Fixed charges operating as floating – the priority of preferential creditors remains vulnerable
It is well documented that Sections 92 and 98(d) of the Companies (Accounting) Act 2017 (by way of amendments to the Companies Act 2014) have provided clarity on the ranking of preferential creditors ahead of crystallised floating charge holders. The amendments to the legislation followed the recommendations of the Company Law Review Group arising from its review of the Supreme Court decision in J.D. Brian Motors Limited, trading as Belgard Motors, (In Liquidation) (and related companies) (Belgard Motors). It is now clear that in the context of a winding-up or receivership, a preferential creditor ranks ahead of the holder of any charge created as a floating charge and thereby crystallisation of a floating charge no longer affords a secured creditor the opportunity to leap-frog the claims of preferential creditors. However, from the practical perspective of negotiating security documents, this now means that practitioners acting for lenders will seek to place fixed charges over all assets, regardless of the character of the assets and whether or not the security affecting those assets shall actually operate as fixed or floating security. The outcome of such an approach in security documents means that while all assets may be subject to fixed charges, for example book debts and bank accounts, they may in fact be freely utilisable until the occurrence of an event of default and as such in practical terms they will operate as floating charges.
The Supreme Court’s decision in Belgard Motors on the issue of priorities was that the Companies Act 2014 (as applicable at the time of the decision) gave priority to the claims of the holder of a crystallised floating charge over those of preferential creditors. In the context of the decision, the Court commented that a legislative amendment would be necessary “to reverse the undoubtedly unsatisfactory outcome of this decision“. As above, amendments to address the issue of priority have been made by way of the Companies (Accounting) Act 2017. However the amendments made have not addressed the “false crystallisation” point raised by Ms Justice Laffoy. Ms Justice Laffoy noted as part of her judgment in Belgard Motors that the Supreme Court’s decision could lead to “false crystallisations” whereby a security provider is effectively allowed to utilise subject assets following the service of a crystallisation notice as if those assets remained subject to a floating charge. However the amendments to the Companies Act 2014 did not follow that thought to address the notion of a false fixed charge. As the legislation stands it does not protect the priority ranking of preferential creditors against fixed charges operating as floating charges.