Spectrum Plus Limited – Court of Appeal judgment

Judgment was handed down on 26 May 2004 by the Court of Appeal in the case of Re Spectrum Plus Limited. The case concerned whether a charge over book debts contained in a bank's debenture was fixed or floating. The Court of Appeal allowed the bank's appeal of the first instance decision and decided the charge was fixed.

Facts in brief

The facts in brief were that Spectrum Plus Ltd had granted a debenture to its bank. The debenture contained a charge over book debts in very similar terms to the corresponding charge in a debenture in an earlier case, Siebe Gorman [1979] 2 Lloyds Rep 142. In the Siebe Gorman case it was held that the charge over book debts was fixed. Siebe Gorman was decided 25 years ago. Since then, many banks have relied on it and drafted their standard debentures in similar terms. Particularly in recent times, however, there has been much comment on the Siebe Gorman decision, culminating in this case before the Court of Appeal.

First instance decision

At first instance, the Vice-Chancellor found that the Spectrum charge was floating. The Vice-Chancellor analysed the nature of the rights that the parties intended to grant each other under the terms of the debenture. He found that the parties intended the company to be free to deal with the book debts and withdraw them from the security without the consent of the bank. On this basis, the Vice-Chancellor concluded that the charge on book debts was a floating charge.

The only material factual distinction between the Siebe Gorman case and Spectrum was that in Siebe Gorman the account was operated in credit, whereas in Spectrum the account was at all times overdrawn.

The appeal

Lord Phillips MR gave the only judgment. After analysing the case law in relation to fixed and floating charges over book debts at length, Lord Phillips reduced the analysis to three key issues:

(i) Was the judge in Siebe Gorman right to construe the debenture as restricting the company's freedom to draw on the account into which the proceeds of book debts were paid when that account was in credit? If so,

(ii) Did the existence of that restriction justify the judge in Siebe Gorman in concluding that the charge on book debts was properly categorised as a fixed charge?

(iii) Should the decision in Siebe Gorman be followed today?

Lord Phillips answered the questions as follows:

(i) Yes. Lord Phillips held that it was open to the judge in Siebe Gorman to conclude that under the terms of the debenture, the company would be entitled to draw on its account when in credit unless the bank chose to exercise its right to block the account in order to secure other obligations of the company to the bank. This was the limited nature of the restriction that was placed on the use that the company could make of the proceeds of its book debts.

(ii) Yes. Lord Phillips concluded that the Siebe Gorman decision was justifiable because of the requirements that (i) the book debts should not be disposed of prior to collection and (ii) that, on collection, the proceeds should be paid to the bank itself. It follows that the judge in Siebe Gorman was entitled to hold that the debenture created a fixed charge over book debts.

In Spectrum the parties intended that the account would always be overdrawn. Therefore payment of book debts into the account were received beneficially by the bank by way of partial repayment of the indebtedness of the company to the bank. The company never had any control of these proceeds. It was bound to permit them to be used to reduce its indebtedness. Even though it then had, until withdrawn, the contractual right to borrow from the bank up to the overdraft limit, as a matter of strict analysis, that did not mean that the charge on the book debts remained floating.

(iii) Yes. Lord Phillips concluded that even if Siebe Gorman appeared to be wrong, he would have been inclined to hold that the form of debenture in question had, by customary usage by banks for 25 years, acquired the meaning and effect that the judge in Siebe Gorman had attributed to it.

For all these reasons, Lord Phillips allowed the appeal, and Lord Justice Jonathan Parker and Lord Justice Jacob agreed.

Comment

Lord Phillips' judgment is lengthy and there is much to analyse in it. It appears to go further than the strict facts of Spectrum in suggesting that a charge over book debts where the collection bank account is in credit, as well as overdraft, can be fixed.

It is likely, because of the importance of the issue, that there will be an appeal to the House of Lords.