National Westminster Bank Plc v Spectrum Plus Ltd & Ors

In Siebe Gorman & Co. Ltd v Barclays Bank Ltd [1979] 2 Ll.L.R.142 (“Siebe Gorman”)Slade J, as he then was, decided that it was possible to create a fixed charge over present and future book debts and that, on its true construction, the debenture granted to Barclays Bank Ltd had done so. That debenture has since become a more or less standard form and little criticism has been levelled at the decision of Slade J. But in Agnew v Commissioner of Inland Revenue [2001] 2 AC 710 (“Agnew”), an appeal to the Privy Council from the Court of Appeal in New Zealand, Siebe Gorman was referred to by Lord Millett in terms which might be thought to cast doubt on the decision of Slade J, not as to the possibility of creating a fixed charge on present and future book debts, but on whether the debenture in Siebe Gorman did so. The application now before me relates to one of several hundred liquidations which are being held up pending the resolution of the doubt which has arisen.

Spectrum Plus Ltd (“the Company”) was incorporated in May 1992 to carry on the business of a manufacturer of dyes, paints, pigments and other chemical products for the paint industry. In the autumn 1997 the Company changed banks. It opened an account with National Westminster Bank plc (“the Bank”), obtained an overdraft facility of £250,000 and granted the Bank a debenture to secure all moneys due from the Company to the Bank. The overdraft facility (“the Facility”) was, in accordance with its terms, made available on a fully fluctuating basis for the purpose of providing working capital. It was to be reviewed on 1st September 1998 but was repayable on demand. It might be withdrawn, reduced or made subject to further conditions or otherwise varied on notice. Otherwise it was subject to the Bank’s “general terms upon which the Bank makes facilities available”.

The debenture dated 30th September 1997 and duly registered on 7th October 1997 (“the Debenture”) was in a standard form and contained the following material terms:

“1.

The Company hereby covenants to pay the Bank on demand the sum of One pound (£1) and to pay and discharge on demand all moneys obligations and liabilities (whether present or future actual or contingent) which may now or at any time hereafter may be or become due owing or incurred by the Company to the Bank....

2.

The Company with full title guarantee and to the intent that the security shall rank as a continuing security hereby charges with the payment or discharge of all moneys obligations and liabilities hereby covenanted to be paid or discharged (together with all costs and expenses howsoever incurred by the Bank in connection with this Mortgage Debenture on a full indemnity basis):

[(i) – (iv)]

(v)

by way of specific charge all book debts and other debts (including without limitation rents) now and from time to time due or owing to the Company...

[(vi) – (vii)]

[3.-4.]

5.

With reference to the book debts and other debts hereby specifically charged the Company shall pay into the Company’s account with the Bank all moneys which it may receive in respect of such debts and shall not without the prior consent of the Bank sell factor discount or otherwise charge or assign the same in favour of any other person or purport to do so and the Company shall if called upon to do so by the Bank from time to time execute legal assignments of such book debts and other debts to the Bank.”

Clause 15 authorised the Bank to combine accounts.

On 6th October 1997 the Bank advanced to the Company £200,000 and debited its new account accordingly. Whilst the overdraft facility varied from time to time the Company’s account was never in credit. The proceeds of book debts were collected by the Company and paid into its account with the Bank, thereby reducing the overdraft, and the Company drew on the account as and when it needed to do so thereby increasing the overdraft.

On 15th October 2001 the company resolved to go into creditors’ voluntary liquidation and appointed the second and third respondents as liquidators. According to the statement of affairs sworn that day £165,407 was due to the Bank, £156,554 was estimated to be realiseable from book debts with a face value of £291,293, £16,136 was due to preferential creditors (including the Inland Revenue £6,865, Customs & Excise £7,760 and employees £1,511) and the deficiency with regard to creditors was £649,249. Since then the liquidators have collected book debts to the value of £113,484 but have refused to account for them to the Bank.

The application before me was issued by the Bank on 10th July 2003. The relief sought, pursuant to s.112 Insolvency Act 1986, is a declaration that the debenture created a fixed charge over the Company’s book debts and the proceeds thereof and an order on the liquidators to account to the Bank in respect of them. Subsequently the Commissioners of Customs & Excise, the Commissioners of Inland Revenue and the Secretary of State for Trade and Industry were joined as the fourth to sixth respondents as being or being subrogated to preferential creditors (collectively “the Crown”).

It is not suggested by the Crown that there is any material distinction between the Debenture and that considered by Slade J in Siebe Gorman. Accordingly it is conceded that if the Crown fails to convince me that the conclusion of Slade J that the debenture in Siebe Gorman created a fixed charge on present and future book debts is wrong then I must allow the application. That counsel for the Crown has adopted the correct test is apparent from Paragraph 1244 Halsbury’s Laws of England 4th Ed.Reissue Vol 37 and the cases there cited.

In some of them the reason why a judge should follow the decision of a judge of co-ordinate jurisdiction unless convinced it is wrong has been described as “judicial comity”. I do not doubt that comity is one reason for the rule or convention. In my view there is another, more compelling, reason, namely certainty. Unless the second judge is convinced that the first was wrong his, contrary, decision merely creates uncertainty. If, by contrast, he leaves the issue to the Court of Appeal the decision of that court, whichever way it goes, will (subject to any further appeal to the House of Lords) bind all lower courts as well as the Court of Appeal itself. Thus, in Re Hotchkiss Trusts (1869) 8 Eq.643 Sir William James V-C said (p.647)

“In this case, if the words of the will had been the same as the words in In re Potter’s Trust, I should, without expressing any opinion of my own, simply have followed the decision of Vice-Chancellor Sir R.Malins in that case; because I do not think it seemly that two branches of a Court of co-ordinate jurisdiction should be found coming to contrary decisions upon similar instruments, and encouraging as it were a race, by inducing persons who wish for one construction to go to one court and those who wish for another construction to go to another. I should simply have affirmed the Vice-Chancellor’s decision, with the intimation of my wish that the whole matter should be brought before a Court of Appeal.”

Some might think that such a statement has a rather dated ring to it, given the extremely high cost of litigation and the present emphasis on case management and expedition. But, in my view, on a point of general importance such as the correctness or otherwise of Siebe Gorman the approach of Sir William James V-C remains valid because of the overriding need, going beyond the interests of the parties, for certainty. I agree with the approach of Neuberger J in Hadley Industries plc v Metal Sections Ltd (21st October 1999) New Law Online p.8 where he said

“I do not pretend that I would have regarded the point as at all easy, if it had been virgin territory. It would be wrong to leave this case with the impression that I regard the decisions of the three judges as clearly right or, indeed, as wrong. What I do think is that the arguments that I have been presented with do not justify me in departing from those decisions. I consider that the arguments that have been addressed to me are arguments which should be addressed to the Court of Appeal. For my part, I await their decision with interest. For me, I think the right course must be to follow Laddie J, Pumfrey J and Jacob J. Whether one characterises that course as craven or prudent no doubt depends on whether one is [the defendant] or the [claimant].”

I turn then to the arguments which have been addressed to me. Both start from the definition or description of a floating charge to be found in Re: Yorkshire Woolcombers Association [1903] 2 Ch.284. The judge, Farwell J, (p.289) said:

“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 Romer LJ (p.295) stated that a charge 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 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.”

As Lord Millett pointed out in Agnew, para 19, it had been thought for a number of years until Siebe Gorman that a charge on fluctuating assets must necessarily be a floating charge. Slade J pointed out that the assumption was wrong because the House of Lords in Tailby v Official Receiver (1888) 13 App.Cas.523 had determined that a creditor can create for good consideration an equitable charge over book debts which will attach to them as soon as they come into existence.

As I have already mentioned the charge in Siebe Gorman was indistinguishable from the Debenture. In particular the provision relating to the collection of the book debts was in the following form:

“During the continuance of this security the Company....(c) shall pay into the Company’s account with the Bank all monies which it may receive in respect of the book debts and other debts hereby charged and shall not without prior consent of the Bank in writing purport to charge or assign the same in favour of any other person and shall if called upon to do so by the Bank execute a legal assignment of such book debts and other debts to the Bank.”

Slade J indicated (pp.158-159) that if he had concluded that the company would have had the unrestricted right to deal with the proceeds of any of the relevant book debts paid into its account, so long as that account remained in credit, he would have been inclined to accept the conclusion that the charge on such book debts could be no more than a floating charge. He referred to the description of Lord Macnaghten in Illingworth v Houldsworth [1904] AC 355, 358 that a floating charge

“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 reach and grasp.”

Slade J indicated that if the debenture on its true construction had given the Bank no right when the company’s account was in credit to prevent the company from spending in the ordinary course of business all or any of the proceeds of book debts paid into its account he would have been inclined to regard the charge as a floating charge. He continued (p.159):

“In my judgment, however, it is perfectly possible in law for a mortgagor, by way of continuing security for future advances, to grant a mortgagee a charge on future book debts in a form which creates in equity a specific charge on the proceeds of such debts as soon as they are received and consequently prevents the mortgagor from disposing of an unencumbered title to the subject matter of such charge without the mortgagee’s consent, even before the mortgagee has taken steps to enforce its security: (compare Evans Coleman and Evans Ltd v R. A. Nelson Construction Ltd.,16 D.L.R. 123). This in my judgment was the effect of the debenture in the present case. I see no reason why the Court should not give effect to the intention of the parties, as stated in cl. 3(d), that the charge should be a first fixed charge on book debts. I do not accept the argument that the provisions of cl. 5(c) negative the existence of a specific charge. All that they do, in my judgment, is to reinforce the specific charge given by cl. 3. The mere fact that there may exist certain forms of dealing with book debts which are not specifically prohibited by cl. 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. However, I see nothing surprising in this conclusion, bearing in mind that the charge afforded continuing security to the bank not only in respect of any indebtedness on that particular account but also in respect of any other indebtedness of [the Company] to the bank. The bank’s lien would, after all, continue only during the subsistence of the debenture, which the debtor would at all times have the right to redeem.

For these reasons, I conclude that the debenture on its true construction conferred on the bank a specific charge in equity on all future book debts owed to [the Company] and that, subject to any rights of Siebe Gorman as assignee of the relevant bills, the rights of the bank, as specific chargee, attached in equity to their proceeds as soon as they were paid.”

Counsel for the Crown submits that it can be seen from that passage in the judgment of Slade J that he, in effect, assumed that which had to be established. Counsel described the reasoning thus: there is a fixed charge on the book debts; such a charge is a specific charge; where there is a specific charge over a book debt then conceptually it is possible to have a specific charge over the proceeds of the book debt; therefore there must be some restriction on the use of the current account to prevent the free use of the proceeds of the book debt. As counsel points out the balance on the account, if in credit, is likely to be a mixed fund because not all credits will necessarily be the proceeds of book debts. There is, he submits, no justification for finding an impediment to the free use of any credit balance from the circumstance that one of its constituent elements is likely to be the proceeds of a book debt.

Counsel for the Bank points out that the observations of Slade J were directed to an account which was in credit. By contrast in this case the account was when opened and at all times thereafter in debit. He submits that the payment of the proceeds of a book debt into an overdrawn bank account prevents its further identification or tracing through such debit balance so that it cannot be contended that the Company thereby enjoyed an unrestricted use of that book debt or of those proceeds. It is convenient to deal with this point at this stage.

I do not think that any distinction is to be drawn for this purpose between the operation of an account which is in credit and the operation of one which is in debit but within the overdraft facilities agreed with the Bank. The question is not whether the subsequent drawings by the company can be traced to or identified as the proceeds of a previous book debt but whether the charge when created contemplated that the company should continue to trade and should until the occurrence of some specified future event be free to use in such trade the class of asset described as book debts. That in summary is the test established by the various judicial statements I have quoted in paragraph 10 above. In Illingworth v Houldsworth [1904] AC 355, 357 Lord Halsbury specifically recognised that individual book debts would be extinguished and in the ordinary course of trade be replaced by others. It can make no difference that the trade is continued in the relevant manner with working capital provided by the bank rather than by the members of the company. The relevant intervention by the Bank in this case would be the demand for repayment or a notice to withdraw the facility.

Accordingly I agree with counsel for the Crown that there is no ground on which the conclusion to which Slade J came in Siebe Gorman can be distinguished. The decision of Slade J has been applied, accepted without qualification or distinguished in many subsequent cases, see, for example, Re Armagh Shoes Ltd [1984] BCLC 405, Re Keenan Bros Ltd [1986] BCLC 242, Barclays Bank plc v Willowbrook International Ltd [1987] 1 FTLR 386, Re Brightlife Ltd [1987] Ch 200, Re Permanent Houses (Holdings) Ltd [1988] BCLC 563, Re Sperrin Textiles Ltd [1992] NI 323, Re Portbase Clothing Ltd [1993] Ch 388, William Gaskell Ltd v Highley [1994] 1 BCLC 197 and Chalk v Kahn [2000] 2 BCLC 361.

I should refer in greater detail to two of those cases, namely Re Keenan Bros Ltd [1986] BCLC 242 and Re Brightlife Ltd [1987] Ch 200. In Re Keenan Bros Ltd the Supreme Court of the Republic of Ireland concluded that the debenture in question conferred a fixed charge on book debts. It was in a similar form to that used in Siebe Gorman. But in addition it was specifically provided that withdrawals from the account to which the proceeds of the book debts had to be credited might only be made with the prior consent in writing of the Bank. This additional restriction on the ordinary operation of a current account made it plain beyond doubt that the charge was fixed or specific and not floating. By contrast the relevant debenture in Re Brightlife Ltd, whilst purporting to create a fixed charge over present and future book debts and imposing restrictions on the sale, factoring or discounting of book debts, did not require the chargor to pay them into an account with the chargee. Hoffmann J distinguished both Siebe Gorman and Re Keenan Bros Ltd on that basis. He held that reference to a “first specific charge” over book debts had to yield to the only conclusion from the rights in fact granted that the charge over book debts was a floating charge only.

The question whether Siebe Gorman was rightly decided has been directly raised in only two cases, Re: A Company, ex parte Copp [1989] BCLC 13 (“Ex Parte Copp”) and Supercool Refrigeration and Air Conditioning v Hoverd Industries Ltd [1994] 3 NZLR 300 (“Supercool”). In Ex Parte Copp it was contended that a debenture in Siebe Gorman form did not create a fixed charge and a declaration to that effect was sought. The bank concerned claimed that the point was covered by the decision of Slade J. Knox J considered the decisions of Slade J in Siebe Gorman and of Hoffmann J in Re Brightlife Ltd. He concluded that the latter did not cast any doubt on the correctness of the former and rejected both grounds for distinguishing Siebe Gorman suggested by counsel for the liquidator.

The first suggested distinction was that the absence of an express provision, such as was included in Re Keenan Bros Ltd, and the passage of eight years since the decision in Siebe Gorman should lead to an inference that a floating charge was intended. Knox J rejected this ground of distinction. At p.25 he said

“It seems to me that the indications are to the contrary effect, because this is a type of transaction in respect of which judicial precedent is a particularly valuable guide to the commercial adviser. It is one of the main justifications for the doctrine of precedent that the adviser can, if he can rely on precedent, give reliable advice to his clients and it is trite law that is a particularly cogent consideration in regard to property transactions of one sort or another. The inference I draw from the very close correspondence between the phrases used in the Siebe Gorman case and those used in the document in the present case is that the parties intended to produce the same known result. I therefore see no strength in the first point of distinction between the two cases.”

The second suggested distinction was the existence of an agreed overdraft limit from which counsel for the liquidator sought to draw the conclusion that a floating charge must have been intended. At p.26 Knox J said

“...the arrangement with regard to an overdraft is a collateral arrangement to the debenture and not a matter which justifies giving the debenture itself as a matter of construction a different meaning from that which it would, but for the overdraft agreement, properly bear. In those circumstances, that does not seem to me, on the face of it, to provide an arguable defence to the claim advanced by the bank that the true construction of this document is covered by the authority of the Siebe Gorman case.

In the event Knox J concluded that

“Although, of course, the decision in Siebe Gorman is a decision of a judge at first instance and is therefore technically not absolutely binding on me, the views which I have expressed about the value of precedents in this particular class of work make it clear that it would be quite wrong for me, even if I thought (as I do not) that there was some error or flaw in the reasoning in the Siebe Gorman case, to decline to follow it.”

In Supercool the company had granted a debenture to the Bank of New Zealand in Siebe Gorman form. Tompkins J noted (p.317) that there was a greater reluctance in Australia and Ireland to accept the creation of a fixed charge over present and future book debts. He considered all the leading authorities in England, including, in addition to Siebe Gorman, Re Yorkshire Woolcombers Association [1903] 2 Ch.284, Illingworth v Houldsworth [1904] AC 355, Re Keenan Bros Ltd [1986] BCLC 242 and Re Brightlife Ltd [1987] Ch 200. Tompkins J concluded (p.321)

“It is my conclusion that a requirement to pay the proceeds of the book debts into the company’s account without any restriction on how the company may use those proceeds does not give effective possession of those proceeds to the Bank. It does not, without more, fasten the charge onto those proceeds. Supercool was free to deal with those proceeds except in the two respects stated, unless and until the BNZ intervened in a manner that would effectively inhibit that freedom.

This conclusion is entirely consistent with the circumstances as they existed at the time the debenture was entered into. Supercool was about to take over part of the business of the old Supercool company. It was the clear intention of Supercool and the BNZ that Supercool was then going to trade in the normal way in the course of which it would acquire book and other debts and would be using the proceeds of those debts in the normal course of its business. If it were not able to do so freely, it would not be able to trade. And the BNZ was well aware that that was what Supercool was about to do – the whole object of the finance facility was to enable Supercool to commence business. There was no intervention by the Bank that in any way restricted this freedom to carry on its business until the Bank appointed the receiver on 10 March 1992.

It follows that the charge over the book and other debts was a floating charge until it crystallised on that date. It also follows that, for the reasons I have expressed, I do not follow the decision of Slade J in Siebe Gorman.”

On appeal it was decided that even if the charge when created had been a floating charge it had crystallised before the relevant events. Accordingly it was

“unnecessary to determine the difficult question whether the wording of this debenture created a fixed charge over book debts, as in Re Keenan Bros Ltd [1986] BCLC 242 and in Siebe Gorman v Barclays Bank Ltd or a floating charge as in Re Brightlife...”

In Re New Bullas Trading Ltd [1994] 1 BCLC 485 the Court of Appeal was concerned with a further variation on the theme of fixed charges on book debts. The lender was 3i plc, not a bank. Accordingly the borrower could not have an ordinary current banking account with the lender into which the proceeds of book debts could be paid. The charge on the book debts was expressed to be a fixed charge. The conditions required the borrower to pay the proceeds of any book debt into a specified bank account and provided that on payment in such proceeds should be released from the fixed charge in favour of 3i and should become subject to the floating charge for which the debenture provided in respect of other assets. Nourse LJ, with whom Russell LJ and Scott Baker J agreed, concluded that

“Just as it is open to contracting parties to provide for a fixed charge on future book debts, so it is open to them to provide that they shall be subject to a fixed charge while they are uncollected and a floating charge on realisation. No authority to the contrary has been cited and, the principle being as spacious as it has been expressed to be, no objection is on that account sustainable. For these reasons, I would accept [Counsel’s] second main submission and hold that the charge over book debts of the company, as created by the debenture, was, unless and until their proceeds were paid into the specified account, a valid fixed charge.”

The decision of the Court of Appeal in Re New Bullas Trading Ltd was criticised by Professor Roy Goode in an article entitled “Charges over Book Debts: a Missed Opportunity” (1994) 110 LQR 592. Professor Goode cast no doubt on the correctness of the decision of Slade J in Siebe Gorman but the author of a reply, Mr Alan Berg in “Charges over Book Debts: a Reply” (1995) Journal of Business Law 433 did. He suggested (p.444) that Slade J gave no real explanation of his conclusion that both the company and the bank intended that the debenture would deprive the company of the free disposal of the book debts even before the bank had taken any steps to enforce its security. He considered that the decision in Siebe Gorman was unsound for the two reasons he gave and concluded (p.469) that

“Siebe Gorman is unsound in deciding that such a general charge is a fixed charge if it requires the company to pay the proceeds into its account with the chargee without expressly prohibiting the company from withdrawing the amounts so paid in.”

I have set out in some detail the extent to which the decision of Slade J in Siebe Gorman has been either accepted or criticised as the context within which to consider the impact of the decision of the Privy Council in Agnew. But it is also relevant in the context of the submission for the Bank, based on the decision of the Court of Appeal in Re Warden and Hotchkiss Ltd [1945] 1 Ch. 270, that judicial decisions upon which title to property depends or which, by establishing principles of construction or otherwise, form the basis of contracts or which affect the general conduct of affairs so that their alteration would mean, for example, that payments have been needlessly made, ought not to be altered even by the House of Lords, unless the decisions were clearly wrong and productive of inconvenience.

It is pointed out that Siebe Gorman has stood for 25 years with little criticism. It is suggested that most bank’s standard forms are drafted on the assumption that Siebe Gorman was correctly decided and that thousands of liquidations have been conducted on the same assumption. It is emphasised that notwithstanding numerous legislative opportunities the Crown has not sought to reverse its effect until the decision of the Privy Council in Agnew.

I turn then to the decision in Agnew. In that case the Privy Council was concerned with a debenture granted by the company to its bank in what may be called the New Bullas form. The charge over the book debts was expressed to be fixed but that over the proceeds of the book debts only floating unless and until the bank required the company to pay them into an account with itself or otherwise crystallised the floating charge. The issue, as described by Lord Millett, was whether a charge over the uncollected book debts which left 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. The judge concluded that it was fixed. The Court of Appeal in New Zealand considered that it was floating. The Privy Council agreed with the Court of Appeal. It applied the decision of Hoffmann J in Re Brightlife Ltd but reversed that of the Court of Appeal in Re New Bullas Trading Ltd. In doing so observations were made in relation to Siebe Gorman which, the Crown submits, indicates such disapproval as should lead me to reach the contrary conclusion.

In paragraphs 5 to 19 Lord Millett traced the history and development of the floating charge. In paragraphs 20 and 21 he described the circumstances in Siebe Gorman and the conclusion of Slade J. In the latter paragraph Lord Millett noted that the conclusion of Slade J had been doubted in that there was no express restriction on the right of the company to draw on the bank account. In paragraph 22 he noted that in Re Keenan Bros Ltd there was such a restriction. In paragraphs 23 to 26 he noted the decisions in Re Brightlife Ltd and Supercool. In paragraphs 27 to 31 Lord Millett turned to the judgment of the Court of Appeal in Re New Bullas Trading Ltd. He recorded that the Privy Council considered that the approach of the Court of Appeal had been fundamentally wrong. He described the correct approach (para 32) in these terms

“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.”

In paragraph 35 Lord Millett noted the articles by Professor Goode and Mr Berg to which I have referred. In paragraph 36 he described the approach of the judge in New Zealand as contrary to principle, authority and commercial sense. He said (para 36)

“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 in collecting it.”

Later he commented (para 38) with regard to an example given by the judge that

“A charge on uncalled share capital leaves the company with the right to make calls, and this may properly be regarded as analogous to a right to collect book debts. But, as the Court of Appeal observed, such a charge is normally accompanied by restrictions on the use to which the company may put the receipts, so that the situation is analogous to that which was thought to obtain in Siebe Gormanand did obtain in In re Keenan. The company can collect the money, but it is not free to use it as it sees fit.

I can only read the qualification “which was thought to obtain in” Siebe Gorman, when compared with Re Keenan, as a recognition that the construction which Slade J put on the debenture in Siebe Gorman was at the least questionable.

In paragraphs 39 to 48 Lord Millett explained in detail why the Privy Council considered that the Court of Appeal in England in Re New Bullas Trading Ltd and the judge in New Zealand in Agnew were wrong. He concluded (para 48)

“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. 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. But it is not necessary to go this far. 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. Siebe Gormanand Re Keenanmerely introduced an alternative mechanism for appropriating the proceeds to the security. The proceeds of the debts collected by the company were no longer to be trust moneys but they were required to be paid into a blocked account with the charge holder. The commercial effect was the same: the proceeds were not at the company's disposal. 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 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.”

That passage again makes plain that the Privy Council were treating the decision in Siebe Gorman as to the same effect as that in Re Keenan Bros Ltd, namely that the account to which the proceeds of the book debts were to be credited was blocked, notwithstanding the absence in Siebe Gorman of any term in the debenture to that effect.

Counsel for the Crown submits that, far from endorsing the decision of Slade J as to the effect of the debenture, the advice of the Privy Council shows, as clearly as is consistent with the fact that correctness of the decision in Siebe Gorman was not in issue, that the latter case was wrongly decided. He submits that I should be convinced of that and dismiss the application.

The advice of the Privy Council is not binding on me but it is undoubtedly highly persuasive. There is no suggestion that the law in New Zealand is different in any material respect to the law of England. All the relevant authorities were exhaustively considered and analysed, not least the decisions of the House of Lords in Illingworth v Houldsworth [1904] AC 355 and Street v Mountford [1985] AC 809. I consider that it is clear that I must apply the principles of those cases in the light of the further elucidation and application provided by the Privy Council in Agnew. If in consequence of doing so I am convinced that the decision of Slade J is wrong then it is my duty to say so. I am bound by the principles established by decisions of the House of Lords not by the decision of Slade J in Siebe Gorman. Further I do not consider that I should be inhibited from doing so by the consideration that the decision in Siebe Gorman has been followed and applied by lending institutions and insolvency practitioners to a substantial extent since 1979. The decision was criticised in 1994 by Tompkins J in Supercool and by Mr Berg in the Journal of Business Law. Whether or not there was a doubt before, the decision on Agnew clearly raised one on 5th June 2001. In February 2002 the Crown gave notice that it intended to challenge the decision in Siebe Gorman as soon as possible but would not seek to disturb distributions made before 5th June 2001. Clearly the issue must be resolved as soon as possible.

The starting point is that pointed out by Lord Millett in paragraph 32 of the Advice of the Privy Council in Agnew quoted in paragraph 29 above, namely to ascertain by the construction of the Debenture the nature of the rights and obligations which the parties intended to grant each other in respect of the book debts. The Debenture was granted in the context of the opening of a new account and the grant of the overdraft facilities for the purpose of providing working capital for the business of the Company. The obligations of the Company are set out in clause 5 and are (i) to pay the proceeds of any book debt into the Company’s account with the Bank, (ii) not to sell, factor, discount, or otherwise charge or assign the book debt in favour of any other person without the consent of the Bank and (iii) if called on so to do to execute legal assignments of such book debts. In Agnew there was no restriction equivalent to (i) unless and until the Bank so required. Nevertheless in this case the account is an ordinary current account with a clearing bank and there is no express restriction on the operation of the bank account within the limits of the Facility contained in either the Debenture or Facility. The Facility is liable to be withdrawn or reduced on notice and is repayable on demand but unless and until either of those events occur the Company is free to draw cheques in favour of suppliers or creditors in the ordinary conduct of its business as it thinks fit. Indeed it is not possible for any contrary term to be implied given that the purpose of the Facility was to provide working capital and the account was opened as an ordinary current business account with a clearing bank.

Although in Ex parte Copp (see para 21 above)Knox J refused to allow the terms of the overdraft facility to affect the construction of the debenture that is no reason to ignore the existence of the Facility and its terms when considering the extent of the restrictions and obligations imposed on the Company by the Debenture. The Facility and the other terms on which the account was opened limit the manner in which the account can be operated. The question is not whether those terms affect the construction of the Debenture but whether the Debenture further restricts the manner in which the account may be operated. It is plain that it does not.

The next stage as described by Lord Millett, also in paragraph 32 of the Advice, is to ascertain from those rights and obligations whether it was the intention of the parties that the Company should be free to deal with the book debts and withdraw them from the security without the consent of the Bank, i.e. whether it was intended that the book debts should be under the control of the Company or the Bank. In my view it is clear that the book debts were to be under the control of and available for use by the Company in the ordinary course of its business through their collection and the ordinary operation of the bank account. If one asks whether and if so how the Debenture affects the collection of debts and their use as working capital in the business of the Company the answer is that factoring, block discounting and the collection of the book debts through an account with another bank is forbidden but otherwise not at all. As Lord Millett pointed out in paragraph 36, quoted in paragraph 30 above, a restriction which nevertheless allows collection and free use of the proceeds is inconsistent with the fixed nature of a charge. It is true that in Agnew there was no restriction on the collection of the book debts through an account with another bank. I do not consider that the existence of that restriction in this case makes sufficient difference. The bank account is an ordinary current business account. There is no restriction on its use for all or any purposes of the Company’s business so long as the overdraft limit is observed, no notice to withdraw or reduce it has been given and no demand for repayment had been made.

The third stage is to complete the categorisation by considering whether such an intention is consistent with the nature of the transaction as described by the label the parties put on it. The answer is clearly in the negative. Clause 2(v) of the Debenture charged the book debts “by way of specific charge”. But that is not the consequence of the rights and obligations granted and imposed by clause 5. As the decision in Agnew shows the former must yield to the latter. The consequence is that the charge over book debts granted by the Company to the Bank can only have been a floating charge and the rights of the parties to this application must be ascertained accordingly.

It is with the greatest hesitation and reluctance that I differ from the conclusion of Slade J in Siebe Gorman. Nevertheless I am convinced that it is wrong. The error, if I may most respectively say so, can be seen in the passage from the judgment of Slade J quoted in paragraph 13 above. In that passage he sought to give effect to the intention of the parties that the charge over the book debts should be a first fixed charge and looked to see if that intention was negatived by the restrictions imposed by clause 5(c). But, as indicated in Agnew, 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 must have led to the conclusion that the collection and free use of the proceeds of book debts through the ordinary operation of the bank account was not only permitted but envisaged. The inevitable consequence would be to reject the description of the transaction as a first fixed charge.

This, as I think, error permeates the subsequent decision of Knox J in Ex parte Copp. At p. 25b-d he said

“In my judgment, Re Brightlife is very far from expressing any doubt on the validity of the Siebe Gormancase and the distinction in that case turns on the absence of the fetter in dealing with the proceeds produced by the book debts which was found to exist by Slade J as a matter of the construction of the terms of the debenture in the Siebe Gorman case and was expressed in words explicitly in the Irish case of Re Keenan Bros Ltd.”

The source of the fetter on the operation of the bank account on which Slade J relied was the description or label of the transaction as a “fixed first charge”. Once that part of the debenture is recognised as the categorisation of the parties which, as a matter of law, may be wrong then there is nothing from which the fetter can be implied.

In my view the decision of Tompkins J in Supercool was right and the criticisms made by Mr Berg in his article in the Journal of Business Law well made. For all these reasons I dismiss this application.