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Charges Over Books Debts- Subversives In Robes?

A. Amoko


It seems self-evident that any commercial lender (almost invariably a bank) anxious to make a buck would like to see the borrower (almost invariably a limited liability company) if a trader, make a profit from which such greedy lender could claim its pound of flesh. It seems equally self-evident that any such lender, who is particularly risk-averse, would be just as anxious to secure not just the sums lent but also its anticipated chunk as much is possible even if the company goes belly-up. This is the great advantage of that invention of the late 19th century courts of equity, the ‘floating charge’ (apparently so christened by Jessel MR in re Colonial Trusts Corp; ex p Bradshaw (1879) 15 Ch D 465) which enabled the lenders to secure their lending without crippling the borrower’s ability to trade.

At a high level of generality it is not too hard to see why, in the minds of commercial men, this development was in keeping with the general claim the equitable remedies were developed where justice so warranted so as to relax the shackles of the common law. It enabled the lender advance money with the assurance of full security. It enabled the borrower to have access to finance without freezing its assets and hampering its ability to trade. From a societal view-point, it kept the wheels of commerce turning to the benefit of an industrialising society. Apparently a win-win-win situation. But, (there had to be a ‘but’), it was not all honey and milk. As initially envisaged the clear winner was the lender at the expense of all other third parties dealing with the borrower (unsecured creditors- employees, tax collectors, trade creditors) if and when things turned sour, the fortunes of the borrower went south and there wasn’t, as is to be expected, enough to go round upon insolvency. The lender would then swoon in on the back of its priority under the floating charge and claim whatever is left of the assets, which might well include goods just delivered by a trade creditor. This position struck commercially-minded Victorian judges as none-too-equitable. Risk aversion was secured and avarice-satisfaction guaranteed for the lender and productive access to finance assured for the borrower at the expense of the others who dealt with the borrower, in particular trade creditors. As was astutely observed by Lord MacNaghten in one of the less well-known passages in Salomon v Salomon [1897] A.C. 22, 53:

“…For such a catastrophe as has occurred in this case some would blame the law that allows the creation of a floating charge. But a floating charge is to too convenient a security to be lightly abolished. I have long thought, and I believe that some of your Lordships also think that the ordinary trade creditors ought to have a preferential claim on the assets in liquidation in respect of debts incurred within a certain limited time before winding-up. But that is not the law at present. Everybody knows that when there is a winding-up debenture-holders generally step in and sweep off everything; a great scandal it is.”

Such concerns appear to have provoked parliament into action. However, legislative intervention was not quite in the direction which his Lordship envisaged. Firstly, rather than giving temporal protection for certain trade creditors upon insolvency against the priority accorded to debenture-holders, the legislature afforded broader protection limited only a specified class of preferred unsecured creditors i.e. the Exchequer and the borrower’s employees. By the Preferential Payments in Bankruptcy Amendment Act, 1897, (passed some 8 months after Lord Macnaghten entreaties but, before any of the most authoritative statements on the nature of the floating charge), Parliament amended an earlier statute and extended protection to statutory debts and payments due to employees (two groups not within contemplation of Victorian commercial judges) by giving them, priority at insolvency or receivership, in the assets comprised in security of “holders of debentures or debenture stock under any floating charge” without actually defining what was meant by the expression a “floating charge.” This has been preserved in various forms in various incarnations of the companies acts since – e.g. see section 311 of the Companies Act (Cap 486).  It is in this context that the distinction between a fixed and floating charge has acquired the greatest significance as it diminished the value of a floating charge as a security upon insolvency or receivership. Thus commercial lenders had to make a trade off between they desire for profit by allowing the borrower to trade freely and the comfort afforded by a fixed charge which effectively froze the borrower’s business. To adopt the evocative imagery of Fletcher Moulton LJ, commercial lenders could not at once give freedom and insist on servitude- Evans v Rival Granite Quarries Limited [1910]2 K.B. 979, 998.

The other statutory intervention surely counts as not the greatest example of parliamentary insight. The requirement of registration of all charges was brought about by section 14 of the Companies Act, 1900. As has been noted, mostly critically, it is not particularly easy to figure out, precisely how unsecured third parties were supposed to benefit from this. The rationalizations and/or justification, which have been advanced, simply do not stand up to scrutiny e.g. put unsuspecting third parties on notice which presumably would affect their dealings with chargee. It is inconceivable that any trader would refuse to deal with a chargor on credit, on the ground that, it has notice of a registered debenture which might potentially adversely affect him should the company go belly-up. Of late judges have joined academics in expressing considerable scepticism as to the utility of this requirement which persists to date with Lord Millet derisively commenting whatever protection it afforded was more apparent than real while Lord Hoffman has not been exactly complimentary about the registration system. Arguably the notification requirement has been counter-productive. It is hardly a credit to Parliamentary insight or foresight that this requirement for registration effectively gutted the possibility that unsecured trade creditors would ever enjoy that the protective embrace of afforded to equity’s darling i.e. the honest and alert third party ignoramus.

Of course, other jurisdictions were not as content with limited or ineffectual interventions. For example, as every schoolboy knows, early at the turn of the last century, New York courts had little trouble outlawing floating charges as frauds against creditors- (see the cases cited by Brandeis J writing for the United States Supreme Court in Benedict v Ratner (1925) 268 US 353) with apparently no harm to American commerce.




It is widely accepted that the most authoritative guidance of what constitutes floating charges are to be found in the decisions across the curial hierarchy in the case of In Re Yorkshire Woolcombers Assn Ltd [1903] 2 Ch 284 sub nom Illingworth v Houldsworth [1904] AC 355] supplemented by that of Buckley LJ in Evans v Rival Granite Quarries Limited [1910]2 K.B. 979, CA. These judgments and speeches established that it was a security over a circulating fund of assets controlled by the borrower until the happening of certain events as agreed by the parties and actual intervention by the chargor.

Here goes. In the High Court as per Farwell J at 288-9:

If the assignment is to be treated as a specific mortgage or charge or disposition, then the company had no business to receive one single book debt after the date of it; but if, on the other hand, although not so called, the company was intended to go on receiving the book debts and to use them for the purpose of carrying on its business, then it contains the true elements of a floating security.  It is of the essence of a charge of that kind that it remains dormant until the person in whose favour the charge is created intervenes


A charge on all book debts which may now be, or at any time hereafter become charged or assigned, leaving the mortgagor or assignor free to deal with them as he pleases until the mortgagee or assignee intervenes, is not a specific charge, and cannot be.  The very essence of a specific charge is that the assignee takes possession, and is the person entitled to receive the book debts at once.  So long as he licenses the mortgagor to go on receiving the book debts and carry on the business, it is within the exact definition of a floating security

In the Court of Appeal per Vaughan Williams LJ at 294:

I do not think that for a “specific security” you need have a security of a subject-matter which is then in existence.  I mean by “then” at the time of the execution of the security;  but what you do require to make a specific security is that the security whenever it has once come into existence, and been identified or appropriated as a security, shall never thereafter at the will of the mortgagor cease to be a security.  If at the will of the mortgagor he can dispose of it and prevent its being any longer a security, although something else may be substituted more or less for it that is not a “specific security”.

per Romer LJ at 295:

I certainly do not intend to attempt to give an exact definition of the term “floating charge”, nor am I prepared to say that there will not be a floating charge within the meaning of the Act, which does not contain all the three characteristics that I am about to mention, but I certainly think that if a charge has the three characteristics that I am about to mention it is a floating charge.  (1).If it is a charge on a class of assets of a company present and future; (2) if that class is one which, in the ordinary course of the business of the company, would be changing from time to time; and (3) if you find that by the charge it is contemplated that, until some future step is taken by or on behalf of those interested in the charge, the company may carry on its business in the ordinary way as far as concerns the particular class of assets I am dealing with.

In the House of Lords delivering the lead speech from the Woolsack, Lord Halsbury approved the judgments of the courts below adding “it seems to me that the whole purport of this instrument is to enable the company to carry on its business in the ordinary way, to receive the book debts that were due to them, to incur new debts, and to carry on their business exactly as if this deed had not been executed at all.  That is what we mean by a floating security.”

Concurring Lord MacNaghten sought to clarify his earlier views:

“With respect regard to criticism which Vaughn Williams L.J. passed, not think unkindly on some words of mine in the Manila Case, I think only wish to add that what I said was intended as a description, not as a definition, of a floating security. I should have thought there was not much difficulty in defining what a floating charge is in contract to what is called a fixed security. A specific charge is, I think, is one that without more fastens on ascertained and definite property or property capable of being ascertained and defined: a floating charge, on the hand is ambulatory and shifting in its nature, hovering over and so to speak floating with the property which it is intended to affect, until some event occurs or some act is done which causes it to settle and fasten on the subject of the charge within its grasp.”

In a much-cited paragraph in Evans v Rival Granite Quarries Limited, Buckley sought to distil the common thread emerging from these passages as well as earlier authorities and concluded thus [at 999]:

“A floating security is not a future security; it is a present security, which is present security, which presently affects all the assets of the company expressed to be included in it. On the other hand, it is not a specific security; the holder cannot affirm that the assets are specifically mortgaged to him. The assets are mortgaged in such a way that the mortgagor can deal with them without the concurrence of the mortgagee. A floating security is not a specific mortgage of the assets, plus a license to the mortgagor to dispose of them in the course of his business, but is a floating mortgage applying to every item comprised in the security, but not specifically affecting any item until some event occurs or some act on part of the mortgagee is done which causes it to crystallize into a fixed security.”

For the sake of completeness, though it is not much cited, I think Fletcher Moulton’s take in that case on Lord MacNaghten descriptions merits equal attention but we need not get into that for our present purposes.

It is important to stress that the matter was not solely a question of form i.e. the construction to be placed upon a particular document but with its actual effect in law against the relevant factual backdrop as crisply put by Fletcher Moulton LJ, “but at an early period it became clear to judges that this conclusion did not depend upon the special language used in the particular document, but upon the essence and nature of the security of this kind.” Evans v Rival Granite Quarries Limited [1910]2 K.B. 979, 993.

In practice, Lord Justice Romer’s statement of the law, which seems to provide that which lawyers love- a test (as though word-play ever amounts to that)-, has become predominant. In fact, as the first two characteristics he identified are not particularly unique to floating charges, attention has usually been directed to the third characteristic i.e. the borrower’s rights or ability to deal with the assets charged. As we will see, it has also had the unintended effect that the issue as to whether or not a security is regarded as floating or fixed is simply a question of construction of the impugned document in light of established doctrine There is, of course, no indication in his judgment that he was laying down any test, let alone the definitive one nor that he considered the issue merely one of interpretation of the terms of a particular security document. Indeed, he was explicit that he was doing nothing of the sort but seductive pull of the illusion of certainty seemingly bestowed by tests appears to have prevailed.


For reasons that are not entirely self-evident, since the descriptions enumerated above were enunciated, it was thought that it was impossible create a fixed charge over book debts. Not unnaturally, banks were not content with this situation. Beginning the early 70s, innovative securities by which the chargors was permitted to deal with the proceeds of the books debts charged but otherwise prohibited from disposing of them with the chargee’s consent were introduced. It was believed, without judicial sanction that such arrangements constituted fixed as opposed to floating charges.

These assumptions were tested in the case of Siebe Gorman & Co Ltd v Barclays Bank Ltd [1979] 2 Lloyd’s L.R. 142 where a Plaintiff challenged the characterisation of such a document as a fixed charge. Just why the issue of the correct characterisation came to play such a big role in that litigation is not clear. The principal issue was whether an assignment of charged book debts in favour of the Plaintiff given by a chargor with notice to the chargee were effective as against the chargee. In fact, Mr Justice Slade’s ultimate determination that the assignment was effective was not in any way affected by his conclusion that the document in question was a fixed charge i.e. arguably his  extended soliquoy on this point was obiter.

His general conclusion that it was possible in law to create to fixed charge over book debts though squelching professional qualms to the contrary did not then and still does not, generate much controversy for as Professor Goode has remarked those misgivings were based upon a fallacy- Charges Over Book Debts: A Missed Opportunity (1994) 110 LQR 59 . It is the second part, i.e. what it takes to create such a charge that excited attention.

Two particular terms appear to have been relevant to Slade’s determination that the charge before him was specific. Firstly the terms of the document was expressed to be that the parties agreed that they were creating a first fixed charge on all present and future debts while not decisive indicated that the parties intended to create a fixed charge. The charge also had a provision (this was the ‘innovation’) to the effect that the proceeded of such book debts had to be paid into a designated account, prohibited the assignment of such debts with prior consent and imposed an obligation on the chargor to assign them to the bank if required to do so.  

Having outlined these terms, his Lordship then referred to counsel’s argument based on Lord Justice Romer’s statement (without its prefatory restriction) and then rather bizarrely set out, what he would have held if his conclusions were different before setting out what his actual conclusion was, e g. “..If I had accepted the premise that R. H. MacDonald Ltd would have had the unrestricted right to deal with the proceeds of any book debts to deal with the proceeds of any book debts so long as the account remains in credit, I would have been inclined to accept the conclusion that the charge in question could be no more than a floating charge..” and “If the debenture on its true construction had given the bank no rights whatsoever, at a time when the credit the account of R.H. Macdonald was in credit, to prevent the bank from spending in the ordinary course of business all or any of the proceeds of the book debts paid into its account, I would have been inclined to regard the charge, for all the wording of the debenture, as doing no more than ‘hovering over and so to speak floating with” the book debts within the words of Lord MacNaghten. Having so dramatically spiced up interest by clarifying what he was not concluding, he finally relieved the pent-up suspense by setting out his conclusion thus:

“I see no reason why the court should not give effect to the intention of the parties, as stated in clause 3 (d), that the charge should be a first fixed charge on book debts. I do not accept the argument that the provisions of clause 5 (c) negative the existence of a specific charge. All that they do, in my judgment, is to reinforce the specific charge given by clause 3. The mere fact that there may exist certain forms of dealing with book debts which are not specifically prohibited by clause 5 (c) does not in my judgment turn the specific charge into a floating charge.

This conclusion that the charge is a specific charge involves the further conclusion that, during the continuance of the security, the bank would have the right, if it chose, to assert its lien under the charge on the proceeds of the book debts, even at a time when the particular account into which they were paid was temporarily in credit.”

The gut reaction to these passages must be huh? There is a yawning gap which is not bridged anywhere in the judgment between the issues presented for adjudication and the judge’s conclusions. It is not explained why he rejected the premise that the chargor had unrestricted right to deal with the proceeds of the book debts or rejected the argument that the bank had no right to prevent it from spending such proceeds. Both contentions appear to be quite plausible on his Lordship’s own exposition of the terms of the charge in question. Nor is it explained anywhere what peculiar features of the charge prevented the chargee without the consent bank from disposing of the proceeds of the book debts before the bank enforced its security. All clause 5(c) did was to prevent the disposal of the books debts prior to collection and payment of the proceeds into a specific account. As far one can tell, there was no provision as to the fate of such proceeds once it was paid into the designated account. What we have is unexplained conclusions backed up by Humpty-Dumptysque raw assertions by one of the best judges around, a phenomenon which is surprisingly common under the guise ‘legal reasoning’. The nearest hint to some kind of justification is the freedom of contract arguments, which are at the core of enforcement of intention of parties’ school of thought. As we will see, critics (and, eventually, the courts) have pounced on these unexplained conclusions.

The effect of Siebe Gorman was to transform settled issues. Determination becomes a matter of construction with the use of phrase ‘fixed charge’ seemingly creating presumption that a document is what the parties describe it as. This is far cry from previous authority which dictated that such determination was not a merely a matter of construction but the ascertainment of the legal effect of the actual arrangements the parties entered into regardless of the actual terms used.

One would have expected that such a decision would have been prime candidate for appellate review. However, it is not surprising that given the adventitious circumstances obtaining in Siebe Gorman that no appeal was pursued. The plaintiff prevailed against the bank and so had no reason to do so. The bank obtained ringing judicial endorsement by one of the most respected commercial judges around of what was till then a document of uncertain legal pedigree. Why risk reversal on this crucial point on appeal (presumably with the unpredictable Lord Denning presiding) over a relatively modest amount. Less readily explicable is the fact that this decision for over twenty-five years escaped challenge before appellate tribunals in the context of insolvency proceedings. It was a first instance decision in the wholly distinct context of whether an assignment of previously charged book debts was effective.

Since its delivery, the essentially unreasoned conclusion that the charge in Siebe Gorman  was a fixed one has more or less been followed, or at any rate not actively questioned, in various contexts. Thus, for example, Knox J, Re a Company (No. 005009), ex parte Copp and another [1989] BCLC 13, had little trouble in insolvency proceedings finding that a similarly expressed document was a fixed charge seemingly oblivious of the fact that this determination deprived the protected classes of priority given to them by Parliament- a factor which did not feature in Siebe Gorman. He brusquely rejected arguments that it was wrongly decided holding that the commercial advantages of certainty provided by precedent required that he followed it as that was the proper intention of the parties, intensions which, it would, trump those of Parliament.

Siebe Gorman did not, however, receive universal assent from all first intance judges. For example, in case Re Amagh Shoes Ltd [1988] BCLC 405 where the dispute arose in insolvency proceedings. While paying lip-service to the correctness of Siebe Gorman, Hutton J distinguished it in construing the charge before him. He held that since that charge did not contain a clause which Slade had actually considered reinforcing his independent conclusion that the charge was specific, Siebe Gorman was distinguishable- an odd holding to say the least but readily understandable for the basis of Slade’s conclusion is simply unclear. Of course, in re Amagh Hutton had already determined that the document before him was a floating charge and was in effect indulging the bank’s counsel by considering his argument that Siebe Gorman compelled a different outcome. Further unlike Slade, Hutton did not place much credit on the fact that parties described the instrument as fixed charge. Hutton’s ‘distinguishment’ of Siebe Gorman brings to mind Judge Frank Easterbrook’s quip that “the alternative to disavowing precedent is to manipulate it”- (“Stability and Reliability in Judicial Decision,” 73 Cornell L Rev 422, 424). The phrase ‘judicial caprice’ is probably a more accurate description of the basis of distinguishing a precedent a judge does not wish, or as is more likely, cannot disavow.

To get a handle of things, we must briefly parse two other cases which have attracted attention. Firstly, the decision of the Irish Supreme Court re Keenan Bros Ltd [1986] BCLC 242. The charge in that case which was described as a fixed charge over book debts contained an additional restriction which was actually absent in that of Siebe Gorman- not only were the proceeds of the book debts to be paid into a designated account with the bank, but the chargor was not free to deal with them with the prior written consent of the bank i.e. it required payment into a blocked account. Judges as well as commentators have, not unreasonably latched onto this, as the basis for the Court’s decision that the charge in question was fixed. However, the actual ‘reasoning’ of the Court did not rest solely upon that restriction (though it played a decisive role) but on much broader grounds some of which echo Slade’s conclusion of the necessity of an unrestricted right to deal with the book debts “A floating charge avoids the restricting (and in some cases paralysing effect) on the use of the assets of the company resulting in the fixed charge.”

Contrast this ‘reasoning’ with that of Hoffman J in re Brightlife [1987] 1 Ch 200, where the charge in question, somewhat modelled on the one is Siebe Gorman, prohibited the disposal of the book debts charged without the consent of the chargee or deal with them otherwise than “in the ordinary course of getting in and realising the same.” His Lordship had little trouble concluding that the instrument before him was a floating charge as “a floating charge is consistent with some restriction upon the company’s freedom to deal with its assets.” He sought to distinguish Siebe Gorman on the basis that “the company was not free to deal with the debts of their proceeds in the ordinary course of business” This does not wash. It is even less persuasive than Hutton’s. It is certainly a reasonable basis upon which to distinguish it from the charge in re Keenan Bros but not the one before Slade in Siebe Gorman.

There is a tension between the approaches of the two judges is clear from their choice of adjectives. By the lights of Slade, for an instrument to qualify as a floating security, the chargor must have unrestricted rights to deal with the items charged. For Hoffman, some restriction is not fatal to the characterisation of the instrument as floating charge. This tension may be brought into sharper focus. One (Slade) adopts a hard and fast definition of a floating charge, a flexible one for a fixed charge and seeks establish the instrument in question satisfies the strict criterion of the floating charge, easily concluding, it does not. Hoffman adopts the same approach but reverses his targets- strict definition for a fixed charge, loose one for floating charge and not surprisingly reaches the opposite result. If this was a doctrinal conflict alone, without more, there would be no rational basis for selecting which approach is superior, something which pervades too much doctrinal conflict. This seemingly infectious and incurable malady of legalism has been accurately diagnosed (in a different context) by Judge Posner:

“…Find precedent (Turner v Salfy ,or Zablocki v Redhail, a case in 1978 that invalidated a law prohibiting a person who was under  a current court order  to support minor children to marry without the court’s permission), and analogize it to the present case, and use the analogy to put an impossible burden of proof on your opponent, and limit the scope of your rule by rejecting further analogies on however arbitrary a ground, so that the right of   a prison inmate to marry is deemed fundamental analogous to a right of homosexual marriage but not a right to polygamous marriage, because the polygamist, unlike, the homosexual, is not denied the right to marry the person of his (first) choice” (“Wedding Bell Blues,” The New Republic)

All this may be depressingly familiar as ‘clever’ advocacy (Professor Jack Balkin so elegantly puts it “we have all known for many years that lawyers are rhetorical whores”), but as Judge Posner notes, it is hard to take seriously. We haven’t even it got to the intellectual dishonesty this entails, nor systematically evaluated its practical utility (nil?) or costs (exorbitant?).


The next turning point in our partial doctrinal narrative is the decision of the English Court of Appeal in re Bullas Trading Co Ltd [1994] 1 BCLC 486, which represents a triumph of effective advocacy over common sense as well as commercial reality in the course of defeating a claim by preferential creditors at insolvency.

The instrument in question purported to create a fixed charge over the present and future debts. At first instance [1993] BCLC 1389, it was contended, relying on clauses that required payment of all money received in payment of books debts to a specially designated account and required moneys so received to be paid into a designated account that was to be operated as directed by the chargee, it created a fixed charge. Knox J was not persuaded finding the restrictions placed on dealing by those provisions were not sufficient to imbue it with the character of a fixed charge notwithstanding the parties’ mutual intention to create one.

On appeal, counsel for the chargee changed tack. He now contended that the position was not quite as simple as that. The instrument actually created a fixed charge over books debts prior to collection or maturity and a floating security over the proceeds upon maturity. Startlingly, the court was persuaded. Nourse LJ upheld this contention in rather cavalier fashion. He accepted the premise that while uncollected books debts were naturally the subjects of fixed charges, upon collection the proceeds could be subject to floating securities so as to enable companies trade. Rejecting the argument that the distinction sought to be drawn was artificial and unavailable as contrary to authority, he held:

“The short answer to these submissions is that the asset here does not cease to be subject to the fixed charge at the will of the company. It ceases to be such because both parties, not the company have determined that if the proceeds of a book debt are paid into the specified account at the time when no directions have been given it shall thereupon be released. The matter is governed by the clear agreement of the parties. Unless there is some authority or principle of law which prevent them from agreeing what they have agreed, their agreement must prevail.”

As the short answer, fails to address the point (indeed borders on the nonsensical), one is tempted to seek in the rest of the judgment for the long answer. It is not there. As was to be convincingly demonstrated (e.g. by the Privy Council- see part V below) his argument fares badly both on internal justification as well doctrinal harmony. Quite apart from this, and more importantly, his judgment on the basis of freedom on contract, grants a licence for the parties to make an end run around statutory provisions granting priority to sums due to a protected class of persons by linguistic sleights of hand, claiming the document created a charge “expressed to take effect as a first fixed mortgage by assignment” or some jabberwocky to similar effect. With this, chargees would no longer be forced to make any trade off as the chargor is free to utilise the proceeds of books debts while upon insolvency, the chargee would enjoy the priority of fixed charge- wholly negating legislative protection accorded to preferential creditors. That Nourse LJ relies on Lord MacNaghten nineteenth century paean to freedom of contract without any reference to the statutory intent is harkens back to the attitude of judicial contempt for statutes which Lord Reid rightly chided “When we come to new statutory provisions the position is somewhat different. We cannot have so free a hand as when dealing with the common law.” (“The Judge as Law Maker,” 12 JSPTL [1972] 22)

Happily, the shockingly bad New Bullas decision was not greeted with general approval. It attracted the viscera of some judges who reached out for opportunity to criticise its basis. For example, in Royal Trust Bank v National Westminster Corporation [1996] BCC 613, 617, 619-20, Millett LJ writing for himself declined to accept counsel’s concession based on New Bullas the High Court’s finding the charge before them was specific, even though it did not affect the result of the appeal. He was determined to revive and affirm what he understood the law expressing his agreement with the reasoning of re Brightlife. Nourse LJ (surprise, surprise) accepted that concession was rightly made. We cannot tell which view is controlling as the third judge, Swinton Thomas LJ was content to concur to the appeal being allowed without committing himself to either of the two rival approaches though it might be fun imagining he was continuing to play peace-maker between Nourse and Millett over a doctrinal dispute that did not rock his world. In re Cosslett (Contractors) Ltd [1998] Ch 495, 510 Millet, this time writing for a unanimous Court of Appeal, once again re-affirmed his position though again without explicitly mentioning that it was  New Bullas he had in his sights.

New Bullas’s prospects as an enduring precedent were hardly assisted by provoking the ire of Professor Roy Goode (Charges Over Book Debts: A Missed Opportunity (1994) 110 LQR 592), one of the pre-eminent commercial law scholars of his generation. Ironically, responding to Goode’s article, Mr. Alan Berg (Charges Over Book Debts: A Reply [1995] JBL 433) while examining Siebe Gorman, found himself unable to support the bland assertions which, in his view, could not sustain the conclusions Slade J. The writing was surely on the wall even though in pencil.


Judicial impetus towards major reconsideration of the modern doctrinal developments represented by Siebe Gorman and New Bullas came from the antipodes. In New Zealand neither decision won a great number of judicial fans.

Confronted with a similarly-worded instrument in Hovered Industries Ltd v Supercool Refrigerators and Air Conditioning [1994] 3 NZLR 300, Tompkins J was unimpressed by Siebe Gorman and concluded that the charge was floating.

Then came In re Brumark Investments [2000] 1 NZLR 223 in which revenue authorities asserted their priority over uncollected books debts of an insolvent company as statutorily privileged preferential creditors. As the instrument in question was modelled on the New Bullas’ ‘innovations’, the chargee demurred on the basis that it enjoyed a fixed charge of the uncollected book debts which took priority. At first instance, the judge declined to accept the ‘reasoning’ of Nourse LJ in New Bullas finding it unpersuasive. Instead, he went back to first principles and on his own independent analysis (which is fuller than the casual oracular pronouncements of Nourse), upheld on the position of the bank. On appeal, the New Zealand Court of Appeal, in valuable judgment which repays full study, reversed, concluding that, in law, it was not possible to separate a book debt from its proceeds and create fixed charge over the latter only. As the instrument in question allowed company to deal relatively freely with such proceeds, it was floating charge and the revenue authorities rightly asserted their statutory priority.

On appeal under the rubric Agnew and another v Commissioner of Inland Revenue [2001] UKPC 28; [2001] 2 AC 710, the Privy Council affirmed the decision of the Court of Appeal. The Board’s opinion was given Lord Millett which was pretty much a death knell for New Bullas. When the opportunity to spank his bette noire presented itself, Lord Millett did not hold back. It does not take a great leap of imagination to visualise, the junior Law Lord insisting that he had to write the decision. It was not as if he was the most familiar with the area. Three of his colleagues (Nicholls, Hoffman and Hobhouse), were just as experienced and just as sharp in chancery matters.

His opinion starts off with an account of the history of the development and nature of the floating charge. To be sure, there isn’t any discussion of financial markets in the 19th century, social conditions then prevailing or the cliometrics of the impact of the floating charge on the economy. Apart from the briefest snippets to felt commercial necessities, it does not contain any detailed discussion of the nature of and subsequent maturation of nineteenth century English economic development (in particular the interaction of financial markets and industrial imperatives), let alone its social structure. One has to read between the lines to get a sense of the ideology of the judges, though you won’t get any sense of how such ideology weaved into the tapestry of mid-to-late nineteenth century English social life generally. Social ontology is not a much valued virtue in the judicial craft. However, as far as so called ‘law-firm history’ in judgments go, it is pretty much as good as it gets.

Having warmed up by rehearsing nineteenth century development of the floating charge, legislative intervention, its classic descriptions as well as the 1970s onwards doctrinal developments, (paying particular tribute to re Brightlife and his own ever so modest contribution in re Cosslett), Lord Millet turned his guns on New Bullas. He first argued that Nourse was wrong in his view that while an uncollected book debt was naturally the subject of a fixed charge while its proceeds were easily the subject of a floating charge as that enabled the borrower to conduct his business. To Lord Millet, this was a wholly artificial and impractical distinction. Turning to the key passage quoted above invoking freedom of contract, Lord Millet let loose:

“32.     Their Lordships consider this approach to be fundamentally mistaken.  The question is not merely one of construction.  In deciding whether a charge is a fixed charge or a floating charge, the Court is engaged in a two-stage process.  At the first stage it must construe the instrument of charge and seek to gather the intentions of the parties from the language they have used.  But the object at this stage of the process is not to discover whether the parties intended to create a fixed or a floating charge.  It is to ascertain the nature of the rights and obligations which the parties intended to grant each other in respect of the charged assets. Once these have been ascertained, the Court can then embark on the second stage of the process, which is one of categorisation.  This is a matter of law.  It does not depend on the intention of the parties.  If their intention, properly gathered from the language of the instrument, is to grant the company rights in respect of the charged assets which are inconsistent with the nature of a fixed charge, then the charge cannot be a fixed charge however they may have chosen to describe it.  A similar process is involved in construing a document to see whether it creates a licence or tenancy.  The Court must construe the grant to ascertain the intention of the parties: but the only intention which is relevant is the intention to grant exclusive possession: see Street v Mountford [1985] AC 809 at p. 826 per Lord Templeman.  So here: in construing a debenture to see whether it creates a fixed or a floating charge, the only intention which is relevant is the intention that the company should be free to deal with the charged assets and withdraw them from the security without the consent of the holder of the charge; or, to put the question another way, whether the charged assets were intended to be under the control of the company or of the charge holder.

  1. In New Bullas the preferential creditors argued that the charge was a floating charge because the company was indeed free to withdraw the book debts from the security, which it could do simply by collecting them and using the proceeds in the ordinary course of its business. Nourse rejected this, holding that it was not correct to say that the book debts could cease to be subject to the fixed charge at the will of the company; they ceased to be subject to the fixed charge because that is what the parties had agreed in advance when they entered into the debenture.
  1. Their Lordships agree with Fisher J in the present case that this reasoning cannot be supported. It is entirely destructive of the floating charge.  Every charge, whether fixed or floating, derives from contract.  The company’s freedom to deal with the charged assets without the consent of the holder of the charge, which is what makes it a floating charge, is of necessity a contractual freedom derived from the agreement of the parties when they entered into the debenture.  To find the consent in question in the original agreement would turn every floating charge into a fixed charge.”

Having disposed of New Bullas, it was still necessary for Lord Millett to explain why the reasons given by the first instance judge for following the result New Bullas. In course of doing so, he made some rather telling statements which would later redound, “A restriction on disposition which nevertheless allows collection and free use of the proceeds is inconsistent with the fixed nature of the charge; it allows the debt and its proceeds to be withdrawn from the security by the act of the company collecting it.” On any reading of this passage, (whether or not combined with the two-stage test he had earlier articulated), Siebe Gorman, where the charge contained no restriction on the use of the proceeds, was wrongly decided. Yet, his Lordship upheld its correctness, though it seems to have been on a mistaken basis that, the document before Slade required the proceeds of the book debts to be paid into a blocked account. Even at the highest levels, such school-boy errors slip by, ­sub-silentio, as it were.

Lord Millet also held that it was not enough “to provide that to provide in the debenture that an account is a blocked account if it not operated as one in fact.” This might strike most commercial lawyers committed to the settled rule of construction that subsequent conduct is irrelevant to the interpretation of a contract as odd. Such a reaction would be mistaken. Since the classic descriptions at the turn of the century, which Lord Millet revived, that the proper characterisation of a document is not simply a question of construction but one of determination of the parties’ respective rights under the documents and their actual exercise.


Now that Brumark could be added to their armoury (detecting the traces of ink in the writing on the wall), preferential creditors were now suitably primed take on Siebe Gorman. The opportunity to do so came in the case of In Re Spectrum Plus Ltd where the document in question purported to create a fixed charge of over debts of the company and required the proceeds of such books debts to be paid into a designated account with the bank and would not dispose of such debts without the bank’s consent. The case was litigated before the courts on the basis that there was no ‘material distinction’ between that instrument and the one in Siebe Gorman. It was selected as the vehicle by which to test the continued validity of Siebe Gorman.

For the intellectually curious the judgments at first instance (In re Spectrum Plus Limited (in liquidation) [2004] EWHC 9 (Ch); [2004] Ch 337, 342) and the Court of Appeal ( [2004] EWCA Civ 670; [2004] Ch 359) as well as the speeches in the House of Lords ([2005] UKHL 41; [2005] 3 WLR 58), constitute a veritable feast touching on so many of the themes anticipated in the preceding discussion- the fetter and nature of precedent within and between the various rungs of the curial hierarchy; the declaratory theory of the common law; the circumstances under which a decision may be overruled and the possibility of prospective overruling; the process of adjudication and the sociology of the judiciary; the propriety and efficacy of judge-led law reform; the ambit and purport of legal scholarship etc. Unfortunately, I cannot explore those themes in this talk, which is confined to the prosaic doctrinal issue of the status of Siebe Gorman.

Emboldened Brumark as well as a slew of academic commentaries, the liquidator contended on behalf of the preferential creditors that Siebe Gorman could not be sustained in light of Lord Millett’s reasoning. The bank countered by arguing that notwithstanding Brumark, Siebe Gorman was correctly decided. Anyway, even if Brumark undermined its foundations, it should be followed as it had been in the books for a long time without dissent and commercial lenders had justifiably relied upon it in structuring their dealings. As far as one can tell, the bank did not rely upon New Bruamrk nor defend it correctness. (Granted, that would have been kind of embarrassing as its lead counsel has co-authored a  leading book in which New Bullas is criticised as incomprehensible- see Lightman & Moss, The Law of Receivers of Companies para. 3-10 to 3.15). Sir Anthony Morritt, V-C, found that the test propounded by Lord Millet was fatal to Siebe Gorman and neither the fetters of co-ordinate courts nor the commercial advantages of certainty were not sufficiently strong to require its continued application. When the rights and obligations conferred on the parties were properly analysed, as there was no restriction on the use of the proceeds of the book debts in the ordinary course of its business, the instrument in question was not a fixed charge. Slade’s error was to unduly concentrate on the intention on the parties as at the expense of identifying the actual rights and obligations of the parties:

“… In that passage he sought to give effect to the intention of the parties to create that the charge over the book debts should be a fixed charge and looked to see if that intention was negatived by the restrictions imposed by clause 5(c). But, as indicated in Agnew’s case, the real question was whether the rights and obligations conferred and imposed by clause 5(c) disclosed an intention that the company should be free to deal with the book debts and withdraw them from the security without the consent of the Bank. Such an approach to the provisions of clause 5(c) of the debenture in Siebe Gorman case must have led to the conclusion that the collection and free use of the proceeds of book debts through the ordinary operation of the back account was not only permitted but envisaged. The inevitable consequence would be to reject the description of the transaction as a first fixed charge.”

On appeal, an issue- whether or not Sir Anthony was bound by New Bullas- which not urged before the High Court and as far as one can tell, not strongly pressed, if at all, by the counsel for Natwest on appeal (see the summary of his arguments at [2004] Ch, 356-357 & 358-9 which does not contain any reference at all to New Bullas), took centre-stage. It formed the focal point of Lord Philip’s judgment. It was the first principal ground upon which the Court of Appeal reversed the High Court, confidently predicting that, this would be upheld upon further appeal. In the second part of his judgment, Phillips found that, Siebe Gorman was in fact, rightly decided, supplementing the reasons supplied by Slade (i.e. intention of the parties) with the observation that a document which imposed restrictions on disposition of books debts and required proceeds to be paid into a designated account, a chargor would have dispose of the books debts nor their proceeds. This is not only less than satisfactory on its own terms but also dismally fails to address at all, the errors in Siebe Gorman identified by Sir Anthony on the basis of Agnew. Finally he found that even if the reasoning of Siebe Gorman was less than satisfactory, as reliance had been placed upon it by banks over an extended period of time, to create what they believed by fixed charges, “I would have been inclined to hold that the form of the debenture in question had, by customary usage, acquired the meaning and effect, he attributed to him.” Custom trumps statute! Isn’t that progressive?

The stage was thus set for the House of Lords to finally join the party. The liquidators essentially repeated their arguments contending that the High Court was right on all essential points. The bank also stood firm on its ground but in addition contended that if their Lordships were minded overrulling Siebe Gorman, they should restrict the effect of their judgment by making their holding prospective. Lords Hope, Scott and Walker addressed the narrow issue we are concerned with in this note.

Their speeches illustrate the singular magnitude of properly identifying the starting point of the framework within which to resolve a legal issue presented for determination. Unlike most of the earlier judges who considered that matter before them, they set as their baseline, legislation. It was not merely some kind of passing reference ahead of the more important doctrinal manipulation, but as setting substantive limits on doctrinal development so as to promote the objects of the statutes. It comes out most clearly in Lord Scott’s speech:

The statutes which first introduced these reforms did not attempt any definition of a “floating charge”. Nor have any of their statutory successors done so. The expression has been taken to be self-explanatory. It bears the meaning attributed to it by judicial decision. But the judicial process over the years whereby the concept of a “floating charge” has been developed must, in my opinion, keep in mind the mischief that these statutory reforms were intended to meet and, in particular, that on a winding-up or receivership preferential creditors were to have their debts paid out of the circulating assets, sometimes referred to as “ambulatory” assets, of the debtor company in priority to a debenture holder with a charge over those assets. (emphasis added)

This is eminently correct. It is a scandal that this simple insight failed to play a more prominent, in fact, decisive role thus far. Manipulation of received doctrine so as to avoid or undermine legislative provisions or at any rate, judicially sanction efforts by commercial parties to do so, cannot be regarded as compatible with the faithful discharge of the judicial function. Given their predominant doctrinal obsession at the expense of statute, the conclusion that judges, however unwittingly, subscribed to Fredrick’s Pollock’s homily that “Parliament generally changes the law for the worse and that the business of judges is to keep the mischief of its interference within the narrowest possible bounds” seems fair.

Having identified the appropriate analytical framework, their Lordships engaged in doctrinal analysis. On the whole, they accepted Agnew, (i.e. its ‘historical’ narrative, exposition of the natures of a floating charge and books debts and analytical framework upon which a security instrument falls to be characterised as a fixed or floating) and on that basis proceeded to overrule the Slade’s conclusion that the charge before him was a fixed charge. Without questioning the general principles of law which he articulated, they were emphatic that he misapplied them in construing the document before him. Applying the approach set out Agnew they found that the restrictions on dealing in that instrument were not sufficient to imbue it the character of a fixed charge. Lord Hope, a good Scotsman, showed he is not averse to the all so effective English style of understated insults spiced with effusive praise, “It is a tribute to the great respect which Slade LJ’s outstandingly careful judgments, both at first instance and the Court of Appeal, have always commanded that his decision in that case has remained unchallenged for so many years. But the fact is that it was a decision that was taken at first instance, and it has now been conclusively demonstrated that the construction which he placed on the debenture was wrong. This is not one of those cases where there are respectable arguments either way. With regret, the conclusion has to be that it is not possible to defend the decision on any rational basis.” For his part, Lord Walker hinted, ever so politely, of course, that the better Chancery judges regarded Siebe Gorman’s conclusions as unreasoned, “…although I do detect some inclination on the part of experienced Chancery judges to treat the decision as turning on a particular (and not fully explained) point of construction.”

Without explaining themselves, they upheld the Court of Appeal on the precedent point while affirming the rest of judgment of Sir Anthony. The lack of reasoned explanation is disappointing and not just because it fails to given any useful guidance to the little peckers at the bottom of the judicial hierarchy. Firstly, it has been powerfully argued that those parts of New Bullas which were alleged to be binding on the High Court were obiter- Fidelis Oditah Fixed Charges and the recycling of proceeds of receivables,” 120 LQR 533. Secondly that was not the precedent point which the High Court actually addressed. So when the House of Lords upholds the Court of Appeal, exactly how was the High Court wrong when the alleged ground for error appears nowhere in its judgment or the arguments before it.

Their Lordships exhibited various degrees of enthusiasm for prospective overruling of precedents in exceptional circumstances, but were unanimous that the age of, and commercial reliance placed upon Siebe Gorman could not limit or cabin the usual retrospective effect of decisions of the House of Lords scornfully treating the suggestion that the House of Lords should defer to a High Court decision on grounds of longevity as impertinent. Siebe Gorman was merely a first instance decision, however eminent the judge who rendered it:

I can see no good reason for postponing the effect of the overruling of Siebe Gorman. If Siebe Gorman had been a decision of this House and therefore, subject to subsequent legislative intervention or to an overruling of the decision pursuant to the 1966 Practice Statement (Judicial Precedent) [1966] 1 WLR 1234, a decision that settled the law with finality, I think your Lordships would have need to hesitate long before overruling. But the rulings of lower courts on points of law do not settle the law with finality. They never have done. It was natural that banks and other lenders taking security from corporate borrowers should have modelled their security on the debenture form that had achieved success in Siebe Gorman. But they would not, or at least should not, have done so on the footing that Slade J’s judgment had finally settled the law. Mr Moss has submitted that the bank’s lending decisions, whether to lend, how much to lend, how much interest to charge, and so on, were taken in the belief that the Siebe Gorman decision on fixed charges over book debts would stand, and that otherwise different decisions might have been taken. My Lords, I am highly sceptical. Banks are in business to receive and hold money for their customers and to lend on that money to others who want to borrow. This is a highly competitive business. The proposition, that the terms on which the bank would have allowed Spectrum a £250,000 overdraft facility would have been significantly different if it had known that its charge over Spectrum’s present and future books would be no more than a floating charge, is one that, for me, carries no ring of conviction whatever.”

The modesty of the Law Lords is commendable but it still rankles. To be sure is the context of an unreasoned decision like Siebe Gorman it is hard to mount a defence. But the House of Lords went further than that, derisively thrashing the notion a decision of lower courts merit much respect as precedents before them. This may very well massage their egos (as if they need that) but as a practical matter, it is downright silly. Inevitably, the overwhelming majority matters will be disposed of by lower courts sometimes settling novel points of law which might not be addressed by the House of Lords (or shortly, the Supreme Court of the United Kingdom), if at all, for while. In fact, it is not possible to tell if or when, the issue will ever be addressed by the highest court. To say that not much reliance should be placed on such decisions until and when the highest court would speaks robs the doctrine of precedent of one of its principal justifications i.e. certainty. I’m not much of a fun of precedent, but the notion that uncertainty necessarily hovers over a Court of Appeal decision well into a respectable middle age simply because the House of Lords hasn’t got around to endorsing or repudiating it makes no sense at all.

Finally, Lord Walker sought to give guidance to drafters as to how to go about creating a fixed charge of receivables as does Lord Hope. In that end it pretty much amounts to Agnew i.e. the instrument must in addition to prohibiting disposal of the charged assets, require proceeds to paid into a blocked account with the bank which is in fact operated as a blocked account.


The one thing which the Court of Appeal and the House of Lords were agreed upon was that this was an area where wholesale Parliamentary intervention was required. This is a welcome acknowledgement of the limits of judicial action. It is to be hoped that if and when it moves, Parliament will eschew the narrow nineteenth century interventions which will either largely ineffectual or effectively overridden by clever acrobatic legalese. The reform should be directed towards a comprehensive review of the entire system of credit, asking whether the framework largely put in place, in the nineteenth century, warrants overhaul.

However, as the narrative above illustrates, as presently constituted, there is no guarantee that loyal to Sir Fred, judges will not proceed to subvert, rather than promote, such a statute. 

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