15 January 2004

The effect of the Privy Council's decision in Brumark [2001] 2 AC 710 was that, notwithstanding the fact that a charge over book debts was stated to create a fixed charge, it took effect as a floating charge where the chargor retained the ability to deal with the book debts and their proceeds.

Brumark was inconsistent with what was previously accepted as the position under English law as expressed in Siebe Gorman [1979] 2 L1.L.R. 142. As Brumark was a Privy Council decision, it is only of persuasive authority - the market has been waiting for Brumark to be tested.

In the High Court today, the Vice-Chancellor gave judgment in Nat West Bank PLC v Spectrum Plus Limited and others, in which Nat West Bank sought a declaration that its standard form debenture created a fixed charge over the proceeds of the book debts of Spectrum. The relevant clauses of that debenture were in substantially the same form as the one in Siebe Gorman.

The Vice-Chancellor dismissed Nat West's application and:

• agreed with the analysis in Brumark;

• said that the judge in Siebe Gorman erred in his decision that the standard form debenture in question created a fixed charge over book debts and their proceeds; that debenture required the chargor to pay the proceeds into an account with the chargee, but did not expressly restrict the company’s right to draw on that account; and

• concluded that by looking at the parties’ intention to create a first fixed charge over book debts and then determining whether that intention was negatived by restrictions in the document, the judge in Siebe Gorman had taken the wrong approach. Instead, the judge should have asked whether the rights and obligations in the document disclosed an intention that the chargor should be free to deal with the book debts without the chargee’s consent. If it did, the inevitable consequence, the Vice-Chancellor said, would be to reject the description of the transaction as a first fixed charge and the charge would take effect as floating security.

In summary, this case confirms the analysis in Brumark and rejects the approach in Siebe Gorman. As leave to appeal has been granted to Nat West, the debate may well continue.


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© Herbert Smith 2004