Supreme Court Decision in the 'Belgard Motors' case
This month, the Supreme Court in a judgment delivered in the case of J.D. Brian Limited (in liquidation) and related companies considered an appeal by the Official Liquidator to those companies to set aside declarations made by the High Court in 2011. Since that decision there had been uncertainty about the status of floating charges as an effective means of security. Clarification of the issue will be welcomed by charge holders seeking to rely on floating charges. Laffoy J in her judgment also mentioned areas of caution for charge holders when exercising its right of crystallisation of a floating charge.
In 2001, in the High Court, Ms Justice Finlay Geoghegan had determined:-
That the service of a "Notice of Crystallisation" in respect of a floating charge could convert it to a fixed charge but did not have the effect of improving the security. This was because the security document did not expressly provide for a restriction on the charger dealing with the floating charge asset post service of the Notice of Crystallisation.
That notwithstanding that the floating charge had been converted to a fixed charge prior to the winding up of the company that the claims of preferential creditors would rank ahead of the claims of the floating charge holder.
Supreme Court decision
The Supreme Court analysed the case law in this area and the provisions of the security document and noted that the clauses contained in it showed a clear intention of the parties that after service of a Notice of Crystallisation, the Company would be restricted from using its assets save without the consent of the charge holder. Ms Justice Laffoy's view was that the floating charge became a fixed charge once a correctly drafted Notice of Crystallisation was served.
On the second point, her view was that where a floating charge converted to a fixed charge prior to winding up then on a winding up, the priority of that charge as a fixed charge was retained and as a result it trumped preferential creditors.
Note of caution
Ms Justice Laffoy noted that the drafting of S.621(7) of the 2014 Act was unsatisfactory. She also noted that once a Crystallisation Notice is validly served then charge holders need to take care so that a preferential creditor could not seek to attack such a crystallisation as being a nominal crystallisation only e.g. in circumstances where the charge holder allows the chargor to continue using the floating charge assets as if the floating charge had not crystallised. Charge holders should exercise caution before any attempt is made to crystallise a floating charge.
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