to allow the completion of a single profitable order. On completion of the order the administrators deducted the advances prior to accounting for the proceeds – on the basis that the liabilities from the administrators to the financier were expenses of the administration. The directors of the company (who had guaranteed the company’s indebtedness to the financier) challenged these deductions, arguing that the sums paid to the financier by the administrators were paid on behalf of the company and should reduce their liabilities to the financier. The court rejected the directors’ contentions, saying that their proposed course would give them a windfall at the expense of unsecured creditors. What was accepted, though, was that the administrators’ liability to the financier was a legitimate administration expense.231

The significance of the Bibby case lies in its demonstrating that the English courts are capable of authorising super-priority funding without there being any need for new legislation.232 If Bibby is followed, this may herald the arrival of a system in which new funds can be raised as an administration expense under super-priority arrangements. It remains to be seen whether, in the future, the courts will further develop such a regime so as to require that administrators seek the consent of different creditors to such arrangements.

Rethinking charges on book debts

In continuing the discussion of funding arrangements as the underpinnings of effective rescue procedures, it is necessary to deal with the issue of book debts. Book debts are sums outstanding and owed to the troubled company and, during a rescue procedure, book debts are often the only funds that are available for the purposes of financing continuing operations through the rescue period. Between 1978 and 2005 many lenders

231In the case of Re Huddersfield Fine Worsteds Ltd [2005] 4 All ER 886 the Court of Appeal stated that protective awards under the Trade Unions Labour Relations (Consolidation) Act 1992 and payments in lieu of notice did not enjoy super-priority since they did not fall within Sch. B1, para. 99(5) and (6). A similar decision regarding claims for wrongful dismissal subsequent to the adoption of a contract of employment by the administrator was made in Re Leeds United Association Football Club Ltd (in administration) [2008] BCC 11. See pp. 415–16 and ch. 17 below.

232As Bacon observes, the decision shows ‘a continued commitment by the courts to the rescue culture and a realistic attitude to striving to ensure that professionals involved in corporate recovery are dealt with even-handedly’: ‘Administration Costs’, p. 4. See, however, D. Fletcher, ‘Time for a DIP?’ (2007) Recovery (Summer) 30, who cautions (at p. 30) that it cannot be assumed that the courts will follow the Bibby judgment in cases where the primary issue is whether DIP funding can be classed as an administration expense. (In Bibby the judgment focused on interpretation of the wording contained in a Tomlin Order.)

sought to secure their loans by way of fixed charges over the borrowing company’s book debts.233 The decision of the House of Lords in the Spectrum Plus234 case, however, changed matters. Spectrum Plus overruled the decision in Siebe Gorman235 and held that the company charges over present and future book debts that were modelled on the form used in Siebe Gorman were floating in spite of their being designated on their face as fixed. In Spectrum Plus236 there was a charge describing itself as fixed; a covenant by the company to pay into its account with the bank all

233If a bank is deemed to possess a floating charge over the book debt proceeds, it will rank behind preferential creditors; if the charge is deemed fixed, the charge holder will precede the preferential creditors in the queue for repayment – the distinction between fixed and floating charges is thus of practical importance.

234Spectrum Plus Ltd v. National Westminster Bank plc [2005] 3 WLR 58; [2005] BCC 694: the reasoning in Brumark (Agnew v. Commissioner of Inland Revenue, Re Brumark Investments Ltd) [2001] 2 AC 710, [2001] All ER 21, was approved and Re New Bullas Trading Ltd [1994] BCC 36 was said to be wrongly decided. On the Brumark decisions (NZCA and Privy Council) see M. Armstrong, ‘“Return to First Principles” in New Zealand: Charges Over Book Debts are Fixed – But the Future’s Not!’ [2000] Ins. Law.

102; R. Gregory and P. Walton, ‘Book Debt Charges: Following Yorkshire Woolcombers Are We Sheep Gone Astray?’ [2000] Ins. Law. 157; Gregory and Walton, ‘Book Debt

Charg e s: The S ag a G’ (oe199s 9On)11 5 LQR 14; F . Od itah, ‘ Fixe d Charges ove Debts after Brumark’ (2001) 14 Insolvency Intelligence 49; A. Berg, ‘Brumark Investments Ltd and the “Innominate Charge”’ [2001] JBL 532; F. Coulson and S.

Hill, ‘Brumark: The End of Banking as We Know It?’ (2001) Recovery (September) 16. On Re New Bullas see R. M. Goode, ‘Charges over Book Debts: A Missed Opportunity’ (1994) 110 LQR 592; M. G. Bridge, ‘Fixed Charges and Freedom of Contract’ (1994) 110 LQR 340; I. Narey and P. Rubenstein, ‘Separation of Book Debts and their Proceeds’ [1994] CLJ 225; S. Griffin, ‘The Effect of a Charge over Book Debts: The Indivisible and Divisible Nature of the Charge’ [1995] 46 NILQ 163.

235Siebe Gorman & Co. Ltd v. Barclays Bank Ltd [1979] 2 Lloyd’s Reports 142. After Siebe a

fixed charge could cover future assets in a manner that, until the decision, had been considered the exclusive domain of the floating charge. According to Siebe, the creditor had to be able to prevent withdrawals from the account into which the proceeds of the book debts were paid but the cash flow implications of this position were not fully explored. In the wake of Siebe an extensive case law had sought to delineate the conditions under which fixed charges could be held over book debts and their proceeds and judges and commentators struggled to make clear the basis for designating book debt charges as fixed or floating: see, for example, Re Brightlife Ltd [1987] Ch 200; Re Keenan Bros. Ltd [1986] BCLC 242; Re New Bullas Trading Ltd [1993] BCC 251. For discussion see E. Ferran, Company Law and Corporate Finance (Oxford University Press, Oxford, 1999) pp. 518–33; Armstrong, ‘“Return to First Principles”’; Gregory and Walton, ‘Book Debt Charges: Following Yorkshire Woolcombers’; Gregory and Walton, ‘Book Debt Charges: The Saga Goes On’. The Cork Report had urged statutory reversal of Siebe in 1982: paras. 1585–6.

236On Spectrum Plus and its significance see J. Getzler and J. Payne (eds.), Company Charges: Spectrum and Beyond (Oxford University Press, Oxford, 2006); D. Capper, ‘Spectrum Plus in the House of Lords’ [2006] 6 JCLS 447; A. Berg, ‘The Cuckoo in the

moneys that it might receive in respect of the charged book debts; an agreement not to sell, factor, charge or assign the charged debts without the bank’s written permission; and an undertaking, if called upon by the bank, to assign the charged book debts to the bank. The House of Lords had to decide whether the charge was a floating charge per section 175(2)(b) of the IA 1986 and ruled that the unrestricted right to draw on the account into which Spectrum was obliged to pay the proceeds of the book debts was inconsistent with there being a fixed charge over those debts. The debenture left the company free to use the proceeds of the book debts in the ordinary course of its business and that was the essence of a floating charge.237

What their lordships did not do was offer a clear set of details on the nature and degree of control that a chargee must possess over the charged assets in order for the charge to be categorised as a fixed charge. The hanging question is how, in the absence of practical guidance from the judges, it is now possible to create a fixed charge over book debts by setting up an arrangement in which the proceeds of book debts are not made available for use in the course of business – for example by providing that all such proceeds are to be paid into a ‘blocked’ account.238 The Lords did, however, take the view that what is of relevance in deciding whether a charge is fixed or floating is the substance and reality of the situation rather than the form of the transaction. Berg suggests that: ‘This is unsurprising since whether the chargee has control over the charged assets is a question of commercial reality not legal technicalities.’239 A residual problem is that there are considerable costs to certainty in commercial transactions if matters are decided with reference to the substance of the particular transactional

Nest of Corporate Insolvency’ [2006] JBL 22; D. Henderson, ‘Problems in the Law of Property after Spectrum Plus’ [2006] ICCLR 30; R. Gregory, ‘Spectrum Plus – Common Law Makes Takeover Bid for Equity’ (2005) 13 Sweet & Maxwell’s Company Law Newsletter 1.

237Spectrum Plus, paras. 112, 138–40. The immediate practical result of the Spectrum decision was that IPs were able to distribute the book debt proceeds in an estimated 550 or more insolvency cases which had been held up in the system as a result of uncertainty following the earlier decision in Brumark [2001] All ER 21. HM Revenue and Customs and the Insolvency Service issued a joint statement in 2005 explaining their expectations regarding such distribution of book debt proceeds post-Spectrum.

238As Marshall notes, it will be interesting to see whether the Spectrum decision adds anything to the debate, post-Brumark, regarding particular collection account arrangements in structured finance, project finance and securitisation transactions: J. Marshall, ‘Spectrum Plus: A Wasted Opportunity?’ (2005) Recovery (Summer) 30.

239Berg, ‘Cuckoo in the Nest’, p. 32.

arrangement.240 On this matter, the Lords agreed with Lord Millett’s statement, in Brumark,241 that it was not enough to provide for blocking in the debenture if it was not in fact operated as a blocked account.

A more recent trend in English cases had, however, moved away from Siebe Gorman before Spectrum Plus was decided.242 The decision in Re Atlantic Computer Systems plc243 concerned a clause dealing with the assignment of leases. This provided for the assignee to have the benefit of all rentals and moneys under certain subleases but no provision was made concerning the application of the individual rent payments made under these subleases. The Court of Appeal ruled that there might have been an intention for Atlantic Computer Systems to be free to use the rent instalments until the assignee intervened, but this did not mean that the charge was floating rather than fixed. Nicholls LJ distinguished, however, between a charge on existing income-producing property (such as a lease) and a charge on present and future property (for example, a typical charge on present and future book debts).244 The decision has thus been criticised as an old-fashioned approach inconsistent with the modern view that what

distinguishes fixed and floating charges is not the nature of the asset but the location of the power to manage and control its use.245 In the wake of Spectrum Plus, it can be argued that Atlantic Computers is no longer good law and that the arrangement in Atlantic Computers would now be likely to be viewed as one involving a floating charge as per Spectrum Plus.246 This view is reinforced by the first application of Spectrum Plus principles to assets other than book debts. In Re Beam Tube Products in 2006247 a

240See Capper, ‘Spectrum Plus in the House of Lords’, p. 458 (speaking of ‘a dangerously schizophrenic approach to the categorisation of security interests’).

241Re Brumark Investments Ltd, Agnew v. Commissioner of Inland Revenue [2001] 3 WLR 454; [2002] BCC 259.

242On such developments see Ferran, Company Law and Corporate Finance, pp. 524–9; D. Milman, ‘Company Charges: Recent Developments’ [2000] 7 Palmer’s In Company 1; A. Walters, ‘Round Up: Corporate Insolvency’ (2000) 21 Co. Law. 262 at 262–5.

243[1992] Ch 505, [1992] 2 WLR 367, [1990] BCC 859.

244Ferran, Company Law and Corporate Finance, p. 525.

245Ibid., pp. 525–6. See also Bridge, ‘Company Administrators’, pp. 396–7; Re Atlantic Medical Ltd [1992] BCC 653; Re CCG International Enterprises Ltd [1993] BCC 580.

246See Henderson, ‘Problems in the Law after Spectrum Plus’, p. 31. For further analysis of the status of Atlantic Computer Systems ([1990] BCC 859) post-Spectrum see Berg, ‘Cuckoo in the Nest’; S. Worthington, ‘Floating Charges: Use and Abuse of Doctrinal Analysis’ in Getzler and Payne, Company Charges, p. 25; N. Frome and K. Gibbons, ‘Spectrum – An End to the Conflict or the Signal for a New Campaign?’ in Getzler and Payne, ibid.

247[2006] BCC 615.

debenture created purported fixed charges over (inter alia) all plant and machinery and all book and other debts and a floating charge over all assets not covered by fixed charges. With regard to the charge over the plant and machinery, the company was left free to deal with many of these items in the ordinary course of business. The court, accordingly, held that, in spite of the description of the charge as fixed, it was floating in nature. It, moreover, took an ‘all or nothing’ approach in saying that the fixed or floating nature of the charge related to all of the assets that it covered and that it could not be treated as fixed regarding some assets and floating regarding others.248

What is likely to be the effect of Spectrum Plus? In combination with the EA 2002 reforms, the effect on bank lenders is likely to be significant. The EA 2002 renders the floating charge less attractive since it removes the right of the holder to appoint a receiver and it reserves a prescribed part of funds for the benefit of unsecured creditors.249 Spectrum, in addition, reduces the availability of the fixed charge.250 It seems unlikely, therefore, that banks will react to Spectrum by taking floating charges to secure receivables financing or by imposing day-to-day controls over customers’ accounts so as to render charges ‘fixed’ within the terms of Spectrum.251 Reducing the availability of fixed charges over book debts may have the effect of increasing the fragmentation of credit as

248See R3, Technical Bulletin, Issue 76, October 2006, para. 76.1. With regard to the charge over book debts, the court in Beam noted that recent authority had held that where the security documentation envisages a fixed charge over those debts and a floating charge over the proceeds of those debts, the fixed charge will be treated as a floating charge: consequently the present charge over the book and other debts was a floating one.

249A fund in which floating charge holders cannot participate for any shortfall: see

Permacell Finesse Ltd (in liquidation) [2008] BCC 208 and further Offord, ‘Case Digest’. See also Re Airbase (UK) Ltd, Thorniley v. Revenue and Customs Commissioner [2008] BCC 213 (Ch) and further Walters, ‘Statutory Redistribution of Floating Charge Assets’.

250The Spectrum judgment does not rule out a lender’s being able to take a fixed charge over book debts. Their Lordships agreed that it was conceptually possible and gave examples of ways in which this could be achieved: by assigning the book debts to the security holder; by preventing all dealings with the debts other than their collection and requiring the proceeds to be paid to the chargee in reduction of the chargor’s debts; by preventing all dealings with the debts other than their collection and requiring the proceeds to be paid into an account with a third party over which the chargee takes a fixed charge; and by preventing all dealings with the debts other than their collection and requiring the proceeds to be paid into a blocked account with the chargee bank.

251See Armour, ‘Should We Redistribute in Insolvency?’. As Armour notes, the effect of the decision is to make it far more difficult for banks to take fixed security over receivables without ‘micro-managing the debtor company’s dealings’ in those assets – a process which would be ‘likely to be uneconomic for banks’ (pp. 202, 203).