Body paying off preferential creditors steps into their shoes to claim same priority status in liquidation.

THE SUPREME COURT

Appeal No 367/06

Fennelly J.

Macken J.

Finnegan J.

IN THE MATTER OF BELL LINES LIMITED (IN LIQUIDATION)

BELL FREIGHT TRANSPORT GROUP LIMITED (IN LIQUIDATION) BELL (MERTENS TERMINAL) LIMITED (IN

LIQUIDATION)

BELVIEW SHIPS AGENTS AND STEVEDORES LIMITED

(IN LIQUIDATION)

AND WATERFORD MULTIPORT LIMITED (IN LIQUIDATION)

AND IN THE MATTER OF THE COMPANIES ACTS, 1963 TO 2003

Judgment delivered by Mr. Justice Fennelly on the 18th day of March 2010.

1. This appeal raises a succinct technical point in a liquidation. Does a body which pays off preferential creditors step into

their shoes and benefit from the preferential status of those creditors?

2. The claim is made by the Insolvency Agency of the United Kingdom in the Liquidation of the Bell group of companies.

The Agency was obliged, following a decision of the European Court of Justice, to discharge the claims of more than 200

Bell employees in the United Kingdom. The Agency claims, with the support of the liquidator, the same right to preferential

treatment in the liquidation as would have been enjoyed by the employees if they had not been paid. The High Court

(Unreported, High Court, Dunne J., 28th April, 2006) rejected the claim. The liquidator appeals. The Port of Waterford

represents the general body of unsecured creditors.

3. The Bell Group was, at one time, an important and successful group of shipping and transport companies, principally

based in the Port of Waterford. On the 4th July, 1997, David Hughes of Ernst and Young, chartered accountants, was

appointed as official liquidator to the companies.

4. A number of employees were based in the United Kingdom; one was in Northern Ireland. Following the collapse of the

group, all employees in the United Kingdom were made redundant. They made their claims against the relevant Insolvency

Service, established in England, for the purposes of Council Directive 80/987/E.E.C. of 20 October, 1980, on the

approximation of the laws of the Member States relating to the protection of employees in the event of the insolvency of

their employer, O.J. L283/23 28.10.1980.That Directive was designed to provide for employees a certain minimum level of

protection in the event of such insolvency. It required the Member States to establish a “guarantee institution.” Article 3

of the Directive provided:-

“1. Member States shall take the measures necessary to ensure that guarantee institutions guarantee, subject to

Article 4, payment of employees' outstanding claims resulting from contracts of employment or employment

relationships and relating to pay for the period prior to a given date.

2. At the choice of the Member States, the date referred to in paragraph 1 shall be: - either that of the onset of

the employer's insolvency;

- or that of the notice of dismissal issued to the employee concerned on account of the employer's

insolvency;

- or that of the onset of the employer's insolvency or that on which the contract of employment or

the employment relationship with the employee concerned was discontinued on account of the

employer's insolvency.”

5. The Agency function in the United Kingdom has been performed by the United Kingdom Department of Government

bearing various names but currently it is titled the Department for Business Innovation and Skills. A similar function in

respect of the employee based in Northern Ireland is performed by the Northern Ireland Department for Employment and

Learning. From this point on, I will simply refer to the UK Agency, as if there were only one.

6. The UK Insolvency Service resisted the claims of the former employees of the group, claiming that they should make

their claims in this jurisdiction. Questions were referred by an Industrial Tribunal to the European Court of Justice. In

Everson and Barrass v. Secretary of State for Trade and Industry and Bell Lines Limited (in liquidation) (Case 198/98)

[1999] ECR I 8903 the Court of Justice determined that the “competent institution……for payment to those employees of

outstanding claims is that of the State within whose territory they were employed.”

7. Thus the UK Agency was obliged, by virtue of Article 3 of the Directive, to discharge the claims of a number of the

employees in respect of wages and a number of other entitlements and did in fact do so. Part of the sums so paid related

to preferential debts due to the employees under the Companies Acts and fall to be considered in the present appeal.

Payments which were made in respect of redundancy and minimum notice are not covered by the relevant section and are

not claimed to rank for preferential treatment.

8. The liquidator applied in the High Court for a determination that the UK Agency should be admitted, subject to

adjudication as a creditor in the Liquidation, in respect of the relevant payments, as a preferential creditor insofar as

payments had been made in respect of Irish preferential debts.

Relevant Statutory Provisions

9. Section 285 of the Companies Act 1963 (as amended) (“the Act of 1963”) deals with preferential claims in a winding

up. The relevant date, for the purposes of the present case is the date of the appointment of the provisional liquidator.

The appeal is concerned with wages and certain other sums due at the relevant date to employees as described in the

section. Section 285(2) of the Act of 1963 provides for three headings, (b), (c) and (d) of preferential payment. Two

more, (h) and (i), were added by section 10 of the Companies (Amendment) Act 1982. The combined provision is, so far

as relevant, as follows:-

“In a winding up there shall be paid in priority to all other debts—

(b) all wages or salary (whether or not earned wholly or in part by way of commission) of any clerk or

servant in respect of services rendered to the company during the 4 months next before the relevant

date;

(c) all wages (whether payable for time or for piece work) of any workman or labourer in respect of

services rendered to the company during the 4 months next before the relevant date;

(d) all accrued holiday remuneration becoming payable to any clerk, servant, workman or labourer (or

in the case of his death to any other person in his right) on the termination of his employment before

or by the effect of the winding-up order or resolution;

(h) all sums due to any employee pursuant to any scheme or arrangement for the provision of

payments to the employee while he is absent from employment due to ill health;

(i) any payments due by the company pursuant to any scheme or arrangement for the provision of

superannuation benefits to or in respect of employees of the company whether such payments are

due in respect of the company's contribution to that scheme or under that arrangement or in respect

of such contributions payable by the employees to the company under any such scheme or

arrangement which have been deducted from the wages or salaries of employees.”

10. In colloquial terms, these headings provide for preferential treatment of amounts due in respect of wages, holiday

pay, sickness benefit and pension rights, when claimed by what the Act of 1963 variously described as clerks, servants,

workmen or labourers, but which the Act of 1982 described by the single term, “employees,” which I will use so far as

possible.

11. The persons primarily entitled to the preferential treatment are the employees themselves. The UK Agency makes its

claim by reference to the additional provision made by section 285(6) of the Act of 1963, as follows:-

“Where any payment has been made—

(a) to any clerk, servant, workman or labourer in the employment of a company, on account of wages

or salary; or

(b) to any such clerk, servant, workman or labourer or, in the case of his death, to any other person

in his right, on account of accrued holiday remuneration;

out of money advanced by some person for that purpose, the person by whom the money was advanced shall, in

a winding up, have a right of priority in respect of the money so advanced and paid up to the amount by which the

sum, in respect of which the clerk, servant, workman or labourer or other person in his right, would have been

entitled to priority in the winding up has been diminished by reason of the payment having been made.”

12. The Act of 1963 was enacted, not only prior to the adoption of Directive 80/987, but prior to accession of Ireland to

membership of what was then the European Economic Community. The question, nonetheless, arises as to whether

payments required to be made by the insolvency agencies of the Member States can come within sub-section (6). The

Oireachtás has made specific provision in respect of payments made under the Protection of Employees (Employers’

Insolvency) Act 1984 (“the Act of 1984”) the Act which implements Directive 80/987 into Irish law. That Act established

the Redundancy and Employers' Insolvency Fund as the Irish guarantee institution, for the purposes of making payments,

some of which come within the scope of section 285 of the Act of 1963, to employees of companies in the event of

insolvency. Section 10 of the Act of 1984 provides, in the relevant part:-

“(1) Where, in pursuance of section 6 of this Act, the Minister makes any payment to an employee in respect of

any debt to which that section applies, any rights and remedies of the employee in respect of that debt (or, if the

Minister has paid only part of it, in respect of that part) shall, on the making of the payment, become rights and

remedies of the Minister.

(2) Without prejudice to the generality of subsection (1) of this section, where rights and remedies become, by

virtue of subsection (1) of this section, rights and remedies of the Minister, there shall be included amongst them

any right to be paid in priority to all other debts under—

(a) section 4 of the Preferential Payments in Bankruptcy (Ireland) Act, 1889; or

(b) section 285, as amended by section 10 of the Companies (Amendment) Act, 1982, of the

Companies Act, 1963

and the Minister shall be entitled to be so paid in priority to any other unsatisfied claim of the employee concerned

being a claim which, but for this subsection, would be payable to the employee in such priority; and in computing

for the purposes of any of the provisions of the said section 4 or the said section 285, as so amended, any limit on

the amount of sums to be paid, any sums paid to the Minister shall be treated as if they had been paid to the

employee.”

The High Court Judgment

13. The liquidator relied upon the wording of section 285 of the 1963 Act, but also submitted that the payments should be

treated as preferential based on a restitutionary right of subrogation to the position of the person whose debt had been

discharged. The ordinary creditors resisted, contending that, in Irish law, there was no provision for preferential status for

the guarantee institution, save as provided for under the Act of 1984.

14. Dunne J. observed that there was no dispute whatsoever regarding the entitlement of the UK Agency to claim, as a

creditor, in the liquidation. She held, however, that there was no entitlement to preferential status, except as provided by

statute. She did not think that section 285(6) could be interpreted so as to grant that status to the UK Agency. If that

were possible, she questioned whether there would have been any need to enact section 10 of the Act of 1984. There

was no provision, she said, within the legislation, for guarantee institutions from outside the jurisdiction to enjoy the

preferential status accorded to the Irish institution.

15. Dealing with the alternative argument, based on equitable principles of restitution, she did not think that those

principles would enable the UK Agency to acquire preferential status, in the absence of express statutory authority.

16. The learned judge also rejected the reliance placed by the liquidator on arguments based on an unjust enrichment.

She could not see how the general body of creditors would be in any way unjustly enriched by the refusal of the

preferential status claimed.

The Appeal

17. The appellant (the liquidator), supported by the UK Agency relied, in the first instance, on section 285 (6) of the 1963

Act and, in the alternative, on general equitable principles of restitution or unjust enrichment. They relied, in particular, on

the principle that this section should receive a "benevolent interpretation." For this purpose, they relied upon the High

Court decision of Carroll J. in Station Motors Ltd v. Allied Irish Banks Ltd [1985] I.R. 756, which does not appear to have

been opened to the learned trial judge. It was submitted that an entity which discharges a preferential liability of a

company in liquidation should not suffer a disadvantage by being reduced to a lower status of debt.

18. Counsel for the Port of Waterford, representing the general body of unsecured creditors, argued that the fact that

the payments in question were made under compulsion had no bearing on the question of priority. In this regard, so to

provide would be to rewrite the statute. The legislature had identified the circumstances in which preferential status

could be enjoyed by the combined effect of section 285 of the Act of 1963 and section 10 of the Act of 1984. He

submitted that the expression “out of money advanced” necessarily meant an advance to somebody else, i.e., to

somebody other than the employee. The ordinary meaning of the word “advanced” is that it refers to monies paid over to

the company as a borrower. There was no loan by the UK Agency; that body had not advanced any money. Furthermore,

any payment, in order to qualify under the subsection must have been made before the winding up: the subsection implies

that the person (employee) receiving the payment must be employed at the time of the payment. Finally, it was

submitted that section 10 of the Act of 1984 and section 285(6) constitute the exclusive statutory basis upon which

persons other than those to whom the priority debts were payable might step into the shoes of those persons.

Decision

19. The claim for preferential status advanced by the UK Agency must be considered by reference to the provisions of

section 285 (6) of the Act of 1963. I do not think that equitable principles of restitution are relevant. The question here is

not the right of the UK Agency to reimbursement. That is not in issue. The only question relates to priority.

20. I would thus express the question to be decided in the following way. The employees of the companies, based in the

UK (including Northern Ireland) had claims in the liquidation which enjoyed preferential status to the limited extent

provided for in section 285 (2). For example, only four months wages come within the provision. The UK Agency

discharged those payments because it was obliged by law to do so.

21. It is not contested that the UK Agency is entitled to prove as an unsecured creditor in the liquidation for sums

including those representing the employees’ preferential claims. The precise legal basis of that entitlement has not been

spelled out in the High Court judgment. It is clear that the UK Agency discharged liabilities of the company by virtue of a

legal obligation. Where any person, under compulsion of law, makes a payment for which another person is primarily liable,

the first person is entitled to recover the amount of the payment from the second person. The result is the same as

where a payment is made to a third-party at the request of a person. On the facts of the present case, these conditions

are satisfied. The companies (in liquidation) were liable to their employees for wages and other employment benefits. The

UK Agency was legally compelled, by virtue of the Directive 80/987/EC, to discharge those payments. It did so.

22. The decisive question then is, of course, whether those payments were made to the employees “out of money

advanced” by the UK Agency “for that purpose.” It is entitled to preferential status only if that question receives an

affirmative answer.

23. In Station Motors Ltd v. Allied Irish Banks Ltd [1985] I.R. 756, a bank had advanced money to a company, part of

which it knew was to be used to pay wages, although there was no clear division between those payments and more

general payments. Carroll J. found, at p. 764:- "the bank in fact advanced money knowing part of it would be used for

wages. Therefore, in my opinion, insofar as that part is concerned, they are entitled to the benefit of subrogation

provided in s. 285, sub-section 6.” In reaching this conclusion, she had relied on a judgment of Plowman J. in Re Rampgill

Mill Ltd. [1967] 1 Ch. 1138, whose facts she summarised as follows:

“This was an action between a bank and a liquidator and it was common ground that within the limit of £500 per

week, there was no restriction on the purpose for which cheques could be drawn on the bank. It was also common

ground that the arrangement was made with wages in mind. In that case, as in this, the bank did not insist on a

wages account being opened and operated in such a way as to allow the bank to get maximum priority.”

Plowman J expressed the following views at page 1145:-

"In my judgment, counsel for the liquidator seeks to apply too rigid a test. The object of section 319 [4]" [the

equivalent of s. 285, sub-s. (6), of the Companies Act, 1963], "as I see it, was to establish a principle of

subrogation in favour of banks [although its operation is not, of course, confined to banks], and the subsection

should, therefore, in my judgment, be given a benevolent construction rather than one which narrows the limits of

its operation . . . In the present case, the bank clearly had a purpose in advancing money to the company --

namely, the purpose of enabling it to meet its commitments. I then ask myself, 'what commitments?', and my

answer, so far as the money provided under the Alston arrangement is concerned, is wages, which were the whole

raison d'etre of that arrangement.”

24. The problem addressed in those two cases arose from the uncertain or loose arrangements between the respective

banks and the company with regard to the use of the monies advanced. No such problem arises in the present case. The

money was paid directly to the employees to discharge ascertained debts. Nonetheless, these cases establish a principle

of "benevolent construction” of section 285(6) of the Act of 1963.

25. As I see it, three objections based on interpretation of the sub-section are raised on behalf of the general body of

creditors, namely: that the UK Agency did not "advance" the money; that the payments were not made out of a sum

advanced, but were paid directly to the employees; that the subsection applies only to monies advanced prior to the

winding up.

26. The court was referred to dictionary definitions and authorities with regard to the meaning of the word "advance." So

far as relevant to the present context the following from the Oxford English Dictionary (1989 2nd ed.) is useful: "The

advancing or paying beforehand of money; payment in advance.” It is, of course, true that "advance" may also and

frequently does refer to the act of lending money. But that is not its exclusive meaning. It may, depending on the

context, refer to a prepayment of sums to be due in the future. I am satisfied that the UK Agency made payments to the

employees of the companies in advance of their rights being discharged in the liquidation. If they had not been paid by

the UK Agency, the employees would have had to await payment at some uncertain future date in the course of the

liquidation. In that sense, therefore, the UK Agency advanced the payments to the employees.

27. The second point is somewhat more difficult. The UK Agency did not make the payments to the employees “out of”

any identifiable larger sum. Nor were they made to the companies or to any other intermediary, as was the case in Station

Motors v. Allied Irish Banks Ltd and Re Rampgill Mill Ltd., both already cited. It is accepted that the sub-section has

normally been invoked where a bank or other lender has “advanced” money to the company for the payment of wages.

But the subsection does not require either payment to the company or another intermediary or that the monies be

advanced out of any larger sum. What is required, in the first instance is that a “payment has been made...,” which is

indisputably the case. As a matter of simple fact, they were made out of monies advanced by the UK Agency. While the

language may suggest that there is a larger fund from which the individual payments come, there is nothing to suggest

that such a fund has to be established outside or independent of the payer’s own funds. Thus, I do not see the

prepositions “out of” as obstacles to the application of the section in this case.

28. The third point is whether the sub-section imposes a temporal limit on the advance of the monies for which

preferential status is claimed. Must they have been paid prior to the winding up? There is nothing to that effect in the

section. Subsection (2)(b) speaks of "all wages or a salary…… of any clerk or servant in respect of services rendered to

the company during the 4 months next before the relevant date…” It does not refer to a former employee. Subsection

(6) speaks of a payment which "has been made…,” without specifying that the payment must have been made prior to

the “relevant date” carefully specified in subsection (2). That sub-section refers, in the case of paragraphs (b) and (c) to

wages or salary "in respect of services rendered to the company during the four months next before the relevant

date…” and in the case of paragraph (d) to "all accrued holiday remuneration…… payable… on the termination of his

employment before or by the effect of the winding- up order.” These provisions relate to amounts becoming due to

employees prior to the winding up. Although they are concerned with those employees’ rights in the winding up, they do

not refer to them as “former employees.” Nor does subsection 6 speak of former employees. Accordingly, the latter

subsection is capable of referring to payments made to employees, who are technically no longer in the employment of

the company, so long as those payments are made in discharge of liabilities arising, as required by subsection (2), in

respect of employment during the period prior to the relevant date.

29. Finally, I should refer to the significance attached by the learned trial judge to section 10 of the Act of 1984, which

makes special provision allowing the Minister, acting as the Irish guarantee institution, to claim priority under section

285(6) of the Act of 1963. Clearly, the legislature did not contemplate a case such as the present where the employees’

claims have been discharged by the guarantee institution of another member state. The UK Agency has not attempted to

make any claim pursuant to section 10 of the Act of 1984. Clearly it could not having regard to its terms. The exclusion of

the guarantee institutions of other member states may well have been an oversight. The Act was passed long before the

decision in Everson and Barrass v. Secretary of State for Trade and Industry and Bell Lines Limited (in liquidation),

already cited. The exclusion of the UK Agency from the preferential rights available to the Irish agency might appear to

discriminate between the guarantee institutions of the member states. It may be that the principle of "conforming

interpretation" could have been invoked on its behalf. See Case 14/83 Von Colson and Kamann v. Land Nordrhein-

Westfalen [1984] ECR 1891; Case C-106/89 Marleasing SA v. La Comercial de Alimentacion SA [1990] ECR I-4135. This

point has not been argued and I express no concluded view. It would tend to lead to the same result as is proposed in

this judgment. For present purposes, however, it suffices to state that this omission from the Act of 1984 cannot affect

the proper interpretation of section 285 (6) of the Act of 1963, if the latter provision, properly interpreted, allows for the

claim of the UK Agency.

30. For the reasons already given, I am satisfied that the UK Agency is entitled to appropriate priority pursuant to section

285(6). I would allow the appeal and, instead, make an order pursuant to paragraph D of the notice of motion returnable

for 11 July 2005.