Characterisation of Fixed and Floating charges



An analysis of the decision of the House of Lords in Re Spectrum Plus Ltd. (2005)

Introduction

This essay aims to analyse the distinction between fixed and floating charges by exploring the development of the law with respect to the securitisation of book debts and examining the decision National Westminister Bank plc v Spectrum Plus Ltd. (Re Spectrum Plus Ltd.) [2005] UKHL 41. It does so by first looking at fixed and floating charges, the distinction between them and why this distinction is important. It goes on to examine case law that determined the classification of charges with respect to book debts. It looks at the uncertainty in the law and how Re Spectrum Plus attempted to clarify the law. This essay goes a step further to look at the implications of the decision and whether it has in fact made the law clear.

Characterisation of Fixed and Floating charges

The distinction between fixed and floating charges is essential as it determines the resolution of priority disputes at the event of insolvency. A fixed charge or specific charge as per Illingworth v Holdsworth [1904] AC 355, 358, is one that ‘fastens on ascertained and definite property’. Fixed charges are often preferred by chargees as they have priority over all creditors and the assets cannot be disposed of by the charger without the consent of the chargee. Floating charges are ‘ambulatory’ and the debtor retains rights to deal with the charged assets until the event of insolvency which causes the floating charge to crystallise and become fixed. Thus, chargors or debtors, prefer floating charges to fixed charges as the latter would make it ‘impossible for the company to carry on business in the ordinary way’ without the chargee’s consent as per Agnew v Commissioner of Inland Revenue (Re Brumark Investments Ltd) [2001] 2 A.C. 710, 13. However, preferential creditors would have priority over the floating charge holders or the banks as per sections 40 and 175 2(b) Insolvency Act 1986. The three characteristics of a floating charge were identified by Romer LJ in Re Yorkshire Woolcombers Association Ltd [1903] 2 CH 284, 295. Firstly, it had to be a charge on the present and future assets of the company. Secondly, it has to belong to a class that changes from time to time in the ordinary course of business. Thirdly, the company could carry on its business in the ordinary way with respect to the charged assets until the occurrence of a future step or event such as insolvency. This third feature is known to be the ‘essential characteristic’ or the ‘hallmark of a floating charge’.

The characterisation of charges is an unsatisfactory area of the law and there is a plethora of academic literature and case law that address this issue. Siebe Gorman v Barclays Bank Ltd., [1979] 2 Lloyds Rep. 142, established that fixed charges could be created over future book debts. Re Brightlife [1987] 1 Ch 200 commenced the ‘movement away’ from Siebe Gorman as it held that if the chargor was allowed to place the book debts outside the control of the bank or chargee, it would be characterised as a floating charge. A persuasive New Zealand authority, Supercool Refrigeration and Air Conditioning v Hoverd Industries Ltd. [1994] 3 NZLR 300, also held that the absence of any restriction on the company’s use of the book debt would deem it to be a floating charge rather than a fixed charge. Subsequently, Re New Bullas Trading, [1993] BCLC 1389 (Knox J) [1994] 1 BCLC 485 (CA), held that the intention of the parties is important to determine whether the charge is a fixed or floating charge. However, Re New Bullas was held to be ‘fundamentally mistaken’ by the Privy Council in Agnew. It was held that the intention of the parties did not matter and a ‘charge cannot be a fixed charge however they may have chosen to describe it’. These aforementioned cases caused confusion and legal uncertainty among banks and practitioners. Re Spectrum Plus

The uncertainty in the law was clarified to some extent with this decision. Spectrum Plus, a manufacturer of dyes entered into an agreement with National Westminster Bank Plc to borrow money and created a specific charge for the overdraft. The money was supposed to be paid into a bank account with the bank, however, there were no restrictions placed on the company’s the use of the account. The bank did not ‘exercise any control over the use’ of the account by Spectrum. Thus, when the company went into voluntary liquidation, there was uncertainty as whether the bank or the other creditors would take priority over the book debt. The main issue was similar to Siebe Gorman and was whether the security over the book debts was a fixed or floating charge. At first instance, it was decided that although the decision in Siebe Gorman was to give effect to the intention of the parties, it was ‘wrongly decided’ and the Agnew decision was favoured instead.

This was overturned in the Court of Appeal as the doctrine of precedent would make New Bullas binding on the court, preventing it from following the Privy Council decision in Agnew. The fact that the account was held in the chargee bank was noted as important due to the ‘nature of the relationship between the banker and the customer’. Lord Phillips held that the Siebe Gorman decision ‘acquired the meaning and effect’ after being in use for twenty-five years. The House of Lords however reversed the Court of Appeal judgement. It was noted that the bank account in question was not ‘blocked’ as in Re Keenan Bros. Ltd. [1986] BCLC 242. The court emphasised on the ‘commercial nature and substance of the arrangement’, thus making the test for characterisation one of ‘substance and not form’. The lack of ‘restrictions’ on the account resulted in the courts overruling Siebe Gorman and stating that the charge over the book debt was a floating charge.

Implications

The characterisation of charges depends on the extent of ‘control’ over the assets and ‘commercial realism’ to assess the existence of this control as suggested by Addy. The unanimous decision by the House of Lords was indeed a step towards legal certainty. However, uncertainty still lurks as to the possibility of having fixed charges over book debts. The House of Lords did not explicitly state that fixed charges over book debts were impossible, yet academics note that there is ‘little or no scope’ for fixed charge characterisation. Sealy and Hooley suggest a practical approach of accepting that fixed charges over book debts as ‘a thing of the past’. Gullifer and Payne noted the practical problems of having a fixed charge over a book debt such as the requirement of consent which make it expensive and time-consuming for the chargee. The Spectrum decision was welcomed by creditors because floating charges are ‘designed to enhance the position of creditors other than its holder’. It can be regarded as the first step towards complete certainty in this area of law.

Conclusion

Thus, this essay demonstrates the analysis in the Re Spectrum Plus decision and has done so by discussing the distinction between fixed and floating charges while exploring the case law prior to this decision. It has briefly examined the impact of the decision as well, by welcoming the limited legal certainty it offers.



Table of Legislation

Insolvency Act 1986

Table of Cases

UK:

Agnew v Commissioner of Inland Revenue (Re Brumark Investments Ltd) [2001] 2 A.C. 710

Brightlife Ltd., Re [1987] 1 Ch 200

Illingworth v Holdsworth [1904] AC 355

National Westminister Bank plc v Spectrum Plus Ltd. (Re Spectrum Plus Ltd.) [2005] UKHL 41

New Bullas Trading, Re [1993] BCLC 1389 (Knox J) [1994] 1 BCLC 485 (CA)

Siebe Gorman v Barclays Bank Ltd. [1979] 2 Lloyds Rep. 142

Yorkshire Woolcombers Association Ltd, Re [1903] 2 CH 284

New Zealand: Supercool Refrigeration and Air Conditioning v Hoverd Industries Ltd. [1994] 3 NZLR 300

Ireland : Keenan Bros. Ltd., Re [1986] BCLC 242

Bibliography

Books

Burrows A, English Private Law, (OUP 2013)

Gullifer L and Payne J, Corporate Finance Law Principles and Policy, (second edition, Hart Publishing)

Omar P(ed.), International Insolvency Law: Themes and Perspectives (Ashgate, 2008)

Sealy LS and Hooley RJA, Commercial Law Text, Cases, and Materials (Fourth Edition OUP 2009)

Journal Articles

Addy C, ‘Fixed and Floating Charges over Book Debts – the Implications of the House of Lords’ Decision in Re Spectrum Plus Limited, Part I’ [2010] Fixed and Floating Charges Landmark Articles, International Corporate Rescue – Special Issue, 16

Andreson K, ‘The Spectrum Plus Case’ (2005) 16 International Company and Commercial Law 405-410

Baird K, Sidle P, ‘Case Comment Spectrum Plus: House of Lords decision – a cloud with a silver lining?’ (2005) 18 Insolvency Intelligence 113

Flood P, ‘Spectrum Plus, Legal and Practical Implications’ (2006) 17 International Company and Commercial Law Review, 78

Levy N, ‘Fixed with a floating charge – some implications of Spectrum for Banks’ (2005) 18 Insolvency Intelligence 140

Pogue L, ‘The Spectrum Plus Case: Fixed or Floating Charges over Book Debts in England” (2005) 9 N.C. Banking Inst. 419

Yeowart G, ‘Why Spectrum Plus is Bad News for Banks’ (2005) 21 International Financial Review 19

16/08/2018

Ramya B.T. 


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