Whether or not a charge over book debts is fixed or floating is an issue which has never been finalised under English law. For lenders with customers in difficulties the distinction is very important where the only real assets (if property is leased) are book debts and stock. As preferential creditors are paid in receivership out of the proceeds of assets charged by floating charge ahead of the floating charge holder the distinction can make the difference for a lender between recovering outstandings and having to make a large write off.
It has long been accepted by the courts that a clearing bank can have a fixed charge over the book debts of its customers (partly on the basis that a clearing bank controls the business accounts of its customers). Following the case of re New Bullas Trading (1994) the courts have held that, if the security document is correctly drafted, then even lenders which are not clearing banks can obtain a fixed charge over book debts although that case was highly controversial and the Court of Appeal in Royal Trust Bank v National Westminster Bank Plc criticised its reasoning. There have recently been three new cases on book debt charges which, although at first instance only, help to clarify current judicial thinking.
In Coakley v Argent Credit Corp plc the court was asked to consider what constituted a book debt. The lender was seeking to recover as a book debt a claim which the customer had under an insurance policy. The judge held that a book debt was a debt which arose in the course of business and would normally be entered as a debt in well kept books of a business, not merely in the balance sheet or profit and loss account. In this case an insurance claim was not a book debt. Lenders who are taking charges over book debts should ensure that if they are seeking to charge items which not normally count as ordinary trade debtors, that charge is drafted carefully and widely enough to catch such items.
Lenders may find the case of Double S Printers (in liquidation) useful where the lender wishes to enforce its security but directors also claim to have competing and prior ranking security over the company. In that case the director took security over book debts and then made a number of loans to the company.
The court held that the charge over book debts took effect as a floating charge only. Whilst the director had real control over the book debts in his capacity as director he had no such control as chargeholder.
The final case is that of Re Westmaze Limited. In that case the charge was over "all book and other debts revenues and claims". The judge considered the decision of Re New Bullas but preferred the judgment of Millett LJ in Royal Trust Bank and held that the charge was floating. This case can be restricted to its particular facts as the judge laid emphasis on the fact that the charge covered revenues. However, this case and Double S Printers may be an indication of a distrust amongst the judiciary of fixed charges over book debts. If so, and this will only become apparent if there are more cases on book debt charges, then non clearing bank lenders will need to take this into account in assessing security values.
For further information please contact Gwen Griffiths, e-mail: Click Contact Link , 7 Devonshire Square, Cutlers Gardens, London EC2M 4YH, UK, Tel: + 44 171 655 1000
This article was first published in the Autumn/Winter 1998 Hammond Suddards Banking Newsletter
The information and opinions contained in this article are provided by Hammond Suddards. They should not be applied to any particular set of facts without appropriate legal or other professional advice.
It has long been accepted by the courts that a clearing bank can have a fixed charge over the book debts of its customers (partly on the basis that a clearing bank controls the business accounts of its customers). Following the case of re New Bullas Trading (1994) the courts have held that, if the security document is correctly drafted, then even lenders which are not clearing banks can obtain a fixed charge over book debts although that case was highly controversial and the Court of Appeal in Royal Trust Bank v National Westminster Bank Plc criticised its reasoning. There have recently been three new cases on book debt charges which, although at first instance only, help to clarify current judicial thinking.
In Coakley v Argent Credit Corp plc the court was asked to consider what constituted a book debt. The lender was seeking to recover as a book debt a claim which the customer had under an insurance policy. The judge held that a book debt was a debt which arose in the course of business and would normally be entered as a debt in well kept books of a business, not merely in the balance sheet or profit and loss account. In this case an insurance claim was not a book debt. Lenders who are taking charges over book debts should ensure that if they are seeking to charge items which not normally count as ordinary trade debtors, that charge is drafted carefully and widely enough to catch such items.
Lenders may find the case of Double S Printers (in liquidation) useful where the lender wishes to enforce its security but directors also claim to have competing and prior ranking security over the company. In that case the director took security over book debts and then made a number of loans to the company.
The court held that the charge over book debts took effect as a floating charge only. Whilst the director had real control over the book debts in his capacity as director he had no such control as chargeholder.
The final case is that of Re Westmaze Limited. In that case the charge was over "all book and other debts revenues and claims". The judge considered the decision of Re New Bullas but preferred the judgment of Millett LJ in Royal Trust Bank and held that the charge was floating. This case can be restricted to its particular facts as the judge laid emphasis on the fact that the charge covered revenues. However, this case and Double S Printers may be an indication of a distrust amongst the judiciary of fixed charges over book debts. If so, and this will only become apparent if there are more cases on book debt charges, then non clearing bank lenders will need to take this into account in assessing security values.
For further information please contact Gwen Griffiths, e-mail: Click Contact Link , 7 Devonshire Square, Cutlers Gardens, London EC2M 4YH, UK, Tel: + 44 171 655 1000
This article was first published in the Autumn/Winter 1998 Hammond Suddards Banking Newsletter
The information and opinions contained in this article are provided by Hammond Suddards. They should not be applied to any particular set of facts without appropriate legal or other professional advice.
