Vol 2 (2005) - Issue 4

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Re Spectrum Plus Limited

On 30 June 2005, the House of Lords delivered its eagerly awaited Judgment in the case of National Westminster Bank plc v Spectrum Plus Limited and others and in so doing dashed the hopes of many banks that the earlier decision of Slade J in Siebe Gorman & Co Ltd v Barclays Bank Ltd might be upheld despite the debate about the correctness of that decision which had centred largely upon the comments of Lord Millett in the Brumark case.
The unanimous decision of the unusually large panel of seven Law Lords (overruling the similarly unanimous decision of the Court of Appeal) is of significance to financiers and lawyers for two reasons: First, because of its legal consequences in relation to the creation of fixed and floating charges over book debts and second, because, for the first time in English legal history, their Lordships have expressly considered that they would have the power to overrule a previous decision with only prospective effect.

Fixed and floating charges over a company’s book debts

The debenture granted by Spectrum Plus Limited to NatWest was, in material terms, no different to that relied upon by Barclay’s Bank in the Siebe Gorman decision. In that earlier case, Slade J had held that a charge over book debts which required the company to pay the proceeds of the same into its account with the chargee bank upon which the company was then free to draw, created a fixed charge over the relevant book debts of the company. However, as UK readers will be aware, in February 2002, prompted by the terms of the Privy Council’s decision in the Brumark case, the Crown issued a public statement to the effect that distributions made by insolvency practitioners after 5 June 2001 to banks in respect of charges where the chargor had been allowed an unfettered right to draw on the proceeds of the book debts without the specific consent of the chargee were liable to challenge from the Crown.

In fact, in the Spectrum Plus litigation NatWest Bank forced the Crown’s hand by issuing its own application against the company, for a Declaration that its charge over the company’s book debts was ‘fixed’ and for an order that the liquidators of the company must accordingly account to them for the full amount of the book debt realisations. Like many duly appointed insolvency practitioners, the liquidators were withholding such proceeds in view of the Crown’s recent public statement - indeed, shortly after the Crown issued its public statement, the Association of Business Recovery Professionals told its members not to make any distributions, or treat charges as floating charges, without the consent of the relevant banks and preferential creditors and, if consensus could not be reached, to make their own application for directions.6 In the result, the liquidators took no active part in the proceedings, rather the argument was between the Bank on the one hand and the Crown Creditors on the other.