[2016] IEHC 141
THE HIGH COURT
[2015/62 COS]
IN THE MATTER OF A-WEAR LIMITED (IN RECEIVERSHIP)
AND IN THE MATTER OF SECTION 316 OF THE COMPANIES ACTS
1963 - 2012
BETWEEN
THE REVENUE COMMISSIONERS
APPLICANTS
RESPONDENT
HILCO CAPITAL IRELAND LIMITED
NOTICE PARTY
JUDGMENT of Mr. Justice Tony O’Connor delivered on the 18th day of March, 2016
Introduction
1. The notice of motion for this application sought directions pursuant to s.316 of the Companies Act 1963 (“CA 1963”) to direct the respondent receiver to categorise as a floating charge assets described under eleven separate headings. The final affidavit for this application was filed in July, 2015, while written and oral submissions were completed in February, 2016.
Background
2. By composite debenture dated the 3rd June, 2007 (“the debenture”), A-Wear Ltd. (“A-Wear”), its parent and group companies of the parent charged and assigned their assets to Ulster Bank Ireland Ltd (“Ulster”) as fixed or floating charges.
3. The respondent was appointed as receiver and manager over the then property and assets of A-Wear on the 13th February, 2013, after an earlier receiver (“the first receiver”) had been discharged. The Court is not aware of any controversy about the discharge of that receiver.
4. By email dated the 16th April, 2014, the respondent’s solicitor sent a schedule of realisations (“the April, 2014 schedule”) to an officer of the applicants. The applicants responded to the effect that the April, 2014 schedule did not provide information to a sufficient degree for the applicants to agree or disagree with the categorisation of each asset being the subject of a fixed or floating charge.
5. A determination that an asset is the subject of a floating charge as opposed to a fixed charge is relevant to the applicants because s.98 of CA 1963 grants to the applicants priority to the assets over which a receiver is appointed pursuant to a floating charge provided the company is not in the course of being wound up.
6. Paragraph (i) of the notice of motion listed eleven categories of assets (“the described assets”) in subparagraphs a - k which became the subject of the application ultimately and they are listed later in this judgment.
The relevant charging sub-clauses
7. The following extract and sub-clauses of the debenture are the provisions which are most relevant to the Court’s determination:-
“3.1 Each Company as beneficial owner… as continuing security for the payment, performance and discharge of the “Secured Obligations”, hereby:-
(n) charges, assigns and agrees to assign to the Security Trustee as trustee for the Secured Parties all book and other debts, revenues and claims both present and future now or at any time hereafter due or owing or purchased or enjoyed by such Company (excluding for the purposes of this clause 3.1 (n) only, any debts or claims referred by, or in respect of, any monies standing to the credit of such Company’s bank accounts) and the full benefit of all rights and remedies relating thereto, including, without limitation, all negotiable and non-negotiable instruments, guarantees, indemnities, rights of tracing and security interests, all things in action which may give rise to a debt, revenue or claim and all other rights and remedies of whatever nature in respect of the same;
(o)…
(p) charges, assigns and agrees to assign to the Security Trustee the Special Accounts and all other bank accounts of such Company (other than those referred to in paragraph (q) below) and all monies now or at any time hereafter standing to the credit thereof and all entitlements to interest and other rights and benefits accruing thereto or arising in connection with such monies;
(q) charges, assigns and agrees to assign to the Security Trustee all present and future trading and operational bank accounts of such Company (howsoever designated) with any bank or other financial institutions (including the Security Trustee), but excluding for the avoidance of doubt any account referred to in paragraph (p) above) and all monies now or at any time hereafter standing to the credit thereof and all entitlements to interest and other rights and benefits accruing thereto or arising in connection with any such monies, and;
(r) charges to the Security Trustee as trustee for the Secured Parties all of such Company’s stock-in-trade, inventory and raw materials together with the whole of such Company’s undertaking and property, assets and rights whatsoever and wheresoever both present and future other than any assets for the time being effectively charged to the Security Trustee as trustee for the Secured Parties by way of fixed charge or effectively assigned (whether at law or in equity) to the Security Trustee as trustee for Secured Parties or otherwise subject to an effective fixed security in favour of the Security Trustee as trustee for the Secured Parties”.
For ease of understanding the applicants accept that 3.1(n) and (p) appear to be fixed charges and that 3.1(q) and (r) are floating charges.
Negative pledge
8. Clause 8 of the debenture provided as follows and was relied upon by each of the parties when making submissions:-
“8.1 Each company undertakes that at no time during the Security Period will such Company otherwise than:-
(i) as permitted under the Finance Documents,
(ii) in the Security Trustee’s favour; or
(iii) with the Security Trustees prior written consent
create, grant, extend or permit to subsist or arise any encumbrance on or over all or any part of the Charged Property.
“8.2 Each company undertakes that at no time during the Security Period will such Company except:-
sell, convey, transfer, assign or otherwise dispose of all or any part of the Charged Property or agree to do any of the foregoing.
“8.3 Notwithstanding Clause 8.2 but subject always to Clause 8.1, each company may sell, transfer or otherwise dispose of or deal with all or any part of its undertaking and assets for the time being subject to the Floating Charge in the ordinary and usual course of, and for the purposes of, such Company’s business”.
Section 316 (1A) of CA 1963
9. The applicants, not being receivers, have a limited right to apply for directions by virtue of the operation of s.316(1A) of CA 1963. Clarke J. clarified In Re: HSS [2011] IEHC 497 that the Court does not have “general jurisdiction to consider whether things are fair or unfair” in this type of application, and added:-
“The court enjoys a wide discretion under s.316. It is true that the court is entitled to give directions or make orders declaring the rights of persons, as the court thinks just. However, it does not seem to me that that section confers on the court any entitlement to change the proper implementation of the regime for dealing with the assets of insolvent companies as set out in the Companies Acts. The reason why the court has been given a wide discretion is that the types of directions or orders that might be required may vary enormously depending on the facts with which the court is faced. The court is, therefore, given a very wide discretion as to the type of intervention which may be appropriate.
However, it does not seem to me that s.316 confers on the court any discretion to alter the legal rights of parties as determined by corporate insolvency law. The Companies Acts contain very many measures designed to determine who gets what out of the assets of insolvent companies. The court can, in an application under s.316, decide issues that arise as to who is to get what and make whatever directions or orders are appropriate to ensure that parties get what they are entitled to. The section does not, however, give the court carte blanche to reassess whether the carefully crafted provisions of corporate insolvency law ought to apply”.
10. This Court elaborates by stating that the burden is on the applicants to prove that there is an injustice, that that injustice stems from the misapplication of insolvency law and that the injustice is specific to an established right. In short, the burden is on the applicants to establish that actions or inactions of the receiver were incorrect.
Hilco
11. Ulster novated its rights and obligations under the debenture to Hilco Capital Ireland Ltd. (“Hilco”) in October, 2011 and was appointed the Security Trustee in lieu of Ulster. In that way, Hilco became a notice party at the hearing of this application.
Process for categorisation
12. Laffoy J. in JD Brian Ltd (in liquidation) [2015] IESC 62 at para.31 referred to the approach of Henchy J. and McCarthy J. in In Re Keenan Brothers [1985] I.R. 401 and reiterated that “the approach to determining whether or not a charge created by a debenture was or was not a fixed charge was stated to be a two stage process, the first stage being to construe the debenture and seek to gather the intention of the parties from the language they used, that is to say, to ascertain the nature of the rights and obligations which they intended to grant each other in respect of the charged assets. Thereafter, it was open to the Court to embark on the second stage of the process, categorisation, which is a matter of law and does not depend on the intention of the parties. The final sentence in the passage from the decision of the Privy Council (in Agnew v. Commissioners of Inland Revenue [2011] 2 A.C. 710) quoted stated:-
‘If their intention, properly gathered from the language of the instrument, is to grant the company rights in respect of the charged assets which are inconsistent with the nature of a fixed charge, then the charge cannot be a fixed charge however they have chosen to describe it.’”
Floating charge
13. This Court relies upon the description of Romer J. in In Re Yorkshire Woolcombers’ Association Ltd [1903] 2 CH 284 at 295 which has been widely cited:-
“… I certainly think that if a charge has three characteristics I am about to mention, it is a floating charge:-
1. if it is a charge on a class of assets of a company present and future;
2. if that class is one which in the ordinary class of the business of the company, would be changing from time to time;
3. if you find that by the charge it is contemplated that, until some future step is taken by or on behalf of those interested in the charge, the company may carry on its business in the ordinary way so far as concerns the particular class of assets I am dealing with.”
Book debts
14. Hogan J. in Response Engineering Ltd. v. Caherconlish Treatment Plants Ltd. [2011] IEHC 345 explained that book debts “refers to no more than future income which will accrue to the company by reason of goods and services to third parties by that company in the course of its trade or business.”
Fixed charge on book debts
15. It has long been established that a fixed charge can be created over book debts and bank accounts.
Control
16. It was contended on behalf of the applicants that a fixed charge over book debts requires the chargee to be in full control of the book debts and the proceeds of realisation of those debts. The applicants relied upon the Supreme Court decision In Re Holidair Ltd. [1994] 1 I.R. 481 which effectively required in the circumstances of that case the existence of a separate bank account and an obligation to pay the proceeds of realisation into that account along with a prohibition on withdrawal of funds from the designated account by the company.
17. The applicants contended that a fixed charge only arises where the chargor is obliged to pass to the chargee the proceeds of realisation or to place them in the full control of the chargee. It was submitted that this control can be agreed through an obligation to lodge the proceeds of realisation in a specific separate account which itself is to be the subject of a fixed charge and from which the chargor has no right to withdraw funds. It is the position of the applicants that a floating charge exists despite whatever terminology is used if such control is not provided for in the charging clause.
Position of the respondent
18. Counsel for the respondent, when outlining how the Court should determine whether a charge is fixed or floating, referred the Court to the type of restrictions imposed by the debenture. He submitted that restrictions on charging or disposal of the assets charged demonstrated that the charged assets were in equity the property of the mortgagee and thus assisted the determination to be made.
19. Counsel for the respondent also submitted that the applicants’ argument failed to address the distinction between “book and other debts, revenues and claims” which under clause 3.1(n) of the debenture were subject to a fixed charge and the credit balances of the company’s “trading and operational bank accounts” came under clause 3.1(q), which created a floating charge.
Notice party
20. Counsel for the notice party drew the Court’s attention to the distinction in In Re Holidair Ltd [1994] 1 IR 416. That case concerned a determination about whether a debenture had created a fixed or floating charge in the context of an examinership. Blayney J. in the Supreme Court found that the sole question in this regard was whether a clause which prevented a company from charging, assigning or disposing of book debts prevented the company from using the proceeds of its book debts. He decided that a provision which required payment into accounts which a trustee may select from time to time was inconsistent with another clause which required the company to carry on business in a proper and efficient manner. He went on to hold that there was no restriction on the company drawing the monies out of the accounts into which the debts were paid. Therefore the relevant debenture clause had created a floating charge. Counsel for the notice party stressed the difference between book debts and the proceeds of book debts.
Applying the principles to the debenture
21. The Court was bemused by the tortuous wording of the 26 page debenture with eight schedules, one of which has 47 pages. Counsel for the parties isolated the provisions which are regarded by those parties as being relevant to determining the questions posed for the respondent and now the Court. Suffice to say that the concept of a company carrying on business in a normal way with so many contractual restrictions is hard to fathom. One can understand how a charge may operate to allow for cash tills, utilities, repairs and regular services to be provided without restrictions. Companies have long raised finance for their businesses by creating fixed charges on known fixed assets. The hovering and ambulatory nature of a floating charge is another instrument of security for those providing loan or credit facilities.
22. When receivers, liquidators and courts are asked to decide upon whether a charge is fixed or floating, they are often placed in the awkward position of having to decipher the wording of a debenture.
23. In this case one can identify that Ulster in the debenture, when one looks at the entire document, required as much security to be fixed as possible and that all other assets fell within the ambit of the floating charge. On the other side A-Wear was prepared to do whatever its bank demanded in order to maintain the credit facilities provided by Ulster.
24. The entire debate in this application came down to whether Ulster had a contractual right to control the book debts and revenues which could be enforced against A-Wear.
25. The applicants while acknowledging the ostensibly fixed nature of sub-clauses (n) and (q) contend that in order for the respondents to maintain their position successfully in relation to the described assets, the debenture ought to have contained a further clause obliging A-Wear to get in the book debts in the ordinary course of its business and to pay the proceeds into a specific designated bank account controlled by Ulster.
26. The provisions relating to control in the debenture are a further determining factor and before proceeding to categorise, the Court refers to the negative pledge clause at 8. Sub clauses 8.1 and 8.2 restricted A-Wear from charging or disposing of any assets which fell within the ambit of a fixed charge. Clause 8.3 allowed A-Wear to dispose of assets which were the subject of a floating charge.
27. The Court further observes that Ulster had fixed charges over specific bank accounts and that any creditor of A-Wear could have ascertained that Ulster had sought to strap its security as tightly as its solicitors could do when drafting the debenture.
28. Taking all that into account, and the specific sub clauses of the debenture set out earlier in this judgment, this Court feels that the following excerpt from the judgment of Barron J. in A. H. Masser Ltd [1986] I.R. 455 resonates for this application:-
“The restrictions imposed upon the borrower in In re Keenan Bros. Ltd. [1985] I.R. 401 were clearly more extensive than those imposed here. Nevertheless it seems to me that the essential provision is the restriction on the chargor which prevents it from purporting to charge, assign or otherwise dispose of its book debts and other debts. I regard this provision as acknowledging that the debts are in equity the property of the chargee and so not available to the chargor in the ordinary course of its business.”
Category A - balance at date of appointment - €59,381.66
29. The respondent in his affidavit sworn on 30th April, 2015, acknowledged that the “balance taken over at date of appointment” described at para. (a) of the notice of motion should be categorised as a floating charge property. Therefore, no issue now arises for determination.
Category B - cash lodgement Brinks €103,532.33
30. The managing director of Hilco and the receiver in his affidavit sworn on 14th July, 2015, referred to evidence that Brinks collected cash each day up to and after the appointment of the receiver.
31. It appears that A-Wear’s business continued seamlessly to be operated by another company which purchased the assets from the receiver. The original receiver split the cash which Brinks had collected between A-Wear and the new enterprise.
32. The evidence adduced suggests that A-Wear could not have used the cash held by Brinks in the ordinary course of its business. Hilco suggested that if a receiver had not been appointed the cash would have been lodged to bank accounts which were subject to another fixed charged under the debenture. The applicants mentioned that the agency agreement between A-Wear and Brinks was not exhibited. They relied upon the ambulatory nature of the cash held by Brinks when making submissions about whether the company was free to deal with this cash in the ordinary course of business.
33. The Court repeats that s.316 of CA 1963 requires applicants, when they are not the receiver, to establish that they are being “unfairly prejudiced to others”. This places an onus on the applicants to adduce sufficient evidence to allow for the directions to be made or to lay the basis for a more focused direction which could allow for the true position to be ascertained.
34. The Court does not have sufficient evidence to determine that the decision made by the respondent and his predecessor was incorrect. If the applicants wish to seek further directions to allow for further evidence to be adduced, such an application should be made by way of a new notice of motion which can assist the Court on how such evidence can be adduced and considered.
(c) Credit card receipts - €118,910.05
35. The respondent’s explanation that the credit card receipts created a debt obligation on the part of the credit card company to A-Wear was not controverted by the applicants.
36. Paragraph 63 of the grounding affidavit for the applicants confirmed that the applicants do not dispute the clause 3.1(n) applied, but the affidavit poses the question about whether the debenture provided for such a sufficient level of control as to allow the Court to determine that a fixed charge was created over the credit card receipts.
37. The Court relies upon the reasoning adopted by Barron J. in In Re A.H. Masser Ltd that the debenture sought to give Ulster a fixed charge over anything that was not ambulatory and that A-Wear so agreed. Taking the respondent’s averment that the credit card company owed a debt to A-Wear, the Court is not in a position to accept the applicants’ argument that the credit card receipts did not fall within the meaning of a book debt.
(d) Debtors - €339,535.78
38. The Court agrees with the respondent’s categorisation of these debtors as falling within the definition of book debts. A-Wear could not sell or dispose of these debts without the consent of Ulster in view of clause 8 of the negative pledge.
39. In this regard the Court having considered the entirety of clause 8 does not favour the applicants’ contention that Ulster did not have control or could not exercise control over the debts due to A-Wear.
(e) PayPal - €28,595.74
40. The respondent explained that this sum arose by the payment of customers through their PayPal account which meant that the customers had paid for their products sold by A-Wear without any credit facility. The applicant submitted that PayPal payments were equivalent to payments into a bank account available to A-Wear which was not the subject of a fixed charge.
41. The Court at the hearing of this application expressed its concern about the lack of evidence available to the Court from PayPal or others about whether a PayPal account payment could be categorised as a bank account credit available to A-Wear.
42. The respondent exhibited a tightly-typed 35 page standard user agreement of PayPal which was last updated on the 7th September, 2011, without an explanation as to its relevance or what provisions help to decide the issue. In those circumstances, the Court cannot have regard to that standard user agreement.
43. It was submitted for the applicants that clause 8.3 of the debenture ought to lead the Court to the conclusion that the PayPal sum could not be covered by sub-clause 3.1(n) of the debenture because “revenues” were not defined as including such payment.
44. The Court has no evidence which allows it to start a review of the respondent’s decision concerning the PayPal sum paid to the first receiver.
45. The Court is conscious of the precedent value of any ruling which it makes under this heading for liquidators or receivers with PayPal accounts having to be considered. In those circumstances, the Court declines to give the direction sought. A direction which is focussed on the type of evidence which can be adduced about the nature of the payments due to A-Wear by PayPal on the date of the appointment of the first receiver could be considered by the Court if the Applicants establish the necessary basis for making such an application.
46. The Court understands the respondent’s limited reasoning and in the absence of sufficient admissible evidence about the arrangements between A-Wear and PayPal, the Court cannot make the direction sought under this heading.
(f) Gift vouchers - €13,733.25
47. This heading in the notice of motion refers to the value of gift vouchers which were issued by third party companies such as One4all or An Post and used by customers to purchase goods from A-Wear. The issuers of those vouchers owed money to A-Wear and paid the sums due to A-Wear to the first receiver appointed. Clause 8.3 of the debenture relied upon by the applicants does not undermine Ulster’s agreed control over book debts. In those circumstances, the Court declines to give a direction as sought by the applicants in regard to these monies.
(g) Pre-payments - insurance rebate - €25,029.10
48. Ultimately, there was no dispute between the parties that this insurance rebate fell to be considered to be a book debt. In view of the contractual provisions in clause 8, the Court agrees with the categorisation maintained by the respondent receiver.
(h) Redundancy rebates - €27,033.62
49. These monies were received after the receiver was appointed and were described by the respondent in his affidavit as relating to a debt due by the Department of Social Protection to A-Wear. In that regard these monies fell within the meaning of book debts as described in clause 3.1(n) and there is no evidence to suggest that the contractual restrictions on A-Wear concerning book debts allowed A-Wear to sell or transfer these outstanding rebates without the consent of Ulster.
(i) Revenue draft cancelled - €90,779.53
50. This was a bank draft which had been obtained by A-Wear in favour of the applicants but had not been sent to the applicants. The applicants submitted that there was nothing explicit in the debenture about bank drafts and that it must therefore fall within the floating charge provisions of the debenture.
51. This submission ignores the fact that clause 3.1(n) includes all negotiable and non-negotiable instruments, indemnities and rights of tracing. The bank draft is an instrument which was capable of being cancelled so that the value could be reimbursed to A-Wear. The debenture precluded A-Wear from selling or disposing of such instruments save in accordance with the consent of Ulster. There does not appear to be anything ambulatory in nature about the bank draft and the court is not in a position to disagree with the categorisation maintained by the respondent.
(j) Inter account transfer - €186,902.22
52. There does not now appear to be a dispute about this sum following the service of the respondent’s affidavits which explained that these monies were the subject of separate charge documents.
(k) Sale of stock
53. It was agreed by the parties before the hearing of this application that this category should fall within the ambit of a floating charge.
Summary
54. The specific directions sought by the applicants for which consent are not forthcoming to date are therefore refused. However it is open to the applicants to seek a more focused application on another date if the parties think that it is desirable for directions to be made to allow for evidence to be adduced.
55. It may help the parties with grievances relating to determinations by a receiver or liquidator concerning the categorisation of assets which fall within fixed charges or floating charges to explain the difficulties which the Court faces in an application to reverse a decision of a receiver as in this case. The onus remains on an applicant to adduce the relevant evidence. Focussed questions to a receiver should be answered with candour. In the absence of a substantive reply and where injustice can be established, directions may be given to produce a fair and transparent reply.
