National Westminster Bank Plc v Spectrum Plus Ltd. & Ors

Classification of a charge as fixed or floating involves two stages. The court first construes the instrument to identify the parties’ rights and obligations. It then categorises the charge as a matter of law. Where a debenture prevents disposal of book debts and requires their proceeds to be paid to the chargee, the charge may be fixed even though the chargor retains contractual rights to borrow or draw under its bank account. Receipt of the proceeds gives the bank title to them; any right of the customer to obtain equivalent funds is contractual. The Court of Appeal remained bound by its own authority despite contrary Privy Council reasoning, although it doubted that authority’s correctness.

The Bank appealed from the dismissal of its application under section 112 of the Insolvency Act 1986 for a declaration that a debenture created a fixed charge over the company’s book debts. The Vice-Chancellor’s judgment is reported at [2004] 2 WLR 783.

The company had used the proceeds of its book debts, paid into its account with the Bank, to reduce and redraw on a fluctuating overdraft. Following the company’s creditors’ voluntary liquidation, the liquidators refused to account for collected debts to the Bank. The central issues were whether the debenture created a fixed or floating charge and whether the Court of Appeal could prefer the Privy Council’s reasoning in Agnew to its own decision in Re New Bullas.

Appeal allowed. Lord Phillips MR gave the judgment, with which Lord Justice Jonathan Parker and Lord Justice Jacob agreed.

1. Method of classification. The court approved the two-stage approach in Agnew v Commissioner of Inland Revenue [2001] UKPC 28. The instrument must first be construed to ascertain the rights and obligations agreed in relation to the charged assets. The charge must then be categorised as a matter of law. The parties’ description of the charge cannot determine its legal character.
2. Precedent. The Court of Appeal was bound by the rule in Young v Bristol Aeroplane Company [1944] KB 718, reaffirmed by the House of Lords in Davis v Johnson [1979] AC 264. Disapproval of a Court of Appeal decision by the Privy Council was not an additional exception. Worcester Works Finance Ltd v Cooden [1972] 1 QB 210 could not be followed. Accordingly, the court could not hold Re New Bullas Trading Ltd [1994] 1 BCLC 485 wrongly decided, although it considered the reasoning unsatisfactory and indicated that the House of Lords would probably decide the issue differently.
3. Construction and categorisation. The debenture required the company not to dispose of the book debts before collection and required collected proceeds to be paid into an account with the Bank. The Bank thereby received title to the proceeds. Any right of the company to require payment from the Bank was contractual, and the extent of that right depended on the banker-customer agreement. The company’s ability to redraw under the overdraft facility did not mean that it had free disposal of the proceeds.
4. Fixed charge. The restrictions were sufficient to support a fixed charge over the book debts. The decision in Siebe Gorman & Co Ltd v Barclays Bank Ltd [1979] 2 Lloyds Reps 142 was therefore followed. The Vice-Chancellor’s conclusion that the debenture created a floating charge was reversed.

The court left unresolved the wider proprietary and priority effects of partial restrictions on book debts. It also observed that a requirement to pay proceeds into a genuinely blocked account would suffice to create a fixed charge, even if the chargor could overdraw another account.

1. Court of Appeal (Civil Division) allowed the Bank’s appeal and held that the debenture created a fixed charge over the book debts: [2004] EWCA Civ 670 .
2. Chancery Division, Companies Court dismissed the Bank’s application for a declaration that the debenture created a fixed charge: [2004] 2 WLR 783 .