BANKING LAW

Floating Charges Smith (as Administrator of Cosslett (Contractors) Ltd) v Bridgend County Borough Council [2001] UKHL 58, [2001] 3 WLR 1347 The company and the council entered into a contract for the company to clear land containing derelict coal dumps.

The company brought onto the land two coal-washing plants to separate usable coal from residue.

The council advanced about 1.8 million to the company to enable it to buy the washing plants on terms that repayment was made out of the sums that would periodically have been payable to the company over the term of the contract.

The contract entered into between the company and the council stated that the washing plants were deemed to be the property of the council while they were on site.

At condition 63, the contract also provided that if the company abandoned the contract the council could complete the works or employ any other contractor to complete the works, and could enter the site and sell any of the plant, and apply the proceeds of sale in or towards the satisfaction of any sums due to the council under the contract with the company.The company abandoned the contract and went into administration.

The council appointed B Limited to complete the works.

B used and subsequently sold the coal- washing plants.

The administrator of the company argued that condition 63 was an unregistered floating charge and therefore void against him under section 395(1) of the Companies Act 1985.

The administrator of the company subsequently claimed damages for the conversion of the washing plants.

At first instance, the administrator obtained summary judgment against the council for damages to be assessed for conversion.

The council appealed.

The Court of Appeal held that section 395(1) made the floating charge void as against the administrator but not the company.

The right to sue for conversion vested in the company, not the administrator and therefore the power of sale remained valid against the company and was a defence to the conversion claim.

Lord Hoffmann, who gave the lead judgment in the House of Lords, found the grounds upon which the Court of Appeal decided the case both 'startling and unorthodox'.

Lord Hoffmann held, following In re Monolithic Building Co [1915] 1 Ch 643, that once a company is in liquidation and can only act by its liquidator there is 'little value in a distinction between whether the charge is void against the liquidator or void against the company.

It is void against the company in liquidation'.

Lord Hoffmann held that as in the case of liquidation, the phrase 'void against the administrator' within section 395(1) meant 'void against the company in administration or (another way of saying the same thing) against the company when acting by its administrator'.

Consequently, the floating charge was void as against the company in administration and was no defence to the claim for conversion.The council sought to argue that even if the charge did not give rise to a defence to the conversion claim, it was entitled to an equitable set off of the sums due to it under the contract.

Lord Hoffmann rejected this claim and held that to do so would be 'to allow the council to exercise the very right which it could have exercised if the charge had been registered but which section 395 was intended to avoid'.In overturning the decision of the Court of Appeal, the House of Lords has closed a significant loophole that threatened the very efficacy of the system of registration of company charges.

Now it is clear beyond any doubt that the failure to register a charge will render it void against a company in liquidation or administration, leaving the chargee unsecured.

Furthermore, in closing the door to any equitable set-off arguments, the Lords have removed any indirect attempts to avoid the consequences of non-registration.

Banks have always been aware of the need to register charges to ensure their effectiveness as securities.

This judgment re-asserts the primacy of the doctrine of registration and confirms that a failure to register will render a creditor unsecured.Settlement of a debt The Commissioners of Inland Revenue v Barbara Jane Fry, 30 November 2001, Mr Justice Jacob In this case, Ms Fry's liability to income tax was assessed at 113,082.

Ms Fry did not dispute the assessment.

Ms Fry had no assets with which to meet the assessment and her husband offered 10,000 to the Inland Revenue in full and final settlement of his wife's outstanding tax liability (see law reports, page 30).

In making the offer, Mr Fry wrote out a personal cheque for 10,000 and sent the cheque along with a letter stating that if the Inland Revenue wished to accept the offer it should present the cheque for payment.

The internal procedure in the enforcement office of the Inland Revenue was that letters were opened in the postroom.

All payments were sent to the cashiers' section for banking and any correspondence would be stamped by the cashiers and then sent to a caseworker to deal with.

When the caseworker received Mr Fry's letter, she informed him that the cheque had been banked but that his offer was not accepted and the money could either be returned or treated as part payment of Ms Fry's liability.

Mr Fry sought to argue that as a consequence of the banking of his cheque, a contract in full and final settlement of his wife's liabilities had been concluded.On consideration of the authorities, the judge concluded that the cashing of a cheque gives rise to no more than a rebuttable presumption that the terms on which it was given were accepted.

On the facts of the case, Mr Justice Jacob held that the presumption had been rebutted.This case ought not to give encouragement to any belief that the presumption of acceptance on the cashing of a cheque is an easily rebuttable presumption.

It is clear that the exceptional facts of the case, namely the procedure in the enforcement office, had a major role to play in rebutting the presumption.

In the ordinary case, advisers should be aware that presenting a cheque for payment is likely to result in the acceptance of the terms upon which the cheque was given.By Simon Sugar, barrister, 36 Bedford Row, London