The causes of crystallisation

It is beyond doubt that where a chargee causes a receiver to be appointed either by relying on the terms of the debenture or by order of the court, this will cause a floating charge to crystallise. One Irish authority on this point is Halpin v Cremin 280 where this was confirmed in the judgment of Lavery J. 281 The mere taking of steps to appoint a receiver will be insufficient to cause a floating charge to crystallise. 282 Where another debenture holder causes a receiver to be appointed to a company, this will usually have the effect of causing all floating charges created by that company to crystallise. This is because most debentures simply provide that the appointment of a receiver will cause the debenture holder’s floating charge to crystallise and do not specify that the receiver must be appointed by them.

Similarly, a floating charge will crystallise where the chargor company goes into liquidation and the process of winding up commences. The reason for this has been given by Warrington J in Re Crompton & Co Ltd 283 where he said:

‘... I think there can be no question at all that according to ordinary principles the winding up puts an end to the period of suspension; and the reason that it does that is that the effect of the winding up is to put an end to the floating nature of the security.’ 284

A floating charge will crystallise whether a company is wound up by its members or creditors voluntarily, or compulsorily, by the court. 285

In 2015 it was accepted by the Supreme Court in Re JD Brian Ltd 287 that a floating charge will crystallise where the debenture creating it expressly provides that the giving of notice will cause it to crystallise. The giving of notice can be seen as a withdrawal of the licence to deal with the assets which are the subject of the floating charge. Since the ability to deal with the assets which are subject to a floating charge is the very essence of a floating charge, the withdrawal of that licence operates to convert the charge from being a floating charge to being a fixed charge.

Unlike the appointment of a receiver and the commencement of a winding up which will take effect unless the charge itself provides to the contrary, the giving of notice will only be such an event where the charge itself expressly contains such a clause. In practice it will take the form of a ‘notice of conversion clause’ which empowers the charge holder to convert the floating charge into a fixed charge. In Re Wogan’s (Drogheda) Ltd 288 clause 8 of the debenture in question provided, inter alia:

‘If the lender shall by notice in writing make a demand on the company as provided for in clause 8E hereof then the floating charge created by clause 4E hereof shall immediately on service of such notice on the company become crystallised and be a specific fixed charge on ... [inter alia] all book debts and other debts and securities due to the company ...’

While the Supreme Court did not specifically comment upon the validity of this clause, Finlay CJ referred to clause 8 in the reasoning for his conclusion. It seems inconceivable that the Supreme Court could base its decision, albeit in part, 289 on a clause which the law did not consider to be effective. 290

The reluctance to accept the effectiveness of express crystallisation clauses gave rise to two schools of thought, one commentator observing: 291

‘There are two schools of thought on this question. One takes the view that the floating charge is not an established phenomenon having fixed characteristics, but is simply the creature of the draughtsman and that a creditor is free to strengthen his security in this way if he wants to. The other looks at the effect of such an arrangement on third parties and contends that it must be against public policy to have a charge crystallise in circumstances which may be unknown (and perhaps even unknowable) at the time, so that a company could not give a buyer a good title even though everyone was acting in good faith.’

Those opposed to the acceptance of express crystallisation clauses in charges, include Keane, 292 who says:

‘It is thought, however, that this line of authority is unlikely to be followed in Ireland. The courts here will probably incline to the view that such automatic 293 crystallisation would present problems for other creditors who would have no actual notice of the terms of the debenture and that any such doctrine would need to be the subject of considered legislation and regulation.’

This work has in previous editions taken the contrary view, maintaining that express crystallisation clauses were effective to crystallise a floating charge. 294

The effectiveness of express crystallisation clauses was put beyond doubt by the Supreme Court in Re JD Brian Ltd 295 where it held that the service of a crystallisation notice, on foot of an express provision in a debenture, can be effective to convert the floating charge, through crystallisation, into a fixed charge. The facts of the case were that the company created a debenture which contained, inter alia, an express crystallisation by service of notice clause:

‘10. The Bank, may, at any time, by notice in writing served on the Company, convert the floating charge contained in this Deed into a first fixed charge over all the property, assets and rights for the time being subject to the said floating charge or over so much of the same as is specified in the notice. A notice under this clause may be served by the Bank only if in the sole judgment of the Bank, the Bank considers that the property, assets and rights described or referred to in the notice are in any way in jeopardy.’

In October 2009 Bank of Ireland served notice on the company converting the floating charge contained in the debenture into a fixed charge; in November 2009 the company was wound up following the presentation of a petition and an official liquidator was appointed. The company was insolvent and owed Bank of Ireland circa €16.25m; the liquidator anticipated realisations of between €12.5m and €14.5m, of which €2m related to assets the subject of the floating charge provisions. The official liquidator contended that the floating charge had crystallised in October 2009 and that bank was entitled to all of the company’s assets ahead of the preferential creditors. The Revenue Commissioners contended that regardless of whether or not the floating charge had crystallised prior to the commencment of the winding up, priority was to be given to the preferential claim (a point already discussed 296); they also disputed that the floating charges had in fact crystallised and converted into fixed charges.

On the question as to whether the charge had crystallised by service of the notice, in the High Court Finlay Geoghegan J 297 noted the existence of the two schools of thought described by Sealy, the opposition of Keane J writing ex-judicially in his text book and the views expressed in the last edition of this work 298 and the decision of Hoffmann J in Re Brightlife Ltd. 299 In relation to the latter decision, Finlay Geoghegan J noted that there the question concerned the validity of the crystallisation effected by notice to the chargor, saying:

‘The primary submission was that events of crystallisation were fixed by law and not by agreement of the parties. Those events were confined to (i) winding up; (ii) appointment of a receiver and (iii) ceasing to carry on business. It was submitted that only those three events would cause crystallisation, notwithstanding any agreement to the contrary. The common features of the events were that, in each case, the business of the company would cease, or at any rate, cease to be conducted by the directors.’

Finlay Geoghegan J noted Hoffmann J’s conclusion that the commercial inconvenience of automatic crystallisation gives rise to a strong presumption that automatic crystallisation was not in fact intended and that accordingly, very clear language would be required to show an intention that automatic crystallisation was intended. The learned judge said:

‘On the public policy argument, the position, simply put, is that it is a matter for the Oireachtas and not the courts to intervene in order to avoid an unfair adverse impact on third party creditors from contractual arrangements which may be entered into between a debenture holder and a company. The Oireachtas has, of course, done so by enacting [the predecessor of s 440 of the Act] (in relation to receivers), [the predecessor of s 409] (in relation to registration of certain charges) and [the predecesor of s 621(7) of the Act] (in relation to priority for certain debts on a winding up) referred to extensively above. I, again, respectfully agree with Hoffmann J that, having regard in particular to those interventions by the legislature, it is inappropriate for the courts to impose additional restrictive rules on grounds of public policy. Accordingly, on the first issue, for the very same reason set out by Hoffmann J, I am of the view that there is no rule of law which precludes parties to a debenture creating a floating charge agreeing, as a matter of contract, that the flowing charge will crystallise upon the happening of an event or a particular step taken by the chargee.’ 300

Although accepting that floating charges can in principle crystallise by notice served pursuant to a clause to that effect in the debenture, Finlay Geoghegan J went on to find that it is not sufficient that a charge be just labelled as being a fixed charge and said:

‘It appears to me, similarly, where a debenture expressly provides that a charge may, by service of a notice, effect a crystallisation of a floating charge over all the assets or specified assets, the mere fact that the debenture so provides does not of itself mean that the service of the notice, has the intended effect ie that the floating charge crystallises. In the words of McCarthy J ‘mere terminology’ used by the parties is not determinative of achieving the stated purpose ...

61. The issue is not, of course, whether the charge created by the debenture was a fixed or floating charge but, rather, whether the service of the notice provided for in Clause 10 of the Debenture does, in reality, what it purports to do, namely, ‘convert the floating charge contained in this deed into a first fixed charge over all the property, assets and rights for the time being, subject to the said floating charge.’ Similar to the approach of the Supreme Court in the above decisions, this Court must determine whether or not the effect of the service of the notice, pursuant to Clause 10, achieved what the parties intended it to achieve, namely, the conversion of the then floating charge into a first fixed charge over all the relevant property...Further, in accordance with the decision in Re Wogan’s (Drogheda) Ltd, it appears that this issue must be determined by a construction of the terms of the Debenture and the notice served, rather than any subsequent actions by either party.’

Finlay Geoghegan J found that if the service of the notice pursuant to clause 10 had in reality the effect of converting the floating charge over the book debts and stock in trade of the company into a first fixed charge on such assets, then it must also have effected an equitable assignment of such assets to the bank and the company would have lost the ability to deal in or dispose of those assets save as permitted by the bank. The presence or absence of restrictions in the debenture on the company’s ability to deal with the assets formerly the subject of the floating charge but which were intended to become the subject of a fixed charge were, therefore, critical to whether the charge was fixed or floating.

The High Court found it was not necessary to consider whether or not the restrictions in the debenture were appropriate to a fixed charge because it had already found that, either way, it would not have had priority to the preferential creditors. When, however, the liquidator indicated the decision would be appealed to the Supreme Court, the High Court considered it appropriate to address the issues so that all relevant issues could be before the Supreme Court. Accordingly, in Re JD Brian Motors Ltd (No 2) 301 Finlay Geoghegan J considered the effectiveness of the language used in the debenture by drawing heavily on the established jurisprudence applicable to the determination of whether a debenture creates a fixed or floating charge over book debts. 302 In approaching the construction of the debenture, she noted the Supreme Court’s approval in Analog Devices BV v Zurich Insurance 303 of the summary by Lord Hoffmann of the proper approach to the construction of commercial contracts in Investors Compensation Scheme v West Bromwich Building Society 304 and summarised by Laffoy J in UPM v BWG 305 but stated that where the issue in question is whether a fixed or floating charge has been created, the court is also engaged in a two-stage process in accordance with the Privy Council’s methodology in Agnew v Commissioner on Inland Revenue. 306 Finlay Geoghegan J said:

‘In my judgment, it follows that the same approach should be taken to deciding whether or not the effect of the service of a notice, pursuant to Clause 10 of the Debenture, was to convert the floating charge created by the Deed over the stock-in-trade, cash-at-bank and book debts into a first fixed charge over such property. The court must, as a first step, construe the Debenture to ascertain the intention of the parties as to the rights and obligations granted to or imposed on each other in relation to the property subject to the floating charge after the service of a notice, pursuant to Clause 10 of the Debenture, referring to that property. Once this has been ascertained, the court should embark on the second stage and determine whether such rights and obligations are consistent with a fixed charge. If so, the notice will have the effect of converting the floating charge into a fixed charge. If not, it will not have achieved the stated intention and the property will remain subject to the floating charge.’ 307

Applying this to the facts of the debenture in hand, Finlay Geoghegan J found that the intention to convert a floating charge into a fixed charge did not carry with it a necessary implication that the company was restricted from dealing in or disposing of any of the assets without the bank’s consent and also found the debenture silent as to the bank’s rights or the company’s obligations following the purported conversion of the charge and nothing which restricted the company’s entitlement to deal with or dispose of its stock in trade or use the proceeds of its book debts or cash at the bank. Moreover, the learned judge found the unqualified covenant in the debenture to ‘carry on and conduct its business in a proper and efficient manner’ to be inconsistent with the existence of a fixed charge on book debts, stock in trade and cash at bank. Finally, it was noted that clause 8 which contained a prohibition on selling, assigning or otherwise disposing of property the subject of a fixed charge was confined to property originally subject to a fixed charge, and not property which was subject to a floating charge which purportedly converted to a fixed charge. This was found to underscore the absence of a similar provision in relation to the property the subject of the purported quasi-fixed charge. So, while there was nothing in principle against a debenture having an express or automatic crystallisation provision, any such purported provision must be effective. On this point Finlay Geoghegan J held that there was no intention expressed in the debenture that the company be restricted in its use of the property after the service of notice and so it continued to be entitled to have permission to use the charged property and that, that:

‘… entitlement is inconsistent with the existence of a first fixed charge over the stock-in-trade, cash-at-bank and book debts in favour of the Bank ... On a proper construction of the Debenture, the service of a notice, pursuant to Clause 10 thereof, does not have the effect of converting the property subject to the floating charge created by the Debenture into a first fixed charge over such property.’

And it was against this finding, as well as the High Court’s construction of the predecessor of s 621(7)(b) of the Act, that the liquidator and bank appealed the High Court decisions to the Supreme Court.

The decision of the High Court was successfully appealed to the Supreme Court, its judgment being delivered by Laffoy J. Concurring with Finlay Geoghegan J in the High Court, the Supreme Court held:

‘… there is no rule of law which precludes parties to a debenture creating a floating charge agreeing, as a matter of contract, that the floating charge will crystallise upon the happening of an event or a particular step taken by the chargee.’ 308

Where the Supreme Court differed with the High Court was in relation to the High Court’s conclusion that the parties to the debenture did not actually achieve their intention, based on the High Court’s purported application of the finding in Re Keenan Brothers. The Supreme Court noted that the High Court had considered it appropriate to adopt a two-stage approach to the question as to the effect of the conversion notice: the first step being to construe the intentions of the parties as to the rights and obligations granted or imposed in relation to the charged property and the second stage being to determine whether such rights and obligations were consistent with the charge being a fixed charge.

In essence, the Supreme Court distinguished the test for determining whether a charge over book debts gave rise to a fixed or floating charge from the test for determining whether a floating charge crystallised by service of notice. Laffoy J said:

‘The task in this case is to determine whether, on a once off basis, the service of the Crystallisation Notice under Clause 10 converted the floating charge into a fixed charge. I am satisfied that in applying the principles enunciated in Keenan Bros. in carrying out that task, the proper conclusion is that, as a matter of construction of Clause 10, the intention of the parties was that, on the service of the Crystallisation Notice, the Company would thereafter be restricted in the use of the property and assets and rights which had been the subject of the floating charge and, contrary to the view expressed by the trial judge at para. 19 of the Second Judgment, that the Company would cease to be entitled to use such property in carrying on its business without the consent of the Bank. That conclusion, in my view, is fully in accordance with the principles outlined in the judgments of Henchy J and McCarthy J in Keenan Bros.’ 309

Referring to the first question posed, the intention of the parties, Laffoy J said that the intention of the parties was ‘absolutely clear’: the bank had the right to serve a notice where in its sole judgment it considered the charged property to be in jeopardy and the purpose of the notice was clearly to convert the floating charge into a fixed charge. While conceding that the consequences of conversion were not spelled out, Laffoy J held that ‘the consequences ensue as a matter of law on the service of the notice … in legal parlance the conversion of the floating charge into a fixed charge is known as crystallisation since the late nineteenth century’. Laffoy J concluded:

‘73. In summary, Clause 10 is absolutely clear as to the intention of the parties in conferring the right on the Bank to serve notice on the Company, the intention being to convert the floating charge into a fixed charge. Such conversion, in other words, crystallisation of the floating charge, was intended to have and did have well established consequential effects on the respective obligations and rights of the chargor and the chargee. The effects flowed from the action of service of the notice. This is not a case of putting the cart before the horse.’ 310

Following this decision, there can be no doubt as to the effectiveness in Ireland of an express crystallisation clause in a debenture.

It is now clear that it is important to distinguish express crystallisation clauses which provide for crystallisation on the service of a notice from so-called automatic crystallisation clauses. An automatic crystallisation clause differs from an express crystallisation clause in that it purports to operate, similar to the traditional causes of crystallisation, automatically upon the occurrence of a particular event, and without the intervention of the chargee. Examples of the events that are commonly expressed to cause automatic crystallisation include: an attempt to create a subsequent charge; an attempt by another creditor to levy execution against the company; and non-payment of loan instalments. 311

It is thought that there is in principle no reason to distinguish the effectiveness of an automatic crystallisation clause from the effectiveness of an express crystallisation clause and that the following finding of Laffoy J for the Supreme Court in Re JD Brian Ltd 312 applies also to an automatic crystallisation clause:

‘… there is no rule of law which precludes parties to a debenture creating a floating charge agreeing, as a matter of contract, that the floating charge will crystallise upon the happening of an event or a particular step taken by the charge.’ 313

Even the generality of the language – ‘the happening of an event or a particular step’ – seems designed to be inclusive of both automatic and express crystallisation clauses (in that order).

One significant difference, however, may lie in their respective effectiveness in the context of the operation of s 621(7)(b) of the Act. In Re JD Brian Ltd there was no question but that the notice had been served, crystallising the floating charge, in advance of the commencement of the company being wound up, which led to the finding that the charge was a fixed charge on the commencement of the winding up. Where an automatic crystallisation charge purports to be triggered by, say, the presentation of a winding-up petition, s 589(1) of the Act provides that the winding up will be deemed to commence at the time of the presentation of the petition. In those circumstances which comes first, the chicken (ie the commencement of the winding up) or the egg (ie the crystallisation of the floating charge)? It is thought that the likelihood is that the charge would be found to be a floating charge on the commencement of the winding up and not a fixed charge since, in order for the trigger to apply, the petition must first be presented and that is the time when the winding up is deemed to have commenced.

Although not one of the original grounds for causing a floating charge to crystallise there are a number of judicial authorities that acknowledge that a floating charge will crystallise where the company ceases to carry on business even where the debenture creating the floating charge is silent on the point. While it has not been conclusively established in Ireland that such an event will cause a floating charge to crystallise, it is submitted that when it eventually falls to be decided by the Irish courts, it will be held to be a valid crystallising event. 315

The principle has now been accepted in England in Re Woodroffes (Musical Instruments) Ltd. 316 There, a company created a debenture in favour of a bank, which contained a first fixed charge over certain property and also a floating charge on all the undertaking and assets of the company, present and future, which were not affected by the fixed charge. The debenture allowed the bank to convert the floating charge into a fixed charge upon the bank giving notice to the company. Later, a second floating charge was created by the company in favour of one of the directors of the company, which provided that it too could become fixed by the debenture holder giving notice to the company. This second debenture and charge was created in violation of a negative pledge clause contained in the earlier debenture. Shortly afterwards, the director debenture holder gave the requisite notice that her debenture should crystallise. Some days later, the bank gave notice that all sums due on the debenture should be paid (although it did not give notice that its floating charge should crystallise) upon which the board of directors of the company resolved to invite the bank to appoint a receiver. The bank acted on this invitation. Later, the company went into liquidation and the net question was, which floating charge should have priority, since the company’s assets did not satisfy both claims. It was assumed that the director’s floating charge had crystallised upon her giving notice to the company.

The bank advanced two main arguments. In the first place it was argued that when the director debenture holder gave notice that her charge should crystallise, this had the result that the floating charge also crystallised, in that it should be implied into the bank’s debenture that crystallisation of a subsequent charge should also crystallise the bank’s charge. The giving of notice by the director debenture holder, it was argued, had the effect of determining the company’s licence to use the assets forming the subject matter of the charge, which would have the effect of automatically crystallising its floating charge. Nourse J rejected this argument 317 saying that it appeared to run contrary to ‘fundamental principles of the law of contract’. Indeed, he could not see that such action by the director debenture holder would necessarily cause the company to cease to carry on business. In effect, the motivation of Nourse J was that he was being asked to imply an automatic crystallisation clause on the happening of a certain event, into the debenture. This he refused to do, although he accepted the validity of an express automatic crystallisation clause.

The second proposition of the bank is our present concern. In the words of Nourse J, it argued:

‘... that there was in fact a cessation of the company’s business [on the giving of notice by the director debenture holder, or prior to its own action] and that that cessation caused an automatic crystallisation of the bank’s floating charge.’ 318

This argument differs from the former, in that its acceptance hinged upon whether or not the judge accepted that cessation of business in fact caused a floating charge to crystallise. Having referred to several 319 authorities, Nourse J held that a factual cessation of business was a third circumstance (along with the appointment of a receiver and the commencement of a winding up) in which a floating charge would crystallise. While accepting that there were opinions which hold that ‘automatic crystallisation clauses’ are undesirable from a policy perspective, Nourse J held:

‘On the state of the authorities it would be very difficult for me to question it, even if I could see a good reason for doing so. On the contrary, it seems to me that it is in accordance with the essential nature of a floating charge. The thinking behind the creation of such charges has always been a recognition that a fixed charge on the whole undertaking and assets of the company would paralyse it and prevent it from carrying on its business ... On the other hand it is a mistake to think that the chargee has no remedy while the charge is still floating. He can always intervene and obtain an injunction to prevent the company from dealing with its assets otherwise than in the ordinary course of its business. That no doubt is one reason why it is preferable to describe the charge as ‘hovering’, a word which can bear an undertone of menace, rather than as ‘dormant’. A cessation of business necessarily puts an end to the company’s dealings with its assets. That which kept the charge hovering has not been released and the force of gravity causes it to settle and fasten on the subject of the charge within its reach and grasp.’ 320

Thus, where a company ‘ceases to carry on business’, 321 any floating charge created by that company will crystallise, in just the same way as it would were a receiver appointed or were the company wound up. While this is the law in England, and other Commonwealth countries, it remains to be seen whether this reasoning will be accepted in Ireland. More recently in Re The Real Meat Co Ltd 322 it was held by Chadwick J that the effect of a company selling its business was to cause a floating charge to automatically crystallise because the sale of a company’s business amounted to a cessation of business which was an implied ground for crystallisation.

It has been questioned whether this is the law in Ireland. 323 Policy considerations aside, the bedrock of possible objection is Halpin v Cremin. 324 In that case, the plaintiff sought a declaration that he owned certain lands, formerly owned by the Listowel and Ballybunion Railway Company (the company), by virtue of a purchase made by him in 1942 and an order of the High Court which had vested in him the estate and interest theretofore vested in the company. The company had acquired those lands by virtue of an Act of 1886. 325 Two years later, the company executed a debenture in favour of the Debenture Corporation Ltd over the entire undertaking of the company. The company ran its last train in 1924, the track being removed from the land the following year. The defendant then entered on that land, and remained in exclusive and uninterrupted possession for many years. In 1928 the then owner of the debenture obtained a declaration that he was entitled to a lien or mortgage under the debenture on inter alia the lands in question. In 1942, the present plaintiff obtained the order referred to at the outset, but the defendant objected, claiming that he had acquired title through adverse possession. In the Circuit Court, the plaintiff lost his case for failing to show that the lands in question were part of the undertaking and premises owned by the company.

Lavery J held that nothing was done by the debenture holder or its successors and assigns to cause the floating charge to crystallise prior to when the squatter entered into adverse possession of the lands in question. In passing, he said 326 ‘the charge becomes specific on the appointment of a receiver or on a winding up’. Since neither of these happened, Lavery J held that the floating charge had not crystallised. However, one cannot say with any conviction that this case is unequivocal authority for the proposition that a company’s cessation of business does not cause a floating charge to crystallise.

In the first place, it can only be implied into the judgment of Lavery J that the fact that the company ceased to carry on business prior to when the defendant squatter entered into occupation of the lands was not an event which in law would crystallise the floating charge. Nowhere in his judgment is this proposition canvassed by counsel for the plaintiff, nor indeed does Lavery J himself even allude to this point. Rather, that he made the point at all is pure surmise, particularly in that there is no statement that the appointment of a receiver or a winding up are the sole events which cause crystallisation: he does not purport to be exhaustive. In the second place, while citing authorities such as Government Stock v Manila Ry Co 327 and Evans v Rival Granite Quarries Ltd 328 he did not allude to the fact that these suggested that ceasing to carry on business can cause a floating charge to crystallise: see Re Woodroffes (Musical Instruments) Ltd. 329 In the third place, the decision of Lavery J can be seen as indicative of a judiciary eager to give full effect to the legislative intent found in the statute similar to the modern s 13 of the Statute of Limitations 1957. Such legislative enactments are intended to ‘quieten title to land’ and avoid doubts as to ownership. In order to upset that intention he, presumably, 330 would have had to raise a point which was not raised before him in argument by counsel. It is submitted that the decision in the case can thus be explained. Finally, and most importantly, it is submitted that the fact that this decision was made in 1953 is of significance, particularly in view of the radical developments in both company and commercial law over even the last decade. In the view of the writer, the decision of Halpin v Cremin is not authority for the proposition that ‘ceasing to carry on business’ will not cause a floating charge to crystallise in Ireland. 331