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The Decision
The long-awaited decision from the House of Lords in the case of National Westminster Bank plc -v- Spectrum Plus Limited and others was handed down on Friday 1 st July 2005 and ruled that book debts are a floating charge asset.
Effect of the decision
This decision may have serious ramifications as banks, companies and those who have given bank guarantees could all be affected. For instance:
| 1, |
There will be companies where they trade on the reliance of ongoing financial support from their bank, based upon book debt security. |
| 2, |
The banks may now review the level of support given and as a consequence, there could be further constraints on the cash flow of companies. |
| 3, |
The Crown may look back as far as six years with a view of reclaiming monies that have been paid to the banks under purported fixed charges, in priority to the preferential creditors. |
| 4, |
In practice, it is anticipated the Crown will honour their statement published in the wake of Re Brumark and only review incidences that occurred after 6 June 2001. |
| 5, |
However, if the Crown do seek to overturn these misapplications of funds then Banks could find themselves relying on other securities; or, |
| 6, |
If this route is not open to them, the guarantees granted by Directors and other third parties could be enforced. |
Background
Since 1979 banks have been able to rely on the decision of Re: Siebe Gorman whereby the court ruled it was possible to have a fixed charge over book debts. However, this reliance was placed into some doubt on 6 June 2001 when Lord Millett, while sitting on the Privy Council case known as Re Brumark, cast doubts on the validity of Siebe Gorman . The Law Lords have followed Lord Millett's lead and made it quite clear the principles of Siebe Gorman were wrong and should be over-ruled.
In the Spectrum decision Lord Hope of Craighead said, ".One must look, not at the declared intention of the parties alone, but to the effect of the instruments whereby they purported to carry out that intention. Was the account one which allowed the company to continue to use the proceeds of the book debts as a source of cash flow or was it one which, on the contrary, preserved the proceeds intact for the benefit of the bank's security? Was it, putting the point shortly, a blocked account?"
The Bank argued that the decision should be held as prospective (i.e. having effect from the date of the ruling) but this was also dismissed. The reason for its dismissal was that any judgment by the House of Lords is treated as "Declaratory", which is to say this is how the law has always been. Accordingly, the House of Lords decision has a retrospective effect.
Important Note: This above information has been prepared as background information for the general professional advisor and is not a comprehensive statement of law - we recommend that expert advice be taken on specific issues arising in practice.
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