How do the courts classify charges over book debts?

  Executive Summary

This study is designed to get a clear understanding of charges over a company’s book debts and the courts role to develope it by judging the nature and volume of reported cases. Although, the charges over book debts frequently give rise to difficulties as the Company Act 1985 does not define ‘book debt’, it has been defined by judges in a series of cases.

This project further discusses the evolution of the floating charge and recent developments in the law which have considered the question whether a lender may create a fixed charge over the borrower’s assets which are of a type traditionally the subject of a floating charge, in particular book debt. The recent Privy Council decision in Agnew is at odds with the English position and this article considers whether the current uncertainty in the law should be resolved by legislative reform based upon the New Zealand model.

Finally, the project examines the nature of the security mechanisms of fixed and floating charges. In particular, charges over company book debts and their practical importance to corporate activity, are considered.

Relevant English, Australian and New Zealand case law is examined, with a detailed analysis of the judgment of the Privy Council in Agnew and Kevin James Bearsley v. The Commissioner of Inland Revenue and Official Assignee for the Estate in Bankruptcy of Bruce william Birtwhistle and Mark Leslie Birtwhistle(2001) UKPC 28; (2002) 20 ACLC 3,051

1.The creation of a charge on book debts:

Significant developments take place this century in law by the courts in relation to one particular type of charge frequently used by companies as security for repayment of a loan, namely, a charge over a company’s book debts. However, a charge over a book debt may be created in many ways and, for it to operate as an equitable assignment or charge, no particular form of words is required in the document1. In particular, an agreement between a debtor and a creditor that the debt owing shall be paid out of a specific fund coming to the debtor, or an order given by a debtor to his creditor upon a person owing money or holding funds belonging to the debtor, directing such person to pay the funds to the creditor, will create a valid equitable charge upon such fund, unless there is an absolute assignment. This will only be the case if the agreement, as well as providing that the fund shall be applied in a particular way, also imposes a positive obligation in favour of the creditor to apply the fund towards payment of the debt2.

 Thus, an undertaking to pay a specified sum out of the first moneys to be received on a future sale of certain rights constituted a good equitable assignment of the entitlement to the moneys3. A letter from a company to its customer instructing the customer to pay to the company’s account at its bank all amounts payable by the customer and stating that the instructions were to be regarded as irrevocable without the bank’s consent, constituted a charge on the book debts of the company and also has been held to be within S 396 (1) (e) of the Company Act 19854.

2.Book debts define in common law:

This category of charge frequently gives rise to difficulties because the Companies Act 1985 does not define ‘book debts’. The question whether any item is a book debt is generally a question of fact. The term ‘book debts’ has been defined by Lord Esher MR as ‘debts arising in a business in which it is the proper and usual course to keep books, and which ought to be entered in such books’5. Furthermore, a debt is a book debt if it arises in the course of a business and, as a matter of practice, such a debt would, in the ordinary course of a business, be entered in well-kept books relating to the business6. It is not necessary that it actually be entered, only that it be of the sort that accountancy practice would ordinarily require to be entered in the relevant books as a book debt (or, at least, as a debt)7. The fact that a company holds security or a guarantee for the debt does not alter its nature as a book debt. However, to be a book debt it must be enforceable by action directly against the debtor.

3.The nature of the charges:

The courts primarily determine whether a charge has been created over book debts and, if it has, the nature of the charge8. However, companies generally have two options available to them. First, a company can, like a natural person, provide a lender with a fixed or specific charge over the company’s property, for example a mortgage over its land. Secondly, unlike a natural person, a company can provide a floating charge. Thus, a fixed charge is one, which attaches to a specific item of property such as freehold and leasehold property, goodwill, shares in subsidiaries, intellectual property rights, fixed plant and machinery. The fixed charges also attaches to these categories of assets acquired in the future by the company. Importantly, the chargor is not permitted to dispose of the property without the chargee’s consent. A floating charge, on the other hand, covers a class of property, but does not attach to any specific items within the class until some specified future event occurs. Until that event transpires, the chargor can dispose of items in the class in the ordinary course of its business without reference to the chargee. In this way, a floating charge enables a company to provide security for a loan via assets, which will flow into and out of its ownership9.

It can be said that recently, the boundary between the fixed and floating charge was fairly settled, at least in England, judging by the nature and volume of reported cases. Lord Macnaghten’s description of fixed versus floating charges in Illingworth v. Houldsworth10 is helpful:

A specific charge, I think, is one that without more fastens on ascertained and definite property or property capable of being ascertained and defined; a floating charge, on the other hand, is ambulatory and shifting in its nature, hovering over and so to speak floating with the property which it is intended to affect until some event occurs or some act is done which causes it to settle and fasten on the subject of the charge within its reach and grasp11.

However, the instrument creating the several charges will, in most cases, state whether each is intended to take effect as ‘fixed’ or ‘floating’ security. So, the characterisation in the instrument is unlikely to be determinative; a charge expressed to be ‘fixed’ may take effect as a floating charge. Indeed, it has been said that ‘the subjective intentions of the parties to the instrument are irrelevant and inadmissible’ for the purposes of determining the proper categorisation of the charge12.

4.The creditors prefer to take fixed charge over book debts:

The efficient operation of company business relies to a great extent on the ability of companies to procure debt capital. This in turn is dependent on the confidence of lenders in their ability to protect themselves against undue risk. A fixed charge gives a greater level of protection than a floating charge. One of the inherent risks of a floating charge, not shared by a fixed charge, is that certain unsecured creditors, including employees of the company, are given priority over a creditor who holds a floating charge (including a floating charge that has become fixed). For this reason, a lender taking security will prefer to obtain a fixed charge over those assets available for such a charge, that is, fixed assets which the company is not likely to want to dispose of whilst the charge exists. Furthermore, many small companies do not have large tangible assets such as property. Therefore, the practice was that the bank would like to take a fixed charge over future monies due to the company (e.g. book and trade debts, amounts due under insurance claims, refunds due from Crown Departments etc.). In reality, for many small companies, the book debt ledger was the barometer, which set the level of lending the bank, was prepared to extend.

 However, there may be insufficient fixed assets available and this will then necessitate the creation of floating charges with their attendant risk. The types of assets, which are typically subject to floating charges, are book debts and trading stock.

5.The floating charge becomes attractive to the creditors:

The floating charge is used most often to take security over a company’s book debts, leaving the company the freedom to deal with the book debts by collecting them in the ordinary course of its business. However, the use of the floating charge took hold because, if a corporate debtor had been obliged to comply with the terms of a fixed charge, the effect on its circulating capital would be to paralyse its business. The reason for this was that under a fixed charge, unless the debtor company obtained the consent of the creditor, it would be unable to deal with its assets without breaking the terms of the fixed charge. This meant that it would be unable to give its customers ownership of the goods that it sold to them, or make use of the money that they paid it for goods sold. It could not use that money or the cash in its bank account to buy more goods or to meet other commitments13. In other words, a fixed charge deprived the company of its cash flow.

The floating charge, on the other hand, was intended to give creditor effective and comprehensive security over the debtor company’s whole business as well as its assets, while at the same time leaving the debtor company free to deal with its assets and pay its trade creditors in the ordinary course of its business. This form of security became especially attractive for banks that advanced loans to their corporate customers.

6.The vulnerability of the floating charges:

By the 1970s, however, banks had become disillusioned with the floating charge, because of the increasing range of claims of other creditors with floating charges, as well as the growth in other classes of preferential creditor with priority over the banks on the insolvency of corporate debtors. This led the banks to explore other ways of expanding their use of fixed charges14.

 It was, however, generally considered that it was not possible to take a fixed charge over a fluctuating class of present and future book debts. The reasons for this were commercial: book debts were part of the circulating capital of a business, and were an important component of its cash flow, and a fixed charge would have the effect of strangling the debtor’s business.

 7.The controversial academic debates on book debts:

In 1994, a decision of the English Court of Appeal (Civil Division)15, relating to charges over company book debts, gave rise to a flurry of academic debate. Professor Roy Goode started the debate, in which he pronounced the New Bullas decision to be “so disappointing”16. Conversely, Alan Berg, in a reply to Goode described New Bullas as “a correct and helpful decision17. The debate (into which a number of other academics also weighed) centred on the question of whether security in a book debt and its proceeds creates one security interest or two. According to Goode, if it creates a single interest which changes its character “from fixed to floating as it moves from assets to proceeds”18, then the interest in the proceeds ranks ahead of the claims of preferential creditors. If, on the other hand, upon collection of the proceeds of the book debt an entirely new floating security “springs into existence19, then the interest will be subordinate to the claims of preferential creditors.

Recently, the Privy Council in Agnew and Kevin James Bearsley v. The Commissioner of Inland Revenue and Official Assignee for the Estate in Bankruptcy of Bruce William Birtwhistle and Mark Leslie Birtwhistle20 emphatically declared New Bullas to have been wrongly decided. The Privy Council’s decision is of significant interest to banks or others that hold a charge over the book debts of a borrowing company as security for a loan. Lenders may be wise to re-evaluate the level of security that such charges afford them, in light of the direction in which the Privy Council’s decision has taken the law.

The Agnew case, which emanated from New Zealand, concerned a company, Brumark Investments Limited that went into receivership. The receiver collected payment of various book debts of the company. The issue before the Privy Council was whether the amounts realised from the book debts should be applied towards payment of the company’s employees (and the Commissioner of Inland Revenue) as preferential creditors, or whether the amounts collected should be paid to Westpac Bank which held a charge over Brumark’s book debts. The answer turned on whether the charge was fixed or floating, for only a fixed charge would allow the bank to receive preferential payment under the relevant statutory provisions relating to receivership. The trial judge held the charge in question was a fixed charge, but this was reversed by the New Zealand Court of Appeal. The Privy Council dismissed the subsequent appeal by the bank and held the charge to be a floating charge, notwithstanding its description as a fixed charge in the debenture.

Lord Millett delivered the judgment of the Privy Council and commenced with a useful account of the history and an analysis of the nature of fixed and floating charges over book debts. This account is briefly summarised.

8.Case law on book debts:

Historically, series of cases have developed the applicability of charges over book debts. The cases analysed here both fixed and floating charges over book debts. The floating charge originated in a series of Chancery Division decisions in the 1870s21. The earliest judgment to recognise a floating charge did so as a necessary inference of the wording used in the particular debenture in question. The case was In re Panama, New Zealand and Australian Royal Mail Co22. The debenture charged ‘the undertaking’ of the company and ‘all sums of money arising there from’23. The court regarded the words ‘the undertaking’ as including circulating assets. To construe the wording in the debenture as creating a fixed charge would mean the company would be unable to deal with its circulating assets without consent of the charge holder. Effectively this would paralyse the company’s operations24. Instead, the court took the view that the parties must have intended the company to continue its business. Such intention was inconsistent with the essential features of a fixed charge and the parties were therefore taken to have agreed on a type of charge, which did not possess the characteristics of a fixed charge. Thus came into existence a type of charge consistent with the intention of the company carrying on business, the floating charge. The floating charge enables a creditor to acquire comprehensive security over the entire undertaking of a company whilst simultaneously allowing the company to deal with its assets in the course of its daily business, without reference to the creditor holding the charge.

The most celebrated, and certainly the most often cited, description of a floating charge is that given by Romer LJ in re Yorkshire Woolcombers Association Ltd25. He stated that a charge would be a floating charge:

….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 assets26.

This case was the first decision to consider charges in the specific context of book debts. The court held that a charge on uncollected book debts was necessarily a floating charge because the company’s right to receive the book debts and use them in carrying on business was inconsistent with the nature of a fixed charge27. The matter went to the House of Lords under the name Illingworth v. Houldsworth28. Where Lord Halsbury LC stated:

the whole purport of this instrument is to enable the company to carry on its business in the ordinary way, to receive the book debts that were due to them, to incur new debts and to carry on their business exactly as if this deed had not been executed at all. That is what we mean by a floating security29.

The analysis primarily in Illingworth does not preclude a lender from holding a fixed charge over a company’s debts. To do so, a lender can take an assignment of a specified debt, notify the debtor of the assignment and become entitled to collect the debt itself. However, Lord Millett, in Agnew, pointed out the impracticality of such an arrangement from the perspective of both the lender and the borrowing company. The lender is unlikely to want to be the collector of the debt. Moreover, notification to the debtors of the company of the assignment has the potential to seriously harm the company’s credit.

An alternative method of obtaining an effective fixed charge over book debts is for the lender/assignee not to notify the company’s debtors of the assignment (until the company is in default). The assignee then authorises the assignor company to collect the debts as trustee on the assignee’s behalf.

 Whilst this alternative method creates a feasible alternative for lenders with regard to specified debts, according to Lord Millett ‘ it was, however, generally considered that it was not possible to take a fixed charge over a fluctuating class of present and future book debts’30. These concerns were laid to rest in cases decided in the 1970s and 1980s. In 1979, in Siebe Gorman & Co Ltd v. Barclays Bank Ltd31. A company granted its bank a fixed charge on its book debts and a floating charge over other assets. The company could not dispose of the debts by, for example, assigning or factoring them. It could, however, collect them if it subsequently paid the proceeds into an account in its name with the lending bank. On the facts, Slade J found that the company was not free thereafter to draw on the account without the bank’s consent, even though this was not expressly stated in the debenture. This critical factor led the Judge to conclude that the charge was fixed. However, had the company enjoyed an unrestricted right to deal with the money in the bank account, the charge would have been ‘no more than a floating charge’32. The bank in Siebe Gorman appeared to be the beneficiary of a generous interpretation of the wording of the debenture. The debenture provided that:

during the continuance of this security the company… shall pay into the company’s account with the Bank all monies which it may receive in respect of the book debts and other debts hereby charged and shall not without the prior consent of the Bank in writing purport to charge or assign the same in favour of any other person and shall if called upon to do so by the bank execute a legal assignment of such book debts and other debts to the Bank.

This wording was sufficient to lead Slade J to conclude that the bank had sufficient control to constitute the charge as fixed33. His Honour stated:

I do not accept the argument that the provisions…negative the existence of a specific charge. All that they do, in my judgment, is to reinforce the specific charge given …The mere fact that there may exist certain forms of dealing with book debts which are not specifically prohibited…does not in my judgment turn the specific charge into a floating charge34.

Lord Millett in Agnew noted that Slade J’s finding that the company was not free to draw on the account without the consent of the bank ‘has been doubted’35.

The decision was followed by the Supreme Court of Ireland in Re Keenan Bros Ltd36, a charge over present and future book debts was held to be a fixed charge where moneys collected by the company from the book debts were required to be paid into a designated account from which withdrawals could only be made with written consent of the bank. In both the above cases the deciding factor was that the proceeds of the book debts collected by the company were not available freely for the company’s use.

 Conversely, in the Australian case Re Falcon Sportswear Pty Ltd; Hart v. Barnes37, where a debenture purported to create a fixed charge over book debts, but the parties agreed that the company could collect the debts and use the proceeds at its discretion. The charge was held to be floating because the charged assets were not under the chargee’s control.

A number of subsequent cases followed this line of reasoning. Where a company was free to utilise the proceeds of collected debts without reference to the lender, the charge over the book debts was consistently held to be a floating charge. In Re Brightlife Ltd38 the company purported to grant its bank a fixed charge over its present and future book debts and a floating charge over its other assets. The company was not permitted to sell, factor or discount debts without the bank’s consent, but it could collect the debts and pay them into its ordinary bank account, although it was not required to do so. Notwithstanding the description of the charge over the book debts as fixed, the court held it was a floating charge, because the company was free to collect the proceeds which were then at the free disposal of the company39. Hoffmann J stated that:

A right to deal in this way with the charged assets for its own account is a badge of a floating charge and is inconsistent with a fixed charge40.

Supercool Refrigeration and Air Conditioning v. Hoverd Industies Ltd41 and In re Cosslett (Contractors) Ltd42 are similar to Brightlife. In Cosslett, the court described the position as follows:

The question is not whether the chargor has complete freedom to carry on his business as he chooses, but whether the chargee is in control of the charged assets.

These decisions established that banks were able to obtain the security of a fixed charge as long as they exercised control over the charged assets. This apparently did not satisfy the banks. Banks did not want to take on the monitoring of the chargor company’s bank account nor did banks want to be required to give consent to withdrawals from the account. Hence, the development in the 1990s of the novel approaches taken by the drafters of the debenture in the New Bullas case.

 9.New Bullas versus Agnew approach:

The debenture in New Bullas was designed to obviate the need for monitoring of bank accounts and consent to withdrawals by the bank whilst still providing the security of a fixed charge. Whereas all the debentures considered in previous cases treated book debts and the proceeds thereof indivisibly, the draftsman in New Bullas split them into two. The new-look New Bullas debenture endeavoured to create two distinct charges, a fixed charge on uncollected book debts and a floating charge on their proceeds. 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. Upon collection the proceeds would be subject to a floating charge.

The debenture in Agnew, which Lord Millett believed to be closely modelled on the New Bullas debenture, was described by his Lordship as follows:

It is expressed to create a fixed charge on the book debts of the company which arise in the ordinary course of trading and their proceeds, but not those proceeds which are received by the company before the charge holder requires them to be paid into an account with itself (which it could do at any time but never did) or the charge created by the deed crystallises or is enforced whichever should first occur. Subject thereto, the charge is expressed to be a floating charge as regards other assets of the company. The debenture prohibits the company from disposing of its uncollected book debts, but permits it to deal freely in the ordinary course of its business with assets, which are merely subject to the floating charge; these include the money in its bank accounts and the proceeds of the book debts when collected43.

This meant that the company was free to collect its book debts and deal with the proceeds in the ordinary course of business. However, the company could not assign or factor the book debts.

The debenture in Agnew differed from the New Bullas debenture in that the proceeds of the debts were not to be released from the fixed charge until they were paid into the company’s bank account, whereas in New Bullas they were to be released as soon as they were collected by the company. However, the Privy Council saw no significance in this distinction to the issue under consideration.

In both cases the companies went into receivership and the issue that arose was whether, given the companies’ ability to deal freely with the collected proceeds of the book debts, the uncollected debts were subject to a fixed or a floating charge, notwithstanding the description of the charge as fixed.

The court at first instance in New Bullas followed the decision in Brightlife and held that the uncollected debts were subject to a floating charge44. However, this was reversed by the Court of Appeal. Nourse LJ gave the Court of Appeal’s judgment and held the matter to be one of construction in which the intention of the parties was paramount. Clearly, the parties intended exactly what they had expressed, namely a fixed charge over the uncollected debts and a floating charge over the proceeds. His Honour concluded that unless some principle of law prohibited the parties from such an agreement, their clear agreement must prevail45.

To approach the issue as a matter of construction was, however, described by Lord Millett in Agnew as ‘fundamentally mistaken’46. Instead, the Privy Council regarded the correct approach as being a two-part process. First, the court must establish the intention of the parties in relation to the rights and obligations each has over the charged assets. This done, it is for the court then to categorise the charge. The categorisation is a matter of law that is not dependent on the intention of the parties.

If their intention, properly gathered from the language of the instrument, is to grant the company rights in respect of the charged assets which are inconsistent with the nature of a fixed charge, then the charge cannot be a fixed charge however they may have chosen to describe it … The only intention which is relevant is the intention that the company should be free to deal with the charged assets and withdraw them from the security without the consent of the holder of the charge; or, to put the question another way, whether charged assets were intended to be under the control of the company or of the charge holder47.

On the facts of Agnew this led to the conclusion that the charge was floating as the only limitation on the company’s control was its inability to assign or factor the book debts. Over and above this, the company enjoyed complete control over the debts, their collection and the proceeds thereof.

One of the grounds of argument of the preferential creditors in New Bullas was rejected by Nourse LJ on an interesting theoretical basis. The preferential creditors argued that the charge over the debts was floating because the company had freedom to withdraw the debts from the security and use the proceeds. Nourse LJ, however, regarded this ability of the company as being not at the will of the company, but rather as arising from the agreement of the parties in advance when they entered into the debenture. The Privy Council in Agnew forcefully rejected this aspect of Nourse LJ’s judgment. Lord Millett pointed out that every charge derives from contract and that pursuit of this reasoning would convert every floating charge into a fixed charge48.

Nourse LJ, in New Bullas, also treated as vital to the court’s finding of a fixed charge the fact that the company could not dispose of the charged assets to third parties by assigning, factoring or charging them. It was regarded as unnecessary to prohibit in addition the collection of the debts and disposal of the proceeds. The Privy Council also rejected this, stating ‘alienation and collection are merely different methods of realising a debt by turning it into money’49. To restrict one and allow the other is inconsistent with the fixed nature of the charge. ‘It allows the debt and its proceeds to be withdrawn from the security by the act of the company in collecting it’50.

The last matter dealt with by the Privy Council in Agnew has been the subject of much debate, namely, whether a debt can be separated from its proceeds. Lord Millett noted the academic articles relating to this issue and whilst recognising that a debt and its proceeds are two different assets, thought that the proceeds represent the entire value of the debt. An assignment or charge of a receivable like a debt, which does not carry the right to its receipt, is worthless. Lord Millett concluded that even if conceptually the ownership of a debt can be separated from the ownership of its proceeds, in the context of security it makes no commercial sense. This accounted for the draftsman of the debenture in Agnew purporting to separate the book debts and their proceeds, but not attempting to separate their ownership. They were charged by the same chargor to the same chargee. Lord Millett described it as a matter of personal choice whether one describes a debenture such as the Agnew debenture as creating two different charges or a single convertible charge.

The Privy Council’s conclusion in Agnew was that the company was left in control over the process by which the charged assets were removed from the charge and replaced by different assets which were not the subject of a fixed charge and were at the company’s free disposal. This was found to be inconsistent with a fixed charge.

10.The approval of New Bullas:

The New South Wales Supreme Court in Australia, in Whitton v. CAN 003 266 886 Pty Ltd (Controller Apptd) (in liq) & Ors51. approved of and followed the decision of Nourse LJ in New Bullas. Bryson J gave judgment on a deed of charge, which purported to create a fixed charge as to all book debts, present and future of the mortgagor and a floating charge over moneys or property actually received by the mortgagor on account of any book debt. The floating charge provided that the mortgagor could not dispose of any property under the floating charge without written consent of the mortgagee except in the ordinary course of business. The New South Wales Supreme Court held that there was a fixed charge over moneys received on book debts after appointment of the receiver.

Bryson J described floating charges52 as “a creation of ingenuity and judicial laissez faire in the Nineteenth Century” and as “prominent features of the raw deal which, according to Lord Templeman, unsecured creditors receive: see Borden (UK) Ltd v. Scottish Timber (1981) Ch 25 at 42”. Bryson J rejected the standpoint taken by Hoffmann J in Brightlife and followed instead the decision in New Bullas. In Bryson J’s view, the intention of the parties should determine the issue-“Principle requires that characterisation as a floating charge take place according to the rights which the parties intended to create”53. His Honour referred to the statement of Nourse LJ in New Bullas that the debt be collected and the proceeds applied to business, however, on insolvency, a fixed charge enabling the lender to intercept payment to the company may be of real value.

11.The consequences of Agnew:

The Privy Council is the highest appellate tribunal for appeals from decisions of British Commonwealth court. Although, strictly speaking, its decisions are not binding on English domestic courts, they are of very persuasive authority and certainly indicative of how such issues are likely to be viewed in the future at the same level (i.e. by the House of Lords as the highest appellate tribunal for purely domestic appeals).

If English courts followed Agnew, the charges on book debts of New Bullas type of debentures will not be fixed on uncollected book debts unless the charges on the proceeds are also made fixed. Importantly, the general rule is that the chargee must be in ‘control’ of the proceeds if the charge is to be fixed.

Furthermore, Banks may well be forced to reconsider the value of their security, particularly where they are heavily reliant upon book debts and if there are likely to be significant preferential claims on insolvency. This may cause certain banks to reduce overdraft limits. There is also likely to be a move away from debenture lending and towards some form of invoice discounting.

The question of fixed or floating charges would be important for insolvency practitioners who are acting as receivers because of preferential claims and priority. A receiver who would wrongly classify the charge as fixed may become personally liable for paying the wrong creditor.

12.Was the decision in Agnew correct?

The effect of Privy Council decision in Agnew is that if a secured party wants to rank ahead of preferential creditors in relation to its security interest in receivables, it must maintain genuine control of the proceeds of those receivables, as they are collected. The categorisation of charges as fixed and floating is actually something of a pretext, as the only significance of the distinction is the relative ranking of the secured party in relation to preferential creditors.

One might conclude, however, that even if the distinction is a pretext, it is perfectly valid for the court to require a secured party to meet certain conditions if it is to take security ranking ahead of preferential creditors. After all, a security agreement between a borrower and a lender has ramifications that go beyond their relationship. Other creditors of the borrower, including particularly vulnerable creditors such as employees,54 are affected by the arrangement. However, the court in Agnew alludes to this in its discussion of the difficulties that floating charges pose for ordinary creditors55.

Although the Privy Council does not expressly put it in these terms, it must be the need to protect other creditors that justifies its interference with an agreed arrangement between a borrower and a lender. It is difficult to find any other justification that there is no inherent feature of fixed and floating charges that requires the distinction between them to be maintained in order for a legal framework governing secured transactions to function effectively.

Furthermore, after Agnew, the borrowers seeking to secure finance with receivables will simply be required to look to factors and other lenders who are in effect prepared to purchase the receivables56. Alternatively, such a borrower could make arrangements with its bank whereby the bank sets up adequate arrangements for policing the collection of the receivables and the payment of their proceeds into a blocked account.

 From the point of view of the borrower, all of this makes the financing of its working capital more complicated and more expensive. It is difficult to see how that serves the interests of employees or any other creditors of the borrower, since such mechanisms will in any event be designed to ensure that the lenders rank ahead of preferential creditors in relation to receivables.

 Notwithstanding its conceptual faults, New Bullas, which Agnew suggests is no longer good law, produced a more satisfactory commercial result than Agnew. New Bullas provided a device whereby a lender could take a valid first-ranking security interest in receivables without the parties incurring the significant additional cost of a policing arrangement. The Privy Council in Agnew took a more interventionist approach, but with no real justification beyond the somewhat perfunctory one of putting right the conceptual shortcomings of New Bullas. Therefore, the English courts should avoid going down the route of Agnew and, if legislation is necessary, Parliament should consider what is required to avoid English law taking this retrograde step.


The legal status of charges over book debts is still unclear. The approach of charges similar to those described in the cases in this article is commonplace in UK’s business and banking practice. It seems inevitable that, before long, the issue considered in these cases will arise again before the English courts. It remains to be seen whether future English courts will follow the New Bullas approach of the Court of Appeal or be persuaded by the opposite decision in the recent Privy Council judgment in Agnew. Importantly, the decision of the Court of Appeal in New Bullas is still binding as a precedent on the English courts up to the Court of Appeal, because decisions of the Judicial Committee of the Privy Council, although of persuasive authority, are not precedents binding on the English courts. Moreover, so far as New Zealand law is concerned, the very question involved in Agnew will cease to exist when New Zealand legislation floating charge passed in 1999 is brought into force. It would therefore appear that a breathing space is available for the banks in this country to amend their loan documentation governing existing secured loans, and to adjust the loan documentation used by them in future, so as to counter the likelihood that the eminent commercial lawyers who sat in the Judicial Committee in Agnew render similar judgments if a parallel English case comes before the House of Lords. If that is done the only disturbance, which the decision of the Judicial Committee will have caused, will be the addition of a paragraph to the standard loan documentation used by English banks. This addition was probably implicit in the documentation used in New Bullas.


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The interchangeability of fixed and floating charges, (2003) Com Law Vol. 24 No.2. P. 60-62.

Brumark’s Implications(2002/3) IHL No.106 Dec/Jan Supp(Finance 2003)P7-8.

Re Brumark (2002)LMCLQ 289. P.289-292.

Fixed Charges over book debts (2002) LMCLQ 246 P.246-258.

The nature of security over receivables (2002) 23 Co Law (3) P 84-92.

Book debt security-The end of New Bullas? (2002) 23 C0 Law  (1) .P 24-25.

Taking security: Some dilemmas and dichotomies (2001) 11 JIBL 498 Vol.16 No.11. P 498-504.

Brumark revisited-The Privy Council and Brumark: A lingering shadow over book debts? ( 2001) 22 Co Law (10). P 318-319.

Charges-Fixed or Floating? (2003) IL & P Vol.17 No.6 P 221-224.

Book debt charges after Brumark: Where are we now? (2001) 10 JIBL 456 Vol.16. No 10. P 456 –463.

The impact of the Brumark decision for lenders and borrowers (2003) Corp Brief. Vol. 15 No8 P25.

Fixed charges over company’s book debts after Brumark (2001) IL & P Vol.17 No. 4. P 125-128.

Fixed and floating charges- A revelation ( 2001) LMCLQ 123 P 123-149.

Fixed charges over book debts (2002) Corp Brief, Vol.14 No. 5. P 17-19.

Fixed or floating charge? ( 2003) SJ Vol. 142 No. 45.  P 1088-1089.

Websites:                      date 15 Feb to 8th may 2003                                   date 15 Feb to 8th may 2003                                          date 15 Feb to 8th may 2003 www.westlaw.shtml                                          date 15 Feb to 8th may 2003                                       date 15 Feb to 8th may 2003                                                      date 15 Feb to 8th may 2003                                           date 15 Feb to 8th may 2003                                               date 15 Feb to 8th may 2003

  1 Durham Brothers v. Robertson (1898) 1 QB 765 at 796; William Brandt’s v. Dunlop (1905) AC 454 at 462).

2 Ridick v. Candell (1852) 1 De GM Lloyds Bank Limited (1982) 2 All ER 449 at 453).

3 Cotton v. Heyl (1930) 1 Ch 510)

4 Re Kent & Sussex Sawmills Limited (1947) Ch 177; Walter & Sullivan Limited v. Murphy Limited (1955) 2 QB 584; Paul and Frank Ltd v. Discount Bank (Overseas) Limited (1967) Ch 348 at 364).

5 Official Receiver v. Tailby (1886).

6 Generally, a bank will issue a bond or a guarantee or will make advances against a ‘charge’ over moneys standing to the credit of a company’s account with it. Such a credit balance represents a debt from the bank to the company; Foley v. Hill (1848) 2 HL Cas 28; Parker v. Marchant 1 Ph 356 at 361, but it is doubtful that it is a ‘book debt’ for the purposes of the section (Re Brightlife, Re Permanent Houses (Holdings) Ltd and Northern Bank v. Ross (1990) BCC 883).

7 Paul and Frank Ltd v. Discount Bank (Overseas) Limited (1967) Ch 348; Re Brightlife).

8 For example, Re Cosslett (Contractors) Ltd (1996) 4 All ER 46).

9 There are three basic features of a floating charge, which need to satisfy before, were analysed in Re Yorkshire Woolcombers Association Ltd; Houldsworth v. Yorkshire Woolcombers Association Ltd (1903) 2 Ch 284, and are:

it is an equitable charge over the whole or a class of the company’s assets, for example over the book debts;

the assets subject to the charge are constantly changing; and

the company retains the freedom to deal with the assets in the ordinary course of business until the charge ‘crystallises’.

This was offered as a description and not a definition. These three characteristics are the ‘indicia’ of a floating charge, not a definition of it and it is possible to have a floating charge, which does not contain all of them (Re Bond Worth (1980) 1 Ch 228). The first two characteristics are typical of a floating charge but they are not distinctive of it, since they are not necessarily inconsistent with a fixed charge. It is the third characteristic, which is the hallmark of a floating charge and serves to distinguish it from a fixed charge. Since the existence of a fixed charge would make it impossible for the company to carry on business in the ordinary way without the consent of the charge holder, it follows that its ability to so without such consent is inconsistent with the fixed nature of the charge.

10 (1904) AC 355

11 At 358

12 Re Cimex Tissues Ltd at 628)

13 In addition, it could not use borrowed money either, not even, as Sir George Jessel MR. observed, the money advanced to it by the charge holder. In short, a fixed charge would deprive the company of access to its cash flow, which is the lifeblood of a business. Where, therefore, the parties contemplated that the company would continue to carry on business despite the existence of the charge, they must be taken to have agreed on a form of charge, which did not possess the ordinary incidents of a fixed charge.

14 Having, however, a fixed charge meant imposing a requirement that the company should pay the proceeds of its book debts into its bank account, but was not a problem for banks or their customers, because companies did that in any case, even where there was no such requirement. But the banks did not want to comply with other fixed charge requirements, such as that of having to monitor the company’s bank account and consent whenever the company wanted to make a withdrawal. The banks wanted the best of both worlds: a fixed charge on the company’s book debts, but with the company having the same freedom to use the proceeds of the charge had been a floating charge.

15 RE New Bullas Trading Ltd (1994) BCC 36 (1994); 12 ACLC 3, 203.

16  “Charges over Book Debts: a Missed Opportunity” (1994) 110 Law Quarterly Review 592.

17  “Charges over Book Debts: a Reply” (1995) Journal of Business Law 433.

18 n 6 at 603

19 Ibid.

20  (2001) UKPC 28; (2002) 20 ACLC 3,051.

21 Before the introduction of the legislation the expression ‘floating charge’, though in common use, had no distinct meaning. It was not a legal term or term of art. Now, it became necessary to distinguish between fixed charges and charges which were floating charges within he meaning of the Acts. Lord Macnaghten’s essayed the first judicial definition in Governments Stock and other Securities Investment Co Ltd v. Manila Railway Co. (1897) AC 81, at p86: ‘ A floating security is an equitable charge on the assets for the time being of a going concern. It attaches to the subject charged in the varying condition in which it happens to be from time to time. It is of the essence of such a charge that it remains dormant until the undertaking charged ceases to be a going concern, or until the person in whose favour the charge is created intervenes’.

22 (1870) 5 Ch App 318.

23 Agnew at 3054

24 This theme was repeated in many of the cases: see for example In re Florence Land and Public works Co (1878) at p 541 per Sir George Jessel MR; Biggerstaff v. Rowatt’s Wharf Ltd (1896) 2 Ch 93 at p 101 per Lindley LJ and p 103 per Lopes LJ.

25 (1903) 2 Ch D 284

26 Ibid at 295.

27 In 1910, the jurisprudential nature of the floating charge further was analysed by Buckley LJ in Evans v. Rival Granite Quarries Ltd. (1910) 2 KB 979. By now it was evident that the classification of a security as a floating charge was a matter of substance and not merely a matter of drafting. As Fletcher Moulton LJ observed in that case at p 993: “But at an early period it became clear to judges that this conclusion did not depend upon the special language used in the particular document, but upon the essence and nature of a security of this kind”.

28(1904) AC 355

29 Quoted in Agnew at 3,056

30 At 3,057

31 (1979) 2 Lloyd’s Rep 142.

32 However, Slade J said at p. 158:

“…if I had accepted the premise that (the company) would have had the unrestricted right to deal with the proceeds of any relevant book debts paid into its account, so long as that account remained in credit, I would have been inclined to accept the conclusion that the charge on such book debts could be no more than a floating charge”.

33 The decision in Siebe Gorman has been criticised on the basis that the parties clearly intended the company to continue to trade and, in practical terms, it could not do so if periodically deprived of all debts due to it. Legal debated on this issue continues, so it is possibly that, at some stage, Siebe Gorman will be reversed- with the consequence that many perceived fixed charges will prove to be floating charges. Until Siebe Gorman is reversed, however, it continues to be relied upon by clearing banks compelled to address the practical and business considerations of their customers.

34 . Ibid at 159.

35 n 1 at 3,057

36 (1986) BCLC 242

37 (1983) 1 ACLC 690; (1982) 7 ACLR 310; In Hart, Anderson J held that the charge was a floating charge. The debenture holder could not sensibly be said to have obtained a proprietary interest by way of a fixed charge when its interest was

“ defeasible and capably of being destroyed by the company which is able to use the proceeds of such book debt in its business without in any way being accountable to the debenture holder for such proceeds”.

38 (1987) Ch 200

39 The case was thus distinguishable from but very similar to Siebe Gorman save that it was concerned with the proceeds of book debts, which were still uncollected when the receivers were appointed.

40 Ibid at 209.

41 (1994) 3 NZLR 300

42 (1998) Ch 495

43 n 1 at 3,053.

44 In addition, Mr Justice Knox’s judgment is reported at (1993) BCC 251. Having considered the provisions of the debenture and several of the previous authorities, including Re Yorkshire Woolcombers Association, Ltd., Siebe Gorman & Co Ltd. v. Barclays Bank Ltd. and RE Brightlife Ltd., the judge reached the conclusion that the case fell on the floating charge side of the line, in that the company’s ability to deal with book debts was, at the creation of the charge. met subject top am a greater fetter than Hoffmann J had held to be inadequate in Re Brightlife Ltd. He continued, at p.265E-F:

“Absent a direction from 3i there was a freedom of action conferred upon the company which was in my judgment inconsistent with the existence of a specific charge”.

45 On the other hand, the decision is inconsistent with the actual decisions in Brightlife and Supercool and contrary to the statements of principle in virtually every case from Re Youkshire Woolcombers Association Ltd. to Cosslett.

46 Ibid at 3,060.

47 Ibid.

48 Ibid.

49 Ibid

50 Ibid at 3,061

51 (1996) 14 ACLC 1799

52 Ibid at 1,809.

53 Ibid at 1813.

54 It is more difficult to make this argument in relation to the Crown revenue agents, and the Department of Trade and Industry has proposed the abolition of the Crown preference. White Paper, Insolvency- A second Chance, Secretary of State for Trade and Industry (July 2oo1)

55 Agnew, paras 9&10

56 This throws into relief the distinction between the sale of a receivable and a charge over a receivable, and means that the distinction could be crucial to the creation of a perfected arrangement for financing secured by receivables. Again, this is contrary to what the draftsmen of the UCC (Uniform Commercial Code-United States) recognised as the commercial trend: “commercial financing on the basis of accounts and chattel paper is often so conducted that the distinction between a security transfer and a sale is blurred…(therefore the purchaser of a receivable) is treated (under the UCC) as a secured party, and his interest is a security interest”. Comment 2 to s.9-102 of the Pre-Revision (2000) Art.9 of the UCC.