Floating Charges, Crystallisation & Priorities between Creditors in a Winding up

On 09 July 2015, the Supreme Court delivered a landmark judgment in the so called “Belgard Motors” case, allowing the Liquidator’s appeals against two declarations made by Ms. Justice Finlay Geoghegan in the High Court. The decision will be welcomed by floating charge creditors who will once again be able to convert their floating charges to fixed charges (known as crystallisation), thus improving their security position and obtaining priority in a subsequent winding up. However, such creditors must exercise caution and careful consideration should be given before seeking to crystallise a floating charge. 

The High Court decisions 

In the High Court, Ms. Justice Finlay Geoghegan determined: 

1. That while the service of a “Notice of Crystallisation” was technically capable of converting a floating charge to a fixed charge, in this case, based on the construction of the particular debentures, such service did not have the effect of elevating the status of the creditor's security to a fixed charge. The relevant debentures, she held, did not restrict the ability of the debtor companies to deal with the charged assets after crystallisation, and thus the characteristics of the “crystallised" charge were not consistent with it being a fixed charge. 
2. That the proper construction of Section 285(7) of the Companies Act 1963 (which has been replaced in identical form by Section 621(7) of the Companies Act 2014) was that the claims of preferential creditors ranked ahead of the claims of floating charge holders in a winding up of the company, irrespective of whether the floating charge had been converted into a fixed charge prior to winding up. 

The Supreme Court decision

The Liquidator successfully appealed both of these decisions. 

Regarding the Notice of Crystallisation, Ms. Justice Laffoy disagreed with the trial Judge’s reasoning. She held that the relevant provisions contained in the debentures indicated that the clear intention of the parties in entering into the debentures was that after the service of a Notice of Crystallisation, the Company would cease to be entitled to use such property in carrying on its business without the consent of the Bank. This, in the view of Ms. Justice Laffoy, meant that the crystallised charge became a fixed charge once a correctly drafted Notice of Crystallisation had been served. 

On the second point, Ms. Justice Laffoy determined that the relevant date for Section 285 was, in this case, the date of the winding up order. Where the floating charge had been converted to a fixed charge prior to that date, under Section 285 the Bank retained priority as a fixed charge holder over the claims of preferential creditors. In the Judge’s view, to have held otherwise would have been to “rewrite” the legislative provisions. 

Implications of the decision

This decision will be of importance in providing clarity to a range of stakeholders from creditors to debtor companies and liquidators. In upholding the ability of floating charge holders to crystallise such charges, and in determining the priority of such crystallised charges in a subsequent winding up, the judgment will be welcomed as a victory for floating charge holders. 
However, the decision leaves unresolved a number of issues including the implications of the charge holder allowing a debtor company to deal with assets post crystallisation, and therefore warrants careful consideration before any attempt is made to crystallise a floating charge.  

For further information contact John Fitzgerald or Eoin Mullowney of our Restructuring & Insolvency Team.

(c) Byrne Wallace