Raising Capital - Debentures Flashcards
Re Yorkshire Woolcombers Association [1903] 2 Ch 284
Nature of Company’s Debenture Charge
The court considered the nature of a debenture charge. Romer LJ said: ‘I certainly do not intend to attempt to give an exact definition of the term ‘floating charge’, nor am I prepared to say that there will not be a floating charge within the meaning of the Act, which does not contain all the three characteristics . . ‘. ‘I certainly think that if a charge has the three characteristics that I am about to mention it is a floating charge. (1) If it is a charge on a class of assets of a company present and future; (2) if that class is one which, in the ordinary course of business of the company, would be changing from time to time; and (3) if you find that by the charge it is contemplated that, until some future step is taken by or on behalf of those interested in the charge, the company may carry on its business in the ordinary way as far as concerns the particular class of assets I am dealing with.’ and (Vaughan Williams LJ) ‘ . . what you do require to make a specific security is that the security whenever it has once come into existence, and been identified or appropriated as a security, shall never thereafter at the will of the mortgagor cease to be a security.’
Romer LJ, Vaughan Williams LJ
[1903] 2 Ch 295
England and Wales
Citing:
Appeal from – In re Yorkshire Woolcombers Association Ltd ChD 1903
Farwell J said: ‘A charge on all book debts which may now be, or at any time hereafter become charged or assigned, leaving the mortgagor or assignor free to deal with them as he pleases until the mortgagee or assignee intervenes, is not a specific . .
Siebe Gorman & Co Ltd v Barclays Bank Ltd [1979] 2 Lloyd’s Rep 142, 10 LDAB 94
(overruled by Spectrum)
Siebe Gorman & Co Ltd v Barclays Bank Ltd [1979] 2 Lloyd’s Rep 142 is a UK insolvency law case, concerning the definition of a floating charge. It was an influential decision for many years, but is now outdated as authority in light of the House of Lords decision in Re Spectrum Plus Ltd.
Facts
Siebe Gorman, a diving equipment company, granted a debenture in favour of Barclays Bank to secure a loan. The document was expressed to create a ‘first fixed charge’ over all present and future book debts. It required Siebe Gorman to pay the proceeds of its book debts into a Barclays Bank account, and prohibited Siebe Gorman from creating any other charges on those book debts, or assigning the book debts to anyone else. So there was a prohibition on dealing with the book debts before collection of them. Barclays also had the right to obtain absolute control by giving notice, but that right was never exercised.
Judgment
Cases on floating charges
Slade J held that it was a fixed charge. The restrictions on Siebe Gorman’s power gave the bank enough control to be inconsistent with being a floating charge.
Authority
Although the case remained good law for many years, it was doubted by the Privy Council in Re Brumark Investments Ltd [2001] UKPC 28, and then formally overruled by the House of Lords in
Re Spectrum Plus Ltd [2005] UKHL 41.
Chalk v Kahn [2000] 2 BCLC 361
Chalk v Kahn: 2000
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 . .
Insolvency
Secured creditors who had proved in respect of the expected shortfall over the value of their security, were not prevented from realising their security over and above its expected value.
Re New Bullas Trading Ltd [1994] 1 BCLC 485
-> Overruled by Spectrum
Re New Bullas Trading Ltd [1994] 1 BCLC 485 is a UK insolvency law case, concerning the definition of a floating charge. It held, somewhat controversially, that it was possible to separate a book debt from its proceeds, and that it was possible to create a fixed charge over the book debt but only a floating charge over the proceeds. At the time the decision attracted a great deal of academic commentary,[1] much of it hostile.[2]
It is now outdated as authority, being first doubted by the Privy Council in Re Brumark Investments Ltd [2001] UKPC 28, and then formally overruled by the House of Lords in Re Spectrum Plus Ltd [2005] UKHL 41.
Facts
Nourse LJ overturned the decision. He held that a charge may be divisible, and the parties had unequivocally expressed their intention and ‘unless there is some authority or principle of law which prevented them from agreeing what they have agreed, their agreement must prevail’. In essence, he held that the wording did allow them to have such a form of security, the parties were free to make such arrangements. He said unless, unlawful, the free will of the parties would prevail.
Judgment
Nourse LJ overturned the decision. He held that a charge may be divisible, and the parties had unequivocally expressed their intention and ‘unless there is some authority or principle of law which prevented them from agreeing what they have agreed, their agreement must prevail’. In essence, he held that the wording did allow them to have such a form of security, the parties were free to make such arrangements. He said unless, unlawful, the free will of the parties would prevail.
Authority
Although the case remained good law for many years, it was doubted by Lord Millett sitting in the Privy Council in Re Brumark Investments Ltd [2001] UKPC 28, before finally being formally overruled by a seven-member House of Lords in Re Spectrum Plus Ltd [2005] UKHL 41.
Ashborder BV v Green Gas Power Ltd [2005] BCC 634
Key takeaways
- If written in that assets can be varied somehow in the ordinary course of business then it will be considered by the courts to be a floating and not fixed charge in nature! (even if documents says fixed)
- Following Ashborder, allowing a company freedom to deal with its assets ‘in the ordinary course of business’ may mean that even one-off or exceptional transactions will be permitted and, in the case of secured loans, that any attempt to take fixed security may be unsuccessful.-
Lenders should be aware that, in secured deals, permitting transactions ‘in the ordinary course of business’, as part of any carve-outs to the restrictions contained in the loan agreement (e.g. in the ‘no disposals’ covenant), is likely to be seen as allowing a degree of freedom inconsistent with fixed security. As a result, assets which can be disposed of by the borrower (or by any charging company) in the ordinary course of its business will be the subject of a floating charge only, even if the relevant security document purports to create a fixed charge over them. In addition, lenders should be aware that, in unsecured deals, the expression ‘in the ordinary course of business’ may in appropriate circumstances be widely construed so as to permit unprecedented or exceptional transactions.
In the recent case of Ashborder BV & Ors v Green Gas Power Ltd & Ors [2004], the borrower group in question disposed of certain assets (licences and shares) which were the subject of debentures securing loans from some of the Enron group of companies. The debentures purported to grant fixed security in relation to some assets (including the licences and shares) and a floating charge over all other assets. The court held (applying the two stage test formulated in Agnew v Commissioner of Inland Revenue [2001]) that a carve-out in the “no disposals” covenant of the loan agreement for the disposal of any asset in the ordinary course of business was inconsistent with the security being fixed under the debenture. As a result, the parties had in fact created only floating security over the licences and shares.
The court then went on to consider whether the shares and licences had been disposed of ‘in the ordinary course of business’. It held on the facts of the particular case that the disposals were not in the ordinary course of business, but it expressly recognised that there was no reason why an unprecedented or exceptional transaction could not in appropriate circumstances be regarded as in the ordinary course of a company’s business. In addition, according to the court, the mere fact that a transaction would, in a liquidation, be liable to be avoided as a fraudulent or otherwise wrongful preference of one creditor over others would not alone preclude the transaction from being in the ordinary course of business, nor would the fact that the transaction constituted a breach of a director’s fiduciary duty. Not surprisingly, however, the court regarded transactions that bring to an end, or are intended to bring to an end, the company’s business as transactions that are outside the ordinary course of its business.
The Ashborder case serves as a warning to lenders that they must carefully consider the implications of any requests they receive from borrowers for carve-outs to the covenant package. Following Ashborder, allowing a company freedom to deal with its assets ‘in the ordinary course of business’ may mean that even one-off or exceptional transactions will be permitted and, in the case of secured loans, that any attempt to take fixed security may be unsuccessful.
Should you require further details or advice please contact Stephen Moore on +44(0) 207 367 2855 or at stephen.moore@cms-cmck.com or Jane Whitfield on +44(0) 207 367 3583 or at jane.whitfield@cms-cmck.com
11 May 2005
B e f o r e :
LORD JUSTICE NEUBERGER
____________________
(1) ASHBORDER BV
(2) CEDARBASE LIMITED
(3) GREENPARK ENERGY LIMITED Respondents/Claimants
-v-
(1) GREEN GAS POWER LIMITED
(2) E&P PRODUCTION LIMITED
(3)CABOT ENERGY LIMITED Appellants/Defendants
____________________
(Computer-Aided Transcript of the Stenograph Notes of
Smith Bernal Wordwave Limited
190 Fleet Street, London EC4A 2AG
Tel No: 020 7404 1400 Fax No: 020 7831 8838
Official Shorthand Writers to the Court)
____________________
MR J GARRATT appeared in person
MR G MOSS QC (instructed by Simmons & Simmons) appeared on behalf of the Claimants
MR L TAMLYN (instructed by Salans) appeared on behalf of the Defendants
____________________
HTML VERSION OF JUDGMENT
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Crown Copyright ©
LORD JUSTICE NEUBERGER: This hearing has been necessitated because Mr John Garratt has been maintaining an application for permission to appeal a decision of Etherton J in relation to proceedings brought by Ashborder BV, Cedarbase Limited and Greenpark Energy Limited ("the claimants"), represented today by Mr Gabriel Moss QC, against Green Gas Power Limited, E&P Production Limited and Cabot Energy Limited ("the defendants"), two of whom are, and have been at all material times, in provisional liquidation, and the third, E&P, were in provisional liquidation but now have been compulsorily wound up. The defendants are represented by Mr Lloyd Tamlyn.
It is, I think, unnecessary to go into the merits of the matter. The application for permission to appeal, maintained by Mr Garratt over the objection of the provisional liquidators and the claimants who contended that he had no authority to maintain it, is now sought to be withdrawn on the basis that any appeal had been compromised. In those circumstances, the first question is whether I should dismiss the application for permission to appeal or permit Mr Garratt to withdraw it. The second question is what, if anything, should be done about the costs.
The first issue does not seem to be controversial. Mr Moss, with Mr Tamlyn's tacit support, contends that I should dismiss the application so that it undoubtedly is at an end, rather than permit Mr Garratt to withdraw it. On the face of it, that seems to me to be right, without making any adverse findings about Mr Garratt's conduct, which it would be unfair to him if I were to make and I am in no position to make. It appears to me to be desirable that a quietus is put to this, and as firm and complete a quietus as possible. In any event, Mr Garratt has not submitted otherwise. It may make very little difference whether I permit it to be withdrawn or whether I dismiss it, but I think that it is only fair on the claimants and the defendants, and the provisional liquidators in particular, if I dismiss it. So the application for permission to appeal is finally dismissed.
So far as costs are concerned, both the claimants and the provisional liquidators contend that the costs of the application for permission to appeal should effectively be visited on Mr Garratt. The provisional liquidators seek £8,886.94, which they say represents their costs, and I have a schedule from 28th January. The claimants ask for £16,775, being all their costs of the application; alternatively, £11,455, their costs from 14th December; further alternatively, their costs from 28th January, £9,947.
On the face of it, the applications for costs seem to me to be well founded. Once the provisional liquidators were appointed it seems plain that Mr Garratt had no authority, and could have no authority -- save if he were given it by the provisional liquidators, which he most certainly was not, and he does not suggest he was -- to pursue, or even to make, the application for permission to appeal or indeed to do anything else on behalf of the defendants -- see the discussion in the judgment of Moore-Bick J in Pacific & General Insurance Company Limited v Hazell [1997] BCC 400. Where a solicitor purports to act for a company in circumstances where he has no authority, then, absent special circumstances, the court will effectively routinely order the solicitor to pay any other party's costs and indeed will normally order it on an indemnity basis.
Originally Mr Garratt had instructed solicitors to act, effectively on his behalf, and purportedly on behalf of the defendants, and in particular Green Gas Power, and those solicitors, Messrs Landau Zeffertt Weir, had instructed counsel and indeed they appeared before the judge below. They withdrew on or about 21st January, having received a clear warning that an order for costs would or might be sought against them on this basis, and I have been referred to a letter from Landau's, dated 20th January 2005, which makes that clear and indeed mentions the case to which I have made reference.
On the face of it, therefore, there is a good claim for costs against Mr Garratt. However, costs are very much in the discretion of the court and, while one would expect a solicitor to know the law, the position can be said not to be so clear when it comes to a lay person, even a lay person with commercial experience and access to legal advice. Indeed, in one of the leading cases on costs against third parties, Symphony Group Plc v Hodgson, Balcombe LJ made the point that an early warning ought to be given, to a person against whom a wasted costs order would be sought, of that very possible possibility. However, as with virtually any rule on costs, as Mr Moss says, that is not a firm rule. In other words, Balcombe LJ was not saying, nor could he say, that unless such a warning was given the court had no jurisdiction to make a third party costs order.
There is a very substantial degree of dispute between the parties as to Mr Garratt's motivation and as to the history. Mr Garratt has portrayed himself, on the face of it very attractively, as a person doing his best in difficult circumstances and acting honestly and reasonably and not being given information which he should have been given. Mr Moss and Mr Tamlyn have both indicated, although they have not gone into any detail in light of my strong discouragement, that Mr Garratt in fact has not portrayed either the facts or his attitude or his lack of personal interest in this matter at all honestly.
It would, as I have already indicated, be quite unfair on Mr Garratt if I were to make adverse findings about the disputed facts again him, or if I were to make adverse findings as to his motivation. Equally, it would be unfair on the claimants and on the provisional liquidators if I were to make findings which were favourable to him.
However, I think it is fair to proceed on the assumption generally that he has told me the truth, and in general terms his attitude is and has been as he has described. I think one would have to give -- on an interlocutory basis, where there has been no cross-examination and, indeed, no detailed consideration of the facts -- the benefit of the doubt in favour of a litigant in person against whom an order for costs is being sought. Having said that, I have to approach the matter in a principled and fair way and not simply let my sympathy run away with me.
In my view it would be quite wrong not to make an order for costs against Mr Garratt. The only question is how much. It was made clear to him, at least from 20th January, (a) that nobody other than persons given such by the provisional liquidators had authority to act for the company; (b) that orders for costs could be sought against those acting, or purporting to act, for the company without such authority. It does not follow that he as a layman necessarily would have appreciated that he was at risk on costs. But I have to say that he ought to have done because he not only had lawyers acting for him at the time, although they withdrew from the case, but, as he himself has said, he plainly has had lawyers giving him informal advice -- I have no idea whether they have been paid or not; that is none of my business -- and indeed the excellent skeleton argument that he has provided for today has clearly -- as he very fairly accepts -- been prepared with legal advice.
While it is conceivable that he could have been completely unaware of the risk of costs up to the end of January, it seems to me that it would be wholly unfair on the claimants and on the provisional liquidators if I were to hold in those circumstances that he should be treated as somebody for whom an application for costs comes completely out of the blue. Unlikely as it seems to me, it may come out of the blue so far as he is concerned, or he may not have been aware of the possibility at the end of January, but I think, viewed from the claimants' and provisional liquidators' point of view, bearing in mind that they had raised the point on 20th January, that he was legally advised at that time and that he has continued to have access to legal advice since then, it would be quite wrong for me not to make an order for costs against him.
Additionally, since the end of January there have been applications for costs against him, references to his potential liability for costs during hearings in February and March in front of David Richards J, and indeed most recently in front of Laddie J, when an order for costs was made against him. In my judgment it would therefore be a denial of justice to the claimants and the provisional liquidators if I was not to make an order for costs against Mr Garratt.
The point is reinforced when one looks at his reason for abandoning the application for permission to appeal. In a witness statement made on 10th May, yesterday, he says this in paragraph 19:
"If the Appeal has been settled between the Petitioners and the [provisional liquidators] then it is only right to withdraw the Appeal."
He goes on to explain why, contrary to my conclusion, it is right to withdraw rather than dismiss the appeal, not a point he has maintained in argument but, even if he had, it would not have altered my view on that point. To my mind, the fact that any appeal had been settled was known to him quite plainly by 22nd February at the latest because he wrote a letter recording that fact. Indeed, in argument he does not deny that, although he denies having been told it by the claimants or the provisional liquidators. I have to say I find that a very surprising submission. It must have been implicit in a number of letters and other documents he received. But at any event he knew it by the end of January.
There is force in Mr Moss's submission that I should grasp the whole of the nettle I am offered -- if that is not a mixed metaphor -- and order Mr Garratt to pay the whole of the costs incurred by the claimants on this application of £16,775. But I think if I were to do that I would not be having regard to any of the mitigating circumstances on which Mr Garratt relies. I think the attitude taken by the provisional liquidators is the one which reflects the justice of the situation, namely that he should pay the costs from 28th January. That is a sensible date because it is the date on or around which in my view he knew that the appeal had been settled, the very ground upon which he now seeks at this very late stage to justify the withdrawal of the application. It is a date a little after the question of liability for costs in the 20th January letter had specifically been raised.
I have looked at the schedule. It is a bitter pill for Mr Garratt to swallow but, in light of what is involved in this case, I can see no good reason for reducing the figures. I have to bear in mind, as Mr Moss and Mr Tamlyn both rightly point out, that any shortfall in costs which their clients do not recover from Mr Garratt will have to be recovered from plainly innocent creditors of the company.
I also am impressed by the fact that Mr Garratt has spent some time today outlining complaints about the actions of the provisional liquidators which I suspect motivated him on maintaining this application and, whether right or wrong -- and I make no findings on that -- were wholly inappropriate for the purpose of justifying the application. That is another reason to my mind why it would be wrong not to make him pay a substantial part of the costs of the two other parties.
I therefore decided that the order this court should make is, first, that the application for permission to appeal is dismissed; secondly, that the claimants have their costs of this application paid by Mr Garratt in the sum of £9,947; thirdly, that the provisional liquidators have their costs of this application paid by Mr Garratt in the sum of £8,086. I am rounding off a few pennies in each case.
Order: application dismissed. The applicant to pay the costs of the claimants in the sum of £9,947. The applicant to pay the costs of the provisional liquidators in the sum of £8,086.
Queens Moat Houses plc v Capita IRG Trustees Ltd [2004] EWHC 868 (Ch)
Queen’s Moat Houses v Capita IRG Trustees Ltd [2004] EWHC 868 (Ch) - successfully argued that
QMH entitled to withdraw hotel property from debenture security.
Agnew v Commissioner of Inland Revenue [2001] 2 AC 710, PC
The Privy Council advised that it was indeed a floating charge. It said the court’s task is not to ask whether the parties intended to create a fixed or floating charge, but to ask what rights the parties intended to create, and then decide as a matter of law whether it is fixed or floating. Lord Millett held that Nourse LJ’s approach in New Bullas based on freedom of contract was ‘fundamentally mistaken’. The process of construction required assessing what was intended, but this meant looking at the substance of the transaction, not its form. He noted that in Siebe Gorman & Co Ltd v Barclays Bank Ltd[2] and In re Keenan Bros Ltd[3] the proceeds of the book debts were not at the free disposal of the company - that is why these were fixed charges - the proceeds were not available to the company as a source of its cash flow.
Agnew v Commissioners of Inland Revenue, more commonly referred to as Re Brumark Investments Ltd [2001] UKPC 28 is a decision of the Privy Council relating to New Zealand and UK insolvency law, concerning the taking of a security interest over a company’s assets, the proper characterisation of a floating charge, and the priority of creditors in a company winding-up.
In Agnew v Commissioner of Inland Revenue, the Privy Council decided that for a fixed charge to be created over a company’s present and future book debts, the chargee must exercise control over both the uncollected book debts and their realised proceeds.
Facts
Brumark Investments Ltd gave security over debts to its bank, Westpac. The terms were that its security was a fixed charge, but a floating charge when proceeds were collected (the same as drafted as in Re New Bullas Trading Ltd[1]). Brumark was free to collect debts for its own account and to use proceeds in its business. Brumark went into receivership. The receivers collected the outstanding debts.
Fisher J held that uncollected debts were subject to a fixed charge, as the parties had agreed. So they were not subject to claims of preferential creditors. The NZ Court of Appeal overturned this and held that the fact Brumark could collect the debts for its own account (and hence remove them from the bank’s security) made it a floating charge. So the preferential creditors had a prior claim.
Advice
The Privy Council advised that it was indeed a floating charge. It said the court’s task is not to ask whether the parties intended to create a fixed or floating charge, but to ask what rights the parties intended to create, and then decide as a matter of law whether it is fixed or floating. Lord Millett held that Nourse LJ’s approach in New Bullas based on freedom of contract was ‘fundamentally mistaken’. The process of construction required assessing what was intended, but this meant looking at the substance of the transaction, not its form. He noted that in Siebe Gorman & Co Ltd v Barclays Bank Ltd[2] and In re Keenan Bros Ltd[3] the proceeds of the book debts were not at the free disposal of the company - that is why these were fixed charges - the proceeds were not available to the company as a source of its cash flow.
National Westminster Bank plc v Spectrum Plus Ltd [2005] UKHL 41.
Signficant Authority for Floating Charge vs. Fixed Charge over Assets like Bank Accounts
-> Signficant Authority for Floating Charge vs. Fixed Charge over Assets like Bank Accounts
Re Spectrum Plus Ltd [2005] UKHL 41 was a UK company law decision of House of Lords that settled a number of outstanding legal issues relating to floating charges and recharacterisation risk under the English common law. However, the House of Lords also discussed the power of the court to make rulings as to the law that were “prospective only” to mitigate potential harshness when issuing a ruling that was different from what the law had previously been understood to be.
Facts
Spectrum Plus Ltd (“Spectrum”) carried on the business of a manufacturer of dyes, paints, pigments and other chemical products for the paint industry. Spectrum opened an overdraft facility, and made an agreement with, National Westminster Bank Plc (“NatWest”) that said it was granting a fixed charge, or in the words of the contract, a “specific charge [of] all book debts and other debts… now and from time to time due or owing to [Spectrum]” to secure a £250,000 overdraft. Spectrum was prohibited from charging or assigning debts, and was required to pay the proceeds of collection into a NatWest account. But there were no restrictions on Spectrum’s operation of the account. Spectrum’s account was always overdrawn but it used the proceeds of the debts as and when it was necessary. When Spectrum went into liquidation, NatWest argued that the charge was a fixed charge over book debts and proceeds. The Inland Revenue, which was a major creditor, argued the debenture was merely a floating charge, so its claim for tax owed took priority over the bank under Insolvency Act 1986 section 175. At stake was merely £16,136, but the case was a test case.
It was apparent that if the House of Lords decided in favour of the Inland Revenue, the expectations of a significant number of banks, who had relied on being able to have “fixed charges” and thus absolute priority in insolvency, would be defeated. Many people had assumed, or at least argued they had assumed that the law since Siebe Gorman & Co Ltd v Barclays Bank Ltd[1] was that if book debts were paid into a separate account, then a charge over them would be deemed to be fixed. Accordingly, it was submitted that if the Lords were to overrule Siebe Gorman, they should only do so prospectively, and not retrospectively.
Judgment
In the High Court, the Vice Chancellor held, applying the ruling of Lord Millett in the Privy Council decision of Agnew v Commissioners of Inland Revenue (Re Brumark) and declining to follow Re New Bullas Trading Ltd, that because the charge allowed Spectrum to use the proceeds of the debts in the normal course of business it must have been a floating charge (therefore not following Siebe Gorman & Co Ltd v Barclays Bank Ltd either). In the Court of Appeal, Lord Phillips MR held that he was bound by Bullas and where a chargor is prohibited from disposing of receivables before they are collected and must pay them into a chargee’s account, the charge must be construed as fixed. He said Siebe Gorman was correctly decided given that the debenture there clearly restricted the company’s ability to draw on the bank account into which the proceeds of the book debts were paid. The Siebe Gorman form of debenture had been followed for 25 years, and therefore had acquired meaning. Jonathan Parker LJ and Jacob LJ concurred.
House of Lords
Cases on floating charges
The House of Lords, with seven members given the constitutional issue of retrospective rulings, held that the charge over Spectrum Plus Ltd’s book debts was floating, because the hallmark of a floating charge is that the business is free to deal with the assets in business as usual. Also relevant, but not determinative were the extent of the restrictions imposed by the debenture, the rights retained by Spectrum to deal with its debtors and collect the money owed by them, Spectrum’s right to draw on its account with the bank into which the collected debts had to be paid, provided it kept within the overdraft limit, the description “fixed charge” attributed to the charge by the parties themselves. Even though the money was put into a separate account, that was the case here. The decision of Slade J in Siebe Gorman & Co Ltd v Barclays Bank[2] had been subject to serious academic criticism, and had been doubted by Hoffmann J in Re Brightlife Ltd.[3] Although Siebe Gorman was followed and extended by the English Court of Appeal in Re New Bullas Trading Ltd[4] it was wrong and was overruled. Recognising freedom to deal with assets as the hallmark of a floating charge was necessary to give effect to the purpose of the legislation on floating charges, and the statutory system of priority.
Prospective rulings
Regarding the prospective ruling issue, Lord Nicholls said that judges had been described as “developing” the law for some time when making novel decisions, and that a judge is not free to repeal laws or distance themselves from bad laws; their only power is to impose a new interpretation. He also noted the new “dynamic” power to interpret statutes under section 3 of the Human Rights Act 1998. He then went on to rule:
But, even in respect of statute law, they do not lead to the conclusion that prospective overruling can never be justified as a proper exercise of judicial power. In this country the established practice of judicial precedent derives from the common law. Constitutionally the judges have power to modify this practice.
He held that in exceptional cases, it would be open to the court to hold that a new interpretation of the law should be applied only prospectively. However, on the facts of the case before him, Lord Hope felt that it was “miles away from the exceptional category in which alone prospective overruling would be legitimate” (para 43) and so relegated his comments upon prospective only rulings to obiter dictum. However, given the strength and number of the court, and that the court specifically invited the Attorney General to appoint leading counsel to address them on that point, it seems clear that the decision on that point will be treated as binding precedent.
Significance
In relation to the substantive issues, the Revenue had already indicated that it would not seek to reopen recent liquidations that had been distributed in compliance with the understandings of the old law so in many senses, the ruling took prospective effect only with respect to the largest preferred creditor. The drafting of security documents has also been modified by the legal profession, and debentures now usually contain provisions stating that the proceeds of book debts may not be assigned and must be paid into a blocked account.
Prior to the decision, “prospective only” rulings were not favoured under English law. In Launchbury v Morgans [1973] AC 127 (at 137), Lord Wilberforce had expressed that view that “We cannot, without yet further innovation, change the law prospectively only”. More recently, in Kleinwort Benson Ltd v Lincoln City Council [1999] 2 AC 349 (at 379), Lord Goff of Chieveley had said the system of prospective overruling “has no place in our legal system”.
Arthur D Little Ltd v Ableco Finance LLC [2002] 2 BCLC 799
Arthur D Little Ltd (in Administration) v Ableco Finance LLC: ChD 27 Mar 2002
The company was a subsidiary of two American companies, but was registered in Scotland. It charged its assets, but the charge was not registered in Scotland. On the insolvency of the company, the respondent chargee claimed it was a fixed charge not requiring registration. The administrators asserted that the charge was a floating charge and void if not registered.
Held: The schemes for registration of charges in the Act applied throughout the United Kingdom, and were not separate, even though the application of the machinery differed in each jurisdiction. Here however the charge was a fixed one, and valid.
Mr Roger Kaye, QC
Times 22-Apr-2002, Gazette 16-May-2002
Companies Act 1985 410
England and Wales
Smith v Bridgend County Borough Council [2002] 1 BCLC 77
Smith (Administrator of Cosslett (Contractors) Limited) v Bridgend County Borough Council; In re Cosslett (Contractors) Ltd: HL 8 Nov 2001
The standard building contract allowed a contractor to take plant and equipment from a site and sell it in payment of sums due under the contract, upon the other contractor becoming insolvent. It was said that this power amounted to a charge over the company’s assets, and should have registered at Companies House. Upon entering receivership, the contractor vacated the site, but the respondent found another contractor to continue the work using the same substantial equipment. The contractor’s receiver alleged the contract was void for non-registration.
Held: The clause operated as a floating charge, and was void as against the liquidator or administrator. It should have been registered.
Lord Hoffmann, Lords Bingham, Browne-Wilkinson and Rodger; Lord Scott (dissenting)
Re Harmony Care Homes Ltd [2009] EWHC 1961.
Case
Harmony Care Homes Limited [2009] EWHC 196 1(Ch.)
Synopsis
A decision of Ms Susan Prevezer QC (sitting as a Deputy High Court Judge), a rare
example in the post-Brumark and Spectrum world of a fixed charge upon debts being
upheld, on the basis of a sufficient degree of control in favour of the chargee. Its value is
more as an example than as a precedent, given that only the applicant administrative
receivers appeared, and the requirements of the Practice Direction on citation of
authorities would not be satisfied. One of the enduring observations from the Brumark
case was Lord Millett’s unequivocal statement as to the operation of blocked accounts
that: ‘it is not enough to provide in the debenture that the account is a blocked account if it
is not operated as one in fact’, a statement endorsed by Lords Scott and Walker in the
Spectrum Plus case. In Harmony, that requirement was made out.
Topics covered: Administrative receivership: fixed/floating charges, disposals
The Facts
The decision arose on an application for directions by the administrative receivers of Harmony Care Homes Limited (HCH), as to whether the proceeds of £671,000 collected during the receivership should benefit the debenture holders under their fixed charges, or the preferential creditors under S.40 IA 1986. HMRC was joined as a representative preferential creditor, but neither it nor the debenture holders appeared.
The issue before the Court was whether the debtor realisations were subject to a floating charge or fixed
charges under the debentures, and whether the debentures created, at their inception, fixed or floating
charges over the book debt realisations collected by the company. If they were subject to a floating charge, the preferential creditors would be entitled to payment out of those monies, and the chargee’s position would be unsecured as regards those realisations.
HCH operated 16 nursing homes. NHP was its landlord, and held several debentures issued between
September 1998 and August 2000 in respect of those 16 nursing homes. The decision was limited to only one of the nursing home debentures, but the relevant terms were common to all. The debenture sought to charge all present and future book and other debts in favour of NHP, including any amount outstanding from time-to-time to the credit of the designated account. The charge was stated to be fixed, and the debenture contained restrictions on disposals of the proceeds of the debts, and obliged HCH to pay the monies received in respect of the debts into a separate designated account. Prior to crystallisation of the floating
charges under the debenture, any monies paid into the designated account would be released from the fixed charge and subjected to the floating charge, but such release was expressed not to derogate from the fixed charge otherwise created by the debenture. NHP asserted that it held a valid fixed charge over HCH’s book debts and proceeds, on the basis that NHP not only had the right to fully control the book debt proceeds, but that it actively exercised that right. NHP also provided evidence to the receivers showing that there had been controls on the proceeds of book debts from January 2001 in relation to the April 1999 debenture. Further information as to the way in which NHP
exercised control (primarily, daily sweeps after appropriating sums for day-to-day expenses), and as to the level of control which it had imposed over the proceeds of book debts prior to January 2001 was provided. The designated account had been opened in July 1999, the signatories on the account mandate were representatives of NHP, and no other account had been operated by HCH in respect of the nursing home between the execution of the debenture in April 1999 and the opening of the designated account in July 1999.
Re: Harmony Care Homes Limited: fixed charges on debts
Technical Bulletin No: 224
The Decision
The Deputy Judge referred (at [12-15]) to the well-known decisions in Yorkshire Woolcombers, Agnew v.
CIR (Brumark) and Spectrum Plus Limited, the latter two decisions being widely seen as inimical to the
Siebe Gorman type of fixed charge over book debts, and set out to examine the scheme created by the
specific debenture under scrutiny. The Court was to consider the true rights and obligations intended to be granted in respect of the charged assets at the inception of the debenture, not just the parties’ categorisation of them. The company’s ability to deal with its book debt realisations has to be considered at the time the debentures were granted, because S40 IA 1986, was concerned with the position of a charge ‘which, as created’ was a floating charge, ie: from the date of its execution.
It was found that HCH could not, and did not, make use of any of the monies paid into the account without NHP’s written instructions, so that all book debts collected in by the company from the inception of the relevant debenture, were subject to NHP’s control. From inception, the status of NHP’s security over the book debts was specific and ascertained, and there was never a moment when HCH was entitled to remove the charged assets from the security. HCH was not free to deal with the debtor realisations, or to withdraw them from the security without NHP’s consent. The Deputy Judge applied the guidelines laid down in Brumark and Spectrum, and concluded that the security granted to NHP was a fixed charge, on the basis that NHP had a sufficient degree of control over the book debts collected by HCH.
Sample examination question
Bill and Bob are the directors of Bank Finances plc (‘the company’) which is a longestablished merchant bank that trades globally. In order to finance margin calls
required by their Singapore office they agreed on 1 January 2003 to create a floating
charge over the company’s entire undertaking (in England) in favour of Ratfink
Bank Ltd in return for a loan of £1,000,000,000 (£1 billion). The floating charge
contained a clause providing that it would crystallise in the event of any default
or enforcement proceedings being taken against the company. This charge was
registered on 21 January 2003.
On 14 January 2003 the company refurbished its head office in London. In order
to finance the interior design project Bill and Bob withheld money due to the
Government in the form of VAT and PAYE and also obtained a loan from Beckley’s
Bank for £1,000,000. This loan was secured over the book debts of the company.
The charge was registered on 17 January 2003.
On 15 February, John demanded payment for the office furniture that his firm had
supplied to the company. Following advice from the company’s finance director
the board secured the amount outstanding to John by a fixed charge over the
company’s factory. The finance director also advised the board ‘that the company is
in a position whereby it is unlikely to pay all its creditors and this financial situation
is unlikely to be resolved’.
The company continued to trade until November 2003 when it went into
liquidation.
Advise the liquidator.
Advice on answering this question
You will need to begin by describing the features of fixed and floating charges. The
question also requires you to explain:
i. the rules governing priority between such charges
ii. the position of such charges as against preferential and unsecured creditors
iii. automatic crystallisation of floating charges
iv. avoidance of floating charges under the 1986 Insolvency Act, s.245.
Ratfink charge: expressed as a fixed charge but is this conclusive of the issue? See Re
Yorkshire Woolcombers Association and Agnew v Commission of Inland Revenue. Is the
charge properly registered?
Beckley’s charge: it is secured on book debts but what type of charge is it? See Siebe
Gorman & Co Ltd v Barclays Bank Ltd and Agnew v Inland Revenue Commissioners. You
should also consider the priority issue between Ratfink and Beckley.
John: is it a fixed charge? You will need to discuss the priority issues between fixed and
floating charges.
Section 245 of the Insolvency Act 1986 should be considered – can the liquidator avoid
the floating charges? Finally, mention should be made of preferential creditors and the
effect of the Insolvency Act 2006.
