High Court: Receiver costs take priority over preferential creditors when winding up a company
The High Court has refused an application by Revenue to declare that the receivers to a company failed to properly discharge monies from the winding up of a company. It was held that the receivers were entitled to repay loans which were taken out to fund the receivership ahead of the preferential creditors to the company.
It had been claimed by Revenue that the receivers had failed to comply with section 440 of the Companies Act 2014 because they had repaid the receivership loans before paying out to other preferential creditors. In the High Court, Mr Justice David Keane held that the receiver’s costs of realising the assets and the receiver’s own expenses may be paid first out of the proceeds of the assets before preferential debts are paid.
The company, Beggasa Limited, leased the Shannon Oaks Hotel and Country Club from Mr Cosmo Flood, a developer. The company operated the hotel and 39 holiday apartments. The company held loans with Zurich Bank, secured by a debenture and a mortgage.
The company defaulted on the loans and the receivers, Mr Aengus Burns and Mr Paul McCann were appointed by the bank over the company’s assets under the debenture. The bank subsequently agreed to provide loans totalling €293,000 to fund the receivership. This included €90,000 to fund the ongoing maintenance of the 39 apartments and €202,000 to fund an arbitration claim arising out of unrelated fire damage to the hotel.
Critically, the debenture under which the receivers was appointed stated that any money which was borrowed by the receivers was defined as a receivership expense.
A total of €234,000 was borrowed by the receivers and €208,700 was repaid to the bank after the sale of the company’s secured assets. The receivers wrote to the Revenue (as a preferential creditor) and confirmed that there was no dividend available to any class of creditor in the receivership after all the costs were paid.
It was argued by Revenue that, since the company’s monies became due and owing after the creation of the debenture, the receivership loans fell within the wide category of “secured liabilities” under the debenture. Second, it was argued that the receivership loans, as secured liabilities, became part of the principal or interest claimed under the debenture and were wrongly repaid to the bank in ignorance of the preferential claim of Revenue. Essentially, Revenue claimed that the receivers had failed to properly prioritise the Revenue’s status as preferential creditor under section 440 of the Companies Act 2014.
In response, the receivers agreed the section 440 of the 2014 Act provided that preferential creditors are paid first as creditors in a winding up. However, it was claimed that section 617 in Part 11 of the 2014 Act provided that a receiver’s costs and expenses are to be paid out “in priority of all other claims.” As such, the receivers claimed they were correct to apply the monies from the sale of the company’s assets to the receivership loan of €234,000.
An application was later brought by Revenue seeking declarations that the receivers had failed to comply with their obligations under section 440 of the 2014 Act and an order for payment of the monies to the preferential creditors.
The High Court refused the application. After outlining the law under the 2014 Act, the court analysed the legal arguments and held that there was a “fundamental difficulty” with the Revenue’s position that the receivership loans were “secured liabilities.” The court said that there was a specific clause in the debenture which deemed that receivership borrowings would be a receivership expense and that receivership expenses would be paid in priority of all other secured creditors.
Referring to the case of Buchler v. Talbot  2 WLR 582, the court noted that the English courts had determined that costs of preserving/realising assets and a receiver’s remuneration ranked higher in priority than preferential debts in the receivership. The court was satisfied that this was also the correct position as a matter of Irish law. It was held that “receivership borrowings (as a receivership cost or expense) are distinct from company borrowings secured by the debenture and are not affected by the priority given to preferential payments under that provision.”
The court also rejected the submission from Revenue that the ‘costs, charges and expenses properly incurred in the winding up of a company’ identified in s. 617 in Part 11 fell within the description in s. 440(1) of the 2014 Act. Mr Justice Keane held that the priority of receivership costs derived either from contract law or common law and was not found in statute. As such, the court held that the 2014 Act did not alter the position that receivership costs ranked higher in priority than preferential debts.
The court also rejected Revenue’s claim for directions on the conduct of the receivership under section 438 of the 2014 Act. The directions were sought as a preliminary step towards a wider review of conduct of the receivership and the court said that it was inappropriate to exercise the powers under section 438 in this way. To fulfil the requirements of the section, Revenue was required to show evidence of prejudice against an established right. In the circumstances, the court ruled that the application was “at best, premature and, at worst, misconceived.”
The court rejected the application and refused to make orders directing the repayment of the monies by the receivers. The parties were invited to agree the terms of the final order and the issue of costs.
© Irish Legal News Ltd 2021