The Russell Cooke Trust Company Ltd. v Elliott

Whether a charge is fixed or floating depends on the rights and obligations created by the instrument, not on the label chosen by the parties. The court must first construe the instrument to identify those rights and then categorise the charge as a matter of law. A charge is fixed where the chargor cannot deal with the charged assets or withdraw them from the security without the chargee’s consent. Extensive restrictions on disposal and dealing may therefore make a charge fixed, even where the document describes it as floating.

The claimant, a court-appointed trustee, sought directions concerning the distribution of approximately £800,000 recovered from property connected with seven loans made under an unsuccessful lending scheme. Each loan had separate primary security and purported secondary security over other property and property interests.

The central issue was whether the secondary charges were fixed charges or floating charges. The classification affected the priority of the lenders’ claims. The court was also invited to consider crystallisation issues if the charges were floating, but those issues became unnecessary once the classification was determined.

1. The secondary charges were fixed charges, not floating charges. The court therefore determined the first issue in favour of fixed-charge classification.
2. The expression “floating deed” was inapt and did not determine the legal character of the security. The court had to examine the instruments as a whole and identify the rights and obligations actually created.
3. The approach in Yorkshire Wool Combers Association Ltd [1903] 2 Ch 284, Re Coslett Contractors Ltd [1998] Ch 495, Agnew v Commissioner of Inland Revenue [2001] 2 AC 710 and Re Spectrum Plus Ltd [2005] 2 AC 680 required attention to the substance of the rights granted rather than the parties’ description.
4. A floating charge requires the chargor to retain freedom, before crystallisation, to deal with the relevant assets in the ordinary course of business or to remove them from the security. The restrictions in the deeds prevented Causeway from disposing of, dealing with, leasing, charging or parting with possession of the secondary property without consent. The chargor therefore lacked the control and freedom characteristic of a floating charge.
5. The classification meant that priority would depend on the dates of creation of the charges over the secondary security. Questions concerning crystallisation and the priority of floating charges did not require determination.