![Show Menu](styles/mobile-menu.png)
![Page Background](./../common/page-substrates/page0137.jpg)
GAZETTE
APRIL 1992
Statutory Interpretation of
the Rule in Clayton's Case
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
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
115