National Westminster Bank Plc v Spectrum Plus Ltd & Ors

A charge over present and future book debts is fixed only if the chargor is not free to collect and use the proceeds in the ordinary course of business without the chargee’s consent. The court must first construe the instrument and identify the rights and obligations created. It must then categorise the charge as a matter of law. The parties’ label is not determinative. A requirement to pay proceeds into an ordinary current account, without restricting withdrawals or use of the money, does not create a fixed charge. The fact that the account operates within an overdraft facility makes no material difference.

The Bank sought a declaration under Insolvency Act 1986, s.112, that its debenture created a fixed charge over the company’s present and future book debts and their proceeds. The company was in creditors’ voluntary liquidation, and the liquidators had collected book debts but declined to account for them to the Bank. The Crown respondents represented or were subrogated to preferential creditors.

The debenture described the book debts as subject to a specific charge and required their proceeds to be paid into the company’s account with the Bank. It did not restrict the company’s use of the account within the agreed overdraft facility. The central issue was whether the debenture was effective as a fixed charge or created only a floating charge.

1. Application dismissed. The debenture created a floating charge over the book debts.
2. The Vice-Chancellor applied the two-stage approach stated by Lord Millett in Agnew v Commissioner of Inland Revenue [2001] 2 AC 710. First, the instrument must be construed to identify the rights and obligations intended by the parties. Secondly, those rights and obligations must be categorised as a matter of law. The parties’ description of a charge as fixed cannot determine its legal character.
3. The relevant question was whether the company remained free to deal with the book debts and withdraw them from the security without the Bank’s consent. The debenture required payment of proceeds into the Bank account and prohibited factoring, discounting or assigning the debts without consent. It imposed no restriction on the company’s ordinary use of the account or on its withdrawal of the proceeds for working capital. The overdraft terms reinforced that conclusion.
4. A distinction could not be drawn between an account in credit and an account operated within an overdraft. The essential issue was whether the company was free to use the class of assets in continuing its business until intervention by the Bank.
5. The description of the book debts as subject to a specific charge therefore yielded to the rights and obligations actually created. The reasoning in Siebe Gorman & Co. Ltd v Barclays Bank Ltd [1979] 2 Ll.L.R.142 was wrong because it treated the parties’ description as supporting an implied restriction on the use of the proceeds.
6. The Vice-Chancellor considered the reasoning of Knox J in Re: A Company, ex parte Copp [1989] BCLC 13 to be affected by the same error, and approved the approach of Tompkins J in Supercool Refrigeration and Air Conditioning v Hoverd Industries Ltd [1994] 3 NZLR 300.