учебный год 2023 / Goode, Legal Problems of Credit and Security

Ill ATIACHMENT, PERFECTION AND EFFECTS OF FIXED SECURITY

Assignor is trustee of sums received by bim

3-35 Where the debtor. whether or nol it has notice of assignment, makes payment of a receivable to the assignor, the latter holds the sum received, whether in cash or in the form of a cheque or other instrument, on trust for the assignee.lll In the latter case, wrongful appropriation of the instrument, e.g. by paying it into the assignor's bank account, constitutes a conversion, 112 with an alternative liability to account for the proceeds of the instrument in an action for money had and received.

Tracing receivables into proceedslll

3-36 A security interest in receivables,.automatically attaches to any proceeds received in exchange for them, ekcept where the assignor has been given freedom to deal with the receiva'b!es and to mingle the proceeds with his own

moneys. So if receivables are· disposed of by the assignor withol).t the assignee's authority, or if it is ~ident that the assignor is in any· event

required to keep collections and other proceeds as a separate. fund for the assignee, the latter's security interest will automatically attach to them, whether they result from collection or sale by the assignor and whether they take the form of cash, instruments, other receivables, goods, land, or indeed anything given in exchange. This tracing right is available against the assignor and the assignee's trustee in bankruptcy or liquidator. Whether it is equally available against a subsequent purchaser or incumbrancer is a priority question which which will be examined a littJe later.t'4

6. LEGAL IMPEDIMENTS TO THE CREATION OF SECURITY

OVER A RECEIVABLE

3-37 In an earlier chapter we have listed the principal types of property which are incapable of being given in security.' 15 Two of these need to be examined in more detail, namely bare rights ofaction, on grounds of public policy, and debts made unassignable by eontrad(. 116

para.540.

LEGAL IMPEDIMENTS TO THE CREATION OF SECURITY OVER A RECEIVABLE

--···~--~····

Bare right of action not ussignabJel!7

The law views with disfavour those who seek to support another's litigation 3-38 without just cause (maintenance) or to exact as the price of such support a

right to share in the fruits of the litigation (champerty). An agreement by which a party purports to assign a bare right of action, unconnected to any legitimate interest of the assignee, savours of maintenance and champerty and is unenforceable as being contrary to public policy, m for its effect would be to enable the assignee to intervene in an action in which he had no proper interest. On the other hand, the assignment of a debt carries with it the right to sue for its recovery, and an assignment is not open to attack as champertous merely because the debt is disputed or it is clear that it will be recovered only through proceedings by the assigneeH9 There is no objection to the assignment of the fruits of an action under an agreement which does not involve either financial support for the litigation or the assignment of a right to intervene in the proceedings. 12ll Again, the assignment of a right of action itself is unobjectionable where, looking at the totality of the transaction, the assignment is one in which the assignee had a genuine commercial interest, 121 as where the action concerns property held by the assignee as principal or ag~'!lt122 or where the assignor will be able to reduce his indebtedness to the assignee from the fruits of the action123 or to assign the claim in satisfaction of the debt124

A good illustration of what is and is not permitted is furnished by the decision of the House of Lords in Trendtex Trading Carp v Crtuiit Suisse 125:

The plaintiff owed money to its bankers, the defendants. The plaintiff had a substantial claim against the Central Bank of Nigeria for dishonour of a letter of credit, and the action was financially supported by the defendants, whose only hope of recouping their advances lay in the successful outcome of the proceedings. Subsequently the plaintiff assigned its right of action to the defendants, who almost immediately resold it to an unidentified third party for a substantially higher figure.

In an action by the plaintiff for a declaration that the assignment to the defendants was void as constituting an assignment of a bare right of action, the House of Lords, affirming the decision of the Court of Appeal,

A Tettenbom, "Assignment of Rights to Compensation" {2007] L.M.C.L.Q, 392,.

118TI'endtex Tradb1g Carp v Credit Suisse [1981} 3 All'E.R. 520, the facts of which are given below.

119Camdex lntematkmal Ltd v Bank 4 Zambia [1998] Q,B. 22 32-33, The position is not entirely clear, however, see A. Tettenborn, "Assignment of Rights to Compensatlon)J [2007) L.M.C.L.Q. 392, 399400.

120ibid. at 33.

121Massal Aviation Services Ltd v Attorney General P007J U.K.P.C 12.

122Kaukomarkkinat 01 Y v Elbe 1'ransport Union GmbH: The Kelo [1985J 2 Lloyd's Rep. 85.

" 4 Re Timothy's Pty Ltd and the Companies Act [1981]2 N.S.WL.R. 706.

1~5 See above,

Ill ATTACHMENT, PERFECTION AND EFFECTS OF FTXED SECCRJTY

held that the assignment in itself was unobjectionable, in that the defendants had a legitimate interest in the success of the action; that the arrangements for sub-sale of the right of action to the third party, who had no legitimate interest in the proceedings, were champertous; but that by virtue of an exclusive jurisdiction clause in the agreement the dispute fell within the jurisdiction of the Swiss courts and was governed by Swiss law.

Contractual prohibition against assignment or cbarge126

3-39 A more serious threat is posed by the common practice on the part of large customers of inserting in their purchase orders a clause prohibiting the supplier from assigning his right to payment under the supply contract. The reasons for such a clause are, first, to avoid the risk of the debtor having to pay twice by inadvertently overlpoking notice of assignment and paying the assignor, secondly, to preserve itq right to set up new equities notwithstanding receipt of notice of assignment, 'aqd thirdly, to avoid exposure to an assignee whom it does not know and who may have a more severe approach to delay in payment or a less amenable attitude to the handling of complaints about the performance for which the payment is exacted. 127

It is clear that the debtor is not obliged to recognise the title of an assignee under an assignment in breach of a no-assignment clause. It is equally clear that a contractual provision against assignment entitles the debtor to refuse to deal with the assignee and to continue making payment to the assignor, so

that the assignment is not capable of taking effect as a statutory assignment. The debtor can therefore ,safely disregard any notice of assignm~'Ilt by the assignee or any person to whom the assignee itself assigns the debt, and, contrary to the usual rule,12s he can continue to assert aguinst the assignor rights of set-off arising from mutual dealings concluded after receipt of the notice of assignment. Further a purported assignment by the original creditor would place him in breach of contract and entitle the debtor to exercise any remedies for breach of contract given him by the agreement or by law, although if the assignment is ineffe<-'tive against the debtor, the

Essays in Honour of DD Prentice (Oxford: Hart Publishing, 2008).

127 ~evertheless, such a prohibition is inimical to receivables financing, where it is simply not (>ractic.able for the assignee (such as fa<::toring company) to examine indjvidual contracts to check for assignment clauses. ThC issue is scarcely one of protection of the weaker party, since a debtor is unlikely to be able to impose the prohibition unless it holds the stronger bargaining position. In § 9----406(d) of the Amerlcan UnifOrm Commercial Code, recognising the impediment to receivables financing that could be created by non-assignment clauses, it is roundly declared that they shall be of no effect. A similar provision appears, with qualifications, in art.6(1) of the UNIDROIT Convention on International Factoring (1988) and in art.9 of the 2001 United Nations Convention on the Assignment of Receivables jn International Trade (2004), Sec also s.354(a) of the German Commercial Code- (HGB).

12s See below, para.l--67.

1!6

LEGAL !MPED!ME!>iTS TO THE CREATION OF SECURITY OVER A RECEIYA.BLE

damages are likely to be nominal."" In short, the prohibition is effective as between debtor and assignee, and if the assignee brings proceedings his claim will be dismissed. Such was the outcome of Helstan Securites Ltd v Hertfordshire County Council. no

Assignments in breach of a no-assignment are commonly described as void, invalid or ineffective.131 Such statements, however, do not refer to the proprietary effects of such an assignment as between assignor and assignee but rather to the ineffectiveness of the assignment against the debtor, who is not bound to recognise it. This is made clear in the speech of Lord BrowneWilkinson in Linden Gardens Securities Ltd v Lemma Sludge Disposals Ltd, in which the assignee sought to recover from the debtor despite a prohibition against assignment in the contract. Rejecting the argument that such a prohibition was of no effect even against the debtor Lord Browne-Wilkinson said:

"Therefore the existing authorities establish that an attempted assignment of contractual rights in breach of a contractual prohibition is ineffective to transfer such contractual rights. I regard the law as being satisfactorily settled in that sense. If the law were otherwise, it would defeat the legitimate commercial reason for inserting the contractual prohibition, viz., to ensure that the original parties to the contract arc not brought into direct contractual relations with third parties." 132

However, the debtor is not concerned with the proprietary effects of an assignment as between the parties themselves, whether in relation to the application of the collected proceeds of the debt or in relation to the contract under which it arises. The former is taken first because it is the most straightforward. The position in relation to the benefit of the contract is more c-Omplex.

(1) Assignment of right to proceeds

The purpose of a no-assignment clause is to protect the debtor from having 3-40 to deal with a different creditor. Therefore, as Professor Goode has suggested

129 A distinction can be made betw-een a clause drafted in terms of a 'promise not to assign; breach of which does not jnvalidate the assignment, hut which renders the purported assignor in breach of contract and a clause stating that the assignor •cannot assign' which renders the chose in action unassignabJe, but where a purported assignment would not necessarily constitute a breach of contract, see G. Tolhurst, The Assignment of Contractual Rights (Oxfi)rd: Hart Publishing, 2007) 265~270. Although this distinction appears to have

?een drawn in Australia ( Devefi Pty Ltd v 1\!ateffy Pearl Nagy Pzy Lld(1993) 113 A.L.R. 225, rt does not appear to be part of English law. ·

130[1978] 3 All E.R. 262. See also Re Turcan (1889) 40 Ch.D 5; Shaw & Co v _.\.foss Empires &

Bastow (!908) 25 T.L.R. 190; and Spellman v Spellman [1961]2 All E.R. 498.

131s,ee. for example, Helstan Securities Ltd V Hertfordshire County Council) above, per Croom-Johnson 1 at 265; Linden Gardens Trust Ltd v Lenesta Sludge Di.sposafs Ltd [1994] 1

A.C 85,per Lord Brov.-ne-.Wilkinson at 109.

132Linden Gardens Trust v Leuesta Sludge Disposal! Ltd at 108.

117

liT ATTACHMENT, PERFECTION AND EFFECTS OF FIXED SECURITY

'assignor' joined as a defendant to the action. 150 It was on this basis that Hooper L.J. dissented. 151

The policy issues are here finely balanced. Rix L.J. expressed them as follows: 152

"It seems to me that there is a tension between (a) the interests of those whose contracts, either because they are of an inherently personal nature or because of agreed restrictions on alienability, should not readily be intruded upon by strangers to them, (b) the interests of those who seek to arrange their affairs on the basis of holding property in trust for others, and (c) the public interest, which is concerued to see that contracts are performed, that the beneficiaries of trusts are protected, and that financial assets are not too readily made inalienable especially where markets regularly provide liquidity for the trading of them. If a prohibition on assignment carried all before, it,'destroying all alienability whatever the circumstances, even to the extent of making it impossible for beneficial interests to be protected in any. circumstances in the absence of the, legal owner as a formal claimant, ilt seems to me that the public interest in freedom of contract and the freedom of markets could be severely prejudiced."

The result in Barbados Trust seems to render it impossible for a debtor to protect himself effectively against having to deal with another creditor, unless llix L.J. is right that it is possible to draft a clause which effectively prohibits a declaration of trust of the contract. 153 On the other hand, in relation to certain types of debts, sucl;i as receivables, which are routinely traded, there is a strong policy argument against inalienability. Prohibitions of assignment of such debts arc ineffective in many jurisdictions, and there is considerable merit in the Law Commission's proposal for a similar provision in English law.!'"'

3-42 The last case to be considered on this topic is the decision of the Court of Appeal in Foamcrete (UK) Ltd v Thrust Engineering Ltd.' 55

could happen for reasons other than an assignment, see Goode 'Contractual Prohibitions Against Assignment', above.

IS: ibid [139).

"' ibid [112].

:sl t,t is arguable that such a clause is an attempt by the debtor to interfere with the position between the creditor and the thirdrparty (who would in other circumStances be assignor and assignee) and rhar this should not be effective, both on grounds of principle and of policy. This argument would be strong if the declaration of trust of the contractual rights had no effect on the position of the debtor. so that he still only had to deal with his original credltor. However, if the result of the declaration of trust was to subject the debtor to dealings with another creditor, this is a circumstance against which the debtor should be able to protect himself

154Law Commission Report 296, ('.A)mpany Security Interests (2005) pnra.4AO,

155[20021 B.C.C. 221.

120

LEGAL IMPEDIMENTS TO THE CREATION OF SECURITY OVER A RECEIVABLE

PTE, a company, granted its bank a debenture containing (inter alia) a floating charge over its undertaking and property, present and future. Later it entered into two agreements with Thrust Engineering, a joint venture agreement ("the principal agreement") and a supplementary "purchase of stock agreement" under which Thrust became liable to make payments for stock and work in progress. The principal agreement provided that rights and obligations under it could not be assigned by either party without the consent of the other. Subsequently PTE went into liquidation, and thereafter the bank transferred the debenture to Foamcrete, who gave notice of assignJTlent to Thrust and, payment not having been made, instituted proceedings. Thrust contended that the assignment of the debenture was ineffective, being in breach of the no-assigment clause.

The Court· of Appeal rejected the defence, holding, first, that the noassignment clause was contained not in the principal agreement but in the purchase of stock agreement, but, secondly, if it was contained in the principal agreement then the bank's rights derived not from the assignment but from the floating charge, by which it "acquired an immediate beneficial interest in all the property, present and future, subject to the equitable charge prior to the creation of the debt due to PTE from Thrust Engineering" 156 and that the grant of the debenture could not possibly infringe the prohibition against assignment, which did not then exist.

The decision is puzzling. Quite apart from the fact that a floating charge confers no interest in any specific asset prior to crystallisation,157 it is well established that even in the case of a fixed charge of after-acquired property the chargee takes the property as he finds it, warts and all, so that if, for example, the property is acquired with the aid of an advance secured by a mortgage or charge agreed prior to tlte purchase the after-acquifed property clause catches the property in its incumbered form, and therefore attaches only to the chargor's equity of redemption.I 58 By the same token, where the after-acquired property clause picks up the benefit of a future contract, it can do so only on the contract terms, including any prohibition against assignment. Accordingly the debtor, Thrust, was not obliged to recognise either the fJXed security interest produced by crystallisation of the floating charge or the title of the bank's assignee, and its defence should, it is submitted, have succeeded.

l$6 r'bid., per Mununery LJ. at 225.

157See below, paras 4-03 et seq,

158See below, para.S-62,

121

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IV

The Floa.ting Charge

The floating charge is one of the most subtle creations of equity, and despite 4-01 the volume of case law and literature devoted to its analysis it remains conceptually elusive.' This is because a floating charge is an interest not in specific assets but in a constantly changing fund of assets and English law has always found it difficult to grapple with the concept of a fund. 2 To Maitland,

one of the most brilliant legal minds in the history of English law, all equitable rights, including the rights of a beneficiary under an active trust, were rights in personam'; to the modern equity lawyer the beneficiary has something more, a proprietary interest in a trust fund which, though not attaching to specific assets while the trust continues in force nevertheless attracts proprietary remedies for the preservation of the fund, including the equitable right to claim traced assets improperly disposed of by the trustees. It can now be taken as settled that the floating charge creates an immediate interest in rem; what continues to be the subject of debate are the nature and incidents of that interest. It is these that it is proposed to explore in the present chapter. The general characteristics of a floating charge are described in section I below. A detailed analysis of the distinction between fixed and floating charges and the degree of control necessary to ensure that a charge is characterised as a fixed charge is provided in section 2. Priolity issues, including the priority effect of a negative pledge clause in a floating charge, will be examined in Ch. V.

..

1The most comprehensive and penetrating treatment is to be found in W.l Gough, Company

Charges 2nd edn (LondQn: Butterworths Law, 1996) Chs 5--16.

2For a recent ana[ysis, seeR. Nolan 'Property in a F1md' {2004) 120 L.Q.R. 108.

3Equity (2nd.), Lecture IX.

123

IV THE FLOATING CHARGE

The present chapter focuses on floating charges by companies. In general, it is not possible for an unincorporated trader to grant a floating charge over goods, for under the Bills of Sale Act (1878) Amendment Act 1882 a security bill of sale is void, except as against the grantor, in respect of any personal chattels not specifically described in the schedule to the bill4 or in respect of personal chattels so described of which the grantor was not the true owner at the time of execution of the bill.5 Other classes of asset are outside the Bills of Sale Acts, but a general assignment of book debts by an unincorporated trader must be registered as if it were a bill of sale.6 Moreover, there are various exemptions from the Bills of Sale Acts. In particular, they do not apply to agricultural charges by a farmer, whether fixed or floating 7

I. THE CONCEPTION OF THE FLOATING CHARGE

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The genesis of the floating charge8

"l

4-02 In Holroyd v Marshal/ 9 the House of Lords settled once and for all the efficacy of a charge over future property. It has been assumed for many years that the charge in Holroyd v Marshal/ was fixed. However, the ability of the chargor to substitute assets raises the issue whether such a charge would be categorised as fixed or floating in the light of Re Spectrum Plus. 10 The concept of a charge over future property was not new; indeed, in Holroyd v Marshal! itself it was considered established. Such a device was most beneficial to the creditor, for it gave him a hold over all after-acquired property of the debtor falling within the classes of asset specified in the charge and precluded the debtor from disposing of such property free from the charge without the debtor's consent. From the debtor's viewpoint, the arrangement was quite acceptable as regards fixed assets but it was another matter in the case of stock in trade. To require a trading company borrowing money on the security of its stock to obtain the consent of the creditor every time it wished to dispose of an item of stock would create an intolerable administrative burden for both parties; and since the debtor could repay the advance. only from the proceeds of sales, it was necessary to allow the company freedom to dispose of it'§ trading stock in the ordinary course of

\

4s.4.

5s.5.

6lrisolvency Act 1986 s.344(1). See also above, para.3-30.

7 Agricultural Q·edits Act 1928 s.8(~). S. 7 of the Act has special provisions as to crystallisation of agricultural floating charges. See below, paras 4-30, 4-52.

s See R.R. Pennington, "The Genesis of the Floating Charge" (1960) 23 M.L.R. 630; and the historical account given by Lord Millett in Agnew v Commissioners of Inland Revenue (also known as Re Brumark) [2001] UKPC 28; [2001] 2 A. C. 710 at 717, giving the decision of the Privy Council on appeal from the New Zealand Court of Appeal. See also R. Gregory and P. Walton, 'Fixed and Floating Charges-a revelation' [2001] L.M.C.L.Q. 123.

9 (1862) 10 H.L. Cas. 191.

to [2005] UKHL 41; [200512 A.C. 680. See below paras 4--12 and 4--21.

THE CONCEPTION OF THE FLOATING CHARGE

business free from the charge. Could a charge instrument allow this to be done without vitiating the security effect of the agreement?

It is interesting to contrast the answers to this question in American and English jurisprudence. Courts in the US roundly declared that to allow such freedom to the debtor was incompatible with the creation of a genuine security interest and was a fraud on creditors. If the creditor did not exercise reasonable dominium over the asset covered by the security agreement, his security was illusory and void11 At best, the security agreement conferred contractual rights on the creditor.

The approach of the English courts was more accommodating to the needs of the inventory financier. The effect of the provision allowing the debtor company freedom to deal with the charged assets in the ordinary course of business was not to negate the security interest but merely to postpone its attachment so long as the debtor's powers of management continued. 12 In conformity with the principle previously stated, that a security .interest does not attach until fulfilment of the conditions for attachment specified in the agreement, the charge floated over all assets of the company, present and future, within the description in the charge instrument, until the debtor company's power to manage the assets was brought to an end by the creditor's intervention in accordance with the terms of the charge instrument or by the debtor going into receivership or liquidation or upon the occurrence of some other event specified in the charge instrument. The charge then crystallised, fastening in specie on property within the description in the charge instrument in which the debtor company then had or subsequently acquired an interest. Thus in contrast to American law, English law permitted a form of security in which attachment was contractually postponed. It was not a specific security with a licence to the debtor company to deal with the assets in the ordinary course of business, but an ambulatO'ry security

11Geilfuss v Corrigan, 95 Wis. 651; 70 N.W. 306 (1897); Benedict v Ratner, 268 U.S. 354; 45 S.Ct. 566; 69 LEd. 991 (1925). There was, at that time, no provision for registration of security interests in the US, see P. Wood, "A Review of Brumark and Spectrum in an International Setting" in Company Charges: Spectrum and Beyond J. Gezler and J. Payne (eds) (Oxford: Oxford University Press, 2006), 149. For a detailed description of the American position prior to the Uniform Commercial Code, see G. Gilmore, Security Interests in Personal Property, (Boston: Little, Brown, 1965) Chs 6 and 8.

12Indeed, for several centuries equity appears to have recognised the concept of a fixed mortgage by individual traders and partnerships covering both present and future property, the mortgagor being left in possession with power to deal with the mortgaged assets in the course of carrying on business, a process brought to an abrupt halt by the controversial decision of Jarvis C.J. in Graham v Chapman (1852) 12 C.B. 85. See the illuminating historical analysis by R. Gregory and P. Walton, "Fixed and floating charges-a revelation" [2001] L.M.C.L.Q. 123, which notes the influence of bankruptcy law in the development of constraints on nonpossessory charges over future property. This article also points out the roots of the floating charge in the mortgage sanctioned in by the Companies Clauses Consolidation Act 1845, which enabled a public utility company to give a mortgage over its entire undertaking which could not be enforced piecemeal, but only once the company had ceased to be a going concern. Companies incorporated under the Companies Act began to grant such a mortgage, which was held to be valid by the courts on the grounds that the company's business would not be paralysed by the width of the charge, as the company could carry on its business until either winding up or the appointment of a receiver (see Re Florence Land and Public Works Company (1878) 10 Ch.D. 530, 546-547).

IV THE FLOATING CHARGE

dependent for its attachment on the fulfilment of a condition precedent, namely the occurrence of a crystallising event. The new device was first ruled effective by the Court of Appeal in Re Panama, New Zealand and Australia Royal Mail Co, 13 a decision upheld and applied in Re Yorkshire Woolcombers Association Ltd. 14

The nature and characteristics of a floating charge

4-03 Despite Re Panama, some judges found it difficult to see how any security interest could be said to exist prior to crystallisation. Surely until this time there was merely a contract between creditor and debtor for the provision of security? Certainly a floating charge does not do much for the creditor prior to crystallisation. He cannot exen;}se proprietary or possessory rights over the assets either as against the company or as against third parties, nor does he have a locus standi to obtain ~n injunction against the company to restrain dealings with its assets in the ordinary course of business where the d~alings are not in breach of the debentilre or subject to the creditor's veto and his security is not in jeopardy. 15 Nevertheless, it is now established that a floating charge creates an immediate, albeit unattached, security interest. This idea is most clearly expressed by Buckley L.J. in Evans v Rival Granite Quarries Ltd16 :

"A floating charge 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 ... 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 act or event occurs or some act on the part of the mortgagee is done which causes it to crystallise into a fixed securi!y." 17

How, then, do we identify a floating charge? What are the hallmarks of such a security? Valuable guidance is offered by the much-quoted judgment of Romer L.J. in Re Yorkshire Woolcombers Association Ltd18 :

"I certainly do not intend to attempt to given an exact definition of the term ''floating charge,' nor am I prepared to say that there will not be a floating charge within the meaning of the Act, which does not contain all the three characteristics that I am about to mention, but I certainly think

13(1870) 5 Ch. App. 318.

14[1903] 2 Ch. 284, affirmed sub nom. IlliiJgworth v Houldsworth [1904] A.C. 355.

15 Re Borax Co [1901] 1 Ch. 326; Lawrence v West Somerset Mineral Ry Co [1918] 2 Ch. 250. For a discussion of when an injunction can be obtained when the security is in jeopardy, see below para.4-48.

'' [1910]2 K.B. 979.

17 [1910]2 K.B. at 999.

1s [1903] 2 Ch. 284, at 295. See also [1904] A. C. 355, per Lord Macnaghten at 358.

THE CONCEPTION OF THE FLOATING CHARGE

that if a charge has the three characteristics that I am about to mention it is a floating charge. (1.) If it is a charge on a class of assets of a company present and future. (2.) If that class is one which in the ordinary course of the business of the company would be changing from time to time; and (3.) If you find that by the charge it is contemplated that, until some 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 so far as concerns the particular class of assets I am dealing with."

When read with the extract from the judgment of Buckley L.J., previously quoted, this passage (if modified to take account of automatic crystallisation) shows the two ingredients of a typical floating charge, namely that it is a present security in a fund of assets which the debtor company is left free to manage in the ordinary course of its business, 19 though not necessarily completely free. 20 Though on a literal reading of the judgment by Romer L.J. the type of charge he is describing is a charge on a changing fund of assets, it seems clear that what he was actually referring to was not a change in the nature of the fund (i.e. a shift from one class of asset to another) but rather a change from time to time in the composition of the fund, as where the fund consists of stock in trade where items of stock will move out of the fund on sale while others will move into the fund on production or acquisition. The status of the floating charge as a present security distinguishes it from a mere contract to give security at a future date on the occurrence of a designated uncertain event. 21 Its characteristic of an interest in a changeable fund of assets distinguishes it from an agreement for the provision of security over a particular asset where attachment is postponed.

In English law, a fund is considered to have an existence distinct from that 4---04 of its components. The contents of the fund are constantly changing as assets

are removed from the fund and new assets cqme into it, but the identity of the fund itself remains unchanged, in much the same way as the river Thames remains the river Thames despite the fact that the water in it is never the same from one minute to the next. Indeed, an open-ended fund (i.e. one which by the terms of its establishment is capable of increase with the addition of new assets) has a notional existence even at times when there are no assets comprised in it. To carry the river simile a stage further, we should continue

19The concept of a floating charge as an interest in a fund has recently been endorsed in the decision by the Privy Council in Agnew v Commissioners of Inland Revenue [2001] UKPC 28; [2001] 2 A.C. 710,per Lord Millett at 719. For the meaning of "ordinary course of business" in the context of priorities see below, para.S-39.

20See below, para.4--21. See below for an analysis of the present status of Romer L.J.'s 'essential ingredients'.

21Cf the view of Lord Scott in Smith v Bridgend [2001] UKHL 58; [2002]1 A.C. 336 [61]-[63] where he says 'In my opinion, a charge expressed to come into existence on the occurrence of an uncertain future event and then to apply to a class of assets that cannot be identified until the event has happened would, if otherwise valid, qualify for registration as a floating charge'. See above para.2-15.

IV THE FLOATING CHARGE

to speak of the river Thames even if, through a drought, it had temporarily dried up. 22

An analogy is not hard to find. The interest of a beneficiary in a trust fund is exactly in point. So long as the trustee's power of management continue, the beneficiary has no rights in any specific asset within the fund. His interest is a floating interest of the same kind as that of the chargee under a floating charge. 23 The analysis of a floating charge as an interest in a fund appears to have been approved by Lord Walker in the Spectrum case. 24

Hence the peculiarity of the floating charge is that, like an interest in a trust fund, it has immediate existence even prior to attachment. But is it of the essence of a floating charge that the fund should be open-ended? Recent cases have shown that Romer L.J.'s judgment offers a description, not a definition, and that while the first two characteristics (charge on a class of present and future assets, the cJass changing25 from time to time in the ordinary course of business) ~re typical of a floating charge they are not

distinctive of it, and it was the third characteristic (freedom to deal) which was the hallmark of a floatin~ charge. 26 Hence a closed fund, which is

restricted to existing assets and cannot increase but can only reduce, because the debtor is obliged to pay over to the chargee the proceeds of assets sold instead of being able to use these to acquire new assets, nevertheless suffices for a floating charge. 27 Further, it is now clear from the opinion of Lord Scott in Re Spectrum Plus that it is possible, though unusual, to have a floating charge over a single identified asset. 28 So long as the debtor's powers of management continue, the fund remains in being until the last unit comprised in it is disposed of. In short, while a fund usually consists of a class or collection of present and future assets, the test of a fund is not whether it encompasses future assets or even the number of present assets comprised in it but the power given to the manager to deal with them free from interference by the beneficial owner or chargee so long as the power continues.

22 As with the river Todd in Alice Spri:ggs, Australia, which is dry for most of the year. The

23 For an.\analysis of property in a trust fu'fld which does not rely on the concept of 'floating interest' seeR. Nolan, "Property in a Fund" (2004) 120 L.Q.R. 108. Mr. Nolan's view is that the beneficiary has a limited interest in the assets presently in the fund, subject to the rights of the trustees to overreach that interest and to substitute assets.

24 ,[2005] UKHL 41; [2005] 2 A. C. 680 [139]. Lord Walker, however, immediately afterwards cites With apparent approval the analysis by Professor Worthington in Proprietary Interests in Commercial Transactions (1996Y, pp.74--77, which suggests that a floating charge is a defeasible fixed charge, see below para.4--06.

25 More accurately, the individual components of the class changing.

26Agnew v Commissioner/or Inland Revenue [2001] UKPC 28; [2001] 2 A.C. 710 [13]; Re Spectrum Plus [2005] UKHL 41; [2005]2 A.C. 680 [lll].

27Re Bond Worth [1980] Ch. 228, 267-268. This was the point overlooked in Re Atlantic Computers Systems plc [1992] Ch. 505. See below, para.4--15.

28The example given by Lotd Scott in Spectrum is that of an express assignment of a single debt by way of security [107].

128

describe the floating charge as a present security. This has led some commentators to advance the theory that a floating charge is a defeasible security interest which confers on the chargee the same quality of proprietary interest as that of a fixed chargee except that it is defeasible,31 or overreachable.32 However, there are fundamental objections to this approach. In the first place, it is impossible to distinguish such a floating charge from a fixed charge with a licence to deal, a characterisation which the authorities have rejected. 33 Secondly, it is clear from the cases referred to above and many others in which they have been cited34 that until crystallisation the charge does not attach to any asset in specie, so that it is quite different in nature from a fixed charge; if that were not the case, there would be no need for a concept of crystallisation. Thirdly, it is equally clear that crystallisation is not retrospective.

What, then, does this presently existing security interest give the floating chargee which he would not have under a mere contract to assign assets in the

29 Re ASRS Establishment Ltd [2000] 2 B.C.L.C. 631; Ashborder BV v Green Gas Power Ltd

[2004] EWHC 1517 (Ch); [2005] B.C.C. 634. See below para.4-20.

30 Agnew v Commissioners of Inland Revenue [2001] UKPC 28; [2001] 2 A.C. 710, per Lord Millett at [32]. This is true even if the label is that the charge is floating, but the rights and obligations created by the parties are those of a fixed charge: the court will thell characterise the charge as fixed, see The Russell~Cooke Trust Company v Elliott [2007] EWHC 1443 (CH); [2007]2 B.C.L.C. 637.

31 See, for example, S. Worthington, Proprietary Interests in Commercial Transactions (Oxford: Clarendon Press, 1996) pp.79-86.

32 R. Nolan, "Property in a Fund" (2004) 120 L.Q.R. 108. The differences between Mr. Nolan's theory and that of Professor Worthingon are discussed in his article at 129. Mr. Nolan's view of the chargee's pre-crystallisation interest is that it is, in any event, very limited since it is overreachable and cannot be enforced until crystallisation. In these circumstances there may be very little in substance between Mr. Nolan's view and the view put forward in this book.

33Evans v Rival Granite Quarries Ltd[l910] 2 K.B. 979,999. The difference is said to be that the fixed charge with a licence to deal is not defeasible (Worthington, Proprietary Interests in Commercial Transactions p.81), but the licence to deal plainly has the effect that it is defeasible.

34See, for example, Re Benjamin Cope & Sons Ltd[1914]1 Ch. 800,per Sargant J. at 806; Agnew v Inland Revenue Commissioners [2001] UKPC 28;[2001] 2 A. C. 710; Re Cosslett Contractors)

Ltd [1998] Ch. 495,per Millett L.J. at 509-510.

129

IV THE FLOATI"!G CHARGE

future? Firstly, the occurrence of the crystallising event causes the charge to attach without the need for any new a~1 on the part of the debtor. Secondly, the debenture holder has the right, on crystallisation, to follow the assets into the hands of a purchaser or incumbrancer who prior to crystallisation took them from the company otherwise than in the ordinary course of the company's business. 35 Thirdly, restrictions in the floating charge on dealings in the assets by the company bind a subsequent party taking with notice of such restrictions, so that upon the floating charge crystallising it will have priority-" Fourthly, the procedural security which an execution creditor obtains by delivery of a writ of execution to the sheriff37 takes effect subject to the prior equity of the debenture holder under the floating charge, so that if the charge crystallises before the execution is completed, the debenture holder obtains priority over the execution creditor, even though crystallisation does not occur untj} after the goods have become bound by the writ or even, indeed, until after/lleir seizure by the sheriff. 38 Finally, by virtue of the fact that he has an existing security interest, albeit floating in character, th.e debenture holder has the riislit t? apply to the court for the apporntment of a receiver where his secunty1s m Jeopardy, even 1f the charge has not crystallised39 and even if there has been no default.40 Though the holding of a property interest by the applicant is not an essential condition of the appointment of a receiver by the court4 J it greatly strengthens the case for such appointment, which has the effect of crystallising the charge.'' Similar considerations apply to the grant of an injunction at the behest of the holder of a floating charge to restrain the company from disposing of its assets otherwise than as permitted by the charge.43

Attachment of the floating charge

4-07 When the debtor company's powers of management come to an end, the charge is said to crystallise, that is, it ceases to be an interest in a fund of

Gh, 158, where Kekewich l held that the court could atso appoint a manager. See also Wily~,

St George Partnetship Banking Ltd (1999) 161 ALR. 1 [45]-[47] pet F1nkelstein J.

40Re London Pressed Hinge Co Ltd, itbove.

~1 See Lightman and Moss, 'The Law of Receivers and Administrators of Companies 4th edn

(London: Sweet & Ma."{wel~ 2007), para:29-001

-t& See below. pata.4--43.

41See below, para.448. Whether the court would grant a mandatory injunction to undo a disposition which to the knowledge of the disponee was in breach of the restriction in the floating charge is another matter. The court might well take the view that such an injunction is unnecessary, since on crystallisation the floating charge would anyv.-ay have priority, so that there is nothing to undo. See below para.S-40.

130

THE CONCEPTION OF THE FLOATING CHARGE

-····~····--

assets and becomes attached to the specific assets then comprised in the fund and any further assets acquired by the company. Like a fixed charge, a floating charge takes effect as a security from the date of the security agreement. It is often said that once a floating charge has crystallised so as to become fixed it is treated in the same way as if it had been fixed from the outset. This, however, is not entirely the case. In the first place, crystallisation is not retrospective. Secondly, the fact that the charge started life as a floating charge means that even after crystallisation the company may have ostensible authority to deal with the charged assets, and this may affect priorities in the event of subsequent dealings." Thirdly, for the purpose of certain provisions of the Insolvency Act 1986 the rule is; once a floating charge, always a floating charge. More accurately, a floating charge is defined as a charge which, as created, was a floating charge45 It follows that crystallisation of a charge before a winding.up or other event attracting the rights of preferential creditors does not prevent the charge from being subordinated to preferential debts and the ring-fenced fund.'6 Conversely, a charge created as a fixed charge retains its status as such for the purposes of the Insolvency Act even though it has subsequently been converted into a floating charge pursuant to an agreement to that effect.47 The result is that the chargee is not postponed to preferential creditors; on the other hand, he cannot appoint an administrative receiver,48 nor can he appoint an administrator out of court.49

2. FIXEJJ CHARGE VERSUS FLOATING CHARGE

The nature of a floating charge has now been examined, togeth,er with the 4-08 characteristics which distinguish it from a fixed (or specific) charge. Though

the distinction is relatively easy to state, it has been found much harder to apply in practice. Particular difficulty has been occasioned by charges over book debts and the relationship between book debts and their proceeds. Everything turns on the extent to which the chargee has contractual control, an issue we shall examine in detail a little later.50 At this stage it is just worth emphasising that the distinction is not, as is frequently supposed, between a charge over existing assets and a charge over future assets, nor between a charge over fixed assets and a charge over current assets, but between a charge which leaves control with the chargee and one which does not.

44 See below, paras ~29, 5-50.

4s Insolvency Act 1986 s.251; and see ibid., sAO(i); Companies Act 2006, s.754{1) and belov,.·, para.5-65.

«<> See below, para.~65.

41 See below, para.4--57--4-58. In these circumstances it may be th.at a new floating charge is created.

48 As to the abolition of administrative receivership except in specified cases,. see above, para.,l-01, below. paras 4---09, 4~1.

49 Insolvency Act 1986 Sch.Bl para.l4. so See below, patas +21 et seq.

131

•

!V THE FLOATING CHARGE

Significance of the distinction

4-09 Meanwhile we must address a preliminary question: what is the significance of the distinction between a fixed and a floating charge? Is one preferable to the other? Here it is necessary to distinguish legal from commercial considerations. Assuming that the debtor company has a sound business, it is not in the interests of either party unduly to fetter the company's ability to run its business, for it is from the income generated by the company's trading activities that the creditor will ultimately be paid. For the creditor to tie up the debtor with covenants so stringent that the creditor will have to turn a blind eye to breaches in order to avoid paralysing the business or impairing its efficiency is not good sense. This is a point which lawyers are all too inclined to overlook. Just as the old-style wills draftsman used to provide a life interest for the testator's widq;,v, rather than an absolute interest, in order to defer estate duty, with the rC!iuft that duty was deferred but the widow was leftdestitute, so also the modern draftsman of debentures is inclined to go for overkill, driven by a desire to obtain the most effective security for his client's advance. This will be considered'later."

A further advantage of the floating charge used to be that if this, with other security, covers the whole or substantially the whole of the debtor company's property, the chargee can take power to appoint an administrative receiver to manage the entire business of the company, continue trading and hive down or sell off the business as a whole in the event of default instead of merely having to sell specific assets. Only the holder of a charge which as created was a floating charge could do this.52 Further, the floating chargee could block the appointment of an administrator." However, with certain ex~'eptions administrative receivership is now abolished, 54 reflecting a concern that it undermined the prospects of reorganisation of a company through administration. 55 The floating chargee, however, is given the power to appoint

51 See below, paraA--54.

!.l See Insolvency Act 1986 s.29(2). So long as there was a f1oa£jng charge it is irrele\"1lnt that most of the company's property was subject to fixed charges ln favour of the same chargee.

S3 This is because s.9(3) of the Insolvency Act 1986 generally required the court to dismiss an application for an administration order where there is an administrative rereh-er unless he consenti;:d. This remains the case in 'rCla,tion to those situations where an administrative receiver, can continue to be appointed bY a floating chargee, Insolvency Act 1986 Sch.Bl p_ara.39.

54Insolvency Act 1986 s.72A(l), inserted by the Etrterprise Act 2002 s.250(1). The exceptions relate chiefly to capital and financial market arrangements, public-private partnerships and P.ther project finance arrangements, see Insolvency Act 1986 ss.72B-G. Floating charges Cr7atcd before September 15, 2003 are also excepted. See further para.4-61.

55It can be argued that the percdved mischief to which the insolvency provisions of the Enterprise Act fH'Cdirected could have been dealt with by simply repealing s.9(3), so that an admiillstration ord~r could be made dyspite the appointment of an administrative receivet~ who upon the makmg of the order would have to vacate office (Insolvency Act 1986 s.l1(2)). Another possible route would have been to reform the duties of an administrative receiver, so

that such duties were owed to creditors more gene.rally, see R. M. Goode,

Corporate Insolvency Law 3rd edn (London: Sweet & MaxweU, 2005) pp.284-285 and

ll2

FIXED CHARGE VERSUS FLOATING CHARGE

an administrator out of court under a 'fast-track' procedure not available to other creditors,50 and thus has the ability to choose who is appointed.

Despite the virtues of a floating charge there is no question that a fixed 4-10 charge has several advantages over a floating charge when it comes to protection of the creditor. In the first place, the creditor acquires immediate

real rights over the asset which can only be cut off by a disposition to a bona fide purchaser of the legal estate or title for value without notice. Since most charges ate registrable, most categories of third party will be fixed with notice of the charge,57 and will accordinjlly be bound by it. By contrast, the disposition of an asset which is the subject pf a floating charge will as a general rule take effect free from the charge, whether the disposition be outright or by way of charge or mortgage and whether or not the charge has been registered or the disponee knows of it.58 Secondly, a floating charge is postponed to the rights of preferential creditors if the debenture holder takes possession of any of the charged assets" or if the company goes into receivership"' or liquidation," whereas a flxed charge6l. has priority over all unsecured claims, preferential or otherwise, The class of preferential creditors has been reduced by the abolition of Crown preference!' but the Enterprise Act 2002 has inserted s.l76A into the Insolvency Act 1986,64 which provides that a 'prescribed part' is to be taken out of the assets subject to any floating charge and made available to the unseeured creditors. The relevant percentage is 50 per cent of the first £10,000 and 20 per cent of any assets above that figure, with a ceiling of £600,000 for the prescribed part65 This 'ring-fenced' fund was supposed to offset the gain to floating chargees caused by the abolition of Crown preference, but since the Crown preference was abolished with effect from September 15, 2003, but the 'ring-fenced' fund deductions only apply to floating charges created after that date, at present some floating chargees are obtaining a 'windfalJ'66 Thirdly, a floating charge given by an insolvent company within the 12 months" prior to the onset of

~~~~~--·····-

, 6 Insolvency Act 1986 Sch.Bl para.l4. Directors of the company and the company itself also have this power (Insolvency Act 1986 Sch.Bl para.22) but this ls subject to rhe power of the l1oa.ting chargee to veto such appoinunent and appoint its own choice of administrator (Insolvency Act 1986 Sch.Bl para.36).

57See above para2-29. Purchasers in the ordinary course of business of the legal interest are unlikely to have notice.

58See below, paras 5···38 et seq.

59Companies Act 2006 a754.

00 Insolvency Act 1986 &40.

61Insolvency Act 1986 s.l75. See further below, paraS-65, as to the effect of this provision and those referred to above.. fn.S9 and 60.

62i.e. a charge which starts life as a fixed charge. See above. paraA-07.

63The only preferential t.'!editors now are employees of the company, and the Secretary of State for Work and Pensions, who is subrogated to the claims of employees against the rompanv to

the extent that employees have claimed ·under ss.182-186 Employment Rights Act 1996. ·

64Enterprise Act 2002 s.252,

65The Insolvency Act 1986 (Prescribed Part) Order 2003. This has the effect that no dedllCtion is made from t1oating charge assets ovet £2,985,000.

ilii The commencement of the ring-fenced fund provisions had to be prospective because of concerns about the application of the H11man Rights Act 1998.

m Or two years in the case of a charge in favour of a person connected with the company.

133