Parties contractual freedom to be respected
A clause in a debenture gave a charge which provided that the chargor should not: ‘deal with its book or other debts or securities for money otherwise than in the ordinary course of getting in and realising the same which expression shall not authorise the selling, factoring or discounting . . of its book debts or other negotiable instruments’
Held: Whilst purporting to create a fixed charge over present and future book debts and imposing restrictions on the sale, factoring or discounting of book debts, the debenture did not require the chargor to pay them into an account with the chargee. Reference to a ‘first specific charge’ over book debts had to yield to the only conclusion from the rights in fact granted that the charge over book debts was a floating charge only.
Hoffmann J said: ‘But a floating charge is consistent with some restriction upon the company’s freedom to deal with its assets. For example, floating charges commonly contain a prohibition upon the creation of other charges ranking prior to or pari passu with the floating charge. Such dealings would otherwise be open to a company in the ordinary course of its business.’ and
‘I do not think that the bank balance falls within the term ‘book debts or other debts’ as it is used in the debenture. It is true that the relationship between banker and customer is one of debtor and creditor. It would not therefore be legally inaccurate to describe a credit balance with a banker as a debt. But this would not be a natural usage for a businessman or accountant. He would ordinarily describe it as ‘cash at bank’: compare the balance sheet formats in Part I, section B of Schedule 4 to the Companies Act 1985′ and ‘In this debenture, the significant feature is that Brightlife was free to collect its debts and pay the proceeds into its bank account. Once in the account, they would be outside the charge over debts and at the free disposal of the company. In my judgment a right to deal in this way with the charged assets for its own account is a badge of a floating charge and is inconsistent with a fixed charge.’
The significant feature of the Brightlife debenture was that the company was free to collect its debts and pay the proceeds into its bank account: ‘Once in the account, they would be outside the charge over debts and at the free disposal of the company. In my judgment a right to deal in this way with the charged assets for its own account is a badge of a floating charge and is inconsistent with a fixed charge.’
The company had given a charge over its book debts to te bank. The bank asserted that it was a first specific charge and purported to restrict the company’s right to factor its debts without the bank’s consent. A debenture holder then gave notice to fix the charge, but only a week before a voluntary winding up resolution.
Held: The charge on the book debts was a floating charge, and having crystallised a week before, it had priority over the other debts.
Although clause 3(A)(ii)(a) referred to a ‘first specific charge’ over book debts and others, ‘the rights over the debts created by the debenture were in my judgment such as to be categorised in law as a floating charge.’ . . And a ‘significant feature is that Brightlife was free to collect its debts and pay the proceeds into its bank account. Once in the account, they would be outside the charge over debts and at the free disposal of the company. In my judgment a right to deal in this way with the charged assets for its own account is a badge of a floating charge and is inconsistent with a fixed charge . . I do not think that it is open to the courts to restrict the contractual freedom of parties to a floating charge on such grounds. The floating charge was invented by Victorian lawyers to enable manufacturing and trading companies to raise loan capital on debentures . . without inhibiting its ability to trade. . The public interest requires a balancing of the advantages to the economy of facilitating the borrowing of money against the possibility of injustice to unsecured creditors . . arguments for and against the floating charge are matters for Parliament rather than the courts.’
Hoffmann J
[1987] 1 Ch 200, [1988] VLY 306
England and Wales
Citing:
Distinguished – Siebe Gorman and Co Ltd v Barclays Bank Ltd ChD 1979
It was possible to create a fixed charge over present and future book debts and on its true construction, the debenture granted to Barclays Bank Ltd in this case had done so. If the chargor of book debts, having collected the book debts, ‘[had] had . .
Distinguished – In Re Keenan Bros Ltd 1986
(Supreme Court of the Republic of Ireland) A debenture conferred a fixed charge on book debts. It specifically provided that withdrawals from the account to which the proceeds of the book debts had to be credited might only be made with the prior . .
Cited by:
Applied – Agnew and Kevin James Bearsley v The Commissioner of Inland Revenue, and Official Assignee for the Estate In Bankruptcy of Bruce William Birtwhistle and Mark Leslie Birtwhistle PC 5-Jun-2001
(New Zealand) A charge had been given by a company over its book debts. The charge was expressed to create a fixed charge over debts uncollected when a receiver was appointed, so that on collection they became payable to the bank. Until the receiver . .
Cited – National Westminster Bank Plc v Spectrum Plus Ltd and others ChD 15-Jan-2004
The company granted a debenture to the claimant purporting to secure its book debts. The company went into liquidation. The liquidator challenged the bank’s charge.
Held: Siebe was wrongly decided. The charge was ineffective over the book . .
Considered – Re: A Company (No. 005009 of 1987), ex parte Copp ChD 1988
MC Bacon Ltd had borrowed money from a bank. The loan was unsecured. The company got into financial difficulty. The bank commissioned a report on the company’s financial affairs; and insisted on the grant of a debenture to secure the company’s . .
Applied – Re: New Bullas Trading Ltd ChD 5-Apr-1993
A fixed charge in a debenture without restrictions on dealing with monies received must be a floating charge. . .
Cited – Buchler and another (as joint liquidators of Leyland DAF Limited) v Talbot and another (as joint administrative receivers of Leyland DAF Limited) and Stichting Ofasec and others HL 4-Mar-2004
The liquidator sought to recover his expenses from assets charged under a floating charge in priority to the chargee.
Held: Barleycorn was decided in error. The liquidators costs incurred in an insolvent winding up were not to be charged . .
Cited – National Westminster Bank Plc v Spectrum Plus Ltd; In re Spectrum Plus CA 26-May-2004
The court was asked whether a charge given over book debts in a debenture was floating or fixed.
Held: Since the charge asserted some control over receipt of the payments, it was a fixed charge. Upon payment into the account, title to the . .
Cited – Quickson (South and West) Limited v Stephen Mark Katz, John Stephen Kelmanson (As Joint Liquidators of Buildlead Limited) ChD 25-Aug-2004
Various applications were made in the insolvency, including for removal of the liquidators and declarations that certain payments were a fraudulent preference on the creditors.
Held: No prejudice had been shown by any procedural irregularity. . .
Cited – In Re Westmaze Ltd (In Administrative Receivership) ChD 15-May-1998
Westmaze were mechanical engineers. They gave a charge to secure borrowings, which described itself as a fixed charge.
Held: A Charge over a company’s book and trading assets was in fact floating even though described as a fixed charge unless . .
Lists of cited by and citing cases may be incomplete.
Banking, Company, Insolvency
Leading Case
Updated: 09 November 2021; Ref: scu.181234