Floating Charge priorities

dermot_sheehan

Myself and a colleague were having a debate and we came to different conclusions as to the law in this area, and I wonder what people's views are.

A company creates two floating charges over the same set of property. There is a no further pledge clause in each charge. If the same event causes both charges to crystallise at the same time which has priority, is it date of creation or date of registration with the CRO?

I say date of registration with CRO, my colleague says date of creating of floating charge regardless of registration date.

Tester46

gabhain7 wrote: »

Myself and a colleague were having a debate and we came to different conclusions as to the law in this area, and I wonder what people's views are.

A company creates two floating charges over the same set of property. There is a no further pledge clause in each charge. If the same event causes both charges to crystallise at the same time which has priority, is it date of creation or date of registration with the CRO?

I say date of registration with CRO, my colleague says date of creating of floating charge regardless of registration date.

The full answer to this is (of course) complicated. The general rule is the first in time will have priority - that means the date of creation rather than registration (assuming both charges were registered in time of course). It is significant that both of your hypothetic floating charges are over the same property. If they weren't over exactly the same property, different rules might apply. See The Law of Company Insolvency, Forde et al., 2nd Ed. at 16-70.

s99 CA 1963 creates an obligation to register corporate charges, and sets out the consequences of not so registering, but doesn't set the priorities as between otherwise "equal" floating charges.

There is an equitable rule - where the equities are equal, the first in time prevails.

I'm open to correction by more learned colleagues...

NoQuarter

Tester seems to have summed it up very well.

Fom studying this very topic last week in college I agree that its the date of creation that would matter.

Tom Young

Depends:

Kinds of property:

The difference between Fixed Charge and Floating Charge relates to the kind of property which secures the charge, how readily it can be defined, and the ability of Creditor to realise the debt.

Fixed Charges – usually made upon unchanging items not required in the day-to-day business, e.g. real property, plant machinery

Floating Charges – usually upon items which change in day-to-day business, e.g. stock, book debts, receivable accounts

Floating Charges:

In the 19th century – English Company law developed somewhat and Courts allowed a type of Floating which would not affect individual items of property until a future event known as Crystalisation.

Only upon crystalisation would the charge affect the items within the category owned by the company – the charge that was floating becomes fixed.

Illingsworth v Holdsworth (1904) per Lord McNaughten

“A floating charge is ambulatory and shifting in its nature, hovering over and so to speak floating with the property which it is intended to affect until some event occurs or some act is done which causes it to settle and fasten on the subject of the charge within its grasp.”

Government Stock Co v Manite Railway (1897) per Lord McNaughten:

“A floating charge is an equitable charge on the assets for the time being of a going concern.”

• Prior to crystalisation, company can freely deal with the asset class in question
• Flaoting charges provide degree of comfort to the creditor secured thereby

What causes crystalisation?
1. Appointment of a Liquidator
2. Appointment of a Receiver
3. Cessation by Company of business
4. Such other events/occurrences agreed between Chargor or Chargee in charge document (often referred to as a debenture)

Floating Charges are particularly valuable to bank lenders of trading Cos who often don’t have fixed assets or valuable premises. Here a floating charges can be over its stock, receiving, book debts, and over residual or intangible assets, such as goodwill of the company.

Weaknesses of Floating Charges:

1. They rank behind subsequently created Fixed Charges
2. They rank behind preferential creditors
3. In danger of being rendered valueless by dissipation of assets in prior class

How to circumvent weaknesses of Floating Charges?

• In most Floating Charges, variety of prohibitions, which seek to protect, as best it can, the Floating Charge
• Re. 1 & 3, Floating Charges normally contain rules preventing certain things from happening.

Floating Charges are subject to preferential creditors under S.285 and in the context of a Receivership (S.98) – (rates, taxes, employee claims usually within a year of Liquidator or Receiver)

Re Griffith Hotel (1914)

Court: preference in s.285 & s.98 applies to those charges which at the time of Liquidator or appointment of Receiver were still uncrystalised. Therefore Floating Charges which have somehow been crystalised prior to Liquidator or Receiver are not subject to the preferential claim.

Therefore, Re. Griffin creates the possibility of attempting to crystalise ahead of the event.

Automatic/Semi-automatic Crystalisation clauses:

Their validity is open to some doubt but the better view in Ireland is that they will be upheld, despite Keane CJ’s previous disapproval (as void for uncertainty)

Re Brightlife (1987) – Hoffman J:

Parties had contractual freedom to specify when and how Floating Charges might crystalise and such clauses were not void as against company policy.

As contractual provisions, however, they must not be void for uncertainty
Semi-automatic – require the intervention of the Chargee such as by giving notice Automatic – if particular provision is breached, irrespective of Chargee’s knowledge

Registration:

As response to potential injustices to creditors and issues of priority, Company Law created a system of transparency:
• All charges created must be registered to be valid
• S.99 CA 1963 – charges of a particular type set out in s.99(3), which are created by the Company, must be registered within 21 days of their creation
• Failure renders those charges void against the L’or and any creditor of the Co
• NB to note: s.99 does not require registration of all charges, merely of the sort set out in s.99(2).

Effect on Priority:

• Charge will have priority according to their: a) type; b) date of creation
• Charges lose their priority if not properly registered, but as unsecured creditor
• S.106 – procedure for late registration by application to the Court (given the severity of consequences of non-registration)
• When a charge is registered late, the pre-existing priorities will not be upset, including the rights of subsequently created, but registered charges.

Problem: 21 days to register – Company files from CRO don’t contain info of all registered charges, i.e. there could be created but unrecognised charges in the Company.

Subsequent charges will take priority if registered before day 22.

• A registerable Charge, which is not registered, will be void against a subsequent creditor even where that creditor is aware of a prior charge.

Re Monolithic Building Co. (1915) – Subsequent encumbrancer (Chargee) who registered his charge notwithstanding his knowledge of the existence of a prior unregistered mortgage was held to have priority – Court of Appeal: Knowledge of the prior charge did not preclude from insisting on his rights as a registered debenture holder.

See also: Re Clarets (1978)

For unsecured creditors, an application will normally adduce evidence that Company is solvent – But even if such evidence is not adduced, an order will normally be granted on terms that if Company goes into Winding Up within a specified period, an application can be made to remove the charge.

Not all charges are registerable (see s.99), however:

• Floating Charge is always registerable (s.99(2)(f))
• Charge on Bad Debts is always registerable (s.99(2)(e))
• To be registerable, the charge must be created by the Company
• If it arises by operation of law, it does not require to be registered.

Quaere: Is is likely that a Floating Charge would apply in the instance mentioned above and also would it be practical to have dual registration and at the instant?

dermot_sheehan

I've said floating, but it's with ignorance as to the law in this area and haven't even looked at Forde's book yet.
it's because floating charges are a contractual liability that acts in personem
against the borrower until whatever act crystalises them, in which
case they act in rem over the property which is charged.

Prior to crystallisation a person who acquires the property acquires
good title to it. Even after crystallisation, a person could rely as a
bona fides purchaser for value of the charged property unless prior
notice was brought to them of the charge. Registration accomplishes
this.

The order of priority is firstly the order in which they crystallise.
One that becomes crystalised first becomes the first charge on the
property. The reason is since a person can get good title from a sale
of the property prior to any crystalisation, a person can get priority
in charging if they charge first, since a charge is in effect a sale
subject to the right of the original owner to redeem when the amount
charged has been paid. An ability to sell and give good, free title
from such a sale consequently gives a right to charge with priority.
The company could create a fixed charge with priority over all
floating ones if it's free to sell with good free title, therefore any
floater that crystalises at this point gets priority.


Let's say you have two charges, A and B. A is created first before B,
but B is registered before A. The holders of the floating charges have
no knowledge of each other save the constructive notice that is
imparted to them of what is on the CRO registrar.

A and B float and then an event occurs which would cause them both to
crystalise.


The argument in favour of A having priority is that B must be subject to A, since A charges the
property regardless of time it's registered in the CRO, and therefore
the company doesn't have the capacity to sell the property absent the
charge since one can't sell what what doesn't own and the company
can't charge it again clear of the A charge since it's subject to A.

What logically flows from this is that dates of
registration can't matter since B could not have charged the property,
subject to A's charge with the particulars registered, since B could
have registered the charge before A and A inherently
has priority.

My response would be that the charge only attaches to the property
upon crystallisation and even then the bona fides purchaser for value
without notice doctrine would apply. Since while floating, charges are
mere in personem liabilities of the company and the company is free to
sell the property and any purchaser gets good, free title, the company
is not in a situation where it's selling what it doesn't own. It could
have created B as a fixed charge while A was floating, and B would
certainly have priority regardless of registration.

So let's go back to A and B,

A is created first but not registered till after B, if at all.

A and B charge when they crystalise and attach to the property. One
day the property can be freely sold by the company (and therefore made
subject to other charges that have priority). It's as if the property
was sold to the A and B charge holder on crystallisation day (subject
to an equity of redemption when the amount charged is paid off). Who
gets priority in this inconsistent contractually required charging.

On crystalisation day, A's charge would be subject to B's because B
having no notice of A would be equity's darling. B can take free of
A's charge since B had no notice when creating the charge.

A however had notice of B and therefore could not rely on that
doctrine on crystallisation day.

It's as if a conveyance took place on crystalisation day but the date
of knowledge for the parties is the day the charges were created.

Tester46

The responses above are both very detailed and correct in what they say. However, the OP asked:

"If the same event causes both charges to crystallise at the same time which has priority, is it date of creation or date of registration with the CRO?"

The answer, as far as I am aware, is date of creation.

Tom Young

Yeah: I answered that.

Effect on Priority

• Charge will have priority according to their: a) type; b) date of creation
• Charges lose their priority if not properly registered, but as unsecured creditor
• S.106 – procedure for late registration by application to the Court (given the severity of consequences of non-registration)
• When a charge is registered late, the pre-existing priorities will not be upset, including the rights of subsequently created, but registered charges.

Problem: 21 days to register – Company files from CRO don’t contain info of all registered charges, i.e. there could be created but unrecognised charges in the Company.
Subsequent charges will take priority if registered before day 22.