Privy Council Decision in Re Brumark

The Privy Council delivered their judgment today in the case of Re Brumark, which was heard on appeal from New Zealand and was delivered by Lord Millet.

The issue in the appeal centred on whether a charge over uncollected book debts which permits a company to collect and use the proceeds of such book debts during the ordinary course of its business, should be classified as either a fixed or floating charge.

The court examined the authorities governing this area and also took account of various academic commentary and concluded that the decision in Re New Bullas was wrongly decided. Their Lordships were unprepared to accept that the question of whether a charge is fixed or floating can be determined solely as a matter of construction of contract.

In essence the Privy Council has supported the long line of authority, that one can have a fixed charge over book debts. What is not possible is to have a fixed charge on the book debt before it is collected, but allow free use of the proceeds by the chargor.

The judgement provides a useful history of the development of the floating charge and the distinctions between fixed and floating charges. In confirming that Re New Bullas was wrongly decided, the Privy Council have closed off a useful route for many providers of mezzanine finance and lenders who cannot operate clearing facilities. For the clearing bank lender with a first fixed charge, this judgment merely reinforces the existing state of the law. It does, however, stress that the wording of the charge document is not the whole story and practice must follow theory.

If you have any queries or would like more information please contact: Dan Hamilton (e-mail: [email protected]), Stephen Foster (e-mail: [email protected]) or Ruth Pedley (e-mail: [email protected]) by telephone on +44 (0)20 7367 3000.