Crystallisation of Floating Charges – Supreme Court Decision

In the Matter of J.D Brian Limited (In Liquidation) T/A East Coast Print and Publicity, In the Matter of J.D. Brian Motors Limited (In Liquidation) T/A Belgard Motors and In the Matter of East Coast Car Parts Limited (In Liquidation) and In the Matter of the Companies Acts 1963 to 2009 (the Companies)

The Supreme Court has recently published its long awaited decision in relation to the ranking of floating charges upon crystallisation.  The decision follows a judgment given in the High Court in March 2011 which arose as a result of an application for directions by the Official Liquidator.

The Companies had entered into various debentures with Bank of Ireland (the Bank) in 2005 which included floating charge security over the assets of the Companies.

The Official Liquidator sought directions in relation to the status of the floating charges which the Bank had purported to crystallise (by way of service of notice on the Companies) prior to the Companies being placed in liquidation and the application of Section 285 of the Companies Act 1963 (which affords priority to certain preferential debts over the claims of the holders of debentures under any floating charge created by a company).  

The High Court Judge had concluded that:

• the service of the crystallisation notice on the Companies pursuant to the debentures did not have the effect of converting the property subject to a floating charge into a fixed charge; and
   
• the preferential debts of the Companies ranked in priority to those of the Bank irrespective of whether the floating charges were converted into fixed charges prior to the commencement of the winding up of those companies.

The Supreme Court judgment overrules the High Court decision as follows:

• The notice of crystallisation served by the Bank on the Companies was a valid notice and had the effect of crystallising the floating charges created under the relevant debentures;
   
• Upon crystallisation of a floating charge, the claims of the debenture holders are no longer claims under a floating charge but claims under a fixed charge.  Therefore the claims of the Bank will rank in priority to preferential creditors.

The Supreme Court decision provides a welcome clarification to the law in this area and provides certainty to financial institutions on the steps that should be taken in order to crystallise floating charges and thus maximise their recovery in a winding up.

The full judgment can be accessed here.

For more information on this case, please contact David Baxter, Mark Traynor, Marsha Coghlan or any member of the Insolvency Team.