Crowley v Northern Bank Finance

• Jurisdiction: Ireland
• Judge: KENNY J.:
• Judgment Date: 01 January 1981
• Neutral Citation: 1980 WJSC-SC 819
• Court: Supreme Court
• Docket Number: [1977 No. 710 Sp.]
• Date: 01 January 1981

CROWLEY v. NORTHERN BANK FINANCE

IN THE MATTER OF CREATION PRINTING COMPANY LIMITED

BETWEEN/

LAURENCE CROWLEY

Plaintiff

and

NORTHERN BANK FINANCE CORPORATION LIMITED AND G.P. KELSO LIMITED

Defendants

1980 WJSC-SC 819

O'Higgins C.J.

Kenny J.

Parke J.

No. 710 Sp./1977

(281/1978)

SUPREME COURT

1 Judgment delivered the 24th day of June 1980 by KENNY J.: [Nem. Diss]

2 Section 288 of the Companies Act, 1963, in so far as it is relevant to this application, reads:

"288(1)...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 shell, 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"...

.

3 When a floating charge on the undertaking or property of a company is created and the company is ordered to be or resolves to be wound up within 12 months afterwards, the burden of establishing that the company was solvent at the date of the debenture rests on the debenture holder. The charge is invalid unless something is proved. Therefore, the proving of the conditions which exempt the charge from invalidity rests on the holder of the charge.

4 On 4th June, 1975, Creation Printing Company Limited ("the printing company") gave three charges on its assets: the first to the Northern Bank Finance Corporation Limited ("the Bank"), the second to Foir Teoranta and the third to the Northern Bank. The charges were to secure the payment of the amounts already advanced by these three institutions (about £305,000) to Creation Group Limited ("the parent company"). There was no payment made by any of these institutions at the time of or subsequent to any of these charge. On 23rd December, 1975 the printing company passed a resolution for voluntary winding up.

5 So the net question which the liquidator poses is whether the printing company was solvent immediately after the three charges were given.

6 "Solvent" and "insolvency" are ambiguous words. It has now been established by the decided cases that, for the purposes of s. 288, the test to be applied in determining this is whether immediately after the debenture was given, the company was able to pay its debts as they became due. The question is not whether its assets exceeded in estimated value its liabilities or whether a business man would have regarded it as solvent (Ex Parte Russell: In re Butterworth L.R. (1882) 19 Ch. D. 588: In re Patrick and Lyon Ltd. 1933 Ch.786). The question whether a company was solvent on a specified date is one of fact and involves many difficult inferences. If there is or is likely to be a large deficiency of assets when the liquidation starts, the temptation to hold that the company was not solvent when the charge was given is strong. But the deficiency may have been caused by some change in economic or market conditions happening after the charge was given. So an examination of the financial history of the company both before and after the charges were given is necessary.

7 Although the solvency of the company is a question of fact, some guidelines as to how this question is to be approached are given by the decided cases. Ex parte Russell L.R. (1882) 19 Ch. D. 588related to s. 19 of the Bankruptcy Act, 1869 which provided that any settlement of property made by a trader not being made in contemplation of marriage or in favour of a purchaser or incumbrancer should, if the settlor became bankrupt at any subsequent time within 10 years after the date of such settlement, be void against the trustees in bankruptcy "unless the parties claiming under such settlement can prove that the settlor was at the time of making the settlement able to pay all his debts without the aid of the property comprised in such settlement". Mr. Butterworth was a baker: he had traded profitably and bought some houses as an investment. In 1878 he settled these in favour of his wife and children. He then purchased a grocery business in which he lost money. He filed a bankruptcy petition in 1881. He had continued to carry on his bakery business after the purchase of the grocery business and when the settlement was impeached, he claimed that in deciding whether he was solvent in 1878, the property, assets and stock in trade of the bakery business should be taken into account. Lord Justice Lindley dealt with this contention in these words:

"I also think the settlement falls within the 91st section of the Bankruptcy Act. When we look at the words of that section, and have to consider whether a man is able to pay his debts, we must not merely look at the amount of his assets and liabilities, but we must consider the position which he is assuming. If, for example, this baker had been retiring from trade, of course we must have taken into account all his pots and shovels, the goodwill of his business, and everything else; all those things would be the means of paying his debts. But, if he is going on with his bakers business, it appears to me idle that we should take such things into account as assets. He must be able to pay his debts in the way in which he proposes to pay them, that is by continuing his business".

8 Lord Justice Lindley's words were written in 1882 in relation to an individual. At that time floating charges by a company were rare. Their validity had been recognised only in 1870 in the celebrated Panama Nev Zealand Case (187O) L.R. 5 Ch. 318. His remarks show that when considering whether a company whose directors intend to carry on its business when they give the floating charge was solvent at that date, its fixed and moveable assets are not to be taken into account when determining whether it was solvent. The power of the company to borrow money on the security of another charge on the assets given after the floating charge under attack must however be taken into account. This necessarily involves the court in an inquiry as to whether any creditor would advance money to the company on the security of another and later floating charge which would...