Citation(2005) 17 SAcLJ 617
Date01 December 2005
Published date01 December 2005

This article examines the main issues in the long-standing controversy regarding the distinction between fixed charges and floating charges over book debts, and analyses them in the light of the latest case law developments that have settled the issue in England.

I. Background to the debate

1 Much of the discussion about the distinction between fixed and floating charges over book debts has taken place in the context of the insolvency of a company. In a receivership or a winding up, where the assets of the company are insufficient to satisfy the creditors, preferential debts have priority over the claims of a holder of a floating charge.1 The

creation of a fixed charge therefore improves a financier’s position vis-à-vis preferential creditors. Although the classic disadvantage of a fixed charge has been that the chargor would be prevented from dealing with the charged asset, this did not seem to present a real obstacle in the case of book debts, as there was generally no need for the chargor to deal with these whilst they were still uncollected. This led to the growth of arrangements whereby debenture holders would obtain a fixed charge over all the present and future book debts of a company, and at the same time made the agreement acceptable to the company by allowing the company to deal with the proceeds of the books debts in the ordinary course of business after the debts were collected. Whether such arrangements succeed in creating a fixed charge, or whether the charge should instead be categorised as a floating charge has been the subject of great academic and judicial controversy in the UK and also countries like New Zealand. The question is also an important one in Singapore, although it has not yet arisen directly for decision in the Singapore courts.

2 The House of Lords recently ruled on this issue in In re Spectrum Plus Ltd,2 and confirmed the Privy Council’s views in Agnew v Commissioner of Inland Revenue.3 Although the dust has yet to settle, it is likely that the House of Lords decision will lay the controversy to rest in England. It is therefore an opportune time to look back on the debate to identify and analyse the main issues that have arisen, and discuss how these have been resolved. Although most of the cases involved in the debate concerned book debts, the debate and its resolution also have wider significance for the distinction between fixed and floating charges generally, regardless of the type of asset subject to the charge. This article will adopt an issue-based approach to examine the distinction between fixed and floating charges generally, and then focus on fixed and floating charges over book debts in particular. To avoid becoming overly embroiled in the baggage of the past, the article will draw primarily from four cases which together illustrate well the problems and solutions that have surfaced: Spectrum Plus, Agnew, Siebe Gorman & Co Ltd v Barclays Bank Ltd4 and Re New Bullas Trading Ltd.5 Just as Agnew and Spectrum Plus represent the last word on the matter in England, Siebe Gorman and New Bullas are equally significant in that they are the catalysts which

started and fuelled the debate. It will be suggested that the position taken in Spectrum Plus, though likely to be unpopular amongst commercial parties, is the right one and should also be the law in Singapore.

II. Distinction between fixed and floating charges generally
A. Test of floating charge: Freedom to deal with charged asset 6

3 After the House of Lords decision in Spectrum Plus, it is clear that in England, the one essential characteristic that distinguishes a floating charge from a fixed one is that in a floating charge:7

[T]he asset subject to the charge is not finally appropriated as a security for the payment of the debt until the occurrence of some future event. In the meantime the chargor is left free to use the charged asset and to remove it from the security.

4 This is not a new test. It corresponds to the third characteristic propounded by Romer LJ in his classical description of a floating charge in the Court of Appeal in In re Yorkshire Woolcombers Association, Limited where he stated:8

… I certainly think that if a charge has the three characteristics that I am about to mention it is a floating charge. (1) If it is a charge on a class of assets of a company present and future; (2) if that class is one which, in the ordinary course of the business of the company, would be changing from time to time; and (3) if you find that by the charge it is contemplated that, until some further step is taken by or on behalf of those interested in the charge, the company may carry on its business in the ordinary way as far as concerns the particular class of assets I am dealing with.

5 In Spectrum Plus, the House of Lords agreed with Lord Millett’s view in the Privy Council decision of Agnew where he pointed out that Romer LJ’s first two characteristics, although typical of a floating charge,

were not distinctive of it, and were not necessarily inconsistent with a fixed charge, and that it was the third characteristic that was important. The House of Lords also expressed their view that if a security had Romer LJ’s third characteristic it would qualify as a floating charge, and cannot be a fixed charge, whatever its other characteristics may be.9 That the House of Lords in Spectrum Plus identified just one of Romer LJ’s three characteristics as being essential is not inconsistent with the views of the learned judge, as he had qualified his statement as follows:10

I certainly do not intend to attempt to give an exact definition of the term “floating charge,” nor am I prepared to say that there will not be a floating charge within the meaning of the Act, which does not contain all the three characteristics …

6 The test propounded by the House of Lords in Spectrum Plus is also consistent with the view taken by the House of Lords slightly over 100 years ago in Illingworth v Houldsworth, where Lord Macnaghten said:11

A specific charge … is one that without more fastens on ascertained and definite property or property capable of being ascertained and defined; a floating charge, on the other hand, is ambulatory and shifting in its nature, hovering over and so to speak floating with the property which it is intended to affect until some event occurs or some act is done which causes it to settle and fasten on the subject of the charge within its reach and grasp.

7 Although the terminology was different, the essence of the quotation from the earlier House of Lords case is the same as in Spectrum Plus. The ambulatory or shifting nature of the floating charge referred to by Lord MacNaghten in Illingworth v Houldsworth is a reflection of the chargor’s freedom to deal with the asset and remove it from the security, as mentioned in Spectrum Plus. And in both cases, there is also reference to the future event or act that will end the chargor’s freedom to deal with the asset.

8 These cases are just a few early examples of the many past decisions on company charges which have identified freedom to deal with the charged assets as an important element in a floating charge. It might therefore seem at first glance as if the law has ended up where it started, at

least as far as the general distinction between fixed and floating charges is concerned. But there are important differences. Leaving aside the issues relating specifically to book debts, which will be discussed later, Spectrum Plus has advanced the general law in at least two ways.

9 First, the identification of the one essential characteristic of a floating charge is significant. It indicates authoritatively the hierarchy amongst the three characteristics mentioned by Romer LJ: The first two are dispensable; the third is crucial and exclusive to a floating charge. This adds a new twist to the old propositions. The third characteristic might have been universally acknowledged as being typical of a floating charge in the past. But Spectrum Plus makes it clear that this characteristic is not just important, it is vital. This has two important consequences: Without the third characteristic, the charge cannot be a floating charge, and conversely, with it, the charge must be a floating charge and not a fixed one. So any charge whereby the company is allowed to deal with the charged assets and remove them from the charge must be a floating charge and not a fixed charge. The House of Lords’ confirmation of the dispensability of the first two characteristics mentioned by Romer LJ as being typical of a floating charge is also useful. In relation to the first characteristic, this means that a floating charge need not necessarily be over present and future property, it can be over present property only or future property only. This proposition is not new12 but may not have been fully appreciated in the past. In In re Atlantic Computers Systems Plc,13 for instance, the court decided that a charge over sub-leases and rentals was a fixed charge and not a floating one because it related to existing assets and not future assets, a position which is now clearly untenable. As for the second characteristic, its dispensability means that a floating charge need not be over a class of assets which, in the ordinary course of the business of the company, would be changing from time to time. It could be over assets like machinery, a class which is more permanent and which need not change from time to time in the ordinary course of business. Under the Spectrum Plus test, that an asset fails to display Romer LJ’s second characteristic is immaterial provided that the third characteristic is present. So assets like machinery could be subject to a floating charge as long as the company is allowed under the terms of the charge to deal with this machinery in the ordinary course of business and remove it from the

charge.14 Whilst it might be thought that the...

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