romer J. in In Re Yorkshire Woolcombers’ Association Ltd [1903] 2 CH 284 at 295 which has been widely cited:-
“… I certainly think that if a charge has three characteristics 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 class of the business of the company, would be changing from time to time;
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 so far as concerns the particular class of assets I am dealing with.”
Book debts
14. Hogan J. in Response Engineering Ltd. v. Caherconlish Treatment Plants Ltd. [2011] IEHC 345 explained that book debts “refers to no more than future income which will accrue to the company by reason of goods and services to third parties by that company in the course of its trade or business.”
Fixed charge on book debts
15. It has long been established that a fixed charge can be created over book debts and bank accounts.
Control
16. It was contended on behalf of the applicants that a fixed charge over book debts requires the chargee to be in full control of the book debts and the proceeds of realisation of those debts. The applicants relied upon the Supreme Court decision In Re Holidair Ltd. [1994] 1 I.R. 481 which effectively required in the circumstances of that case the existence of a separate bank account and an obligation to pay the proceeds of realisation into that account along with a prohibition on withdrawal of funds from the designated account by the company.
17. The applicants contended that a fixed charge only arises where the chargor is obliged to pass to the chargee the proceeds of realisation or to place them in the full control of the chargee. It was submitted that this control can be agreed through an obligation to lodge the proceeds of realisation in a specific separate account which itself is to be the subject of a fixed charge and from which the chargor has no right to withdraw funds. It is the position of the applicants that a floating charge exists despite whatever terminology is used if such control is not provided for in the charging clause.
Position of the respondent
18. Counsel for the respondent, when outlining how the Court should determine whether a charge is fixed or floating, referred the Court to the type of restrictions imposed by the debenture. He submitted that restrictions on charging or disposal of the assets charged demonstrated that the charged assets were in equity the property of the mortgagee and thus assisted the determination to be made.
19. Counsel for the respondent also submitted that the applicants’ argument failed to address the distinction between “book and other debts, revenues and claims” which under clause 3.1(n) of the debenture were subject to a fixed charge and the credit balances of the company’s “trading and operational bank accounts” came under clause 3.1(q), which created a floating charge.
Notice party
20. Counsel for the notice party drew the Court’s attention to the distinction in In Re Holidair Ltd [1994] 1 IR 416. That case concerned a determination about whether a debenture had created a fixed or floating charge in the context of an examinership. Blayney J. in the Supreme Court found that the sole question in this regard was whether a clause which prevented a company from charging, assigning or disposing of book debts prevented the company from using the proceeds of its book debts. He decided that a provision which required payment into accounts which a trustee may select from time to time was inconsistent with another clause which required the company to carry on business in a proper and efficient manner. He went on to hold that there was no restriction on the company drawing the monies out of the accounts into which the debts were paid. Therefore the relevant debenture clause had created a floating charge. Counsel for the notice party stressed the difference between book debts and the proceeds of book debts.
Applying the principles to the debenture
21. The Court was bemused by the tortuous wording of the 26 page debenture with eight schedules, one of which has 47 pages. Counsel for the parties isolated the provisions which are regarded by those parties as being relevant to determining the questions posed for the respondent and now the Court. Suffice to say that the concept of a company carrying on business in a normal way with so many contractual restrictions is hard to fathom. One can understand how a charge may operate to allow for cash tills, utilities, repairs and regular services to be provided without restrictions. Companies have long raised finance for their businesses by creating fixed charges on known fixed assets. The hovering and ambulatory nature of a floating charge is another instrument of security for those providing loan or credit facilities.
22. When receivers, liquidators and courts are asked to decide upon whether a charge is fixed or floating, they are often placed in the awkward position of having to decipher the wording of a debenture.
23. In this case one can identify that Ulster in the debenture, when one looks at the entire document, required as much security to be fixed as possible and that all other assets fell within the ambit of the floating charge. On the other side A-Wear was prepared to do whatever its bank demanded in order to maintain the credit facilities provided by Ulster.
24. The entire debate in this application came down to whether Ulster had a contractual right to control the book debts and revenues which could be enforced against A-Wear.
25. The applicants while acknowledging the ostensibly fixed nature of sub-clauses (n) and (q) contend that in order for the respondents to maintain their position successfully in relation to the described assets, the debenture ought to have contained a further clause obliging A-Wear to get in the book debts in the ordinary course of its business and to pay the proceeds into a specific designated bank account controlled by Ulster.
26. The provisions relating to control in the debenture are a further determining factor and before proceeding to categorise, the Court refers to the negative pledge clause at 8. Sub clauses 8.1 and 8.2 restricted A-Wear from charging or disposing of any assets which fell within the ambit of a fixed charge. Clause 8.3 allowed A-Wear to dispose of assets which were the subject of a floating charge.
27. The Court further observes that Ulster had fixed charges over specific bank accounts and that any creditor of A-Wear could have ascertained that Ulster had sought to strap its security as tightly as its solicitors could do when drafting the debenture.
28. Taking all that into account, and the specific sub clauses of the debenture set out earlier in this judgment, this Court feels that the following excerpt from the judgment of Barron J. in A. H. Masser Ltd [1986] I.R. 455 resonates for this application:-
“The restrictions imposed upon the borrower in In re Keenan Bros. Ltd. [1985] I.R. 401 were clearly more extensive than those imposed here. Nevertheless it seems to me that the essential provision is the restriction on the chargor which prevents it from purporting to charge, assign or otherwise dispose of its book debts and other debts. I regard this provision as acknowledging that the debts are in equity the property of the chargee and so not available to the chargor in the ordinary course of its business.”
Category A – balance at date of appointment – €59,381.66
29. The respondent in his affidavit sworn on 30th April, 2015, acknowledged that the “balance taken over at date of appointment” described at para. (a) of the notice of motion should be categorised as a floating charge property. Therefore, no issue now arises for determination.
Category B – cash lodgement Brinks €103,532.33
30. The managing director of Hilco and the receiver in his affidavit sworn on 14th July, 2015, referred to evidence that Brinks collected cash each day up to and after the appointment of the receiver.
31. It appears that A-Wear’s business continued seamlessly to be operated by another company which purchased the assets from the receiver. The original receiver split the cash which Brinks had collected between A-Wear and the new enterprise.
32. The evidence adduced suggests that A-Wear could not have used the cash held by Brinks in the ordinary course of its business. Hilco suggested that if a receiver had not been appointed the cash would have been lodged to bank accounts which were subject to another fixed charged under the debenture. The applicants mentioned that the agency agreement between A-Wear and Brinks was not exhibited. They relied upon the ambulatory nature of the cash held by Brinks when making submissions about whether the company was free to deal with this cash in the ordinary course of business.
33. The Court repeats that s.316 of CA 1963 requires applicants, when they are not the receiver, to establish that they are being “unfairly prejudiced to others”. This places an onus on the applicants to adduce sufficient evidence to allow for the directions to be made or to lay the basis for a more focused direction which could allow for the true position to be ascertained.
34. The Court does not have sufficient evidence to determine that the decision made by the respondent and his predecessor was incorrect. If the applicants wish to seek further directions to allow for further evidence to be adduced, such an application should be made by way of a new notice of motion which can assist the Court on how such evidence can be adduced and considered.
(c) Credit card receipts – €118,910.05
35. The respondent’s explanation that the credit card receipts created a debt obligation on the part of the credit card company to A-Wear was not controverted by the applicants.
36. Paragraph 63 of the grounding affidavit for the applicants confirmed that the applicants do not dispute the clause 3.1(n) applied, but the affidavit poses the question about whether the debenture provided for such a sufficient level of control as to allow the Court to determine that a fixed charge was created over the credit card receipts.
37. The Court relies upon the reasoning adopted by Barron J. in In Re A.H. Masser Ltd that the debenture sought to give Ulster a fixed charge over anything that was not ambulatory and that A-Wear so agreed. Taking the respondent’s averment that the credit card company owed a debt to A-Wear, the Court is not in a position to accept the applicants’ argument that the credit card receipts did not fall within the meaning of a book debt.
(d) Debtors – €339,535.78
38. The Court agrees with the respondent’s categorisation of these debtors as falling within the definition of book debts. A-Wear could not sell or dispose of these debts without the consent of Ulster in view of clause 8 of the negative pledge.
39. In this regard the Court having considered the entirety of clause 8 does not favour the applicants’ contention that Ulster did not have control or could not exercise control over the debts due to A-Wear.
(e) PayPal – €28,595.74
40. The respondent explained that this sum arose by the payment of customers through their PayPal account which meant that the customers had paid for their products sold by A-Wear without any credit facility. The applicant submitted that PayPal payments were equivalent to payments into a bank account available to A-Wear which was not the subject of a fixed charge.
41. The Court at the hearing of this application expressed its concern about the lack of evidence available to the Court from PayPal or others about whether a PayPal account payment could be categorised as a bank account credit available to A-Wear.
42. The respondent exhibited a tightly-typed 35 page standard user agreement of PayPal which was last updated on the 7th September, 2011, without an explanation as to its relevance or what provisions help to decide the issue. In those circumstances, the Court cannot have regard to that standard user agreement.
43. It was submitted for the applicants that clause 8.3 of the debenture ought to lead the Court to the conclusion that the PayPal sum could not be covered by sub-clause 3.1(n) of the debenture because “revenues” were not defined as including such payment.
44. The Court has no evidence which allows it to start a review of the respondent’s decision concerning the PayPal sum paid to the first receiver.
45. The Court is conscious of the precedent value of any ruling which it makes under this heading for liquidators or receivers with PayPal accounts having to be considered. In those circumstances, the Court declines to give the direction sought. A direction which is focussed on the type of evidence which can be adduced about the nature of the payments due to A-Wear by PayPal on the date of the appointment of the first receiver could be considered by the Court if the Applicants establish the necessary basis for making such an application.
46. The Court understands the respondent’s limited reasoning and in the absence of sufficient admissible evidence about the arrangements between A-Wear and PayPal, the Court cannot make the direction sought under this heading.
(f) Gift vouchers – €13,733.25
47. This heading in the notice of motion refers to the value of gift vouchers which were issued by third party companies such as One4all or An Post and used by customers to purchase goods from A-Wear. The issuers of those vouchers owed money to A-Wear and paid the sums due to A-Wear to the first receiver appointed. Clause 8.3 of the debenture relied upon by the applicants does not undermine Ulster’s agreed control over book debts. In those circumstances, the Court declines to give a direction as sought by the applicants in regard to these monies.
(g) Pre-payments – insurance rebate – €25,029.10
48. Ultimately, there was no dispute between the parties that this insurance rebate fell to be considered to be a book debt. In view of the contractual provisions in clause 8, the Court agrees with the categorisation maintained by the respondent receiver.
(h) Redundancy rebates – €27,033.62
49. These monies were received after the receiver was appointed and were described by the respondent in his affidavit as relating to a debt due by the Department of Social Protection to A-Wear. In that regard these monies fell within the meaning of book debts as described in clause 3.1(n) and there is no evidence to suggest that the contractual restrictions on A-Wear concerning book debts allowed A-Wear to sell or transfer these outstanding rebates without the consent of Ulster.
(i) Revenue draft cancelled – €90,779.53
50. This was a bank draft which had been obtained by A-Wear in favour of the applicants but had not been sent to the applicants. The applicants submitted that there was nothing explicit in the debenture about bank drafts and that it must therefore fall within the floating charge provisions of the debenture.
51. This submission ignores the fact that clause 3.1(n) includes all negotiable and non-negotiable instruments, indemnities and rights of tracing. The bank draft is an instrument which was capable of being cancelled so that the value could be reimbursed to A-Wear. The debenture precluded A-Wear from selling or disposing of such instruments save in accordance with the consent of Ulster. There does not appear to be anything ambulatory in nature about the bank draft and the court is not in a position to disagree with the categorisation maintained by the respondent.
(j) Inter account transfer – €186,902.22
52. There does not now appear to be a dispute about this sum following the service of the respondent’s affidavits which explained that these monies were the subject of separate charge documents.
(k) Sale of stock
53. It was agreed by the parties before the hearing of this application that this category should fall within the ambit of a floating charge.
Summary
54. The specific directions sought by the applicants for which consent are not forthcoming to date are therefore refused. However it is open to the applicants to seek a more focused application on another date if the parties think that it is desirable for directions to be made to allow for evidence to be adduced.
55. It may help the parties with grievances relating to determinations by a receiver or liquidator concerning the categorisation of assets which fall within fixed charges or floating charges to explain the difficulties which the Court faces in an application to reverse a decision of a receiver as in this case. The onus remains on an applicant to adduce the relevant evidence. Focussed questions to a receiver should be answered with candour. In the absence of a substantive reply and where injustice can be established, directions may be given to produce a fair and transparent reply.