The Revenue Commissioners v Aengus Burns and Paul McCann (as Receivers and Managers Over the Property and Assets of Beggasa Ltd ((in Receivership)))

• Jurisdiction: Ireland
• Judge: Mr. Justice David Keane
• Judgment Date: 19 February 2021
• Neutral Citation: [2021] IEHC 110
• Docket Number: [2019 No.88COS]
• Court: High Court
• Date: 19 February 2021

In the Matter of Beggasa Limited (In Receivership)

And in the Matter of the Companies Act 2014

Between

The Revenue Commissioners

Applicants

and

Aengus Burns and Paul McCann (As Receivers and Managers Over the Property and Assets of Beggasa Limited (In Receivership))

Respondents

[2021] IEHC 110

[2019 No.88COS]

THE HIGH COURT

CHANCERY

Directions – Declarations of right – Companies Act 2014 s. 440 – Applicants seeking directions and declarations of right – Whether the respondents had failed to comply with the requirement under s. 440(1) of the Companies Act 2014 to pay certain taxes as preferential debts of the company in priority to the bank’s claim for payment of principal and interest under that debenture

Facts: The applicants, the Revenue Commissioners (Revenue), applied to the High Court seeking various directions and declarations of right pursuant to s. 438 of the Companies Act 2014 against the respondents, Mr Burns and Mr McCann (the receivers), as receivers and managers of the property of Beggasa Ltd (the company). The receivers were appointed under a debenture originally held by Zurich Bank (the bank), secured by fixed and floating charges over the company’s property. Revenue alleged that the receivers had failed to comply with the requirement under s. 440(1) of the 2014 Act to pay certain taxes as preferential debts of the company in priority to the bank’s claim for payment of principal and interest under that debenture. The directions and declarations of right sought by Revenue, as a creditor of the company, were as follows: (1) a declaration the receivers failed to comply with the provisions of s. 440 of the 2014 Act in that they discharged certain claims made by the debenture holder in part from assets secured by the bank’s floating charge over the company’s assets, in priority to the claims of the preferential creditors of the company; (2) a declaration that the receivers, in failing to pay any dividend to the company’s preferential creditors, have failed to comply with the requirements of s. 440 of the 2014 Act; (3) an order directing the receivers to discharge the payments due to the preferential creditors of the company in accordance with s. 440 of the 2014 Act; and (4) an order determining the sum of money that should have been made available to pay the preferential creditors of the company or an order giving directions on how to determine that sum.

Held by Keane J that, whether the issue was approached as one of the proper construction of the terms of the debenture or one of the correct interpretation of the words ‘any claim for interest or principal in respect of the debentures’ in s. 440(1) of the 2014 Act, although the receivers undoubtedly acted as agents for the company both under the debenture and at common law, receivership borrowings (as a receivership cost or expense) were distinct from company borrowings secured by the debenture and were not affected by the priority given to preferential payments under that provision. Keane J did not accept that the receivers were in breach of s. 440(1) of the 2014 Act in defraying €57,905.67 of the receivership loan of €234,589.33 from the pool of funds subject to the company’s floating charge, as he concluded that the payment concerned was more properly described as the payment of a cost or expense in that receivership than as the repayment of principal or interest under the debenture. Keane J held that while appropriate directions may be a fitting remedy for unfair prejudice caused by a receiver’s failure to engage, either properly or at all, the directions procedure is not intended to provide a creditor with an alternative to that engagement. As matters stood, Keane J concluded that an application on the grounds identified was, at best, premature and, at worst, misconceived.

Keane J held that the application for the reliefs set out in the notice of motion would be refused.

Application refused.

JUDGMENT of Mr. Justice David Keane delivered on the 19 February 2021

Introduction

1 The Revenue Commissioners (‘Revenue’) move for various directions and declarations of right, pursuant to s. 438 of the Companies Act 2014 (‘the 2014 Act’) against Aengus Burns and Paul McCann (together, ‘the receivers’), as receivers and managers of the property of Beggasa Limited (‘the company’). The receivers were appointed under a debenture originally held by Zurich Bank (‘the bank’), secured by fixed and floating charges over the company's property. Revenue alleges that the receivers have failed to comply with the requirement under s. 440(1) of the 2014 Act to pay certain taxes as preferential debts of the company in priority to the bank's claim for payment of principal and interest under that debenture.

Background

2 The company was incorporated in 2006. It leased the premises known as the Shannon Oaks Hotel and Country Club in Portumna, County Galway, from the developer of that property, Cosmo Flood. The property comprised a hotel and 39 holiday apartments, both of which the company operated.

3 On 18 July 2007, the company entered into a debenture with the bank as security for loans that the bank made to the company under facility letters of 25 May 2007 and 17 December 2010. The debenture created fixed and floating charges over the company's assets.

4 Mr Flood mortgaged the property to the bank on the same date, as security for loans that the bank made available to him under separate facility letters of 25 May 2007 and 25 February 2009.

5 On 5 September 2011, the bank wrote to the company, asserting that it was in default on its loans and demanding immediate repayment of the aggregate sum of €1,603,502.59 in principal and accrued interest and fees.

6 On the same date, the bank wrote to Mr Flood in similar terms, demanding repayment by him of the sum of €22,165,873.72.

7 To compound those difficulties, two days later, on 7 September 2011, a fire caused extensive damage to the hotel building on the property.

8 Two days after that, by deed made on 9 September 2011, the bank appointed Aengus Burns and Paul McCann as joint receivers and managers over the company's assets secured by the debenture (‘the company receivership’). By a separate deed made on the same date, the bank appointed the same persons as receivers over the property mortgaged by Mr Flood (‘the Flood receivership’)

9 By letter dated 28 February 2012, the bank agreed to provide the receivers with a loan facility of up to €293,000 to fund those receiverships.

10 On 1 December 2015, Revenue wrote to the receivers, outlining the company's outstanding PAYE and VAT obligations and inquiring about the dividend that would be available to the company's preferential creditors. The receivers replied on 11 December 2015 that, according to their records, the sum due to preferential creditors was €100,344, comprising the company's outstanding VAT and PAYE/PRSI liabilities, thus implying that Revenue was the company's only preferential creditor. The receivers' letter continued that the current draft estimated outcome statement showed an 80% dividend available to preferential creditors. On 15 December 2015, Revenue wrote to accept the receivers' proposal of the same date, whatever that may have been, confirming as they did so that the preferential payment due to them from the company was then €87,317.60, comprising PAYE/PRSI of €53,117.60 and VAT of €34,200.

11 Two and a half years later, on 13 June 2018, the receivers wrote again to Revenue, stating in material part:

‘Please be advised that there is no dividend available to any class of creditor in the receivership. I do note that [we] confirmed in [our letter of 11 December 2015] that a dividend would be available to Revenue of c. €80k. However, this confirmation was issued in error and was not the correct position in the receivership.

In this regard, I have enclosed at Appendix B the receivership's receipts and payments accounts prepared on a fixed and floating charge basis. Please note that the property was sold in 2016.

Please note that the assets subject to the fixed and floating charges were the sale proceeds for the property including fixtures, fittings, hotel furnishings, apartment furnishings, apartment income, debtor receipts, salvage stock and marketing rebate.

The only asset subject to the fixed charge was the insurance settlement received in relation to the damage caused by a storm at the Hotel. The assets captured by the floating charge only included the cash on-hand received at the commencement of the receivership and the debts collected in the receivership.

You will see in the enclosed receipts and payments account that the fixed charge holder was required to provide a loan facility in the receivership in the sum of €234,589 in order to fund and discharge receivership costs as they arose. Following the sale of the Property the fixed charge holder received a payment of €208,570 in relation to the loan provided to the receivership.’

12 The document at Appendix B to that letter is a combined statement of the assets charged by both the company and Mr Flood, intermingling the income and expenditure in the receiverships of each, while allocating those sums between fixed and floating charges. Some income or expenditure is attributed to the fixed charges; some to the floating charge; and some is apportioned between fixed and floating charges in the ratio of 72:28, which was applied by the receivers. So, for example, the receivers' drawdown of the bank's loan of €234,589.33 appears as a receipt in the fixed charge asset column; the company's cash in hand of €70,956.46 appears as a receipt in the floating charge asset column; and the partial repayment of the bank loan in the sum of €208,570, apportioned in the ratio 72:28, appears as a payment of €150,664.33 in the fixed charge asset column and one of €57,905.67 in the floating charge asset column.

13 Revenue wrote to the receivers...