Hull & Anor (Re Harmony Care Homes Ltd) v NHP Securities No 3 Ltd & Ors

Whether a debenture creates a fixed or floating charge over book-debt proceeds depends on the rights and obligations created by the instrument and the arrangements operating from its inception.

The court must first construe those rights and obligations, and then categorise the charge as a matter of law. A charge is fixed only if the company cannot use or withdraw the proceeds without the chargee’s consent. A later restriction or blocked account cannot retrospectively convert a charge which was floating when created for the purposes of preferential-creditor priority.

Joint administrative receivers of Harmony Care Homes Ltd applied under section 35 of the Insolvency Act 1986 for directions concerning £671,366.07 of book-debt proceeds. NHP held debentures over 16 care homes and claimed that the proceeds were subject to fixed charges. The receivers were neutral, and neither NHP nor HMRC appeared or filed evidence at the hearing.

The central issue was whether the debentures created fixed or floating charges over the proceeds, particularly whether NHP had exercised sufficient control from the inception of each debenture.

1. Applicable approach. Under Agnew v Commissioners of Inland Revenue [2001] 2 AC 701, the court must first construe the instrument and ascertain the parties’ intended rights and obligations. It must then categorise the charge as a matter of law. The decisive question is whether the company was free to deal with the charged assets and withdraw them from the security without the chargee’s consent.
2. The guidance in In re Spectrum Plus Limited (in Liquidation) [2005] UKHL 41 identifies limited methods by which a fixed charge over book debts may be secured, including preventing dealings other than collection and preserving collected proceeds in a blocked account or under the chargee’s control.
3. Section 40 of the Insolvency Act 1986. The relevant question is the nature of the charge when created. The date of creation is the date on which the charge is executed: Re Shoe Lace Limited, Power v Sharp Investments Ltd [1993] BCC 609. A charge initially created as floating cannot become fixed for section 40 purposes merely through later crystallisation or conversion: Re Brightlife Limited [1987] Ch 200.
4. Application. The Hygrove House evidence showed that, from the inception of the debenture, the company could not use the proceeds without NHP’s written instructions. The charge over those proceeds was therefore fixed. The evidence concerning the other 15 homes did not establish equivalent control from inception. Their proceeds could not yet be treated as subject to fixed charges.
5. NHP was given 28 days to provide further evidence concerning the other homes. The order was deferred for 56 days. If sufficient evidence was not produced, the relevant proceeds would be treated as subject to floating charges and available for preferential creditors. The receivers’ costs were payable as an expense of the administrative receivership.