The Gazette 1979

GAZETTE

SEPTEMBER 1979

RECENT IRISH CASES COMPANY LAW Debenture issued by company in favour of ma j or creditors — debenture created separate charges over different assets including book debts — charge on book debts undefined — whether charge included future book debts — whether charge fixed or floating — company insolvent at time of creation of charges — Section 288 Companies Act, 1963. This was an application to the High Court pursuant to Section 280 of the Companies Act, 1963 by the official liquidator of Lakeglen Construction Limited ( " t he Comp a n y ") to determine a question arising in the winding up of the Company. The facts of the case, which were not in dispute, disclosed that on 24 November, 1977 the Company had executed a debenture in favour of a group of major creditors in return for their f o r bea r ance in enforcing immediate payment of the debts due to them by the Company. The debenture, in which the Company's holding company also joined, contained a number of sub-clauses which purported to create charges over various types of assets of the Company and its holding company and included a sub-clause which read as follows :- "3(b) The Company and the holding company, as beneficial owners, hereby charge in favour of the major creditors all their respective book debts and all rights and powers of recovery in respect thereof to hold the same unto the major creditors absolutely". The debenture provisions did not however define the nature of the charge over "book debts". The winding-up of the Company commenced on 13 March, 1978 within four months of the execution of the debenture. In the winding-up proceedings the question of whether the charge at clause 3(b) of the debenture created a fixed charge or a floating one over the book debts of the Company became material. If the charge was a floating charge it would be invalid under Section 288 of the Companies Act, 1963 since it was admitted that at the time of the

be put into immediate operation, but such that the Company is to be allowed. to carry on its business. It contemplates not only that it should carry with it the book debts which were then existing, but it contemplates also the possibility of these debts being extinguished by payment to the Company, and that other book debts should come in and take the place of those that had disappeared. That, my Lords, seems to me an essential characteristic of what is properly called a floating security (see (1904) A.C. at p. 257)". Accepting, as it did, that these were the tests to be applied in the present case in determining whether the charge was a floating one or a fixed one the Court posed the question — "When they executed the debenture did the parties intend that in relation to its book debts the Company was free to receive them and bring new book debts into existence as if the debenture had not been created until such time as the debenture holder became entitled to intervene in the Comp a n y 's affairs? In its examination of - the question the Court considered the following points to be of significance — (a) The Company was a trading company; (b) The debenture holders (the major creditors) expressly agreed that the Company was to be permitted to carry on its business; (c) In normal course of affairs it would obviously create It was the view of the Court that when permission to trade is given in a debenture and the debenture contains no restrictions on the Company using its book debts in the course of business, an authority to receive and use such book debts is more readily inferred than is an obligation to hand them over to the debenture holder. In the present case there was nothing in the arrangement between the parties which would tend to displace this inference. On the contrary there was support for it in sub-clauses 2(c) and 2(d) of the debenture document. Under these provisions, the difficulties for a trading company if it was required to hand over to its mortgagees its book debts as it received them from time to time.

creation of the debenture the Company was insolvent. If it was a fixed charge it would not be so invalidated. Although the nature of the charge on book debts was not defined this was not so in the case of all the other forms of security created by the debenture. Under the very same clause, i.e. clause 3, the Company, at sub-clause (a), assigned all its fixed and movable plant, machinery and equipment, fixtures, implements and utensils to the major creditors absolutely; at sub-clause (c) charged, by way of first fixed charge, its goodwill and uncalled capital for the time being; and at sub-clause (e) charged, by way of first floating charge, its undertaking and assets whatsoever and wheresoever both present and future. The controversy arose by reason of the failure of the debenture explicitly to state whether the charge in clause 3(b) was a floating one or a fixed one. In a reserved judgment the Court (per Costello J.) pointed out that there is no statutory definition of the term 'floating charge'. The Courts have however indicated certain tests by which a security can be identified as a floating charge or fixed one. The problem of construction in this case could best be dealt with by looking at the different consequences which flow when a charge on book debts is a floating one and when it is a fixed one. In Houldsworth v. Yorkshire Woolcombers Association Limited [19031 2 Ch. 284, Farwell J. had said that if the security (in respect of book debts) was to be treated as a fixed or specific charge then the Company had no business to receive one singly book debt after the date of the charge; but, on the other hand, if it was intended that the charge was to remain dormant until some future date, and the Company was in the meantime to be permitted to receive the book debts and use them until that date, then the security would contain the true dement of a floating charge. In the Appeal which followed to the House of Lords, the Lord Chancellor, in agreeing with the interpretation put on the document by the lower Court, said —

"In the first place you have that which is in a sense I suppose must be an dement in the definition of a floating security, t hat it is something which is to float, not to