Vol 1 (2004) - Issue 2

Article preview

Book Debts - Banks May Need to Think Again as Siebe Gorman is Put under Microscope

Any lingering hope that banks could rely on the wording of fixed charging clauses to provide a route to priority over either book debts or their proceeds, while at the same time allowing their customers flexibility over the use of their money, seems to have been extinguished by the decision of the Companies Court in Re Spectrum Plus Ltd. [2004] EWHC 9 (Ch).
This was one of a number of cases where liquidators were holding up the process of final determination of priority over assets due to the judicial uncertainty created over the position of banks and others holding what purports to be fixed charge security over book debts and/or their proceeds. For banks financing trade or retail business, the availability of a convenient form of security which assures the bank that the net value of the company which it is financing will be realized in the bank’s favour on an insolvency is a major consideration in its lending decision.
Where the monitoring of individual receivables (often involving the taking of absolute assignments on specific invoices) is impracticable due to the sheer weight of invoice traffic, the only viable security - assuming that the customer is happy to have a registration against its name - is to take a charge and if possible a fixed charge which will defeat other creditors in an insolvency. The court’s endorsement in 1979 of the form used by the bank in Siebe Gorman & Co Ltd v Barclays Bank Ltd [1979] 2 Lloyd’s Rep 142 appeared to cement the banks’ position. The appearance of a charge on the company’s register containing that format of charging clause told both liquidator and other potential creditors that there would be little available on an insolvency of a company which had the bulk of its assets tied up in book debts.

The Spectrum charge

The aim of the charging clause is to ring-fence book debts from every angle, and the clause in National Westminster Bank’s standard debenture executed by Spectrum Plus Ltd on 7 October 1997 sought to do exactly that. It provided:

(1) that all book debts and other debts now and from time to time owing to the company would be the subject of a specific fixed charge;

(2) that the company would pay all moneys received in respect of such debts into the company’s account with NatWest;

(3) that the company could not sell, factor or otherwise deal with the debts (though crucially not the proceeds in the account) without the consent of the bank; and

(4) that if required to do so the company would execute legal assignments of the debts to the bank.

What the clause (intentionally) does not seek to do, as highlighted above and pointed out by a number of commentators over the 25 years that Siebe Gorman has stood as good law, is to place any real practical restriction on the customer’s access to the funds in the account. In practical terms such a restriction would stifle the business which the bank was attempting to assist through its finance, because the day to day monitoring of an account which was host to the incoming funds which need to be recycled as working capital would make the entire basis of the financing unsustainable economically. Banks would have to post members of staff on full-time duty assigned to a particular customer’s account and would have to pass on the associated cost to the customer. The customer in turn would not accept the level of intrusion into its day-to-day affairs.

NatWest’s lending

On 6 October 1997 NatWest advanced GBP200,000 to the company and debited the new account into which the proceeds of the book debts were to be paid. The account was never in credit throughout its period of operation. As funds came into the account to reduce the overdraft, the company drew on the account to increase the overdraft again as was intended. On 15 October 2001 the company resolved to go into creditors’ voluntary liquidation. On that date GBP165,407 was due to Nat West and GBP156,554 was estimated to be realisable from book debts with a face value of just over GBP290,000. Preferential creditors were due around GBP16,000 but there was a shortfall to creditors generally of around GBP650,000.