On 26 May, the Court of Appeal in National Westminster Bank v Spectrum Plus Limited overturned a 2001 Privy Council ruling in the Brumark Investments case, thereby giving banks increased access to the book debts of insolvent companies. Book debts are the sums shown in the company's books as being due to the company, for example, from customers.
The case turned on the distinction between fixed and floating charges. Where a company grants a fixed charge over one of its assets - for example to a bank, as security for a loan - the charge prevents the company from dealing with the asset. By contrast, a floating charge "floats" above the assets of the company, leaving the company free to buy and sell those assets in the normal course of its business until it becomes insolvent or ceases to trade, at which point the floating charge crystallises and the assets become available as security to the holder of the charge, subject to certain creditors, such as the Inland Revenue.
The Brumark case decided that a debenture created a floating (and not a fixed) charge over book debts. The High Court in the Spectrum Plus case followed the Brumark ruling and held that National Westminster Bank ("NatWest") only had a floating charge over the book debts of Spectrum Plus Limited ("Spectrum"), and would not therefore receive any payment from the collection of the book debts until the Treasury, Inland Revenue and Customs & Excise had been paid. NatWest appealed against this decision.
The Court of Appeal found in favour of NatWest, deciding that the bank's debenture created a fixed charge. As a result, the liquidators of Spectrum had to account to NatWest for the book debt proceeds in priority to any other creditor.
The Court of Appeal based its landmark decision on the following: (a) the terms of the debenture prevented Spectrum from disposing of the book debts to a third party before they were collected (for example by factoring) and required it to pay them into a specified account at NatWest; (b) the fact that Spectrum was permitted to draw out sums equivalent to the amount of the book debt proceeds paid in from time to time did not prevent the debenture from operating as a fixed charge, because the bank was entitled at any time to use the book debts to reduce the company's indebtedness; and (c) the intention of the parties had been to create a fixed charge, as reflected in the wording of the debenture itself, so the Court should give effect to this intention.
Commentary
What difference will the Spectrum Plus case make in practice? Where a bank has a debenture which is expressed to create a fixed charge over a company's book debts, the bank will most likely rank in priority to other creditors in relation to those book debts. In turn, this may be of benefit to anyone who has given a personal guarantee to a bank to secure the repayment of a company's loan. To the extent that the bank can recover the loan out of the book debts, this will reduce the risk that the bank will seek to recover repayment of the loan under the personal guarantee.
© RadcliffesLeBrasseur
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