Lawyers to the finance industry
banknotes
Summer 2004
contents
Charges over book
debts
1
Consumer credit
legislation
2
UCP 500
2
Lender benefits from another’s 3
security
Bad news for liquidators
4
Who to contact
4
Welcome to the
Summer edition.
It has been a quarter for overturning
decades of accepted law!
Bankers' ability both to have a fixed
charge over uncollected book debts
and yet let their customers deal with
the proceeds has been overturned by
the Courts in Re Spectrum Plus.
In the Leyland Daf decision, the Lords
held that where a company is at the
same time in receivership and being
wound up, recourse may not be had
to the receivership assets in order to
meet the expenses of liquidation.
Charges over book debts
The original position
A fixed charge over present and future
book debts enables lenders, on a
liquidation, to have priority over
preferential creditors and holders of
floating charges with regard to
uncollected debts. It has always been
possible for lenders to take a valid fixed
charge over book debts providing that
the lender is in control of the debts.
Generally, this is achieved by the debts
being paid into a blocked account with
the lender. This arrangement is resisted
by borrowers as it does not allow them
control over their cash flow. A floating
charge gives borrowers the flexibility
they require but does not give the lender
priority.
This issue considers these judgments
and also changes proposed in relation
to consumer credit and UCP 500.
www.ngj.co.uk
Siebe Gorman & Co. Ltd v Barclays Bank
Ltd ([1979] 2 Lloyds Rep 142) established
the premise that it was possible to create
a fixed charge over present and future
book debts if the proceeds were paid
into an ordinary account with the
lending bank. Standard debentures used
by lenders today often contain clauses
based on the Siebe Gorman debenture,
creating a fixed charge over outstanding
debts which are to be paid into a
specified account with the lender on
collection. The monies in the account are
then subject to a floating charge unless
the company is otherwise notified by the
bank.
The Brumark decision
The decision of the Privy Council in Re
Brumark ([2001] 2AC 710) cast doubt
on the Siebe Gorman position. Here the
Privy Council had to consider a charge
over book debts which was expressed to
banknotes
be fixed but was only floating over the
proceeds unless and until the lender
required the company to pay them into
an account with itself or otherwise
crystallised the floating charge.
The Privy Council held that, in deciding
whether a charge is fixed or floating, the
Courts must first consider "…the nature
of the rights and obligations which the
parties intended to grant each other in
respect of the charged assets. Once
these have been ascertained, the Court
can then embark on the second stage of
the process which is one of
categorisation."
account for them to the bank. The bank
sought a declaration that the debenture
created a fixed charge over the book
debts due to the company and an order
to the liquidators to account to the bank
in respect of them.
The Court applied the two stage test set
out in Brumark. The Court found that
the obligations of the company set out
in the debenture in relation to the book
debts were:
J
J
The Privy Council held that the nature of
the rights given over the charged assets
was the relevant distinction regardless of
whether the charge was expressed to be
fixed or floating. A charge over
uncollected book debts which left the
company free to collect them and use
the proceeds in the ordinary course of its
business was inconsistent with a fixed
charge.
Although Privy Council decisions are not
binding authority in the English domestic
Courts they are persuasive, particularly
because the Privy Council is made up of
members of the House of Lords.
Re Spectrum Plus Ltd
In order to settle the position a test case
was brought in the English Courts by
National Westminster Bank PLC.
Spectrum Plus Ltd had opened an
account with the bank and obtained an
overdraft facility secured by a debenture
in the standard Siebe Gorman form. The
company subsequently went into
creditors' voluntary liquidation.
The liquidators collected in the proceeds
of the book debts but refused to
2
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"to pay the proceeds of any book
debt into the company's account
with the bank,
not to sell, factor, discount or
otherwise charge or assign the book
debt in favour of any other person
without the consent of the bank
and
if called on so to do to execute legal
assignments of such book debts."
The Court then looked at the intentions
of the parties and whether it was
intended that the book debts should be
under the control of the company or the
bank. The account with the bank was an
ordinary current account with no express
restrictions on its operation. The
company was free to use the proceeds
of the book debts in the ordinary course
of its business unless and until the bank
facility was withdrawn or reduced on
notice or a demand for repayment was
made. The Court held that the charge
could only be categorised as floating and
that Siebe Gorman was wrongly
decided.
The bank has been given leave to appeal
and it is expected that the appeal will be
expedited in order for the matter to be
clarified as quickly as possible. In the
meantime lenders and insolvency
practitioners should act with caution.
Consumer credit
legislation
The Department of Trade and Industry
has published its white paper on the
consumer credit market entitled "Fair
clear and competitive: the consumer
credit market in the 21st century".
One of the key reforms proposed is that
the financial limit of £25,000 for the
application of the Consumer Credit Act
be abolished so that all consumer credit
agreements, other than first mortgages,
will be subject to the new rules.
However, loans to small businesses
currently covered by the rules will
continue to be subject to a limit of
£25,000.
UCP 500
The Uniform Customs & Practice for
Documentary Credits (UCP 500) is
currently being redrafted to take
account of changes in international
trade since UCP 500 was adopted in
1993.
The drafting committee is supported
by a consultation group which
includes representatives from around
the world. The UK consultation group
has already commented on Articles 1
to 19 (excluding 13 and 14) and is
now focussing on the remainder of
the articles.
If you would like to contribute to the
revision or to the ICC initiative on
common practices in factoring and
forfaiting please contact Carolanne
Cunningham at Nicholson Graham &
Jones, a member of the ICC UK
Committee on Banking Technique and
Practice.
Summer 2004
Lender benefits from another’s security
In Cheltenham & Gloucester plc v
Appleyard and another [2004] EWCA
291 (Court of Appeal) the
defendants, Mr and Mrs Appleyard
had purchased a property with a loan
from Bradford & Bingley Building
Society ("B&B") secured by a first
charge registered against the
property.
The Bank of Credit and Commerce
International ("BCCI") subsequently
registered a second charge over the
property. The charge contained a
provision that no further charges or
mortgages were to be registered
against the property without the
consent of BCCI.
The defendants entered into
refinancing arrangements with
Cheltenham & Gloucester ("C&G")
and executed a mortgage in favour
of C&G. Cheques were forwarded to
B&B and BCCI to discharge the
amounts owing to them. On the
same day as the cheque was
forwarded to BCCI, provisional
liquidators were appointed and BCCI
ceased trading. BCCI refused to
supply C&G with confirmation of
discharge of their charge and refused
to give consent to the C&G
mortgage being registered. An
unregistered mortgage of registered
land only operates as an equitable
charge. The holder of an equitable
charge is not entitled to obtain
possession of the charged property
or sell the property with good title.
subrogated to the rights of B&B
under the B&B mortgage. C&G
argued that, because their money
was used to pay off the B&B
mortgage, they were entitled to be
regarded in equity as having an
assignment of B&B's rights as a
secured creditor.
The Appleyards argued that C&G
were prevented from being
subrogated to the rights of B&B
because they had obtained valid
contractual security in the form of
the C&G mortgage regardless of the
fact that it was not registrable (and
due to the fact that BCCI had
subsequently agreed to C&G
registering the mortgage).
The Court held that C&G were
entitled to be subrogated to the
rights of B&B under the B&B
mortgage to the extent of that
mortgage at the time it was paid off
together with interest.
Subrogation
J
Subrogation is the right of one
person to take over the legal rights
of another in certain
circumstances. For example where
A pays money to B, (a secured
creditor), to redeem the debts of
C, A will then be entitled to step
into the shoes of B as a secured
creditor of C
J
Subrogation is a flexible remedy
aimed at preventing unjust
enrichment
J
A lender cannot claim subrogation
if he has obtained all of the
security for which he has
bargained
J
The fact that a lender has obtained
some security for which he has
bargained does not prevent him
from claiming to be subrogated to
another security
J
The absence of a common
intention on the part of the
borrower and the lender that the
lender should be secured is not
fatal to a subrogation claim but is
a relevant consideration
J
The capital sum in respect of
which a lender claims to be
subrogated cannot normally be
greater than the amount of the
secured debt that has been
discharged
The Appleyards did not make any
payments to C&G and C&G began
proceedings for possession on the
basis that they were entitled to be
3
banknotes
Bad news for liquidators
In Buchler and Another v Talbot and
Others (The Times 5 March 2004) the
House of Lords was called upon to
address the extent of a liquidator's
priority in relation to assets which are
subject to a floating charge. In
particular, could a liquidator claim any
shortfall in its expenses and costs out
of the assets held by a receiver in
respect of a crystallised floating
charge?
Leyland Daf Ltd (“LDL”) was part of
the DAF NV group of companies. It
granted a mortgage debenture to a
Dutch foundation containing fixed and
floating charges to secure monies
loaned to the group. The DAF NV
group collapsed and the mortgage
holder appointed receivers under its
debenture whereupon the floating
charge crystallised into a fixed charge.
The receivers then proceeded to collect
in the charged assets.
LDL subsequently went into creditors'
voluntary winding up. The liquidators
realised the remaining assets and
found that they were far short of the
estimated liquidation costs and
expenses. The liquidators therefore
sought a declaration from the Court
that the liquidation expenses were
payable out of the charged assets in
Who to contact
For further information contact
Richard Hardwick
richard.hardwick@ngj.co.uk
tel: 020 7360 8125
4
the receivers' hands in priority to the
charge holder.
The Court of Appeal, bound by its
earlier decision in Re Barleycorn
Enterprises Ltd (1970), found in favour
of the liquidators. However, the House
of Lords held that Re Barleycorn was
wrongly decided and should not be
followed.
The House of Lords, analysing the true
construction of sections 40 and 175 of
the Insolvency Act 1986, found that
assets of a company being wound up
are in two distinct funds:
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the proceeds of the free assets
which belong to the Company and
are administrated by the liquidator;
and
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the proceeds of the assets
comprised in a floating charge
which belong to the charge holder
to the extent of the security and are
administered by the receiver.
subject to the floating charge until all
principal and interest owed to the
floating charge holder had been paid.
Comment
Although this decision is good news
for secured lenders it will not be
welcomed by liquidators and creditors.
Liquidators will require evidence that
the free assets will be sufficient to
meet their expenses prior to agreeing
to act in a liquidation and may be
unwilling to be appointed where a
company is subject to a crystallised
floating charge. Creditors may now
find that liquidators are unwilling to act
unless their expenses are underwritten
or funded by creditors.
The House of Lords upheld the appeal
and stated that the costs of
administering each fund should be
borne by the fund in question. The
costs and expenses of the liquidation
were not payable out of the assets
Nicholson Graham & Jones
110 Cannon Street, London EC4N 6AR
tel: 020 7648 9000
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The contents of these notes have been
gathered from various sources. You
should take advice before acting on
any material covered in banknotes.
© Nicholson Graham & Jones 2004