Decision on fixed charges over book debts awaited

United Kingdom

Setting the Scene for Brumark

Fixed or Floating Charges over Book Debts - will the Privy Council decision next month resolve the differences between New Bullas and Royal Trust Bank?

The New Zealand case of in re Brumark Investments Limited (in Receivership), The Commissioner of Inland Revenue v Agnew and Beardsley will be heard by the Privy Council on 2 and 3 April. The issue to be decided is whether there can be a fixed charge over book debts where the proceeds of those book debts can be freely used by the chargor in its business.

Case law on fixed charges over book debts has the following history:

Fixed Charges over book debts

A fixed charge is created where the proceeds of the debts are paid into an account with and controlled by the bank chargee (re Siebe Gorman v Barclays 1979).

When is a floating charge created?

Re Brightlife 1987 established that liberty to deal with the proceeds of the debt indicates a floating charge. So the issue of how much control the chargor has over the proceeds of the book debts becomes relevant. A charge instrument which contains instructions as to collection, a negative pledge and a covenant to legally assign is not enough to amount to the chargor's control over proceeds (Supercool Refrigeration v Hoverd 1994 NZ). Neither is a covenant not to compromise debts or delay or prejudice recovery adequate. In both cases, the chargor only had a floating charge over book debts.

Thus control of the bank account and its proceeds is essential. The question to ask is, is the chargor in control of the charged assets or has it lost its power of alienation? If so, the chargeholder does not have a fixed charge (re Coslett (Contractors) 1997).

Are book debts and their proceeds indivisible?

Before the case of New Bullas 1994, it was assumed that a chargeholder had either a fixed or a floating charge over book debts, and the nature of that charge depended on whether the chargee had control over the charged assets. In other words, the fate of the proceeds determined the nature of the charge.

New Bullas challenged this assumption by making a distinction between the debts and the proceeds so that their charge instrument successfully created a fixed charge over the debt pending collection and a floating charge on the proceeds once collected. The instrument also reserved the right to direct the application of proceeds prior to collection. A debt and its proceeds therefore became divisible, and the charge over book debts could be part fixed and part floating.

This wonderfully cerebral approach came under attack very quickly. In the case of Royal Trust Bank 1996, it was stated (obiter) that a debt and its proceeds are indivisible. New Bullas was not overturned, but is regarded by some now being special on its facts.


Brumark at first instance approved New Bullas. However, the NZ Court of Appeal then rejected the arguments that debts are divisible from their proceeds. The debenture in that case expressly contained a fixed charge over book debts, but provided that the fixed charge did not extend to the proceeds.

The relevant wording in the debenture was as follows:

2. Charge Priority and Crystallisation

"2.1 Nature of Charge: The charge created by this Deed operates as follows: (a) It is a fixed charge as regards all present and future … (xi) accounts and deposits with Westpac where there is some restriction on the right of the Company to withdraw or use the funds in those accounts or deposits; (xii) all book debts owed to the Company not included in the above which arise in the ordinary course of trading and the proceeds of those book debts but not proceeds of those debts which are received before the first to occur of Westpac requiring such proceeds to be paid into an account or deposit of the type mentioned in sub-paragraph (xi), and the charge created by this Deed crystallising or being enforced (Westpac may require proceeds to be paid into such an account at any time) and (xiii) all other debts owed to the Company including the proceeds of those debts. (b) Subject to clause 2.3, it is a floating charge as regards all other assets charged."

There were 157,000 US dollars of uncollected book debts when Receivers were appointed over the company. The Preferential debts were 181,000 US dollars and the debt to the chargor Westpac was 292,000 US dollars. If the charge over the uncollected book debts floated, then the uncollected book debts would go to the preferential creditors in priority to the chargeholder. If the wording created a fixed charge then the book debts would go to the chargeholder in priority to the preferential creditors.

It was held by the Court of Appeal that the bank and the company were emphasising the freedom of the company to collect debts for its own account. The New Zealand court even appeared to reject the possibility of there being a fixed charge over book debts where the proceeds of those debts can be used by the chargor in its business. The court considered the question of whether there was any distinction between dealing in the uncollected debts by disposal to third parties and dealing by collection. It concluded there was no basis for such a distinction. (For a detailed analysis of this view, see Roger Gregory, "The Narrow Issue in Brumark", RALQ Vol 4 Issue 3 2001.) When Brumark is heard next week, it is to be hoped that they will squarely confirm earlier authority that it is possible to have a fixed charge on book debts. If the Privy Council say that it is possible, then non-clearer providers of finance will have to place even more reliance on factoring or discounting (given the difficulty of controlling accounts into which the proceeds of book debts are paid). Alternatively, if it is decided that it is not really possible to have a fixed charge on book debts then this may have a serious impact on secured bank lending.

For further information, please call Ruth Pedley by e-mail at or by telephone on +44 (0)20 7367 2098.