Summary

A debenture which provided that a charge over book debts was a specific (i.e. fixed) charge and required the company to pay the proceeds of the debts when received into the company's account with the bank and not otherwise to deal with the debts created a fixed charge over the book debts in accordance with the decision in Siebe Gorman v Barclays Bank Ltd (1979).

Facts

The appellant bank (N) appealed from the decision dismissing its application pursuant to the Insolvency Act 1986 s.112 for a declaration that a debenture granted to N by the respondent company (S) created a fixed charge over the company's book debts. S granted a charge to N over its book debts by a clause in a debenture which secured S's obligation to N to repay borrowings under an overdraft facility. The debenture provided that the charge over book debts was a specific (i.e. fixed) charge and required the company to pay the proceeds of the debts when received into the company's account with the bank and not otherwise to deal with the debts. S's account was never in credit. The proceeds of book debts were paid into S's account with N and S drew on the account as necessary. In 2001 S went into liquidation. The liquidators collected the book debts but refused to account for them to N. The judge held (following Agnew & anr v Commissioner of Inland Revenue & anr (2001) UKPC 28, (2002) 1 AC 710 and declining to follow Re New Bullas Trading Ltd (1994) BBC 36 ) that the charge would be a floating charge if the debenture permitted S to use the proceeds in the normal course of business, and that the charge in the instant case did so permit so that it was not a fixed charge (declining to follow Siebe Gorman & Co Ltd v Barclays Bank Ltd 2 Lloyd's 142 ).

Held

(1) The reasoning in Agnew was that the essential characteristic of the floating charge was that it left the chargor free to make use of the assets charged in order to continue to run the business. So long as he was free to use the proceeds of book debts for that purpose the charge was properly considered as floating. The reasoning in New Bullas was less satisfactory in holding that the parties could create a fixed charge over book debts but not their proceeds by so agreeing in terms. The Court of Appeal could only uphold the decision below in the instant case if it was open to it to hold that New Bullas was wrongly decided. New Bullas could not be distinguished by confining its reasoning to debentures which drew a distinction between book debts and their proceeds. There was no English decision which permitted the court to disregard the decision of the Court of Appeal in New Bullas that it was possible to have a fixed charge over book debts notwithstanding that the chargor was entitled to collect and use the proceeds of the debts which were agreed to be subject only to a floating charge. The Court of Appeal was bound by the doctrine of precedent to follow its own decision in New Bullas even though it had been disapproved by the Privy Council in Agnew (Young v Bristol Aeroplane Co Ltd (1944) KB 718 and Davis v Johnson (1979) AC 264 applied). (2) In Siebe Gorman it seemed that the provisions of the debenture that the charge on book debts should be a fixed charge and the requirement that the proceeds of the book debts should be paid into an account with the bank led the judge to conclude that the debenture gave the bank the right, if it chose, to prevent the company from drawing on the account into which the book debts were paid even where that account was in credit. The crucial issue was whether the restrictions imposed by a debenture in the terms of the debenture in Siebe Gorman on the use that the chargor could make of the proceeds of the book debts were sufficient in law to create a fixed charge. The judge in Siebe Gorman would have been entitled to conclude that the charge on book debts created by the debenture was a fixed charge because the debts were not to be disposed of prior to collection and on collection had to be paid to the bank itself. It followed that he was certainly entitled to hold that the debenture, imposing restrictions on the use of the proceeds, created a fixed charge over the book debts. The form of debenture used in Siebe Gorman had been used for 25 years since that decision on the understanding that its meaning and effect were as set out in that decision and even if the interpretation of the debenture in that decision had been erroneous, the court would have been inclined to hold that that form of debenture had, by customary usage, acquired that meaning and effect.

Appeal allowed.