Case Note: SURVIVING SPECTRUM PLUS: FIXING CHARGES OVER DEBTS

Date01 December 2005
Published date01 December 2005

In re Spectrum Plus Ltd [2005] 3 WLR 58

This note predicts that banks will attempt to get around the ruling in In re Spectrum Plus Ltd[2005] 3 WLR 58 that a charge over a borrower’s debts cannot be a fixed charge if the borrower is allowed the use of the proceeds of the debts without restriction. One alternative arrangement that may be used is to require the proceeds of the charged debts to be paid into a blocked account but to allow the bank to periodically apply such proceeds towards the reduction of the outstanding sums under the borrowing facility, so that the borrower is able to make fresh drawings under the facility for working capital. This note argues that such an arrangement is likely to be upheld as creating a fixed charge over the borrower’s debts.

1 If the Singapore courts follow the recent House of Lords’ decision in In re Spectrum Plus Plus Ltd,1 it will no longer be possible for a bank to take a fixed charge over a borrower’s debts if the bank allows the proceeds of the debts to be paid into the borrower’s account and used by the borrower without restriction. The bank’s security will be regarded as only a floating charge over the borrower’s debts and, in the liquidation of the borrower, the bank’s claims secured by such a floating charge will lose priority to the statutory preferential claims against the borrower (ss 328(1) and 328(5) of the Companies Act2). In the humble view of this commentator, however, it is far too early to conclude that fixed charges over book debts will become commercially extinct as a form of security in the banking and financing industry.

2 In Spectrum Plus, a company (Spectrum) had executed a debenture in favour of its bank, granting what was described in the debenture as a “specific charge” over all its book debts and other debts.

The debenture provided that all moneys which Spectrum might receive in respect of the specifically charged debts had to be paid into Spectrum’s account with the bank, and that Spectrum was not to sell, factor, discount or otherwise charge or assign such debts without the prior consent of the bank. However, Spectrum was at liberty to deal with the debtors and to collect the debts in the normal course of business. Spectrum’s account with the bank was a normal bank account with an overdraft facility and, as long as the overdraft limit was not exceeded, Spectrum could draw on the account for its business purposes. During the life of the facility, the overdraft limit was never exceeded but the account was also never in credit. Spectrum then went into liquidation, and the issue arose as to whether the bank held a fixed charge or a floating charge over Spectrum’s uncollected book debts.

3 According to Siebe Gorman & Co Ltd v Barclays Bank Ltd,3 such an arrangement would give the bank a fixed charge over Spectrum’s debts. The English Court of Appeal followed Siebe Gorman and held the security to be a fixed charge.4

4 However, the House of Lords overruled the Court of Appeal as well as Siebe Gorman, and held that only a floating charge had been created over Spectrum’s debts. The law lords reaffirmed that, in principle, a fixed charge could be...

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