Vol 2 (2005) - Issue 6

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Fixed and Floating Charges over Book Debts - the Implications of the House of Lords’ Decision in Re Spectrum Plus Limited [2005]UKHL 41, Part I

Introduction

This article examines the history behind and the reasoning and implications of the House of Lords’ recent decision in Re Spectrum Plus Limited [2005] UKHL 41 concerning the grant of fixed and floating charges over a company’s book debts. The material facts in Re Spectrum Plus are set out in the Case Summary written by the author in Issue 4 of Volume 2 of this publication and this more in-depth analysis should be read in conjunction with that earlier article.

The importance of creating a fixed charge

S175 of the Insolvency Act 1986 (‘the Act’) provides that in so far as the assets of the company available for payment of general creditors are insufficient to meet the claims of the preferential creditors, those creditors have priority over the claims of any floating charge holder in respect of any property comprised in or subject to that charge. By virtue of the Enterprise Act 2002 (‘EA 2002’), most creditors who were preferential lost their status as such in respect of liquidations commencing on or after 15 September 2003 (including HM Revenue and Customs (‘HMRC’)) although debts due to employees within Category 5 of Schedule 6 to the Act remain preferential and accordingly the Secretary of State for Trade and Industry retains a potential interest as a preferential creditor by way of subrogation.
In addition, s252 EA 2002 inserted a new s176A into the Act which provides that, with effect from 15 September 2003, a ‘prescribed part’ of the net property of a company which has gone into liquidation, administration or receivership shall ordinarily be made available for the satisfaction of unsecured debts in preference to the claims of floating charge holders to those assets; the net property being defined as the amount of the company’s property which, but for s176A, would be made available for the satisfaction of floating charge holders’ claims. (S251 of the Act provides that a ‘floating charge’ means ‘a charge which, as created, was a floating charge’.)
Accordingly, a chargee will ordinarily prefer and therefore seek the grant of a fixed charge rather than a floating charge over the book debts of a debtor company.
When Spectrum Plus Limited went into creditors’ voluntary liquidation the assets available for payment of its general creditors were insufficient to pay its preferential creditors and accordingly, if the charge which it granted to NatWest was, as created, a floating charge then the preferential creditors, HMRC (then the Inland Revenue and Customs & Excise) and the Secretary of State for Trade and Industry, would be paid out of the realised book debts in priority to the Bank’s claim.

The law prior to the bank’s application in Re Spectrum Plus

The starting point was and is the classic definition expounded by Romer LJ in In re Yorkshire Woolcombers’ Association Ltd [1903] Ch 284:

... 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 the 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.