National Westminster Bank plc (Respondents) v. Spectrum Plus Limited and others and others (Appellants)

A charge is floating where, until a future event or intervention, the chargor may use the charged assets and withdraw them from the security in the ordinary course of business. A fixed charge requires the assets to be permanently appropriated to the security and subject to the chargee’s control.

A purported fixed charge over book debts therefore remains floating if the company may collect the debts, pay the proceeds into an ordinary current account and freely draw on that account. The parties’ label cannot alter the legal substance of their rights.

Judicial overruling ordinarily has retrospective effect. The House declined to exclude a power to limit that effect in a wholly exceptional case, but commercial reliance on a first-instance decision did not justify depriving preferential creditors of their statutory priority.

Spectrum Plus Ltd granted the bank a debenture expressed to create a fixed charge over its present and future book debts. Spectrum had to pay collected debts into its current account with the bank but could draw on that account for its business purposes within an agreed overdraft limit.

After Spectrum entered voluntary liquidation, a dispute arose between the bank and the preferential Crown creditors. If the charge was floating, section 175(2)(b) of the Insolvency Act 1986 gave the preferential creditors priority over the proceeds.

The Vice-Chancellor held that the charge was floating: [2004] Ch 337. The Court of Appeal reversed that decision in [2004] EWCA Civ 670, treating itself as bound by In re New Bullas Trading Ltd. The central questions were whether Spectrum’s freedom to draw on the account made the charge floating and, if so, whether the ruling should apply only prospectively.

1. Disposition. The House unanimously allowed the appeal. Lord Scott of Foscote delivered the principal analysis of the charge, supplemented by Lord Hope of Craighead and Lord Walker of Gestingthorpe. The debenture created a floating charge. The preferential creditors consequently had priority under section 175(2)(b) of the Insolvency Act 1986. The Vice-Chancellor’s order was restored and the bank was ordered to pay the costs here and below.

2. Characterisation of the security. Per Lord Scott, the essential characteristic of a floating charge is that the asset is not finally appropriated to the security until a future event. Meanwhile, the chargor remains free to use the asset and remove it from the security. Lord Walker explained that a fixed charge instead permanently appropriates the asset to payment of the secured debt, so that release requires the chargee’s active concurrence. The description chosen by the parties is relevant but cannot displace the legal effect and commercial substance of their rights.

3. Book debts and collected proceeds. A fixed charge over present and future book debts is conceptually possible. It ordinarily requires effective control over the debts or their proceeds, such as payment into an account which is genuinely blocked. Spectrum could collect the debts and freely draw on the current account into which the proceeds were paid. Whether that account was in credit or debit was immaterial while drawing remained permitted. The charge was therefore floating.

4. Earlier authority. The reasoning of the Privy Council in Agnew v Commissioners of Inland Revenue [2001] 2 AC 710 was approved and applied. In re New Bullas Trading Ltd [1994] 1 BCLC 485 was wrongly decided. The construction adopted in Siebe Gorman & Co Ltd v Barclays Bank Ltd [1979] 2 Lloyd's Rep 142 was also wrong and was overruled. Its valid confirmation that a fixed charge over future book debts is legally possible was left intact.

5. Temporal effect. Lord Nicholls gave the leading discussion of prospective overruling. Lord Hope, Lord Walker, Baroness Hale and Lord Brown likewise declined to rule out a power to limit the temporal effect of a decision in a wholly exceptional case. Lord Steyn agreed with that cautious approach, while he and Lord Scott expressed particular difficulty where statutory interpretation was involved. The present case was far from exceptional. Reliance on a first-instance decision by sophisticated lenders did not justify prospective-only relief, especially because it would deprive preferential creditors of rights conferred by Parliament.

1. House of Lords: In [2005] UKHL 41, unanimously allowed the appeal, held that the charge was floating, overruled the relevant construction in Siebe Gorman & Co Ltd v Barclays Bank Ltd, restored the Vice-Chancellor’s order and declined to limit the ruling’s temporal effect.
2. Court of Appeal: In [2004] EWCA Civ 670, reversed the Vice-Chancellor and held that the debenture created a fixed charge, considering itself bound by In re New Bullas Trading Ltd.
3. High Court, Chancery Division: The Vice-Chancellor held that the charge was floating and that the preferential creditors had priority: [2004] Ch 337.