Critically evaluate the implications relating to floating charges over book debts in light of the House of

Lords decision in RE Spectrum Limited [2005].

To perform trading or manufacturing a company will need assets such as machinery, storage facilities
etc. In order to obtain funds companies sell claims against them in return for capital. The claims fall into
2 categories: Equity or debt, equity is risk baring shares usually called ordinary shares and debt signifies
a claim against the company for the payment at a future date usually accumulating interest. The most
usual form for a company to borrow money is by means of debentures. A debenture is a loan agreement
and sets out the terms of the loan; such as the amount borrowed, repayment, interest, charges securing
the loan etc. Debentures are usually secured by charges on the companys property; it may be secured
by a fixed or floating charge, or a combination of both.
A fixed charge usually takes on the form of mortgage over specified assets of the company such as its
land and buildings. A fixed charge restricts the debtors power to dispose of or deal with the property
without the creditors permission. By contrast a floating charge leaves the chargor free to deal with the
charged property in the ordinary course of business. The advantage of the floating charge for companies
is that it allows them to borrow even if they have no specific assets or assets which are continually
turned over or used. The charge remains floating until the charge 'crystallizes' which is when the charge
is converted into a fixed charge. The effect of crystallisation is to deprive the company of the freedom to
deal with the assets subject to the charge in the normal course of business. The event of crystallisation
usually occurs in instances such as a wind up or the appointment of an administrative receiver etc.
The main purpose of any security is to enable the secured creditor to have priority of claim to the
insolvent party's assets in the event of insolvency. However, because of the nature of floating charge,
the priority of floating charges holder's claims normally rank behind holders of fixed security and
preferential creditors. The floating charge cannot normally be enforced until it has crystallised and so
most statutes provide that the priority of a fixed charge that was created as a floating charge is treated
as a floating charge.
The first time that the possibility of a fixed charge existing in law over book debts was considered by the
courts was in Siebe Gorman & Co Ltd v Barclays Bank. In this case the debenture stated that the charge
on book debts was fixed as the debenture gave sufficient control to the bank as to make the charge
fixed. This decision was developed further in Re New Bullas Trading; the company granted a charge over
book debts which were stated to be a fixed charge over the uncollected book debts and a floating
charge over their proceeds. The Court of Appeal held this was hybrid was possible. Goode expressed his
disappointment at the way Re New Bullas was decided, by referring to the combination of charges as
unethical. This was the law until the case of Re Brumark in which the ruling came out of an appeal from
New Zealand the Privy Council held Re New Bullas was wrongly decided and stated where the chargor
was free to use the proceeds in the ordinary course of business could be no more than a floating charge.
The decision in the House of Lords in the case of Re Spectrum settled the decision on whether charges
over book debts are fixed or floating charges. In this case Spectrum Plus ltd made an agreement with
westminster Bank that said it was granting a fixed charge of all book debts in order to secure a 250,000
overdraft. Spectru was required to pay the proceeds into a Natwest account which had no restrictions
on Spectrums operation of it. When Spectrum went into liquidation Natwest argued that the charge was
a fixed charge over book debts. Inland Revenue who was a major creditor agued the debenture was a
floating charge so its claim for tax owed took priority. The House of Lords overruled the decision in Siebe
Gorman and held that the charge over Spectrum Plus Ltd's book debts was floating, because the
hallmark of a floating charge is that the business is free to deal with ctions on Spectrum the assets in
business as usual. The decision of the House of lords recieved criticism as a result. Yeowart argues the
decision in Spectrum will swell the assets available to administrators and creditors generally, at the
expense of banks lending in reliance on charges over receivables, those charges must now be treated as
floating charges. He also argues that the decision may lead to a further increase in the use of less flexible
methods of finance, such as debt factoring and asset-backed lending. Additionally Berg argues why is it
legally significant whether or not, after the charge was created, the account into which the proceeds
were paid was actually operated as a blocked account. Henderson argues there can be no basis for
saying that a book debt and its collected proceeds are one and the same thing. Self-evidently they are
not, and in law they are not treated as being the same thing. He asserts that it is disappointing that in
dealing with the weight of conflicting authorities, the judges failed to articulate the conceptual
reasoning being their decision.