Book debts fixed or floating

In order for a fixed charge on book debts to be a valid charge for the purposes of s. The lords unanimously upheld the vice chancellors first instance decision and found that the banks debenture created a floating charge over book debts as opposed to a fixed charge. Fixed charges over book debts ported to be fixed over uncollected book debts while leaving their proceeds subject to a floating charge would be floating as regards the uncollected debts as well. Interest rate risk management and the mix of fixed and. Key cases on fixed charges over book debts the issue of whether charges over book debts are fixed or floating has been the subject of. If it is a single indivisible charge, can it be a convertible charge, that is a charge which is fixed so long as it attaches to unrealised debts but floating in respect of proceeds of the debts.

Fixed and floating charges volume 60 issue 3 philip r. Book debts subject to a fixed or floating charge book debts are a current asset and whether or not there can be a valid fixed charge on book debts has been the subject of much legal discussion. It is well documented that sections 92 and 98d of the companies accounting act 2017 by way of amendments to the companies act 2014 have provided clarity on the ranking of preferential creditors ahead of crystallised floating charge holders. Charges over chattels issues in the fixedfloating jurisprudence stephen atherton and rizwaan jameel mokal 1. 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. You can find out more about the legislation of business insolvency with our what is insolvency law article.

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. The terms were that its security was a fixed charge, but a floating charge. Fixed charge holders are first in line for repayment and receive the money they are owed from the sale of the asset they hold a fixed charge over. Nourse lj upheld the freedom of the contracting parties to create a fixed charge over the uncollected book debts and a floating charge over their realised proceeds, thereby implying that, for a fixed charge to be created over book debts, the chargee need not exercise control over their realised proceeds. Debtor appointees who rely on stock, cash and book debts to fund their administrations may do better initially, at the expense of inventory suppliers and others who fail to appreciate that their ownership is liable to attack under ppsa, especially once the 24 month transitional.

The term floating charge is apt, as a floating charge floats. There, the lenders control over the book debts and the. Spectrum plus house of lords decides that the bank. A fixed charge is over a nonchanging asset like property whereas a floating charge is where the security is on assets that can change like a debtor book or stock. The charger is usually free to deal with the assets the subject of the charge, e. Jan 10, 2006 although the charge over the companys present and future book debts was expressed to be a fixed charge, the house of lords held that the banks debenture only created a floating charge and the commissioners of inland revenue and customs and excise had priority over the proceeds of the companys book debts. Banking law charges over book debts may no longer be fixed. In effect, the book debts belong to the bank or factoring company, not the company. Insolvency shakeup over book debts at fbc manby bowdler llp, gareth ruddock acts for a range of smes including construction and software companies, as well as insolvency practitioners, which the firm. Examples of financial arrangements that are commonly subject to a fixed charge include. The factoring or discounting charge is the most common fixed charge, other than property. Is a charge over future book debts necessarily a floating charge. Book debts and the need for careful drafting of security documents.

The intention of the debenture was clearly to create a situation where the company could not factor or assign uncollected debts, but could collect them. Book debts are a current asset and whether or not there can be a valid fixed charge on book debts has been the subject of much legal discussion. Where a fixed charge over book debts provides that the collection of debts are paid into a separate bank account and the company is not free to deal with the. Floating charge holders must wait until fixed charge holders, preferential creditors such as employees and the insolvency practitioner have received the money they are owed before they are repaid.

A floating charge, on the other hand, is a charge on a class of assets, does not attach to any particular assets and allows the company to continue. How do the courts classify charges over book debts. Charges over book debts in the united kingdom and australia. A problem that has troubled the courts for at least a century is the concept of security over present and future debts. Banking law charges over book debts may no longer be.

In light of spectrum, it is evident that the key determinant and pivotal distinction between fixed and floating charges over book debts is that of control over both the account and its proceeds. Following this decision it appears that in the majority of cases encountered by the official receiver where a fixed charge over book debts leaves the company free to collect the debts and to use. Fixed charges operating as floating the priority of. Fixed charge over uncollected book debts and floating charge over their proceeds when those debt proceeds were credited to a specified bank account as in re new bullas trading.

Book debts and the need for careful drafting of security. Is the fixed charge over book debts a viable security. Is a security on book debts and proceeds a single indivisible charge or two charges. Is a charge confined to existing debts necessarily a fixed charge. The lawyers newsletter for business professionals banks left. Where a receiver has not been appointed under a floating charge it falls to the liquidator of the company including the official receiver when heshe occupies that position to realise any book debts covered by the floating charge. A typical debenture will purport to create a fixed charge over a companys book debts.

Priority given to floating charge creditors holmes o. It could, however, collect them if it subsequently paid the proceeds into an account in its name with the lending bank. This was logical as the value of the book debts lay in its proceeds. Priority given to floating charge creditors holmes omalley. A companys book debts maybe a valuable asset to have available as security. As to book debts, todays blocked account agreements perhaps trace their origins to re spectrum plus ltd 2005 2 ac 680 where the house of lords found that book debts were a floating charge asset, despite their identification as a fixed charge asset in the lenders security. Fixed charges over book debts ported to be fixed over uncollected book debts while leaving their proceeds sub ject to a floating charge would be floating as. What will become of the fixed and floating charge under ppsa. A company granted its bank a fixed charge on its book debts and a floating charge over other assets. Fixed and floating charges the privy council decision in agnew v. This article explains the latest position in australia based on some recent cases, and discusses the consequences of. Another fixed charge is the goodwill payment in administration. The end of an era re spectrum plus despite romer ljs classic statement identifying the usual characteristics of a floating charge, 1 it has long been clear that the essential difference between a fixed and a floating charge turns upon the extent to which the chargor is free to deal with the charged assets in the ordinary course of business.

He began by observing that, there being usually no need to deal with a book debt before collection, an uncollected book debt is a natural subject of a fixed. If a fixed charge is created over a property, which is subject to a floating charge, the fixed charge shall get priority, whereas if a floating charge is created over the assets, which are subject to a fixed charge, the charges shall not get any priority. The effect of ppsa on the fixed and floating charge. However, because the debenture did not specifically restrict the debtor company from dealing with the assets following crystallisation it could not be. Brumark investments ltd gave security over debts to its bank, westpac. In the decision of the house of lords in national westminster bank plc v spectrum plus limited in voluntary liquidation and others 2005 ukhl 41 it was suggested that a fixed charge over book debts. Related contenta recent house of lords decision on how to characterise security over book debts will have wide implications for banks and insolvency practitioners. Fixed and floating charges are a type of security that a lender has over assets. The newlook new bullas debenture endeavoured to create two distinct charges, a fixed charge on uncollected book debts and a floating charge on their proceeds. Free practical law trialto access this resource, sign up for a free trial of practical law. Banks debenture created a floating charge over the companys book debts, as opposed to a fixed charge, despite the wording of the debenture. How stringent the postcollection controls had to be was not made completely. Its important to note that a fixed charge repayment ranks before that of a floating charge repayment in company insolvency. Faced with the threat of rising interest rates, plenty of chief financial officers are wrestling with the choice of issuing fixed or floatingrate debt.

The company could not dispose of the debts by, for example, assigning or factoring them. The lawyers newsletter for business professionals banks. By permitting the chargor to collect the debts for its own use and benefit, the debenture in re brightlife failed the control test required for creating a fixed charge over book debts. The house of lords, with seven members given the constitutional issue of retrospective rulings, held that the charge over spectrum plus ltds 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. The supreme court confirmed this in a judgment delivered by ms. It will be suggested that the position taken in spectrum plus, though likely to be unpopular amongst commercial parties, is the right one and should also be the law in singapore.

Case law on fixed charges over book debts has the following history. The key message from this model is that the mix of fixed and floating rate debt that optimizes shareholder value depends on the relative size of ebit and the relative variation in interest rates and the correlation between ebit and interest rates, taking into account future investment opportunities including financial frictions. Although the charge over the companys present and future book debts was expressed to be a fixed charge, the house of lords held that the banks debenture only created a floating charge and the commissioners of inland revenue and customs and excise had priority over the proceeds of the companys book debts. Under the ppsa, the concept of a fixed charge will be replaced with a noncirculating asset and a floating charge will be replaced with a circulating asset. Can security be created over all a companys future debts. Tax and duty manual section 1001 fixed charges on book debts 2 section 1001, tca 1997 fixed charges on book debts legislation and procedures 1. There still remains some doubt concerning how such a security should be framed in the debenture so as to ensure that what is created is indeed a fixed charge over the book debts and not a. Fixed and floating charge understanding the differences. The significant question however, is how this charge is treated. The floating charge in question covered assets such as stock and book debts of the company, which are typical floating charge assets. Book debts can comprise a large part of a companys assets, so the issue of whether or not they are subject to a fixed or floating charge can have a significant impact on the returns to a charge holder. Fixed charges on book debtsthe story continues the. What are fixed and floating charges company rescue. Pdf there is no future for the floating charge under.

The question of what is or isnt a book debt often raises its head when lenders are looking to enforce their security. Is it possible to create a fixed charge over book debts. A fixed or floating charge the spectrum case uk house of lords august 2005 a companys book debts maybe a valuable asset to have available as security. The notice of crystallisation which was served by the bank was technically capable of converting the floating charge to a fixed charge. Introduction much of the recent debate as to the criteria which determine whether a charge is properly characterised as fixed or floating has revolved around charges over book debts or other receivables. The charge will remain on the companys records until the. The brumark case charge over book debts fixed or floating. Agnew v commissioners of inland revenue, more commonly referred to as re brumark.

A typical debenture will purport to create a fixed charge over a. Chargor was free to collect debts for its own account and to use proceeds in its business. Fixed and floating charges the cambridge law journal. Section 1001, taxes consolidation act 1997, which applies only to fixed charges on the book debts of a company, states that where a fixed charge is placed over the book debts of a company, the. The house of lords judges gave their decision in national westminster bank plc v spectrum plus limited and others 2005 ukhl 41. A fixed charge is created where the proceeds of the debts are paid into an account with and controlled by the bank chargee re siebe gorman v barclays 1979.

Priority given to floating charge creditors the holder of a validly crystallised floating charge will obtain priority over preferential creditor claims during a liquidation. The debtor book is then subject to a fixed charge, which means the businesss invoices effectively belong to the finance provider and not the company. This was logical as the value of the book debts lay in its proceeds, rendering the security worthless if there was no control over the proceeds. Book debts and the need for careful drafting of security documents print publication. The intention of the debenture was clearly to create a situation where the company could not factor or. The solution was an ingenious bit of drafting by virtue of which the charge over the book debts was declared to be fixed while the charge over the proceeds of those book debts paid into an account with a clearing bank was said to be a floating one. Fixed charges operating as floating the priority of preferential creditors remains vulnerable. Relevance of fixed versus floating charges to book debts. House of lords decisionby plc financerelated contentan update on national westminster bank plc v spectrum plus limited and others 2005 ukhl 41, in which the house of lords considered whether a charge over book debts that permited the chargor to draw freely on the account into which the proceeds of the book debts were required to be paid, created a floating. In an important judgment in re brumark investments limited, the privy council upheld the concept of fixed charges on present and future debts but held that re.