Increased Security For Banks In Company Liquidations: Benefits to Emerging Companies

companies_act_2014 The Supreme Court has issued a ruling in relation to the priority of floating charges over preferential creditors in the liquidation of companies in the Belgard Motors Group. The ruling states that the bank’s floating charges had crystallised into fixed charges and therefore the bank would rank ahead of preferential creditors, including the Revenue Commissioners.

The floating charge into a fixed charge

Prior to the winding up of the company, the bank had served a written notice on the company converting the floating charge into a fixed charge. The bank’s debenture included a specific clause that enabled them serve this notice if, in the sole judgement of the bank, the bank considered the assets and rights at issue were in any way in jeopardy. A floating charge, which applies generally to movable assets, ranks below preferential creditors in the event of a liquidation. The holder of a fixed charge, secured normally on property or other “fixed” assets, is deemed to be a secured creditor and gets paid ahead of preferential creditors.

Good for banks and for emerging companies

This is a significant ruling for Irish banks. Banks can now be more secure in lending to trading businesses because if a company fails the bank may be able to crystallise the floating charge and rank ahead of the preferential creditors. This should be a benefit to emerging companies who are trying to raise working capital to finance growth.

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