Brumark Investments Ltd, Re [2001] UKPC 28

The Privy Council determined whether a charge over uncollected book debts, where the company could freely collect debts and use proceeds in ordinary business, constituted a fixed or floating charge. The Board held it was a floating charge, overruling In re New Bullas Trading Ltd, establishing that company control over charged assets is determinative.

Facts

Brumark Investments Limited granted a debenture to Westpac Banking Corporation dated 9th August 1995. The debenture purported to create a fixed charge on the company’s book debts and their proceeds, but permitted the company to collect the debts and deal freely with the proceeds in the ordinary course of business. The company was prohibited from disposing of uncollected book debts (by assignment or factoring) but the proceeds, once collected, became subject only to a floating charge. When receivers were appointed, the only available assets were proceeds of book debts collected since receivership. The Commissioner of Inland Revenue and Official Assignee, as preferential creditors, argued the charge was floating, giving them priority over the bank.

Issues

Principal Issue

Whether a charge over uncollected book debts which leaves the company free to collect them and use the proceeds in ordinary business constitutes a fixed charge or a floating charge.

Secondary Issue

Whether the approach in In re New Bullas Trading Ltd [1994] 1 BCLC 449, which permitted separation of book debts from their proceeds for charge characterisation purposes, was correct.

Judgment

The Privy Council, with Lord Millett delivering judgment, held the charge was a floating charge. The Board engaged in a comprehensive review of floating charge jurisprudence from its origins in the 1870s.

“In deciding whether a charge is a fixed charge or a floating charge, the Court is engaged in a two-stage process. At the first stage it must construe the instrument of charge and seek to gather the intentions of the parties from the language they have used. But the object at this stage of the process is not to discover whether the parties intended to create a fixed or a floating charge. It is to ascertain the nature of the rights and obligations which the parties intended to grant each other in respect of the charged assets. Once these have been ascertained, the Court can then embark on the second stage of the process, which is one of categorisation. This is a matter of law. It does not depend on the intention of the parties.”

Lord Millett emphasised the hallmark distinguishing floating from fixed charges:

“The essence of a floating charge is that it is a charge, not on any particular asset, but on a fluctuating body of assets which remain under the management and control of the chargor, and which the chargor has the right to withdraw from the security despite the existence of the charge. The essence of a fixed charge is that the charge is on a particular asset or class of assets which the chargor cannot deal with free from the charge without the consent of the chargee. The question is not whether the chargor has complete freedom to carry on his business as he chooses, but whether the chargee is in control of the charged assets.”

The Board rejected the reasoning in New Bullas as “fundamentally mistaken”:

“Their Lordships consider that New Bullas was wrongly decided.”

Key Legal Principles

• Characterisation of a charge as fixed or floating is a two-stage process: construction of the instrument, then legal categorisation based on the nature of rights granted.
• The critical factor is whether the chargee has control over the charged assets, not the label attached by parties.
• A restriction on disposing of book debts while permitting collection and free use of proceeds is insufficient to create a fixed charge.
• Book debts and their proceeds cannot effectively be separated to create a fixed charge on uncollected debts while permitting free dealing with proceeds.

Implications

This decision fundamentally clarified the law on charges over book debts. It confirmed that substance prevails over form in characterising security interests. Banks seeking fixed charge protection over book debts must ensure genuine control over both the debts and their proceeds, typically through blocked accounts operated as such in practice. The decision enhanced protection for preferential creditors by preventing artificial drafting techniques from circumventing statutory priorities. It remains the leading authority on distinguishing fixed from floating charges over receivables.

Verdict: Appeal dismissed. The charge on uncollected book debts was held to be a floating charge, not a fixed charge. In re New Bullas Trading Ltd was declared wrongly decided. The appellants were ordered to pay the respondents’ costs.

Source: Brumark Investments Ltd, Re [2001] UKPC 28