O'Donnell & Sons (Huddersfield) Ltd v Midland Bank Plc

In construing a debenture, “other debts” is not a term of art. It ordinarily bears its legal meaning unless the instrument and its commercial background indicate otherwise. Accountancy evidence may assist in identifying a “book debt”, but it cannot determine the meaning of “other debt” where there is no settled accountancy practice and the parties agree that the liability is not a book debt.

A debt arising from the sale of business assets may therefore fall within a fixed charge over “book debts and other debts”. Clauses governing the collection of charged debts concern the manner of realisation, not whether the debt qualifies for the charge. The debenture must be construed by reference to the events that occurred, rather than hypothetical events.

The Company granted the Bank a debenture containing a first fixed charge over “all book debts and other debts” and a floating charge over other property. It later sold its business assets to Alstan Ltd for £180,000 payable by instalments. After the Company entered voluntary liquidation, the Bank appointed receivers, who collected the instalments and paid the net proceeds to the Bank.

On preliminary issues, His Honour Judge Behrens held that the amount received from Alstan was an “other debt” within clause 4(a) and was subject to the fixed charge. The Company appealed, challenging the exclusion of expert accountancy evidence, the construction of “other debts”, and the effect of the floating charge and its alleged earlier crystallisation.

1. Appeal dismissed. The amount due from Alstan was an “other debt” within clause 4(a) of the Debenture and was subject to the first fixed charge.
2. Per Lady Justice Arden, “book debt” was a term of art. Under section 395 of the Companies Act 1985, accountancy evidence could assist in showing which debts would ordinarily be entered in the company’s accounting records. Since the parties agreed that the Alstan liability was not a book debt, that evidence was not relevant to the issue before the court.
3. “Other debts” was not a term of art. Applying the contractual interpretation principles stated in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896, the question was what the Debenture would convey to a reasonable person with the reasonably available background knowledge. There was no settled accountancy practice capable of determining the meaning of the phrase.
4. The Alstan liability was plainly a debt in law, and nothing in the Debenture displaced that meaning. Clause 6(a), which regulated the manner in which debts were collected and realised, did not restrict “other debts” to liabilities incurred in the ordinary course of business. The reasoning in Re Brightlife Ltd [1987] Ch 200 depended materially on the inability to “get in” or “realise” a bank credit balance and did not determine the present issue.
5. The “as if” argument failed. The Debenture had to be construed by reference to the events that actually occurred. There was no basis for treating the assets as subject to an earlier crystallised floating charge, and a fixed charge over debts was legally permissible.
6. The critical date for determining the position on receipt was the appointment of the receivers, when the charges were enforced. There was no finding or evidence that crystallisation had occurred earlier. The appeal was dismissed with costs, subject to detailed assessment, and permission to appeal to the House of Lords was refused.

• Chancery Division: His Honour Judge Behrens decided the preliminary construction questions on 22 February 2001. He held that the Alstan liability was an “other debt” within clause 4(a) and subject to the fixed charge, and dismissed the action.
• Court of Appeal (Civil Division): The appeal was dismissed with costs. Permission to appeal to the House of Lords was refused.