Fixed Charges on Book Debts: the Saga Continues

Richard Gray discusses the latest instalment on the issue of fixed charges on book debts.

In an English case reported earlier this year (Re Spectrum Plus Limited) the Vice-Chancellor delivered the latest instalment in the long running debate on what is required to establish a fixed charge on book debts. It is the first reported decision in England and Northern Ireland since the judgment of the Privy Council in the New Zealand Brumark case, which is, strictly speaking, only of persuasive authority to the courts here.

Control

In Brumark, the Privy Council decided that it was possible to have a fixed charge on book debts provided there was sufficient evidence of the parties' intention to give the lender adequate control over the proceeds of those debts. In practical terms in order to demonstrate that intention, as well as the usual restrictions on dealing with book debts (such as a prohibition on assignment or charging) it is necessary for the security to require the book debts to be credited to an account from which no withdrawals are permissible without the chargeholder's prior written consent.

The Vice-Chancellor in the Spectrum case held that charges over book debts that allow borrowers the freedom, as a matter of fact, to collect in and deal with the proceeds in the ordinary course of business (whether or not their accounts are in credit or overdraft) are properly characterised as floating charges, even if the debenture labels them as fixed.

Caution

The Spectrum decision is, however, being appealed and R3, the Association of Business Recovery Professionals, has advised caution to its members pending the outcome of the appeal. The appeal looks likely to centre on the fact that in Spectrum the account into which the book debt proceeds were collected and paid was at all times overdrawn. The argument is likely to be put that in this situation the book debt is effectively extinguished when it is paid into the overdrawn account, so that when the borrower redraws monies from the account it is effectively taking a new loan. The bank is likely to argue that this is not the same legal thing as dealing with book debt proceeds in the ordinary course of business. It remains to be seen what view the English Court of Appeal will take on this line of argument.

Lending Practices

In the light of the Brumark decision many banks altered their lending practices because of the practical difficulties in establishing a fixed charge over book debts. There...