Siebe Gorman charge - fixed or floating?

National Westminster Bank plc v (1) Spectrum Plus Limited (in Creditors' Voluntary Liquidation) (2) Richard Hawes (3) David Thomas (4) The Commissioners of Customs & Excise (5) The Commissioners of Inland Revenue (6) The Secretary of State for Trade and Industry [2004] EWCA 9(Ch), 15 January 2004, [2004] 1 All ER 981, Sir Andrew Morritt Vice-Chancellor

In this case, the National Westminster Bank sought to argue that the terms of a debenture granted in its favour by Spectrum Plus Limited created a fixed as opposed to a floating charge over book debts and their proceeds.

In so doing, the bank sought to uphold a standard form of wording that had in the past at least been understood to create a fixed charge.

The company obtained an overdraft facility from the bank.

As security, the company granted the bank a debenture.

The debenture was in standard form, under which the company charged by way of specific charge all book debts and other debts now and from time to time due or owing to the company, with the payment or discharge of all monies, obligation and liabilities covenanted to be paid or discharged to the bank.

The debenture went on to record that, 'with reference to the book debts and other debts hereby specifically charged, the company shall pay into the company's account with the bank all monies which it may receive in respect of such debts, and shall not without the prior consent of the bank sell factor discount or otherwise charge or assign the same in favour of any other person or purport to do so and the company shall if called upon to do so by the bank from time to time execute legal assignments of such book debts and other debts to the bank'.

The bank advanced 200,000 to the company by way of overdraft on a current account.

Proceeds of book debts were collected by the company and paid into the account with the bank, so reducing the overdraft.

The company would also draw on the account as required with the result that there was always a fluctuating sum owing to the bank by way of overdraft.

In October 2001, the company went into creditors' voluntary liquidation.

The statement of affairs recorded that the bank was owed 165,407 and that 156,554 was estimated as being realisable from book debts.

Preferential creditors were owed some 16,136.

The deficiency with regard to the creditors was 649,249.

The liquidators had collected book debts in the sum of 113,484.

The bank claimed that the debenture created a fixed charge over book debts and their proceeds and applied for a declaration that the charge was fixed and for an order requiring the liquidators to account.

The first defendant on the application was the company.

The second and third defendants on the application were the liquidators.

The fourth to sixth defendants represented the various preferential creditors.

It was accepted that there were no material differences between the terms of the debenture in this case and the terms of the debenture in Siebe Gorman & Co v Barclays Bank Ltd [1979] 2 Ll L R 142.

In Siebe Gorman, Mr Justice Slade held that it was possible to create a fixed charge over present and future book debts.

He also held that on a proper construction the terms of the debenture in that case had created a fixed charge.

Following Siebe Gorman, the terms of the debenture in that case were adopted as a more or less standard form used by banks and other institutions to create a fixed charge over present and future book debts.

However, in Agnew v Commissioner of Inland Revenue [2001] 2 AC 710, the Privy Council appeared to cast doubt on whether on a true construction the terms of the debenture in Siebe Gorman did in fact create a fixed charge.

On the application in this case, the Crown sought to establish that the Siebe Gorman debenture did not create a fixed charge on present and future book debts and that the conclusion of Mr Justice Slade that it did, was wrong.

If this burden was not discharged, the Siebe Gorman debenture would remain categorised as a fixed charge and the bank would be entitled to the book debts.

The vice-chancellor adopted the approach used by the Privy Council in Agnew.

Firstly, the debenture was construed so as to determine the nature of the rights and obligations that the parties intended to grant each other in respect of book debts.

Thereafter, it was ascertained from those rights and obligations whether it was the intention of the parties that the company should be free to deal with the book debts and withdraw them from the security without the consent of the bank.

If it was intended that the book debts were under the control of the company, the charge was likely to be floating.

Looking at the rights and obligations granted in respect of book debts, it was clear from the terms of the debenture that the book debts were to be under the control of and available for the use of the company in the ordinary course of its business, through their collection and the ordinary operation of the bank account.

The debenture only affected the collection and use of the book debts in that factoring, block discounting and the collection of the book debts through an account with another bank were forbidden.

This was insufficient for the charge to be categorised as fixed, despite the label that the parties had used to describe the nature of the charge.

Therefore, the vice-chancellor held that the charge created by the debenture ought to be classified as a floating charge.

Accordingly, the preferential creditors were entitled to be paid in priority to debts secured by the bank as the holder of a floating charge.

There can be little doubt that this judgment was not good news for banks.

Many will have adopted the Siebe Gorman form of debenture and assumed that they would be taking a fixed charge over present and future book debts.

The fact that their charge turned out to be floating rather than fixed will mean that they are no longer entitled to recover book debts in priority to preferential creditors and the costs of the liquidation.

However, the ramifications of this decision for banks are significantly affected by the Enterprise Act 2002.

In post-Enterprise Act liquidations, Crown preference is abolished.

So, while older liquidations may see a bank's entitlement subordinated and frequently extinguished by the Crown preference, the future may be not be thought so bleak.

In any event, one would expect to see banks and institutions - if they have not done so already - changing their standard form debentures so as to protect them from the decision in this case and the potential consequences of section 252 of the Enterprise Act.

That section will allow part of the property secured by a floating charge to be made available to unsecured creditors.

By Simon Sugar, 36 Bedford Row, London