The Gazette 1979

GAZETTE

JULY-AUGUST

1979

Fixed charge on Future Book Debts of a Company The Judgment in Siebe Gorman A Co. Limited v. Barclays Bank Limited{ 1978) reviewed by E. Rory O'Connor

It is correct to say that the Siebe Gorman case is authority for the proposition that it is competent for a company to create a fixed or specific charge on existing and future book debts. It is authority for little else. Indeed the decision on the priorities issue cannot be regarded as satisfactory considering that the Court had held that Barclays Bank had a valid fixed charge in respect of which particulars had been duly registered in the Companies Office which should have put any person dealing with the company's book debts on notice of the existence of the charge and of its particular nature. The reaction among Irish Banks and other lending agencies to the Siebe Gorman decision has been quite dramatic and already many institutions have amended their forms of debenture with a view to providing for a fixed charge on book debts. Other Banks have such amendment under active consideration. In these circum- stances it is thought well to caution against the con- clusion that the mere describing of a charge as a fixed charge will have the desired effect on all occasions. In the writer's view it will still be open to a Court in any case where the nature, quality or priority of a charge is in dispute to examine the provisions of the instrument of charge and to look at the intentions and attitudes of the parties as regards the company's freedom to deal with any particular class of asset embraced by such charge. This is clearly illustrated by a Judgment of the Irish High Court delivered by Mr. Justice Costello on 20th December, 1978, in an application brought under the Companies Act, 1963, by the Official Liquidator in the matter of Lakeglen Construction Limited, the winding up of which had commenced in March, 1978. In this case the Company had issued a debenture on 24th November, 1977, in favour of a group of major creditors to secure existing indebtedness. The debenture purported to create a number of charges over various properties and assets of the Company including a charge on all the company's book debts and all rights and powers of recovery in respect of them. The debenture also con- tained a "sweeper-up" provision which created a first floating charge on "all other" assets of the Company present and future. The issues to be determined were whether the undefined charge over book debts would include future book debts and whether it constituted a fixed charge or a floating charge over such debts. Ifjt was a fixed charge then the debenture holder's security would not be invalidated by Section 288 of the Companies Act, 1963 and the proceeds of such book debts, when collected, would not be subject to the claims of the preferential creditors. If on the other hand it was a floating charge it would be invalidated by Section 288 since it was acknowledged that the Company was insolvent when the debenture was created and that no fresh moneys were advanced at the time and in con- sideration of the granting of the debenture. On the preliminary point the Court (Costello J.) con- 103

The Judgment delivered by Mr. Justice Slade of the English High Court in the above Action on 26th May, 1978, generated more than average interest in legal, banking and accountancy circles. In the first place it high- lighted a difference between the practice of the principal English Commercial Banks and the Irish Commercial Banks in taking security over book debts of a company. The English Banks have for some time used a provision in their debentures which purports to create a fixed charge on all book debts both present and future; whereas Irish Banks have traditionally regarded security over book debts as more appropriate for inclusion under a floating charge. In the second place it proved that in the English Courts at any rate a fixed charge on future book debts will be recognised and enforced as such where the circum- stances warrant such a conclusion. The case was concerned with a question of priorities between an assignment of a bill of exchange made by a company in favour of Siebe Gorman & Co. Limited and a fixed charge over present and future book debts and other debts of the company created by a debenture issued by the company to Barclays Bank Limited. The debenture contained an express prohibition against the company charging or assigning any book debts or other debts without the prior consent of the Bank. In its Judgment the Court considered the provisions of Barclays Bank's debenture which, inter alia, purported to create a fixed, as distinct from a floating, charge on exist- ing and future book debts of the company. The relevant clause read as follows:- "3(d) by way of fixed charge all book debts and other debts now and from time to time due or owing to the Company." The Court, having reviewed a number of earlier authorities on the subject, concluded that the debenture did create a first fixed charge on the Company's book debts and other debts including future debts. The position was expressed thus by Slade J.: " . . . it is perfectly possible in law for a mortgagor, by way of continuing security for future advances, to grant to a mortgagee a charge on future book debts in a form which creates in equity a specific charge on the proceeds of such debts as soon as they are received . . . " However, the Court went on to hold that the assignment °f the bill of exchange in favour of Siebe Gorman & Co. Limited took effect free from the fixed charge over the future book debts of the Company granted to Barclays Bank Limited by the debenture. This was, the Court explained, by reason only of the fact that in the form 47 (particulars of charges) delivered by Barclays Bank Limited to the Registrar of Companies under Section 95 °f the Companies Act, 1948, no mention was made of the Provision in the debenture which prohibited the Company from charging or assigning its debts in favour of any third Party.