Beggasa Ltd ((in Receivership))
| Jurisdiction | Ireland |
| Judge | Mr. Justice Murray |
| Judgment Date | 03 February 2023 |
| Neutral Citation | [2023] IECA 21 |
| Court | Court of Appeal (Ireland) |
| Docket Number | High Court Record No. 2019/88COS |
In the Matter of Beggasa Limited (In Receivership)
And in the Matter of the Companies Act 2014
[2023] IECA 21
Barniville P.
Murray J.
Haughton J.
High Court Record No. 2019/88COS
Court of Appeal Record No. 2021/158
THE COURT OF APPEAL
CIVIL
Legal aid – Body corporate – Civil Legal Aid Act 1995 – Respondents seeking to repay some of the advance to Zurich Bank out of floating charge realisations – Whether the appellants enjoyed priority in respect of some of those monies as a preferential creditor of Beggasa Limited
Facts: The respondents, Mr Burns and Mr McCann (the Receivers), were appointed receivers and managers to the Shannon Oaks Hotel and Country Club by Zurich Bank (the Bank) on 9 September 2011. The appointment was made pursuant to two debentures of 18 July 2007; a fixed and floating charge debenture between Beggasa Ltd (the Company) and the Bank, and a fixed charge mortgage between a Mr Flood and the Bank. The Receivers required funds to conduct the receivership and continue the trade of the company and in February 2012 they borrowed a sum of €293,000 from the Bank. An application for directions was brought pursuant to inter alia s. 438 of the Companies Act 2014. The appellants, the Revenue Commissioners (Revenue), submitted that payment of monies to the Bank in respect of a loan to fund the costs and expenses of a trading receivership in priority to preferential claims represented a breach of the statutory priorities governing the application of the proceeds of floating charge realisations contained in s. 440 of the 2014 Act. The High Court ([2021] IEHC 110) found that there was no breach of that statutory obligation. It reached that conclusion on the basis that there was an antecedent priority attaching to the costs and expenses of a receivership derived either from the terms of the debenture entered into between the Company and the Bank, or alternatively from a common law principle said to be expressed in the case of Buchler v Talbot [2004] 2 AC 298. The High Court concluded that the loan was an expense of the receivership and that, on either one of those two legal bases, the Receivers were entitled to repay it. Revenue appealed to the Court of Appeal, saying that this was wrong: a receiver appointed under a floating charge is required by the provisions of s. 440 to ring fence liquid assets as they are obtained so as to ensure that the preferential creditor’s claims can be satisfied; it is not entitled to continue to trade the business of the company and to thereby run down the amounts due to the preferential creditor.
Held by Murray J that a receiver is entitled to be paid, in priority to the claims of preferential creditors or the debenture holder, the costs of realisation of assets subject to a floating charge, and the costs and expenses of the receivership; to that extent, the Receivers were correct when they said that s. 440 affords priority to preferential debts only over assets to which the debenture holders would otherwise be entitled to have recourse, and that this does not include the costs and expenses of the receivership. Murray J held that this analysis only resolves the issue of priorities. He held that one of the effects of s. 440 is to impose on a receiver a duty to preferential creditors, breach of which sounds in damages in tort; this duty is triggered at any point when the receiver, after taking the costs of realisation and the amounts then due to the receiver in respect of the costs and expenses of the receivership and his remuneration into consideration, has in his hands sufficient assets to enable him to discharge the preferential debts either in whole or in part. Murray J held that the effect of the duty is that if, in that event, the receiver determines to continue to trade, he does so at his own risk, and if he loses those moneys in the course of trading, he will be personally liable to the extent that preferential creditors have lost moneys they would otherwise have received had the receiver not embarked on that course of action.
Murray J gave the parties an opportunity to consider their positions in the light of this judgment before listing the matter for a further hearing, if required.
Appeal allowed in part.
JUDGMENT of Mr. Justice Murray delivered on the 3 of February 2023
. The respondents to this appeal (‘the Receivers’) were appointed receivers and managers to the Shannon Oaks Hotel and Country Club by Zurich Bank (‘the Bank’) on 9 September 2011. The appointment was made pursuant to two debentures of 18 July 2007 – a fixed and floating charge debenture between Beggasa Ltd (‘the Company’) and the Bank, and a fixed charge mortgage between a Mr. Flood and the Bank. The Receivers required funds to conduct the receivership and continue the trade of the company and in February 2012 they borrowed a sum of €293,000 from the Bank.
. The issue in this appeal (which arises from an application for directions brought pursuant to inter alia s. 438 of the Companies Act 2014) (‘CA14’) is whether the Receivers could lawfully repay some of that advance to the Bank out of floating charge realisations, or whether the Revenue Commissioners (‘Revenue’) enjoy priority in respect of some of those monies as a preferential creditor of the Company. The application brings sharply into focus the relationship between the costs and expenses incurred by a receiver appointed on foot of a floating charge who proceeds to carry on the business of the company, and the claims of preferential creditors whose recovery may be adversely impacted by the decision to continue the company's trade.
. Revenue does not dispute that the cost of realising floating charge assets must be paid in priority to the preferential claims. Revenue's difficulty is with being visited with the costs and expenses of a trading receivership. The basic point it makes is that payment of monies to the Bank in respect of a loan to fund the costs and expenses of a trading receivership in priority to preferential claims represented a breach of the statutory priorities governing the application of the proceeds of floating charge realisations contained in s. 440 of CA14.
. The High Court ( [2021] IEHC 110) found that there was no breach of this statutory obligation. It reached that conclusion on the basis that there was an antecedent priority attaching to the costs and expenses of a receivership derived either from the terms of the debenture entered into between the company and the Bank, or alternatively from a common law principle said to be expressed in the case of Buchler v. Talbot [2004] 2 AC 298. The High Court concluded that the loan was an expense of the receivership and that, on either one of these two legal bases, the Receivers were entitled to repay it.
. Revenue says that this was wrong: a receiver appointed under a floating charge (Revenue says) is required by the provisions of s. 440 to ring fence liquid assets as they are obtained so as to ensure that the preferential creditor's claims can be satisfied. It is not entitled (as it is said the Receivers did in this case) to continue to trade the business of the company and to thereby run down the amounts due to the preferential creditor.
. The Receivers, obviously, say that the High Court judge was correct. They contend that the preferential claims of Revenue are necessarily subordinated to the costs and expenses of the receivership and that given that the monies paid to the Bank in discharge of the loan comprised such costs and expenses, Revenue have no basis for objecting to the repayment of that loan.
. The resolution of the issue is complicated by the context and, in particular, by the fact (a) that part of the security was a fixed rather than a floating charge and (b) that there were two borrowers, only one of which was a body corporate. In summary, Mr. Flood was the developer of the Shannon Oaks Hotel and Country Club (comprising a hotel and 39 holiday cottages in Portumna Co. Galway). He leased this premises to the Company, which operated the property. Separate loans were advanced by the Bank to the Company and to Mr. Flood giving rise to the distinct securities to which I have referred. The effect of those debentures was that the Company's leasehold interest in the hotel and apartments was charged in favour of the Bank by fixed charge, Mr. Flood's reversion also being charged in favour of the Bank.
. By September 2011 each was in default, the Company and Mr. Flood, having failed to discharge then outstanding sums of (respectively) €1,603,502.59 and €22,165,873.72. On 5 September 2011 the Bank demanded repayment of these sums. Two days after the demands, the hotel building (but not the holiday apartments) was extensively damaged in a fire, and two days after that again the Receivers were appointed on foot of the powers conferred by each debenture. The evidence is that at the time the receivership commenced the Receivers had cash on hand of €70,956.46. Revenue's preferential claim amounts to €87,317.60.
. The loan was advanced by the Bank to the Receivers on 28 February 2012. The purpose of the advance was stated to be to fund the two receiverships, €90,000 being advanced for the purposes of the ongoing maintenance of the apartments and €202,950 to finance an arbitration claim against the hotel's insurer arising from the fire. The evidence was that this loan was essential to the conduct of the receivership, and that it was ultimately applied to insurance premia, management fees, repairs, utility costs, caretaker wages, security costs, local property taxes, non-principal private residence and household charges,...
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