Book debts Subject to a fixed or floating charge

May 2005

31.1.43 Background

Book debts are a current asset and whether or not there can be a valid fixed charge on book debts has been the subject of much legal discussion. For 25 years banks and other chargeholders have used a standard form of debenture which had been approved as creating a fixed charge over present and future book debts by Mr. Justice Slade in the matter of Siebe Gorman & Co Limited v Barclays Bank Ltd [1979] 2 Lloyds Rep 142, (hereafter referred to as Siebe Gorman). In June 2001 the Privy council heard an appeal from the Court of Appeal of New Zealand in the matter of Richard Dale Agnew and Kevin James Bearsley v The Commissioners of Inland Revenue and the Official Assignee for the estate in bankruptcy of Bruce William Birtwhistle and Mark Lesley Birtwhistle [2001] BCC 259 (hereafter referred to as Brumark). Following this decision it appears that in the majority of cases encountered by the official receiver where a fixed charge over book debts leaves the company free to collect the debts and to use the proceeds in the ordinary course of business, the charge should instead be treated as though it were a floating charge and realised accordingly (see paragraph 31.1.47).

This decision which is not binding in English law was challenged by the bank in the High Court in the case of National Westminster Bank plc v Spectrum Plus Limited and others [2004]All ER (D) 76 (Jan) (hereafter referred to as Spectrum). The Vice Chancellor 'very reluctantly' followed the position of the Privy Council in Brumark concluding that the Siebe Gorman judgment was wrong. The bank appealed and in May 2004 the Court of Appeal unanimously overturned this decision and concluded that the decision in Siebe Gorman should be upheld. A prohibition on disposing of book debts prior to collection together with an obligation to pay the proceeds into an account, in the judgment of the Court of Appeal was sufficient to give rise to a fixed charge on book debts. If the bank is in a position to exercise control over the book debts, then this is sufficient whether or not the bank does exercise that control.

The Court also considered that, notwithstanding that Siebe Gorman was upheld on legal grounds, Siebe Gorman should be upheld on public policy grounds. Over the last 25 years banks, borrowers and guarantors have proceeded on the basis that debentures based on the Siebe Gorman decision will create a fixed charge over book debts. Had there been any doubt that such charges should take effect as fixed charges these parties would have arranged their affairs very differently in order to protect these parties and achieve what was intended to be achieved. The Court of Appeal concluded that the need for commercial certainty requires that Siebe Gorman be followed.

H M Customs and Excise, the Commissioners of Inland Revenue and the Secretary of State for Trade and Industry who were joint respondents in the Spectrum case have appealed to the House of Lords and a decision is expected later this year. As a consequence the position of fixed charges over book debts remains unresolved.

31.1.44 Realisation of book debts where the validity of the charge as a fixed charge is in doubt

It is imperative for the book debts to be collected notwithstanding any dispute as to the entitlement to the proceeds between the official receiver as liquidator and the chargeholder. Only the debtors will benefit if there is a delay in collecting the book debts.

It is suggested that where the official receiver acts as the liquidator of the company and has responsibility for the collection of book debts claimed to be subject to a fixed charge a way forward should be agreed with the chargeholder so that the collection of the debts is not imperilled.

It is suggested that with the knowledge and, perhaps the consent of the chargeholder the official receiver proceeds with the collection of the debts affected by the dispute which, when realised, can be credited to a suspense or other appropriately named account and held therein, on deposit terms if appropriate, until the position is clearer. The contractor (see Part 2 of this chapter) may be instructed to collect the debts as agent for the official receiver (see paragraph 31.1.46).

In the early stages of the liquidation, it will also be of assistance for the official receiver to determine the basis on which the company’s account with the lender, for which the security was held, was operated. That might be ascertained by reference to the company’s accounting records or by further enquiry of one or more of the company’s directors. The official receiver will need to establish whether the company was able to recycle receipts from the trade debts purportedly subject to the fixed charge or whether they were in some way retained by the chargeholder (bank), with the company’s access to them being denied or severely restricted, perhaps by the use of a blocked account.

With the funds held by the official receiver, in the suspense or other named account, when the collection of debts is complete, information can be supplied to the chargeholder and, perhaps, a way forward found. In view of the amount of the funds, or because other assets have been realised to meet the debt, it might be that the chargeholder will be prepared to concede that the trade debts in the particular case can be regarded as being subject only to the floating charge, if any, whilst reserving the position overall, in which case the funds can be transferred to the general estate account and fees charged as appropriate (see paragraph 31.1.47)

If the chargeholder is not prepared to act in this way, until the situation is resolved generally, it might be that the funds will have to remain credited to the suspense or other account. For example, it is not considered appropriate for funds to be released from such an account to the holder of a fixed charge where the company was allowed to recycle the trade debt receipts. It is accepted that cases might have to be closed with credit balances on such accounts when it is essential that application be made to defer the dissolution of the company (see Chapter 37, paragraphs 37.8 to 37.10 and Chapter 38, paragraphs 38.23 to 38.27). This is necessary to prevent the funds held becoming the property of the Crown as bona vacantia.

Before being allowed to collect trade and other debts in this way, it is possible that the official receiver will be asked to give an accounting undertaking of some description to the chargeholder. That might include a provision whereby the funds held will not be distributed or parted with by the official receiver without appropriate notice to the chargeholder. If the undertaking seems reasonable, and can be honoured by the official receiver without undue difficulty, it may be given. But, of course, any undertaking given must be met.

It remains incumbent upon official receivers to agree the position with the chargeholder. The position of the banks has undoubtedly been strengthened now the Court of Appeal has overturned the Vice Chancellor’s judgment and upheld the Siebe Gorman decision. Offers by charge holders, for example, to divide (disputed) book realisations equally to enable a case to be closed pending further appeal in the Spectrum case should still be refused but if in the unlikely event that creditors, including creditors for liquidation expenses, are willing to consent to such an arrangement in an individual case, without setting a precedent, to progress it, such an offer might be accepted.

31.1.45 Book debts subject to a valid fixed charge

Where the official receiver is of the opinion that the charge over the book debt is a valid fixed charge having considered whether the required elements of control over the collection and disposition of the debts are present, (for example whether the company was able to recycle receipts from the trade debts purportedly subject to the fixed charge or whether they were in some way retained by the chargeholder (bank), with the company’s access to them being denied or severely restricted, perhaps by the use of a blocked account) and no prospect of a surplus for the benefit of the estate once the chargeholder has been paid, the official receiver, as liquidator or trustee, has no obligation to seek to realise the debts for the benefit of the secured creditor as it is the chargeholder who will benefit from the realisation not the general body of creditors. The chargeholder may appoint a receiver to realise the book debts or take direct action himself/herself to collect the debts. Where the official receiver is aware of the chargeholder's interest, a copy of the list of book debts should be provided to the chargeholder so that he/she may approach the book debtors directly for payment.

If the chargeholder is not prepared to collect the debts, he/she is not entitled to assume that the official receiver will seek to realise the asset on his/her behalf. The official receiver should not normally commit his/her resources to such activity but the collection of book debts should not be neglected, with both the official receiver and the chargeholder expecting the other to take action to collect the book debts. The action to be taken should be agreed in writing between the official receiver and the chargeholder.

31.1.46 Realisation of book debts where the holder of a valid fixed charge refuses to realise the book debts.

Where a fixed charge over book debts provides that the collection of debts are paid into a separate bank account and the company is not free to deal with the proceeds in the ordinary course of business the Official Receiver may be satisfied that the validity of the charge as fixed is not in doubt. In such circumstances there may be problems if neither the official receiver nor the chargeholder do anything to protect or collect an asset of the estate which could be at risk of collection by a former director or successor company. These assets should not go unrealised. If the chargeholder refuses to collect the book debts and an insolvency practitioner cannot be attracted the official receiver should instruct the contractor to collect the book debts. Thus the book debts will at least be collected and once remitted to the official receiver they can be put through a secured creditor’s account. In this way appropriate action is taken to collect the assets, a creditor may receive some benefit (albeit only small) and the contractor and the official receiver will receive fees.

Where the official receiver does agree to collect book debts subject to a valid fixed charge, he/she should make it clear to the chargeholder that the contractor will be instructed to realise the book debts. It should be pointed out to the chargeholder that there will be additional costs involved in the form of the contractor’s fee and that the official receiver will also charge remuneration [note 1], together with VAT on that remuneration, and that those charges will be deducted from the amounts realised before any payment is made to the chargeholder. The chargeholder should be asked for confirmation in writing that he/she still wishes the official receiver to proceed in such circumstances. In such a case, the official receiver should open a fixed charge account (on LOLA) to receive the proceeds and to charge fees etc. and to make payments .Where such a situation arises the contractor (see Part 2 of this chapter) must be informed that the realisation is being performed by it as agent for the official receiver on behalf of a secured creditor to avoid any difficulties at a later stage in the proceedings.

31.1.47 Collection of book debts subject to a floating charge.

Where a receiver has not been appointed under a floating charge it falls to the liquidator of the company (including the official receiver when he/she occupies that position) to realise any book debts covered by the floating charge. The official receiver should instruct the contractor (see Part 2 of this chapter) to collect the debts in the usual way. For further information on floating charges see paragraphs 31.4 and for the appointment of receivers see Chapter 56, Part 2.

In the case of a floating charge the preferential creditors take priority over the chargeholder, and any book debts realised under a floating charge, once the fees etc have been paid, will be used in the first instance to pay the preferential creditors rather than the chargeholder [note 2].

The official receiver must make the chargeholder aware that he/she will be instructing the contractor to collect the debts covered by the floating charge and there will be additional costs involved in the form of the contractor's fee. The usual realisation fees and VAT will also be charged once the book debts are recovered [note 3]. All monies received from the realisation of book debts subject to a floating charge should be paid into the estate account (as usual).

 

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