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Book debts - floating charge |
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The HL has finally held that a debenture over book debts gives rise to a floating
charge (rather than a fixed charge). The importance of the decision is that
it deals with a standard NatWest Bank debenture, with the HL taking the view
that a fixed charge will not be an effective fixed charge if, in practice, the
borrower is free to deal with the assets without bank controls.
Accordingly,
a standard clearing bank debenture, which includes a term that all book debts
are charged as fixed-charge assets, is now likely to be only effective as a
floating charge over book debts if, in practice, the borrower retains day-to-day
control over how the book debts are applied.
In many ways this is a highly unsatisfactory decision in that it overturns 25
years of accepted commercial practice. Having said that, the decision is not
likely to impact much on day-to-day business banking, because the problem
was anticipated following Brumark [2001], and, as a result, lending against
book debts since 2001 has tended to be by factored lending, where fixed
charges over book debts are usually effective. Thus, the trend towards book
debt factoring has simply been reinforced. What the HL decision will mean,
however, is that a large number of liquidations that have been waiting for
this decision will now be able to be finalised, with the book debt proceeds
being paid to preferential creditors (not the banks). That, in turn, will no
doubt result in the banks calling in many personal guarantees (with some
guarantors no doubt arguing that they were told by the bank that book debts
would first be applied in reducing the debt). For an excellent commentary on
Re Spectrum Plus [2005] UK HL 41 see [2005] SJ 829.
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September 2005 |
