• 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.

• Since the existence of a fixed charge would make it impossible for the company to carry on business in the ordinary way without the consent of the charge holder, it follows
  that its ability to so without such consent is inconsistent with the fixed nature of the charge.

• But it does not follow that the nature of the charge on the uncollected book debts may not differ according to whether the proceeds are subject to a fixed charge or a floating
  charge; for in the one case the charge holder can prevent the company from having the use of the proceeds and in the other it cannot.

• The question in this appeal is whether a charge over the uncollected book debts of a company which leaves the company free to collect them and use the proceeds in the ordinary
  course of its business is a fixed charge or a floating charge.

• 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.

• 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.

• 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.”

• The question is whether the company’s right to collect the debts and deal with their proceeds free from the security means that the charge on the uncollected debts, though
  described in the debenture as fixed, was nevertheless a floating charge until it crystallised by the appointment of the receivers.

• To find the consent in question in the original agreement would turn every floating charge into a fixed charge.

• Nourse LJ 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.

• He began by observing that, there being usually no need to deal with a book debt before collection, an uncollected book debt is a natural subject of a fixed charge; but once
  collected, the proceeds being needed for the conduct of the business, it becomes a natural subject of a floating charge.

• In each case the commercial effect is the same: the charge holder cannot prevent the company from collecting the debts and having the free use of the proceeds.

• …if the company is free to collect the debts, the nature of the charge on the uncollected debts cannot differ according to whether the proceeds are subject to a floating
  charge or are not subject to any charge.

• The question in New Bullas, as in the present case, was whether the book debts which were uncollected when the receivers were appointed were subject to a fixed charge or a
  floating charge.

• They held that, even if a debt and its proceeds are two different assets, the company was free to realise the uncollected debts, and accordingly the charge on those assets
  (being the assets whose destination was in dispute) could not be a fixed charge.

• The most celebrated, and certainly the most often cited, description of a floating charge is that given by Romer LJ in In re Yorkshire Woolcombers Association Ltd [1903] 2
  Ch D 284 at p. 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.

• The NZ Court of Appeal overturned this and held that the fact Brumark could collect the debts for its own account (and hence remove them from the bank’s security) made it
  a floating charge.

• But their Lordships would wish to make it clear that it is not enough to provide in the debenture that the account is a blocked account if it is not operated as one in fact.

• It said the court’s task is not to ask whether the parties intended to create a fixed or floating charge, but to ask what rights the parties intended to create, and then decide
  as a matter of law whether it is fixed or floating.

• As their Lordships have already noted, it is not inconsistent with the fixed nature of a charge on book debts for the holder of the charge to appoint the company its agent
  to collect the debts for its account and on its behalf.

• They propose to start by tracing the history of the floating charge from its inception to the present day, paying particular attention to charges over book debts.

• 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 constitute a charge on book debts a fixed charge, it is sufficient to prohibit the company from realising the debts itself, whether by assignment or collection.

• The seller’s former property right in the subject matter of the sale give him an equivalent property right in its exchange product.

• The question is not whether the company is free to collect the uncollected debts, but whether it is free to do so for its own benefit.

• The question was therefore simply one of construction; unless unlawful the intention of the parties, to be gathered from the terms of the debenture, must prevail.

• Their Lordships regard this as unsound: one might equally well say that unsold trading stock is a suitable subject of a fixed charge.

• It was clear from the descriptions which the parties attached to the charges that they had intended to create a fixed charge over the book debts while they were uncollected
  and a floating charge over the proceeds.

• Agnew v Commissioners of Inland Revenue, more commonly referred to as Re Brumark Investments Ltd [2001] UKPC 28 is a decision of the Privy Council relating to New Zealand
  and UK insolvency law, concerning the taking of a security interest over a company’s assets, the proper characterisation of a floating charge, and the priority of creditors in a company winding-up.

• In deciding whether a charge is a fixed charge or a floating charge, the Court is engaged in a two-stage process.

• Such an arrangement is inconsistent with the charge being a floating charge, since the debts are not available to the company as a source of its cash flow.

• 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.

• If it is a charge on a class of assets of a company present and future; (2.)

• The terms were that its security was a fixed charge, but a floating charge when proceeds were collected (the same as drafted as in Re New Bullas Trading Ltd[1]).

• The principal theme of the judgment, however, was that the parties were free to make whatever agreement they liked.

• If the company seeks permission to do so in respect of a particular debt, the charge holder can refuse permission or grant permission on terms, and can thus direct the application
  of the proceeds.

• The process of construction required assessing what was intended, but this meant looking at the substance of the transaction, not its form.

 

Works Cited

[“1. [1994] 1 BCLC 485
2. ^ [1979] 2 Lloyd’s Rep 142
3. ^ [1986] BCLC 242 Photo credit: https://www.flickr.com/photos/mikecogh/6908789145/”]