England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM CHANCERY DIVISION, COMPANIES COURT
(VICE CHANCELLOR, SIR ANDREW MORRITT)

		Royal Courts of Justice Strand, London, WC2A 2LL
		12 July 2004

Lord Phillips, MR :

Introduction

1. This is an appeal against a judgment of Sir Andrew Morritt V-C dated 15 January 2004 [2004] 2 WLR 783 in which he dismissed an application by the appellant ('the Bank') pursuant to s.112 Insolvency Act 1986 for a declaration that a debenture granted to the Bank by the first respondent ('the Company') created a fixed charge over the Company's book debts.
2. Both fixed and floating charges are the products of agreement between the chargor and the chargee. The rights conferred by fixed and floating charges were initially the creatures of equity. The use of fixed charges long predated the existence of floating charges. Floating charges were introduced and recognised in the second half of the 19^th century. The creation of floating charges was rapidly followed by the introduction of statutory provisions which made the distinction between fixed and floating charges of particular significance.
3. Initially it was not difficult to distinguish between a fixed and a floating charge. A fixed charge arose where the chargor agreed that he would no longer have the right of free disposal of the assets charged, but that they should stand as security for the discharge of obligations owed to the chargee. A floating charge was normally granted by a company which wished to be free to acquire and dispose of assets in the normal course of its business, but nonetheless to make its assets available as security to the chargee in priority to other creditors should it cease to trade. The hallmark of the floating charge was the agreement that the chargor should be free to dispose of his assets in the normal course of business unless and until the chargee intervened. Up to that moment the charge 'floated'.
4. Where the chargor and the chargee agree that there shall be immediate restrictions, but not a total embargo, on the manner in which the chargor may dispose of the assets charged it can be less easy to decide whether the charge should be categorised as a fixed or a floating charge. This is such a case.
5. This appeal concerns a charge granted over book debts by a clause in a debenture. The courts sometimes have problems in identifying whether an agreement to grant a charge over book debts has created a fixed or a floating charge. Two problems can arise. The first is of identifying the degree to which the parties have agreed that the chargor's right to dispose of the book debts or their proceeds are to be restricted. This is a problem of construction of the relevant agreement. The second problem is of determining whether, having regard to the restrictions that the parties have agreed should be imposed on the chargor's rights, the resulting charge is properly to be categorised as a fixed or a floating charge. This is an issue of law.
6. The charge in issue in this case was granted by the Company over its book debts to secure its obligations to the Bank to repay borrowings under an overdraft facility. There were two stages in the reasoning that led the Vice-Chancellor to conclude that the charge constituted a floating rather than a fixed charge over book debts. (1) If the terms of a debenture entitle a chargor to collect book debts and use the proceeds in the normal course of business, unless and until the chargee intervenes, the charge will necessarily be a floating charge, notwithstanding that the debenture may contain restrictions against particular modes of dealing with or collecting the book debts. (2) The effect in law of the debenture, properly construed, was that, the Company was free to use the proceeds of its book debts in the normal course of its business, unless and until the Bank intervened.
7. The first stage of this reasoning is in direct conflict with the decision of this court in Re New Bullas Trading Ltd [1994] 1 BCLC 485. In Agnew v Commissioner of Inland Revenue [2001] UKPC 28;[2001] 2 AC 710 the Privy Council held that New Bullas was wrongly decided. The question arises of whether the requirements of precedent permitted the Vice-Chancellor or permit this court to prefer the reasoning of the Privy Council in Agnew to that of this court in New Bullas. Mr Gabriel Moss QC for the Bank has not, however, been anxious, either before the Vice-Chancellor or before this court to take his stand on the reasoning in New Bullas, no doubt through apprehension that any victory on that ground would be ephemeral.
8. The second stage of the reasoning of the Vice-Chancellor is in conflict with the relevant part of the judgment of Slade J in Siebe Gorman & Co Ltd v Barclays Bank Ltd [1979] 2 Lloyds Reps 142. In that case Slade J had to consider a clause in a debenture that was in essentially the same terms as those in issue in the present case. Slade J held that those terms placed a certain restriction on the freedom of the chargor to use the proceeds of its book debts once these had, as the debenture required, been paid into its account with the chargee bank and that the debenture created a fixed charge. The Vice-Chancellor held that this conclusion was erroneous and that Siebe Gorman had been wrongly decided.
9. It is with this conclusion of the Vice-Chancellor that Mr Moss has joined vigorous issue. He has submitted that over the last 25 years the wording of innumerable debentures has been based on that construed by Slade J in Siebe Gorman with the intention and belief (1) that the wording carried the meaning found by Slade J and (2) that the effect in law of that meaning was to create a fixed charge over book debts. In these circumstances his submission is that the decision in Siebe Gorman should not be reversed unless it is plainly wrong. He submits that, far from being plainly wrong, it was correctly decided.
10. This appeal requires a detailed analysis of the decision in Siebe Gorman in the light of the relevant jurisprudence that bears on the essential characteristics of a floating charge.

The relevant facts

11. The facts found by the Vice-Chancellor are not in issue. They are as follows. 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 of 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 1 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".
12. The debenture dated 30 September 1997 and duly registered on 7 October 1997 ("the Debenture") was in a standard form and contained the following material terms:

"1. The Company hereby covenants to pay to 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.

13. On 6 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.
14. On 15 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 realisable from book debts with a face value of £291,293, £16,136 was due to preferential creditors (including the Inland Revenue £6,865, Customs and 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 nature of a floating charge

15. The early history of the floating charge is set out in detail in the speech of Lord Millett in Agnew at paragraphs 5 to 15 to which reference should be made for the detailed picture. I shall restrict myself to a few key references. In the early days it was common for a floating charge to cover the entire undertaking of the chargor company. The agreement, commonly a debenture, would identify the assets to be charged and provide the right on the part of the chargee to enter into possession of those assets for the purpose of enforcing the security. Expressly, or by implication, the agreement would permit the chargor to continue to use and dispose of those assets in the ordinary course of business unless and until the chargee exercised his right to enter into possession, or some other specified event occurred.
16. The object of the floating charge was to provide security to the chargee in a form that would not inhibit the chargor from continuing to carry on its business.
17. A floating charge was not, and is not, easy to define. Initially the courts tended to analyse it as a charge coupled with a licence by the chargee to the chargor to dispose of the assets charged. Thus in Robson v Smith [1895] Ch D 118 at p. 124 Romer J approved the statement that floating charges "constitute a charge but give a licence to the company to carry on its business". In Evans v Rival Granite Quarries Ltd [1910] 2 KB 979, however, Buckley LJ provided the following, more accurate, description of a floating charge at p. 999:

"A floating security is not a future security; it is a 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 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."

18. In Illingworth v Houldsworth [1904] AC 355 at 358 Lord Macnaghten illustrated the difference between a specific and a floating charge with the following description:

"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."

19. When that case was before the Court of Appeal under the name Re: Yorkshire Woolcombers Association [1903] 2 Ch 284, Romer LJ, at p. 295, identified three characteristics of 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."

20. That case concerned a charge over book debts. In the House of Lords at p. 357 Lord Halsbury expanded on the third characteristic identified by Romer LJ:

"It contemplates not only that it should carry with it the book debts which were then existing, but it contemplates also the possibility of those book debts being extinguished by payment to the company, and that other book debts should come in and take the place of those that had disappeared. That, my Lords, seems to me to be an essential characteristic of what is properly called a floating security. The recitals … shew an intention on the part of both parties that the business of the company shall continue to be carried on in the ordinary way – that the book debts shall be at the command of, and for the purpose of being used by, the company. Of course, if there was an absolute assignment of them which fixed the property in them, the company would have no right to touch them at all. The minute after the execution of such an assignment they would have no more interest in them, and would not be allowed to touch them, whereas as a matter of fact 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."

21. Where a grantor of a floating charge ceased to carry on business, the floating charge crystallised and the chargee could look to the assets charged to secure the debt owed to it. This was to the detriment of the other creditors of the chargor. The legislature then intervened to protect preferential creditors from this detriment. Section 107 of the Preferential Payments in Bankruptcy Amendment Act 1897 made preferential debts payable out of the proceeds of a floating charge in priority to the right of the chargee. This made the distinction between a fixed and a floating charge of particular importance and subsequent insolvency legislation has perpetuated the importance of that distinction. The significance of this appeal is that sections 40 and 175(2)((b) of the Insolvency Act 1986 give priority to the preferential creditors over the Bank's charge if that charge, as created, was a floating charge, but not if it was a fixed charge. They provide as follows:

"40. Payment of debts out of assets subject to floating charge

(1) The following applies, in the case of a company, where a receiver is appointed on behalf of the holders of any debentures of the company secured by a charge which, as created, was a floating charge.

(2) If the company is not at the time in course of being wound up, its preferential debts (within the meaning given to that expression by section 386 in Part XII) shall be paid out of the assets coming to the hands of the receiver in priority to any claims for principal or interest in respect of the debentures.

(3) Payments made under this section shall be recouped, as far as may be, out of the assets of the company available for payment of general creditors.

175. Preferential Debts (general provision)

(1) In a winding up the company's preferential debts (within the meaning given by section 386 in Part XII) shall be paid in priority to all other debts.

(2) Preferential debts-

(a) rank equally among themselves after the expenses of the winding up and shall be paid in full, unless the assets are insufficient to meet them, in which case they abate in equal proportions; and

(b) so far as the assets of the company available for payment of general creditors are insufficient to meet them, have priority over the claims of holders of debentures secured by, or holders of, any floating charge created by the company, and shall be paid accordingly out of any property comprised in or subject to that charge."

22. The distinction between a fixed and a floating charge over book debts became less clear when debentures began to impose restrictions upon the right of the chargor to dispose of book debts in the course of business, notwithstanding that the charge was described as a 'floating charge'. Thus in re Brightlife Ltd [1987] 1 Ch 200 a clause of a debenture gave a charge which provided that the chargor should not:

"deal with its book or other debts or securities for money otherwise than in the ordinary course of getting in and realising the same which expression shall not authorise the selling, factoring or discounting …of its book debts or other negotiable instruments …"

23. Hoffmann J, in determining that the charge created was none the less a floating charge, remarked at page 209G:

"But a floating charge is consistent with some restriction upon the company's freedom to deal with its assets. For example, floating charges commonly contain a prohibition upon the creation of other charges ranking prior to or pari passu with the floating charge. Such dealings would otherwise be open to a company in the ordinary course of its business."

24. It might have been suggested that the charge in question was a hybrid, which did not fully satisfy the descriptions of a floating charge in the early jurisprudence, for the restrictions in question did not leave the chargor, so far as the book debts were concerned, free 'to carry on their business exactly as if this deed had not been executed at all' – per Lord Halsbury in Illingworth v Houldsworth (paragraph 20 above).
25. The conundrum of the nature and effect of restrictions of this nature over the use of book debts is not merely one of whether, as a matter of categorisation, they classify as a floating charge for purposes of insolvency legislation. A related issue arises as to the effect on third parties of partial restrictions on the right to dispose of book debts. Surprisingly, this is a topic which has received little principled discussion in recent English cases and it is not easy to fathom the equitable principles in play.
26. In In re Portbase Clothing Ltd [1993] Ch 388 Chadwick J, after reference to authority, remarked at p. 401:

"The principle to be derived from those decisions of the Court of Appeal, as I understand it, is that a holder of a subsequent fixed charge which has been made subject to a prior floating charge – either by express provisions in the fixed charge itself or by a restriction in the floating charge of which the holder of the fixed charge had notice – takes his security upon terms that, if before the charged property has been realised under that fixed charge events occur which cause the floating charge to crystallise, then the proceeds of realisation must be paid to the holder of the floating charge; the holder of the fixed charge can have no claim upon those proceeds until the claims under the floating charge have been paid out."

27. In the following year in Griffiths v Yorkshire Bank Plc [1994] 1 WLR 1497 at 1435 Morritt J commented on this observation as follows:

"Chadwick J. envisaged two possibilities. One is a restriction in the floating charge of which the holder of the fixed charge had notice, i.e. the 1977 debenture. In none of the cases to which he had earlier referred was this possibility considered or in issue.

In my judgment it is not the law that such a restriction affects priorities as a matter of property law whatever may be the contractual result. It is of the essence of a floating charge that proprietary interests having priority over any interest of the holder of the floating charge may be created."

28. In his illuminating work on Legal Problems of Credit and Security, 3^rd Ed at 5-40 Professor Roy Goode prefers the conclusions of Chadwick J referring to three early decisions, one of which, English & Scottish Mercantile Investment Co Ltd v Brunton [1892] 2 QB 700 was a decision of the Court of Appeal. In that case the debenture in issue contained provisions that would normally have created a simple floating charge but which included a restriction on the chargor company from granting any prior charge on the assets in question. The chargor subsequently granted a charge over a fund that was one of those assets. The only issue was whether the chargee of the fund, who was aware of the existence of the debenture, had constructive knowledge of the restriction. The Court of Appeal held that he did not. It appears to have been taken for granted that, had the chargee had such knowledge, its security would have ranked after the debenture – see Lord Esher MR at 707.
29. Professor Goode summarises the position as follows:

"If the debenture imposes restrictions on sales or subsequent encumbrances and the particular sale or charge, though in the ordinary course of business is in breach of such restrictions, the floating charge will, on crystallisation, retain its priority if the buyer or incumbrancer took with notice of the restrictions, whether his interest is legal or equitable. This stems from the fact that the floating charge, though ambulatory, is a present security, not a mere contract right, so that restrictions contained in it will constitute an equity binding those who have notice of them."

30. This passage raises a number of questions. Why cannot the chargee assert his security interest over the asset that has been disposed of in breach of contract until the remainder of the charge has crystallised? If the assignee of the asset charged realises the asset, can the chargee trace into the proceeds? If so, what is the nature of the interest that entitles him to do so? In considering the first of these questions, Professor Goode refers to a passage in Reynolds Bros. (Motors) Pty Ltd & Ors v Ensanda Ltd (1983) 1 ACLC 1333, a decision of the Court of Appeal of New South Wales. Mahoney JA at 1338 gives detailed consideration to charges containing restrictions on disposal and comments that the effect of such restrictions has yet to be fully explained and the rationale of Brunton's case yet to be finally stated. I would endorse his comments.
31. It is not necessary in this appeal to pursue this difficult area of the law further. It suffices to note that where a charge places restrictions on the disposal of book debts prior to collection but leaves the chargor free to collect and use their proceeds in the ordinary course of business there are problems in identifying the precise effect in law of what has been agreed. There are also problems in deciding whether such a charge falls to be classified as a fixed or a floating charge.

The conflict of authority

32. In Siebe Gorman, applying Tailby v Official Receiver (1888) LR 13 App. Cas., 523 Slade J recognised that it was possible, by agreement, to create a fixed charge over both present and future book debts. The conflict of authority relates to the question of the effect of an agreement which precludes the chargor from alienating its book debts, but leaves it free to receive the proceeds of those debts as and when they fall due for payment and to use those proceeds in the normal course of its business. Is such a charge properly to be categorised as a fixed charge or a floating charge over the book debts? To a degree this question was considered by Slade J himself, and I shall consider his observations when I come to look at Siebe Gorman in detail. First I propose to consider the approach to categorisation and the more recent decisions which bear on this issue.

The approach to categorisation

33. In Agnew Lord Millett pointed out that whether a charge falls into the category of a fixed or a floating charge cannot depend upon the manner in which the parties choose to describe it in the instrument creating it. He said at paragraph 32:

"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."

34. With respect these observations are plainly sound. I would, however, make one comment. They do not accommodate the possibility that the rights agreed by the parties may be inconsistent both with a fixed charge and with a floating charge, as these terms were originally understood. In such a situation the issue becomes whether the charge has some dominant characteristics which have the effect that it falls to be classified as a floating charge, for the purposes of the insolvency legislation.

The more recent decisions

35. In re Atlantic Computer Systems Plc [1992] Ch 505 has been analysed by Professor Goode in an article in (1994) 110 LQR 592 entitled 'Charges over Book Debts: a Missed Opportunity'. The chargor was a company which arranged with the chargee, a funding bank, that it should purchase equipment and let it on hire purchase to the chargor with permission to sub-lease to end users. The chargor charged to the chargee by way of security all the benefit of the terms of each of the specific sub-leases involved and, in particular, the rentals due under them. The chargor later went into administration and the issue arose as to whether the charges were fixed or floating charges. The reasoning of Nicholls LJ, when giving the judgment of the court, included the following passages at p 534:

"The notable feature of the present case is that the charges were not ambulatory. The property assigned by the company was confined to rights to which the company was entitled under specific, existing contracts. The assignments consisted of the company's rights 'under or by virtue of' sub-leases each of which was already in existence at the time of the assignments and each of which was specifically identified in the relevant deeds of assignment. In each case the payments due to the company under a specific sub-lease were charged as security for the payments due by the company under the head lease relating to the same equipment. The company's right to receive future instalments from end users in due course pursuant to the terms of these sub-leases was as much a present asset of the company, within Romer LJ's reference to "present and future" assets of the company, as a right to receive payment of a sum which was immediately due. Romer LJ's reference to future assets was a reference to assets of which, when the charge was created, the company was not the owner. That was the position in that case. That is not the position in this case.

We have in mind that in practice sums payable by the end users under these sub-leases were paid to the company and utilised by it in the ordinary course of business. In so far as this is relevant, it may well be that this was what the parties intended should happen. The company was to be at liberty to receive and use the instalments until AIB chose to intervene. We are unpersuaded that this results in these charges, on existing and defined property, becoming floating charges. A mortgage of land does not become a floating charge by reason of the mortgagor being permitted to remain in possession and enjoy the fruits of the property charged for the time being."

36. Professor Goode has criticised this reasoning. He comments that the emphasis placed by the court on the fact that the assets subject to the charge were restricted to rights under existing contracts was misplaced, in that this was not incompatible with a floating charge. The material consideration in his opinion was that the chargor was free to use the proceeds of the rentals charged in the ordinary course of business free from the security interest. This was only consistent with the charge being a floating charge.
37. Atlantic Computer Systems was followed by Vinelott J in Re Atlantic Medical Ltd [1992] BCC 653. That case resembled Atlantic Computer Systems in that it involved a charge granted over hire-purchase agreements, sub-leases and rentals of leased equipment. The difference was that the charge extended to such agreements as the chargor might enter into in the future. Here again, Professor Goode considers that the judge overlooked the crucial characteristic – the right of the chargor to make use of the proceeds of the agreements in the ordinary course of its business.
38. I now come to Re New Bullas. In that case the chargor company executed a debenture which purported to charge to the chargee all book debts both present and future, the charge to take effect 'as a first fixed mortgage by assignment'. The debenture provided that when the debts were paid, the proceeds should be placed in a designated account and, in the absence of directions by the chargee to the contrary, thereupon treated as subject to a floating charge – i.e. the chargor was free to use the proceeds. Administrative receivers of the chargor were appointed, which brought into play s 40 of the Insolvency Act 1986 (see paragraph 21 above). The issue was whether the charge over the book debts constituted a fixed or a floating charge.
39. Giving a single judgment, with which Russell LJ and Scott Baker J agreed, Nourse LJ held that the parties had succeeded in their intention of creating a fixed charge over the book debts. His reasoning appears in the following passages from pp 491-3 of his judgment:

"Mr Henderson has submitted that the distinction drawn between the book debts before collection and after realisation is unrealistic and artificial because a debt is worth nothing unless and until it is turned into money. He says that it is of the essence of a fixed charge that the asset is appropriated to the charge from the beginning and that it cannot be released from it without the consent of the chargee. He relies strongly on a passage in the judgment of Vaughan Williams LJ in Re Yorkshire Woolcombers Association Ltd [1903] 2 Ch 284 at 294, where he said:

"… 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."

The short answer to these submissions is that here the asset 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 alone, have determined that if the proceeds of a book debt are paid into the specified account at a time when no directions have been given it shall thereupon be released. The matter is governed by a clear agreement of the parties. Unless there is some authority or principle of law which prevented them from agreeing what they have agreed, their agreement must prevail.

An equitable assignment, whether it takes effect as an out and out assignment or, as here, by way of charge, is a creature of exceptional versatility, malleable to the intention of its creators, adaptable to the subject matter assigned. Provided it is in writing, made for value and the intention is clear, it requires no formalities of expression, it may take effect over property real or personal, and over estates or interests legal or equitable, vested or contingent or, as in the case of future book debts, mere expectancies."

"… 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."

40. Re New Bullas was criticised by Professor Goode and has been held to be wrongly decided in Agnew, both by the Court of Appeal of New Zealand and by the Privy Council. Before turning to that case, I propose to consider those English decisions which are in conflict with Re New Bullas.
41. In re Brightlife Ltd involved a debenture which purported to create a "first specific charge" over all book debts. The debenture prohibited the chargor from dealing with the book debts "otherwise than in the ordinary course of getting in and realising the same" (see paragraph 22 above). Hoffmann J held that, despite the language used by the parties, the charge created fell to be categorised as a floating charge. He said at p. 209:

"In this debenture, the significant feature is that Brightlife was free to collect its debts and pay the proceeds into its bank account. 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."

42. Royal Trust Bank v National Westminster Bank [1996] 2 BCLC 682 involved a charge over the benefits of hire purchase and leasing agreements. The terms of the charge entitled the chargee to require payments under the agreements to be paid into a special account, but the chargee never in fact did so and the chargor paid them into its own bank account from which it drew for its own purposes. The issue was whether the funds in that account were subject to a trust in favour of the chargee. It was conceded that the charge itself was a fixed charge, but Millett LJ held that this concession was wrongly made. He observed at p. 704 that he did not see how it could be possible to separate a debt or other receivable from the proceeds of its realisation. He went on to find that, unless and until the chargee intervened, the chargor had a contractual right to apply the proceeds of the charged assets in the ordinary course of its business. This right was "a badge of a floating charge" and "inconsistent with the existence of a fixed charge". However, the view expressed by Millett LJ was not adopted by the other members of the court and was not essential to his determination of the issue before the court.
43. So far as the doctrine of precedent is concerned, therefore, there is no English decision which permits this court to disregard the decision of the Court of Appeal in Re New Bullas that it is possible to have a fixed charge over book debts notwithstanding that the chargor is entitled to collect and use the proceeds of the debts, which are agreed to be subject only to a floating charge.
44. In Re ASRS Establishment Ltd [2002] 2 BCLC 631 at p. 642 Robert Walker LJ remarked that Re New Bullas was a controversial decision which was "concerned with a very unusual provision…under which receivables were subject to a fixed charge until received but were then released so as to be subject merely to a floating charge". In Re Pearl Maintenance Services Ltd [1995] BCLC 449 at 454 Carnwath J held that a charge which left the chargor free to realise its book debts and use them in the ordinary course of its business was a floating charge. At p. 454 he had this to say of Re New Bullas:

"That decision has promoted considerable academic interest (see eg Goode 'Charges over book debts: A missed opportunity' (1994) 110 LQR 592 and Lightman & Moss Receivers (2^nd ed) at pp 35ff). However, the court in terms treated the case as turning on the specific wording of the clause in the debenture before it. It does not give any basis for revisiting the earlier authorities in cases where the debenture does not draw the same sharp distinction between the treatment of the book debts and their proceeds. Those authorities will have been consistently acted upon by draftsmen, receivers and others. Whatever the precise limits of the New Bullas approach, it offers no excuse (certainly at first instance) for introducing uncertainty in relation to forms of charge whose interpretation has been treated as settled.

In Chalk v Kahn [2000] 2 BCLC 361 at 366 Hart J distinguished Re New Bullas in the same way.

45. In the present case, Mr Philip Jones for the preferential creditors contended, without great enthusiasm, that Re New Bullas could be distinguished by confining its reasoning to debentures that draw a similar specific distinction between book debts and their proceeds. We do not consider that this course is open to us. In Agnew Lord Millett remarked at paragraph 45:

"Their Lordships agree with this to this extent: 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. 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 an essential step in upholding the decision of the Vice-Chancellor is to hold that a fixed charge over book debts cannot exist where the chargor is free to use the proceeds of those debts in the ordinary course of his business we can only take that step if it is open to us to hold that Re New Bullas was wrongly decided. It is time to consider why the Privy Council so held in Agnew.

The decision in Agnew

46. In Agnew the chargor company created a charge on book debts that was modelled on that in Re New Bullas. It was expressed to be "fixed" in favour of its bank, but left the chargor free to collect the debts when they fell due and to use the proceeds in the ordinary course of business.
47. In giving the advice of the Privy Council Lord Millett traced the jurisprudence relating to the nature of a floating charge, including Siebe Gorman and a number of decisions which followed it, which do not bind this court and to which I have yet to refer. He then set out the reasoning of Nourse LJ in Re New Bullas. At paragraph 34 he expressed the view that the reasoning could not 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 debenture. To find the consent in question in the original agreement would turn every floating charge into a fixed charge."

48. After reference to academic comment, Lord Millett continued (in paragraph 36):

"The judge considered that the critical distinction between a floating charge and a fixed charge lay in the presence or absence of a power on the part of the company to dispose of the charged assets to third parties. It was sufficient to create a fixed charge on book debts that the company should be prohibited from alienating them, whether by assigning, factoring or charging them. It was not necessary to go further and also prohibit the company from collecting them and disposing of the proceeds. Their Lordships cannot accept this. It is contrary to both principle and authority and their Lordships think to commercial sense. It is inconsistent with the actual decisions in the Brightlife case [1987] Ch 200 and the Supercool case [1994] 2 NZLR 300 and contrary to the statements of principle in virtually every case from In re Yorkshire Woolcombers Association Ltd [1903] 2 Ch 284 to In re Cosslett (Contractors) Ltd [1998] Ch 495. It makes no commercial sense because alienation and collection are merely different methods of realising a debt by turning it into money, collection being the natural and ordinary method of doing so. 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."

49. Lord Millett added at paragraph 46:

"While a debt and its proceeds are two separate assets, however, the latter are merely the traceable proceeds of the former and represent its entire value. A debt is a receivable; it is merely a right to receive payment from the debtor. Such a right cannot be enjoyed in specie; its value can be exploited only by exercising the right or by assigning it for value to a third party. An assignment or charge of a receivable which does not carry with it the right to the receipt has no value. It is worthless as a security. Any attempt in the present context to separate the ownership of the debts from the ownership of their proceeds (even if conceptually possible) makes no commercial sense."

50. Lord Millett concluded at paragraph 49:

"Before their Lordships the receivers insisted that the company had no power to withdraw either the book debts or their proceeds from the security of the fixed charge. The debenture was so drafted that the company had no need to do so. The debts were automatically extinguished by collection and their proceeds never became subject to a fixed charge. But this is simply playing with words. Whether conceptually there was one charge or two, the debenture was so drafted that the company was at liberty to turn the uncollected book debts to account by its own act. Taking the relevant assets to be the uncollected book debts, the company was left in control of the process by which the charged assets were extinguished and replaced by different assets which were not the subject of a fixed charge and were at the free disposal of the company. That is inconsistent with the nature of a fixed charge."

Commentary

51. Where book debts are payable forthwith, or after a short period of credit, a charge which prohibits alienation of the debts but leaves the chargor free to collect them and use the proceeds is of limited value as a security. The position is quite different where the debts in question are payable by instalments over lengthy periods, as is the case with hire purchase or credit sale agreements. In the latter case at any one time the vast majority of the book debts will not be susceptible to being withdrawn from the security by collection. The primary concern of the chargee is likely to be to ensure that he is not deprived of the bulk of his security by some form of alienation. A debenture which prohibits all forms of disposal of the security but which allows collection of the debts by the chargor when they fall due is a very different form of security from those which were described as floating charges in the early cases.
52. As I have demonstrated above, it seems to be the case that a chargee can enhance his security over book debts beyond that which would be provided by a simple floating charge if he imposes restrictions on disposing of them. It has, apparently, been suggested that such a charge is a third type of charge, neither fixed nor floating. The authors of Palmer's Company Law comment (13.115 – footnote 7) that "there is no conceptual or practical room for such third charge to be inserted between the other two".
53. So far as categorisation is concerned, it seems to me that there might have been scope for identifying, by way of a third category, a charge that prohibits disposal of book debts but permits the chargor to collect and use their proceeds. That course has not, however, been adopted by the courts and so it is necessary to decide whether such a charge falls to be categorised as a fixed or a floating charge. Nourse LJ in Re New Bullas considered that such a charge could properly be categorised as a fixed charge. The Privy Council in Agnew did not agree.
54. Agnew identifies as the definitive touchstone of a floating charge on book debts the unrestricted right of the chargor, prior to crystallisation, to collect and make use of the proceeds of the book debts. This not only conflicts directly with the decision in Re New Bullas but also conflicts indirectly with the decisions in Atlantic Computer Systems and Atlantic Medical.
55. The reasoning in Agnew is that the essential characteristic of the floating charge is that it leaves the chargor free to make use of the assets charged in order to continue to run the business. So long as he is free to use the proceeds of book debts for this purpose the charge is properly to be considered as floating over the book debts rather than fixed to them.
56. The reasoning in Re New Bullas is less satisfactory. Nourse LJ held that the parties could create a fixed charge over book debts, but not their proceeds, by so agreeing in terms. He did not analyse the nature of the respective rights and obligations involved in the agreement. He elided the two steps that Lord Millett rightly identified as essential to the categorisation of the nature of a charge.

The fetter of precedent

57. Is it open to this court to reach a decision which is incompatible both with the reasoning and the result in Re New Bullas? In Worcester Works Finance Ltd v Cooden [1972] 1 QB 210 the Court of Appeal held that it was not bound to follow decisions of the court which had been held to be wrongly decided by the Privy Council. Lord Denning MR held at p. 217:

"…although decisions of the Privy Council are not binding on this court, nevertheless when the Privy Council disapprove of a previous decision of this court, or cast doubt on it, then we are at liberty to depart from the previous decision. I am glad to depart from those earlier cases and to follow the Privy Council."

Phillimore LJ expressly and Megaw LJ by implication agreed with Lord Denning.

58. In Young v Bristol Aeroplane Company [1944] KB 718 the Court of Appeal gave detailed consideration to the doctrine of precedent and held that there were only three situations in which the Court of Appeal was not bound to follow one of its own decisions. Disapproval of the decision by the Privy Council was not one of them. In Davis v Johnson [1979] AC 264 the House of Lords reaffirmed "expressly, unequivocally and unanimously" that the rule laid down in Young v Bristol Aeroplane Company was still binding. The authors of Halsbury's Laws of England, 4^th Edition Reissue, Volume 37 paragraph 1242 footnote 6 express the view that this decision must be taken as nullifying earlier attempts to spell out further exceptions, including that in Worcester Works v Cooden Engineering. I agree. It is not open to this court to rule that Re New Bullas was wrongly decided. There can be little doubt however, that if and when this point falls for decision in the House of Lords their Lordships will so decide.
59. For this reason alone I am driven to conclude that the first stage in the reasoning of the Vice-Chancellor (see paragraph 6 above) cannot be supported.
60. I propose to proceed to consider the second stage in the Vice-Chancellor's reasoning. He concluded that, on the true construction of the debenture in this case, 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 and the effect in law of the debenture, so construed, was to create a floating charge. He went on to hold that Slade J should have reached the same conclusion on the similar wording of the debenture that was in issue in Siebe Gorman.

The decision in Siebe Gorman

61. The facts of Siebe Gorman were complex, indeed they occupy 12 pages of the judgment. Even so, there are aspects of the story which are not entirely clear. I shall attempt a short summary of the material facts, as I understand them.
62. R.H. McDonald Ltd ('the Company') carried on business as suppliers of safety equipment. On 5 January 1971 the Company granted to Barclays Bank ('the Bank') a debenture to secure payment or discharge of 'all monies and liabilities which shall for the time being…be due or owing or incurred to the Bank by the Company'. The terms of the debenture included the following:

"3. The Company as beneficial owner hereby charges with the payment or discharge of all monies and liabilities hereby covenanted to be paid or discharged by the Company:

…

(d) by way of first fixed charge all book debts and other debts now and from time to time due or owing to the Company;

(e) by way of a first floating charge all other the undertaking and assets of the Company whatsoever and wheresoever both present and future but so that the Company is not to be at liberty to create any mortgage or charge upon and so that no lien shall in any case or in any manner arise on or affect any part of the said premises either in priority to or pari passu with the charge hereby created and further that the Company shall have no power without the consent of the Bank to part with or dispose of any part of such premises except by way of sale in the ordinary course of its business.

5. …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 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."

63. The Bank opened a single account in the name of the Company – the 'A' account. It was subject to an overdraft limit. It was, from the outset, overdrawn and by February 1972 was at or near that limit. By this time the Company was indebted to Siebe Gorman in what was then the considerable sum of about £10,000.
64. On 24 March 1972 the Company assigned to Siebe Gorman bills of exchange and a letter of credit that were subject to the Bank's charge under the debenture. I shall refer to these instruments simply as 'the bills of exchange'. Siebe Gorman were aware of the existence of the charge. They also had constructive knowledge of it, as it was registered. They did not, however, have notice of the terms of clause 5(c) of the debenture.
65. By 6 April 1972 the overdraft on the 'A' account stood at £6,105, which was in excess of the overdraft limit. The Company then arranged a loan from a finance house, which was paid into the 'A' account. For a brief period this account went into credit, before lapsing again into debit.
66. On 1 May 1972 the Bank opened a new account for the Company – the 'C' account. The Bank transferred to the 'C' account, to the debit of the 'A' account, sums intended to represent the proceeds of some of the bills of exchange that had been received.
67. On 8 May 1972 the proprietor of the Company gave the Bank notice that he did not wish the Company's overdraft to be further increased. This led the Bank to decide that, for the time being, no further cheques drawn by the Company would be honoured. The Bank then transferred back to the 'A' account the sum standing to the credit of the Company in the 'C' account.
68. The Bank then opened a new account – the 'B' account, into which credits, and in particular further proceeds of bills of exchange, were paid. The Bank permitted the Company to draw on this account, but not to overdraw on it (with one brief and very minor exception).
69. On 30 June 1972 the Bank learned that the Company had been made subject of a winding-up petition. Thereupon it permitted no further drawings on the 'B' account and opened a further account, the 'D' account to receive credits. On 6 July the Bank appointed a receiver of all the property subject to its debenture and opened a further account, the 'E' account, to receive all further proceeds of the letters of credit.
70. The principal issue in the action was the extent to which the Bank could assert its charge over the proceeds of the bills of exchange that had been assigned to Siebe Gorman. The relevant issue, for present purposes, was whether the debenture created a fixed or a floating charge over the Company's book debts.
71. In considering the nature of the charge upon book debts created by clause 3(d) of the debenture Slade J first held, at p. 158, applying Tailby v Official Receiver (1888) 13 App Cas 523, that it was possible to create an equitable charge upon future book debts, which would attach to them as soon as they came into existence. He went on to consider whether the charge created over the book debts was a specific (i.e. fixed) or a floating charge.
72. After quoting the three characteristics of a floating charge identified by Romer LJ in Re Yorkshire Woolcombers Association (see paragraph 19 above). Slade J proceeded to examine whether all three existed in the case of the charge created by clause 3(d) of the debenture. He concluded that the first two characteristics were demonstrated, but that the third was not. In consequence, he concluded that the charge created was a specific or fixed charge and not a floating charge. I shall set out his reasoning at pp 158-9 in full:

"The charge on the book debts represented by the relevant bills in the present case clearly possesses the first two of these three characteristics. The dispute arises in regard to the third, The provisions of cl.5(c) of the debenture obliged the debtor, even before the bank had taken any steps to enforce its security, to pay into the debtor's account with the bank all moneys which it might receive in respect of the relevant bills and not without the prior consent of the bank in writing to purport to charge to assign the same in favour of any other person. Notwithstanding these provisions, Mr Phillips, on behalf of Siebe Gorman, submitted that it was plain in the context of the debenture that R.H. McDonald Ltd was intended, until the bank took steps to enforce its security, to be free to continue trading and to use the proceeds of its future book debts, including the relevant bills for the purposes of such trading. He submitted that there were a number of forms of dealing with future book debts which were not precluded by the terms of cl.5(c), for example dealings by way of barter, exchange or set-off, and that the sub-clause necessarily implied that the debtor had the right to deal with future book debts, save as thereby expressly precluded. He emphasised that, while according to the terms of cl.5(c) all the proceeds of future book debts would in the first instance have to go into the debtor's account with the bank, it must have been contemplated that R.H. McDonald Ltd would then be free immediately to draw out all those moneys for the ordinary purposes of its business, at least if such account was for the time being in credit.

In regard to the latter point, if I had accepted the premise that R.H. McDonald Ltd would have had the unrestricted right to deal with the proceeds of any of the relevant books 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. I refer to the respective definitions of a floating charge and a specific charge given by Lord Macnaghten in Illingworth v Holdsworth (1904) App. Ca. 355 at p.358:

"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."

If the debenture on its true construction had given the bank no rights whatsoever, at a time when the account of R.H. McDonald Ltd 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, 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. Such, I would conceive, is the effect of a charge on future book debts in the form more usually employed. Commonly it is intended, by both creditor and debtor, that the debtor shall have the free disposal of the proceeds of future book debts which may come into his hands, so long as the creditor takes no steps to enforce his security, or the charge has not otherwise crystallised.

In my judgment, however, it is perfectly possible in law for a mortgagor, by way of continuing security for future advances, to grant to 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 DLR 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 R.H. McDonald Ltd 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 R.H. McDonald Ltd."

73. This passage raises the following questions:

i) To what did Slade J refer when he drew a distinction between 'the particular account into which the proceeds of the book debts were paid' and 'any other indebtedness of R.H. McDonald Ltd to the Bank'?

ii) What was the nature of the restriction that Slade J held that the debenture placed upon the use by the Company of the proceeds of the book debts that were paid to the Bank?

iii) What provision or provisions of the debenture had the effect of imposing the restrictions in question?

'any other indebtedness'

74. Slade J appears to have envisaged that a situation might develop in which one account might exist, into which the proceeds of book debts were paid, standing in credit, while other accounts or dealings might co-exist, giving rise to indebtedness to the Bank on the part of the Company. Such a situation can arise. A bank and its customer can agree to the creation of independent accounts governed by different terms and one can stand in credit, affording security for another that is in debit – see Halesowen Presswork & Assmblies Ltd v Westminster Bank Ltd [1971] 1 QB 1; Re Bank of Credit and Commerce International SA (No 8) [1998] AC 214. It is possible that such a situation in fact developed in the latter stages of the dealings that I have described above.
75. There are, of course, many situations in which a customer may become actually or potentially indebted to its bank notwithstanding that its current account stands in credit.

The restriction on the use of the proceeds of book debts

76. Slade J did not accept the premise that the Company 'would have had the unrestricted right to deal with the proceeds of any relevant book debts paid into its account, so long as that account remained in credit' – p. 158. The nature of the restriction that he envisaged appears at p. 159. 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' [emphasis mine]. The phrase 'assert its lien' is imprecise – see the comments of Lord Denning MR at p. 33 and Buckley LJ at p. 46 in Halesowen.
77. My understanding of this passage of Slade J's judgment is as follows. Under the terms of the debenture the Bank would be entitled to decline to honour cheques drawn when the account into which the proceeds of book debts was paid was in credit if there existed other actual or potential indebtedness on the part of the Company towards the Bank.
78. In Agnew at paragraph 20 Lord Millett made the following comment on Siebe Gorman:

"Slade J held that the critical feature which distinguished a floating charge from a fixed charge was not the fluctuating character of the charged assets but the company's power to deal with them in the ordinary course of business. He found that, on the proper construction of the debenture, the company was not free to draw on the account without the consent of the bank even when it was in credit. Accordingly, he held that the charge on the uncollected book debts and their proceeds was a fixed charge."

In paragraph 38 he commented:

"The judge gave two examples of fixed charges over assets which are defeasible at the will of the chargor. One was a charge over uncalled share capital; the other was a shipowner's lien on subfreights. With respect neither supports his argument. 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 the Siebe Gorman case [1979] 2 Lloyd's Rep 142 and did obtain in In re Keenan Bros Ltd [1986] BCLC 242. The company can collect the money, but it is not free to use it as it sees fit."

The words that I have emphasised indicate, perhaps, doubt on the part of Lord Millett as to whether Slade J correctly construed the effect of the debenture in Siebe Gorman.

79. Finally in paragraph 48 Lord Millett said:

"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. The Siebe Gorman case [1979] 2 Lloyld's Rep 142 and In re Keenan Bros Ltd [1986] BCLC 242 merely 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. "

80. I shall have to revert to this last important passage. At present I am only concerned with identifying the nature of the restriction that Slade J concluded was placed by the debenture that he was considering over the use of the proceeds of the book debts that were paid into the Company's account.
81. In Agnew Lord Millett equated Siebe Gorman with In re Keenan. The latter case was a decision of the Supreme Court of Ireland. That case concerned a charge in a debenture in favour of a bank which prohibited a company from disposing of its book debts, permitted it to collect the proceeds of those debts, but required it to pay those proceeds into a designated account with the bank from which the company was not permitted to make any withdrawals without the written consent of the bank. Lord Millett commented in paragraph 22:

"The critical feature which led the court to characterise the charge on the book debts as a fixed charge was that their proceeds were to be segregated in a blocked account where they would be frozen and rendered unusable by the company without the bank's written consent."

82. Lord Millett stated in paragraph 48 that in both Siebe Gorman and in Re Keenan the proceeds of the debt were required to be paid into 'a blocked account with the charge holder'. This suggests that he concluded that in Siebe Gorman Slade J had held that the book debts had to be paid into an account with the Bank upon which the Company could not draw without the express consent of the Bank. If this was his conclusion, I respectfully dissent from it. It seems to me that Slade J held that, under the terms of the debenture, the Company would be entitled to draw on its account when in credit unless the Bank chose to exercise its right to block the account in order to secure other obligations of the Company to the Bank. That was the limited nature of the restriction that was, according to Slade J, placed on the use that the Company could make of the proceeds of its book debts.

How did the wording of the debenture give rise to the restriction?

83. Slade J at p. 159 contrasted the debenture with which he was concerned with 'the charge on future book debts in the form more usually employed' which expressed the intention 'that the debtor shall have the free disposal of the proceeds of future book debts which may come into his hands, so long as the creditor takes no steps to enforce his security, or the charge has not otherwise crystallised'. What did Slade J consider to be the unusual features of the debenture with which he was concerned? It seems to me that they were (i) the provision in clause 3(d) that the charge on book debts should be a fixed charge and (ii) the requirements of clause 5(c) including, in particular, the requirement that the proceeds of all book debts should be paid into an account with the Bank. It was these features which led Slade J to conclude that the debenture gave the Bank the right, if it chose, to prevent the company from drawing on the account into which the book debts were to be paid, even where that account was in credit.

Discussion

84. In the present case the Vice-Chancellor was driven by the reasoning in Agnew to conclude that Siebe Gorman was wrongly decided. He gave the following explanation at paragraph 39 for his conclusion that Slade J had fallen into error:

"… 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."

85. I agree with the Vice-Chancellor that the intention in Siebe Gorman was that the Company should continue to draw on the account with the Bank into which the proceeds of book debts were being paid. The issue, however, is whether Slade J was correct to conclude that the Bank had a contractual right under the terms of the debenture to decline to continue to honour cheques drawn on that account, even if it should be in credit. That conclusion was premised, at least in part, on the possibility that there might be other indebtedness of the Company to the Bank which the Bank might wish to secure.
86. In my judgment the crucial issue of principle is whether the restrictions imposed by a debenture in the terms of the debenture in Siebe Gorman on the use that the chargor can make of the proceeds of the book debts charged are sufficient in law to create a fixed charge on those debts. But for the obstacle of the decision in Re New Bullas, the decision of the Privy Council in Agnew would surely lead this court to the conclusion that an unrestricted freedom on the part of a chargor to use the proceeds of book debts charged necessarily means that the charge cannot properly be described as a fixed charge. Thus the effect of the debenture on the use that can be made of the proceeds of book debts is of vital significance.
87. In comparing the present case to Agnew the Vice-Chancellor observed at paragraph 37:

"As Lord Millett pointed out in paragraph 36, 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."

I consider that the fact that the debenture required the proceeds of book debts to be paid into an account at the chargee bank was of critical importance in Siebe Gorman and is of critical importance in the present case.

88. The starting point is the classic exposition by Lord Cottenham LC of the relationship of banker and customer in Foley v Hill (1848) 2 HLC 28 at p. 36:

"Money, when paid into a bank, ceases altogether to be the money of the principal (see Parker v Marchant, 1 Phillips 360); it is then the money of the banker, who is bound to return an equivalent by paying a similar sum to that deposited with him when he is asked for it. The money paid into the banker's custody is money known by the principal to be placed there for the purpose of being under the control of the banker; it is then the banker's money; he is known to deal with it as his own; he makes what profit of it he can, which profit he retains to himself, paying back only the principal, according to the custom of bankers in some places, or the principal and a small rate of interest, according to the custom of bankers in other places. The money placed in the custody of a banker is, to all intents and purposes, the money of the banker, to do with it as he pleases; he is guilty of no breach of trust in employing it; he is not answerable to the principal if he puts it into jeopardy, if he engages in a hazardous speculation; he is not bound it keep it or deal with it as the property of his principal, but he is of course answerable for the amount, because he has contracted, having received that money, to repay to the principal, when demanded, a sum equivalent to that paid into his hands."

89. Thus, where the proceeds of book debts owed to the customer of a bank are paid into that customer's account with the bank, title to those proceeds passes absolutely to the bank. The obligations that the bank comes under to the customer as a result of receiving those proceeds depend upon the terms of the contract between the customer and the bank. Insofar as the customer is entitled to call upon the bank to pay over the amount of the proceeds received, the right will be contractual, not proprietary. There is no reason why the customer's right to call for such payment should not be restricted by contract.
90. Where a bank honours cheques drawn by a customer on an overdrawn account, the bank thereby loans the customer the amount in question – see Coutts & Co v Stock [2000] 2 All ER 56 at p. 59. It is common for bank and customer to agree the terms upon and the extent to which a bank will lend the customer money in this way. Thus it is common for a bank to impose an overdraft limit on a customer's account.
91. If the proceeds of debts owed to a customer are paid into an account which is overdrawn, their receipt by the bank will discharge, to the extent of the amount paid in, the debt to the bank represented by the overdraft. Where there is an overdraft limit the payment in will, to the extent of the amount paid in, enable the customer to make a further withdrawal from the overdrawn account.
92. Having regard to these considerations I turn to consider the following questions in relation to the Siebe Gorman decision:

i) Was Slade J right to construe the debenture as restricting the Company's freedom to draw on the account into which the proceeds of book debts were paid when that account was in credit? If so:

ii) Did the existence of that restriction justify Slade J in concluding that the charge on book debts fell to be categorised as a fixed charge?

iii) Should the decision in Siebe Gorman be followed today?

93. Dealing with the first question, I consider that it was open to Slade J to conclude that the effect of the provisions of the debenture, which appears to have been in a novel form, imposed on the Company the restriction on the use of the account into which the proceeds of book debts had to be paid that I have set out in paragraph 82 above. The Vice-Chancellor is correct to point out that he gave weight to the intention of parties that the charge should operate as a fixed charge, but I do not understand that the approach to construction laid down by Lord Millett in Agnew precludes the court from giving weight to such an intention when construing the restrictions placed upon a chargor by a debenture.
94. Turning to the second question, I do not consider it satisfactory that the limited restraint that Slade J held arose under the debenture should be the critical factor in determining whether the charge should be categorised as a fixed or a floating charge. 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 amounts 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 a lender or as a borrower, from the bank. The extent to which, at any moment in time, a bank is contractually bound to permit a customer who has charged his book debts to make withdrawals which are back to back with the amounts of book debts collected will depend upon the terms of the contract between banker and customer and possibly on the financial consequences of mutual dealings. It is not satisfactory that the categorisation of a charge created by a debenture should turn upon the precise details of a bank's relationship with its customer.
95. Furthermore, in a case such as the present, it is wholly artificial to ask the question, would the Company be entitled to draw freely on its account if in credit? The sole object of the transaction was that the Bank should provide working capital for the Company by lending it money. The account that was to be set up was, in effect, a loan account. No provision was made, by way of provision of interest or otherwise, to cater for the possibility that the account would go into credit. In the result payment of book debts into the account were received beneficially by the Bank by way of partial repayment of the indebtedness of the Company to the Bank. The Company never had any control of these proceeds. It was bound to permit them to be used to reduce its indebtedness. Admittedly it then had, until withdrawn, the contractual right to borrow from the Bank up to the overdraft limit, but as a matter of strict analysis that did not mean that the charge on the book debts remained floating.
96. Thus my conclusion is that Slade J could properly have held the charge on book debts created by the debenture to be a fixed charge simply because of the requirements (i) that the book debts should not be disposed of prior to collection and (ii) that, on collection, the proceeds should be paid to the Bank itself. It follows that he was certainly entitled to hold that the debenture, imposing as he found restrictions on the use of the proceeds of book debts, created a fixed charge over book debts.
97. I turn to the third question. For twenty five years parties have used the form of debenture used in Siebe Gorman under the understanding that its meaning and effect were those held by Slade J. Not only will banks have relied upon this understanding, individuals will have guaranteed the liabilities of companies to banks on the understanding that the banks would first be entitled to look to their charges on book debts, unaffected by the claims of preferred creditors. In these circumstances, even if Slade J's construction of the debenture had appeared erroneous, I would have been inclined to hold that the form of debenture in question had, by customary usage, acquired the meaning and effect that he had attributed to it.
98. For all these reasons, I would allow this appeal.

Postscript

99. This is an unsatisfactory area of the law. For 25 years, by following the example of the Bank in Siebe Gorman, banks have succeeded in providing working capital to enable companies to continue to trade, while maintaining a fixed charge over their book debts. Banks have undoubtedly been able to do this in other ways also. For instance it would seem beyond dispute that a requirement to pay book debts into a blocked account will be sufficient restriction to render a charge over book debts a fixed charge, even if the chargor is permitted to overdraw on another account, into which from time to time transfers are made from the blocked account. That was precisely the position in In re Keenan Bros Ltd.. Priorities in the event of insolvency should not turn upon the technical skill with which the bank accounting arrangements have been set up. Professor Goode recommends 'structured personal property security legislation' of a type to be found in other common law jurisdictions. This appeal may underline the desirability of such legislation.

Lord Justice Jonathan Parker:

100. I agree.

Lord Justice Jacob:

101. I also agree.