Facts
Brookes Associates Finance Limited was in the business of providing equipment under hire purchase agreements. In 1992 Royal Trust Bank (called RTB in the judgment) extended finance to the company, and took a deed of charge under which the company purported to charge the benefit of certain hire purchase agreements deposited with RTB. Those deeds of charge required all sums paid to the company under the hire purchase agreement to be deposited into a specified bank account which the company was required to open with RTB. No such bank account was ever opened, and the company deposited the sums received under those contracts into an account with National Westminster Bank, which it was free to draw upon.
Although some sums were paid to RTB from that account in repayment of the loans, when the company entered into financial difficulty, NatWest Bank blocked the account. RTB sued NatWest Bank alleging that it held the sums in that account as constructive trustee for RTB. The company did not appear and was not represented. At first instance noted that he had been advised that it was in receivership at the time of the hearing.
The case came before Jonathan Parker J who decided in favour of RTB. NatWest Bank then appealed to the Court of Appeal.
Decision
Nourse LJ gave the lead judgment in the Court of Appeal, and allowed the appeal on the basis that the company had at all times been free to deal with the proceeds in those accounts, and thus it was never a trustee of them. Accordingly, it was not material what notice NatWest Bank had or had not received - it could not become a constructive trustee.
In his short decision, Millett LJ noted that the trial judge had determined that the charge created was a fixed charge, and that no appeal had been made against that finding. However, he was satisfied that this was not correct, and that the proper construction of the charge was a floating charge. Accordingly, the company was free to deal with the proceeds of the hire purchase contracts as it saw fit, including paying them over to NatWest Bank, which meant that NatWest Bank was at liberty to apply them to the company's indebtedness to it pursuant to the banker's right to combine accounts.
Millet LJ held:
As I have already pointed out, the proper characterisation of a security as 'fixed' or 'floating' depends upon the freedom of the chargor to deal with the proceeds of the charged assets in the ordinary course of business free from the security. A contractual right in the chargor to collect the proceeds and pay them into its own bank account for use in the ordinary course of business is the badge of a floating charge and is inconsistent with the existence of a fixed charge: see Re Brightlife [1986] BCLC 418 at 422, [1987] Ch 200 at 209. I would, therefore, for my own part, and notwithstanding the concession made by National Westminster before us, characterise the charge created by cl 3 as a floating charge, notice of the existence of which would not affect the priority of National Westminster's rights in respect of the moneys in the No 2 account. [4]
Liquidation is the process in accounting by which a company is brought to an end. The assets and property of the business are redistributed. When a firm has been liquidated, it is sometimes referred to as wound-up or dissolved, although dissolution technically refers to the last stage of liquidation. The process of liquidation also arises when customs, an authority or agency in a country responsible for collecting and safeguarding customs duties, determines the final computation or ascertainment of the duties or drawback accruing on an entry.
In finance, a floating charge is a security interest over a fund of changing assets of a company or other legal person. Unlike a fixed charge, which is created over ascertained and definite property, a floating charge is created over property of an ambulatory and shifting nature, such as receivables and stock.
Barclays Bank Ltd v Quistclose Investments Ltd[1968] UKHL 4 is a leading property, unjust enrichment and trusts case, which invented a new species of proprietary interest in English law. A "Quistclose trust" arises when an asset is given to somebody for a specific purpose and if, for whatever reason, the purpose for the transfer fails, the transferor may take back the asset.
Re Spectrum Plus Ltd[2005] UKHL 41 was a UK company law decision of House of Lords that settled a number of outstanding legal issues relating to floating charges and recharacterisation risk under the English common law. However, the House of Lords also discussed the power of the court to make rulings as to the law that were "prospective only" to mitigate potential harshness when issuing a ruling that was different from what the law had previously been understood to be.
United Kingdom insolvency law regulates companies in the United Kingdom which are unable to repay their debts. While UK bankruptcy law concerns the rules for natural persons, the term insolvency is generally used for companies formed under the Companies Act 2006. Insolvency means being unable to pay debts. Since the Cork Report of 1982, the modern policy of UK insolvency law has been to attempt to rescue a company that is in difficulty, to minimise losses and fairly distribute the burdens between the community, employees, creditors and other stakeholders that result from enterprise failure. If a company cannot be saved it is liquidated, meaning that the assets are sold off to repay creditors according to their priority. The main sources of law include the Insolvency Act 1986, the Insolvency Rules 1986, the Company Directors Disqualification Act 1986, the Employment Rights Act 1996 Part XII, the EU Insolvency Regulation, and case law. Numerous other Acts, statutory instruments and cases relating to labour, banking, property and conflicts of laws also shape the subject.
Re MC Bacon Ltd [1990] BCLC 324 is a leading UK insolvency law case, concerning transactions at an undervalue and voidable preferences.
Agnew v Commissioners of Inland Revenue, more commonly referred to as Re Brumark Investments Ltd[2001] UKPC 28 is a decision of the Privy Council relating to New Zealand and UK insolvency law, concerning the taking of a security interest over a company's assets, the proper characterisation of a floating charge, and the priority of creditors in a company winding-up.
Re Bank of Credit and Commerce International SA [1998] AC 214 is a UK insolvency law case, concerning the taking of a security interest over a company's assets and priority of creditors in a company winding up.
Illingworth v Houldsworth [1904] AC 355 is a UK insolvency law case, concerning the taking of a security interest over a company's assets with a floating charge. In the Court of Appeal Romer LJ held that a key to a floating charge, as opposed to a fixed charge was that the company can carry on its business with assets subject to the charge.
Re Yeovil Glove Co Ltd [1965] Ch 148 is a leading UK insolvency law case, concerning voidable floating charges for past value. It holds that a floating charge can harden when it secures a debt in an overdraft account, when the bank keeps the facility open as a company takes money out and puts money in.
Re New Bullas Trading Ltd [1994] 1 BCLC 485 is a UK insolvency law case, concerning the definition of a floating charge. It held, somewhat controversially, that it was possible to separate a book debt from its proceeds, and that it was possible to create a fixed charge over the book debt but only a floating charge over the proceeds. At the time the decision attracted a great deal of academic commentary, much of it hostile.
Siebe Gorman & Co Ltd v Barclays Bank Ltd [1979] 2 Lloyd's Rep 142 is a UK insolvency law case, concerning the definition of a floating charge. It was an influential decision for many years, but is now outdated as authority in light of the House of Lords decision in Re Spectrum Plus Ltd.
Foskett v McKeown[2000] UKHL 29 is a leading case on the English law of trusts, concerning tracing and the availability of proprietary relief following a breach of trust.
Administration in United Kingdom law is the main kind of procedure in UK insolvency law when a company is unable to pay its debts. The management of the company is usually replaced by an insolvency practitioner whose statutory duty is to rescue the company, save the business, or get the best result possible. While creditors with a security interest over all a company's assets could control the procedure previously through receivership, the Enterprise Act 2002 made administration the main procedure.
Buchler v Talbot[2004] UKHL 9 is a UK insolvency law case, concerning the priority of claims in a liquidation. Under English law at the time the expenses of liquidation took priority over the preferred creditors, and the preferred creditors took priority over the claims of the holder of a floating charge. However, a crystallised floating charge theoretically took priority over the liquidation expenses. Accordingly the courts had to try and reconcile the apparent triangular conflict between priorities.
Cayman Islands bankruptcy law is principally codified in five statutes and statutory instruments:
Joachimson v Swiss Bank Corporation [1921] 3 KB 110 is a judicial decision of the Court of Appeal of England and Wales in relation to the fundamental nature of the legal relationship between banker and customer. Together with Foley v Hill (1848) 2 HLC 28 it forms part of the foundational cases relating to English banking law and the nature of a bank's relationship with its customer in relation to the account.
Stein v Blake[1995] UKHL 11 is a decision of the House of Lords in relation to the effect of automatic set-off in bankruptcy, and the power of a bankruptcy trustee to assign rights in action after the operation of such set-off under English law.
Re MC Bacon Ltd [1991] Ch 127 is a UK insolvency law case relating specifically to the recovery the legal costs of the liquidator in relation to an application to set aside a floating charge as an unfair preference.
Welsh Development Agency v Export Finance Co Ltd [1992] BCLC 148 is a judicial decision of the English Court of Appeal. The decision related to a number of aspects relating to complex financing arrangement, but is most often cited for the decision in relation to recharacterisation.
