Vol 1 (2004) - Issue 4

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An 'Unsatisfactory Area of the Law' - Fixed and Floating Charges Yet Again

News of the Court of Appeal’s unanimous decision on fixed and floating charges in the test case, National Westminster Bank plc v Spectrum Plus Ltd & Ors, is now a little stale, but incredulity over the result persists. Few lawyers had correctly predicted the outcome. If Lord Phillips MR is right a bank’s charge will be fixed so long as the proceeds obtained by the debtor from any sale of the charged assets are paid into the debtor’s account with the lending bank. How the account is then operated is immaterial. In particular, the debtor is free to use the account in the ordinary course of its business, subject only to any contractual restrictions the bank cares to impose. Put like this, the decision is astonishing. All the post-insolvency advantages of fixed security can be obtained without any of the pre-insolvency disadvantages: the debtor can sell the charged assets in the ordinary course of its business, pay the proceeds to the bank, and then use the account at will; if the debtor defaults, the bank can realize its fixed security over the charged assets without a thought for statutory floating charge invalidity provisions, or for the claims of preferred or general unsecured creditors. For banks, the Court of Appeal decision suggests the floating charge has all but disappeared. If a bank wants a floating charge, perhaps for control rather than for financial security, it will need to take some rather odd steps to ensure that its security falls outside this new expanded class of fixed charges. This note respectfully suggests that the Court of Appeal decision is unsupportable, and that the case well merits the forthcoming appeal to the House of Lords.

Facts

The debenture in Spectrum secured a relatively insignificant overdraft of GBP 250,000. Crucially, it specified that the security was by way of specific charge over all present and future book debts and other debts, and that the chargor was prohibited from charging or assigning the debts, and was required to pay the proceeds of collection into an account with the lending bank. The debenture did not specify any restrictions on the chargor’s operation of that account. The issue was whether this charge was fixed or floating.

Decision at first instance

At first instance, Sir Andrew Morritt V-C decided the charge was floating. He held, first, as a matter of law, that if a chargor is entitled to use proceeds in the normal course of business unless and until the chargee intervenes, then the charge will necessarily be floating notwithstanding other restrictions on the dealing with the book debts. This followed the Privy Council’s approach in Agnew v Commissioner of Inland Revenue (better-known simply as Brumark). Secondly, he held that the effect in law of the actual terms of the debenture was this.