|Judgments - National Westminster Bank plc (Respondents) v. Spectrum Plus Limited and others and others (Appellants)
HOUSE OF LORDS
OPINIONS OF THE LORDS OF APPEAL FOR JUDGMENT
IN THE CAUSE
National Westminster Bank plc (Respondents) v. Spectrum Plus Limited and others and others (Appellants)
 UKHL 41
LORD NICHOLLS OF BIRKENHEAD
United Kingdom practice
'We cannot say that the law was one thing yesterday but is to be something different tomorrow. If we decide that [the existing rule] is wrong we must decide that it always has been wrong, and that would mean that in many completed transactions owners have received too little compensation. But that often happens when an existing decision is reversed.'
'I consider it to be a legitimate exercise of your Lordships' judicial function to declare prospectively whether or not the immunity - which is a judge-made rule - is to be available in the future and, if so, in what circumstances.'
Luxembourg and Strasbourg
'the interpretation the Court of Justice gives to a rule of Community law is limited to clarifying and defining the meaning and scope of that rule as it ought to have been understood and applied from the time of its coming into force. It follows that the rule as thus interpreted may, and must, be applied by the courts even to legal relationships arising and established before the judgment ruling on the request for interpretation ..' (emphasis added)
But the court noted that 'exceptionally' it may limit the temporal effect of a ruling. It has done so only in defined circumstances (paragraph 69):
'The court has taken that step only in quite specific circumstances, where there was a risk of serious economic repercussions owing in particular to the large number of legal relationships entered into in good faith on the basis of rules considered to be validly in force and where it appeared that both individuals and national authorities had been led into adopting practices which did not comply with Community legislation by reason of objective, significant uncertainty regarding the implications of Community provisions, to which the conduct of other member states or the Commission may even have contributed ...'
Objections in principle
'The judge, even when he is free, is still not wholly free. He is not to innovate at pleasure. He is not a knight-errant, roaming at will in pursuit of his own ideal of beauty or of goodness. He is to draw his inspiration from consecrated principles. He is not to yield to spasmodic sentiment, to vague and unregulated benevolence. He is to exercise a discretion informed by tradition, methodized by analogy, disciplined by system, and subordinated to "the primordial necessity of order in the social life"'.
LORD HOPE OF CRAIGHEAD
"It is competent under the law of Scotland for an incorporated company…, for the purpose of securing any debt or other obligation (including a cautionary obligation) incurred or to be incurred by, or binding upon, the company or any other person, to create in favour of the creditor in the debt or obligation a charge, in this Part referred to as a floating charge, over all or any part of the property (including uncalled capital) which may from time to time be comprised in its property and undertaking."
That provision must be read together with section 463(1)(b) of the 1985 Act, which declares that where a Scottish company goes into liquidation within the meaning of section 247(2) of the Insolvency Act 1986 a floating charge created by the company attaches to the property then comprised in the company's property and undertaking or, as the case may be, in part of that property and undertaking, but does so subject to the rights of any person who holds a fixed security over the property or any part of it ranking in priority to the floating charge. It must also be read together with section 464(6) the 1985 Act as amended by section 439(1) of and Schedule 13 to the 1986 Act, which states that the order of ranking set out in that section is subject to sections 175 and 176 of the 1986 Act as to the ranking of preferential debts in winding up. So the rule that was first introduced by the 1897 Act for England and Wales applies to Scottish floating charges too.
Did Spectrum's debenture create a fixed charge?
"It is well established that the normal relation between a banker and his customer is that of debtor and creditor, but it is equally well established that quoad the drawing and payment of the customer's cheques as against money of the customer's in the banker's hands the relation is that of principal and agent. The cheque is an order of the principal's addressed to the agent to pay out of the principal's money in the agent's hands the amount of the cheque to the payee thereof."
The general rule is that a banker is bound to honour his customer's cheque so long as he has funds in his hands if the account is in credit, or up to the agreed limit of any overdraft. He may determine the contract at any time on giving notice to the customer. But he cannot refuse to honour cheques drawn before the notice of determination is received.
Should Siebe Gorman be overruled?
Should Siebe Gorman be overruled prospectively?
"Subject to consideration by appellate tribunals, and (within limits) by judges of equal jurisdiction, what [a judge] states to be the law will, generally speaking, be applicable not only to the case before him but, as part of the common law, to other comparable cases which come before the courts, whenever the events which are the subject of those cases in fact occurred.
It is in this context that we have to reinterpret the declaratory theory of judicial decision…. when the judges state what the law is, their decisions do, in the sense I have described, have a retrospective effect. That is, I believe, inevitable. It is inevitable in relation to the particular case before the court, in which the events must have occurred some time, perhaps some years, before the judge's decision is made. But is also inevitable in relation to other cases in which the law as so stated will in future fall to be applied. I must confess that I cannot imagine how a common law system, or indeed any legal system, can operate otherwise if the law is to be applied equally to all and yet be capable of organic change."
Later in the same paragraph he said that a system of prospective overruling, although it had occasionally been adopted elsewhere, had no place in our legal system.
"This Court has no power to overrule cases prospectively. A hallmark of the judicial process has long been the making of binding decisions of rights and obligations arising from the operation of the law upon past events or conduct. The adjudication of existing rights and obligations as distinct from the creation of rights and obligations distinguishes the judicial power from non-judicial power. Prospective overruling is thus inconsistent with judicial power on the simple ground that the new regime that would be ushered in when the overruling took effect would alter existing rights and obligations. If an earlier case is erroneous and it is necessary to overrule it, it would be a perversion of judicial power to maintain in force that which is acknowledged not to be the law."
"In principle it must be that your Lordships, as the ultimate court of appeal, have power to correct any injustice caused by an earlier order of this House. There is no relevant statutory limitation on the jurisdiction of the House in this regard and therefore its inherent jurisdiction remains unfettered. In Broom v Cassell & Co Ltd (No 2)  AC 1136 your Lordships varied an order for costs already made by the House in circumstances where the parties had not had a fair opportunity to address argument on the point."
The circumstances in that case were, of course, quite different. But the principle which the House was applying there is capable of a much wider application.
"I consider it to be a legitimate exercise of your Lordships' judicial function to declare prospectively whether or not the immunity - which is judge-made rule - is to be available in the future and, if so, in what circumstances."
LORD SCOTT OF FOSCOTE
"… [a] specific charge [of] all book debts and other debts … now and from time to time due or owing to [Spectrum]" (para. 2(v))
"[a] floating security [of] its undertaking and all its property assets and rights whatsoever and wheresoever present and/or future including those for the time being charged by way of specific charge pursuant to the foregoing paragraphs if and to the extend that such charges as aforesaid shall fail as specific charges but without prejudice to any such specific charges as shall continue to be effective." (para.2(vii))
"5. With reference to the book debts and other debts hereby specifically charged [Spectrum] shall pay into [Spectrum's] account with the Bank all moneys which it may receive in respect of such debts and shall not without the prior consent in writing 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 [Spectrum] 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."
This provision barred Spectrum from dealing with its book debts in any of the ways specified but left Spectrum free to deal with the debtors who owed the debts and, in particular, to collect the debts in the normal course of business.
The rival lines of judicial authority
"… 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".(p 321)
"A restriction on disposition [of book debts] 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"
The judgments in the courts below
"It seems to me that it is at least arguable that a debenture which prohibits a chargor from disposing of book debts before they are collected and requires him to pay them, beneficially, to the chargee as and when they are collected properly falls within the definition of a fixed charge, regardless of the extent of his contractual right to draw out sums equivalent to the amount paid in. Strictly speaking the chargor is neither entitled to dispose of the book debts before they fall due for payment, nor to dispose of the proceeds. What he does enjoy are contractual rights to payments, whether as lender or borrower, from the bank" (para 94).
What is a floating charge?
"…immediately on the new machinery and effects being fixed or placed in the mill, they became subject to the operation of the contract, and passed in equity to the mortgagees" (per Lord Westbury at p 211)
"… in equity it is not disputed that the moment the property comes into existence, the agreement operates on it" (per Lord Chelmsford at p 220).
"… all the property of the company, not only which existed at the date of the debenture, but which might afterwards become the property of the company."
He said also that the word "undertaking"
"… necessarily infers that the company will go on, and that the debenture holder could not interfere until either the interest which was due was unpaid, or until the period had arrived for the payment of his principal, and that principal was unpaid".
(see also In re Florence Land and Public Works Co  10 Ch D 530, 540).
The two features mentioned by Gifford LJ became the hallmark of the new form of security, namely, (1) a charge on the chargor company's assets, or a specified class of assets, present and future and (2) the right of the chargor company to continue to use the charged assets for the time being owned by it and to dispose of them for its normal business purposes until the occurrence of some particular future event. In In re Colonial Trusts Corporation (1879) 15 Ch D 465 Jessel MR referred to this form of security as a "floating security" (see at pp 468, 469 and 472) and in Moor v Anglo-Italian Bank (1879) 10 Ch D 681, 687 he contrasted the new form of security with a "specific charge" on the property of the company.
"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 further 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."
But it is important to notice that Romer LJ prefaced his definition with a qualification. He said -
"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 …".
The case came to this House under the name Illingworth v Houldsworth  AC 355. In short ex tempore speeches their Lordships upheld the Court of Appeal. Lord Macnaghten described the case as "clear" and offered the following definition of a floating charge in contrast to a "specific charge" -
"A specific charge, 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 other 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 reach and grasp"(p 358).
"[A floating security] 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 licence 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 the part of the mortgagee is done which causes it to crystallise into a fixed security".
"… [had] 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 … the charge on such book debts could be no more than a floating charge."
Hoffmann J in In re Brightlife Ltd  Ch 200, 209, in a passage cited with approval by Lord Millett in Agnew v Commissioners of Inland Revenue  2 AC 710, 723, said that the significant feature of the Brightlife debenture was that the company was free to collect its debts and pay the proceeds into its bank account. He went on
"Once in the account, they would be outside the charge over debts and at the free disposal of the company. In my judgment a right to deal in this way with the charged assets for its own account is a badge of a floating charge and is inconsistent with a fixed charge."
Similar conclusions were expressed in In re Keenan Bros Ltd  BCLC 242 in the Supreme Court of Ireland and by Tompkins J in the Supercool Refrigeration case  3 NZLR 300, in New Zealand.
"Between men of full age and competent understanding ought there to be any limit to the freedom of contract but that imposed by positive law or dictated by considerations of morality or public policy? The limit proposed is purely arbitrary, and I think meaningless and unreasonable."
These reservations, he thought, supported the view that it was open to contracting parties, if they wished to do so, to provide for a fixed charge on uncollected book debts but a floating charge on the money received in payment of those debts.
Did the bank's debenture create a fixed charge or only a floating charge?
(1) The extent of the restrictions imposed by the debenture (para 81 above)
(2) The rights retained by Spectrum to deal with its debtors and collect the money owed by them (para 81 above)
(3) Spectrum's right to draw on its account with the bank into which the collected debts had to be paid, provided it kept within the overdraft limit (para 82 above)
(4) The description "fixed charge" attributed to the charge by the parties themselves.
"… creat[ed] in equity a specific charge on the proceeds of [the book 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". (p 159)
But it is very difficult to see what feature of the arrangement between chargor and bank chargee in Siebe Gorman justified this conclusion. The debenture was on all fours with the debenture in the present case. There is nothing in the report of the case to suggest that the bank account into which the chargor had to pay the collected book debts was other than, as here, a normal bank current account on which the chargor could draw for its normal business purposes. In considering the cited passage it seems to me worth noting that the issues that Slade J had to decide in the Siebe Gorman case did not include the question whether the charge over book debts was a fixed charge or a floating charge. The main issue in the case was one of priority as between the bank chargee on the one hand and a subsequent assignee of the charged book debts on the other. This issue turned on notice. Did the subsequent assignee have notice of the bank's charge and the provision barring subsequent assignments? If the subsequent assignee did have notice, the bank would have priority. If not, the subsequent assignee would have priority. The categorisation of the charge did not matter.
"… the pretended power of suspending of laws or the execution of laws by regall authority without consent of Parliament is illegall."
It is probably right that the exercise of judicial authority is not caught by the reference to "regall authority" in the Bill of Rights but your Lordships in this House exercise an appellate jurisdiction deriving from the Queen in Council and if the promoters of the Bill of Rights in 1688 had been asked whether there was a power in the House of Lords to suspend laws without the consent of Parliament I do not think it is difficult to guess what their answer would have been.
LORD WALKER OF GESTINGTHORPE
The history of the floating charge
"It was admitted by the learned counsel for the respondent, that a trader may assign his future book debts in a specified business. Why should the line be drawn there? Between men of full age and competent understanding ought there to be any limit to the freedom of contract but that imposed by positive law or dictated by considerations of morality or public policy?"
But in Salomon v Salomon & Co Ltd  AC 22, 53, he said,
"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 too convenient a form of security to be lightly abolished. I have long thought, and I believe some of your Lordships also think, that the ordinary trade creditors of a trading company ought to have a preferential claim on the assets in liquidation in respect of debts incurred within a certain limited time before the 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; and a great scandal it is."
Upgrading the security to a fixed charge
"if I had accepted the premise that [McDonald] 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, I would have been inclined to accept the conclusion that the charge on such book debts could be no more than a floating charge."
The Crown has little quarrel with that, except perhaps for the adjective "unrestricted."
The essential difference
Siebe Gorman & Co Ltd v Barclays Bank Ltd
"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."
"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 the 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."
The judge saw this as reinforcing the specific charge given by clause 3 (that is, the "label"). Its real significance, in my opinion, was that it did not in any way restrict McDonald from taking the most natural course for a trader in the ordinary way of business, that is collecting the debts and paying them into its current account with the chargee bank. I agree with the criticism by Alan Berg, "Charges over Book Debts: a Reply"  JBL 433, 445 that the judge's construction was based too much on linguistic considerations, in isolation from the matrix of facts in which the security was created.
"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."
I consider that that would be a correct statement of the position under English law.
"I am satisfied, accordingly, that the correct construction of the clause is that the trustee had a discretion to determine into what company account with what bank the proceeds of book debts should be paid from time to time. But there is no restriction in the clause on the companies drawing the monies out of these accounts. Accordingly, there is nothing in it to prevent the companies from using the proceeds of the book debts in the normal way for the purpose of carrying on their business. By reason of this the charge has also the third characteristic referred to by Romer LJ in his judgment in the case of In re Yorkshire Woolcombers' Association Ltd and is accordingly a floating charge and not a fixed charge."
"The categorisation of a charge over receivables requires examination of the permitted dealings with collected proceeds only in order to clarify whether the chargor is free to deal with the charged asset itself (the receivable) in the ordinary course of business without the consent of the chargee. This, and nothing else, is the hallmark of a floating charge."
The judgments below
"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."
"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 the 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 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."
Postcript: draftsmen's precedents and collateral transactions
"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 that is a particularly cogent consideration in regard to property transactions of one sort or another."
Requirements for particulars of floating charges to be registered publicly, and for a company's register of debentures to be open for inspection, suggest that Parliament intended that the existence and scope of any floating charge should be ascertainable by the general public, at least in theory (doubts as to how the system works in practice were expressed by Lord Hoffmann in the Cosslett case,  1 AC 336, 347-8, para 19).
"The question we have to decide must be decided, like all other questions of the kind, having regard to the surrounding circumstances under which the instrument was executed, and especially the respective positions of the parties who were the contracting parties, to carry out whose agreement that instrument was executed."
Cozens-Hardy LJ made similar observations in Yorkshire Woolcombers  2 Ch 284, 297. Many of the later cases have emphasised the need for the court to look at the commercial realities of the situation. The wish to achieve legal certainty by use of a standard precedent cannot override the need to construe any document in its commercial context.
BARONESS HALE OF RICHMOND
LORD BROWN OF EATON-UNDER-HEYWOOD