The House of Lords has delivered its judgment in the long running case of National Westminster Bank Plc v Spectrum Plus Limited. The House of Lords overruled the first instance decision in Siebe Gorman (1979) which gave judicial blessing to the concept of banks being able to have a fixed charge on book debts.

It is interesting to note that the appellate committee consisted of seven Law Lords which is a reflection of the importance placed upon establishing the distinction between a fixed and floating charge and the significance of whether or not their decision should have retrospective effect. NatWest had argued that if they lost then the ruling should not have retrospective effect..

The leading opinions were given by Lords Hope, Scott and Walker and they concluded that:

1. An attempt to distinguish a book debt from its proceeds made "no commercial sense".

2. The fact that a charge is described as fixed is indicative but not conclusive of its nature. The essential characteristic which must be present for there to be a floating charge is the company’s ability to use the assets for its normal business purposes. Clearly with book debt realisations a company is at liberty to use those funds until the bank intervenes.

3. It is possible to create a fixed charge over a specific ascertained book debt and made specific reference into paying those book debts into a blocked account. However, the House of Lords stopped short of providing a mechanism or a solution that would be regarded as a suitable arrangement to enable book debts to be classed as subject to a fixed charge.

4. The fact that the bank account was in credit or debit makes no difference to the position because the company is still able to draw on the account.

5. The House of Lords also determined that the decision will have retrospective effect. Whilst they varied in their degrees of enthusiasm to make an order expressed only to take effect in the future they were unanimous that in the circumstances of the case before them that it should have retrospective effect and that they should not depart from the norm.

Insolvency Practitioners up and down the country are currently holding significant sums in relation to book debt realisations pending the outcome of this case. At last the stand off between Insolvency Practitioners and banks has been brought to a close. In most of the cases the monies will now be released to those creditors who are afforded statutory priority. In the majority of cases this will be the Crown.

It will now be open to preferential creditors to challenge certain payments that may have been made to banks in reliance upon the perceived understanding that a fixed charge on books debts was valid. The decision in Brumark prompted the Crown Departments to issue a statement in 2002 confirming that they would not seek to challenge any payments made before the Brumark decision in June 2001. However, that does not affect in any way the capability of a company’s liquidator or any other preferential creditor from perusing such an action.

There are also going to be issues thrown up in relation to those persons who have guaranteed a company’s debt to the bank. Such persons will have given personal guarantees on the basis that the bank’s security in relation to book debts was valid. As the decision now has retrospective effect, guarantors may find themselves being called upon by the banks to reimburse them for any monies they themselves have to release to preferential creditors.

We may actually find that this judgment is just the start of an attack on fixed charges generally to bring us more into line with European jurisdictions where the concept of fixed charges are not afforded as great a significance as they are in this jurisdiction.

This decision has a significant impact on established banking practice as well as on the wider business community and its full scope and effect may not be realised for many years.

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