On May 26, the Court of Appeal handed down its decision on the appeal against the judgment of the Vice-Chancellor in National Westminster Bank PLC v Spectrum Plus Limited and others  EWHC 9 (Ch) ("Spectrum"). In his judgment, the Vice-Chancellor had dealt with the issue of proper characterization of a charge over book debts in a manner consistent with the reasoning applied by the Judicial Committee of the Privy Council in Agnew and Bearsley v The Commissioner of Inland Revenue and Others, re Brumark Investments Limited  UKPC 28 ("Brumark"). While the Court of Appeal, for reasons given by Phillips MR, overturned the Vice-Chancellor's decision on two principal grounds (namely, the specific facts of the Spectrum case and the fact that both the High Court and the Court of Appeal were still bound by Re New Bullas Trading Ltd  1 BCLC 485 ("New Bullas")), the Court of Appeal preferred the reasoning in Brumark, noting that there is little doubt that if and when the issue comes before the House of Lords, the House of Lords will hold that New Bullas was wrongly decided and that an unrestricted right to collect and make use of the proceeds of book debts is inconsistent with a fixed charge.
On the facts of the Spectrum case, the Court of Appeal considered that the Vice-Chancellor had been wrong to hold that the terms of the Spectrum debenture were insufficient to create a fixed charge on the basis that the book debts were under the control of and available for use by the company in the ordinary course of its business through their collection and the ordinary operation of its bank account. The Court of Appeal disagreed with the Vice-Chancellor's view that Slade J, in his decision in Siebe Gorman & Co Ltd. v Barclays Bank Ltd.  2 Lloyds Reps 142 ("Siebe Gorman"), should have reached the same conclusion on the basis of similar wording used in the debenture at issue in that case (which was held in that case to be sufficient to constitute a fixed charge and which has since been in common use for 25 years).
Critical to the Court of Appeal's reasoning in this respect was the fact that, in both the Siebe Gorman and Spectrum cases, the chargor company was obliged pursuant to the relevant debenture to pay the proceeds of the book debts to the chargee bank. The Court of Appeal reasoned that such payment would, by definition, transfer the proprietary interest the charger had in the proceeds to the bank. Moreover, where the debenture governed a loan account (i.e. an overdraft), such payment would inevitably result in the proceeds being applied to reduce the indebtedness to the bank.
The Court of Appeal considered that whether or not there were terms governing the account permitting or restricting the drawing of equivalent amounts by the chargor was unimportant, noting that "... it is not satisfactory that the [categorization] of a charge by a debenture should turn upon the precise details of a bank's relationship with its customer". Instead, Phillips MR considered that it was "at least arguable" that a debenture which both prohibited disposal of debts prior to collection and required proceeds to be paid beneficially to the chargee fell within the definition of a fixed charge, regardless of the extent of the chargor's right to draw out sums equivalent to the amounts paid in.
Regrettably, because the Court of Appeal was able to overturn the decision on this basis, it did not have to deal with the issue of control in more general terms. Specifically, the Court of Appeal decision provides no clear guidance on the degree of control that would be sufficient to support the characterization of a charge as a fixed charge (rather than a floating charge) in circumstances where the proceeds of the debt are not paid into an account with the chargee bank. Consequently, the law remains unsettled, particularly with respect to the treatment of charges over book debts in the context of securitization transactions, where the relevant chargor is typically a special purpose vehicle (and not an operating company) and the proceeds of book debts are not paid into an account with the chargee bank, and in the context of lending transactions where the depositary bank is not the chargee bank or a security trustee for the lenders.
The Court of Appeal decision does, however, provide some guidance with regard to the drafting of debentures. While the characterization of a charge as a fixed charge is a legal (as opposed to factual) question to be decided by the courts in each case having regard to the particular restrictions in a given debenture that affect the chargor's rights, the Court of Appeal noted that the reasoning in the Brumark case did not preclude a court from giving weight to the intention of the parties to have the charge take effect as a fixed charge when construing such restrictions. Until such time as the courts or legislation may provide further guidance, parties should therefore continue to seek to ensure that this intention is clearly reflected in their drafting.
Contributed by James Croke, Jerry De Melo, James Douglas and Christopher Kandel of Cadwalader, Wickersham & Taft.