By Jerry De Melo, Cadwalader, Wickersham & Taft
In its decision last week, The Court of Appeal held that the High Court was wrong to hold that the terms of the Spectrum debenture, which was in the commonly used "Siebe Gorman" form, 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 also disagreed with the Vice Chancellor's view that the judge in the earlier case of Siebe Gorman should have reached the same conclusion on the basis of similar wording used in the debenture at issue in that case. 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. 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 the absence or existence of terms governing the account that restricted the drawing of equivalent amounts by the chargor to be irrelevant, stating: "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." In other words, it didn't matter whether the account was blocked or not. All that mattered in the circumstances of the Spectrum and Siebe Gorman cases was that the company had no control over the proceeds and was bound to permit them to be used to reduce its indebtedness to the bank.
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