The Gazette 1992

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.

Rule in Clayton's Case

For nearly two centuries the Rule in

Clayton's case

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;

in 1964

the Court of Appeal

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;

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.

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

) 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

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".

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;

(iii) In

the absence of clear words it is

assumed that a statute does not alter

the Common Law,

or any

established principle of law,

nor

remove private rights.

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

Daniel Murphy

following the

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