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

V FIXED AND FLOATING CHARGES: SOME PROBLEMS OF PRIORITY

interest in the proceeds, 121 and this overrides the general rule giving priority to a bona fide pnrchaser of the legal title for valne and without notice. So the starting position is that 0 has the superior interest by virtue of being first-in- time. What is not clear is whether this can be displaced in favour of M if he is the first to give notice to the debtor122 and thereby obtain priority under the rule in Dearle v Hall. 123

Various kinds of lien have priority even over a consensual security interest created before the events giving l'ise to the lien. These include the possessory lien of caiTiers and the various kinds of maritime lien. Whether a consensual security interest has priority over statutory charges depends on the particular statute. 124

6. RANKING OFTHE FLOATING CHARGE

I

5-37 So far, the discussion has been confined to priority issues relating tn fixed security interests. The floating ~harge attracts entirely different principles because of the l'ight given to the debtor, and much depends on whether the competing interest arose before or after crystallisation. The position of the holder of a floating charge in relation to preferential creditors and the prescl'ibed part raises distinct considerations and will be dealt with separately later in the present chapter.'"

As against interests arising prior to crystallisation

5-38 The ranking of a floating charge in relation to subsequent interests arising piior to the crystallisation of the charge depends partly on the type of

RANKING OF THE FLOATING CHARGE

interest in question and partly on whether the floating charge contains restrictions on dealings of which the subsequent claimant has notice. The peculiar nature of .the floating charge creates difficulties of analysis in the context of priorities, for whilst the charge is a present security it is nonspecific and in principle does not affect third parties at all while it continues to float. Since crystallisation of the charge, which converts it from a floating security to a fixed seeurity, is not retrospective, the subordination of intervening interests which occurs in certain conditions described below is not always easy to explain and, indeed, has never been fully analysed by the courts. 126 It is clear that there are certain situations in which a floating charge retains its priority over subsequent interests, but it would seem that such priority is inchoate so long as the charge continues to float and can only be asserted upon crystallisation.

(I) Buyer or incumbrancer in ordinary course of business

dispositions by way of sale,127 hire-purchase, llS specific mortgage or charge, 129 and, indeed, any other form of bona fide disposition which is intra vires the company and is designed to promote rather than to terminate or destroy its business. 130 Even a sale of its goodwill, assets and undertaking will be considered in the ordinary course of business if intended in furtherance of the business,131 and not with a view to ceasing trading. 132 In Ashborder BV v Green Gas Power Lrd, a recent decision in which the authorities were analysed at length, 133 Ether ton J. summarised the position as follows: 134 ·"

issue generating much academic debtite.(see the 2nd edition of this OOok at pp.l2~122, and R. Go~de, Commercial Law 2nd edl\· (London: Butterworths. Law, 1998) pp.818-819). Usually {he issue has been rendered moot by a finding that the contractual proceeds provision created a charge void for want of registration. But where this is not so the question arises as to the correct principles which apply to a contes't between the holder of an equitable tracing right and a mortgagee of the proceeds.

122iAs he almost always will, since it is likely to be some time before 0 discovers the wrongful ~resa[e and the identity of the puocJw.ser.

123 This poi?t ~s argued but not \!lecided in Compaq Computers Ltd v Ahercom Group Ltd, abov"e, smce ~t was held that the seller's interest in the debt arose by way of assignment and not by operation of law. The authorities are inconclusive. For further dis.v'USsion see D. MacLaucfilan, "Priorities.·····Equitable tracing rights and assignments of debts" (1980) 96

L.Q.R. 90, 95-98 and Oditah, Legal Aspects of Receivables Financing, 137-139.

114 An example of a statutory charge havJng priority over a mortgage is provided by s.87(6) of the Agricultural Holdings Act 1986 in relation to tenants' charges created 1.mder s.85(2) of the Act.

m See below, para.5-65,

126A point well made by Mahoney lA, in Reynolds Bros, (Motors) Pty Ltd vEsatldtJ.Ltd(1983)

BA.C.L.R. 422,427.

121Hamer v l,ondon, City & ,t!idland Bank Ltd (1918) 87 LJ.K.B. 973; Reynolds Broj, (Motor) Pty Ltdv Esanda Ltd(1983) 8 A.CL.R. 422.

1211 Dempsey and National Bank of New Zealand v Traders' Finance Corp Ltd [1933] N.Z.LR.

1258.

129Cox MOore v Peruvian Carp Ltd [1908]1 Ch. 604; Re Hamilton's Windsor Ironworks (1879) 12 Ch.D. 707.

130See Ashborder BV v Green Gas Power Ltd [2004] EWHC 1517 [227] and W.J. Gough,

Company Charges 2nd edn (London: Butterworths Law, 1996) p,198.

131e.g. by way of amalgamation (Re Borax Co [1901] J Ch. 326) or disposal of a loss-making part of the business to enable the remainder of the business to be continued profitably (Re

H. H. VMan & Ca Lld]l900]2 01. 654).

134 Hubbuck v Helms (1887) 56 L.J. Ch. 536; Hamilton¥ Hunter (1982) 7 A.C.LR. 295; Torzillu Pty Ltd' Brynac Pty Ltd (1983) 8 A.C.L.R. 52.

l3l Especially at [2004] EWHC 1517 [202]-{216] and [227].

134 [2004] EWHC 1517 at[227].

V FIXED AND FLOATING CHARGES: SOME PROBLEMS OF PRIORITY

company's business in the context of a floating charge is a mixed question of fact and law; (2) it is convenient to approach the matter in a two stage process; (3) first, to ascertain, as a matter of fact, whether an objective observer, with knowledge of the company, its memorandum of association and its business, would view the tmnsaction as having taken place in the ordinary course of its business, and, if so (4) second, to consider whether, on the proper interpretation of the document creating the floating charge, applying standard techniques of interpretation, the parties nonetheless did not intend that the transaction should be regarded as being in the ordinary course of the company's business for the purpose of the charge; (5) subject to any such special considerations resulting from the proper interpretation of the charge document, there is no reason why an unprecedented or exceptional transaction cannot, in appropriate circumstances, be regarded as in the ordinary course of the company's business; (6) subject to any such special considerations, the mere fa~ tl.at a transaction would, in a liquidation, be liable to be avoided as a fraudulent or otherwise wrongful preference of one creditor over others, does not,·of itself, necessarily preclude the traqsaction from being in the ordinary cotrse of the company's business; (7) nor does the mere fact that a transaction was made in breach of fiduciary duty by one or more directors of the company; (8) such matters in (6) and (7) may, however, where appropriate and in all the circumstances, be among the factors leading to the conclusion that the transaction was not in the ordinary course of the company's business; (9) transactions which are intended to bring to an end, or have the effect of bringing to an end, the company's business are not transactions in the ordinary course of its business.

Given the implied authority of the debtor company to continue to deal with its assets in the ordinary course of business~ it follows that the buyer, incumbrancer or other party acquiring an interest in the charged assets in the ordinary course of business has priority over the holder of the floating charge, even if he takes with knowledge of its existence. 135 Where, in this situation, the charge covers book debts or other receivables, the rule in Dearle v Hall does not apply, for the floating chargee, having impliedly authorised the subsequent fixed charge, cannot jump ahead by being the first to give notice to the debtor after the charge has crystallisedll6

5-40 If the debenture imposes restridtions on sales or subsequent incumbrances and the particular sale or charge, though in the ordinary course of business, is in breach of such restrictions, the floating charge will, on crystallisation, retain its priority if the buyer or incumbrancer took with notice of the ~strictions, whether his interest is legal or equitable.m This stems from the

135 Re Caste!! & Brown Ltd [1898] 1. Ch.~315; English & Scottish Afercanrile Jnvestmen; Co v B'unton [I 892]2 Q.B. 700.

136Ward v Rnyal Exchange Skipping Co Ltd (1887} 58 LT. 174; Re Jnd Coope & Co Ltd [1911] 3

Cn. 223.

mEnglish & Scottish Jl!ercantile Investment Co Ltd v Brunton [1892] 2 Q.R 700,per Lord E.<~her

M,R. at 707; Cox v Dublin City Distillery Co [1906] I.R. 446; Wilson v Kelland [1910] 2 Ch.

306. As to whether registration constitutes notice. see above, paras 2-24, 2-26.

196

RANKING OF THE FLOATING CHARGE

fact that the floating charge, though ambulatory, is a present security, 138 not a mere contract right, so that restrictions contained in it will constitute an equity binding those who have notice of them. It is true that in Griffiths v Yorkshire Bank plc139 Morritt J., disapproving of a dictum by Chadwick J. in Re Portbase Clothing Ltd, '"'expressed the view that a restriction on the grant of subsequent charges is purely contractual and has no proprietary or priority effects.141 But the learned judge's attention does not appear to have been drawn to the earlier authorities clearly supporting the position taken by Chadwick J. to the eflect that a negative pledge clause creates an equity in favour of the holder of the floating charge142 or to the authorities stating that the grant of a subsequent !1oating charge ranking in priority to the first !1oating charge is prima facie outside the chargor's dealing powers. 143 The position is otherwise, however, where the subsequent purchaser or incumbrancer takes without notice of the restrictions contained in the floating charge,' 44 for the third party is entitled to assume that the company retains the power to deal with its assets in the ordinary course of business and in the absence of notice of the restriction he will obtain priority.' 45

Where the subsequent purchaser or incumbrancer takes with notice of the fact that the disposition to him is in breach of the debenture creating the floating charge, the debenture holder's right to assert his security interest would appear to be exercisable only on crystallisation and until then would, it is thought, be merely inchoate, Unless otherwise provided by the debenture, the wrongful dealing by the company does not of itself cause the charge to crystallise,'46 and until crystallisation the debenture holder has no right to any specific asset capable of being asserted against the third party. The exact effect of a buyer or an incumbrancer taking subject to an uncrystallised floating charge is complex and relatively unexplored. This is because, in all reported cases, the relevant floating charge crystallised by the tirne the matter is considered by the court and so all statements on this issue are obiter. Further, sensible chargeholders will attempt to protect themselves by including a provision for automatic crystallisation triggered by the grant of an interest in breach of the restriction. Lord Phillips in the Court of Appeal decision in the Spectrum Plus litigation,147 says that the passage above raises a number of questions:

us See above, para.+06.

'" [1994] I W.L.R. 1427.

140 [1993] Ch. 388 at 401.

t41 ibid. at 1435-1436.

142 [1993] Ch. 388 at 4Ql.

A:> Re Benjamin Cope & Sons Ltd fl914] l Cfi. 8.00~ Re Household Products Co Ltd (1981) 124

D.L.R. (3d) 325.

: 44 As to when registration constitutes notice, see above, para.2-23 et seq.

145English & Scottish Mercantile Investment Co v Brunton [1892] 2 Q.B. 700; Welch v Bowmaket

(Ireland) Ltd[l980] I.R. 251.

146Reynolds Bros. (Motors; Pty Ltd ;; Esanda Ltd(I983) 8 A.C.L.R. 421,per Mahoney J.A. at

427. However, many agreements will make such a disposition a crystallising event, soe, for example. Re Manurewa Transport Limited [1971] N.Z.L.R. 909; Fire Nymph Products Ltd v

The Heating Centre Property Ltd (1992) 7 AC.S.R. 365; ABN Amro Bank NV v Ch(vu

Banking Corp Ltd [2001]2 H.K.L.R,D. 175. '" [2004] EWCA Civ 670; [2004] Ch. 337 [30].

197

V FIXED AND FLOATING CHARGES: SOME PROBLEMS OF PRIORITY

"Why cannot the chargee assert his security interest over the asset that has been disposed of in breach of contract until the remainder of the charge has crystallised? If the assignee of the asset charged realises the asset, can the chargee trace into the proceeds? If so, what is the nature of the interest that entitles him to do so? In considering the first of these questions, Professor Goode refers to a passage in Reynolds Bros. (Motors) Pty Ltd & Ors v Esanda Ltd148... Mahoney JA gives detailed consideration to charges containing restrictions on disposal and comments that the effect of such restrictions has yet to be fully explained and the rationale of Brunton's case yet to be finally stated. I would endorse his comments."

The following is an attempt to take up the challenge laid down by Lord Phillips and to explore the effect of a restriction on disposaJ.I 49 The problem is

the same whether the disposition was in breach of a restriction of which the disponee has notice, or was out~ide the ordinary course of business.I5o A

distinction should be made be'tween a disposition to a buyer and one to an incumbrancer. A buyer is bo)lnd by the charge once the charge has crystallised. 151 Before that point,'!what remedy does the chargeholder have? A mandatory inju?ction requiring the buyer to restore the assets to the company, even If theoretiCally available, would not normally be appropriate, for ex hypothesi the debenture holder will have priority on crystallisation of the charge, so that the improper dealing causes him no loss and the only relief he could expect is a declaration that his charge enjoys priority. 152 If he discovers the d~btor company's intentions in time he can no doubt obtain a quia timet

lllJUnctJon to restrain a threatened disposition in breach of the debenture 153 but it see'?~ unlikely that the court would go further than ordering th~t any

d!sposJt!On should be on terms preserving the priority of the floating charge, for in most cases a disposition on such terms would be permitted by the debenture.

'" (1983) 8 A.C.L.R. 422,427.

149 See also Beale, Bridge, Gullifer and Lomnicka, The Law of Personal Property Security

13.28-13.29, 13.32, 13.45.

150See below para.5-41.

151This. has been t~e result in three A~stralian cases, where in each case, there was a disposition outstd_e the ord~nary course of bu~mess before the charge crystallised by the appointment of a recet~er.and m.each case, the dtsp<?n~e was held to hold the assets subject to the charge.

However, mHam1lto~ vHunte: (198~) 7A>C.L.R. 295 the significance of the later crystallisation was nqt, how~ver, dtscussed m the Judg'ment. In Torzillu Pty Ltd v Brynac Pty Ltd (1983) 8

A.C.L.R. 52 tt was conceded that if the disposition was outside the ordinary course of business, the charge bound_ the purchas_er. In Re, Bartlett Estates Pty Ltd (Sup Ct Qnd) ,(19_88) .14 A.C.L.R. 5_12, agam there was little discussion of the significance of crystallisation.

152 ,!hts vtew may be satd to have some support from the analysis of Dowsett J. in Re Bartlett

1 ~ty (Sup C~ Qnd) (1988) 14 A.C.L.R. 512, 516-7, where he refers to the right of

'ijlstates Ltd

the floatmg chargee to u~tervene Qefore the disposition (see below fn.153), and then says: "It follo~s that ~e may also. mtervene,to recover property so mishandled, at least where the rights

of thtrd parties do not mtervene. In that case, the charge had crystallised before the action was. commenced, an~ so the result of the intervention was that the funds disposed of were subJ:ct to the crystallised charge. However, if the intervention had been before crystallisation,

the likely result would be a declaration as described in the text

153 No~se J. in Re Woodroffts Lt~ [1986] Ch, 366, 378 envisage~ that such injunctive relief is avmlable when the threatened dtsposition is outside the ordinary course of business. See also

Atkins v Mercantile Credits Ltd (1985) 10 A.C.L.R. 153, 157.

198

RANKING OF THE FLOATING CHARGE

What if the buyer disposes of the assets subject to the floating charge before crystallisation? Can the floating chargeholder trace the assets, or into the proceeds? The authorities are very limited, but appear to lead to the rather strange conclusion that there is an inchoate right to the assets, which can be enforced on crystallisation, but that the buyer can dispose of the assets

"in the ordinary course of business carried on by the chargor company". 154

This is obviously unlikely to happen, so if the buyer still has the assets or their traceable proceeds at the time of crystallisation, it would appear that the floating chargeholder can claim them at that point.

In relation to a subsequent incumbrancer, who takes with notice of a restriction in a floating charge, it is again cle~r that once the floating charge has crystallised, the subsequent fixed chargee cannot enforce his charge without accounting to the floating chargeholder as a prior incumbrancer. 155 Before the floating charge crystallises, the company still has the right to dispose of the assets vis-a-vis the floating chargeholder, but. not vis a vis the fixed chargeholder. This appears to lead to the conclusion that the company can dispose of the assets free from the floating charge, but not the fixed charge unless the holder of the fixed charge consentsi56 : if he does not consent, then the disposition is unauthorised and the proceeds are subject to the fixed charge, if he does consent then any right to the proceeds depends upon the terms of the authorisation. I" This leads to the further conclusion that if the fixed chargeholder chooses to enforce his security before the floating charge crystallises, and by means which do not lead to the crystallisation of the floating charge, the fixed chargeholder does not have to account to the floating chargeholder as a prior chargeholder, I58 (and any surplus would only fall within the floating charge if it was an asset covered by that charge). If, however, the floating charge crystallised before or during enforcement, there will be such a duty to account.

(2) Buyer or incumbrancer outside ordinary course of business

Where assets are disposed of by the debtor company to a buyer or 5-41 incumbrancer outside the ordinary course of business, the transaction is ex hypothesi outside both the actual authority of the company. Thus the exception to the nemo dat rule of an authorised disposition does not apply.

This means, therefore, that the buyer or incumbrancer will take subject to the

154Hubbuck v Helms (1887) 56 L.J. Ch. 536.

155Re Portbase Clothing Ltd[1993] Ch. 388,401.

156Re Camden Brewery Ltd (1911) 106 L.T. 598n; Re Robert Stephenson & Co (1912) 106 L.T. 595, 597. These cases concerned a fixed charge that was made subject to a prior floating charge by agreement, but this does not seem a valid point of distinction in this context. The relevant passage from Re Camden Brewery was quoted by Chadwick J. in Re Portbase Ltd [1993] 3 Ch. 388, 398-9, apparently with approval. See also Gough, Company Charges

274-275.

157See above para. I-59.

158In re Robert Stephenson & Co Ltd [1913] 2 Ch. 201, 205. For the duty to account, see above para.5-34.

199

V FIXED AND FLOATING CHARGES: SOME PROBLEMS OF PRIORITY

floating charge unless one of the other exceptions apply. It is possible that a buyer might fall within the exception of a bona fide purchaser without notice.'59 Where, however, the second disposition is equitable, or where the second buyer or incumbrancer has notice that the disposition is outside the ordinary course of business (which is reasonably likely to be the case)160 then the effect of such a disposition is similar to that of a disposition in breach of a restriction contained in the debenture discussed above. The buyer or incumbrancer takes subject to the floating charge, I6l but the priority of the debenture holder as floating chargee is inchoate and can only be asserted once the charge has crystallised. The mere fact that the disposition is outside the ordinary course of business does not in itself cause crystallisation, though it may trigger automatic crystallisation or entitle the debenture holder to intervene to assert his seeurity interest and thereby crystallise the charge, either pursuant to the terms of the debenture or by obtaining an order for appoiutment of a recei!lier on the ground of jeopardy to the security.

S-42 The courts have held that the dealing power implied in a floating charge does not extend to the grant of a subsequent floating charge over the same assets,162 but that it remains permissible for the company to grant a subsequent floating charge over part of those assets ranking in priority to or pari passu with the earlier floating charge.163 However, despite some rather loose dicta by Warrington L.J. in Re Automatic Bottle },fakers Ltd, 164 the true ratio of these cases is based not on a distinction between a floating charge over all the assets and a subsequent floating charge over part of them but on a proper construction of the charge instrument. Prima facie a company which has given a floating charge over all its assets is not at liberty to give a subsequent floating charge over all or any of such assets displacing the priority of the earlier floating charge. It wonld, however, be open to the

159See above para5-09. This view is supported by a dictum in Re Bartlett Estates Pty Ltd (Sup Ct Qnd) (1988) 14 A.C.L.R. 512, 516 and see also Reynolds Bros {Moto~>) Ply Ltd v Esanda

Lid (1983) 8 A.CL.R. 422, per Maponey IA. at 427. This exception would not, however,

apply where the first interest was i'tsclf a !egallnterest, and thus in the cases of Taylor v M'Kcand(l880) 5 C.P.D. 358; Payne vEJ!rn (1881) 6 Q.B.D. 620, where goods were subject to biils Of sale which only permitted dispositions in the ordinary course of business, purchasers were held to take subject to the interests of the_ holders of the bi1ls of sale, despite having bought the goods in good faith and without notiCe.

160Presumably the buyer or incumbrancer would also need to have notice uf the existence of the ,:_. floating charge, btlt if the charge is registered, both incumbrancers and buyers outside the \_ordinary course of business would normally be expected to search the register (see above

pa1'a.2~29) and so would have cOnstructive notice of the charge.

161Hamilton v Hunter (1982) 7 A.C.L,R. '295; Torzillu Pty Ltd v Brynac Pty Ltd (1983) A.C.L.R.

52; Re Bartlett Estates Pty Ltd(Sup L'l Qnd) (1988) 14 A,C.LR. 512.

162Benjamin Cope & Sons Ltd [1914J 1 Ch. 800, Hence the first floating charge has priority even though the [atcr charge is the first to crystallise (Re Household Products Co Ltd (1981) 124 D.L.R. (3d) 325).

163Re Automatic Bottle Makers Ltd [1926] Ch 412.

164Re Automatic Boule Makers l.td [1926] Ch. 412 at 423.

200

para.~53.

169See cases cited fn.166, above, There is a curious provision in ss.l83(3)(a) and s.346(5)(a) of the Insolvency Act 1986 to the effect that for the purpo:-.-es of those sections an execution against goods is completed by seizure and sale "or by the making of a charging ord_er under section 1 of the Charging Orders Act 1979". The quoted words are clearly a draftmg error

since the 1979 Act makes. no provision for a charging order against goods.

110 Insolvency A~t 1986 ss.346(5)(a), 1S3(3)(a); Rbberts Petroleum Ltd v Bernard Kenny Ltd [1983]2 A.C. !92, per Lotrl Brightman at 213.

201

5-45

5-46

V FIXED AND FLOATING CHARGES: SO.\lE PROBLEMS OF PRIORITY

------------ ······· --

a meeting having been called to pass a resolution for voluntary winding up. 171 There seems no reason why seizure and sale should not equally perfect the execution creditor's right to the proceeds vis-a-vis the holder of a floating charge even before these have been paid to the sheriff,172 subject to divestment as stated above. If the execution creditor is divested of his rights under the above statutory provisions and the floating charge has crystallised after sale but before divesunent, do the statutory provisions enure for the benefit of the debenture holder or the general body of creditors? Under such provisions the title of the trustee or liquidator is expressed to be good only as against the execution creditor, not against third parties such as a chargee under a crystallised charge. However, we have predicated that the execution creditor obtains priority over the debenture holder as a result of a sale prior to crystallisation of the charge. Accordingly, since the trustee or liquidator displaces the execution creditor he necessarily displaces the debenture holder and is thus to be entitled to the .proceeds of the execution up to the amount covered by the writ of fi. fa.( any surplus being caught by the crystallised charge.

<t

(b) Execution against debts An attachment of debts by third party debt proceedings 173 does not result in completed execution until their receipt by the execution creditor. " 4 Even a payment into court by the third party pursuant to the third party order is insufficient, for this does not of itself vest title to the moneys in the execution creditor."'

(c) Execution against land, securities andfunds in court By virtue of statute a special rule applies to attachment of land, securities and funds in court by way of a charging order. Under s.3(4) of the Charging Orders Act 1979 a charge imposed by a charging order has the like effect and is enforceable in the same courts and in the same mariner as an equitable charge created by the

171Insolvency Act 1986 ss.l83(3) and (4); 346(3), {4); Re Greer [1895] 2 Ch, 217, per Chitty J. at

221. These statutory provisions displace the ve.sting of the right to the proceeds in the execution creditors which would othl:twise arise when the sheriff received the proceeds. See also Bi'IJston & Bramley v Lefgh [1950] ·2:K.B. 528.

173These are in substance the same as the former gar:nishee proceedings; CPR Pt 72.

174Cairney v Back [1906] 2 K.B. 746. The case is distinguishable from the earlier decision in

~Rnbson v Smith [1895] 2 Ch. 118 in that the charge had not crystallised ln that case, the ·-:debenture holder's attempt to collect in the garnisheed debt being held ineffective in the absence of the appointment of h receiver or other crysLaUisJng event In G:Jirney v Back

Walton l expressed the view that the absence of the appointment of a receiver in Rvbson v Smith was irrelevant to the decisiOn inahat ea.se, but this dictum 1s plainly incorrect. Innay be noted that for the purpose of insolvency law also it is the time of receipt of the garni&heed debt which constitutes completion of the execution (Insolvency Act 1986 ss.346(5)(c),

183(3)(b): Roberts PetrvkumLtd e liemard Kenny Ltd[I983]2A.C. 192,per Lord Brightman at 213. See to tile same elfect the Insolvency Act 1986 &346(5)(c).

'" Coopers & Lybrand Ltdv National Caterers Ltd (1982) 47 C.B.R.(N.S.) 57.

202

RANKING OF THE FLOATING CHARGE

--···~··-----------

debtor under his hand. This applies even to a charging order nisi,l16 which will thus have priority over an uncrystallised floating charge unless the effect of the order is negated by the court exercising its discretion to refuse to make it absolute.'77 Execution against land may be completed not only by a charging order but by seizure or the appointment of a receiver. 178

(5) Landlord or local authority levying distress

A landlord levying distress for ren't on the goods of the company on the 5-47 demised premises is not subject to the floating charge. In tbis particular case,

as will be seen. m it is irrelevant whether the distress is levied before or after crystallisation. A local authority may distrain for unpaid business rates before crystallisation of the floating charge but not after. 180

(6) Debtor asserting right of set-off

The trading power implicit in a floating charge encompasses the ability of .the 5-48 cDmpany to engage in mutual dealings with a customer as the result of which

the customer aequires a right of set-off. Since on crystallisation the debenture holder cannot acquire rights over the company's assets greater than those the company has itself, it follows that the debenture holder's rights over book debts and other contract sums due to the company are subject to the debtor's rights of set-off in respect of cross-claims arising prior to notice of

crvstallisation.l!l The fact that the debtor was aware of the existence of the fl~ating charge at the time he concluded the transaction generating the right

of set-off is irrelevant, for ex hypothesi the company had authority to enter into such a transaction free from the ambit of the floating charge. A good illustration is Biggerstaff v Rowatt's Wharf Ltd. 182

The defendant company, having executed a debenture creating a floating charge over its assets, contracted to sell 7,000 barrels of oil to a firm of oil merchants, who paid the price in advance. The company failed to deliver the majority of the barrels. The oil merchants themselves owed the company a substantial sum for wharfage rent, but when, on the appointment of a

no Roberts Petroleum Ltd v &rnard Kenny Ltd, above, per Lord Brightman at 205. r77 Roberts Petroleum Ltd v Bernard Kenny Ltd [1983] 2 A.C. 192,

m Insolvency Act 1986 ss.!83(3)(c}and 346(5)(b). m See below, paraS·52.

"' R£ ELS Ltd [1995) Ch.ll, rightly declining to follow R£ Marriage. Neave & Ca [1896) 2 Ch. 663. The latter case was distinguished on the basis that it concerned a 1mere charge' rather than, as in ELS Ltd, a charge wllich took effect as a mortgage. Where a charge took effect as a mortgage, on crystallisation the goods were assigned to the ehargeholder and no longer were the "goods of the debtor'. For further discussion see· Beale, Bridge, Guliifer and Lomnicka, The Law of Personal Property Security 4.31 and 14.27~14.29.

11n Biggerstaffv &watt's Whwf Ltd{18%] 2 Ch. 93. See below,

181 See above.

203

V FIXED AND FLOATING CHARGES: SOME PROBLEMS OF PRIORITY

receiver for the debenture holders, he sought to recover the rent, the oil merchants claiilled a right to set off their cross-claim for recovery of the price of the undelivered barrels.

The Court of Appeal held that they were entitled to exercise the right of set-off against the receiver, despite the fact that at all relevant times they were aware of the floating charge.

As against interests arising subsequent to crystallisation

5-49 Once a floating charge crystallises, so as to become fixed, the general rule is that except for preferential insolvency creditors and the prescribed part for unsecured creditors it has priority over subsequent interests,183 including rights of set-off, 184 in just the same way as if it had been fixed at the outset. To this principle there are at leas't three exceptions:

!

(1) Subsequent purchaser or chargee without notice of crystallisation

5-50 Though there appears to be no authority directly on the point, it is submitted that, in accordance with the principle of apparent authority referred to earlier, 185 a purchaser or incumbrancer under a transaction concluded after crystallisation but before the purchaser or incumbrancer had notice of crystallisation, takes free from the floating charge (in the case of purchase)186 or has priority over it (where he is an incumbrancer) if he had had dealings with the company prior to crystallisation or was aware of the existence of the floating charge at the time he paid out his money. In such a case, the subsequent party is entitled to say that he was unaware of the termination of the company's authority to manage its assets and is thus not bound by the termination of that authority. This, of course, is on the assumption that the transaction was in the apparent course of the company's business. As previously stated, there is no reported case exactly on the point, 187 but the

183See Re Real Meat Co Ltd [1996] B.G•C. 254. For insolvency, see para.S-65.

184But only rights of set-off arising aftef. the account debtor (the debtor company's debtor) receivr-ct nqtice that the charge had cryStallised. See below, para.?-66.

185See above, paras 4-29, 5-02.

186A purchaser might also take free as a bona fide purchaser of the legal interest without notice of the charge, ABN Amro Bank NV v Chiyu Bariking Corporation Ltd [2001] 2 H.K.L.R.D.

175, 190; cf Fire Nymph Products Ltd 11 Heating Centre Property Ltd (1992) 7 A.C.S.R. 365,

~~ 374 where a legal purchaser was held to take subject to a crystallised charge where it was held

',to have notice of the charge and jts contents by failing to discharge the onus of proof.

1

187However, support for the views expre$sed in the text can be found in ABN Amro Bank NV 11 Chiyu Banking Corporation Ltd [2001] 2 H.K.L.R.D. 175. In that case, the question of priority arose between a floating·charge which crystallised on the grant of the subsequent (fixed) charges. The fixed chargeholders had constructive notice of the floating charge by reason of its registration, but not of the negative pledge or aUtomatic crystallisation clauses. The Hong Kong Court of First Instance decided the case on the basis of Dearle 11 Hall, and the subsequent chargeholders, who had given notice first, had priority. However, it can be argued that it was only because the first chargeholder had apparent authority to grant the

204

RANKING OF THE FLOATING CHARGE

result suggested is in accordance with principle, and this view is shared by Dr Gough in his monograph on company charges. 188

This situation does not apply to unsecured creditors, for they have no interest in the assets of the company and are therefore not concerned with the company's actual or ostensible dealing powers. So an execution creditor who fails to complete his execution before crystallisation of the floating charge is postponed to the charge even if he proceeds to complete the execution without notice of the fact that there is a charge which has crystallised. !89

subsequent charges that the first limb of Dearle 11 Hall was relevant at all: without such apparent authority the subsequent chargeholders would have had notice of a fixed charge and the second limb of Dearle 11 Hall would have applied.

188 Goode, Company Charges p.255 when dealing with the effect of express crystallisation clauses.

189Robson v Smith [1891] 3 Ch. 260.

190ABN Amro Bank v Chiyu Banking Cmp Ltd [2001] 2 H.K.L.R.D. 175, see above fn.l87.

191For a detailed discussion see Beale, Bridge, Gullifer and Lomnicka, The Law of Personal Property Security 14.17-14.26.

192Re Coal Consumers Association (1876) L.R. 4 Ch. D. 625.

dealing with waiver of non-consensual security, for example possessory or equitable liens, by the taking of additional or substitute security.

205

V FLXED AND FLOATING CHARGES: SOME PROBLEMS OF PRIORITY

purchase of or loan against assets comprising the security. It does not usually pay the first fmancier to try to preserve a monopoly of the debtor company's financing. The debtor's access to other funding will expand his business base and thus enhance the value of the first financier's security. It may therefore be of advantage to the secured creditor, or at least of no disadvantage to him, to grant a waiver to a subsequent financier or to subordinate his security interest to that of the later financier. Subordination is dealt with a little later. For the moment we will discuss waiver of a security interest, or of covenants contained in the security agreement, by a promise not to invoke them against the later financier. Waiver is to be distinguished from contractual subordination in that it is voluntary rather than contractual'" and it may deal with matters other than subordination, for example, waiver in favour of a purchaser (which operates as a release and not merely subordinates but destroys the security) and waiver of a negative pledge clause in a floating charge. ··"

Waivers take a variety of fofms. 196 They may be formal or informal; often no more than an exchange of letters is involved. They may be given ~thout reference to any limit of indebtetlness or they may be a waiver as to'a given slice of the obligations owed to the first financier, on the basis that as regards indebtedness above the stated figure, the security will continue to bind the assets. It is not u.~ually necessary to get a waiver from a creditor who holds a floating charge imposing no restrictions on the debtor's dealing powers; but even in such a case, now unusual, a waiver may be desirable in certain situations to avoid a possible argument that the later transaction was not within the company's ordinary course of business. Waiver of a negative pledge clause in a floating charge is designed to preclude the chargee from invoking the clause against the subsequent secured creditor in whose favour it was waived.

The effect of waiver

5-54 In what circumstances is a waiver enforceable by the party in whose favour it is given? Though the question appears not to have been decided in this specific context, the general priJlciple of promissory (or equitable) estoppel applies to preclude the secured creditor giving the waiver, either temporarily or perinanently, from asserting his security interest or restrictive clause against the subsequent secured creditor197,"where the latter alters his position in reliance upon it (as by advancing the secured loan) so as to render it

i!),equitable for the first creditor to resile from his prontise. 19' Two questions

',';-

111$ This is the 1egal c-haracterisation {sC~ Chitty on Contracts 29th edn (London: Sweet & Maxwell, 2004) para.22--040 et seq.), but in the world of commerce and finance the term

"waiver" is not infrequently used to denote a contractual release or subordination.

196 See S. Wilken, The Law of Waiver, Variation and Estoppel 2nd edn (Oxford: Oxford

University Press. 2002) Ch.4.

Ln A waiver may also be given to an unsecured creditor or to the debtor himself

198 See generally Chitty on Contracts paras 3--085 et seq,

206

WAIVER OF A SECURITY INTEREST

arise in relation to waivers. Firstly, is the effect of a waiver. temporary or permanent? Secondly, does it bind the secured creditor's assignee if taking for value and without notice of it?

(I) Temporary or permanent?

the subordinated creditor to be indorsed with a note of the subordination. Similarly, waiver in favour of a purchaser, though operating as a release of the security as between the parties, does not affect a bona fide transferee for value without notice.

Waiver of a floating charge compared with certificate of non-crystallisation

5-57 It is not uncommon for those advising the purchaser or mortgagee of property comprised in a floating charge (particolarly land) to ask the chargee for a certificate that the floating charge has not crystallised. The preswned object of this procedure is to estop the debenture holder from subsequently claiming that at the time of the sale or mortgage the debtor company's powers of management had already been brought to an end. Now it may well be that a debenture holder is um'hlling to give a waiver but prepared to give a certificate of non.crystallisation. In such a case, that is the best' the purchaser or mortgagee can !let and he must take his chance. He ought, however, to be left in no doubt !l!at compared with a waiver a certificate of non-crystallisation is very much second best. The reason is that the debenture holder himself will not necessarily be aware of events that have caused his charge to crystallise; he is therefore unlikely to be willing to give a certificate that goes beyond a statement that he is unaware of the occurrence of any crystallising event. This will not protect the party to whom it is given if it transpires that, unbeknown to the debenture holder, his charge had in fact crystallised. Certainly no one should accept a certificate of noncrystallisation unless he is satisfied that he is unable to get a waiver, for if he can get the latter, which solves his problems, why go for the oblique approach of a certificate of non-crystallisation, when what he really wants is an assurance that the debenture holder will not assert his security over the assets in question?

8. SUBORDINATION OF A SECURITY INTEREST

5-58 The nature of secured and uns~cured subordination has been discussed earlier202 and reference has been "made to the fact that it is open to two creditors holding security over the same asset to reverse by a!,'Teement the order of priority that would otherwise apply. 203 The effect is the same as that of waiver; the subordination constitutes an equitv binding the party giving it ~d an assignee from hfm who is a volunteer ~t takes with notice of the subordination but not affecting .a bona fide purchaser for value (whether acquiring a legal or an equ1table interest) without notice of the subordination.

W:l. See above, paras 1-79 et seq. :ntl See above, para.l-80.

208

SUBORD!KAT!ON OF A SECURITY mTEREST

There are two aspects of subordination which I should now like to develop in the context of the impact of the debtor's insolvency. The first is whether a subordination agreement relating to unsecured debt is likely to be held unenforceable in bankruptcy or winding up as contravening the statutory requirement of pari passu distribution. The second is the resolution of a circularity problem which arises where the debtor has granted a floating charge to one creditor and a fixed charge to another over the same asset and because of a subordination agreement between the two creditors the floating charge has priority over the fixed c~arge.

Does contractual subordination contravene the pari passu principle?

Secured creditors are not affected by the pari passu principle, so that an 5-59 agreement for the subordination of secured debt is not open to objection on

that ground where the debtor becomes insolvent. There has in the past however, been a concern that a liquidator or trustee is precluded by statute from giving effect to that form of subordination agreement by which the junior creditor whose debt is unsecured undertakes not to prove in the bankruptcy or v.inding up until the senior creditor has received I00 pence in the pound. The reason advanced was that under the Insolvency Act 1986 (re· enacting previous insolvency legislation) the company's property remaining after the satisfaction of preferential debts is required to be applied in discharge of its liabilities pari passu,204 that this requirement forms part of a mandatory set of statutory rules governing the administration of estates in bankruptcy and liquidation which cannot be excluded by contract,2os and that the exclusion of the subordinated creditor from proving in the bankruptcy or winding up before the senior creditor has beeri''paid in full contravenes the rule of pari passu distribution.

One issue is whether the statutory rules for administration of assets in insolvency embody private rights in favour of creditors which any creditor is free to waive or subordinate so long as he does not thereby prejudice the others,206 or whether they are rules of public policy designed to ensure that in the public interest insolvent estates are to be administered in a proper and orderly way. The latter view has been adopted in two House of Lords decisions, 207 made in the context of the operation of insolvency set·off'"'

--------- ~---------~ ········-

1(14 Insolvency Act 1986 ss.107. 328(3). Foe detailed analysis of the current state of the pari passu rule, see L,C. Ho, "On Pari Passu, Equality and Hotchpot in Cross-Border Insolvency" [2003] L.M.C.L.Q. 95; R. Mokal, "Priority as Pathology; The Pari Passu Myth" (2001) 60

C.L.J. 581.

205 National Westminster Bank Ltd v Iialesowen Presswork & Assemblies Ltd {1972] A.C 785;

Briiish Eagle International Airlines L-td 11 Compagnie NatWnale Air Fram:e [1975] t W.L.R.

758.

205 A principle expressed in the Latin maxim quilihet potest renunciarejuri pro se introducto.

201 National Westminster Bank Ltd v Halesown Presswork. & Assemblies Ltd {1972] A.C. 785; British Eagle Iniernationa! Airlines Ltd v Compagnie Natianale Air France {1975] 1 W.L.R, 758.

W3 Ch.7. For discussion see particularly para.7-29 et seq.

209

V FIXED AND FLOATII'G CHARGES: SOME PROBLEMS OF PRIORITY

--

Despite these decisions, it has been made clear in a nnmber of subsequent cases that none of the forms of contractual subordination commonly nsed contravene the principle. The more straightforward situation from this point of view is that of a turnover .subordination, where the subordinated creditor agrees to hold the dividends and distributions it receives on trust for the senior crcditor'o' It is clear that this does not infringe the pari passu rule since the subordinated creditor proves in the insolvency in the normal way. 210 This form is the most advantageous for the senior creditor, since it results in him obtaining a double dividend, and the subordination benefits only him and not all the other creditors as well, as is the ca.se in other forms of subordination.m Another reasonably straightforward form is where the subordinated debt it expressed as a contingent obligation, so that it is only payable if the senior creditor is paid in full, or if the debtor has sufficient assets to pay the senior creditor in full. This does not infringe the pari passu rule, since if the contingency is dot satisfied, the subordinated debt is valued at nil by the liquidator, and if the contingency is satisfied the subordinated creditor is paid pari passu with the other creditors.212 The most controversial formulation is a plain contracmal subordination, where the subordinated creditor agrees not to claim or prove until the senior creditor has been fully paid, without creating a contingent debt. It could possibly be argued that this infringes the pari passu rule, since the senior creditor is better off in the distribution than he otherwise would be, as are the rest of the other creditors. However, this is looking at the situation the wrong way round. If anything, the result of the agreement is that the subordinated creditor is worse off, rather than the senior creditor being better off, and the subordinated creditor is free to bargain for this position, for which he will usually r="ive an enhanced return. This form of subordination has, accmdingly, been held to be valid in a nnmber of cases.213 The recent case of SSSL Realisations also confirmed that where both the debtor and the subordinated creditor were insolvent, question of the validity of the subordination agreement vis-a-vis the pari passu rule has to be looked at separately in relation to each insolvency, despite the deleterious effect of the subordination agreement on the creditors of the subordinated creditor.214

210 This is confirmed though not directly, by the decision in Re Britl~h and Commonwealth

Holdings plc (No.' 3) [1992] 1 W.L.R. 672, aQd_ also by Lloyd J. in Re SSSL Realisatio~s

(2002) Ltd. Manning,, AIG Europe IUK) Ltd [2004] EWHC 1760 (Ch) [25]. There JS, however, a possible issue as to whether the turnover trust ts a regtstrable charge, see above

i1 para.l-·~81 and below para.8-24. .

2:!.This poJnt is confirmed bv Llo;rd J. in Re SSSL RealisatiortS (2002) Ltd. Mannmg v AJG Europe {UK) Ltd [2004] EWHC 1760 (Ch) at [27] and illustrated by !he facts of that case. See

further para.8-24 below. _ ·· ·

m G. Fuller, Corporate Borrowing: Law and Practice 3rd edn (Bristol: Jordans Ltd, 2006) 139.

•t) Horne v Chester & Feitt Property Dew!lopments Pty Ltd {1987) 11 A.C.LR. 485; Re Maxwell Communications Corp plc (No. 2) rJ994] 1 B.C.LC. l; SSSL Realisations (2002) Ltd, Manning v AIG Europe ( UK) Ltd [2004] EWHC 1760 (Cil) confirmed .on appeal sub nom

Squires v AIG Europe I UK) Ltd [2006] EWCA Civ 7. [200612 WL.R. 1369.

'" SSSLRealisarions 12002) Ltd. Mannh•g v AIG Europe I UK) Ltd[2004] EWHC 1760 (Ch)[45].

210

SUBORDINATION OF A SECURITY INTEREST

This judicial confirmation of the validity of subordination agreements is very much to be welcomed. Such agreements are widely used in corporate finance: for example, as a means of increasing available credit, as a way for banks to increase their capital base and in bond issues as a means for some bondholders to receive a higher return. Subordination agreements are enforceable in most developed countries,215 and it would be most unfortunate if English law took a different view. The principle established in British Eagle is in any event excluded as regards netting arrangements put in place by a recDgnised investment exchange or a recognised clearing house to limit systemic risk. 216

Subordination of a fixed charge to a floating charge: a circularity problem217

A fixed chargee, C, who would ordinarily have priority over an earlier 5-60 floating chargee, F, in the absence of restrictions of which he has notice, may

agree with F that his charge shall be subordinated to the floating charge. If the company then goes into liquidation having preferential creditors (P), a neat circularity problem arises. The liquidator indicates that as there are insufficient free assets for the purpose, he proposes to pay Pout of the assets comprised in the floating charge, pursuant to s.l75(2)(b) of the Insolvency Act 1986218 On the other hand, he must allow C first bite out of the assets comprised in the fixed cbarge (whicb are also within the floating charge), as a fixed charge has priority over preferential claims. F protests that this cannot be right, since he has priority over C by virtue of the agreement between them. We thus have a scenario which is not unfamiliar to property lawyers:

• P has priority over F under s. 175(2)(b)21 ~;

•C has priority over P as a matter of general law; and

•F has priority over C by virtue of their agreement.

How should the liquidator distribute the estate? As it happens, this particular cireularity problem is a lot easier to solve than those posed by our property

215 SeeP. Wood, Project Finance, Securitisations and Subordinated Debt 2nd edn (London; Sweet

& Maxwell, 2007) 204-207.

:<!G Financial Markets and Insolvency (Settlement Finality) Regu1ations 1999, SI 1999/2979. See below 7-31.

:!l? Following the Spectrum case, it is now difficult to create a fixed charge over many kinds of assets (see above paras 4-B--4--19), including book debts which were the subject matter of the charges in the Portbase case. This is likely to mean that the circularity problems described in this section are less likely to arise, although the same issue would a.rjse •.vere the recipient of an outright transfer under, for example, an invoice discounting arrangement, to agree to subordinate his interest to that of a floating chargee..

218 See further below, para.5~65, as to the subordination of a floating charge to the claims of preferential creditors in various insolvency-related events.

119The same point would now apply to the ring-fenced fund, under s..176A Insolvency Act 1986, if the floating ch.arge was created after September 15, 2003.

211

VFIXED AND FLOATING CHARGES: SO:ME PROBLEMS OF PRIORITY

"--

textbooks and arising from conflicting statutory provisions. Indeed, Professor Gilmore, who devotes an entire chapter to the mysteries of circularity which makes one wonder how we ever managed before computers, dismisses the circularity through contractual subordination as not a true circularity at alL'20 At all events, the problem is readily soluble through the principle of subrogation. Since F has priority over C by virtue of their agreement, so tbat C would be accountable to F for moneys received in the liquidation to the extent of C's subordination, all the interests are satisfied by treating F as subrogated to C to the extent necessary to give effect to the subordination agreement. That is to say, F will collect from the liquidator in right of C the amount due to C, or such part of that amount as is necessary to satisfy F's claim. As regards any balance due to F, this is postponed to the claims of P under s.l75(2) (b). That this is the correct solution was conceded in Re Woodroffe's (Musical Instruments) Ltd. 221 However, in Re Portbase Clothing Ltd,222 Chadwick 1 fe)t·tnable to adopt this approach and preferred to follow the Victorian decisi6n in Waters v Widdows,223 where Nicholson J. held that the fixed chargee, in s<ubordinating its claims to those of the .\)oating chargee, also subordinated thmff to the preferential debts. In that case the result was said to be dictated by the statutory policy of protecting preferential creditors. It is hard to see why. The purpose of the legislation is to give preferential debts priority over those secured by a floating charge, not over debts secured by a fixed charge. The result is that the preferential creditors gain a windfall from an agreement to which they were not party, which was not intended to benefit them and which can do so only at the expense of the fixed chargee.

5-{)1 It is, however, necessary to address the technical arguments on which Chadwick J. reached his conclusions in his carefully reasoned judgment. Firstly, whereas in the ordinary way the property the subject of the floating charge, and thus available for preferential creditors, was only the equity of redemption remaining in the chargor after the grant of the fixed charge, the effect of the priority agreement was tbat the whole of the debtor's interest in the property, not merely the equity of redemption, fell within the floating chargCc So by subordinating itself to the holder of the floating charge the fixed chargee was in effect swelling the assets that are subject to the floating charge and thereby increasing tile amount available to preferential creditors. Secondly, recourse to the doctritie:pf subrogation would have put the floating chargeJ in the same position as if the fixed chargee had assigned his charge to the floating chargee or declared a trust of the proceeds in favour of the floating charge, when in fact there has been no such assignment or

'~

lit Securitv Interests in Personal Property, para.39.1.

21:[1986) Cn 366, 368, 375. Similarly G]Imore, above, fn.79. This solution was also th,e one recommended by the Lav1 Coilll11issio'n to deal with the situation which was likely (m ~he absence of ~ontrary agreement) to arise under a 'first to file' scheme whereby a noatmg charge had priority over a subsequent fixed charge, see Law Commission Report No.296 on Company Security Interests (2005) 3.181-187.

"' [1993) Ch. 388.

:<23 [1984) Y.R. 503. See also Deputy Commissioner of Taxation v Horsburgh [198.4] V.R. 773.

212

SUBORDI:-lATION OF A SECURITY INTEREST

------

declaration of trust, merely a subordination. It would have been open to the two chargees to exchange their security interests but they bad not done so.

The answer to the first point is that the statutory provisions are designed to provide for payment to preferential creditors from assets which would be free assets of the company but for the floating chargCc However, the additional assets !bat become available to the lloating chargee asthe result of the subordination do not come from the company and would not form part of its free assets if there were no floating charge; they come from the fixed chargee and are released on the basis that it is the holder of the floating charge, and no one else, who will benefit from them. As to the second point, it is in the nature of subrogation to a security interest that it places the subrogee in much the same position as if the security interest had been assigned to him. Thus a surety who pays off the debt is subrogated to the rights of the secured creditor, including any security interest; and it has never been an objection that the surety could have taken an assignment instead of paying off the debt.

If the fixed chargee, despite the subordination agreement, had collected the debt due to it when there was still an amount due to the holder of the floating charge, it is clear that the sum collected would have been held on trust for the floating chargee.224 Applying the principle of subrogation does no more than short-circuit this procedure and allow the floating chargee to enforce the chargee's priority directly and for its own benefit, so achieving the result intended by the subordination agreement but without disturbing the position of the preferential creditors, who are neither prejudiced nor enriched by a purely inter-creditor agreement.

9. THE AFTER ACQUIRED PROPERTY CLAUSE AND THE SUBSEQUENT PURCHASE-MONEY SECURITY INTEREST

We now turn to a priority question which has caused difficulty in a number 5-62 of countries and which has been answered in a highly unsatisfactory manner

by English case law. This is the case where A makes an advance to the debtor on the security of its future property and the debtor subsequently acquires an asset with funds pro>~ded by B on the security of that asset. Whose interest has priority, Ns or B's? In policy terms, Ns ease has little merit. He may be first in the field, but why should that give him a monopoly over the debtor's flnancing? And since it is B's money that has furnished the new asset, why should this accrue as a windfall toNs security?225 Unfortunately, English law

224This at least is the position once the floating charge has crystallised, see above para,~O.

225!<Or further discussion of the relevant policy considerations, sec C. Walsh, "The Floating

Charges is Dead: Long Live the Floating Charge" in A. Mugasha (ed} Perspectives in Commercial Law (London: Prospect Publish1ng, 2000) 129, 134,

213