UK: Spectrum Plus - House of Lords decides that the bank´s charge over book debts was floating rather than fixed

Last Updated: 1 July 2005
Article by Rita Lowe

This morning, the House of Lords judges gave their decision in National Westminster Bank plc v Spectrum Plus Limited and others [2005] UKHL 41.

The Lords unanimously upheld the Vice Chancellor’s first instance decision and found that the bank’s debenture created a floating charge over book debts (as opposed to a fixed charge).

To view the article in full please see below:

Full Article

The House of Lords judges gave their decision in National Westminster bank plc v Spectrum Plus Limited and others [2005] UKHL 41. The Lords unanimously upheld the Vice Chancellor’s first instance decision and found that the bank’s debenture created a floating charge over book debts (as opposed to a fixed charge). A summary of the case is set out below.

The bank’s debenture

The debenture in question created what was labelled a "specific charge" over book (and other debts). "Specific charge" in this context was a term used to mean "fixed charge". The debenture contained provisions restricting Spectrum’s ability to deal with its book and other debts, as follows:

"with reference to book and other debts hereby specifically charged [Spectrum] shall pay into [Spectrum’s] account with the Bank all moneys which it may receive in respect of such debts and shall not, without the prior consent in writing of the Bank sell factor discount or otherwise charge or assign the same in favour of any person or purport to do so and [Spectrum] shall if called upon to do so by the bank from time to time execute legal assignments of such book debts and other debts to the Bank."

Spectrum’s book debts were paid into an overdrawn account with the bank. However, Spectrum remained free to draw on the account until the overdraft limit was reached.

Book debts – fixed or floating charges?

In deciding whether or not the book debts were subject to fixed or floating charges, the House of Lords considered what characterised a charge as floating as opposed to fixed. Although the nature of a floating charge has been widely considered by the courts, no full definition has ever been given (a description was given in Re Yorkshire Woolcombers Association ([1903] 2 CH 284) which has been widely used since – but the judge in that case stated that he did not intend to give a definition of the term floating charge).

The House of Lords decided that the essential characteristic of a floating charge is that:

"the asset subject to the charge is not finally appropriated as a security for the payment of the debt until the occurrence of some future event. In the meantime the chargor is left free to use the charged asset and to remove it from the security."

Book debts are usually needed by a company in order to fund continued trading. The difficulty faced by those wishing to create a fixed charge over book debts has been to give the borrower sufficient freedom to use its book debts to fund its business while at the same time giving sufficient control to the chargor in order to satisfy the control requirements of a fixed charge.

The Lords agreed with earlier decisions - that it is conceptually possible to create a fixed charge over book debts, and listed the possible ways. These all involve preventing the chargor from dealing with book debts (so that they are preserved for the benefit of the chargee’s security):

  1. assigning the book debts to the chargee;
  2. requiring the borrower to pay proceeds to the chargee in reduction of the chargor’s outstanding debt;
  3. requiring the borrower to pay the collected proceeds into a blocked account with the chargor bank; or
  4. requiring the borrower to pay the collected proceeds into a separate account with a third party bank over which the chargee has a fixed charge.

The House of Lords considered that the method selected in this case came closest to the blocked account structure.

The Lords considered that the key question in this case was whether the account was one which allowed Spectrum to continue to use the proceeds of book debts as a source of cash flow or whether it was one that kept the proceeds intact for the benefit of the bank’s security. In short, the crucial question was whether or not the account was blocked.

The House of Lords decided that Spectrum’s continuing contractual right to draw out sums equivalent to amounts paid in to the account meant that the account was not blocked. Spectrum’s right to draw on the account was "wholly destructive" of the argument that there was a fixed charge over the uncollected proceeds of book debts.

The House of Lords thus approved Lord Millett’s reasoning in Re Brumark - that formal provisions for a blocked account are not enough "if [the account] is not operated as one in fact."

The bank sought to argue that because the proceeds were paid into an overdrawn account, and the bank was entitled to refuse to allow Spectrum to draw on the account at any time, the bank had "control" over the proceeds (which was sufficient to create a fixed charge over book debts). The Lords rejected this argument. The company effectively remained free to deal with the book debt proceeds by drawing out equivalent amounts (until the bank exercised its right to prevent it from so doing).

Why does it matter?

Book debts can comprise a large part of a company’s assets, so the issue of whether or not they are subject to a fixed or floating charge can have a significant impact on the returns to a charge holder.

This is mostly to do with the returns a charge holder can expect to receive in a formal insolvency in respect of fixed and floating charge assets. When fixed charge assets are realised, the charge holder is entitled to the proceeds of those assets after effectively deducting only the costs of realisation.

In contrast, the proceeds of floating charge assets are subject to the costs of realisation, expenses of the relevant insolvency procedure (most likely to be administration or liquidation), preferential creditors (following the Enterprise Act 2002, mostly employees), and the prescribed part (a percentage of the company’s floating charge asset proceeds – capped at £600,000). Only after these costs have been deducted is the floating charge holder entitled to receive any remaining funds.

Siebe Gorman & Co Ltd v Barclays bank Ltd [1979] 2 Lloyd’s Rep 142

The debenture in the Spectrum case was drafted in similar terms to a debenture that, in Siebe Gorman, was held to create a fixed charge. One of the considerations for the House of Lords was whether or not they should overrule Siebe Gorman. They decided that Siebe Gorman was wrongly decided and should be overruled.

Clearing banks have drafted their standard form debentures in reliance on the Siebe Gorman case for 25 years. Therefore, the bank requested that if Siebe Gorman was overruled, the House of Lords should rule that such a decision would only have prospective effect. The House of Lords stated that although they would never say it would never be appropriate to make a prospective over-ruling, this case did not warrant such treatment.


The final chapter in this long-running and important debate has now been decided in favour of the Crown. Their Lordships rejected the technical legal analysis of bank accounts argument in favour of the more pragmatic approach. Without special blocked account restrictions, borrowers who pay book debt proceeds into their bank accounts (whether in credit or overdraft) expect to be able to (and indeed usually can) draw an equivalent amount out again (provided in the case of an overdrawn account, the borrower is within his agreed limit). This means that borrowers in the position of Spectrum can in practice use their book debt proceeds in the ordinary course, making the charge over them floating.

And so their Lordships overruled the 25 year old judgment of Slade J in Siebe Gorman, albeit reluctantly in deference to the respect in which they generally held his other judgments. The Court of Appeal’s decision in In re New Bullas Trading Ltd ([1994] 1 BCLC) 485 befalls the same fate. Lord Millett’s judgment sitting in the Privy Council in Agnew was adopted.

It seems that to some degree their Lordships were influenced by the purpose of the legislation in favour of preferential creditors giving them priority over floating charge holders. This was originally introduced back in 1897 to meet the problem in the early days of floating charges where floating charge holders were able to "sweep off everything" leaving nothing for the unsecured employees. If book debts in cases like Spectrum were subject to a fixed charge, this would often leave preferential creditors with next to nothing, defeating the priority enjoyed by preferential creditors for two centuries.

This important judgment therefore clears up a long-debated issue and the certainty it creates is definitely to be welcomed. The 100s of outstanding receiverships, administrations and liquidations that have been held up pending this judgment can now be closed.

Outside the immediate parties in Spectrum, the potential victims of the decision are all the stakeholders involved in cases that have long since been closed in reliance upon Siebe Gorman. It was with these in mind that their Lordships considered at some considerable length whether they could make their ruling with only future effect. Their Lordships ultimately decided that they could not do so in this case. All is not completely lost for those involved in past cases where book debts were treated in accordance with what was then believed to be the law, but we now know was not. Apart from arguments of limitation, they may also be able to rely on a defence that they have changed their position and therefore argue that their case should not now be reopened. It remains to be seen whether anyone will bring such a case.

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 01/07/2005.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.