The Gazette 1992

APRIL 1992

GAZETTE

Statutory Interpretation of the Rule in Clayton's Case

the charge was created should be deemed to pay off the pre-charge overdraft; thus, it was argued, only the excess of the repayment should be deemed to reduce the amount of borrowing secured by the charge. It is not clear from the judgment the precise difference this would make to the amount recoverable but in previous cases 7 the difference has been substantial. Barron J found: (i) that the company was not solvent when the charge was created: (ii) that in view of the gap of two years between the making of the first advance and the execution of the charge, it could not be said that the money was advanced "at the time of or subsequently to the creation of and in consideration for the charge". Since the plaintiff was not entitled to the benefit of the proviso it was unnecessary to decide whether the Rule in Clayton's case applied; however Barron J. added:- "It seems to me that the application of the Rule defeats the intention of the legislation and that the proviso would be better construed where there is an unbroken account between the company and the debenture holder by deeming that it has been broken and a new account opened". 8 The objections to this view are formidable. They may be summarised: (i) Irish and English authority is unanimously in favour of the Rule being applied; (ii) It is settled that the Rule applies to other aspects of a winding up e.g. under Section 285 of the 1963 Act; 9 (iii) In the absence of clear words it is assumed that a statute does not alter the Common Law, 10 or any established principle of law, 11 nor remove private rights. 12 Earlier case law As to authority, Barron J was not bound by any of the decisions in point i.e. that of Kenny J in Re Daniel Murphy , 13 following the

If an established rule of Common Law undermines a statutory clause, but the statute does not explicitly alter the Common Law, how should the courts read the statute? Should they accept that the statute has been thwarted, or is it allowable to find that there has been a "silent" change in the law? This question was posed recently in Smurfit Paribas Bank Ltd. -v- A.A.B. Export Finance Ltd. 1 Rule in Clayton's Case For nearly two centuries the Rule in Clayton's case 2 i.e. that on a running account in the absence of special agreement the creditor may treat the earliest credit as being in repayment of the earliest debit - has been accepted without question. Yet, if invoked in a case under Section 288 of the Companies Act, 1963 or its UK equivalent, the rule effectively makes the Section useless. In the UK it has been settled since the 1920s that the Rule must apply; 3 in 1964 the Court of Appeal 4 accepted that the result was "puzzling" but it could see no other solution. In Ireland also it has long been settled that the Rule applies to a Section 288 case; 5 however in Smurfit Paribas Barron J. indicated that had the matter required a decision on the facts before him (which it did not) he would have refused to apply the Rule and hold that Section 288 effectively excluded it. In Smurtif Paribas the plaintiff and defendant were both creditors of a company called Peter Simms Group Ltd. which went into receivership; the plaintiff held a floating charge over the company's assets. The plaintiff claimed that the defendant had agreed that the plaintiff would be paid £300,000 plus interest out of monies recovered from the company in priority to any claim of the defendant. The principal defence

By Christopher Doyle, BL was that the charge was invalid under Section 288 (1) of the Companies Act, 1963 (now re- enacted in a somewhat different form by Section 136 of the 1990 Act 6 ) which provides:-

"Where a company is being wound up, a floating charge on the undertaking or property of the company created within 12 months before the commencement of the winding up shall unless it is proved that the company immediately after the creation of the charge was solvent be invalid except to the amount of any cash paid to the company at the time of or subsequently to the creation of and in consideration for the charge . . . " A winding up order had been made and it does not appear to have been disputed that the floating charge was created within the preceding 12 months. The plaintiff however claimed the benefit of the proviso on the ground that the money, the subject matter of the claim, was advanced " t o the company at the time of or subsequent to the creation of and in consideration for the charge". The ancillary claim, the concern of this article, was that the Rule in Clayton's case should be I applied so that lodgments made after

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