A HIGH Court ruling arising out of the liquidation of Belgard Motors could throw a question mark over the status of some charges used by banks and other organisations to secure loans, according to a law firm involved in the case.
Belgard Motors went into liquidation towards the end of 2009 with debts estimated at about €17 million. The High Court appointed Tom Kavanagh as liquidator to the business.
A recent High Court ruling connected with the liquidation has called into question clauses used by banks and other lenders designed to ensure that the holders of floating charges rank ahead of creditors such as the Revenue Commissioners and employees in a liquidation.
The case, JD Brian Ltd – which traded as Belgard Motors – involved a floating charge held over some of the company’s assets by Bank of Ireland.
Under the loan agreement’s terms, this converted or “crystallised” to a fixed charge once a creditors’ meeting had been called or a liquidator appointed.
The holders of floating charges rank behind preferential creditors – normally employees and the Revenue – in a liquidation, but fixed-charge holders rank ahead of such creditors. The liquidator argued that the charge had crystallised and that Bank of Ireland was entitled to the company’s assets ahead of the preferential claims. The Revenue contended its claim still took precedence over the bank’s.
Justice Finlay Geoghegan ruled that – despite the crystallisation clause – the bank’s claim was still a claim under a floating charge and therefore the preferential creditors’ claims took precedence.
According to Steve Rodgers, a partner with Eversheds O’Donnell Sweeney, the law firm that advised JD Brian Ltd, the decision establishes that floating charges rank behind preferential creditors, even if they convert to a fixed charge ahead of liquidation.
Previous to this, once the charge was validly crystallised, it ranked as a secured debt and ahead of preferential creditors.
Mr Rodgers said at the weekend that while the decision would disappoint banks and lenders who hold floating charges, this kind of security ranks ahead of unsecured creditors. In future, lenders could use floating charges to monitor and restrict the activities of the business that borrowed the money.
