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GAZETTE
SEPTEMBER 1979
RECENT IRISH CASES
COMPANY LAW
Debenture issued by company in
favour of ma j or creditors —
debenture created separate charges
over different assets including book
debts — charge on book debts
undefined — whether charge
included future book debts —
whether charge fixed or floating —
company insolvent at time of creation
of charges — Section
288
Companies Act, 1963.
This was an application to the High
Court pursuant to Section 280 of the
Companies Act, 1963 by the official
liquidator of Lakeglen Construction
Limited ( " t he Comp a n y ") to
determine a question arising in the
winding up of the Company.
The facts of the case, which were
not in dispute, disclosed that on 24
November, 1977 the Company had
executed a debenture in favour of a
group of major creditors in return for
their f o r bea r ance in enforcing
immediate payment of the debts due
to them by the Company. The
debenture, in which the Company's
holding company also joined,
contained a number of sub-clauses
which purported to create charges
over various types of assets of the
Company and its holding company
and included a sub-clause which read
as follows :-
"3(b) The Company and the
holding company, as beneficial
owners, hereby charge in favour of
the major creditors all their
respective book debts and all
rights and powers of recovery in
respect thereof to hold the same
unto
the
major
creditors
absolutely".
The debenture provisions did not
however define the nature of the
charge over "book debts".
The winding-up of the Company
commenced on 13 March, 1978
within four months of the execution
of the debenture. In the winding-up
proceedings the question of whether
the charge at clause 3(b) of the
debenture created a fixed charge or a
floating one over the book debts of
the Company became material. If the
charge was a floating charge it would
be invalid under Section 288 of the
Companies Act, 1963 since it was
admitted that at the time of the
creation of the debenture the
Company was insolvent. If it was a
fixed charge it would not be so
invalidated.
Although the nature of the charge
on book debts was not defined this
was not so in the case of all the other
forms of security created by the
debenture. Under the very same
clause, i.e. clause 3, the Company, at
sub-clause (a),
assigned
all its fixed
and movable plant, machinery and
equipment, fixtures, implements and
utensils to the major creditors
absolutely;
at sub-clause (c) charged,
by way of first fixed charge,
its
goodwill and uncalled capital for the
time being; and at sub-clause (e)
charged,
by way of first floating
charge,
its undertaking and assets
whatsoever and wheresoever both
present and future. The controversy
arose by reason of the failure of the
debenture explicitly to state whether
the charge in clause 3(b) was a
floating one or a fixed one.
In a reserved judgment the Court
(per Costello J.) pointed out that
there is no statutory definition of the
term 'floating charge'. The Courts
have however indicated certain tests
by which a security can be identified
as a floating charge or fixed one. The
problem of construction in this case
could best be dealt with by looking at
the different consequences which flow
when a charge on book debts is a
floating one and when it is a fixed
one.
In
Houldsworth
v.
Yorkshire
Woolcombers Association
Limited
[19031 2 Ch. 284, Farwell J. had
said that if the security (in respect of
book debts) was to be treated as a
fixed or specific charge then the
Company had no business to receive
one singly book debt after the date of
the charge; but, on the other hand, if
it was intended that the charge was to
remain dormant until some future
date, and the Company was in the
meantime to be permitted to receive
the book debts and use them until
that date, then the security would
contain the true dement of a floating
charge. In the Appeal which followed
to the House of Lords, the Lord
Chancellor, in agreeing with the
interpretation put on the document
by the lower Court, said —
"In the first place you have that
which is in a sense I suppose must
be an dement in the definition of a
floating
security, t hat it is
something which is to float, not to
be put into immediate operation,
but such that the Company is to
be allowed. to carry on its
business. It contemplates not only
that it should carry with it the
book debts which were then
existing, but it contemplates also
the possibility of these debts being
extinguished by payment to the
Company, and that other book
debts should come in and take the
place of those
that
had
disappeared. That, my Lords,
seems to me an essential
characteristic of what is properly
called a floating security (see
(1904) A.C. at p. 257)".
Accepting, as it did, that these were
the tests to be applied in the present
case in determining whether the
charge was a floating one or a fixed
one the Court posed the question —
"When they executed the debenture
did the parties intend that in relation
to its book debts the Company was
free to receive them and bring new
book debts into existence as if the
debenture had not been created until
such time as the debenture holder
became entitled to intervene in the
Comp a n y 's
affairs?
In
its
examination of - the question the
Court considered the following points
to be of significance —
(a) The Company was a trading
company;
(b) The debenture holders (the
major creditors) expressly
agreed that the Company was
to be permitted to carry on its
business;
(c) In normal course of affairs it
would
obviously
create
difficulties for a trading
company if it was required to
hand over to its mortgagees its
book debts as it received them
from time to time.
It was the view of the Court that
when permission to trade is given in a
debenture and the debenture contains
no restrictions on the Company using
its book debts in the course of
business, an authority to receive and
use such book debts is more readily
inferred than is an obligation to hand
them over to the debenture holder. In
the present case there was nothing in
the arrangement between the parties
which would tend to displace this
inference. On the contrary there was
support for it in sub-clauses 2(c) and
2(d) of the debenture document.
Under
these provisions,
the