Article - Insolvency Law

Fixed Charges on Book Debts - Re Spectrum Plus Limited

Since Siebe Gorman & Co v Barclays Bank plc [1979] the Court have held that a fixed charge may be created over book debts in a standard bank debenture.

However, the recent case of Re Spectrum Plus Limited [2005] the House of Lords have confirmed that fixed charges over book debts in a standard bank debenture was, in fact, a floating charge since there was no real restriction on the manner in which the proceeds of book debts were used by the customer after those proceeds were paid into the account.

This overturns the earlier judgment of the Court of Appeal (see Re Spectrum Plus Limited [2004]) which held that it was bound to follow Siebe Gorman and in order to ascertain whether a charge was fixed or floating depended not on the manner in which the charge was described in the agreement but on the nature of rights and obligations granted by the parties to each other.

Where there was some inconsistency the court would consider whether there were any ‘dominant’ characteristics which caused it to be classified as a floating charge.  The ability of the company to use the proceeds of the book debts as it saw fit did not weaken the obligation not to sell, factor or pay the debts into another account.

The House of Lords have refused to make the ruling prospective.  However, the Crown preferential creditors have already indicated that they will not seek to claw back payments made to banks prior to the decision in Re Brumark [2001].  As the Judgment has retrospective effect on all such charges it will allow pre-Enterprise Act 2002 preferential creditors to claw-back these sums.  

Obviously, the lending community will have to re-consider their existing debentures and this may have a detrimental affect on lending to companies.

Article First Published: 21 April 2005


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