Re Spectrum Plus Ltd [2005] UKHL 41

Spectrum granted a debenture to National Westminster Bank purporting to create a fixed charge over book debts. The House of Lords held that despite the label, the charge was a floating charge because Spectrum remained free to collect debts and draw on its bank account without restriction. This overruled Siebe Gorman and clarified the distinction between fixed and floating charges.

Facts

Spectrum Plus Ltd carried on business as a manufacturer and granted a debenture to National Westminster Bank plc on 30 September 1997, securing an overdraft facility of £250,000. The debenture purported to grant a ‘specific charge’ over all book debts present and future. Clause 5 required Spectrum to pay collected debts into its account with the bank but imposed no restrictions on withdrawing funds from that account for business purposes, provided the overdraft limit was not exceeded. Spectrum went into voluntary liquidation on 15 October 2001 with preferential creditors owed £16,136. The issue was whether the charge over book debts was fixed (giving the bank priority) or floating (giving preferential creditors priority under section 175(2)(b) of the Insolvency Act 1986).

Issues

Primary Issue

Whether the charge over book debts created by the debenture was a fixed charge or a floating charge in law, notwithstanding the parties’ description of it as a ‘specific charge’.

Secondary Issue

Whether, if Siebe Gorman & Co Ltd v Barclays Bank Ltd was wrongly decided, the House of Lords should overrule it prospectively only.

Judgment

The House of Lords unanimously allowed the appeal, holding that the charge was a floating charge and overruling Siebe Gorman. The label attached by the parties was not determinative; what mattered was the chargor’s freedom to deal with the charged assets.

Lord Scott stated: ‘The essential characteristic of a floating charge, the characteristic that distinguishes it from a fixed charge, is that the asset subject to the charge is not finally appropriated as a security for the payment of the debt until the occurrence of some future event. In the meantime the chargor is left free to use the charged asset and to remove it from the security.’

Lord Hope observed: ‘I do not see how this question can be answered without examining the contractual relationship in regard to that account between the bank and its customer. An account from which the customer is entitled to withdraw funds whenever it wishes within the agreed limits of any overdraft is not a blocked account.’

Lord Walker explained: ‘Under a floating charge, by contrast, the chargee does not have the same power to control the security for its own benefit. The chargee has a proprietary interest, but its interest is in a fund of circulating capital, and unless and until the chargee intervenes (on crystallisation of the charge) it is for the trader, and not the bank, to decide how to run its business.’

The House declined to give the ruling prospective effect only. Lord Nicholls stated that whilst the power might exist in exceptional circumstances, this case was ‘miles away from the exceptional category in which alone prospective overruling would be legitimate.’ Siebe Gorman was a first instance decision which could never have been regarded as definitively settling the law.

Key Legal Principles

Fixed vs Floating Charges

The hallmark of a floating charge is that the chargor remains free to use the charged assets and withdraw them from the security without the chargee’s consent until crystallisation. A charge cannot be fixed merely by labelling it as such if the chargor retains freedom to deal with the assets.

Book Debts

Where a chargor is required to pay collected book debts into a bank account but can freely draw on that account for business purposes, the charge is floating, not fixed. The critical question is whether the account is blocked or whether the chargor can withdraw funds.

Prospective Overruling

Whilst not ruling out the possibility entirely, the House held that prospective overruling would only be appropriate in wholly exceptional circumstances and that courts should not deprive parties of statutory rights by declining to apply the law as correctly interpreted.

Implications

This decision fundamentally clarified the distinction between fixed and floating charges over book debts. Banks and commercial lenders taking security over book debts must ensure genuine control over collected proceeds through blocked accounts if they wish to achieve fixed charge status. The decision protects preferential creditors by ensuring they receive the statutory priority Parliament intended. It also established that first instance decisions, however long-standing, cannot be relied upon as definitively settling the law and remain open to correction by higher courts.

Verdict: Appeal allowed. The charge over book debts created by the debenture was a floating charge, not a fixed charge. Siebe Gorman & Co Ltd v Barclays Bank Ltd was overruled. Preferential creditors were entitled to priority over the bank under section 175(2)(b) of the Insolvency Act 1986.

Source: Re Spectrum Plus Ltd [2005] UKHL 41