In re Spectrum Plus Ltd

The House of Lords held that the debenture granted by Spectrum over its present and future book debts created a floating charge, not a fixed charge. The court applied the established test that the hallmark of a floating charge is that the chargor remains free, in the ordinary course of business, to deal with the charged assets and thereby to withdraw them from the security. Because Spectrum could collect debts and freely draw on its current account (subject only to an overdraft facility), the charge was floating. The House overruled the decision in Siebe Gorman & Co Ltd v Barclays Bank Ltd to the extent that it held that the same form of debenture necessarily created a fixed charge.

The House rejected the bank's argument that the overruling should have prospective effect only. Although the court accepted that, in principle and in wholly exceptional cases, a prospective overruling may be possible, it refused to limit the temporal effect in this case because doing so would deprive preferential creditors of the statutory priority conferred by section 175(2)(b) of the Insolvency Act 1986.

Background and procedural history.

Spectrum Plus Ltd granted a debenture in September 1997 in the bank's standard form, described as creating a "specific" (fixed) charge over present and future book debts and also a floating charge over other assets. Spectrum opened a current account with the bank with an overdraft facility of £250,000, collected its book debts, paid those proceeds into that account and drew on the account for business purposes. Spectrum later went into voluntary liquidation. Preferential creditors (mainly Crown creditors) claimed priority under section 175(2)(b) Insolvency Act 1986. The Vice-Chancellor found the charge to be floating, the Court of Appeal reversed, and the case reached the House of Lords on appeal.

Nature of the claim / relief sought.

• The primary issue was the legal characterisation of the charge over book debts: fixed or floating, with the attendant consequences for priority on liquidation.
• The bank alternatively sought that, if the House concluded that the charge was floating, the overruling of Siebe Gorman should operate prospectively only.

Issues framed by the court.

1. What is the correct test to determine whether a charge over book debts is fixed or floating?
2. Applying that test to the debenture, was the charge fixed or floating?
3. Whether the House could, and should, give any overruling only prospective effect.

Reasoning and conclusions.

The court examined the history and purpose of the floating charge and accepted the synthesis in prior authority (notably Romer LJ in Yorkshire Woolcombers / Illingworth v Houldsworth and the Privy Council in Agnew) that the essential characteristic of a floating charge is that the chargor is left free in the ordinary course of business to deal with the charged assets so as to remove them from the security. The House concluded that the bank's standard-form debenture left Spectrum free to collect debts and to use the proceeds by drawing on its current account within the overdraft facility; the account was not a blocked account. That freedom was inconsistent with a fixed charge. Accordingly the charge was floating and the bank's claim was subordinated to preferential claims under section 175(2)(b) Insolvency Act 1986. The House overruled the earlier first-instance decision in Siebe Gorman to the extent it had been understood to establish a contrary principle.

The House considered the bank's invitation for a purely prospective overruling of Siebe Gorman. While recognising that, in principle and in exceptional circumstances, a court of the highest authority may limit the temporal effect of its rulings, the House declined to do so here. The court emphasised the statutory nature of the preferential priority and concluded it would be inappropriate to deprive preferential creditors of rights Parliament had given them.

Appeal allowed. The House held that the debenture created a floating charge because Spectrum retained the ability, in the ordinary course of business, to collect book debts and to draw on the account into which proceeds were paid; that freedom is inconsistent with a fixed charge. Siebe Gorman was overruled on this point. The House refused to limit the temporal effect of the overruling, concluding that prospective-only relief was inappropriate in the present circumstances because it would undermine statutory priorities under section 175(2)(b) of the Insolvency Act 1986.

First instance (Chancery) — Vice-Chancellor (trial) [2004] Ch 337 (held charge floating). Court of Appeal — reversed the Vice-Chancellor: [2004] EWCA Civ 670. Appeal to House of Lords — [2005] UKHL 41; House of Lords allowed the appeal and restored the Vice-Chancellor's order.