Summary

The court interpreted agreements by which a video games development company had agreed to accept funding from a loan company, secured by various charges. In particular, it determined that the funder had no security or other proprietary interest in monies in the company's bank accounts, derived from tax credits.

Facts

The administrators of a company applied for determination of the preliminary issue of whether the first and/or fourth respondent had any security or other proprietary interest in monies in the company's bank accounts.

The company was a video games developer. It had entered into three development and sales agreements (DSAs) with the first respondent, whereby the first respondent provided funding in return for various securities. The DSAs set up two payment streams. The first was for the funds provided by the first respondent and was paid into a "production account" in the name of the fourth respondent, a wholly-owned subsidiary of the company. The second was for net sales revenue and was paid into a different account. The company executed a deed of charge to secure all its existing and future liabilities to the first respondent. The charged property included "book debts" which were defined as "all present and future book and other debts and monetary claims due or owing to [the Company] in respect of the Products...". The "products" were the games funded by the DSAs. The DSAs required the company to collect in and realise all book debts, pay the proceeds into a designated bank account and hold them on trust for the first respondent. No designated account was ever set up. The fourth respondent also granted a debenture to the first respondent, by which it charged all its assets as security for payment of all its present and future liabilities to the first respondent. That included a fixed charge over all "book debts" and all monies standing to the credit of the fourth respondent's accounts with any bank, which included the production account. The definition of "book debts" in the debenture was similar to that contained in the company's deed of charge: it included debts and money claims due to the fourth respondent in respect of products. The company had claimed video games tax relief. The DSAs provided that the company and the fourth respondent should procure that all tax credits were paid into the production account. The company subsequently needed further funding and entered into secured funding arrangements with the second and third respondents. The first respondent requested that any tax credits should be paid directly into the production account rather than to the company so that they would not be dissipated or come under the control of other secured creditors. The company received a tax credits payment of £190,000 from HMRC, paid into its trading bank account. Shortly afterwards, it entered administration.

Held

Did the company's charge over book debts apply to the tax credits? No. The tax credits were not part of the payment stream and were not to be paid into the designated account. In the absence of any express provision about what was to be done with any tax credits paid into the production account, on the face of it the fourth respondent had the power to deal with them without requiring the first respondent's consent. If the first respondent had any interest in or right of control over monies in the production account, it could only arise under the fourth respondent's debenture. However, the tax credits could not be book debts because they were not sums due to the fourth respondent in respect of products. They were to be paid to the fourth respondent by virtue of the company's obligation to the first respondent under the DSA, not because of any obligation owed by any person to the fourth respondent. There were no restrictions in the debenture on the fourth respondent's ability to deal with monies in the production account unless and until the security in the debenture was enforced. It followed that the charge created by the fourth respondent over that account, although stated to be a fixed charge, was to be construed only as a floating charge. Further, any charge created by the fourth respondent over monies in the production account would attach only to any beneficial interest which the fourth respondent had in those monies, but the fourth respondent had no beneficial interest in the tax credits. The contractual and security documents treated tax credits in a materially different manner from other sums that would be regarded as book debts. They were not subject to the contractual controls through the mechanism of payment into a designated account but were to be dealt with in a wholly different manner by payment into an account in the fourth respondent's name. They were not intended to be treated as book debts for the purpose of the security created by the company (see paras 29-40 of judgment).

Was there a specifically enforceable contract giving the fourth respondent a proprietary interest in the tax credits? No. The obligation to pay the tax credits into the production account held by the fourth respondent did not amount to a specifically enforceable contract to transfer or charge the tax credits and did not pass an immediate beneficial interest in the tax credits to the fourth respondent (para.48).

Was the first respondent entitled to a proprietary estoppel? No. The company had not offered assurances or made representations that the first respondent would acquire any proprietary interest in the tax credits (paras 50-58).

Determination of preliminary issue - In relation to the monies derived from the tax credits, the first and fourth respondents had no security or other interest in any bank account of the company (para.59).

Preliminary issue determined in favour of applicants