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Amendments coming to the JD Brian decision following the Enactment of the Companies (Accounting) Bill 2016 & A Practical Quandary the 2016 Bill Raises

  • Ireland
  • General

13-04-2017

Introduction

The core concern arising from the JD Brian1 litigation centred around what was the effect for preferential creditors if a clause was included in the debenture which permitted the crystallisation of a floating charge by notice.  In such circumstances, could a lender circumvent existing priorities on insolvency, in particular, the priority afforded to preferential creditors under s.621(7) of the Companies Act 2014 (“2014 Act”)2?  It should be noted that a similar provision applies to receiverships pursuant to s.440 of the 2014 Act.

The JD Brian decision

In JD Brian, prior to the commencement of the liquidation, and in accordance with the terms of the debenture, the bank served a crystallisation notice which crystallised a floating charge into a fixed charge.  The question arose whether the Notice which crystallised the floating charge prior to the Company going into liquidation had the effect of taking those assets outside the remit of s.285(7)(b) of the Companies Act 1963, now re-enacted in s.621(7)(b) of the 2014 Act.

In the Supreme Court, Laffoy J., giving the leading judgment3, ruled that once a floating charge had crystallised into a fixed charge on foot of a prior written notice served in accordance with the debenture’s terms, prior to the liquidation of the company, then the floating charge holder takes priority over preferential creditors. In coming to this conclusion, Laffoy J. applied a straightforward interpretation of s.285(7)(b) and endorsed the view of the English High Court in Griffin Hotel4.  

Post JD Brian and the 2016 Bill

On foot of the Supreme Courts’ decision, the Company Law Review Group (“CLRG”) was requested to examine the decision in JD Brian, its implications regarding the priority of payments to preferential creditors, and to recommend what revisions, if any, ought to be made to the 2014 Act.  Based upon the recommendations contained in the CLRG’s Report5, s.92 of the Companies (Accounting) Bill 2016 (“the 2016 Bill”) was drafted.  The new s.621(7) of the 2014 Act, shall provide that the payment of the company’s preferential debts “shall, so far as the assets of the company available for payment of general creditors are insufficient to meet them, have priority over the claims of holders of debentures under any floating charge created by the company”.  There is a similar amendment in respect of receiverships to be made to s.440 of the 2014 Act by s.98(d) of the 2016 Bill.  Effectively, the 2016 Bill, if and when it is passed into law, shall provide that if a floating charge crystallises prior to a company going into liquidation or receivership the priorities of preferential creditors will not be affected.

In England, a similar amendment was enacted by s.175(2) and s.251 of the Insolvency (England) Act 1986.  However, the English legislation, unlike the 2016  Bill, fortunately included a transition clause, thereby providing that this amending provision was not to have retrospective effect.  Therefore, it was clear that the English amendment would not affect either (i) liquidations or receiverships completed, or (ii) liquidations or receiverships in being when the 1986 amendment came into force.

The practical quandary contained in the 2016 Bill

Unfortunately, the 2016 Bill does not include a similar transition provision as its English counterpart. In fact, it is silent on the question of whether the 2016 Bill has retrospective effect or not.  This problem has not been discussed at the Dáil or Seanad Debates, despite the fact that the 2016 Bill passed the Second Stage in the Seanad on 4 April 2017.  It was due to discussed at Committee Stage on 11 April, however, it does not appear that transitional issues were discussed at Committee Stage.

As such, the practical quandary arises whether the amending provisions will have prospective effect only.  There is a common law presumption against legislation having retrospective effect, which is supported by the guarantee afforded in Art.15.5 of the Irish Constitution, that the Oireachtas shall not declare acts to be a legal infringement which were not so at the date of their commission. Therefore, the law of statutory interpretation supports the contention that the 2016 Bill will not have retrospective effect.  Furthermore, because the amendments contained in s.92 and s.98(d) of the 2016 Bill mirror the amendments made by s.175(2) and s.251 of the Insolvency (England) Act 1986, the Irish courts are likely to consider that the amendments made by the 2016 Bill shall have prospective effect only.

Conclusion

The amendments contained in s.92 and s.98(d) of the 2016 Bill are to be welcomed because they will bring a resolution to the practical problem which arose as a result of JD Brian.  The 2016 Bill reinstates, in a simple manner, the normal priority rules and provides much-needed clarity for preferential creditors.   Upon the 2016 Bill’s enactment, the priority of preferential creditors will not be affected by a floating charge crystallising before a company goes into receivership or liquidation.   In response to the practical quandary whether the 2016 Bill has retrospective effect, this article argues that the 2016 Bill should be interpreted as having prospective effect only.  This argument is based upon the law of statutory interpretation and the fact that the 2016 Bill is reflective of s.175(2) and s.251 of the Insolvency (England) Act 1986, which did not have retrospective effect.  Further, if the 2016 Bill was considered to act retrospectively it would result in holding retroactive payments made to floating charge holders, whose charges crystallised prior to liquidation or receivership, an infringement of the law6.


1 In the Matter of Re In the Matter of JD Brian Ltd (In Liquidation) T/A East Coast Print & Publicity, and In the Matter of JD Brian Motors Ltd (In Liquidation) T/A Belgard; and In the Matter of East Coast Car Parks Ltd (In Liquidation), and In the Matter of the Companies Acts 1963-2009 (the “JD Brian decision”) [2011] 3 IR 244; [2015] IESC 62.
2 Preferential creditors include the Revenue Commissioners and employee remuneration incurred before the company goes into liquidation.
3 Clarke and Charleton JJ concurring.
4 [1941] Ch 129.
5 CLRG Report, “Review of the Implications of the Supreme Court Judgment: In the Matter of J.D. Brian Ltd t/a East Coast Print and Publicity and Re East Coast Car Parts [2015] IESC 62 (Laffoy J.)” November 2015.
6 See Doyle v An Taoiseach [1986] ILRM 693 – Henchy J ruled that s.79 of the Finance Act 1980, which sought to impose a 2% levy in respect of bovine animals slaughtered in or exported from the State, was considered to have prospective effect.

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