Where have all the loans gone?
Business Money talks to City barrister, Professor Mark Watson-Gandy, about how Brumark gave the banks cold feet
What is all the fuss about?
In June 2005 the House of Lords reached their decision about the test of what is and what is not a fl oating charge. In the case of National Westminster Bank v Spectrum Plus.
Sounds like heady stuff. But really who cares?
A lot of commercial lenders were very worried as it affected the nature of their security over book debts. Indeed whether it was possible at all to have a fi xed charge over book debts or merely a floating charge. A fl oating charge catches both present and future assets but is subject to a hardening period.
Fixed charges are far less fl exible and basically provide that a company cannot deal with the assets except with lender’s consent. They do have certain advantages over fl oating charges; they are not subject to the hardening rule and they have absolute priority over charged security.
Why would a bank care if it had a fl oating charge? They sound better!
I mentioned that a fl oating charge is subject to a hardening period. In essence a fl oating charge given within 12 months of the winding up or an administration order petition is invalid unless (a) the company was solvent when it was created or (b) to the extent it was for value. Even if it is valid, unlike with a fi xed charge, part of the secured money under the floating charge can be swallowed by the unsecured creditors as they are
6 June 2011
Examples include anyone owed up to four months’ worth of unpaid wages, maternity pay, protective awards and pension contributions: Schedule 6, Insolvency Act 1986.
So the director’s salary gets paid in priority to your security!
How did this come about? The position used to be under New
Bullas that the test for determining whether a charge was fi xed or fl oating depended on its description. Put in other words if you called something a spade, it was a spade.
That is straightforward enough. So how did Brumark change things?
In 2001 when the Privy Council in
a case called Re Brumark Investments, Agnew v IRC ruled that the test of whether a charge was fi xed or fl oating was not self description but had to be assessed on the basis of the rights and obligations attaching to the charge. That is to say, it didn’t matter what you called it, a spade had to look and feel like spade before it was. This meant that New Bullas was wrongly decided. So you can imagine this would have had a knock on effect on all those debentures that had been drafted with the old test in mind.
Business Money – RSM Tenon
given a ring-fenced sum out of the sum secured. Worse still a fl oating charge (unlike a
fi xed charge) ranks behind a preferential creditor as regards priority: section 40 and 175 IA 1986.
Who are the preferential creditors?
But at least we knew where we stood?
Well not exactly. Re Brumark Investments, Agnew v IRC was a decision of the Privy Council. The Privy Council may be the supreme court of many Commonwealth jurisdictions but it is not our Supreme Court. In practice many of the same judges sit on the Privy Council as on our Supreme Court but this makes their decisions persuasive rather than binding.
So you waited for the English Supreme Court to adopt with the decision in Brumark?
Yes and this came up when the case
of National Westminster Bank v Spectrum Plus came before the House of Lords (now called the Supreme Court). The House of Lords said it was possible to create a fixed charge over book debts: Tailby v Official Receiver. However they said the debenture in this case did not create a fixed charge.
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