High Court holds notice under clause 10 does not convert floating charge to fixed charge.

Neutral Citation Number: [2011] IEHC 283

THE HIGH COURT

2009 719, 720 & 721 COS

IN THE MATTER OF J.D. BRIAN LIMITED (IN LIQUIDATION)

AND

IN THE MATTER OF J.D. BRIAN MOTORS LIMITED (IN LIQUIDATION)

AND

IN THE MATTER OF EAST COAST CAR PARTS LIMITED

(IN LIQUIDATION)

AND

IN THE MATTER OF THE COMPANIES ACTS 1963 TO 2009

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 I.R. 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 A.C. 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 A.C. 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.