High Court of Ireland Decisions

Judgment Title: J. D. Brian Ltd & Ors -v- Companies Acts

Neutral Citation: [2011] IEHC 283


High Court Record Number: 2009 719, 720 & 721 COS

Date of Delivery: 11/07/2011

Court: High Court

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.”

“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.”

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.”

“[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.”

“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.”

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.”

“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.”

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.