England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
(MISS SUSAN PREVEZER QC)
No 328 2006

		Royal Courts of Justice Strand, London, WC2A 2LL
		29/11/2007

Sir John Chadwick :

1. This is an appeal and cross-appeal from the order made on 6 November 2006 by Miss Susan Prevezer QC, sitting as a Deputy Judge of the High Court in the Chancery Division, on a preliminary issue in proceedings brought under section 112(2) of the Insolvency Act 1986 by the liquidators of Oval 1742 Limited ("the Company"). The parties to the preliminary issue were two of the respondents to those proceedings, HM Commissioners of Customs and Excise (now HM Commissioners for Revenue and Customs and hereafter "the Commissioners") and The Royal Bank of Scotland Plc ("RBS").
2. RBS is the holder of a debenture ("the Debenture") issued by the Company on 22 December 1999. It was agreed, for the purposes of the preliminary issue only, that the charge over book debts in the Debenture was to be treated as a charge which, as created, was a floating charge. The Commissioners were creditors of the Company in respect of unpaid value added tax. Part of that debt (at least) was a preferential debt in the liquidation of the Company. In substance, the issue before the judge, defined by an order made on 13 April 2006, was whether, in the events which had happened, the interest of RBS (under the floating charge) in book debts sold and transferred by the Company to subsidiaries immediately before it ceased to trade was subject to a prior claim of Customs (as a preferential creditor) under section 196 of the Companies Act 1985 or section 175 of the Insolvency Act 1986

The underlying facts

3. The underlying facts are fully set out by the judge in her judgment [2006] EWHC 2813 (Ch). For the purposes of this appeal they may be summarised as follows:

(1) The Company was incorporated on 30 September 1999 under the Companies Act 1985. It carried on business from premises in London, Bristol and Manchester. It was engaged in the production of high quality moving images for use in films, videos and television programmes. By the middle of 2002 it was experiencing financial difficulties. On 2 August 2002 the board of directors resolved that the Company was insolvent and should cease to trade. Notice of a shareholders' meeting to consider winding up was given on 8 August 2002. On 5 September 2002 the shareholders resolved that the Company should be wound up voluntarily. Joint liquidators were appointed by a creditors' meeting held immediately thereafter.

(2) In contemplation of the cessation of trade and the subsequent winding up the Company formed or acquired two subsidiaries, 422 Limited and 422 Manchester Limited (together "the 422 companies"); sold and transferred its business and assets to those subsidiaries; and sold all the shares in those subsidiaries to a third party purchaser, Barcud Derwen Limited ("Barcud"). Those sales were completed on 2 August 2002. Under the terms of the agreements between the Company and the 422 companies ("the hive down agreements"), there was payable by the 422 companies (i) immediate sums of £595,000 in aggregate and (ii) further deferred consideration (up to a maximum of £365,000 in aggregate) as and when the book debts and work in progress transferred by the Company were collected. The amount of the deferred consideration, if not paid in full by 29 November 2002, was reduced by £1 for each £1 of the debts and work in progress which remained uncollected on that day. Further, any book debts formerly owing to the Company which remained uncollected on 29 November 2002 were to be assigned by the 422 companies to RBS by 6 December 2002.

(3) The hive down agreements provided that the immediate payment of £595,000 was to be paid to the solicitors (Osborne Clarke) as was the deferred consideration. The solicitors - who were acting for the Company in connection with the hive down and sale - gave undertakings to RBS in a letter dated 1 August 2002 in these terms:

"We refer to the purchase by Barcud Derwen Limited ('the Purchaser') of the entire issued share capital of 422 Limited and 422 Manchester Limited from the Company ('the Transaction'). Conditional upon completion of the Transaction and receipt by us of £595,000 in cash consideration payable by the Purchaser on completion, we hereby undertake to remit to you the sum of £487,338.64 forthwith after completion.

We further undertake to remit to you within 2 working days of receipt all collections received by us from or on behalf of the Purchaser by way of Deferred Consideration (as defined in the supplemental hive down agreements dated 2 August 2002 and made between the Company and each of 422 Limited and 422 Manchester Limited) until your indebtedness is discharged, subject to the retention by us of the sum of £2,500 for each £100,000 received by us, up to a maximum of £10,000."

(4) As at 2 August 2002 the amount owing to RBS by the Company and secured by the Debenture was £954,653.14. On 2 August 2002 RBS executed a deed of release ("the Release") in the following terms:

"The Royal Bank of Scotland Plc ('the Bank') hereby releases all of the property comprised within the definitions of 'Assets' in each of (i) the supplemental hive-down agreement between (1) Oval 1742 Limited (formerly 422 Limited) (company Number 03851258) ('the Company') and (2) 422 Limited (formerly Oval (1742) Limited) (company number 4449042) and dated 2 August 2002 and (ii) the supplemental hive-down agreement between (1) the Company and (2) 422 Manchester Limited (formerly Oval (1741) Limited) (company number 4449045) and dated 2 August 2002 and attached hereto (the 'Released Property') from the charges created by the Debenture dated 22 December 1999 ('the Mortgage Debenture') between (1) the Company and (2) the Bank and from all other charges which the Bank may hold over the Released Property.

Nothing herein contained shall prejudice or affect the security of the Bank under the Mortgage Debenture in respect of the remaining property comprised therein or the obligations of the Company or the rights of the Bank thereunder and for the avoidance of doubt subject to this release the Mortgage Debenture will remain in full force and effect.

The Deed of Release will be dependent upon the Bank receiving cleared funds of £487, 338.64."

(5) Pursuant to the arrangements which I have described: (i) £595,000 was paid to Osborne Clarke on 2 August 2002, on completion of the hive downs and sale; (ii) the solicitors paid £487,338.64 to RBS shortly after completion, in accordance with their undertaking; (iii) between 2 August 2002 and 29 November 2002 the solicitors received payments in excess of £200,000 in respect of deferred consideration from the 422 companies; (iv) the solicitors paid a further £202,191.43 to RBS before 29 November 2002 in accordance with their undertaking; (v) by deeds of assignment dated 16 December 2003 the 422 companies assigned to RBS their interests in the uncollected book debts formerly owed to the Company; and (vi) RBS received a further £50,278.20 from the collection of those book debts after 6 December 2002. The sums received by RBS were applied in reduction of (but not so as to extinguish) the Company's indebtedness under the Debenture.  

4. On 7 August 2002 Osborne Clarke wrote to Mr Andrew Beckingham, one of the proposed joint liquidators (who were to be appointed on 5 September 2002), in these terms:

"You will be aware that the business and assets of the Company were sold to Barcud Derwen Limited on 2 August 2002. The proceeds of sale (less some costs and expenses) were passed to the Royal Bank of Scotland pursuant to their fixed and floating charge over the Company's assets contained in their Debenture dated 22 December 1999. Some future deferred consideration will also be paid to them to the extent of their indebtedness.

In our opinion, it is strongly arguable that a substantial portion of the proceeds of sale constitute floating charge realisations. We have written to the Royal Bank of Scotland reminding them of their duties under section 196 Companies Act 1985 and section 175 Insolvency Act 1986. We have also written to the preferential creditors in similar terms to this letter."

The statutory provisions

5. Sections 196 of the Companies Act 1985 and 175 of the Insolvency Act 1986 are in these terms (so far as material):

"196(1) The following applies, in the case of a company registered in England and Wales, where debentures of the company are secured by a charge which, as created, was a floating charge.

(2) If possession is taken, by or on behalf of the holders of any of the debentures, of any property comprised in or subject to the charge, and the company is not at that time in course of being wound up, the company's preferential debts shall be paid out of the assets coming to the hands of the person taking possession in priority to any claims for principal or interest in respect of the debentures.

(3) 'Preferential debts' means the categories of debts listed in Schedule 6 to the Insolvency Act; and for the purposes of that Schedule 'the relevant date' is the date of possession being taken as above mentioned."

"175(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) . . . ; 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 charges created by the company, and shall be paid accordingly out of any property comprised in or subject to that charge."

I should add, for completeness, that section 386 of the Insolvency Act 1986 defines preferential debts as the debts listed in Schedule 6 to that Act; and that, at the relevant time, those debts included value added tax referable to the period of six months next before the relevant date (paragraph 3 of that schedule, repealed with effect from 15 September 2003 by the Enterprise Act 2002).

6. The judge observed that it was common ground between the parties that, as the Company went into liquidation on 5 September 2002, the application of section 196 of the 1985 Act (in so far as the section had any application in the events which had happened) was limited to the non-deferred consideration received by RBS on 5 August 2002 (£487,338.64) and to so much of the deferred consideration (if any) as was received by RBS after that date but prior to 5 September 2002. Section 175 of the 1986 Act was in point (if at all) in relation to non-deferred consideration received by RBS after 5 September 2002.

These proceedings

7. These proceedings were commenced by originating application issued by the joint liquidators on 3 November 2003. By that application the liquidators invited the court to determine (i) whether the assets of the Company sold under the hive down agreements (including, in particular, the debts and work in progress) were subject to a fixed or a floating charge immediately prior to the sale and (ii) to the extent that those assets were subject to a floating charge, whether RBS was liable to account for the proceeds of sale to the liquidators and (or in the alternative) to the Commissioners. On the application of RBS it was ordered on 13 April 2006 that it be determined as a preliminary issue whether the Commissioners had any real prospect of establishing that section 196 of the 1985 Act and section 175 of the 1986 Act had any application in the events which had happened. For the purposes of that preliminary issue it was agreed that the charge in the Debenture be characterised as a floating charge.
8. Save in relation to sums received by RBS under the assignments in its favour dated 16 December 2003, the judge determined that preliminary issue in favour of the Commissioners. She held (i) that receipt by RBS of the non-deferred consideration amounted to the taking of possession of property comprised in or subject to the floating charge for the purposes of section 196 of the 1985 Act; (ii) that receipt by RBS of so much of the deferred consideration as was paid to it prior to the commencement of the liquidation of the Company on 5 September 2002 also amounted to the taking of possession comprised in or subject to the floating charge for the purposes of section 196; and (iii) that (save in respect of sums received under the December 2003 assignments) section 175 of the 1986 Act was applicable to sums received by RBS in respect of so much of the deferred consideration as was paid to it after the Company went into liquidation on 5 September 2002. But, as the judge held, RBS was entitled to retain sums received by it under the December 2003assignments. The order made by the judge on 6 November 2006 reflects those conclusions. She gave both RBS and the Commissioners permission to appeal from that order.

The judge's reasons

9. The judge directed herself (at paragraph [24] of her judgment) that the first question that she needed to resolve, in the context of section 196 of the 1985 Act, was whether payment by a company out of assets comprised in or subject to a charge constituted the "taking of possession" of those assets.
10. The judge had been referred to the decision of Mr Justice Goff in Inland Revenue Commissioners v Goldblatt [1972] Ch 498. She summarised the facts of that case at paragraph [25]:

"[25] . . . In that case, the debenture-holder had first appointed a receiver who, although he had taken possession of the assets subject to the charge, had not complied with his duty under section 94 of the Companies Act [1948] (as it then was) to pay the priority debts. The debenture-holder had then discharged the receiver, and entered into an agreement with the company whereby the company assigned assets (which it was held were subject to the charge) and made a payment of just over £6,000 to the debenture-holder to be accepted in full satisfaction of all his claims under the debentures."

The judge noted that Mr Justice Goff had rejected the submission that, in receiving the property and money subject to the charge, the debenture holder had not "taken possession" so as himself to come under a duty to pay preferential creditors. She went on to say this:

"[28] . . . [It] seems to be right that the debenture-holder cannot avoid the application of section 196 merely by taking care that it should obtain possession of the relevant assets otherwise than by the exercise of a power under the debenture. To the extent that Mr Atherton, on behalf of RBS, suggested that Section 196 applies only when some enforcement of the charge in question has taken place by the chargee or at least some entitlement to enforce the charge has arisen, I reject that argument. There is nothing in Section 196 to this effect or which would suggest such a gloss. . . .

[29] The application of Section 196 does not depend upon who has conduct of the realisation of the charged assets. In my view, there is considerable force in Mr Girolami's submission that one must bear in mind when construing Section 196 that the section is not concerned with land but with floating charges and assets subject to a floating charge. It is impossible to enforce a charge over a receivable or other choses in action, classically the subject of a floating charge, by the act of 'taking possession' [of] the receivables or choses in question. All one can do is receive or possess their proceeds.

[30]. On the other hand, it seems to me to be stretching the language and purpose of the section considerably if one holds that every time a company pays a debenture-holder and uses, as a source of that payment, assets which are subject to a charge, the debenture-holder 'takes possession' of those assets. The extreme circumstances which were present in Goldblatt's case do not necessarily decide that issue and I would be reluctant to conclude that in every case where the company pays the debenture-holder out of assets subject to a floating charge, Section 196 applies. In effect, where a floating charge is widely drawn to apply to most or all of a company's assets, that would mean that every time a debenture holder ever received a payment he would be obliged to inquire into the possibility that priority creditors ought to be paid. It does not seem to me that this was the intention of the section. The primary focus of section 196 - as originally drafted - and of Section 196 in conjunction with section 40 of the Insolvency Act 1986, as they now stand, is on acts which amount to the realisation of the security interest conferred by the floating charge. Nor does it seem to me to be a natural use of language. If X is paid a sum of money by Y, one would not normally or naturally describe that as a case where X had 'taken possession' of Y's money.

[31]      Nevertheless, if Section 196 is to be effective, then attention has to be paid to the substance of what is done and not merely to its form. It may be, as Goldblatt's case demonstrates, that something that is in form a voluntary or consensual act to discharge the indebtedness to the debenture-holder nevertheless operates in such a way as to be tantamount to the debenture-holder 'taking possession'. Where, for example, the debenture holder is positively and actively involved in the transaction(s) whereby payment is made to it of monies which are subject to its floating charge, then this may amount to 'taking possession', the emphasis there being on the 'taking' of possession. I say this because where a floating charge has not crystallised or its crystallisation is not imminent, a debenture holder arguably does not have to do anything in order to be paid. No release of its floating charge is necessary; the company can dispose of its assets in the ordinary course of its business and then simply pay the debenture holder out of the proceeds. However, if the debenture holder is being asked expressly to release its charge over certain assets in anticipation that on the sale by the company of those assets the floating charge will in fact or is likely to crystallise, and the debenture holder and the company come to an arrangement whereby particular monies, subject to the floating charge, are earmarked to be used to pay the debenture holder, then it can be said to be 'taking' possession of those monies. In such circumstances, it may be said that the arrangement between the company and the debenture holder, in substance, puts the parties in the same position as if a Receiver had been appointed and had taken possession of those assets. Obviously, not every payment made to discharge liability will have that character and in each case one must look at the substance of the transaction.

[32] . . . It seems to me wrong, in principle . . . to suppose that Section 196 alone has the practical consequence that every payment to a debenture holder whose rights are secured by a floating charge carries with it an obligation on the part of that debenture-holder to apply all sums received to pay preferential creditors. Some line has to be drawn between acts which are, in substance (whatever their form), acts by which the charge-holder realises the security and acts which are (in substance) no more than the ordinary discharge of the debtor's liability."

11. I have set out those paragraphs of the judge's reasoning at some length because they identify the problem (as the judge saw it) if the phrase "possession is taken, by . . . the holders of any of the debentures, of any properly comprised in or subject to the charge" is construed so as to include a case in which the debenture holder is paid out of the proceeds of book debts subject to the floating charge. In the context of a standard bank debenture, it can be expected that payments made by the company to the credit of its account with the bank in the ordinary course of trade will be payments made out of the proceeds of book debts subject to the floating charge: indeed, the terms of the debenture may well require that all trade receivables are paid to the credit of the company's bank account. But the conclusion that section 196 of the 1985 Act applied to all those payments – so as to impose on the bank an obligation to satisfy the company's preferential debts out of payments received to the credit of the company's bank account in the ordinary course of trade – would (to say the least) be surprising. The problem was to draw a line between "acts which are, in substance (whatever their form), acts by which the charge-holder realises the security and acts which are (in substance) no more than the ordinary discharge of the debtor's liability." The solution, as the judge held, lay in the need to look at the substance of each transaction.
12. The judge asked herself whether, immediately before the payment of £487,338.64 was made to RBS on 5 August 2002, the non-deferred consideration (£595,000) was properly to be regarded as "property comprised in or subject to the charge". She held that it was. In that context "the charge" was the charge which, as created by the Debenture, was a floating charge. The judge noted that (by its terms) the Release was not intended to and did not have effect until RBS had received £487,338.64 in cleared funds. It followed that, between 2 August 2002 – the date on which there was a transfer of assets from the Company to the two 422 companies under the terms of the hive down agreements – and 5 August 2002, the property subject to the charge included the book debts (respectively £547,328 and £512,672) owed to the Company by the two 422 companies under those agreements. Those book debts included the amount payable by way of non-deferred consideration.
13. The judge then asked herself whether, in receiving the sum of £487,338.64 on 5 August 2002, RBS was to be regarded as "taking possession" of part of the non-deferred consideration. Again, she held that it was. Her reasoning appears at paragraphs [43] and [44] of her judgment:

"[43] What happened in the present case can not be characterised . . . as simply a payment to RBS of its debt in the ordinary course of the Company's business nor did it amount to a redemption of the bank's charge.

[44] . . . The Company and RBS agreed, in the face of the impending crystallisation of RBS's floating charge over the Company's assets (which happened at the very latest when the Company resolved to cease trading on 5 September 2002, but more likely would have been determined as having occurred on the sale of the Assets to the 422 Companies), that RBS would be paid out of the proceeds of the sale of the Assets. Thereafter RBS participated in the arrangements whereby these particular monies were applied to discharge its debt, The position is almost indistinguishable to that in IRC v Goldblatt."

14. In reaching that conclusion the judge held that the analysis was not affected by the fact that the £487,338.64 was received by RBS from Osborne Clarke pursuant to the undertaking which those solicitors had given in their letter of 1 August 2002. She observed (at paragraph [45] of her judgment) that she must look at the substance of the transaction, not its form: what had occurred in the present case, in substance, was the realisation of RBS's security. She said this:

"[45] . . . In fact, the wording of the Undertaking . . . implicitly recognises RBS's rights over the monies received by the Solicitors from Barcud/the 422 companies. Contrary to RBS's submissions, the Undertaking does not create a separate contractual entitlement on the part of RBS to receive the monies from the Company (and held by the Solicitors on the Company's behalf); rather the Undertaking recognises RBS's existing entitlement to the monies subject to its Charge and the Solicitors' agreement to transfer such monies to RBS on their receipt from Barcud/the 422 Companies."

Nor was the analysis affected by the fact that the non-deferred consideration (including the £487,338.64 received by RBS) was funded by Barcud. As the judge put it (at paragraph [46]):

"[46] . . . Barcud was the purchaser of the entire issued share capital of the 422 companies. It was clearly discharging the debts owed by the 422 Companies to the Company."

15. The judge applied the same analysis to that part (if any) of the deferred consideration received by the solicitors and paid to RBS between 5 August and 5 September 2002 (the date on which the Company went into liquidation). She pointed out that (save to the extent that they were discharged by payment on 5 August 2002) the book debts owed by the two 422 companies under the hive down agreements remained subject to the charge created by the Debenture after the Release took effect on that date. The Release contained the proviso that "Nothing herein contained shall prejudice or affect the security of the Bank under the Mortgage Debenture in respect of the remaining property comprised therein". In that context, "the remaining property" comprised property other than the assets transferred by the Company to the two 422 companies under the terms of the hive down agreements. It followed that, in receiving monies from the solicitors pursuant to their undertaking after 5 August 2002, RBS was to be regarded as "taking possession" (pro tanto) of the deferred consideration. In so far as those monies were received by RBS before the commencement of liquidation, they were caught by section 196 of the 1985 Act.
16. The judge accepted that it was unclear on the evidence whether any (and, if so, what) part of the deferred consideration actually received by the solicitors was received before 5 September 2002. To the extent that the deferred consideration was not received by the solicitors before 5 September 2002, it was received, and (in part) paid to RBS, between 5 September and 29 November 2002. But, in the judge's view, that made no difference to the outcome: to the extent that the monies received by RBS before 29 November 2002 were received after 5 September 2002, they were caught by section 175 of the 1986 Act. The judge's reasoning appears at paragraphs [51] to [53] of her judgment:

"[51] Further, to the extent that it is not clear on the evidence whether the whole or only part of the £202,191.43 was received before or after 5 September, I accept the Commissioners' submission that it does not in fact matter because the result is the same whether Section 196 Companies Act [1985] or Section 175 Insolvency Act 1986 applies to these monies. The only substantive difference between the two sections is that Section 175 contains no concept of 'taking possession' and the manner in which the charged assets came to be realised under Section 175 is irrelevant. In my view, RBS in fact 'took possession' of the whole of the £202,191.43 for the same reasons I find that it 'took possession' of the Non Deferred Consideration. Accordingly, to the extent that any part of the £202,191.43 was realised after 5 September 2002, in my view it is caught by Section 175.

[52] The [£202,191.43] was received by RBS from the Solicitors on the Company's behalf in accordance with the Undertaking. It is quite clear from Clause 4.1 of the Supplemental Hive-down Agreements that this Deferred Consideration was consideration which was due to the Company from the 422 companies (but not then payable) on the execution of the Supplemental Hive-down Agreements, namely on 2 August 2002.

[53]. During the period between 5 August 2002 and 29 November 2002, as between the Company and the 422 companies, the Deferred Consideration was being paid by the 422 companies to the Company in discharge of their debts, over which debts RBS had retained its floating charge. RBS realised its security over these monies by the mechanism agreed with the Company, namely by the operation of the Undertaking. Its receipt of these monies was however referable to its entitlement to them by virtue of its debenture."

17. The position was different in relation to the monies (£50,278.20) realised by RBS itself from the proceeds of collection of the uncollected book debts which were assigned to it by the 422 companies on 16 December 2002. As the judge explained, on the assignment of those book debts RBS did not receive any property "comprised in or subject to" its floating charge. The two 422 companies assigned to RBS book debts owed to those companies. At the time of the assignment RBS had no charge over those debts. The charge over those debts which RBS had enjoyed when (prior to the transfer of assets under the hive down agreements) the debts were owed to the Company had been released on 5 August 2002. So section 175 of the 1986 Act could have no application to those monies.

This appeal

18. RBS, by an appellant's notice filed on 4 December 2006, appeals from the declarations in paragraph 1 of the order of 6 November 2006: that is to say, from declarations which reflect the conclusions summarised under (i), (ii) and (iii) in paragraph [8] of this judgment.
19. The grounds of appeal advanced on behalf of RBS are set out, at some length, in an annex to the appellant's notice; but they are summarised under three heads at paragraph 9 of outline submissions dated 18 December 2006 which were filed on its behalf. In summary, it is said, first, that the judge erred in her interpretation of the relevant facts: in that (in particular) she failed to take proper account of the nature and substance of the obligations entered into between the Company and the two 422 companies; the Company and RBS; the 422 companies and RBS; and the solicitors and RBS. Second, that, as a consequence of her misinterpretation of the relevant facts, the judge failed to recognise the true legal effect of the basis upon which RBS was paid the monies which it received: in that she failed to recognise that those monies were not paid to it or received by it by reference to the security interest over the assets of the Company as created by the Debenture. And, third, that, by reason of those errors, the judge misapplied section 196 of the 1985 Act and section 175 of the 1986 Act.

Fixed or floating charge

20. In addressing those submissions it is pertinent to have in mind that, in the context of section 196 of the 1985 Act, the necessary characteristic of the charge in which the relevant property (of which possession is taken by or on behalf of debenture holders) is comprised – or to which the relevant property is subject – is that it is a charge which, as created, was a floating charge. It is not necessary that the charge should be floating at the time when possession of the property comprised in it (or subject to it) is taken by or on behalf of the debenture holder. That is made clear, in terms, by section 196(1) of the 1985 Act. The position in the context of section 175 of the 1986 Act is the same. The necessary characteristic of the charge is that it was a floating charge as created. It need not be floating at the commencement of the liquidation: section 251 of the 1986 Act. Those provisions in the 1985 and 1986 Acts have the effect of reversing the decision of Mr Justice Bennett in In re Griffin Hotel Co Ltd [1941] Ch 129 on that point.
21. It is pertinent to have in mind, also, that clause 1.9 of the Debenture purported to charge by way of fixed charge all book debts and other debts of the Company present and future. The question whether a charge (purporting to be a fixed charge over book debts) in a standard form bank debenture was to be characterised in law as a fixed or a floating charge was the subject of conflicting decisions of the Court of Appeal in In re New Bullas Trading Ltd [1994] 1 BCLC 485 and of the Privy Council in Agnew v Comr of Inland Revenue [2001] 2 AC 710. It was, I think, the uncertainty generated by those conflicting decisions which led the joint liquidators to seek the determination of the court on the question raised under paragraph 1 of the originating application which they issued on 4 November 2003: whether the debts and work in progress sold by the Company to the two 422 companies on 2 August 2002 had, immediately prior to that sale, been subject to a fixed or a floating charge under the Debenture. The question was prompted by the terms of the Debenture.
22. Thereafter (as appears from paragraph 13 of the appellant's outline submissions) these proceedings were effectively stayed to await the final determination of proceedings in In re Spectrum Plus Limited [2005] UKHL 41, [2005] 2 AC 680. The decision of the House of Lords in those proceedings was handed down on 30 June 2005. The order of 13 April 2006 in the present proceedings, directing a preliminary issue, was made in the light of the decision of the House of Lords in Spectrum Plus. It is clear that the assumption on which (by agreement) the preliminary issue was to be determined - that "as a matter of law . . . the charge dated 22 December 1999 . . . is to be characterised as a floating charge" – is directed to the question raised under paragraph 1 of the originating application. The agreed assumption was that the charge over book debts created by clause 1.9 of the Debenture was a floating charge as created; and that that charge remained floating immediately prior to the sale on 2 August 2002.

The restrictions imposed by the Debenture

23. Clause 2.1 of the Debenture imposed restrictions on what the Company could do without the previous written consent of RBS. In particular clause 2.1.2 restrained the Company from disposing of the book debts charged by clause 1.9; clause 2.1.3 restrained the Company from dealing with its book debts and other debts otherwise than by collecting them in the ordinary course of business; and clause 2.1.4 (so far as relevant) restrained disposition of the property charged by clause 1.11 other than in the ordinary course of business. Clause 4.2 required the Company to pay into its account with RBS (or into such other account as RBS might specify from time to time) all money which the Company might receive in respect of its book or other debts. Clause 6 provided that RBS might, by written notice to the Company, convert the floating charge into a fixed charge as regards any of the property specified in the notice.

The payment obligations under the hive down agreements and the solicitors' undertaking

24. The hive down agreements, in the form in which they were after variation on 2 August 2002, defined "Debts" as all amounts owing to the Company on the Transfer Date (whether or not then due and payable) in relation to the business being sold. The Transfer Date was 29 or 30 July 2002 (as the case may be). The Debts were sold free from all charges and encumbrances: clause 3.3. Title to the Debts was to pass to the 422 companies on the Transfer Date: clause 3.4. The consideration payable on completion (£595,000 in aggregate) was to be paid to the "Solicitors" (defined as Osborne Clarke): clause 7.2(b). The "Deferred Consideration" (defined as that part of the total consideration which was not payable on completion) was to be paid "to the Solicitors on behalf of the Vendor [meaning the Company]"; it was acknowledged by the 422 companies (as purchasers) that "the Solicitors will deal with the Deferred Consideration in accordance with the undertaking given by them to [RBS]"; and the Deferred Consideration was not to be paid to anyone other than the Solicitors without the express written consent of [RBS]": clause 4.3(d).
25. I have set out, earlier in this judgment, the terms of the solicitors' undertakings (in their letter dated 1 August 2002). It is said on behalf of RBS (at paragraphs 38, 43 and 44 of the outline submissions) and that the effect of the hive down agreements, read with those undertakings, was to impose a trust on the monies received by the solicitors: a trust of which RBS and not the Company was the beneficiary. I reject the second limb of that submission. In my view the correct analysis of the arrangements is that the monies received by the solicitors (whether on completion or by way of deferred consideration) were received by them on behalf of the Company. Plainly the monies were held by the solicitors upon trust: in that they were to be held on client account. But the client, throughout, was the Company, not RBS. That is put beyond doubt, in relation to the non-deferred consideration, by the terms of clause 4.1 of the hive down agreements - ". . . the Consideration is the payment by the Purchaser to the Vendor of the sum of £547,328 [or £512,672, as the case may be] . . . which shall be payable . . . (a) as to £307,227 [or £333,200, as the case may be] in cash on the execution of this agreement" - read with clause 7.2(b); and, in relation to the deferred consideration, by clause 4.3(d) of the hive down agreements - "The Purchaser shall pay the Deferred Consideration . . . to the Solicitors on behalf of the Vendor".

Property from time to time subject to the RBS charge

26. The position immediately before the transfer of assets pursuant to the hive down agreements was that the Debts (as defined in those agreements) were subject to the charge created by clause 1.9 of the Debenture: and that that charge (although purporting to be a fixed charge) was, by agreement, assumed to be a floating charge for the purposes of the preliminary issue directed by the order of 13 April 2006. It is plain that the hive down agreements were not agreements entered into by the Company in the ordinary course of business. The effect of clause 2.1.3 - and (so far as relevant) clause 2.1.4 - of the Debenture was that the Company could not transfer the Debts free of the RBS charge without first obtaining the written consent of RBS. In those circumstances, as it seems to me, the Debts remained subject to the RBS charge until the Release took effect in accordance with its terms. If it were necessary to decide the point (which it is not) I would hold that, in the period 29 or 30 July to 5 August 2002 - during which the Debts were in the hands of the 422 companies as assignees, but subject to the RBS charge - the charge was properly to be characterised as a fixed charge: in that the 422 companies were not free to dispose of, or otherwise deal with, the Debts save subject to the security interest of RBS. But that restriction came to an end when the Release took effect: thereafter the Debts were free of any charge in favour of RBS.
27. The hive down agreements imposed obligations on the 422 companies which included the payment of monies to the Company by way of consideration for the transfer of assets. It is clear that the effect of the agreements was that debts ("the new debts") became owing from the 422 companies to the Company. The new debts fell within the description "all book debts and other debts of the Company present and future" in clause 1.9 of the Debenture. The assumption to be made for the purposes of the preliminary issue was that the charge created by that clause was, as created, a floating charge. For my part, if it were necessary to decide the point, I would hold that the effect of the hive down agreements, read with the solicitors' undertaking, was that the charge over the new debts had become a fixed charge before 5 August 2002: the Company was not free to dispose of, or otherwise deal with, the new debts save with the consent of RBS. But it is unnecessary to decide the point: the effect of the assumption was that the charge to which the new debts were subject was, as created, a floating charge.
28. On or before 5 August 2002, the solicitors received the sum of £595,000 – being the aggregate of the non-deferred consideration payable under the hive down agreements. As I have said, on a true analysis, that sum was received by the solicitors as trustees for the Company. The interest of the Company in the monies received and held (while it remained in client account) by the solicitors was itself subject to a charge in favour of RBS. That follows, as it seems to me from the terms of clause 1.9 of the Debenture: the charge created by that clause is a charge over all book debts and other debts of the Company present and future "and the proceeds of payment or realisation of each of them until the receipt of the proceeds from time to time into an account in accordance with clause 4.2". There is nothing to suggest that the solicitors' client account was an account within the description in clause 4.2 of the Debenture.
29. The judge made no finding of fact that the £487,388.64 paid by the solicitors to RBS on 5 August 2002 was paid out of the money (£595,000) received by the solicitors as trustees for the Company. But, in the context of a preliminary issue on an application by RBS for summary judgment, it seems to me reasonable to assume that it was. If this matter goes to trial, the source of the payment made by the solicitors to RBS can be determined on the evidence and after discovery: at this stage (and for the purposes of this judgment) I am content to proceed on the basis that the solicitors would not have paid RBS out of their own monies. On that basis, the position is that the £487,338.64 was paid to RBS out of monies which were subject to a charge which, as created, was a floating charge.
30. Between 5 August and 29 November 2002, the solicitors received further sums in excess of £200,000 in respect of the deferred consideration. For the reasons which I have already explained those monies were received by the solicitors as trustees for the Company; but the interest of the Company in the monies received and held (while it remained in client account) by the solicitors was itself subject to a charge in favour of RBS. Again, the judge made no finding of fact that the £202,191.43 paid by the solicitors to RBS between 5 August and 29 November 2002 was paid out of those monies; but, again (and for the same reason) I am content to assume (for the purposes of this judgment) that it was. On that basis, also, the £202,191.43 was paid to RBS out of monies which were subject to a charge which, as created, was a floating charge.

Did RBS take possession of property subject to the RBS charge

31. The remaining question, in relation (i) to the £487,338.64 paid by the solicitors to RBS on 5 August 2002 and (ii) to so much of the £202,191.43 as was paid by the solicitors to RBS between 5 August and 5 September 2002, is whether RBS can be said to have "taken possession" of those monies for the purposes of section 196 of the 1985 Act. That question does not arise in relation to so much of the £202,191.43 as was paid by the solicitors to RBS between 5 September and 29 November 2002. On the basis of the conclusion which I have reached in paragraph [30] of this judgment, those monies fell within section 175(2)(b) of the 1986 Act.
32. In my view the answer to question whether RBS can be said to have taken possession, for the purposes of section 196 of the 1985 Act, of the monies paid to it by the solicitors before 5 September 2002 is "Yes". I reach that conclusion for substantially the same reasons as those which persuaded the judge. The monies paid by the solicitors to RBS were paid in pursuance of the solicitors' undertakings, given in their letter of 1 August 2002. They were not paid as a result of some independent decision by the Company to pay its debts out of monies subject to its control. It is, I think, reasonably plain that the undertaking was given as part of the price which RBS required for not enforcing its security. If the undertaking had not been given then (i) RBS would not have released the Debts from its charge and (ii) would have taken steps to enforce its security interest over the monies paid to and held by the solicitors as trustees for the Company. In those circumstances, adopting the approach which the judge held she should adopt (and which I would endorse) and looking at the substance of the transaction, the payment of monies to RBS pursuant to the solicitors' undertakings were (in substance) acts by which RBS realised its security over monies held by the solicitors subject to that security: they were not acts which were (in substance) no more than the ordinary discharge of the debtor's liability.
33. It follows that I would uphold the judge's conclusions, summarised under (i), (ii) and (iii) in paragraph [8] of this judgment, in relation to the monies paid to RBS before 29 November 2002.

The cross appeal

34. The Commissioners, by respondents' notice filed on 22 December 2006, appeal from the declaration in paragraph 2 of the order of 6 November 2002: that is to say, from a declaration which reflects the judge's conclusion that RBS is entitled to retain the amounts which it has realised in respect of the debts assigned to it on 16 December 2003. It is said, succinctly (but, perhaps without any real conviction) that "the receipt of the £50,287.20 or more after 6 December 2002 represented the proceeds of property subject to or comprised in the charge and should also be within section 175 of the Insolvency Act 1986.
35. In my view that submission cannot be sustained. The monies received from the realisation of the uncollected book debts – pursuant to the assignment by the 422 companies to RBS dated 16 December 2003 – cannot be monies realised from assets which were subject to a charge immediately before the assignment. The uncollected book debts were Debts which had been transferred by the Company to the 422 companies on 29 or 30 July 2002: they were assets which had been released from the RBS charge under the Debenture by the Release which took effect on 5 August 2002. It is impossible to contend that, thereafter, they remained (or became) subject to some equitable charge in the hands of the 422 companies which was converted into a legal charge by the December 2003 assignment. The judge was correct to reach the conclusion which she did in relation to the post-December 2000 receipts.

The order to be made on the preliminary issues

36. It is, I think, important to have in mind the terms of the order of 13 April 2006, by which preliminary issues were directed. The issues for determination, as set out in that order, were (i) whether the Commissioners had "no real prospect of succeeding on the issue that [section] 175 Insolvency Act 1986 and section 196 Companies Act 1985 are applicable to the facts of this case and (ii) whether there was "no other compelling reason why the issue should be disposed of at trial". The judge's order of 6 November 2006 does not address those issues in terms: she chose to make declarations to reflect the conclusions which she had reached. Although I agree with the conclusions, I would not, myself, think it sensible to impose on the judge who may, in due course, have the task of trying these proceedings, the inflexibility of declarations on assumed facts. For that reason I would set aside the declarations made by the judge. It seems to me that that the proper order is simply to answer the issues raised by the order of 13 April 2006. Subject to any submissions which the parties may wish to make on the form of the order, I would do so in these terms: in answer to issue (i), there is a real prospect that the Commissioners will succeed in establishing that section 196 of the Companies Act 1985 and section 175 of the Insolvency Act 1986 have application to the facts of this case; in the light of the answer to issue (i) issue (ii) does not arise. The directions for trial given by the judge have been overtaken by events: I would invite the parties to agree revised directions in their place; failing which the matter will need to be remitted to the High Court for that purpose.

Lord Justice Wilson : I agree.

Lady Justice Smith : I agree.