Corporate Finance
Cases
In re Cummins; Barton v. Bank of Ireland.
[1939] IR 60
Johnston J.
This is a matter which is brought before the Court by Mr. John Horace Barton, the liquidator appointed in the voluntary winding up of M. J. Cummins, Ltd., a small trading concern in the town of Mullingar which was registered as a limited liability company in 1907 (without Articles of Association) under the name of “Dowdall, Limited”a name which was changed to “M. J. Cummins, Ltd.” on July 13th, 1918.
The capital of the company was, and is, a sum of £1,000, divided up into 1,000 shares of £1 each. The Memorandum of Association provides that “the objects for which the company is established” included primarily the purpose “to acquire as a going concern the business of a hardware and leather merchant carried on under the style or firm-name of Joseph P. Dowdall at 4 Dominick Street, Mullingar . . . and to acquire the whole or any of the assets in connexion with the said business.” The seven persons whose names are subscribed to this Memorandum as being desirous of being formed into a company (each being the possessor of one share) include the names of the said Joseph P. Dowdall, Josephine Dowdall (his wife) and M. J. Cummins, who was an assistant in the firm.
The business of the new company was carried on with great success, thanks (I understand) to the business ability and the industry of Mr. M. J. Cummins (who had been appointed the manager of the business and the secretary of the company) until in 1916.
Mr. J. P. Dowdall died. Then his son, Mr. T. J. Dowdall, solicitor, became a director of the company in his father’s place; and on June 25th, 1918 (Mrs. Dowdall and her son being now the directors) it was resolved at a meeting of the company to offer the business of the company to Mr. Cummins for a sum of £3,000. Now, if Mr. Cummins had fortunately been the possessor of £3,000. or if he had been able to raise that sum by means of a loan in his private capacity from the Bank of Ireland, who were the company’s bankers, giving the bank such security as he could offer, the question which arises in this case would never have been heard of; but Mr. Cummins’ resources were very limited. He had only a sum in ready cash of something over £200. Accordingly a very ingenious scheme was devised by which the bank was induced to advance a sum of £2,750 to enable Mr. Cummins to purchase the business, and the loan was made, not to Mr. Cummins but, (as I shall show), to the company. The company therefore exercised its general borrowing powers to get sufficient cash to enable Mr. Cummins to purchase the assets of the company, including the entire statutory capital, to become a director of the company and the owner of the whole of the capital, except a few single shares, and to carry on the concern as a one-man company, burdened at the outset of its new career with a huge debt, which was incurred for a purpose which was not one of the objects of the company, and which was clearly ultra vires.
The liquidator has now realised the assets of the company and there is a sum of £1,447 which is available for distribution; the ordinary creditors of the company have proved debts amounting in the aggregate to £1,724; and the bank’s debt has been reduced to the sum of £1,371.
The liquidator now wants the determination by the Court of the question whether he should admit the Bank of Ireland, in respect of their debt, to rank pari passu with the other unsecured creditors, and that is the question that I am called upon to answer. If the bank’s debt is to be postponed until the ordinary creditors are paid, the entire realised assets of the company will be exhausted, and the bank will have to look to their other securities for the amount of their debt.
This exercise by the company of its borrowing powers was, as I have indicated, clearly an act ultra viresthe powers of the company, and it is contended on behalf of the liquidator that the bank, at the time when they advanced this sum were well aware that the company was exceeding its powers and that no valid debt was thereby incurred whichso far, at any rate, as the innocent trade creditors of the company are concernedcan be relied upon by the bank.
Now, there are certain propositions of the law which have been advanced on behalf of the bank with which I entirely agree. For instance, it is the law that while a proposed lender in his dealings with a public company must be presumed to have notice of the provisions of its Memorandum and Articles of Association, he is not called upon in the case of a company which has a general power of borrowing, to make any inquiries as to the purpose of the loan in order to make sure that that purpose is within the powers of the company. That proposition is very conveniently illustrated in the case of In re David Payne & Co., Ltd. (1), where it was further decided that knowledge on the part of the lender that the money was intended to be misapplied will avoid the loan. In the same case it was held that knowledge, on the part of a director of the lenders, of the ultra vires purpose for which the loan is being got will not be imputed to the lending company if the person having such knowledge has a personal interest in the transaction. That principle, however, does not apply to the present case.
The main question in the case, therefore, is whether the bank had knowledge of the wrongful purpose for which this money was being raised; and, having analysed all the circumstances connected with the loan, I am satisfied that not only had the bank the fullest knowledge of that purpose, but the local Agent of the bank in MullingarMr. Lord was the person who arranged the ingenious plan by which the loan was carried through; so that, so far as the bank’s participation in the affair is concerned, the case goes far beyond the question of mere knowledge. In saying so much I do not wish it to be thought that I am imputing to Mr. Lord or to the bank blame of any kind. I think that the mistake took place through a failure to appreciate the limitations that must be read into Article 3 (o) of the Memorandum of Association and the realities as to the purpose of the loan.
The matter was first mooted in a letter from Mr. Lord to the bank, dated June 11th, 1918. The letter is headed”Mr. M. J. Cummins. Overdraft required £2,000,” and in it Mr. Lord explains to his directors that Cummins wants to open a current account and overdraw to the extent of £2,000, the accommodation being required “for the purpose of purchasing and taking over the business of Messrs. Dowdall, Ltd.” The writer states that the balance sheets and accounts of the company were enclosed together with the auditor’s reports to the previous December. Cummins, as a business man, is greatly praised by Mr. Lord, who adds:”He purposes paying about £2,500 to the Dowdalls.”It is stated further that the turnover of the business is £5,269 per annum and that Cummins “has already been offered the advance by another hank, but he does not want to leave the hank he has been dealing with.” The bank in their reply (a letter which is not before the Court) evidently asked for some further information, and Mr. Lord, on June 22nd, says: “Mr. Cummins is purchasing the whole business and intends working it in his own name.”Seeing that Dowdall, Ltd., was at the time being run as what is called a one-man company by Mr. Dowdall, there is a certain element of ambiguity in Mr. Lord’s letter. He makes a reference to the fact that “Mr. Dowdall is to give him a lease for 50 years at a rent of £80,” and that “at this rent the premises should be worth at least £800”;and then follows this important assurance: “Mr. Cummins does not anticipate any difficulty in paying off the overdraft in a few years . . . Mr. Dowdall is willing, if the directors require him, to sign a guarantee for £500. Mr. Dowdall is Crown solicitor.” I may add that he was also a director of Dowdall, Limited. The letter concludes:”We have no solicitor here keeping his account in this office. I would like to get Mr. Dowdall to open an account for business connected with the office which might pass through his hands, and for this reason would like to meet him as far as possible.” The consideration for the loan, then, is not only the liability of Cummins for the whole debt, but a guarantee from Mr. Dowdall for £500 and an expectation that he would open an account of his own with the Bank of Ireland.
There was a third letter from Mr. Lord to the bank on June 25th, which is now headed: “Michael J. Cummins. Overdraft required, £2,000. Accommodation bill, £750.”He says: “The price now agreed on between Mr. Cummins and Dowdall is £3,000. This will leave Cummins short by £750 of what he thought he would require. He has therefore to ask the Governors and Directors, in addition to the £2,000 on overdraft, for liberty to discount a pro. note for £750. Mr. Dowdall has agreed to sign this pro. note, provided Cummins gets another good party to join. Mr. Dowdall will then be responsible for the note and also a guarantee for £500.” He added that Cummins would lodge two small policies of insurance for £200 and insure his life for a further sum of £800.
In the bank’s letter in reply, it is stated that the bank consents to give Cummins accommodation to the extent of £2,000 and to discount the joint and several promissory note of Cummins and Thomas Dowdall “to assist him [Cummins] to purchase the assets and goodwill of Messrs. Dowdall, Ltd., which he has agreed to buy for £3,000.”This advance is to be collaterally secured by the policies of insurance to which I have referred, the £500 guarantee by Mr. Dowdall and a deposit of the lease of the premises. security which is described in the letter as “of a rather meagre nature.” Now, it seems to me that, if there were nothing more in the case, the circumstances that I have detailed undoubtedly called for inquiry at the hands of the bank. First of all there was the statement in Mr. Lord’s first letter that Cummins required the accommodation for the purpose of “purchasing and taking over the business of Dowdall, Ltd.”a highly ambiguous phrase that required explanation. Secondly, there was the reference to the purchase of the “assets” of this incorporated company, an operation that certainly could not be carried through by a stroke of the pen, particularly as the assets might have been regarded as including the share capital. Thirdly, some explanation was required of the extent of the loan£2,750in the case of a little company whose capital amounted in all to a sum of £1,000; and, finally, the bank authorities had before them the balance sheets of the company and the report of the auditor which Mr. Lord had taken the trouble to send to headquarters. These documents must have given the Governors of the bank an exact picture of the financial position of the concern that was to be “taken over”; and the bank knew, or could have known if they had taken the trouble to look at the Memorandum of Association, that Cummins was one of the shareholders in the company. But, apart from these considerations, there is a great deal more in the case.
The course of events in connection with the disappearance of the Dowdalls and the emergence of Cummins is interesting. On June 25th, 1918, a resolution was passed by the company that the business of the company should be offered to Cummins for £3,000, and on July 13th a resolution was passed that the name of the company should be changed to “M. J. Cummins, Ltd.,” and that resolution was confirmed at an extraordinary meeting on the 29th. Two days previously a resolution had been passed that a transfer of 490 shares by Mr. Dowdall to Cummins should be registered. It does not appear that Cummins made any payment in respect of these shares. On August 1st Dowdall’s letter of guarantee to the bank for £500 was executed. It is true that it was a document guaranteeing Cummins’s own account only, but it was a step in the carrying out of the plan that had been arranged, and it was witnessed by Mr. Lord, the hank’s Agent in Mullingar. The following clause, in the light of what happened sub-sequently, is important: “In the event of this guarantee ceasing to be a continuing guarantee, the bank may open a fresh account or fresh accounts, or continue any existing account with the principal debtor.” In 1922 when Mr. T. J. Dowdall intimated to the bank his intention to withdraw from his guarantee, the bank seems to have treated that guarantee as one securing the company’s liability, and not Cummins’s own personal liability.
The actual payment off of the Dowdalls was effected by the opening of two accounts in the Mullingar branch of the bank. First of all, Mr. Cummins opened a private account on (I think) August 9th with an overdraft to his credit of £2,750. On that date he drew a cheque upon his account for £2,750 in favour of Mr. T. J. Dowdall, and thereupon he became indebted personally to the bank in that sum; and he lodged with the bank the promissory note for £750, signed by two sureties, one of whom was Dowdall. On the same date there was a meeting of the directors of Dowdall, Ltd.that is, Mrs. Dowdall and her son. The former resigned her directorship and Cummins was appointed a director in her place. The cheque given to Dowdall presumably was lodged to his own account, and came back to the Bank of Ireland to be cleared; so that Mr. Lord then became aware (if he did not know the fact before) that the Dowdalls had been paid off, and he knew also that Dowdall remained liable to the bank as surety to the extent of £750. Cummins’s private account, which obviously was intended to be used as a bridging expedient, stood in this way. He was debited with the following sums: discount on the note (£23 1s. 0d.); overdraft (£2,750) and the costs of the bank’s law agent (£1 18s. 6d.). He was credited with the amount of the bill (£750 0s. 0d.) and with a sum of £2,024 19s. 6d. which was paid to his credit by “M. J. Cummins, Ltd.” The balance is marked “nil,” and the account, having done its work, was closed on October 14th.
The reorganised company’s own account was opened on October 12th under the name of “M. J. Cummins, Ltd., hardware, leather and seed merchant; M. J. Cummins, director.” The first item is a lodgment to credit by Mr. Cummins of a sum of £232 4s. 5d. (which was, I assume, the only ready cash of which he was possessed at the time) and a cheque is drawn on this account for the sum of £2,024 19s. 6d. (the amount which was lodged to Cummins’s private account), leaving a net debit balance on this date of £1,792 15s. 1d. The firm of M. J. Cummins, Ltd., accordingly starts on its career, burdened with this huge debt which was incurred not in the course of its trading (for it was really incurred before the company began to trade at all) or for any of the purposes of the company within the meaning of the Memorandum of Association, but for the purpose of a borrowing by the company in order to discharge a personal debt incurred by Cummins himself;
and the debt includes not only the amount borrowed, but even the amount of the discount upon the promissory note of Cummins and Dowdall and the amount of the bank’s law expenses. The last episode in this roundabout process is the guarantee of September 23rd, 1918, in which the”principal debtor” is described as the company and Cummins himself is the guarantor. This document, which is stated to have been executed “at the request of the above-named M. J. Cummins, Ltd.,” guarantees to the bank the sum of £2,750 with costs, charges and interest, and it is executed by M. J. Cummins personally as guarantor, the witness being Mr. Lord as Agent of the bank. On October 28th, the account of Dowdall, Ltd., was closed in the Mullingar branch, and on June 2nd, 1919, a general meeting of the company was held and a transfer of 508 additional shares from Dowdall to Cummins was ordered to be registered.
I am satisfied from the evidence that is before me that the bank had the fullest notice and that they cannot be heard to allege that they did not know that the borrowing by the company was an ultra vires transaction. It seems to me that they knew of every step in the process, and not only did they know of, but they actually participated in, nearly everything that happened. It is unfortunate that Mr. Lord is unable to make an affidavit as to his version of the facts, but nothing that he could say would alter the outstanding facts. In January, 1922, Mr. Dowdall served a notice intimating that he withdrew from his guarantee, and the bank closed the account of the company and opened a new working account to enable the company to carry on its business. As the full facts of that transaction are not before me and as it may give rise to questions in the future, I feel that I ought to say nothing about it.
It seems to me, then, that I have said enough to enable me to decide the matter that the liquidator has brought before me, seeing that it involves only a question as between the claims of a number of ordinary trading creditors and the claim of the bank founded upon an ultra vires transaction of the company of which they had notice; but, out of courtesy to the learned counsel for the hank, I think that I should say a word or two as to a number of extraneous matters.
First of all, it is almost unnecessary to say that a company cannot ratify an act of its own or an act of its directors which is outside and beyond the constitutional powers of the company. If such a thing were possible, it would mean an end for ever of the salutary principle of ultra vires. There are eases in which the ultra vires acts of directors have been held to be ratified by the conduct of the company, but those were cases in which the acts, if done by the company, would have been intra vires. In the case of the Ashbury Railway Carriage and Iron Co. v.Riche (1), Lord Cairns said: “It would be perfectly fatal to the whole scheme of legislation . . . if you were to hold that, in the first place, directors might do that which even the whole company could not do, and that then, the shareholders finding out what had been done, could sanction subsequently what they could not antecedently have authorised,” and Lord Hatherly laid down a proposition which is very pertinent in the present case: “I think that the Legislature had in view the object of protecting outside dealers and contractors with this limited company from the funds of the company being applied . . . for any other object whatsoever than those specified in the Memorandum of Association.” Similarly Lord Macnaghten in the case of Trevor v. Whitworth (2), quoting Cotton L.J., said that no part of the capital of a company “can be returned to a member so as to take away from the fund to which the creditors have a right to look as that out of which they are to be paid.” This matter has been very neatly summed up in the following proposition which I take from Mr. Howard A. Street’s excellent text-book onUltra Vires. The learned author says: “No act which isultra vires of the corporation itself can be validated by ratification or acquiescence, or otherwise than by statute.”
The learned counsel for the bank then discussed at length the law as to subrogation and tracing orders, and endeavoured by some such means to place the bank’s claim on an equality with the debts of the ordinary trading creditors. There is here a confusion of thought which must be set right. When an ultra vires act is committed by a borrowing company, on the one hand, and by a lending company, on the other, no debt, common law, equitable or otherwise, is thereby created in favour of the latter as against the former. The theory of the law is that the whole transaction is null and void and can give rise to no legal rights or claims whatever. In dealing with a limited company, which must act strictly within its constitution, a contracting party must watch his step; and in regard to this liability there is no difference between a family company and a great trading corporation. As was said by that master of clear-thinking and lucid expositionLord Macnaghtenin Trevor v. Whitworth (1), “a family company . . . does not limit its trading to the family circle. If it takes the benefit of the Act, it is bound by the Act as much as any other company. It can have no special privilege or immunity.”In the Ashbury Case(2), Lord Cairns quotes with approval the following words of Blackburn J., in all their useful harshness, as to the effect of an ultra vires transaction:”I do not entertain any doubt that if, on the true construction of a statute creating a corporation it appears to be the intention of the Legislature, expressed or implied, that the corporation shall not enter into a particular contract, every Court, whether of law or equity, is bound to treat a contract entered into contrary to the enactment as illegal, and therefore wholly void.”
It frequently happened, however, that corporations, found themselves with surplus assets in their hands, after the ordinary creditors had been paid in full, and the anxious question then arose whether the shareholders of the company were to be allowed to make a profit for themselves by means of the money which had been wrongly or mistakenly advanced by their partner in the ultra virestransaction. That question was discussed at great length in the great case of Sinclair v. Brougham (3) (the celebrated Birkbeck Bank case) in which a building society had opened a bank and had taken huge sums, amounting to millions of pounds, from depositors. In the liquidation of the company, after the ordinary creditors has been paid in full, a large surplus remained in the hands of the liquidators, and the question arose whether that sum should be paid to certain classes of members of the building societythat is, whether the surplus in its entirety was assets of the societyor should be paid back in whole or in part to the depositors (the lenders). The problem before the House was how to work out “the higher equity that no one has a right to keep either property or the proceeds of property which does not belong to him,” without trenching upon the principle of ultra vires. The anxious search of the Law Lords, set out in fifty pages of the Law Reports, for a formula which would on the one hand, be based upon sound principles of equity, and, on the other, would not be a mere good-natured gesture, is the most remarkable illustration of which I am aware of the meticulous care with which that House approaches the task of reconciling what is called “abstract justice” with the strict rule of law. In the result, it was pointed out that that reconcilement could be effected either through the principle of subrogation (the principle, as Lord Dunedin explained, that if the lender could show that the borrowed moneys had been expended in paying the just debts of the borrower, the lender would be entitledpro tanto to the benefit of the relief that the borrower had thereby gained), or through the principle that the money that was lent was not a debt, but was trust money that the lender might follow by means of a tracing order.
But these considerations have no applicability to the present case. Neither principle could possibly be brought into operation in a contest between the genuine creditors of a company and a person who had lent money to the company under an arrangement that was “illegal and therefore wholly void.” In the Birkbeck Bank Case (1)the ordinary creditors had been paid in full, and their right to that treatment was not controverted. Lord Dunedin (at p. 437) says that the trade creditors were, in his judgment, “rightly paid, under the circumstances of the actual case, and had they not been, they would stand, after expenses of the liquidation, as first in the ranking. For, in a question with shareholders, we are told that they were debts of a character which the directors had a power to make. And in a question with the depositors [the lenders] they were incurred in a business, illegally carried on no doubt, as for the society, but yet one which the depositors had been willing that the directors should carry on.” That is exactly the question that arises in the present case, and it seems to me that this proposition of Lord Dunedin determines it. Lord Sumner seems to express the same view in a passage at p. 459, and the implications that are to be drawn from a passage in Lord Haldane’s judgment at p. 414 are to the same effect.
The case of In re National Permanent Benefit Building Society (2) seems to me to afford further authorityif such is neededfor the conclusion at which I have arrived. The case decides that if the bank had applied for the winding up of M. J. Cummins, Ltd., claiming to be creditors by virtue of the loan that had been made, the Court would have been obliged to refuse the order. In that case a lender who had advanced an ultra vires loan was held to be unable to get a winding up order, and Romilly M.R., who had made such an order, was reversed. Giffard L.J. held that there was no debt, either legal or equitable, owing to the petitioners and that therefore they could not ask for the winding-up of the company. He said that if the lenders had any rights founded in equity, either against the property of this company, which was pledged to them, or against the persons to whom the money was lent,”they can only be asserted by filing a bill and taking a very different proceeding from that which has been taken here.” In other words, he held that there could be no controversy between the ultra vires lenders and the creditors of the society, but that the former persons might establish rights as against the persons to whom the money was lent or against the property to which it could be traced.
The last case to which I need refer is that of the Bank of Ireland v. Cogry Flax-spinning Co., Ltd. (1), in which Porter M.R., in the course of the winding-up of a one-man company, found that certain debentures which had been issued to a supposedly secured creditor were “issued without authority and without consideration” and that “they do not bind the assets as against the creditors.”
In this judgment I have said nothing as to the collateral security which the bank insisted upon getting not only from Mr. Cummins but from Mr. T. J. Dowdall as well the guarantee for the whole debt from Cummins, the promissory note from the two of them and the guarantee for £500 from Dowdall; but it might be said that all this suggests at least a certain amount of misgiving in the mind of the bank as to the entire regularity of the transaction with M. J. Cummins, Ltd. It is satisfactory to know, however, that the taking of this wise precaution on the part of the bank may have useful consequences in regard to the balance owing to them.
I shall therefore make the order which has been suggested by the liquidator (2).
Northern Bank Finance Corp Ltd v Bernard Fursey Quinn and Achates Investment Co
1979 No. 102 Sp
High Court
8 November 1979
[1979] I.L.R.M. 221
(Keane J)
KEANE J
delivered his judgment on 8 November 1979 saying: On 15 November 1973, the plaintiffs (whom I shall call ‘the bank’) wrote to the first-named defendant (whom I shall call ‘Mr Quinn’) informing him that they would make loan facilities available to him on the terms and conditions set out in the letter. The letter went on to state that the amount of the loan was £145,000.00 and that the rate of interest thereon would be 3% per annum over the average cost to the bank of raising funds on the inter bank market. It was also stated that the loan be repayable on demand, but that if no demand were made, it would be the bank’s understanding that, with effect from 1 November 1974, monthly payments of £3,000 each would be made by Mr Quinn towards the payment of principal and interest.
The letter also stated that the loan was to be secured inter alia by the unconditional and continuing guarantee of the second-named defendant (whom I shall call ‘the company’) of the loan, interest and repayment arrangements, supported by a first legal mortgage on the title deeds and documents relating to 54 acres of land at Ratoath, County Meath and 56 acres at Jamestown, County Meath.
The bank’s solicitor, Mr T.F. O’Connell, was asked by the bank to attend to the legal formalities necessary to complete the transaction; and on 29 November 1973 he sent to Mr Quinn’s solicitors a number of documents, including requisitions on title relating to the properties which were to be the subject of the mortgage, a draft mortgage, a draft guarantee by the company and a draft *224 resolution to be passed by the directors of the company empowering the company to guarantee the sum of £145,000 and the interest thereon. On 30 November 1973 the necessary resolution was passed by the directors of the company; and on the same day a guarantee was also executed by them in respect of the sum of £145,000. and interest thereon. The mortgage supporting the guarantee was executed by the company on 13 December 1973, the delay being due to the necessity to discharge a prior incumbrance on the land.
Mr O’Connell also received from Mr Quinn’s solicitors a copy of the memorandum and articles of association of the company. It will be necessary to refer to these documents in more detail at a later stage.
Mr Quinn having failed to pay certain of the instalments of £3,000 as they fell due, the bank called in the balance of the loan and commenced these proceedings by way of special summons claiming as against Mr Quinn payment of the sum of £50,829.38 as due and owing by him on foot of a covenant in the mortgage; and as against the company an order declaring the same sum well charged upon the two properties already referred to together with the usual consequential relief.
The liability in principle of Mr Quinn on foot of the covenant in the mortgage was not disputed. Evidence was adduced on behalf of the bank that the amount due in respect of principal and interest calculated in accordance with paragraph 1 (1) (c) of the mortgage at the date of the hearing was £56,524.60. Counsel for Mr Quinn submitted that the bank had not properly proved the amount of interest properly payable having regard to the terms of paragraph 1 (1) (c) and that accordingly the summons should be dismissed against him. I rejected this submission and gave judgment against Mr Quinn for the sum of £56,524.60 and costs.
It was submitted on behalf of the company that the execution of the guarantee was ultra vires the memorandum and articles of association and that, accordingly, both the guarantee and the mortgage (insofar as it comprised the company’s property) were void. Counsel for the bank submitted that the guarantee was intra vires the memorandum and articles of association; but that even it if were not, the bank were protected by the modification of the ultra vires rule effected by s. 8 of the Companies Act, 1963. He further submitted that, since the memorandum had been subsequently altered by a resolution of 18 May 1974, so as to put beyond doubt the power of the company to execute guarantees, the guarantee of 30 November 1973 was retrospectively validated and he relied in this connection on s. 10(1) of the Act. Counsel for the bank finally submitted that, in any event, the company were estopped from relying on the alleged lack of vires.
The company is an unlimited company having a share capital. Its objects are set out in paragraph 2 of the memorandum of association. The first of them, in truncated form, reads as follows:
To acquire and hold … shares and stocks of any class or description, debentures, debenture books, bonds, bills, mortgages, obligations, investments and securities of all descriptions and of any kind issued or guaranteed by any company, corporation or undertaking … and investments, securities and property of all descriptions and of any kind …
*225
This, coupled with the fact that the company is an unlimited company, would suggest, so far as it is relevant, that the company was not intended to be a trading company in the ordinary sense but rather an investment company. Clause 2(f) empowers the company:
Incidentally to the objects aforesaid, but not as a primary object, to sell, exchange, mortgage (with or without power of sale), assign, turn to account or otherwise dispose of and generally deal with the whole or any part of the property, shares, stocks, securities, estates, rights or undertakings of the company …
This clause was not relied on by counsel for the bank as empowering the transaction in question, but was relied on by counsel for the company as indicating that the company was empowered to mortgage its property only where the execution of the mortgage was incidental to one of the objects of the company set out in sub-paragraphs (a) to (e).
Sub-paragraph (k) empowers the company:
to raise or borrow or secure the payment of money in such manner and on such terms as the directors may deem expedient and in particular by the issue of bonds, debentures or debenture stock, perpetual or redeemable, or by mortgage, charge, lien or pledge upon the whole or any part of the undertaking, property, assets and rights of the company, present or future, including its uncalled capital and generally in any other manner as the directors shall from time to time determine and to guarantee the liabilities of the company and any debentures, debenture stock or other securities may be issued at a discount, premium or otherwise, and with any special privileges as to redemption, surrender, transfer, drawings, allotments of shares, attending and voting at general meetings of the company, appointment of directors and otherwise.
This sub-paragraph — and in particular the words ‘secure the payment of money’ — was relied on by counsel for the bank as authorising the execution of the guarantee. It was accepted that the words ‘to guarantee the liabilities of the company’ in this clause were meaningless as they stood; but counsel for the bank submitted that the clear intention was to enable the company to guarantee the liabilities of third parties and that these words in the sub-paragraph should be so read. Counsel for the company submitted that, insofar as the words could be given any meaning, they should be read as empowering the company to procure the guaranteeing of its own liabilities by third parties.
Sub-paragraph (t) empowered the company:
to do and carry out all such other things as may be deemed by the company to be incidental or conducive to the attainment of the above objects or any of them or calculated to enhance the value of or render profitable any of the company’s properties or rights.
It was submitted on behalf of the bank that this sub-paragraph was sufficiently wide-ranging in its terms to enable the company to execute the guarantee in question. It was submitted on behalf of the company that the sub-paragraph merely authorised the doing of such things as were incidental to the attainment of any of the preceding objects and that since it could not be shown that the execution of a guarantee was incidental or conducive to the attainment of any of the objects referred to in the preceding sub-paragraphs, of itself it could not render the transaction in question intra vires.
It is clear that sub-paragraph (f) did not authorise the execution of the guarantee *226 in question and that, insofar as it authorised the company to execute a mortgage, this could only be done incidentally to the objects set out in sub-paragraphs (a) to (e). Counsel for the bank did not indeed advance any submission to the contrary. He did, however, as I have already indicated rely on sub-paragraph (k). I have set out that sub-paragraph in full, because I think the wording used plainly indicates that it was essentially intended to confer a power of borrowing on the company. Viewed in this context, the words ‘secure the payment of money’ could not reasonably be read, in my opinion, as conferring a power to execute guarantees. The words ‘secure the payment of’ are used disjunctively in opposition to ‘raise’ and ‘borrow’, clearly indicating that it was intended to confer on the company a power of obtaining money for its own purposes and not a power to guarantee advances made to other persons. Counsel also relied on the words ‘to guarantee the liabilities of the company’ and submitted that, as this phrase literally construed was meaningless, it should be construed as though, in place of the words ‘the company’, there appear the words ‘other persons’ or similar words. While I accept that the words, literally construed, are meaningless, since a company cannot guarantee its own liabilities, I see no warrant in the wording of sub-paragraph (k) as a whole for giving the expression in question the meaning contended for by Mr O’Neill SC. To give it such a meaning would not merely be to do violence to the actual language used but would also be inappropriate in any event in the context of a sub-paragraph which, as I have said, is essentially concerned with enabling the company, and not other persons, to borrow money. It seems more likely to me that it was intended by the use of this phrase to enable the company to secure the guaranteeing by third parties of its own liabilities.
Sub-paragraph (t) was also relied on by counsel for the bank; but, in my view, the execution of a guarantee could not reasonably be regarded as ‘incidental or conducive to the attainment of’ any of the objects set out in the preceding sub-paragraphs. The sole object of executing the guarantee was to facilitate the borrowing by Mr Quinn of the sum of £145,000 from the bank. Only the bank and Mr Quinn could possibly derive any benefit from this transaction; the company could derive no benefit from the advancing of money to Mr Quinn. The securing by means of a guarantee of a loan to Mr Quinn could not properly be regarded as being fairly incidental to the objects expressly authorised by the memorandum within the meaning of the well known rule first laid down in Attorney General v Great Eastern Railway Co (1880) 5 App. Cas. 473. The effecting of such a transaction was not ‘incidental or conducive to the attainment of’ any of the expressly authorised objects within the meaning of sub-paragraph (t); nor was it ‘calculated to enhance the value of or render profitable any of the company’s properties or rights’ within the meaning of that sub-paragraph.
It follows, in my view, that the memorandum conferred neither expressly nor by implication any power on the company to execute a guarantee for the purpose of securing the payment of a bank loan to Mr Quinn. In these circumstances, it is unnecessary to express any final opinion on a further submission advanced by Mr McCracken SC that, even were the memorandum to be read as conferring an express power on the company to execute such a guarantee, the transaction would nonetheless be ultra vires since no conceivable benefit could result to the *227 company from it. The celebrated observations of Bowen LJ, in Hutton v West Cork Railway Co (1883) 23 Ch D 654 that ‘charity cannot sit at the boardroom table’ and ‘there are to be no cakes and ale except for the benefit of the company’ may have been extended too far in In re Lee, Behrens & Co [1932] 2 Ch 46; and while this latter decision might appear to afford support for Mr McCracken’s proposition, its authority as a persuasive precedent would require reconsideration to-day in the light of the decision in Charterbridge Corporation Ltd v Lloyds Bank Ltd [1970] Ch 62. Having regard, however, to the conclusion I have arrived at, it is unnecessary that I should say anything more on this aspect of the case.
Counsel for the bank submitted that, even if the execution of the guarantee were ultra vires the memorandum, his clients were protected by s. 8(1) of the Companies Act, 1963. That sub-section provides as follows:
Any act or thing done by a company which if the company had been empowered to do the same would have been lawfully and effectively done shall, notwithstanding that the company had not power to do such act or thing, be effective in favour of any person relying on such act or thing who is not shown to have been actually aware, at the time when he so relied thereon, that such act or thing was not within the powers of the company, but any director or officer of the company, who was responsible for the doing by the company of such act or thing shall be liable to the company for any loss or damage suffered by the company in consequence thereof.
Evidence was given on behalf of the bank by Mr T.F. O’Connell who was, in November 1973, the bank’s solicitor. He said that he received the title documents relative to the transaction from the security department of the bank in November 1973, with instructions to prepare the necessary mortgage documentation in connection with the loan. He was furnished with the title deeds to the properties concerned and with the memorandum and articles of the company. He investigated the title in the normal manner and drew up the necessary resolution to be passed by the directors of the company, the mortgage and the guarantees. He also sent out the two sets of requisitions on title. He said that the first intimation that he had that there was any doubt as to the power of the company to execute the guarantee was contained in a letter from the company’s solicitors to the bank dated 6 December 1978.
Mr O’Connell said that he did not specifically recall reading the memorandum and articles. His normal procedure, before drawing up the resolution of the directors, was to check the objects clause. He could not, however, recall checking the objects clause in the present case. He said that it did not occur to him that the transaction was not within the powers of the company. His normal practice was to mark the relevant objects in pencil, but he had not done so in this instance.
It is not surprising to find that Mr O’Connell had no positive recollection of reading the memorandum and articles, since, as he indicated, he has occasion to read so many documents of this nature that he can hardly be expected to remember each of them, particularly when the transaction in question took place nearly six years ago. I think that the probabilities are that Mr O’Connell did read the objects clause of the memorandum; it would be surprising if he did not, since it was furnished to him so that he could satisfy himself as to the existence in law of the company and its power to enter into the proposed transaction. It may well be that, as is not uncommon with busy practitioners when dealing with *228 matters of this nature, his eye travelled reasonably rapidly over a number of the clauses. But I think that the probabilities are that he did read the memorandum and came to the conclusion that the execution of the guarantee and the mortgage was within the powers of the company. Had he come to any other conclusion, I have not the slightest doubt but that he would have advised his principals not to close the transaction until the necessary amendment had been effected to the memorandum. It follows that Mr O’Connell was aware of the contents of the objects clause of the memorandum, but must have mistakenly believed that they empowered the company to execute the guarantee and mortgage. It would not have been in accordance with his normal practice to dispense with reading the memorandum and I have no reason to suppose that he departed from his normal practice on this occasion. It is, of course, inconceivable that he appreciated the lack of vires but simply did not do anything about it.
The question accordingly arises as to whether, in these circumstances, the bank were ‘actually aware’, within the meaning of s.8(1) of the lack of vires. Mr O’Neill SC submitted that the language of s. 8(1) clearly demonstrated that the onus of establishing actual knowledge within the meaning of the section is on the person who asserts that such knowledge existed and that, accordingly, the onus was on the company, to establish that the bank were ‘actually aware’ of the lack of vires. This may well be so, but I do not think it is material to the issue which has to be resolved in the present case. There is no conflict as to the facts in the present case; Mr O’Connell was the only witness on this issue and he was called by the bank. The only question that arises is as to whether, having regard to that evidence and the inferences, which, in my view, necessarily follow from it, the bank can be said to have been ‘actually aware’ of the lack of vires.
Mr O’Neill SC submitted that actual, as distinguished from constructive, notice of the lack of vires was essential if a third party was to lose the protection of s. 8(1). I accept that this is so: altogether apart from authority, the language used would suggest that what the legislature had in mind was actual and not constructive notice. Moreover, to interpret the section in any other way would be to frustrate its manifest object. While there is no authority of which counsel were aware or which I have been able to discover on the section, the mischief which it was designed to avoid is clear. Prior to the enactment of the section, all persons dealing with a company were deemed to have notice of the contents of the company’s public documents, including its memorandum and articles. If a transaction was ultra vires, the other party to it, speaking generally, had no rights at all. The manifest injustice and inconvenience which followed from this rule is amply illustrated by the decision in In Re Beauforte (Jon) (London) Ltd [1953] Ch 131, which was referred to in the argument.
But if constructive notice can still be relied on in answer to a party claiming the protection of this section, the protection in question would be, to a significant extent, eroded. It is clear, moreover, that the doctrine of constructive notice should not normally be applied to purely commercial transactions, such as the advancing of money: see the observations of Kenny J delivering the judgment of the Supreme Court in Bank of Ireland Ltd v Rockfield Ltd [1979] IR 21.
But while I am satisfied that the doctrine of constructive notice does not apply *229 to the sub-section under consideration, this does not dispose of the matter. The bank, because of the knowledge of their agent, Mr O’Connell, which must be imputed to them, were aware of the objects of the company. There were no further facts of which they could be put on notice. But they failed to draw the appropriate inference from those facts, i.e. that the transaction was ultra vires. Mr O’Neill SC submits that, even accepting this to be so, this is not the actual knowledge which the section contemplates.
A great number of transactions are entered into every day by companies, public and private, without any of the parties looking at the memorandum in order to see whether the transaction in question is in fact authorised by the memorandum. I think it probable that, on the occasions when the memorandum is looked at before a transaction is entered into, it is normally because the company’s solicitor or a solicitor for a third party wishes to satisfy himself that the proposed transaction is intra vires the memorandum. I think it is clear that the section was designed to ensure that, in the first category of cases, persons who had entered into transactions in good faith with the company without ever reading the memorandum and accordingly with no actual knowledge that the transaction was ultra vires were not to suffer. I can see no reason in logic or justice why the legislature should have intended to afford the same protection to persons who had actually read the memorandum and simply failed to appreciate the lack of vires. The maxim ignorantia juris haud neminem excusat may not be of universal application, but this is certainly one situation where it seems fair that it should apply.
This is best illustrated by an example. The directors of a public company decide to invest the bulk of the company’s resources in a disastrous property speculation as a result of which the company suffers enormous losses. The company in fact had no power to enter into any such transaction, but the vendor’s solicitors, although furnished with the memorandum and articles, failed to appreciate this. If the submission advanced on behalf of the bank in this case is well founded, it would mean that, in such circumstances, the innocent shareholder would be the victims rather than the vendors. There seems no reason why the consequences of the vendors’ failure to appreciate the lack of vires should be visited on the heads of the blameless shareholders. I do not overlook the fact that the sub-section gives the company a remedy against any director or officer of the company who is responsible for the ultra vires act; but such a remedy may not necessarily enable the innocent shareholder to recoup all his losses.
It is interesting in this context to note that in the United Kingdom the Jenkins Committee recommended that even actual knowledge of the contents of the memorandum should not deprive a third party of his right to enforce a contract if he honestly and reasonably failed to appreciate that they precluded the company or its officers from entering into the contract: see Cmnd. 1749, paras, 35–42. Writing in the early days of the operation of our Act, Mr Alexis Fitzgerald said of s. 8 (see ‘A Consideration of the Companies Act …’ 1 Ir. Jur. (n.s.) 16):
The draughtsmen wisely reject the advice of the Jenkins Committee, which would have given contractual rights even to third parties with actual knowledge, where such a third party could prove he honestly and reasonably failed to appreciate the effect of the lack of power. Acceptance of this recommendation would have created uncertain and therefore bad law
*230
In England, the ultra vires rule was modified by s. 9(1) of the European Communities Act, 1972, and while the language of the section is different from that of s. 8 of our 1963 Act, the requirement being that the third party should have acted in good faith, it is interesting to note that the editors of the 22nd edition of Palmer’s Company Law take the view that it would not protect the third party in circumstances such as the present: see Vol I, p. 97.
I am satisfied that, where a party is shown to have been actually aware of the contents of the memorandum but failed to appreciate that the company were not empowered thereby to enter into the transaction in issue, s. 8(1) has no application. It follows that, in the present case, the bank cannot successfully rely on s. 8(1).
Mr O’Neill SC next submitted that the execution of the guarantee was retrospectively validated by a special resolution of the company passed on 18 May 1974. It is conceded on behalf of the company that this resolution effectively amended the memorandum so as to enable a guarantee to be executed. Mr O’Neill SC relied on s. 10(1) of the Act of 1963, which provides that:
Subject to sub-section (2) a company may, by special resolution, alter the provisions of its memorandum by abandoning, restricting or amending any existing object or by adopting a new object and any alteration so made shall be as valid as if originally contained therein, and be subject to alteration in like manner.
He argued that the words ‘shall be as valid as if originally contained therein’ meant, in a case such as the present, that a transaction entered into prior to the passing of the resolution was, as it were, retrospectively validated.
I do not think that is correct. Were it so, the consequences would be strange indeed: as pointed out by Mr McCracken SC, if the company in the present case originally had power to execute a guarantee and deprived itself of that power by the passing of a subsequent resolution, it could hardly be said that the execution of the guarantee prior thereto was thereby invalidated. I think that the meaning of the words in question is quite clear, if one considers the provisions of s. 7 which provides that:
the memorandum must be printed, must bear the same stamp as if it were a deed, and must be signed by each subscriber in the presence of at least one witness who must attest the signature.
The words relied on by Mr O’Neill SC were clearly designed, in my view, to relieve the company from the necessity of having the memorandum in its altered form signed again by the subscribers and attesting witnesses and then reprinted. This is also the view taken in one of the leading English text books on the subject: see Gower’s Principles of Modern Company Law (3rd ed.) at p. 90, n. 43.
Finally, Mr O’Neill SC submitted that the company were estopped at this stage from contesting the validity of the guarantee. He concedes that the doctrine of estoppel could not enable the company validly to perform an act which was ultra vires; but submits that as the company had been empowered since 18 May 1974, to enter into the transaction, they cannot now be heard to say that it is ultra vires. In particular, he relies on a letter written by the company to the bank on 31 December 1976, in which they said: *231
As you are aware, this company has guaranteed the borrowings from the corporation of Mr Fursey Quinn.
Please let us have details, in confidence, of the guaranteed borrowings in relation to the amount outstanding including interest, the amount and timing of repayments made and interest paid to date.
Mr O’Neill SC points out that the bank had power at any times to call in the amount of the loan; and that, following the receipt of this letter, they acted to their detriment by failing to call it in.
The ingredients of estoppel in pais are set out in Vol. 16 of Halsbury’s Laws of England , 4th ed, para. 1505 as follows:
Where a person has by words or conduct made to another a clear and unequivocal representation of fact, either with knowledge of its falsehood or with the intention that it should be acted upon, or has so conducted himself that another would, as a reasonable man, understand that a certain representation of fact was intended to be acted on, and that [sic] the other has acted on the representation and thereby altered his position to his prejudice, an estoppel arises against the party who made the representation, and he is not allowed to aver that the fact is otherwise than he represented it to be.
Can it reasonably be said that, in the present case, the bank acted on the representation contained in the letter of 31 December — if representation it were — and thereby altered their position to their prejudice? There is no reason to suppose that at the date this letter was written the bank entertained the slightest doubts as to the validity of the guarantee or mortgage. Had they entertained any such doubts, they would have immediately required the re-execution of the guarantee and the mortgage before allowing any further interest to accumulate. There is nothing to suggest that this letter had any effect on the attitude of the bank towards calling in the loan. I do not think that it could be said that they in any way altered their position to their prejudice as a result of any representation that may have been contained in this letter. I think it is also clear that the mere fact that the company sent to the bank its memorandum and articles of association at the time of its application for a loan could not in any sense be said to constitute a representation which was subsequently acted on to their detriment by the bank. Their action in so doing was not a representation that the company had the power in question; it was no more than an invitation to the bank to satisfy themselves the the transaction was intra vires and there is no reason to suppose that any request to alter the memorandum would not have been immediately complied with. I am accordingly satisfied that this submission also fails.
In these circumstances, I am satisfied that the execution of the guarantee was ultra vires and that the bank cannot successfully rely on any of the grounds advanced by counsel. It is, I think, accepted that the mortgage is in turn dependent for its validity upon the guarantee; the company could not validly execute a mortgage in order to secure an obligation which they had no power to accept in the first place. This is, in any event, made clear by sub-paragraph (f) to which reference has already been made. The claim of the bank against the company will accordingly be dismissed.
Compustore Limited (In Voluntary Liquidation) v Companies Act
[2006] IEHC 52 (22 February 2006)
Judgment of Miss Justice Laffoy delivered on 22nd February, 2006.
The applicants, the members of the firm of Eugene F. Collins, Solicitors, bring this application as creditors of Compustore Limited (the Company) under s. 280 of the Companies Act, 1963 (the Act of 1963), asking the court to determine the question whether fees and expenses due to the applicants in respect of advices given in relation to the procedures to be followed to place the Company into creditors’ voluntary liquidation are “expenses properly incurred in the winding up of the company” within the meaning of s. 281 of the Act of 1963. Section 281 provides as follows:
“All costs, charges and expenses properly incurred in the winding up, including the remuneration of the liquidator, shall be payable out of the assets of the company in priority to all other claims.”
The resolution to wind up the Company was passed by its members on 9th November, 2004. By virtue of s. 254 of the Act of 1963 the winding up was deemed to have commenced on that day. The liquidator of the Company, David Hughes, on behalf of the Company contends that the fees and expenses in issue are not expenses properly incurred in the winding up within the meaning of s. 281.
The factual background is that the applicants were first consulted by the Company on 18th October, 2004 for the sole purpose of advising it on the procedures to be followed in initiating a creditors’ voluntary liquidation. On being engaged, the applicants sought a payment on account for services to be rendered. The directors of the Company confirmed that they had sufficient cash at the bank to make such a payment and that remained the position up to the commencement of the winding up. However, the Company’s bankers refused to allow a withdrawal of any funds. In outlining the services rendered by the applicants to the Company in the grounding affidavit, which is not controverted, Barry O’Neill, a partner in the applicants’ firm, stressed the scale and notoriety of the Company, a household name for the sale of computers with outlets in numerous locations throughout Ireland. Mr. O’Neill averred that the Company’s financial collapse was very sudden and necessitated numerous meetings with the directors to ensure the Company complied with the procedures leading up to the liquidation. The Company had over 200 creditors and some of the trade creditors were owed significant amounts. The applicants advised on the imminent liquidation and on issues involving internal Company matters, and prepared all documents relating to the creditors’ meeting. They also made preparations with the Burlington Hotel for the creditors’ meeting itself. The scale of the Company and the speed with which events unfolded resulted in a period of intense legal advice.
The applicants have indicated that they are willing to have the quantum of the costs and expenses claimed determined by taxation. Accordingly, the court is concerned with the issue of principle, not the quantum of the bill presented.
It is convenient before considering the arguments advanced on behalf of the applicants to refer to the position in a winding up by the court. Rule 128 of Order 74 of the Rules of the Superior Courts, 1986, insofar as it is relevant for present purposes, provides as follows:
“The assets of a company in a winding up by the Court remaining after payment of the fees and expenses properly incurred in preserving, realising or getting in the assets, including where the company has previously commenced to be wound up voluntarily such remuneration, costs and expenses as the Court may allow to a Liquidator appointed in such a voluntary winding up, shall, subject to any order of the Court, be liable to the following payments which shall be made in the following order of priority, namely:
First The costs of the petition, including the costs of any person appearing on the petition whose costs are allowed by the Court. …”
As there is no authority directly in point in this jurisdiction on the question raised on this application, counsel for the applicants urged that the court should adopt the approach adopted by the English High Court (Hoffman J.) in dealing with what was suggested were somewhat similar circumstances in Re A.V. Sorge & Company Limited [1986] BCLC 490. The facts in that case were that, on 10th November, 1982 a creditor had presented a petition to wind up the company. Before the petition came to hearing, on 8th December, 1982, it was resolved that the company be wound up as a creditors’ voluntary winding up and A was appointed liquidator. On 17th January, 1983 an order for the compulsory winding up of the company was made by the High Court. Subsequently, B was appointed liquidator for the purposes of the compulsory winding up. The issue before Hoffman J. was whether A was entitled to remuneration, including disbursements, for acting as liquidator. B contended that he was not.
The issue fell to be determined by the application of a rule of court in identical terms to rule 128 of Order 74. In applying the rule, Hoffman J. rejected an argument made on behalf of B that the company had not “previously commenced to be wound up voluntarily” because the compulsory winding up was deemed to commence on the date of the presentation of the petition, which predated the commencement of the voluntary winding up. Hoffman J. held that “previously” in the rule meant before the making of the compulsory order.
Hoffman J. also rejected a challenge on behalf of B to the expenses incurred before the resolution for voluntary winding up was passed, which included the cost of sending out notices of the meeting to creditors, advertising the meeting, preparing the statement of affairs for presentation at the meeting, and hiring the room for the meeting to take place. Hoffman J. commented that those expenses were expenses which had to be incurred to comply with the requirements of s. 293 of the Companies Act, 1948, a provision with which s. 266 of the Act of 1963 corresponds. The approach of Hoffman J. to this challenge is pertinent on this application because the basis of B’s challenge was that the court should not under the rule allow priority to expenses which would not have been entitled to priority if the voluntary winding up had proceeded under a provision in identical terms to s. 281. Therefore, Hoffman J. had to consider whether B’s contention that those expenses were not “incurred in the winding up” because they were incurred before the commencement of the winding up was correct.
In addressing the proper construction of the analogue of s. 281, Hoffman J. referred to a reported County Court decision, which was fifty years old, Re Waterloo Manufacturing Company (Burnley) Limited [1936] 3 CCR 281, in which the County Court judge had held that pre-resolution expenses might be “costs of the winding up” or “incidental to the winding up” but could not be costs “in the winding up”. He also referred to a guidance note issued by the Insolvency Practitioners’ Association in 1982, which advised that all pre-resolution expenses would rank only as unsecured claims in the liquidation and recommended that all such expenses be paid for in advance. Alternatively, if no funds were available, it was suggested that cheques from debtors might be endorsed over to meet bills. Having commented that, if the Company was wholly illiquid, it seemed that it would have to languish in limbo, unable either to trade or to be wound up, until a creditor could be persuaded to put it out of its misery by presenting a petition for the compulsory order, Hoffman J. continued (at p. 494):
“If this is the law, its effect is to create a trap for the unwary (in penalising anyone who incurs s. 293 expenses without taking the precaution of asking for cash in advance) and to prohibit steps being taking to wind up insolvent companies. I do not believe that the legislature intended such an odd result. In my judgment no distinction was intended between the words ‘costs in the winding up’ and phrases like, ‘costs of and incidental to the winding up’.”
After commenting that a rigid temporal cut-off was altogether too mechanistic, Hoffman J. noted that in Re William Adler & Company Limited [1935] Ch. 134 at 141-142, Eve J. had distinguished between a solicitor’s entitlement to costs which the company had incurred before the winding up resolution and after it and had stated that, in relation to the former category, the solicitor was in the same position as any other creditor of the company. Hoffman J. commented that there was nothing in that case to suggest that the advice for which the solicitor was charging was specifically for the purpose of enabling the company to pass the winding up resolution and to take the other steps required by s. 293. He continued (at p. 495):
“In some case it may not be easy to distinguish between general advice (e.g. on the options open to the company, one of which may be winding up) and advice which is truly ‘incidental to the winding up’. But this is a familiar problem to taxing masters and should not affect the general principle.”
Although, as counsel for the liquidator pointed out, Hoffman J. was applying the corresponding rule to rule 128, not the statutory provision, and he was concerned with the remuneration of a liquidator rather than the costs of obtaining legal advice, in my view, it is to be deduced from his judgment that the general principle to which he referred was that pre-resolution costs incurred, whether through a solicitor or otherwise, so as to enable the company to pass the winding up resolution and take other statutorily required steps are costs “incurred in the winding up”.
In a subsequent decision of the English High Court (Re Sandwell Copiers Limited [1988] BCLC 209) Mervyn Davies J. referred to the judgment of Hoffman J. in the Sorge case, but distinguished it on the facts. In the case before him the pre-liquidation expenses were not incurred “specifically for the purpose of enabling the company to pass the winding up resolution and take the other steps required by section 293”; rather they were expenses incurred by the person who became the voluntary liquidator in collecting the company’s debts. Accordingly, it was held that the liquidator was not entitled to be remunerated for those services.
It was submitted on behalf of the applicants that sound policy considerations underlie the approach adopted by Hoffman J. in the Sorge case and that significant practical benefits ensue from adopting such approach. If no priority were to attach to the costs and expenses of obtaining legal advice prior to the passing of a resolution to wind up a company, companies in financial difficulties could find it difficult to obtain appropriate advice. Given the priority afforded to a petitioner’s costs in rule 128 of Order 74, the directors of a company might opt for compulsory liquidation in a situation in which a voluntary liquidation might be more beneficial. Alternatively, a more serious consequence might be that the directors would not initiate winding up proceedings at all.
The position advanced by the liquidator on behalf of the Company was that the words of s. 281 are clear and unambiguous. The reference in s. 281 to costs “incurred in the winding up” presupposes that the winding up was in being when the costs were incurred. In this case, the costs and expenses at issue were not incurred in the winding up; they were incurred prior to the winding up. While counsel for the liquidator acknowledged that it is permissible for the court to depart from a literal construction of a statute and adopt in its place a teleological or purposive approach that would ascertain the true legislative intention from the Act as a whole, it is not necessary to do so in this case. The interpretation contended for by the liquidator does not in any way undermine the legislative intent of the Act as a whole; on the contrary it advances the legislative intent of protecting the totality of creditors. Without prejudice to his contention that there is no basis for adopting other than a literal construction of s. 281, it was submitted on behalf of the liquidator that the policy considerations or practical benefits advanced by the applicants are not compelling. It was suggested that of all possible creditors, lawyers are best equipped to secure their own position. It was also suggested that a situation in which a company is not in a position to pay for legal advice prior to the winding up resolution but is in a position to pay for it after liquidation in priority to other creditors is a rare occurrence.
The determination of the question raised on this application turns on the proper construction of the words “costs, charges and expenses properly incurred in the winding up” in s. 281. Rule 128 of Order 74 has no application in a voluntary winding up (In Re A. Noyek & Sons Limited [1986] I.R. 183). In my view, those words refer to costs, charges and expenses properly incurred while the winding up is in being, that is to say, after the resolution to wind up the company has been passed. The words in the section are clear and unambiguous and the intention of the legislature is plain. I do not find the reasoning on which Hoffman J. arrived at a different conclusion in the Sorge case as persuasive. I am satisfied that in enacting s. 281, the legislature intended that there would be a rigid temporal cut-off at the time of the passing of the resolution to wind up voluntarily. Accordingly, the fees and expenses due to the applicants for pre-resolution advice and services are not “expenses properly incurred in the winding up of the company” within the meaning of s. 281.
Finally, I think it appropriate to record that the application was heard before the coming into operation of the Interpretation Act, 2005 (the Act of 2005) on 1st January, 2006 and it has been decided on the basis of the submissions made on behalf of the parties. The decision would be no different if the case had been argued after s. 5 of the Act of 2005 came into operation because, in my view, s. 281 is neither obscure nor ambiguous nor does a literal interpretation produce an absurd result or fail to reflect the plain intention of the Oireachtas.
The application is dismissed.
J. D. Brian Ltd & Ors -v- Companies Acts
[2011] IEHC 283 (11 July 2011)
SUPPLEMENTARY JUDGMENT of Ms. Justice Finlay Geoghegan delivered on the 11th day of July, 2011
1. This judgment is supplementary to the judgment delivered here on 25th March, 2011. It should be read in conjunction with that judgment. I do not propose repeating the background and facts.
2. In the first judgment, on a second issue in relation to a so-called “automatic crystallisation” of floating charges, I concluded, at paragraph 56, that:
“there is no rule of law which precludes parties to a debenture creating a floating charge agreeing, as a matter of contract, that the floating charge will crystallise upon the happening of an event or a particular step taken by the chargee. Whether the parties actually achieve their intention is a separate issue by reason inter alia of the Supreme Court decision in In re Keenan Brothers [1985] IR 401.”
3. The background to the further issue and the necessity for a further hearing is set out at paragraphs 57 to 65 of the first judgment where I stated:
“57. In In Re Keenan Brothers, the issue was whether or not the charge created by the debenture over book debts was a fixed charge or a floating charge. In the debenture, the charge was expressed to be a “fixed charge”. McCarthy J. who gave a judgment with which the majority of the court agreed, states, at p. 421:
‘It is not suggested that mere terminology itself, such as using the expression “fixed charge”, achieves the purpose; one must look, not within the narrow confines of such term, not to the declared intention of the parties alone, but to the effect of the instruments whereby they purported to carry out that intention; did they achieve what they intended or was the intention defeated by the ancillary requirements?’
58. Each of the judgments in the Supreme Court in In Re Keenan Brothers, notwithstanding the express terms of the debentures, considered whether or not the charges created, having regard to the other terms in the debentures, were, in reality, fixed or floating charges. There were two debentures at issue in the proceedings. Henchy J., at p. 419, epitomises what appears to be the proper approach of a court in determining whether or not a debenture, by its terms, creates a fixed or floating charge. In relation to the second debenture, he concluded:
‘As to the debenture deed of the 5th May, 1983, the company professed to charge in favour of the Bank (A.I.I.B. Ltd.) its present and future debts as a first fixed legal charge. The extent to which this was to be in reality a fixed, rather than a floating charge, is shown by the following provisions in the deed:—
1. all moneys which were received by the company in respect of book debts were to be paid into a specified A.I.B. branch and no withdrawals or payments from that account were to be made without the prior consent of the Bank;
2. the company was not, without the consent of the Bank, to carry on its business otherwise than in the ordinary and normal course;
3. the company was not, without the consent in writing of the Bank, to diminish or dispose of its book debts otherwise than by collecting and lodging them in the specified account.
It seems to me that such a degree of sequestration of the book debts when collected made those monies incapable of being used in the ordinary course of business and meant that they were put, specifically and expressly, at the disposal of the Bank. I am satisfied that assets thus withdrawn from ordinary trade use, put in the keeping of the debenture holder, and sterilised and made undisposable save at the absolute discretion of the debenture holder, have the distinguishing features of a fixed charge. The charge was not intended to fasten in the future on the book debts; it was affixed forthwith and without further ado to those debts as they were collected; so it did not in any sense float over those moneys. As I understand the law, assets the subject matter of a floating charge may be disposed of, at least in the ordinary course of business, by the maker of the charge without the consent of the chargee. That was not the case here. I would allow this appeal and declare that the charge created by each of the two instruments of charge was a fixed charge’.
59. The Supreme Court in In Re Wogan’s (Drogheda) Ltd. [1993] 1 I.R. 157 followed In Re Keenan Brothers and made clear that where a court is required to determine whether or not a debenture creates a fixed or floating charge, that it must be done by construction of the debentures concerned and that the subsequent conduct of the parties is not a relevant evidential factor. See Finlay C.J. at p. 169. In that decision, the Supreme Court again construed the relevant debenture and concluded that, having regard to several terms of the debentures, the parties did, in reality, create a fixed charge over the book debts.
60. It appears to me, similarly, where a debenture expressly provides that a chargee may, by service of a notice, effect a crystallisation of a floating charge over all the assets or specified assets, the mere fact that the debenture so provides does not of itself mean that the service of the notice, has the intended effect i.e. that the floating charge crystallises. In the words of McCarthy J. ‘mere terminology’ used by the parties is not determinative of achieving the stated purpose but rather ‘one must look, not within the narrow confines of such term, not to the declared intention of the parties alone, but to the effect of the instruments whereby they purported to carry out that intention; did they achieve what they intended or was the intention defeated by the ancillary requirements’.
61. The issue is not, of course, whether the charge created by the debenture was a fixed or floating charge but, rather, whether the service of the notice provided for in Clause 10 of the Debenture does, in reality, what it purports to do, namely, ‘convert the floating charge contained in this deed into a first fixed charge over all the property, assets and rights for the time being, subject to the said floating charge’. Similar to the approach of the Supreme Court in the above decisions, this Court must determine whether or not the effect of the service of the notice, pursuant to Clause 10, achieved what the parties intended it to achieve, namely, the conversion of the then floating charge into a first fixed charge over all the relevant property i.e. over all of the property specified in the notice. Further, in accordance with the decision in In Re Wogan’s (Drogheda) Ltd., it appears that this issue must be determined by a construction of the terms of the Debenture and the notice served, rather than any subsequent actions by either party.
62. In accordance with Clause 5 of the Debenture, the property subject to the floating charge in October 2009 appears to have been all the property of the Companies other than land and related rights, proceeds from insurance, goodwill and uncalled capital. Certain of the Companies were trading companies in the motor business. The assets, therefore, included, inevitably, stock in trade, book debts and possibly monies deposited at the Bank.
63. If the service of the notice, pursuant to Clause 10, in reality had the effect of converting the floating charge over the book debts and stock in trade of the Companies into a first fixed charge on such assets, then it must also have effected an equitable assignment of such assets to the Bank. As a consequence, the Companies would have lost the ability to deal in or dispose of those assets, save to the extent permitted by the Bank. The Court appears obliged, in accordance with the judgments in In Re Keenan Brothers, to determine whether, in reality, such was the effect of the service of the notice, pursuant to Clause 10 having regard to the other provisions of the Debenture and the notice served.
64. It is not clear to me from the terms of the Debenture itself whether the Debenture provides that, on the service of a notice pursuant to Clause 10, any restrictions come into force on the Company’s ability to deal with assets which were formerly subject to the floating charge but which are now intended to be subject to a fixed charge. The notice served did not contain any such requirement.
65. As I have already indicated, this issue does not have to be resolved in the present application by reason of my conclusion on the construction of s 285(7) of the Companies Act 1963. If it did in the future become necessary to resolve, it would have to be further argued and in particular the Bank given an opportunity of making submissions on the issue. It was not an issue expressly addressed at the hearing before me. It would probably be necessary to consider further the nature of the assets subject to the floating charge created by each of the Companies.”
4. Subsequent to the delivery of the first judgment, the liquidator, supported by the Governor and company of the Bank of Ireland (“the Bank”), indicated that he had instructions to appeal to the Supreme Court my conclusion on the construction of s. 285(7) of the Companies Act 1963. In such circumstances, he sought a determination of the outstanding issue in order that all relevant issues could be before the Supreme Court when the appeal came on for hearing. The Revenue Commissioners did not object to this approach. I gave the parties the opportunity of filing any additional affidavits and making legal submissions. No additional affidavits were filed and written submissions were lodged in advance of the hearing by the liquidator, the Bank and the Revenue Commissioners.
5. An issue arose on the morning of the hearing when the Bank sought to file an additional affidavit. This arose by reason of an exchange of correspondence between the official liquidator and the Revenue Commissioners and matters of fact referred to in the written submissions of the Revenue Commissioners.
6. Ultimately, it was agreed by reason of the issue which had to be determined by the court i.e. the effect of the service of a notice pursuant to clause 10 of the Debenture in accordance with the proper construction of the Debenture and the requirement following the decision in In Re Wogan’s (Drogheda) Ltd. [1993] 1 I.R. 157, that such issue must be determined by construction of the terms of the Debenture and not any subsequent action by either party, that it was unnecessary that the additional affidavit be filed and that I should not have regard to the correspondence attached to the Revenue Commissioners’ submissions.
7. As in the first judgment, I propose referring to the Debenture given by J.D. Brian Motors Ltd. (In Liquidation) (“the Company”) on 20th December, 2005. It is agreed that, having regard to the business of the Company at the time of creation of the business, i.e. a motor business including buying and selling cars, and having regard to the terms of clauses 4 and 5 of the Debenture, that the property of the Company subject to the floating charge principally included stock-in-trade, cash-at-bank and other book debts. Clause 5, by its terms, specifies that in relation to certain types of property, the charge created is to be a specific charge and “shall as regards the other properties hereby charged be a floating security”. It is by a process of deduction, having regard to the types of property the subject of a specific charge in clause 5, that the remaining property subject to the floating charge at the date of creation of the Debenture is identified.
8. It is hence agreed that in construing the effect of the service of a notice pursuant to clause 10, the court is considering its application primarily to a floating charge over the stock-in-trade, cash-at-bank and book debts of the Company. It is further agreed that if the proper effect of clause 10 is to convert the floating charge into a fixed charge, then, as a matter of law, the Company was no longer thereafter entitled to deal with any of its stock, cash-at-bank or book debts without the consent of the Bank. Further, that this, in effect, meant the directors of the Company could no longer carry on the normal trade of the Company as it will not be entitled, without the specific consent of the Bank, to dispose of any of the stock-in-trade, to write cheques or to draw on its bank account, including for the purpose of paying its employees, or otherwise use the proceeds of its realised book debts. The legal position is well put by Millett L.J.in the Court of Appeal in In Re Cosslett (Contractors) Ltd. [1998] Ch 495 at 510:
“The essence of a fixed charge is that the charge in on a particular asset or class of assets which the charger cannot deal with free from the charge without the consent of the chargee. The question is not whether the charger has complete freedom to carry on his business as he chooses, but whether the chargee is in control of the charged assets.”
9. Counsel for the liquidator, in the supplementary submissions, contended that the court should approach the construction of the Debenture in accordance with the by now well-known approval by the Supreme Court per Geoghegan J. in Analog Devices B.V. v Zurich Insurance [2005] 1 IR 274 at p. 280, of the summary by Lord Hoffmann of the proper approach to the construction of commercial contracts in Investors Compensation Scheme v. West Bromwich Building Society [1998] 1 WLR 896 at p.912.. I was also referred to the same principles, succinctly stated by Laffoy J. in UPM v. BWG (High Court, Unreported, 11th June, 1999) and affirmed by the Supreme Court (Unreported, 4th April, 2001), where she stated:
“[T]he basic rules of construction which the Court must apply in interpreting the documents which contain the parties’ agreement are not in dispute. The Court’s task is to ascertain the intention of the parties and that intention must be ascertained from the language they have used considered in the light of the surrounding circumstances and the object of the contract. Moreover, in attempting to ascertain the presumed intention of the parties, the Court should adopt an objective, rather than a subjective approach, and should consider what would have been the intention of reasonable persons in the position of the parties.”
10. The above is, of course, a correct statement of the general principles which apply to the construction of an agreement between parties which would include a debenture. However, where the issue to be determined by a court is whether or not a charge created by a debenture was or was not a fixed charge, the court is also engaged in a two-stage process in accordance with the methodology succinctly stated by the Privy Council in Agnew v. Commissioner of Inland Revenue [2001] 2 AC 710, at para. 32:
“In deciding whether a charge is a fixed charge or a floating charge, the court is engaged in a two-stage process. At the first stage it must construe the instrument of charge and seek to gather the intentions of the parties from the language they have used. But the object at this stage of the process is not to discover whether the parties intended to create a fixed or floating charge. It is to ascertain the nature of the rights and obligations which the parties intended to grant each other in respect of the charged assets. Once these have been ascertained, the court can then embark on the second stage of the process, which is one of categorisation. This is a matter of law. It does not depend on the intention of the parties. If their intention, properly gathered from the language of the instrument, is to grant the company rights in respect of the charged assets which are inconsistent with the nature of a fixed charge, then the charge cannot be a fixed charge however they may have chosen to describe it.”
11. I was referred to the above decision by counsel for the Bank. It is to the first step in the two-stage process described that the principles relied upon by counsel for the liquidator from Analog Devices B.V. v Zurich Insurance and UPM v. BWG apply.
12. The approach of the Privy Council in Agnew v. Commissioner of Inland Revenue appears to me to be identical to that of Henchy J. and McCarthy J. in the Supreme Court in In Re Keenan Brothers set out above.
13. In my judgment, it follows that the same approach should be taken to deciding whether or not the effect of the service of a notice, pursuant to clause 10 of the Debenture, was to convert the floating charge created by the Deed over the stock-in-trade, cash-at-bank and book debts into a first fixed charge over such property. The court must, as a first step, construe the Debenture to ascertain the intention of the parties as to the rights and obligations granted to or imposed on each other in relation to the property subject to the floating charge after the service of a notice, pursuant to clause 10 of the Debenture, referring to that property. Once this has been ascertained, the court should embark on the second stage and determine whether such rights and obligations are consistent with a fixed charge. If so, the notice will have the effect of converting the floating charge into a fixed charge. If not, it will not have achieved the stated intention and the property will remain subject to the floating charge.
14. Clause 10 of the Debenture provides:
“The Bank, may, at any time, by notice in writing served on the Company, convert the floating charge contained in this Deed into a first fixed charge over all the property, assets and rights for the time being subject to the said floating charge or over so much of the same as is specified in the notice. A notice under this Clause may be served by the Bank only if, in the sole judgement of the Bank, the Bank considers that the property, assets and rights described or referred to in the notice are in any way in jeopardy.”
15. Counsel for the liquidator and Bank submitted, correctly, that the court should have regard, when construing the clause, to the fact that a notice may only be served by the Bank where the Bank considered the relevant property to be “in jeopardy”. They further submitted that the court should construe clause 10 of the Debenture by reason of the fact that it refers to the conversion of the floating charge into a first fixed charge as including, by necessary implication, a restriction on the Company thereafter from dealing in or disposing of any of the assets the subject of the notice without the consent of the Bank. I do not accept this latter submission, rather, I respectfully agree with Lord Scott where, in his speech in Re Spectrum Plus Ltd. [2005] 2 AC 680, where, in the following passage at para. 119, he stated that a similar submission “put the cart before the horse”:
“Mr Moss indeed argued that a debenture expressed to grant a fixed charge thereby limited by necessary implication the ability of the chargor to deal with the charged assets. He argued that Spectrum had no right without the consent of the bank to draw on the account into which the cheques received by Spectrum in payment of its book debts had to be paid. This limitation was, he said, an inevitable result of the grant by the debenture of the fixed charge. This argument, my Lords, puts the card before the horse. The nature of the charge depends on the rights of the chargor and chargee respectively.”
16. Similarly, as stated by McCarthy J in In Re Keenan Bros., mere terminology alone is not sufficient. The Court must look at the rights and obligations pursuant to the Debenture. The Debenture is silent as to any rights of the Bank or, more particularly, obligations of the Company, in relation to property subject to the floating charge created by the Debenture after the service of a notice, pursuant to clause 10, purporting to convert such floating charge into a fixed charge. There is nothing in the Debenture which restricts the entitlement of the Company to deal with or dispose of its stock-in-trade or use the proceeds of its book debts or cash-at-bank specifically following the service of a notice, pursuant to clause 10.
17. Further, clause 8 of the Debenture applies insofar as it sets out the obligations on the Company, “at all times during the continuance of this security”. It was agreed between the parties that the security continued to subsist after the service of a notice, pursuant to clause 10, and hence, the obligations expressly set out in clause 8 of the Debenture continued to apply. The first of these, at para. (a), is that the Company shall, “carry on and conduct its business in a proper and efficient manner”. A continuing obligation on the Company to carry on and conduct its business in a proper and efficient manner is inconsistent with the existence of a fixed charge over its stock-in-trade, cash-at-bank and book debts. Counsel for the liquidator and Bank submitted that upon their construction of the Debenture, the effect of service of a notice, pursuant to clause 10, was that the Company had to effectively cease carrying on its business by reason of the equitable assignment to the Bank of the stock-in-trade cash at bank and book debts and consequent control of the Bank over same.
18. Further, the Debenture, in clause 8(k), expressly provides that the Company may not, without the prior consent in writing of the Bank, “sell, assign or otherwise dispose of any property hereby charged as a specific charge or any of its book debts and other receivables in favour of any person”. It was not contended on behalf of the Bank and liquidator, correctly, in my view, that on any proper construction, this sub-clause could include property subject to the floating charge created by the Debenture after the service of a notice, pursuant to clause 10. It is confined to the property charged by the Debenture as a specific charge. The inclusion of such provision in relation to the property subject to the specific charge created by the Debenture underscores the absence of any similar provision restricting sale or other disposal of property subject to the floating charge after the service of a notice, pursuant to clause 10 of the Debenture and hence the absence of any such intention of the parties expressed in the Debenture.
19. Accordingly, construing the Debenture, it appears from its provisions, that notwithstanding the provision for the service of a notice, pursuant to clause 10, when the Bank considers the property subject to the floating charge to be in jeopardy, there is no intention expressed therein that the Company should thereafter be restricted in its use of the property subject to the notice, other than pursuant to Clause 8. The Company, in my judgment, in accordance with the terms of the Debenture, continued to be entitled to use such property for the proper carrying on and conduct of its business including selling stock-in-trade and making payments from cash-at-Bank and realised book debts without the necessity of obtaining the consent of the Bank for sale or other disposal. This entitlement is inconsistent with the existence of a first fixed charge over the stock-in-trade, cash-at-bank and book debts in favour of the Bank.
Conclusion
20. On a proper construction of the Debenture, the service of a notice, pursuant to clause 10 thereof, does not have the effect of converting the property subject to the floating charge created by the Debenture into a first fixed charge over such property.
Unitherm Heating Systems Ltd -v- Wallace as the Official Liquidator of BHT Group Ltd (In Liquidation)
[2014] IEHC 177 (02 April 2014)
JUDGMENT OF MR JUSTICE MICHAEL PEART DELIVERED ON THE 2nd DAY OF APRIL 2014:
1. The applicant company (“the applicant”) has carried on business since 2004 in the design and supply of heating systems throughout Ireland. In addition it provides training and support to installers of such systems.
2. During the course of business, it supplied goods to BHT Group Limited (In Liquidation) (“the company”) which the company in turn would sell on to third parties.
3. On the 16th February 2012 the company went into examinership. On the 20th April 2012 the respondent was appointed as liquidator, and on the same date an asset sale agreement was entered into with Harleston Limited, through its subsidiary Washglade Limited whereby the assets of the company were purchased for value.
4. By this time a sum of €107,761.14 was due and owing to the applicant for goods sold and delivered. This amount was reduced by a payment to the applicant by Washglade in the sum of €13,853.49 in respect of some of its goods which were still physically on the company’s premises at the time of the asset sale, and over which the applicant had the benefit of a retention of title clause. Those goods were clearly identifiable as belonging to the applicant company, and no issue arose as to the applicability of the relevant part of the retention clause.
5. The balance of €93,907.65 remains due, but in respect of goods supplied to the company and which had already been sold on to third parties before the appointment of the liquidator.
6. The liquidator does not accept that the applicant is entitled to any priority or tracing in respect of that balance of €93,907.65 based upon the proceeds of sale clause within the retention of title clause. The applicant submits that the company held the goods as agent of the applicant, and hence as a fiduciary, entitling the applicant to trace the proceeds of sale in accordance with the equitable principles in Re Hallett’s Estate (1880) 13 Ch.D.696, C.A. The liquidator on the other hand submits that the legal effect of the proceeds of sale clause is to create a charge which is registrable under section 99 of the Companies Act, 1963, and in so far as it has not been so registered, the charge is void as against the liquidator – the net effect being therefore that the applicant is an ordinary creditor in the liquidation with no special priority over the other ordinary creditors.
7. The retention of title clause appears at Clause 11 of the Standard Conditions of Sale. It states as follows:
“(a) The property in the goods shall not pass to the Buyer until the price of the goods shall have been wholly paid and until all other sums whatsoever which are due from the Buyer to the Company whether under this contract or howsoever otherwise shall have been paid in full without any reduction or deferment on account of any dispute or cross claim whatsoever.
(b) pending the payment of all sums aforesaid and the passing of property in the said goods:
(i) a fiduciary relationship shall exist between the buyer and the company and the buyer shall hold the said goods as trustee for and on behalf of the company and shall return the same to the company on demand.
(ii) the buyer hereby licences the company and its agents to enter onto any premises on which the goods or any of them may be situation for the purpose of inspecting and taking an inventory of the said goods and/or repossessing the said goods.
(iii) if the buyer (being an individual) commits an act of bankruptcy or (being a company) has a Receiver appointed to all or part of its assets or a petition presented or a resolution passed for the winding up of the buyer the right of the buyer to retain possession of the goods shall automatically cease and the goods shall be returned to the company immediately.
(iv) the buyer shall store the goods separately from goods belonging to the buyer or third parties so as to be clearly identifiable as being the goods of the company.
(v) the buyer shall be entitled to sell the goods to third parties (other than to a subsidiary or holding company of the buyer within the meaning of section 155 of the Companies Act 1963 or to an associated company within the meaning of section 102 of the Corporation Tax Act 1976) in the normal course of the buyer’s business (but not otherwise) but the proceeds of any such sale shall be held by the buyer on trust for the company (to be lodged in a separate account by the buyer) and the buyer is hereby deemed to have assigned to the company absolutely the benefit of any claim (including the right to trace the said goods or the proceeds thereof) which the buyer has against any such third party arising from such sale.
(vi) if the buyer mixes or incorporates the goods with any other goods then if the goods used in such mixture or incorporation are capable of being identified the company shall be entitled to dismantle or separate its goods from any other goods comprised in such mixture or incorporation notwithstanding that such dismantling or separation may cause damage to or destruction of those other goods. Where the company’s goods mixed or incorporated as aforesaid are no longer capable of being identified the ownership of the product of such mixing incorporation shall be and remain in the companies subject to a charge in favour of the buyer in respect of the value of the other goods comprised in the product of such mixing or incorporation.
(vii) where goods are worked or cut without the addition of any other goods the property in such goods shall remain in the company.
(c) the risk of damage to the goods shall pass to the buyer on delivery”. [Emphasis added]
8. While I have set forth the entire of paragraph 11, it is Clause 11(b)(v) which is relevant for the purpose of the present argument. It is common case that no separate bank account was opened by the company into which the proceeds of any re-sale ought to have been placed in order to prevent sums due to the applicant becoming mixed with other sums in the company’s own bank accounts, even though this was required under the terns and conditions.
9. Declan Kissane of the applicant company has stated in his grounding affidavit that at all times the applicant relied on the company’s obligation to maintain a separate bank account in respect of payments received, and had no reason to suspect that this term of the agreement had not been complied with. The Receiver does not accept that the applicant had no reason to suspect that no separate account had been opened, and notes that it was not until the 7th March 2012 that the applicant first wrote to the company seeking confirmation that a separate bank account had been opened, even though the company had exceeded its credit limit six months previously. In that letter, Mr Kissane stated to the company that “it is important that you understand that any monies collected for goods supplied by us should be set aside in accordance with the terms of our standard terms and conditions of sale”. He states that there was no requirement on the applicant under those terms and conditions to seek out such a confirmation, and that it was a condition to which the company agreed and was obliged to adhere to even in the absence of such a confirmation. The first time he learned that the company had not maintained any separate bank account as required under the terms of the agreement was when his solicitor received a letter from the solicitors acting for the official liquidator dated 12th February 2012, and in which it was stated that, subject to confirmation from KPMG, it was understood that the company never operated a separate bank account as required under the retention of title clause, and it was denied also that during the course of the examinership, the examiner, who had no involvement in the day to day running of the business, had any responsibility for the lodgement of monies into any particular bank account.
10. On the 7th March 2012, Mr Kissane wrote to the company in relation to a particular customer project at Castlegar, Co. Galway stating that in relation to a heating system supplied to the customer, he would, in order to assist the company in receiving payment for the goods supplied, organise that their engineer would commission the system, even though payment had not been received, and that following the system being commissioned it would be covered by the manufacturer’s warranty. However, he went on to state:
“We appreciate the future in relation to Heatmerchants [the company] is currently unclear but it is important you understand any monies collected for goods, supplied by us, should be set aside in accordance with the terms of our Standard Terms and Conditions of Sale. We cannot be expected to cover warranty for material we have not been paid for.”
11. During the course of the examinership between February 2012 and April 2012, the applicant continued to provide product, and to commission same and ensure that it was covered by the manufacturer’s warranty. The applicant was paid by the examiner for the cost of commissioning. But Mr Kissane says that he continued to operate on the understanding that there was a separate bank account in respect of the proceeds of sale, and that he therefore was protected against the possibility of a liquidator being appointed. It is safe to assume, I think, that he must have considered that his prospects of getting paid what was owing would be enhanced by his continuing to supply product to the company, so that the company in turn would have a greater chance of coming out of examinership and survive.
12. He was later informed by letter dated 1st May 2012 from the liquidator’s solicitor that, despite his request, no separate account was ever opened by the company, and that any account to which he was seeking to trace monies received from customers in respect of the applicant’s product was one where the majority of the funds did not relate to the proceeds of sale of such product. In so far as the applicant had maintained in its correspondence with the liquidator that the proceeds of sale clause created a fiduciary relationship between the parties, the liquidator’s solicitors stated that it has been held by the Irish Courts that the imposition of such a relationship created a charge over property, and as such, it had to be registered as a charge against the company pursuant to Section 99 of the Companies Act, 1963 within 21 days of its creation, otherwise it was void. The applicant’s view in this regard as expressed in correspondence was that since the company never owned the goods in question (not having paid for them) the company could never have created a charge over the product supplied to it. Mr Kissane states that he is advised that in the light of the terms agreed between the parties, and the manner in which trade between them was conducted, Clause 11 does not amount to a charge requiring to be registered under Section 99 of the Act of 1963, and that the clause must be seen in the context of the overall trading relationship between the parties and the terms and conditions.
Legal submissions:
13. Dominick Hussey SC for the applicant relies firstly on Aluminium Industrie Vaasen BV v. Romalpa Aluminium Limited [1976] 2 All ER 552. In Romalpa, there was a retention of title clause which covered goods supplied to the company but not sold by the date of the liquidation, as well as goods supplied, and which became, in a process of manufacture, mixed with other goods to create new objects. In addition the clause went on to provide that “Nevertheless, purchaser will be entitled to sell these [new] objects to a third party within the framework of the normal carrying on of his business and to deliver them on condition that – if [the seller] so requires – the buyer, as long as he has not fully discharged his debt to [the seller], shall hand over to [the seller] the claims he has against his buyer emanating from the transaction”.
14. However, it happened that some of the goods supplied by the plaintiff came within neither of these categories of goods i.e. they were neither unsold and remaining with the defendant company at the date of liquidation, nor mixed with other goods in the manufacture of other objects. They had simply been sold on to sub-purchasers in the same form as when supplied. In Romalpa it was concluded that having regard to the clause read as a whole, there must be implied into the clause a power to sell goods on to a sub-purchaser, but not on the defendant’s own account, but rather for the account of the plaintiff, until such time as all monies due to the plaintiff were paid. It was held that the defendant was selling on as agent for the plaintiff company since the ownership in the goods had not passed to the defendant, and accordingly that a fiduciary relationship existed, meaning that the defendant remained accountable to the plaintiff, who in turn had a right to trace the proceeds of sale and recover the monies, by way of the application of the principles in Re Hallett’s Estate.
15. I note in the judgment of Mocatta J. at first instance that a submission made on behalf of the defendant in the case was that “if the plaintiffs were to succeed in their tracing claim this would, in effect, be a method available against a liquidator to a creditor of avoiding the provisions establishing the need to register charges on book debts” i.e. the equivalent in this jurisdiction of the need to register a charge coming within the ambit of Section 99 of the Act of 1963. Mocatta J. however agreed with the submission made by the plaintiff against that argument, namely that “if the property in the foil never passed to the defendants with the result that the proceeds of sub-sales belonged in equity to the plaintiffs, section 95 (1) [of the English Act] had no application”. It is important to note, I feel, that in Romalpa there was a concession made by the liquidator that there was a relationship of bailor/bailee between the parties. It was on the basis of such concession that the fiduciary relationship arose, rather than any conclusion reached by the court that on the facts of Romalpa such a fiduciary relationship arose.
16. Mr Hussey refers also to the judgment of Barron J. in W.J.Hickey Limited (in Receivership) [1988] 1 IR 126 which concluded that where the retention clause specifically stated that the property in the goods is not to pass until some future date i.e. until they are paid for, then under the provisions of s.1 of the Sale of Goods Act, 1893 the transaction is an agreement to sell and not a sale as such, since “the transfer of the property in the goods is to take place at a future time”. In such circumstances, where the property in the goods had not passed, Barron J. could find no basis for construing the clause in a way that all the property in the goods passed to the company, and that it in turn assigned back to the seller an equitable interest in the goods by way of charge. He went on to say that in so far as there were cases where a charge was found to have been created, there had been a clear assignment back to the seller of such an interest, and he instanced In re Interview Limited [1975] I.R. 382. In that case the relevant retention clause included the following:
“with respect to a case of re-sale 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 re-sale, by way of security, and undertakes [etc] ………” . [emphasis added]
17. Kenny J. was in no doubt that this clause, particularly given the inclusion of the phrase “by way of security”, was not an absolute assignment of the property in the goods, but rather an assignment by way of security, and as such was a charge which was void unless registered under Section 99 of the Act of 1963. He stated:
“In my opinion, it follows that, as the terms for deliveries abroad were not registered under s. 99 of the Act of 1963, 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 …”.
18. I pause for convenience to note that Clause 11 (1) of the terms and conditions under consideration in the present case includes within sub-clause (v) thereof:
“… and the buyer is hereby deemed to have assigned to the company absolutely the benefit of any claim (including the right to trace the said goods or the proceeds thereof) which the buyer has against any such third party arising from such sale”.
19. This clause is in very similar terms (though notably absent are the words “by way of security”) to that considered by Kenny J. in In re Interview Limited, and which Barron J. considered distinguished it from the facts in In re W.J. Hickey Limited (in Receivership) where he found no charge to have been created since there was no such assignment within the retention clause in that case. I will come back to that matter.
20. Mr Hussey, taking the clause in its entirety in the present case, and taking into account also the particular course of trading between the parties as described in the affidavit of Mr Kissane, has urged that the clear intention of the parties was that until such time as the goods were paid for the property in the goods would remain with the company. He submits that in so far as the goods are sold on to the end user, the company was acting only as the agent of the applicant, that status being consistent with and supported by, the requirement within the terms and conditions that the proceeds of such sale be held on trust for the applicant and lodged to a separate account. As such, it is submitted, there was a fiduciary relationship in existence in respect of the proceeds of sale, and that the clause therefore does not constitute a charge over the assets of the company registrable under section 99 of the Act of 1963.
21. Rossa Fanning BL for the respondent Receiver argues the contrary case, namely that the clause does indeed comprise a charge on the book debts of the company, and as such was required to be registered under s. 99 if it is not to be held to be void as against the liquidator. He relies upon the judgment of Murphy J. in Carroll Group Distributors Limited v. G. and J. F. Bourke Limited (in voluntary liquidation) [1990] 1 IR 481.
22. In that case the plaintiff supplied tobacco products to the defendant company’s shops which in turn sold them on to its customers. As part of the agreed trading terms the defendant companies were allowed four weeks credit, and there was also a reservation of title clause. After the defendant companies went into liquidation, the plaintiff recovered unsold product from the defendants’ premises, but an issue arose as to the plaintiff’s entitlement to trace the proceeds of sale of product sold to customers into the general bank accounts of the defendants. The defendants had been required under the terms and conditions to keep a separate bank account into which only the proceeds of sales to customers were be lodged, but did not do so. The plaintiff was aware that no such separate account had been opened. The clause also specifically provided that in the event of any sale to customers the defendants were acting on their own account and not as agent for the plaintiff. Murphy J. was satisfied accordingly that no fiduciary relationship was imposed by law, and if there was such a relationship between the parties such that the proceeds could be traced under the equitable principles in Re Hallett’s Estate “it must be found in the actual bargain or the trust created in respect of the proceeds by the agreement contained in the conditions of sale”. In so concluding the learned judge stated at page 484:
“Whether fiduciary obligations are imposed on one party or another depends in part upon the character in which they contract and partly on the nature of the dealings in which they engage. Obviously one would be slow to infer that a vendor and purchaser engaged in an arms length commercial transaction undertook obligations of a fiduciary nature one to the other. On the other hand if one postulates that in any context one person is selling the goods of another the assumption of fiduciary obligations in relation to the sale and in particular the proceeds thereof might well be appropriate. It seems to me that the question must be asked how does a party come to sell property of which he is not the owner? Is he selling as a trustee in pursuance of a power of sale? Is he selling as the agent of the true owner? Does the sale constitute a wrongful conversion? If any of those questions were answered in the affirmative it seems to me that the law would impose a trust on the proceeds of sale which would confer on the true owner the right to recover those proceeds from the actual seller or, if the proceeds were no longer in the seller’s hands, to trace them into any other property acquired with them. If the new asset was acquired partly with such proceedings and partly with other monies provided by the seller then the right of the true owner would be to a charge on the new asset or mixed fund to the extent of the proceeds of sale of his property. This is the rule enunciated in In re Hallets Estate. Knatchbull v. Hallett (1880) 13 Ch.D 696.” [emphasis added]
23. The agreement in Carroll made it clear that in so far as product is sold on to a customer by the company, it was acting on its own account and not as agent of Carrolls. The company could sell on the product at whatever price it chose, either at a loss or at a profit. Carrolls had no control over that price “so that the goods would not be immediately or necessarily replaced by assets of equal value”. Murphy J. was of the view that it was clear that on such a sale on to the customer the property in the goods would pass to the customer.
24. The retention of title clause was an “all sums” clause in the sense that ownership of the property remained with Carrolls until all sums due by the company to Carrolls shall have been discharged, and not simply until the amounts payable in respect of the particular goods delivered on any particular consignment shall have been discharged. As in the present case, no separate bank account was opened even though the conditions of sale required that this be done. However, Murphy J. was satisfied that it was probable that Carrolls was aware that no such steps had been taken. As with the present case, the proceeds of sale of the goods supplied to customers together with any other income received by the company were paid into the general bank account, so that there was more in that account than represented any amounts owing to Carrolls. In that regard, Murphy J. stated:
“If one ignores the particular facts of the case and simply analyses the bargain made between the parties it is clear that such an arrangement properly implemented would result in a bank account with sums of money credited thereto which would probably be in excess of the amounts due by Bourkes to Carrolls. This would arise partly from the fact that the goods would be resold at a marked up price and partly from the fact that the proceeds of sale would include some goods the cost price of which had been discharged and some of which it had not. In other words the bank account would be a fund to which Carrolls could have recourse to ensure the discharge of the monies due to it even though it would not be entitled to the entire of that fund. Accordingly the fund agreed to be credited would possess all the characteristics of a mortgage or charge as identified by Romer L.J. in In re George Inglefield Ltd. [1933] Ch.1 at pages 27 and 28.”
25. Murphy J. went on to refer to the judgement of McWilliam J. in Frigoscandia (Contracting) Ltd v. Continental Irish Meat Ltd [1982] ILRM 396 in which McWilliam J. stated, in the context of a standard retention of title clause i.e. not a proceeds of sale clause, that the conclusion that a retention of title clause must be treated as creating a mortgage or a charge over the goods, could not have general application to these types of clauses, and that “each case must depend on its own facts”. Murphy J agreed with that observation, and stated:
“the rights of the parties and the nature of the transaction in which they are engaged must be determined from a consideration of the document as a whole and the obligations and rights which it imposes on both parties. This is a principle of general application. Not infrequently efforts have been made to treat a document which is in truth a lease as a licence by so describing it. The description may be a material consideration but clearly it cannot be decisive. Specifically in relation to mortgages registrable under the Companies Acts it has been held that it is the substance of the transaction as ascertained from the words used by the parties and the context in which the document is executed that determines registrability under the Companies Acts (see In re Kent and Sussex Sawmills Ltd [1947] Ch. 177]. It seems to me that the bargain between the parties insofar as it relates to the transaction subsequent to a sale by Bourkes is in substance – though not in terms – the same as that which existed in In re Interview Ltd [1975] I.R. 382 in that Bourkes were creating or conferring a charge on the proceeds of sale in substitution for the right of property which Carrolls had previously enjoyed. The charge so created required registration under s. 99 of the Companies Act, 1963, and in the absence of such registration was invalid.”
Conclusions:
26. The resolution of the controversy at hand depends upon whether the applicant and the company were fiduciaries by reason of a relationship of principal and agent. If they were not, then the proceeds of sale clause is a registrable charge. This seems clear, and consistent with the approach of Murphy J. in Carroll, where, as already set forth, he stated:
“It seems to me that the question must be asked how does a party come to sell property of which he is not the owner? Is he selling as a trustee in pursuance of a power of sale? Is he selling as the agent of the true owner? Does the sale constitute a wrongful conversion? If any of those questions were answered in the affirmative it seems to me that the law would impose a trust on the proceeds of sale which would confer on the true owner the right to recover those proceeds from the actual seller or, if the proceeds were no longer in the seller’s hands, to trace them into any other property acquired with them”.
27. It is clear from the authorities opened on this application that whether or not a fiduciary relationship exists between the parties does not depend simply upon what is stated in the terms and conditions agreed between the parties. As stated by Murphy J. in Carroll, parties often attach a label to a transaction, yet their relationship may not in truth be consistent with that label. A relationship of agency cannot be brought into existence in law simply by stating in the agreement that the relationship is one of principal and agent. As Lord Templeman in a different context stated in Street v. Mountford [1985] AC 809:
“The manufacture of a five pronged instrument for manual digging results in a fork even if the manufacturer, unfamiliar with the English language, insists that he intended to make and has made a spade”.
28. In Carroll, Murphy J. noted that the retention clause in that case specifically provided that in the event of a sale on of the products to a third party, the companies in question would act on their own account “and not as agent for Carrolls”. It is hardly surprising that in such circumstances he was unable to conclude that a fiduciary relationship existed, even though, if the clause had said the opposite i.e. that they were ‘sold as agent’, it would not necessarily mean that a relationship of agency existed as a matter of law. Other factors militating against the existence of a fiduciary relationship in that case included that there was a four week credit period provided for, the purpose of which was uncertain if in fact the companies were not free to use the proceeds during the period of credit as they wished. As against that however the clause did provide that the monies should be held in trust and in “an independent account”. No such account was in fact opened, and Murphy J. seemed satisfied that Carrolls were probably aware of that fact.
29. The submissions made to me proceeded to an extent on the basis that there was a conflict between the judgment of Barron J. in W.J.Hickey Limited, and that of Murphy J. in Carroll. I do not see any conflict in fact. Each was dealing with different facts and can be distinguished. Specifically, Barron J. drew attention to the fact that where a charge had been found to have been created by the retention clause there had been a clear assignment of such an interest from the buyer back to the seller, and he gave In re Interview Limited as an example of such a case where the clause provided inter alia that “the purchaser agrees to assign and assigns to the supplier ……… any claims against the purchaser’s customers … by way of security …”. In Carroll, as I have said, the clause was clear in stating that in any sale on to a third party, the companies acted on their own account and not as agent, and it did not therefore matter that in Carroll, as in W.J.Hickey Limited, there was no clear assignment back to the seller of an equitable interest. So, different cases have different facts and circumstances, and it is not the case that these two decisions are in any way in conflict. Every case must be examined on its own facts and surrounding circumstances in order to conclude whether the clause creates a registrable charge, or instead is such as to create a fiduciary relationship. In passing I would again point to the fact that in Romalpa the Court of Appeal, and Mocatta J. at first instance, were able to proceed on the basis of a concession by the defendant that a relationship of bailor/bailee existed between the parties.
30. I should refer to the fact that in Carroll, Murphy J. referred to the fact that the companies could sell the goods on at below cost or indeed on credit terms, and considered that these terms were consistent with the companies dealing with the goods on their own account and not as agents of Carrolls.
31. In some cases, much has been made of the fact that the allowance by the seller to the buyer of a credit period is inconsistent with a relationship of, say, principal and agent, since it implied that during that credit period even where the goods had been sold on and paid for by the end user, the company was free to use those proceeds of sale for its own use, as otherwise the credit period was of no benefit. I do not think that this is necessarily so. A credit period also allows the buyer a period of time in which to actually find a customer to purchase the goods. At the end of the credit period the buyer is obliged to pay the seller regardless of whether or not a third party purchaser or end user has in turn bought and paid for the goods. In other words, it is not always the case that the buyer will have re-sold and been paid for the goods, and has those funds available to use as he wishes during the entire of the agreed credit period. Accordingly, I do not believe that the existence of a credit period (and it is to be noted that one was agreed between the parties in the present case – i.e. 60 days) necessarily or in all cases rules out the existence of a principal/agent relationship. It may of course be one of several indicia pointing against such a relationship, but it alone will not in all cases do so.
32. The Courts in the United Kingdom have been reluctant to find a fiduciary relationship to exist, and the majority if not all such cases since Romalpa have concluded that the proceeds of sale clauses have amounted to a registrable charge. I instance two such cases to which I was referred, namely Tatung (UK) Ltd v. Galex Telesure Ltd [1989] 5 B.C.C. 325, and Compaq Computer Ltd v. Abercorn Group Ltd [1993] BCLC 602. To these I would add the judgment of Peter Gibson J. in Re Andrabell Ltd (in liq.) [1984] 2 All ER 407 which has a helpful clarity about it for anybody having difficulty understanding the vagaries of the various decisions in this area, and reconciling them. He concurs with the view expressed by Straughton J. in Hendy Lennox (Industrial Engines) Ltd v. Grahame Puttick Ltd [1984] 2 All ER 152, that “one therefore has to examine the relationship in each individual case to see whether it is of a fiduciary nature”. But certainly it is not the case that there can never be a fiduciary relationship created by such clauses. I do not read these judgments as concluding that there can no longer be any circumstances in which a seller and buyer can be in the position of fiduciaries. Neither are the cases in this jurisdiction to that effect. Both W.J.Hickey Ltd, and Carroll, foresee that such a relationship can arise in particular cases.
33. It is necessary therefore to examine the terms and conditions in the present case, and also consider the manner in which the parties conducted their business, in order to arrive at a conclusion as to whether their relationship was in truth one of principal and agent. If it was, then a fiduciary relationship existed, and the applicant would be entitled to the reliefs sought.
34. The company (that is, the BHT Group) is a retailer, including as part of the Heatmerchants Group, which operates throughout Ireland from over 40 branches. It supplies heating and plumbing products not only to the trade, but also to end-user customers.
35. The following features seem to me to be particularly significant in pointing to the existence of an agency relationship, rather than one of debtor and creditor, and therefore to a fiduciary relationship. They distinguish this case from cases such as Carroll and others where a charge has been found to have been created by the retention clause, and where goods were simply supplied by a wholesaler to a retailer for onward sale in the normal way, at a price controlled and set by the buyer, not the seller.
36. The applicant supplied heating systems and related products to the company from March 2007. In addition, the applicant provided commissioning services in respect of some of the goods, such as heating boilers, pumps and so forth, and provided a warranty also, upon such commissioning. The terms and conditions under which the parties were to do business were provided by the applicant prior to the commencement of business between them. A letter dated 23rd February 2006 enclosing the applicant’s standard terms and conditions, also gave details of applicable discount rates on prices, a system of rebate based on annual purchases, and also a 60 day credit period. This letter drew particular attention to the existence of the retention of title clause contained within the terms and conditions, but otherwise was silent as to the details of same. A further letter dated 9th March 2007 again made such references, and made the point also that the applicant does not deal directly with the end-users, and stated: “we are pleased to be able to put this business through Heatmerchants upon receipt of official order numbers”.
37. Mr Kissane has stated that it was a term of the parties’ agreement and the practice between them that prior to ordering goods from the applicant, the company would send the customer’s plans to the applicant. If necessary a representative of the applicant would attend at the customer’s site and carry out a survey and consider the customer’s plans. Thereafter, it was the applicant who prepared the quotation for the goods, but on the company’s letter-head (that is, Heatmerchants letter-head), and in which the applicant set and specified the price which the customer would pay to the company e.g. Heatmerchants.
38. Thereafter, if the quoted price was accepted by the customer, the applicant would supply the goods to the company at one of its retail locations. It would in due course invoice the company for the price quoted to the customer, less an agreed discount rate. The discount represented what Heatmerchants would make out of the transaction. It was percentage-based, and based on prices dictated by the applicant.
39. When the goods were delivered to the company they were never mixed with any other goods as part of some manufacturing process. They were by agreement stored separately from the company’s other goods, and were at all times readily identifiable through the use of unique serial numbers and other distinguishing features. This modus operandi was in place from March 2007 until the company went into liquidation in April 2012. Once the goods were supplied to the end-user, the applicant would commission the equipment in so far as that was necessary, and provide any necessary warranties. This involved a servant or agent of the applicant attending at the end-user’s premises, inspecting the method and manner of installation of the heating system in order to make sure that it was correctly installed and working properly. Mr Kissane has averred also that it was part of the agreement between the parties that these commissioning services were normally not undertaken until such time as the goods had been paid for, and neither was the warranty extended to cover the goods until payment had been made. But I have referred to the fact that exceptionally during the examinership, Mr Kissane agreed with the examiner that he would commission systems and extend the warranty, even though he had not been paid for the goods.
40. In an ideal world, the company would be paid the full quoted price by the end-user upon installation, and the company would then discharge its own invoice from the applicant, which was the end-user price as quoted, less the agreed discount.
41. This modus operandi is a far cry from a situation where, for example in the Carroll case, Carrolls supplied cigarettes to a shop which in turn sold them on to the customer. In that scenario, Carrolls did not dictate, or otherwise control the price at which the goods were sold on to the customer. The shop could sell the cigarettes at a profit or at a loss, as they themselves decide. It could not be said that a relationship of principal and agent, or bailor and bailee existed between those parties, even if the retention clause stated that the shop was the agent of Carrolls in relation to the goods.
42. Other features of the retention clause in the present case are consistent with an agency relationship, such as the requirement to store the goods separately, to hold the sale proceeds in trust and in a separate bank account. The terms stated that a fiduciary relationship would exist between the parties, that they would be held as trustee for the seller, and that the buyer had to return them on demand. All these are consistent with, though not themselves determinative of, an agency relationship, notwithstanding that in another scenario, they would not be sufficient for a court to conclude that an agreement which in reality created a charge, was nevertheless not such an agreement, but was one which created a fiduciary relationship. It is the substance and reality of the parties’ relationship that must be considered, and not merely the words used.
43. It has been stated in some of the cases (for example in Re Andrabell Ltd [1984] 3 All ER 407) that the existence of an agreed credit period is inconsistent with a fiduciary relationship. I can see what is meant by that, but I do not consider that it is so in all cases. Those who have considered that it points away from a fiduciary relationship make the point that the purpose of a credit period is to ease pressure on the cash-flow of the buyer since he can use the monies generated by the sale on to third parties during that period of credit. That cannot be assumed to be the only purpose of a credit period. In some cases, a credit period allows some lead time between the supply of the goods and the finding of the eventual purchaser, or to allow a period of time for the buyer to get paid by the sub-purchaser. It cannot be presumed that the credit period is simply a period in which the buyer can retain the money received in the re-sale, and at the end of the credit period pay same over. There is nothing to stop the buyer paying the seller ahead of the expiration of the credit period where he has been paid earlier by the sub-purchaser. The credit period can be seen as a period agreed during which the seller may not seek to be paid, whether the goods have been sold on or not. It should not necessarily be seen as a term which automatically deprives the relationship of the character that of principal and agent. I do agree that in any particular case it may well add support to arguments that a charge has been created, but it is just one of perhaps several features which will have to be considered and weighed up. In the present case it is just one feature of the terms and conditions under which the parties traded, but I do not think that when the overall trading relationship which I have described above is taken account of, it can trump all the other indicators of a principal/agent relationship, and therefore the existence of a fiduciary relationship.
44. As I have said already, there has certainly been a marked reluctance on the part of courts in the UK to recognise a fiduciary relationship since Romalpa, including where there is a requirement to keep all proceeds of re-sale in a separate account. In so far as such decisions indicate that under English law a retention of title clause will not be considered to create a fiduciary relationship, such decisions are not binding here. I have already stated my view that the decision of Barron J. in W.J.Hickey Ltd and that of Murphy J. in Carroll are not in conflict and can be readily distinguished one form the other. They co-exist comfortably, each having its own facts. Murphy J. in Carroll clearly states that if any of the three questions which he posed were to be answered in the affirmative, then a fiduciary relationship will exist. That is the law in this jurisdiction, and I have no reason to depart from that decision.
45. It is clear that how the question is answered will depend on the special facts of each particular case under consideration. I consider that while the requirement to lodge all the proceeds of a re-sale into a separate account may, when combined with all the other facts of the case, indicate a charge and not a fiduciary relationship, one must in the present case understand that the parties expressly agreed that while the end-user would be invoiced with the full amount, the applicant would invoice the seller only for that amount less an agreed discount. In this way, the amount of the company’s profit on any transaction was set by the applicant. It seems clear, giving business efficacy to the clause, that what was to be lodged to a separate account was the amount due to the applicant on foot of its invoice to the company, rather than the greater amount paid by the end-user to the company. I see no conflict arising in this regard with other decisions I have been referred to. The fiduciary relationship existing by virtue of this course of dealing between these particular parties determines that it was this portion of the re-sale proceeds which were to be held in trust and not the entire re-sale proceeds, and in so far as this is not specifically provided for in the retention clause, I would be prepared to imply such a term, just as in Romalpa a necessary term was implied in order to give business efficacy to that agreement, particularly in the light of the wording of Clause 11(a) of the terms and conditions which makes it clear that the purpose of the retention of title was to protect the applicant in respect of monies “which are due from the Buyer to the Company”. It is not inconsistent with that fiduciary relationship that the company was required to lodge into a separate account that part of the re-sale price which is clearly due and owing to the applicant, and which was the subject of the applicant’s own invoice to the company. The discount agreed was effectively the agent’s commission on the sale, since it had no input into the price charged to the ultimate consumer.
46. I should also refer to the existence within the retention clause in the present case of the following part of Clause 11(b)(v) to which I referred earlier when discussing the judgment of Barron J. in W.J.Hickey Ltd:
“… and the buyer is hereby deemed to have assigned to the company absolutely the benefit of any claim (including the right to trace the said goods or the proceeds thereof) which the buyer has against any such third party arising from such sale”.
47. Barron J. stated that cases where a charge had been found to exist were cases where, as in In re Interview Ltd, there was an assignment of rights back to the seller. I have already referred to the fact that in In re Interview Ltd the assignment back included the phrase “by way of security” – a phrase absent from the clause in the present case. That is enough to distinguish it from the remarks of Barron J. and the grasp of In re Interview Ltd. But in any event, in the present case where, taking into account the trading relationship, and the terms and conditions I am satisfied that no charge is created for the purpose of s. 99 of the Act of 1963, the existence of this assignment of rights clause, as with the credit period provision, is insufficient to disturb that conclusion. All the cases to which I have been referred have had factually distinguishing features. None of the decisions can have general application. But a consideration of them assists the Court in how to approach the often difficult task of deciding, not what the parties intended the position to be, but what the agreement, combined with their actual modus operandi, should mean as a matter of law. As stated by Mocatta J. in Romalpa at page 557: “ [it is made] clear that the special facts of each case are crucial in determining whether there is a simple debtor/creditor relationship, although the intention of the parties as ascertained from the terms of their contract shows that some kind of fiduciary relationship exists.”
48. In so far as the liquidator argues that it would be impossible, or even unreasonably burdensome and costly to have to try at this stage to identify completed sales, and sales for which payment has been received, in order to ‘trace’ the fund over which the applicant’s rights in equity exist, this is not an argument which should hold sway in order to disentitle the applicant to its reliefs. The principles from In Re Hallett’s Estate make no such exception. I note that at p. 796 Jessel MR stated:
“But … where a trustee has mixed the money with his own, there is this distinction, that the cestui que trust, or beneficial owner, can no longer elect to take the property, because it is no longer bought with the trust money simply and purely, but with a mixed fund. He is, however, still entitled to a charge on the property purchased, for the amount of the trust money laid out in the purchase; and that charge is quite independent of the fact of the amount laid out by the trustee, using the word ‘trustee’ in the sense I have mentioned, as including all persons in a fiduciary relation, the right to the charge follows. That is the modern doctrine of equity.”
49. He then goes on to state that he had never heard it suggested that there was any distinction for these purposes between “an express trustee, or an agent or a bailee, or a collector of rents, or anybody else in a fiduciary position”. The ‘charge’ referred to must not be confused with one requiring registration for the purposes of s. 99 of the Act of 1963, but is rather one arising by virtue of equitable principles.
50. I am therefore satisfied that the proceeds of sale clause in this case is not a charge requiring registration under s. 99 of the Act of 1963, and that in relation to the proceeds of any re-sale of the applicant’s goods to third parties, which have been received by the respondent either as examiner or liquidator, he is obliged to hold in trust for the applicant the amount of such proceeds of re-sale less the amount of the discount to which the company was entitled under the agreed terms, and to pay same to the applicant, in priority to ordinary creditors. Under equitable principles the applicant is entitled to trace such proceeds, since it appears that such proceeds received have not been kept in a separate bank account as required. I will hear the parties as to the precise terms in which this Court’s order should be drawn and perfected in order to give effect to my conclusions.
In the matter of J.D. Brian Ltd (in Liquidation) t/a East Coast Print and Publicity
[2015] IESC 62 (09 July 2015)
Judgment of Ms. Justice Laffoy delivered on the 9th day of July, 2015
Factual and procedural background
1. The three companies mentioned in the title hereof, which were part of the Belgard Motors Group of companies, are being wound up by the Court. In the case of each of the companies the winding up order was made by the High Court on 7th December, 2009 on foot of a petition presented by the company on 13th November, 2009. The liquidator appointed by the Court in respect of each company in liquidation is Tom Kavanagh (the Liquidator). In the course of the liquidation in 2010 the liquidator applied to the High Court pursuant to s. 280 of the Companies Act 1963 (the Act of 1963) seeking directions against the following background.
2. On 20th December, 2005 each of the companies entered into a debenture with the Governor and Company of the Bank of Ireland (the Bank). The three debentures were in similar terms. Each of the companies will henceforth be referred to as “the Company” and the related debenture will be referred to as “the Debenture” and together they will be referred to as “the Companies” and “the Debentures”.
3. The charging provisions in the Debenture are Clauses 4, 5 and 6. Clause 4 provides as follows:
“The Company as Beneficial Owner hereby charges in favour of the Bank all its undertaking, property and assets, whatsoever and wheresoever both present and future including goodwill and its uncalled capital for the time being with the payment of all monies hereby secured including interest as aforesaid.”
Clause 5 then elaborates on the nature of the charge and provides as follows:
“The Charge hereby created shall as regards the lands described in the Schedule hereto . . . (the ‘Scheduled Premises’) and all estate or interest legal or equitable in all freehold and leasehold property . . . which shall at any time hereafter during the continuance of this security become the property of the company all present and future proceeds of insurance receivable by the Company, and its goodwill and uncalled capital for the time being be a specific charge and shall as regards the other property hereby charged be a floating security but so that the Company shall not be at liberty to create any mortgage or charge ranking in priority to or pari passu with these presents.”
Clause 6 creates a mortgage by demise in favour of the Bank of the Scheduled Premises.
4. The Debenture also contains provisions of the type one would expect to find in such a security document, for example, covenants dealing with the obligations of the Company for repayment of the monies due by the Company to the Bank and interest thereon (Clauses 1, 2 and 3). Clause 8 contains covenants by the Company to do or refrain from doing certain actions “at all times during the continuance of this security”. For example, in paragraph (a) the Company covenants to “carry on and conduct its business in a proper and efficient manner”. In paragraph (d) it covenants to notify the Bank forthwith of its intention or any intention on the part of any person of which it should become aware to present a petition to appoint an examiner or a liquidator or similar officer to the Company. In paragraph (k) the Company covenants in the following terms:
“not without the prior consent in writing of the Bank [to] sell, assign or otherwise dispose of any property hereby charged as a specific charge or any of its book debts and other receivables in favour of any person.”
5. Clause 10 is the provision of the Debenture which is at the core of the legal issues which arose on the Liquidator’s application and which arise on this appeal. It provides:
“The Bank, may, at any time, by notice in writing served on the Company, convert the floating charge contained in this Deed into a first fixed charge over all the property, assets, and rights for the time being subject to the said floating charge or over so much of the same as is specified in the notice. A notice under this Clause may be served by the Bank only if, in the sole judgement of the Bank, the Bank considers that the property, assets and rights described or referred to in the notice are in any way in jeopardy.”
Clause 11 also deals with the conversion of the floating charge into a fixed charge and provides as follows:
“The floating charge contained in this Deed shall in any event stand converted into a fixed charge automatically upon:
(a) the filing of a petition for the winding up of the Company;
(b) the passing of a resolution for the winding up of the Company;
(c) the appointment of a Receiver on behalf of the holders of any debentures of the Company secured by a floating charge;
(d) possession being taken of any property by or on behalf of the holders of any debentures of the Company secured by a floating charge.”
Clause 12 deals with the circumstances in which it would be lawful for the Bank to appoint a Receiver and Manager, the circumstances being outlined in paras. (a) to (k) inclusive in Clause 12, the last two circumstances being the following:
“(j) if any of the events set out in Clauses 10 and 11 occurs;
(k) if any circumstance shall occur which in the sole judgment of the Bank is prejudicial to or imperils or is likely to prejudice or imperil the security hereby created;”.
6. In the case of each Debenture Clause 10 was invoked by the Bank by a notice dated 28th October, 2009 (the Crystallisation Notice), which was addressed to the Company and which was headed “Notice of conversion of floating charge”. Having referred to the Debenture, which was described as having “created fixed and floating security in our favour over all your undertaking, property and assets, whatsoever and wheresoever both present and future as security for your present and future liabilities to us”, it then provided:
“We now give you NOTICE that we now consider that the property, assets and rights which are subject to the floating charge contained in the Debenture are in jeopardy.
We further give you NOTICE that, pursuant to clause 10 of the Debenture, we hereby convert the floating charge contained in the Debenture into a first fixed charge with respect to all property, assets and rights which are subject to such floating charge.”
7. On 23rd June, 2010 the Liquidator initiated the application to the High Court pursuant to the provisions of s. 280 of the Act of 1963 for an order providing the Liquidator with directions, inter alia, in the following terms:
(a) confirming that the floating charge granted by each Company and held by the Bank had been validly crystallised; and
(b) confirming that as a result of the crystallisation of the floating charges all assets of each Company fall outside of the liquidation and accordingly, no distribution or dividend will be available or payable to any other creditor of the Company.
8. It was clear from the grounding affidavit sworn by the Liquidator on 23rd June, 2010 that the nub of the Liquidator’s application for directions related to the application of s. 285 of the Act of 1963 to the circumstances and, in particular, that the Liquidator’s position was that the debts due by the Company which had preferential status by virtue of subs. (1) to (7) of s. 285 did not have priority over the claims of the Bank under the Debenture. Indeed, that position was broadly reflected in the terms of the directions which the Liquidator sought.
9. The parties to the application initiated by the Liquidator were the Liquidator, the Revenue Commissioners, as a preferential creditor, and the Bank, as the holder of each Debenture.
10. Very little factual evidence was put before the High Court on the application. There was no evidence whatsoever as to what happened to the business and assets of the Company in the two week period between the service of the Crystallisation Notices on 28th October, 2009 and the presentation of the petition to wind up on 13th November, 2009, although it would not have been of any relevance to the legal issues which arose for determination in the High Court, and arise on the appeal. In the Liquidator’s grounding affidavit it was disclosed that at the date of the presentation of the petitions the total indebtedness of the Companies to the Bank was €16,250,000. It was averred that, whilst a significant portion of the assets of the Companies –
“are properties and accordingly it is difficult to predict with precision the values that may be achieved, based on current estimated realisations in the liquidations, I anticipate that between €12,500,000 and €14,500,000 will be realised, of which circa €2,000,000 relates to assets which I say and am advised are subject to the floating charge provisions of the Debentures”.
In the light of the anticipated shortfall in the monies owed to the Bank, the Liquidator averred that he was satisfied that there was no likelihood of a return to any other creditors. On that basis he believed that the monies then currently standing the liquidation account of each Company were assets to which the Bank was entitled.
11. In the replying affidavit sworn on 6th July, 2010, Noel Wall, an officer of the Revenue Commissioners, averred that the Revenue Commissioners were preferential creditors of the first two of the Companies named in the title hereof in amounts aggregating €595,850.
12. Before outlining the outcome of the application in the High Court, it is convenient to identify the statutory provisions which were in issue on the application and the statutory provisions which may be material to the proper construction of those provisions.
Statutory provisions
13. Section 285 of the Act of 1963, which is in Part VI of the Act of 1963 and applies to every mode of winding up, concerns the treatment of preferential payments in a winding up. Subs (1) defines “the relevant date”, by reference to which the cut-off point in relation to periods of time over which various preferential debts are given priority is identified. Sub-paragraph (i) of subs. (1), which is relevant to the circumstances here, provides that the relevant date means –
“where the company is ordered to be wound up compulsorily, the date of the appointment (or first appointment) of a provisional liquidator or, if no such appointment was made, the date of the winding-up order, unless in either case the company had commenced to be wound up voluntarily before that date.”
This Court was informed that the Liquidator was appointed as provisional liquidator on the day the petition to wind up was presented in the High Court. Therefore, the relevant date in this case is 13th November, 2009, the date of the appointment of the provisional liquidator. Sub-section (2) lists the debts which in a winding up shall be paid in priority to all other debts. To take an example in which the Revenue Commissioners would have an interest, subs. (2)(a)(ii) covers –
“all assessed taxes, including income tax and corporation profits tax, assessed on the company up to 5th April next before the relevant date and not exceeding in the whole one year’s assessment;”
The succeeding subss. (3) to (6) elaborate on the quantification of debts which have priority.
14. Subs. (7) of s. 285 provides:
“The foregoing debts shall –
(a) rank equally among themselves and be paid in full, unless the assets are insufficient to meet them, in which case they shall abate in equal proportions; and
(b) so far as the assets of the company available for payment of general creditors are insufficient to meet them, have priority over the claims of holders of debentures under any floating charge created by the company, and be paid accordingly out of any property comprised in or subject to that charge.”
While “debenture” is defined in the definitions section of the Act of 1963, s. 2, the expression “floating charge” is not defined. In section 2, which sets out general provisions as to interpretation, unless the context otherwise requires, “debenture” is defined as including –
“. . . debenture stock, bonds and any other securities of a company whether constituting a charge on the assets of the company or not”.
That definition, in my view, is not of any assistance in properly construing s. 285(7)(b).
15. Section 98 of the Act of 1963, while having no direct application to the facts of this case, is of some materiality because it applies the provisions of s. 285 to circumstances where a receiver is appointed under a floating charge and, in other jurisdictions, its counterpart has been considered in the context of considering issues similar to the issues which arise on this appeal. Subs. (1) of s. 98 provides:
“Where either a receiver is appointed on behalf of the holders of any debentures of a company secured by a floating charge, or possession is taken by or on behalf of those debenture holders of any property comprised in or subject to the charge, then, if the company is not at the time in course of being wound up, the debts which in every winding up are, under the provisions of Part VI relating to preferential payments to be paid in priority to all other debts, shall be paid out of any assets coming to the hands of the receiver or other person taking possession as aforesaid in priority to any claim for principal or interest in respect of the debentures.”
For the purposes of the application of s. 285 to the appointment of a receiver, it is provided in subs. (3) that periods of time shall be reckoned from the date of the appointment of the receiver.
16. Section 99 of the Act of 1963, which deals with the registration of charges created by companies, is only of peripheral materiality to the issues on this appeal, although it is worth noting that, while it applies to “a floating charge on the undertaking or property of the company” (subs. (2)(f)), it does not apply to the coming into being of a fixed charge on the conversion of a floating charge to a fixed charge.
17. As the authorities referred to later disclose, a new definition of “floating charge” was introduced by legislation in the United Kingdom in 1985 and 1986 and in New South Wales in 1971. There is no definition of floating charge in the Companies Act 2014 (the Act of 2014), most of the provisions of which came into operation on 1st June, 2015.
The process in and outcome of the High Court proceedings in outline
18. Having heard the Liquidator’s application in the High Court, the trial judge (Finlay Geoghegan J.) delivered judgment on 25th March, 2011 (the First Judgment). In the First Judgment, she addressed the proper construction of s. 285(7) of the Act of 1963. She stated (at para. 19):
“If there were no relevant judicial authority on the construction of s. 285(7) or a predecessor or similar section in the UK Companies Acts, I would have no hesitation in construing the section as giving priority to preferential debts over the claims of holders of debentures under floating charges which crystallise prior to the commencement of winding up. Further, I would construe the section as meaning that the preferential debts were entitled to be paid out of the realisation of assets subject to a floating charge in the Debenture, notwithstanding that such floating charge crystallised prior to the commencement of winding up.”
She then set out her reasons for so construing the section, in accordance with the ordinary and plain meaning of the words used, including the definition of debenture in s. 2 of the Act of 1963, in paras. 20 to 22 inclusive of the judgment. The reasons set out will be outlined later in addressing the issue of the construction of s. 285(7).
19. However, the trial judge recorded that there are relevant authorities from other jurisdictions upon which counsel for the Liquidator had relied in the High Court. Having conducted a comprehensive analysis of the relevant authorities relied on by the Liquidator she made it clear that she did not find the reasoning in the relevant authorities persuasive. Further, having stated that she concluded that s. 285(7) is not ambiguous in the meaning of s. 5 of the Interpretation Act 2005, so that it was not necessary to consider further its construction in accordance with the provisions of that Act, she stated (at para. 41):
“Accordingly, in my judgment the proper meaning of s. 285(7) is that the preferential debts rank in priority to the claim of the Bank, as debenture holder, to the funds realised from the assets subject to the floating charge pursuant to clause 5 of the Debenture, irrespective of whether the floating charge crystallised prior to the commencement of winding up.”
Later (at para. 65) she stated that the issue as to the effect of the Crystallisation Notice did not have to be resolved on the application by reason of her conclusion on the construction of s. 285(7) and she left it for future resolution, if that should become necessary.
20. Subsequent to the delivery of the First Judgment, the Liquidator, supported by the Bank, indicated that he had instructions to appeal to this Court the conclusion of the High Court on the construction of s. 285(7) and he sought a determination of the outstanding issue in order that all the relevant issues could be before this Court on the appeal. The Revenue Commissioners did not object to that approach. Having heard further submissions from all of the parties, the trial judge delivered a supplementary judgment on 11th July, 2011 (the Second Judgment). Both the First Judgment and the Second Judgment are reported in [2011] 3 IR 244.
21. In the Second Judgment (at para. 6), the trial judge explained the approach which the parties had agreed to as follows:
“. . . it was agreed by reason of the issue which had to be determined by the court i.e. the effect of the service of a notice pursuant to clause 10 of the Debenture in accordance with the proper construction of the Debenture and the requirement following the decision in In Re Wogan’s (Drogheda) Ltd. [1993] 1 I.R. 157, that such issue must be determined by construction of the terms of the Debenture and not any subsequent action by either party . . .”
It is appropriate to record that, in dealing with that issue, the trial judge stated (at para. 7) that she proposed referring to the debenture given by the second named company in the title hereof (J.D. Brian Motors Ltd.) and she recorded that it was agreed that, having regard to the business of the Company at the time of the creation of the Debenture, i.e. a motor business including buying and selling cars, and having regard to the terms of Clauses 4 and 5 of the Debenture, the property of the Company subject to the floating charge principally included stock-in-trade, cash-at-bank and other book debts.
22. Having analysed the provisions of the Debenture in the context of the proper approach to the construction of commercial contracts, for reasons set out in the Second Judgment, which will be considered later, the trial judge concluded (at para. 20) that, on a proper construction of the Debenture, the service of the Crystallisation Notice pursuant to Clause 10 of the Debenture, did not have “the effect of converting the property subject to the floating charge created by the Debenture into a first fixed charge over such property”.
23. The order of the High Court (Finlay Geoghegan J.) was dated 18th July, 2011 and it contained the following declarations:
“. . . pursuant to section 285(7) of the [Act of 1963] that the preferential debts of the Companies rank in priority to the claims of [the Bank] as debenture holder to the funds realised from the assets subject to the floating charges pursuant to Clause 5 of the Debentures irrespective of whether said floating charges were converted into fixed charges prior to the commencement of the winding up of the Companies
AND . . . that the service of notice by [the Bank] pursuant to the provisions of said Debentures did not have the effect of converting said floating charges into first fixed charges over the property.”
The appeal
24. The Liquidator is the appellant on the appeal. He has sought orders setting aside both of the declarations made by the High Court quoted above. The grounds of appeal are unusually succinct and to the point and, in essence, assert that the trial judge erred in law and in fact and/or in a mixed question of law and fact in making the findings embodied in the two declarations in the order dated 18th July, 2011 as to –
(a) the construction of s. 285(7) and
(b) the effect of each of the Crystallisation Notices dated 28th October, 2009,
and, further, in failing to hold that, as a result of the valid crystallisation of the floating charge in each Debenture prior to the winding up of the Company, s. 285(7) does not apply and that the preferential debts owed by the Company do not rank in priority to the claims of the Bank.
25. The Revenue Commissioners were, in reality, the respondents on the appeal. The Bank was also represented and made submissions and, in the main, adopted the approach of the Liquidator.
26. In addressing the issues which arise on the appeal, it seems to me logical to consider, first, whether the service by the Bank of the Crystallisation Notice on the Company had the effect of converting what was a floating charge in the Debenture into a fixed charge, so that no floating charge existed at the commencement of the winding up. Whether or not the service of the Crystallisation Notice had that effect, having regard to the finding of the trial judge on the construction of s. 285(7), it will be necessary to consider, secondly, whether, on the proper construction of that provision, the preferential creditors have priority over the claims of the Bank under what had been the floating charge in the Debenture before its conversion.
Effect, if any, of Crystallisation Notice: discussion
The judgments of the High Court
27. In the First Judgment (at para. 45) the trial judge identified two separate issues which needed to be addressed:
(i) whether, as a matter of principle, Irish law recognises that a chargee may, pursuant to an express contractual term, validly effect crystallisation by or on the occurrence of an expressly specified “non-traditional event” (meaning an event other than a business cessation event, such as a winding up, or a chargee intervention event, such as the appointment of a receiver), and thereby cause the floating charge to become fixed on all or specified assets; and
(ii) if, as a matter of principle, the chargee may do so, whether, on the facts, the service by the Bank of the Crystallisation Notice was effective to crystallise the floating charge created by the Debenture such that it then became a fixed charge on all the property which had been the subject of the floating charge.
28. On issue (i), the trial judge stated (at para. 56) of the First Judgment that she was of the view that there is no rule of law which precludes parties to a debenture creating a floating charge agreeing, as a matter of contract, that the floating charge will crystallise upon the happening of an event or a particular step taken by the chargee. That conclusion, with which I agree, is not disputed by any of the parties to the appeal. She then pointed out that whether the parties actually achieved their intention is a separate issue and she went on to consider that issue by reference to the decision of this Court in In re Keenan Bros. Ltd. [1985] I.R. 401 (Keenan Bros.), although emphasising that the issue here is not whether the charge as created by the Debenture was a fixed or a floating charge, but rather the effect of the service of the Crystallisation Notice pursuant to Clause 10 of the Debenture. She then summarised the task for the Court as follows (at para. 63):
“If the service of the notice, pursuant to Clause 10, in reality had the effect of converting the floating charge over the book debts and stock in trade of the Companies into a first fixed charge on such assets, then it must also have effected an equitable assignment of such assets to the Bank. As a consequence, the Companies would have lost the ability to deal in or dispose of those assets, save to the extent permitted by the Bank. The Court appears obliged, in accordance with the judgments in In Re Keenan Brothers, to determine whether, in reality, such was the effect of the service of the notice, pursuant to Clause 10 having regard to the other provisions of the Debenture and the notice served.”
29. As has been recorded above, in the First Judgment the trial judge left for future resolution that issue, given that it was not necessary to resolve it having regard to her conclusion on the construction of s. 285(7).
30. In the Second Judgment the trial judge quoted paras. 57 to 65 of the First Judgment, including the analysis of the decision of this Court in Keenan Bros. It is clear from the Second Judgment that there was a degree of consensus between the parties as to the approach to be adopted, as has already been recorded. In particular, it was recorded (at para. 8) that there was agreement that, if the effect of the Crystallisation Notice was to convert the floating charge into a fixed charge, then, as a matter of law, the Company was no longer thereafter entitled to deal with any of its stock, cash-at-bank or book debts without the consent of the Bank, which meant that the Company could no longer carry on its normal trade.
31. Moreover, there was no dispute as to the general principles which apply to the construction of an agreement between the parties which would include a debenture, reference being made to the decision of this Court in Analog Devices B.V. v Zurich Insurance [2005] 1 IR 274. However, by reference to the decision of the Privy Council in Agnew v. Commissioner of Inland Revenue [2001] 2 AC 710 (Agnew), 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 intentions 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 quoted stated:
“If their intention, properly gathered from the language of the instrument, is to grant the company rights in respect of the charge assets which are inconsistent with the nature of a fixed charge, then the charge cannot be a fixed charge however they may have chosen to describe it.”
I agree with the observation of the trial judge that the approach of the Privy Council appears to be identical to that of Henchy J. and McCarthy J. in this Court in Keenan Bros.
32. The trial judge considered it appropriate to adopt a similar approach to determining whether the effect of the service of the Crystallisation Notice pursuant to Clause 10 of the Debenture was to convert the floating charge over the stock-in-trade, cash-at-bank and books debts into a fixed charge over such property, the first step being to construe the Debenture to ascertain the intention of the parties as to the rights and obligations granted to or imposed on each other in relation to the property the subject of the floating charge after service of such notice and the second stage being to determine whether such rights and obligations are consistent with the charge being a fixed charge.
33. The trial judge accepted as correct a submission made on behalf of the Liquidator and the Bank that the Court should have regard, when construing Clause 10 of the Debenture, to the fact that a notice may only be served by the Bank where the Bank considers the relevant property to be “in jeopardy”. However, she rejected the submission on behalf of the Liquidator and the Bank that the Court should construe Clause 10, by reason of the fact that it refers to the conversion of the floating charge into first fixed charge, as including, by necessary implication, a restriction on the Company thereafter from dealing or disposing of any of the assets the subject of the Crystallisation Notice without the consent of the Bank, the trial judge citing a passage from the speech of Lord Scott in Re Spectrum Plus Limited [2005] 2 AC 680 (Spectrum Plus), which will be quoted later, and suggesting that the submission “put the cart before the horse”. Having observed that the Debenture is silent as to any rights of the Bank or obligations of the Company in relation to the property the subject of the floating charge after service of the Crystallisation Notice, she stated (at para. 16) that there is nothing in the Debenture which restricts the entitlement of the Company to deal with or dispose of its stock-in-trade or to use the proceeds of its book debts or cash-at-bank specifically following the service of such notice.
34. The trial judge attached some significance to Clause 8 of the Debenture, insofar as it sets out obligations on the Company “at all times during the continuance of this security”. Referring to the obligations expressly set out in para. (a) that the Company shall “carry on and conduct its business in a proper efficient manner”, she found that such a continuing obligation was inconsistent with the existence of a fixed charge over its stock-in-trade, cash-at-bank and books debts. In relation to para. (k) of Clause 8, which is quoted above, the trial judge concluded that it was confined to property charged by the Debenture as a specific charge. The inclusion of restriction in relation to specifically charged property she considered “underscores the absence of any similar provision restricting sale or other disposal of property subject to the floating charge after the service of a notice, pursuant to Clause 10 of the Debenture and hence the absence of any such intention on the part of the parties expressed in the Debenture”.
35. On the foregoing basis, the trial judge concluded (at para. 19) that, as a matter of construction, “there is no intention expressed in the Debenture that the Company should after the service of the Crystallisation Notice be restricted in its use of the property subject to that notice, other than pursuant to Clause 8”. Therefore, she concluded that the Company continued to be entitled to use such property for the proper carrying on and conduct of its business, including selling stock-in-trade and making payments from cash-at-bank and realised book debts, without the necessity of obtaining the consent of the Bank for sale or other disposal. That entitlement she found to be inconsistent with the existence of a first fixed charge over the stock-in-trade, cash-at-bank and book debts in favour of the Bank. Accordingly, she found that the service of the Crystallisation Notice did not have the effect of converting the property the subject of the floating charge into a first fixed charge over such property.
36. Before considering the bases on which counsel for the Liquidator and the Bank dispute the correctness of those findings, it is convenient to consider the main authorities which were addressed on this point.
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.
44. The most in-depth analysis of the question whether the security given by Spectrum Plus to the relevant bank created a fixed charge or a floating charge is to be found in the speech of Lord Scott. He stated (at para. 78) that the security created by the debenture was expressed to include “[a] specific charge [of] all book debts and other debts . . . now and from time to time due and owing to [Spectrum]” and also:
“[a] floating security [of] its undertaking and all its property assets and rights whatsoever and wheresoever present and/or future including those for the time being charged by way of specific charge pursuant to the foregoing paragraphs if and to the extent that such charges as aforesaid shall fail as specific charges but without prejudice to any such specific charges as shall continue to be effective.”
While noting (at para. 79) that the expression “specific charge” was potentially ambiguous, Lord Scott concluded that in the context in which it was used was intended to mean a fixed charge in contrast to a floating charge. Lord Scott (at para. 81) also quoted a provision of the debenture, which he then paraphrased as follows:
“This provision barred Spectrum from dealing with its book debts in any of the ways specified but left Spectrum free to deal with the debtors who owed the debts and, in particular, to collect the debts in the normal course of business.”
It is convenient at this juncture to observe that in this case there is a certain inconsistency in language between the charging clauses, in particular Clause 5, in each Debenture in issue here quoted at para. 3 above and Clause 10 quoted at para. 5 above. Clause 5 refers to “specific charge” and “floating security”, while Clause 10 refers to “first fixed charge” and “floating charge”. Adopting the approach adopted by Lord Scott, I conclude that, having regard to the context, the intention of the Company and the Bank in the case of Debenture was to mean a fixed charge in contrast to a floating charge in both clauses.
45. To put the passage from the speech of Lord Scott, which, as is mentioned in para. 33 above, was cited by the trial judge, into context it is appropriate to start at para. 116 thereof. There he stated that an attempt had been made to justify the categorisation of the charge as a fixed charge by looking no further than the receipt by the bank, through the operation of the clearing system, of the proceeds of cheques from Spectrum’s debtors that were paid in by Spectrum. The consequent crediting of Spectrum’s account with amounts equal to the proceeds of the cheques and Spectrum’s ability to draw on that account for its business purposes was not inconsistent, it was suggested, with the categorisation of the charge over the book debts as a fixed charge. It was stated that the point was stressed by Mr. Moss, Q.C., counsel for the bank. Lord Scott rejected that argument and he stated that the categorisation as a fixed charge must depend on what, if any, restrictions there were on the use the chargor could make of the credit to the account that reflects each payment in. He continued (at para. 117):
“The bank’s debenture placed no restrictions on the use that Spectrum could make of the balance on the account available to be drawn by Spectrum. Slade J in Siebe Gorman thought it might make a difference whether the accounts were in credit or in debit. I must respectfully disagree. The critical question, in my opinion, is whether the chargor can draw on the account. If the chargor’s bank account were in debit and the chargor had no right to draw on it, the account would have become, and would remain until the drawing rights were restored, a blocked account. The situation would be as it was in In re Keenan Bros Ltd. But so long as the chargor can draw on the account, and whether the account is in credit or debit, the money paid in is not being appropriated to the repayment of the debt owing to the debenture holder but is being made available for drawings on the account by the chargor.”
46. Against that background the passage (excluding the first sentence) quoted by the trial judge is to be found in para. 119 where Lord Scott stated:
“Slade J in Siebe Gorman, . . . and Mr Moss QC in his submission on behalf of the bank in the present case, attributed considerable significance to the labels that the parties to the debenture had chosen to attribute to the charge over book debts. Mr Moss indeed argued that a debenture expressed to grant a fixed charge thereby limited by necessary implication the ability of the chargor to deal with the charged assets. He argued that Spectrum had no right without the consent of the bank to draw on the account into which the cheques received by Spectrum in payment of its book debts had to be paid. This limitation was, he said, an inevitable result of the grant by the debenture of the fixed charge. This argument . . . puts the cart before the horse. The nature of the charge depends on the rights of the chargor and chargee respectively over the assets subject to the charge.”
While, as will appear later, I consider that the task of the Court here in ascertaining, as a matter of construction of the Debenture, the effect of the service of the Crystallisation Notice is fundamentally different to the task of determining, as a matter of construction of a debenture, whether a fixed charge or a floating charge on book debts is created on the execution of the debenture, with which the courts were confronted in Keenan Bros. and Spectrum Plus, I have set out the issue in the Spectrum Plus case and Lord Scott’s observations in some detail, because the trial judge attached weight to the observations at para. 15 in the Second Judgment.
47. Before leaving the decision of the House of Lords in Spectrum Plus it is worth recording that Lord Walker in his speech (at para. 150) quoted the passage from the judgment of Blayney J. in Holidair, which is quoted at para. 42 above, stating that the reasoning in it “is compelling”. In general, a comparison of the reasoning in Spectrum Plus, on the one hand, and the reasoning of this Court in Keenan Bros. and Holidair, on the other hand, does not disclose any major inconsistencies, so that, if Keenan Bros. had been decided by an English court, it is reasonable to assume that it would not have suffered the fate of Siebe Gorman and been overruled.
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).
49. In Brightlife the charging clause in the debenture had three elements. The first dealt with freehold and leasehold property. The second charged –
“by way of first specific charge (a) all book debts and other debts now or at any time during the continuance of this security due or owing to Brightlife and the benefit of all securities and guarantees now or at any time held by Brightlife in relation thereto; (b) the goodwill and uncalled capital for the time being of Brightlife; and (c) the benefit of any licences for the time being in Brightlife.”
The third element was a floating charge over after-acquired freehold and leasehold property and “the undertaking and all other property, assets and rights whatsoever present and future of Brightlife”, subject to a proviso prohibiting the creation of any other charges ranking in priority to or pari passu with the floating charge or the disposal of any assets subject to the floating charge contrary to the provisions of a covenant by Brightlife.
50. There were two further provisions of the debenture given by Brightlife which were considered to be of significance. The first was Clause 3B which provided:
“[The lender] may at any time by notice to Brightlife convert the floating charge into a specific charge as regards any assets specified in the notice which [the lender] shall consider to be in danger of being seized or sold under any form of distress or execution levied or threatened or to be otherwise in jeopardy and may appoint a receiver thereof.”
That was the provision which corresponded to Clause 10 of the Debenture in this case. The other provision was Clause 13, which was a covenant for further assurance and which provided as follows:
“Brightlife shall execute and do all such assurances, acts and things as [the lender] may reasonably require for perfecting or protecting the security created by these presents over the property hereby charged or any part thereof or for facilitating the realisation of such property and the exercise of all powers, authorities and discretions vested in [the lender] . . . and shall in particular execute all transfers, conveyances, assignments and assurances of such property whether [to] [the lender] or its nominees . . . which [the lender] may think expedient and for the purposes of this Clause a certificate in writing by [the lender] to the effect that any particular assurance, act or thing required by it is reasonably required shall be conclusive evidence of such fact.”
51. The first argument advanced on behalf of the lender, which, in my view, is not of particular relevance to this case, was that para. (a) of the second element of the charge in Clause 3 had from the outset created, according to its terms, a “first specific charge” over “all book debts and other debts”. Hoffman J. rejected that argument, stating that neither Siebe Gorman nor Keenan Bros., which he described as “an even stronger case” than Siebe Gorman, was of assistance to the lender, having stated earlier, in a passage referred to by Lord Scott in Re Spectrum Plus (at p. 209):
“In this debenture, the significant feature is that Brightlife was free to collect its debts and pay the proceeds into its bank account. Once in the account, they would be outside the charge over debts and at the free disposal of the company. In my judgment a right to deal in this way with the charged assets for its own account is a badge of a floating charge and is inconsistent with a fixed charge.”
52. Hoffman J. then went on to deal with the alternative submission on behalf of the lender, which, in my view, is of particular relevance to this case, namely that the floating charge was converted into a fixed charge before the resolution for winding up was passed. The chronology was that on 4th December, 1984, Brightlife had given notice of a creditors’ meeting to be held on 20th December, 1984 at which a resolution to voluntarily wind up Brightlife would be proposed. The lender then served four separate notices on Brightlife on 10th December, 1984, including a demand for payment, notice pursuant to Clause 3(B), and a demand pursuant to Clause 13 for execution forthwith of “a legal assignment of all book debts currently due to Brightlife . . . specifying full details of the said debts therein”. The notice pursuant to Clause 3(B) was expressed to be notice –
“of the conversion with immediate effect of the floating charge created [by the debenture] into a specific charge over all the assets of [Brightlife] the subject of the said floating charge.”
53. Having remarked that s. 614(2)(b), which he was applying, and s. 196, being the section of the U.K. Companies Act 1985 corresponding to s. 98 of the Act of 1963, originated in the Preferential Payments in Bankruptcy Amendment Act, 1897, Hoffman J. stated (at p. 211):
“One imagines that they were intended to ensure that in all cases preferential debts had priority over the holder of a charge originally created as a floating charge. It would be difficult to think of any reason for making distinctions according to the moment at which the charge crystallised or the event which brought this about. But Re Griffin Hotel Co. Ltd. revealed a defect in the drafting. It meant, for example, that if the floating charge crystallised before winding up, but otherwise than by the appointment of a receiver, the preferential debts would have no priority under either section. For example, if crystallisation occurred simply because the company ceased to carry on business before it was wound up, . . ., the preferential debts would have no priority. One could construct other examples of cases which would slip through the net. Counsel for [the lender] submits that this is such a case. He says that the notices under cll 3(B) and 13 caused crystallisation of the floating charge over all or part of the assets before the winding up but without the appointment of a receiver.”
It is perhaps apt to remark, lest it be considered overlooked, that as in the corresponding United Kingdom provision, under s. 98 of the Act of 1963 the taking of possession by or on behalf of the debenture holder of any property comprised in or subject to the charge also triggers the application of the priority of preferential creditors under s. 285(7). The reference to the fact that a defect in drafting was revealed by the decision in Re Griffin Hotel Limited will be considered further in considering the issue as to the proper construction of s. 285(7). Hoffman J. also recorded that, while since that decision Parliament had made many amendments to the Companies Acts, until very recently before his judgment no attempt had been made to reverse the effect of the decision. He then stated that the Insolvency Act 1985 had by then done so, by defining a “floating charge” as “a charge which as created was a floating charge”.
54. Having analysed the opposing submissions made on behalf of the Commissioners of Customs and Excise, and having determined that it would be inappropriate for the courts to impose additional restrictive rules on the grounds of public policy, a conclusion with which the trial judge expressly concurred in the First Judgment (at para. 56), and having noted that, on the case before him, it was not necessary to decide questions about automatic crystallisation, Hoffman J. stated (at p. 215):
“The notices under Clauses 3(B) and 13 constitute intervention by the debenture-holder and there is in my judgment no conceptual reason why they should not crystallise the floating charge if the terms of the charge upon their true construction have this effect.
Counsel for the commissioners last submission was that the actual notice under Clause 3(b) was ineffective because the assets over which the charge was to be crystallised were not ‘specified in the notice’. The notice said that it was to apply to ‘all the assets of Brightlife Ltd. the subject of the said floating charge’, In my judgment that is sufficient specification. It is not necessary to list each separate asset. Although my decision that the notice under Clause 3(B) crystallised the charge makes it unnecessary for me to decide whether the notice under Clause 13 did so in respect of the book debts, I will add for the sake of completeness that in my judgment it did. The company’s obligation to execute an assignment removed that freedom to deal with the debts which made the charge float.”
The outcome, accordingly, was that the debts secured by the debenture ranked in priority to the preferential debts in respect of all the assets in the hands of the liquidator.
55. Hoffman J. clearly considered that he was bound by the earlier decision of the English High Court in Re Griffin Hotel [1941] Ch. 129 (Griffin Hotel) on the construction of the counterpart of s. 285(7)(b). As noted at para. 53 above, he recorded in his judgment (at p. 211) that since Griffin Hotel, Parliament had made many amendments to the Companies Acts but until recently no attempt had been made to reverse the effect of the decision. However, the Insolvency Act 1985 had by then done so by introducing the definition of a “floating charge” quoted in para. 53 above. However, that provision had not been introduced at the time of the transactions under consideration by Hoffman J., so that he was deciding the matter by reference to a provision in identical terms to s. 285(7)(b). While the wording of Clause 10 of the Debenture under consideration here differs somewhat from the wording of the corresponding clause under consideration by Hoffman J. and there is no covenant for further assurance in the Debenture, if it is appropriate to apply the reasoning of Hoffman J. to this case, the outcome as regards the effect of service of the Crystallisation Notice should be the same as in Brightlife.
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.
57. Before considering the submissions made on behalf of the parties, I think it is appropriate to emphasise that the decision of Hoffman J. in Brightlife and in a subsequent authority which will be referred to in the context of the construction of s. 285(7) are no longer of relevance in the United Kingdom. The current position in the United Kingdom is succinctly summarised in the following passage in Lynch-Fannon and Murphy on Corporate Insolvency and Rescue (2nd Ed.) at para. 9.30:
“In relation to priorities, and the consequent effect of this decision [Brightlife], the situation in England is clarified by ss. 175(2) and 251 of the Insolvency Act 1986. Now a floating charge, which was created as a floating charge, will not have priority over preferential debts even though crystallising before the liquidation. The issue is therefore moot under English law.”
Submissions on behalf of the Liquidator
58. The Liquidator does not quibble with what the trial judge stated in para. 63 of the First Judgment, as quoted in para. 28 earlier. What he takes issue with is the finding in para. 16 of the Second Judgment that there is nothing in the Debenture which restricts the entitlement of the Company to deal with or dispose of its stock in trade or to use the proceeds of its book debts or cash-at-bank specifically following the service of the crystallisation notice. The gravamen of the Liquidator’s response is that Clause 10 of the Debenture must mean that the service of a Crystallisation Notice brings to an end the general freedom of the relevant Company to deal with its assets. It is submitted that crystallisation, whether happening as a matter of law (for example, as in the case of a receivership) or as a matter of contract, brings to an end, as a matter of law, the entitlement of the Company to use and dispose its assets in the ordinary course of business. Further, it is submitted that, because this restriction happens as a matter of law, it does not need to be expressly spelt out in the Debenture in order to occur. On the contrary, it is submitted that where a charge starts life as a “floating charge” but some contractual event occurs which the parties have agreed will convert it into a “fixed charge”, it inevitably follows that the parties have implicitly agreed that the consequences of fixed charge status will thereafter apply, namely, that the entitlement to use and dispose of the assets in question in the ordinary course of business will no longer be enjoyed by the chargor. It is submitted that any other interpretation would render the crystallisation clause, in this case Clause 10, a nullity.
59. As regards the covenants in Clause 8 of the Debenture and the fact that they are expressed to endure during the continuance of the security, the Liquidator’s position is that the covenant in para. (a) of Clause 8 in relation to carrying on and conducting business is of no relevance, in that it can only apply for so long as the chargor is actually carrying on business and not beyond crystallisation, for example, by the appointment of a receiver. By using the terminology of converting the floating charge “into a first fixed charge”, it is submitted that the parties to the Debenture clearly intended that upon service of the Crystallisation Notice the use of any charged assets would require the consent of the Bank. Any other conclusion, it is suggested, would run entirely counter to what the parties bargained for and what Irish business people have, for decades, understood to be the nature and effect of crystallisation. Clause 10, it is submitted, should be analysed and applied in the same way as Hoffman J. analysed Clause 3B in Brightlife.
Submissions on behalf of the Bank
60. In general, the Bank’s position is the same as that of the Liquidator. However, it is strongly urged on behalf of the Bank that the issue for this Court in determining the effect of the service of the Crystallisation Notice is entirely different from the task which faced the Court in Keenan Bros. and the later decisions of this Court in which it was considered. In each of those cases, it is submitted, the security document set out in detail the obligations and rights of the chargor and the chargee while the Company was operating as a going concern. So the question was not one of construction of the security document to ascertain to what restrictions the relevant asset (in each case book debts) was subject. Rather, the question in those cases was primarily one of characterisation by reference to the balance of control of the asset class. In this case, it is submitted, the situation is different, in that the primary question is not whether a listed set of restrictions and entitlements constituted a fixed or a floating charge, but rather whether, by use of specific legal terminology, the parties in fact intended, upon the service of the Crystallisation Notice, that any further disposition of a charged asset would require the consent of the Bank as chargee. The answer, it is submitted is that, by reason of the use of the term “first fixed charge” in Clause 10, a necessarily implied global prohibition on the use of any assets the subject of the floating charge arose on the service of the Crystallisation Notice. In short, the Bank’s position, which is put very convincingly, is that there is simply no basis for the conclusion in para. 19 of the Second Judgment that there is no intention expressed in the Debenture that the Company should, after service of the Crystallisation Notice, be restricted in its use of the property the subject of that notice.
Submissions on behalf of the Revenue Commissioners
61. The starting point in defining the position of the Revenue Commissioners on the effect of the service of the Crystallisation Notice is their reliance on and application of what is stated in para. 63 of the First Judgment, which is quoted at para. 28 above. The Revenue Commissioners correctly submit that there is no express provision in the Debenture that specifies that the service of a crystallisation notice pursuant to Clause 10 causes an equitable assignment of the assets the subject of the floating charge or that, in consequence, the Company is to lose the ability to deal in or dispose of those assets. The approach of the Revenue Commissioners, understandably, is to attack the bases on which the Liquidator and the Bank argue that, notwithstanding the absence of an express provision, the service of the Crystallisation Notice put to an end the entitlement of the Company to deal with the assets which have been the subject of the floating charge.
62. The Revenue Commissioners’ interpretation of Clause 10 is that it is “a trigger event” in the Debenture. In other words, it triggers the right of the Bank to appoint a receiver, an act which itself would result in the crystallisation of the floating charge, so as to effectively remove the assets from the control of the Company. In this connection Clause 12(j) is pointed to. That interpretation, it is submitted, means that there is an answer to the argument of the Liquidator and the Bank that the finding of the trial judge means that Clause 10 is devoid of effect. Further, it is suggested that the two step process which that interpretation gives rise to, the service of the Crystallisation Notice and the exercise of the right to appoint a receiver under Clause 12(j), is more suitable to redress the situation which gives rise to the entitlement to serve the Crystallisation Notice under Clause 10, namely, that the Bank considers that the property, assets and rights the subject of the floating charge are “in any way in jeopardy”. It is suggested by the Revenue Commissioners that the source of the jeopardy could be other than the financial state of the Company, for example, conditions of storage might put the assets in jeopardy, in which case the two step process could be commercially appropriate in that the Bank could serve the Crystallisation Notice as a warning and that might lead to the risk to the assets being dealt with by the Company.
63. Whatever benefits are perceived from interpreting Clause 10 as a “trigger event”, the fact is that on a plain reading of Clause 10, in the context of the provisions of all of the Debenture, it is not open to such interpretation. Clause 10 provides that in a certain situation (where the Bank considers that the property, assets and rights the subject of the floating charge are in any way in jeopardy), and where the Bank takes certain action (the service of a notice on the Company), the result will be to “convert the floating charge . . . into a fixed charge”. It is a separate and distinct action by the Bank in a particular situation which crystallises the floating charge. Other situations in which crystallisation occurs are set out in Clause 11, one being the appointment of a receiver. It is true that by virtue of Clause 12(j), where notice has been served under Clause 10, the Bank may appoint a receiver. However, Clauses 10, 11 and 12 read together are not open to the construction that, in order to crystallise the floating charge, if the Bank invokes Clause 10, it must also invoke Clause 12(j).
64. It is also suggested by the Revenue Commissioners that to have the effect which the Liquidator submits Clause 10 has, it will be necessary for the Court to imply into the Debenture a clause similar in terms to Clause 8(k), which is quoted in para. 4 above, which implication would be triggered by the service of the Crystallisation Notice. However, it is submitted that this would not be sufficient as regards book debts and that it would be necessary to go further and to imply in addition provisions similar to the provisions under consideration in Keenan Bros. That overlooks the fundamental difference between the situation being considered in Keenan Bros. and the situation being considered here. In Keenan Bros. this Court, on the basis of what was provided in the security documents, was determining whether from the outset a charge over book debts could be properly characterised as a fixed charge, so that, as Henchy J. put it, the company will be able to deal with the assets, the book debts, only to the extent permitted by the terms of the charge into the future. On the other hand, here the purpose of the Bank serving the Crystallisation Notice under Clause 10 is to “convert the floating charge . . . into a fixed charge”, which, when it happens, again using the words of Henchy J., means that the Company cannot deal with the assets in question except subject to the charge. In my view, the question of implying terms into Clause 10 does not arise.
65. In general, the Revenue Commissioners take issue with the contention of the Liquidator that, as a matter of law, upon the crystallisation of a floating charge, the ability of the chargor to deal with or dispose of the charged assets come to an end and they suggest that this proposition is not supported by any authority. In my view, once again, referring back to the statement from the judgment of Henchy J. in Keenan Bros. quoted above, the effect of the crystallisation of a floating charge is clearly stated there as that the company cannot deal with the assets in question except subject to the charge.
66. In opposing the Liquidator’s submission that crystallisation brings to an end, as a matter of law, the entitlement of the Company to use and dispose of its assets in the ordinary course of business, the Revenue Commissioners submit that the proposition is contrary to decisions of this Court with respect to the nature of fixed charges, including the decision in Keenan Bros. They rely, in particular, on the passage from the judgment of McCarthy J. in Keenan Bros., which is quoted at para. 41 above. It is submitted that there is no rational basis for taking a different approach to the categorisation of a security as a fixed or a floating charge based on whether it was purported to be a fixed security on creation, or whether it initially floated and was later to be converted. That, it seems to me, is the fundamental flaw in the reasoning of the Revenue Commissioners.
67. Before addressing the specifics of the flaw, I think it would be useful to make some general observations following on from the analysis of the decisions in Keenan Bros. and Agnew set out at para. 31 above. The approach which is found in those authorities is an example of an application of a broader principle. Where the law makes a formal distinction between two different types of legal arrangements, as it does in s. 285 of the Act of 1963 between floating and fixed charges, then the question concerning into which category a particular arrangement or agreement falls is determined by an objective analysis of the substance of the arrangement or agreement concerned in which the name given to the arrangement or agreement by the parties is not decisive. A similar approach can be seen in, for example, Irish Shell & BP Limited v. Costello [1981] ILRM 66 in the context of determining whether an agreement in respect of the occupation of a property in return for a periodic payment can properly be characterised as a lease or a licence. However, it is also important to emphasise that the description given by the parties to their arrangement or agreement remains an appropriate part of the overall analysis. The task is to identify the terms of the arrangement or agreement concerned in accordance with the appropriate principles of the construction of legally binding documents. This requires the application of the “text in context” approach. But text remains an important part of that analysis and, just as any other provision in an agreement or an arrangement must be considered as part of the overall assessment of the intention of the parties in the light of the words which they have used to express their agreement, so must all due regard be paid, in that exercise, to how the parties describe the arrangement concerned. That is not, of course, to say that if, properly construed, the entirety of the agreement creates a set of rights and obligations which makes it inconsistent to characterise that agreement in the way in which it is described by the parties, the Court is not required to depart from the term which the parties have chosen to use. But it would be wrong to suggest that the term used by the parties may not, in many cases, be important and can, at least in some cases, be decisive.
68. Returning to the specifics of the reasoning of the Revenue Commissioners, the task of the Court in a Keenan Bros. type situation is to construe the security document to determine the nature of the charge created over a particular class of assets, for example, book debts. As all the authorities make clear, the terminology deployed in the security document is not conclusive. The fact that the charge is referred to as a “fixed charge” does not necessarily mean it is a fixed charge. As McCarthy J. stated in Keenan Bros. the Court has to look to the effect of the security document to see whether it achieves what was intended, for instance, to create a fixed charge. It may contain provisions which defeat what the parties intended. This is illustrated by the authorities which have been considered earlier. For example, in Keenan Bros. this Court was satisfied that fixed charges were created by the two security documents, whereas in Holidair this Court found that the charge was a floating charge although described in the debenture as a fixed charge.
69. The task of the Court in this case, like the task of the High Court of England and Wales in Brightlife, is to determine whether a notice served in accordance with the express terms of a clause in the security document does, on a once-off basis, what it was intended to do, that is to say, convert a floating charge into a first fixed charge. There is no categorisation involved in this task where, as in this case, the notice relates to all of the property, assets and rights the subject of the floating charge. The only possible effect of the service of the notice in accordance with Clause 10 is to convert the floating charge into a first fixed charge. While the Revenue Commissioners acknowledge that there is a strong similarity between the facts and issues in this case and those considered in Brightlife, it is argued that Brightlife can be distinguished on a number of bases. As will be clear from my observation at the end of paragraph 55 above, I do not consider the differences to be of any materiality to the determination of the effect of the service of the Crystallisation Notice in this case.
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): discussion
First Judgment of the High Court
74. In her analysis of s. 285(7) in the First Judgment, the trial judge stated (at para. 20):
“It is important to note that the section, by its words, gives priority ‘over the claims of holders of debentures under any floating charge created by the company’, and not over the claims of holders of any floating charge created by the Company. Debentures, as already stated, is defined in s. 2 to include ‘any other securities of a company, whether constituting a charge on the assets of the company or not’. It appears to me that the phrase ‘holders of debentures under any floating charge created by the company’ is deliberately worded, having regard to the potentiality for a floating charge to crystallise and become a fixed charge so as to include persons who hold security of whatever nature, provided it is held under or by reason of a floating charge created by the company. It is the floating charge created by the Company which gives the Bank the right to make a claim to the assets. It is only the nature of the claim which changes post-crystallisation. The Bank’s claim to the charged assets remains a claim as the holder of a debenture or security under the floating charge created by the company.” (Emphasis in original).
75. The trial judge expressed the view, in para. 21, that the word “charge” in the phrase “property comprised in or subject to that charge” refers to the floating charge created by the Company, notwithstanding that, by reason of crystallisation, such floating charge may have become fixed on such property prior to the commencement of the winding up.
76. I read the ordinary language of s. 285(7)(b), in the context of all of the provisions of the section and all of the provisions of the Act of 1963, differently. Section 285 comes into play “[in] a winding up”, which, where the winding up is a winding up by the Court, as here, comes into being when the winding up order is made by the Court. The section, in subs. (1) to (6), identifies debts due to certain creditors which are to be paid in priority to all other debts, identifying the creditors and the extent to which their debts are to get priority. How those creditors and those debts are to be treated inter se is dealt with in para. (a) of sub. (7). Paragraph (b) of sub. (7) deals with the situation where there is a shortfall of assets to meet the claims of the general body of creditors and it deals with two competing classes of debts or claims:
(i) the debts which have priority by virtue of subs. (1) to (6) and
(ii) the “claims of holders of debentures under any floating charge created by the company”.
Paragraph (b) of subs. (7) gives priority to the debts referred to at (i) over the claims referred to at (ii).
77. Looking at the application of para. (b) from the perspective of the Liquidator, after the winding up order was made on 7th December, 2009 he had to decide how to apply para. (b) of subs. (7), because there was a shortfall of assets to meet the claims of the general creditors and there is one holder of a debenture who is claiming against the assets, the Bank. The Liquidator had to decide whether the debts of preferential creditors, such as the Revenue Commissioners, get priority in accordance with para. (b) over the claims of the Bank as the holder of the Debenture. The debts of the preferential creditors would get priority provided the claims of the Bank were under the floating charge created by the Company in favour of the Bank by the Debenture. On the wording of s. 285 the Liquidator is assessing the situation in the winding up. Where, as here, the floating charge created by the Company in favour of the Bank had crystallised before the commencement of the winding up, the claim of the Bank is not a claim under a floating charge. Rather it is a claim under the fixed charge which came into existence on the crystallisation of the floating charge. That being the case, the Bank retains its priority as a fixed chargee. If it were otherwise, the Liquidator would be paying the priority debts, not out of property comprised in or subject to a floating charge, but rather out of property comprised in a fixed charge.
78. To read s. 285(7)(b) as entitling preferential creditors to priority for the priority debts specified in s. 285 over the claims of a debenture holder whose charge has crystallised into a fixed charge prior to the commencement of the winding up and to have those debts discharged out of property which at the time is subject to the fixed charge, by reason of the fact that the fixed charge evolved from a floating charge, in my view, would be to rewrite s. 285(7)(b). It is clear on the face of subs (7) that the operative time for the assessment of entitlement to priority in accordance with para. (b) is in the winding up, that is to say, after the winding up order is made. If the Oireachtas had intended that the holder of a debenture who, at the time of the assessment, has a fixed charge, but that fixed charge is the result of the crystallisation of a floating charge which occurred prior to the commencement of the winding up, should lose priority for its claims to the priority debts and that the priority debts should be paid out of property comprised in what at the commencement of the winding up was a fixed charge, that should have been provided for in para. (b) of subs. (7). In my view, as it stands, para. (b) cannot be read to achieve that end.
79. The trial judge (at para. 22 of the First Judgment) referred to the absence in s. 285(7) “of any specification by the Oireachtas as to the date upon which the nature of the claims of ‘holders of debentures under any floating charge’ is to be ascertained” as a subsidiary reason in support of what she considered the proper construction of the subsection. She stated:
“If it was intended by the Oireachtas that this should be ascertained at the date of commencement of the winding up, as is suggested by certain judicial authorities from other jurisdictions, then it appears to me that such date would have been specified by the Oireachtas, given that in s. 285(1), they have clearly specified a date which is potentially a date other than the commencement of the winding up as the relevant date for the ascertainment of preferential claims. This is not a point which appears to have been adverted to in the decisions of other jurisdictions to which I was referred.”
In my view, there is no lacuna in s. 285, if it is given the construction which I suggest it must be given in accordance with its ordinary language used. The expression “the relevant date” in subs. (1), as I stated at para. 13 above, is the date by reference to which the cut off point in relation to periods of time over which various preferential debts are given priority is identified. The application of subs. (7), however, occurs in the winding up and para. (b) must be applied in accordance with the situation which prevails after the commencement of the winding up in relation to the nature of the charge to which the claims of the debenture-holder relate, that is to say, whether it is then floating or fixed.
80. While I propose now considering the decisions of other jurisdictions referred to by the trial judge, on the basis of the analysis of s. 285 conducted above, I am of the view that the construction which the trial judge has put on subs. (7)(b) is only achievable by an amendment of that provision by the Oireachtas.
Decisions of other jurisdictions on counterpart of s. 285(7)(b)
81. As is clear from the judgment of Hoffman J. in Brightlife, he considered that he was bound by the decision of the High Court in Griffin Hotel. In that case, in November 1937 the company had issued a debenture to the lender which contained a charge by way of floating security upon the company’s undertaking and property, present and future, including its uncalled capital to secure its indebtedness to the lender. In December 1938 the lender issued a writ for the purpose of enforcing its debenture and subsequently in December 1938 an order was made in the action appointing a receiver and manager of part only of the property then subject to the debenture, the remaining property being purposely excluded as it was subject to prior charges. On 15th March, 1939 an order was made for the winding up of the company by the Court. The issue for the High Court was the application of two provisions of the UK Companies Act 1929: s. 78, which was in precisely the same terms as s. 98 of the Act of 1963; and s. 264(4)(b), which was in precisely the same terms as s. 285(7)(b) of the Act of 1963. In his judgment Bennett J. stated (at p. 135):
“. . . the provisions of s. 78 do not exclude or prevent the operation of s. 264(4)(b). There is, in my judgment, no language in the sections which excludes or prevents the operation of subs. 4(b) in the supposed case.
[However], that conclusion upon the construction and effect of the statutory provisions leaves open the question whether or not, in the supposed events, there is, when the winding up takes place, any floating charge or any property subject to that charge. In my judgment, s. 264(4)(b) only operates if, at the moment of the winding up, there is still floating a charge created by the company and it only gives the preferential creditors a priority over the claims of the debenture holders in any property which at that moment of time is comprised in or subject to that charge.
In the present case the debenture held by the plaintiffs contained a floating charge over all the borrowers’ property. On December 9, 1938, the charge ceased to be a floating charge upon the property and assets of which Mr. Veale was appointed receiver. The charge on that day crystallized and became fixed on that property and those assets. It remained a floating charge upon any other assets of the borrowers. At the moment before the winding up order was made, the charge still floated over any other assets of the borrowers, and over those other assets, if any, the preferential creditors as defined by s. 264(1) have a priority over the claims of the plaintiffs, by force of the provisions of s.264(4). This seems to be a corollary of the proposition established by In re Lewis Merthyr Consolidated Collieries Ltd. . . .”
82. The last sentence in that quotation has been the subject of criticism in the past. Indeed, in the First Judgment (at para. 36), having expressed the view that Bennett J. reached a conclusion on the wording of the section under consideration in the passage quoted in the preceding paragraph without any consideration of the phrase “the claims of holders of debentures under any floating charge created by the company”, the trial judge stated that Bennett J. did not explain why he considered that the section under consideration by him only operated “if, at the moment of the winding up, there is still a floating charge created by the company”, save the statement in the last sentence. The trial judge then set out the facts and judgments both in the High Court and the Court of Appeal in In re Lewis Merthyr Consolidated Collieries Ltd [1929] 1 Ch. 498 (Lewis Merthyr). She stated (at para. 31) that it did not appear to her that the decision in that case on the construction of s. 107 of the Companies Consolidation Act 1908, which was the section in that Act which corresponded to s. 98 of the Act of 1963, was such that the conclusion of Bennett J. in Griffin Hotel might be considered a corollary, stating that the corollary would be whether the provision under the legislation enacted in 1908 or 1929 which corresponded with s. 285(5) “granted priority over the claim of a debenture holder to assets the subject of a fixed charge created by a debenture, simply because the company also created a floating charge in the same debenture over different property”.
83. The decision in Lewis Merthyr, in my view, is not of assistance in resolving the issue as to the construction of s. 285(7) on the facts of this case, although it may explain what Bennett J. meant in the controversial sentence. As is noted above, the issue there concerned the application of the provision then corresponding to s. 98 of the Act of 1963 (s. 107 of the Companies (Consolidation) Act 1908) in circumstances where the debenture under which the receiver was appointed created both a fixed charge and a floating charge and the issue was over which assets, whether the assets the subject of the floating charge only or, alternatively, the assets the subject of the floating charge and the assets the subject of the fixed charge, priority was given to the preferential debts. It was held that the priority applied only to the assets the subject of the floating charge. One can understand why the losing party in the case argued the point. The corresponding section to s. 98, like s. 98, stipulated that the preferential payments “shall be paid . . . out of any assets coming into the hands of the receiver”. In the Court of Appeal Lord Handworth M.R., noting that the receiver was taking possession of property which was comprised in or subject to both the fixed charge and the floating charge stated (at p. 512):
“But s. 107 is only directed to debentures secured by a floating charge, so that when one comes to the words ‘any assets’ it must mean such assets as are subject to a floating charge which the receiver receives in his character of receiver. It is in respect of those assets that a duty is imposed upon him to deal with them in a particular way.”
Likewise, Lawrence L.J. stated that the assets the subject of the fixed charge were “outside the scope and purview” of the section.
84. In Griffin Hotel, Bennett J., having determined that, as regards the property over which a receiver had been appointed before the winding up order was made, what had been a floating charge had become a fixed charge, the circumstances were that he was applying the counterpart of s. 285(7)(b) to a situation where, at the commencement of the winding up, some assets of the company were subject to a fixed charge and other assets were subject to a floating charge, which mirrored the factual situation to which the Court of Appeal was applying the counterpart of s. 98 in Lewis Merthyr. Presumably that was why Bennett J. considered his decision flowed from the decision in Lewis Merthyr.
85. The suggestion by Bennett J. in Griffin Hotel that his reasoning was a corollary of the decision in Lewis Merthyr was also implicitly criticised in the dissenting judgment of Barwick C.J. in Stein v. Saywell (1969) CLR 529, which was a decision of the High Court of Australia on an appeal from the Supreme Court of New South Wales. The statutory provision under consideration there was the subsection of the Companies Act 1961 of New South Wales the relevant portion of which was in precisely the same terms as paragraph (b) of s. 285(7). The trial judge outlined the outcome of the appeal in the First Judgment (at para. 35) and quoted a long passage from the dissenting judgment of Barwick C.J. (at para. 36). Having regard to the chronological summary of the facts as set out in the majority judgments of McTiernan and Menzies JJ (at p. 547), I think it reasonable to truncate the events which gave rise to and the factual context of the application of the counterpart of s. 285(7) in that case to the following:
(i) A petition to wind up the company the subject of the proceedings was presented by a creditor on 13th August, 1965 and a provisional liquidator, Mr. Saywell, was appointed on that day.
(ii) On 24th August, 1965 Mr. Saywell was appointed as receiver and manager pursuant to the powers contained in a deed of floating charge created by the company in 1963. Significantly, that triggered the crystallisation of another floating charge contained in a debenture created in 1964 in favour of individuals, who were respondents on the appeal, whereupon, as stated in the summary, that floating charge “became fixed and specific ‘ipso facto’”, on 24th August, 1965, as Barwick C.J. acknowledged (at p. 542).
(iii) On 11th November, 1965 Mr. Saywell was appointed receiver and manager pursuant to the 1964 floating charge.
(iv) Finally, a winding up order was made on 22nd November, 1965, whereupon Mr. Saywell was appointed as liquidator.
86. The passage from the judgment of Barwick C.J. quoted in the First Judgment commences with the statement that the High Court of Australia was not bound by the decision in Griffin Hotel, after which he expressed his opinion that the proposition that s. 292(4) (the counterpart of s. 285(7)) did not defer the claim of the debenture- holder, if in any case before the making of the winding up order, or the commencement of the liquidation, the charge over the assets of the company had crystallised, was insupportable. Thereafter, much of the passage concerns the proper construction of the counterpart of s. 98 of the Act of 1963 and, in effect, Barwick C.J. construed the counterpart of s. 285(7) in the same sense as he had construed the counterpart of s. 98. Barwick C.J. went on to consider the policy behind and the interaction between the counterpart of s. 98 and the counterpart of s. 285(7) in some detail. He did so in the context that there existed in New South Wales law at the time (but apparently not in England when Griffin Hotel was decided) a provision similar to s. 220(2) of the Act of 1963 which provides that in a case in which subs. (1) does not apply, the winding up of a company by the court shall be deemed to commence at the presentation of the petition for the winding up. By way of explanation, subs. (1) of s. 220 of the Act of 1963 relates to a situation in which, before the presentation of the winding up petition, a resolution has been passed by the company for voluntary winding up. That was not the situation in this case, so that s. 220(2) applied and the commencement of the winding up of each Company related back to 13th November, 2009, the date of the presentation of the petition to the High Court.
87. Later, in a passage not quoted by the trial judge, Barwick C.J. repeated his conclusion as to the construction of the counterpart of s. 285(7) (at p. 546) stating:
“In my opinion, the operation of s. 292(4) cannot be limited to the occasions when the charge remains floating at the commencement of the winding up. It will come into play if the claims of the chargee to assets or their proceeds arises out of a security which initially created a floating charge which, having become specific, now comprises those assets. The final words of s. 292(4) ‘and shall be paid accordingly out of any property comprised in or subject to that charge’, in my opinion, support this view of the operation of the section.”
Of course, on the facts summarised above, the crystallisation of the floating charge had occurred after the presentation of the petition, but Barwick C.J. stated immediately before the passage quoted by the trial judge that he would prefer not to base his reasons “for the appellant’s success” on that ground, the appellant being the representative of the class of employees of the company who were claiming to be preferential creditors.
88. Following the decision in Griffin Hotel, the majority decision of the High Court of Australia in that case was that s. 292(4) (the counterpart of s. 285(7)) did not confer priority to preferential debts over the claims of the debenture holders under a floating charge which became specific after the presentation by a creditor of a winding up petition, but before the making of the winding up order. As the trial judge recorded in the First Judgment (para. 37), subsequent to the decision in Stein v. Saywell, a legislative amendment was introduced in 1971 in New South Wales by virtue of which “floating charge” was defined for the purposes of the relevant sections as including a charge which was “a floating charge at the date of its creation which has since become a fixed or specific charge”.
89. In the United Kingdom, Hoffman J. had occasion to re-visit the issue of the priority of preferential creditors in Re Permanent Houses (Holdings) Ltd. [1988] BCLC 563. However, it was the application of the equivalent of s. 98 of the Act of 1963 which was at issue there. The facts were complicated but the significant feature which emerges from the sequence of events which culminated in the appointment of the receiver, as set out in the judgment (at p. 566), is that the floating charge had crystallised before the receiver was appointed. Hoffman J. recorded the fact that, although the equivalent of s. 98 (s. 196 of the U.K. Companies Act 1985) had been amended by the Insolvency Act 1986, Schedule 13, Part I, to make it clear that the section applied when the charge “as created, was a floating charge”, the amendment did not apply to receivers appointed before it came into force on 29th December, 1986. Accordingly, he had to consider whether s. 196 required that the charge over the assets in question should be floating at the moment when the receiver is appointed or whether it was sufficient that it was floating when created. Hoffman J. stated (at p. 568) that he could not see any basis for giving s. 196 and s. 614 of the Companies Act 1985 (the counterparts of s. 98 and s. 285) different constructions, so that, in effect, he adopted the same approach as he had adopted in Brightlife. He noted that in Stein v. Saywell, none of the judges, including Barwick C.J., thought that the equivalent of s. 98 and the equivalent of s. 285(7) should be construed differently. Like the trial judge in this case, he did confess to “a personal preference for the powerful reasoning of Barwick C.J. in his dissenting judgment” but once again he considered himself bound by the decision in Griffin Hotel.
Submissions made on behalf of the parties
90. Predictably the line taken by the Liquidator and the Bank is that the Court should follow the approach adopted in Griffin Hotel and in the succeeding cases in the United Kingdom in which it was followed and that adopted by the majority in Stein v. Saywell. In essence, their position is that the words “as created” in respect of a floating charge such as the Debenture in the present case cannot be read into s. 285(7) and that, as happened in the United Kingdom, specific legislation is required if, in the case of a holder of a debenture, priority under s. 285(7)(b) is to be determined by reference to the fact that the debenture holders’ charge, as created, was a floating charge. As will be clear from my analysis of the wording of the provision at paras. 75 to 78 above, I consider that submission to be correct. It is important to emphasise that that conclusion is based on what I consider to be the proper reading of the ordinary language of s. 285(7). It is not based to any extent on the so-called “Barras Principle” invoked by the Liquidator and the Bank and referred to in this Court by Fennelly J. in Clinton v. An Bord Pleanála and ors. [2007] 1 IR 272.
91. The position of the Revenue Commissioners, also predictably, is that the statutory interpretation of the trial judge is impeccable. It is urged that, when examined on its merits, the decision in Griffin Hotel ought not to be followed. Once again, I would emphasise that my interpretation of s. 285(7)(b) is based on a reading of the ordinary language used in the section. Having said that, there are a number of points made by the Revenue Commissioners which I think it is appropriate to comment on. It is suggested that the interpretation of s. 285(7) urged on behalf of the Liquidator and the Bank would lead to an almost capricious ordering of priorities on insolvency. A debenture holder under a floating charge who can initiate an express crystallisation by service of a notice similar to the Crystallisation Notice before the appointment of a receiver or the commencement of a winding up will avoid the effects of both s. 98 and s. 285 and effectively leap-frog over the preferential creditors. That is certainly the case and, in my view, it is an unsatisfactory state of affairs. However, it can be rectified by amending legislation, as was done in the United Kingdom and in New South Wales.
92. The Revenue Commissioners submit that there is no necessity to insert the words “as created” into the legislation, as has been done in the United Kingdom. It is suggested that the words “created by the company” used in connection with “any floating charge” in para. (b) of s. 285(7) can only mean the charge as originally created, or later amended, by the Company. It is submitted that the conversion from a fixed charge to a floating charge which occurred in this case on the service of the Crystallisation Notice was not an act of the Company. The conversion was done unilaterally by the Bank and, thus, the conversion was created by the Bank, not by the Company. The reality is that only the Company could create a charge over its assets and only the Company could change the nature of a charge over its assets. It is true that the Company gave the Bank the authority to initiate the conversion. However, the conversion was the act of the Company.
93. The Revenue Commissioners attach particular significance to the word “under” in the phrase “under any floating charge created by the company” in s. 285(7)(b). As I understand the argument, it is that when the conversion of a floating charge to a fixed charge takes place on the service of the Crystallisation Notice, there is not, as a matter of law, any new charge created. While this is not clearly spelt out, I assume that the argument is that the original floating charge is still the charge. What is overlooked in that argument and what I think it is appropriate to reiterate is that the competing factors in the application of s. 285(7)(b) are the priority debts of the preferential creditors, on the one hand, and the claims of the holder of the debenture under a floating charge, on the other hand. Once the floating charge crystallises, the claims of the debenture holders are not claims under a floating charge; they are claims under a fixed charge.
94. Finally, in the context of addressing the so-called Barras Principle argument, the Revenue Commissioners brought to the Court’s attention s. 621(7) of the Act of 2014, which was due to come into operation on 1st June, 2015, and which is a verbatim replication of s. 285(7) of the Act of 1963, which it has now replaced. The point made by the Revenue Commissioners was that as s. 621(7) was enacted after the decision of the High Court, it is untenable to suggest that the will of the Oireachtas is properly to be determined according to a judgment at first instance in a foreign court, i.e. the judgment in Griffin Hotel. Being conscious of the volume of work which the Company Law Review Group and the State authorities involved put into the enactment of the Act of 2014, which, containing 1,448 sections and 17 schedules is, I understand, the largest piece of legislation ever enacted in the State, one regrets finding that what Hoffman J. characterised in Brightlife as “a defect in the drafting” is perpetuated in the Act of 2014.
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.
Order
99. There will be an order allowing the appeal and setting aside the portions of the order of the High Court dated 18th July, 2011 referred to in the notice of appeal and substituting therefor the following directions:
(a) that the floating charge created by Clause 5 of each of the Debentures was converted into a fixed charge over the property of each Company by virtue of the service of the Crystallisation Notice by the Bank on 28th October, 2009 and, accordingly, prior to the commencement of the winding up of each Company; and
(b) that the claims of the Bank as debenture holder to the funds realised from the assets the subject of the floating charges created by the Debenture and converted into fixed charges on 28th October, 2009 shall rank in priority to the preferential debts due by the Company identified by reference to s. 285(1) to (6) of the Act of 1963.