Does it float?

Of major concern to creditors is the decision in re Spectrum Plus Limited (In Voluntary Liquidation), which was reported in The Times on 23 January. In this case, the Vice-Chancellor of the Chancery Division, Sir Andrew Morritt, had to consider whether a charge created by a debenture was 'fixed' or

Spectrum Plus opened an account with National Westminster Bank and obtained an overdraft of 250,000. The company signed a debenture in standard form giving security "by way of specific charge" in respect of "all book debts and other debts now and from time to time due to the company".

The debenture required the company to pay into the bank account all monies which it received in respect of such debts. It prohibited the selling, factoring, discounting or charging or assigning those debts without the prior consent of the bank.

The company traded. Book debts were collected and paid into the account - reducing the overdraft. The company drew on the account when it needed to do so, and the overdraft increased.

Subsequently, the company went into creditors voluntary liquidation. The Statement of Affairs showed 165,407 owed to the bank, with estimated realisable book debts of 156,554. In fact, the liquidators collected 113,484. However, they had no option but to hold that money until a court decided the effect of the debenture.

This stems from a decision made just over two years ago - the Brumark case. Although that case began in New Zealand it was held, on it being referred, on appeal, to the Privy Council that a charge over assets taken by a bank may not be effective if the company goes into insolvency.

The bank therefore had to apply to the court for a declaration that the debenture created a fixed charge over the company's book debts and for an order that the liquidators paid over to them the sums collected. The Court had to consider the question 'fixed' or 'floating'.

The Vice-Chancellor held that in deciding that question the court had to consider three matters:

* What rights and obligations did the parties intend to grant to each other?

* Whether it was intended that the charged assets should be under the control of the company or the charge holder.

* Whether these intentions were consistent with the nature of the transaction 'as described by the label the parties had put on it'.

It was clear that the book debts were under the control of, and available for the use of, the company in the normal course of its business. Despite the noted restrictions on factoring and discounting, the debenture did not affect the collection of debts or their use as working capital. This 'free use' of the proceeds of book debts was inconsistent with the nature of a fixed charge. As a result, the charge granted by the company could only have been a floating charge, and the rights of the creditors had to be determined accordingly.

For a bank to be able to take a fixed charge on book debts, it has to ensure that the proceeds are paid into a "stopped account". In this instance, the bank would control the debt realisations. If, however, the proceeds are used by the debtor, the bank will have difficulty in enforcing a fixed charge.