UK: Make Up Your Mind!-BLG Banking Law Briefing

In the recent first instance decision of Re Spectrum Plus Ltd., sub nom National Westminster Bank Plc ("NatWest") v Spectrum Plus Ltd ("Spectrum") (In Creditors Voluntary Liquidation) the Vice- Chancellor, Sir Andrew Morritt, dismissed an application by NatWest for a declaration that the debenture granted to it by Spectrum created a fixed charge over Spectrum’s book debts and their proceeds and an order that the liquidators should account to NatWest for the same.

It had been decided that it was possible to create a fixed charge over present and future book debts in another first instance case, that of Siebe Gorman & Co Ltd. v Barclays Bank Ltd [1979]. In that case, it was held that the debenture granted to Barclays Bank Ltd had done so, following which such debenture became more or less standard form for lenders intending to take a fixed charge over book debts. However, doubt was cast on whether such debenture did in fact achieve such an effect by the Privy Council in the subsequent case of Agnew v Commissioner of Inland Revenue (The "Brumark" case) [2001]. The application by NatWest was an opportunity to clarify the position.

Spectrum had opened an account with NatWest in the Autumn of 1997. NatWest granted Spectrum an overdraft facility on a fully fluctuating basis to meet its working capital requirements. Amounts outstanding pursuant to the overdraft facility were secured by a debenture in the standard form mentioned above, granted by Spectrum to NatWest. Under the terms of the debenture, all book debts were charged by way of specific charge. The debenture contained the following term:

"………..[Spectrum] shall pay into [Spectrum’s] account with [NatWest] all moneys which it may receive in respect of such [book] debts and shall not without the prior consent of [NatWest] sell factor discount or otherwise charge or assign the same in favour of any other person or purport to do so ……………."

In practice, Spectrum collected the proceeds of the book debts and paid them into its account with NatWest, temporarily reducing amounts outstanding under the overdraft facility and re-drawing such amounts as and when they were needed. In October 2001, it was resolved that Spectrum would go into creditors’ voluntary liquidation and liquidators were appointed. The liquidators had collected in many of the book debts but refused to account for them to NatWest.

Before reviewing the authorities on this issue, the Vice- Chancellor noted that the Crown, which had been joined as a respondent in this case, had not argued that there was any material distinction between the form of the debenture considered in Siebe Gorman and the one which was the subject of the present case. Therefore, it was for the Crown to show that the decision made in Siebe Gorman – namely that the debenture created a fixed charge over book debts – was wrong. Otherwise, in the interests of certainty, as well as "judicial comity", the Vice-Chancellor should follow Siebe Gorman.

The Vice-Chancellor was, however, persuaded that Siebe Gorman had been wrongly decided, despite the fact that the decision had been applied and accepted without qualification in many cases since. In Siebe Gorman, Slade J had held that it was possible for a mortgagor to grant "a charge on future book debts in a form which creates in equity a specific charge on the proceeds of such debts as soon as they are received and consequently prevents the mortgagor from disposing of an unencumbered title to the subject matter of such charge without the mortgagee’s consent, even before the mortgagee has taken steps to enforce its security….". Slade J said he saw no reason why the Court should not give effect to the intention of the parties as stated in the debenture that the charge should be fixed. The question whether the decision was correct had been raised in the case of Supercool Refrigeration and Air Conditioning v Hoverd Industries Ltd. [1994] ("Supercool"), where a debenture had been granted in Siebe Gorman form. The judge in Supercool, Tompkins J, did not follow the Siebe Gorman decision, holding that the charge over book debts was a floating charge. The requirement to pay the proceeds of book debts into the company’s account with no restriction on its use of such proceeds meant that the bank did not effectively control those proceeds. The charge would not automatically "fasten" onto those proceeds. The conclusion that there was a floating, not fixed, charge was consistent with the surrounding circumstances of the case. The parties had intended that Supercool would acquire book debts and use their proceeds in the normal course of its business. A restriction on its being able to do so would starve the company of cash and prevent it from trading.

The Vice-Chancellor was also persuaded by an article by Mr Alan Berg entitled "Charges over Book Debts: a Reply" which was published in the Journal of Business Law in 1995 and referred to in Brumark. Mr Berg asserted that Slade J had not explained how he had reached his conclusion in Siebe Gorman that the debenture restricted the company from freely disposing of the book debts. The Vice-Chancellor quoted Mr Berg’s conclusion that, "Siebe Gorman is unsound in deciding that such a general charge is a fixed charge if it requires the company to pay the proceeds into its account with the chargee without expressly prohibiting the company from withdrawing the amounts so paid in."

The Privy Council’s approach in Brumark was therefore considered correct and should be followed. This involved not merely construing the intention of the parties from the language of the debenture. Only once the rights and obligations which the parties intended to confer on each other have been ascertained should the nature of the charge be categorised. Furthermore, categorisation was a matter of law and did not depend on the intention of the parties or the "label" they put on the charge. As noted by Lord Millett in Brumark: "A restriction on disposition which nevertheless allows collection and free use of the proceeds is inconsistent with the fixed nature of the charge……."

The Vice-Chancellor found that Slade J had erred in relying on the description of the debenture as a fixed charge to mean that there was a fetter on the operation of the bank account. Rather than seeking to give effect to the stated intention of a fixed charge, Slade J should have looked to see whether the way in which the charge was operated in practice pointed to a fixed or floating security.

This decision means that there are now two conflicting first instance decisions – Spectrum and Siebe Gorman, prolonging the uncertainty for the hundreds of insolvency practitioners who have been holding onto the proceeds of book debts collected in relation to the hundreds of insolvencies across England and Wales pending clarification of law relating to how such proceeds should be distributed. Whilst it would seem prudent for lenders currently taking security for them to take, and operate, such security in accordance with the principles set out in Brumark, it looks like they will have to wait a little longer to discover for certain whether they have fixed or floating charges in connection with earlier security taken using Siebe Gormanstyle debentures. An appeal to a higher court is needed to clarify the position …. so watch this space.

Spectrum Plus Ltd, Re, sub nom National Westminster Bank Plc v Spectrum Plus Ltd (In Creditors Voluntary Liquidation) [2004] 1All ER 981

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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