Fixed charges over book debts david capper the court of appeals recent decision in national westminster bank plc v spectrum plus ltd was a great victory for banks in their efforts to keep fixed security over book debts alive. Search publications security over book debtsreceivables. The elusive floating charge the student journal of law. In the past, a director of a company with few fixed assets, such as property or plant, would be readily prepared to give security over its book debts in order to get funding, and this was commonly provided in the form of a debenture. This has led to a search for the exclusive the concept of control over the last 20 years or so, the tide began to turn in favour of. If you have, by way of acquisition or otherwise, taken the transfer of security comprising of fixed charges over book debts and you are concerned that material tax liabilities may arise, action should be taken promptly to make a section 1001 notification before the deadline of 31 january 2020 expires. Co limited v barclays bank limited 1979 2 lloyds lr 142 which provided that the book debts were not to be disposed of prior to collection and that, on collection, the proceeds of the book debts were to be. Book debt meaning in the cambridge english dictionary. If the bank is in a position to exercise control over the book debts, then this is. Tax credits and other payments such as vat rebates or loss reliefs can be classed as book debts if they relate to the business of the company and these can be secured by a fixed charge if the security holder has sufficient control over the account into which they are paid. Definition of book debt from the cambridge business english dictionary. A prohibition on disposing of book debts prior to collection together with an obligation to pay the proceeds into an account, in the judgment of the court of appeal was sufficient to give rise to a. If you owe money on your taxes, the irs can come after your social security income to be made whole. Legal issues in the creation of security part 2 wealth.
The most relevant features common to all types of in rem guarantees or security interests under spanish law may be summarised as follows. This has led to a search for the exclusive the concept of control over the last 20 years or so, the tide began to turn in favour of recognising the validity of the fixed charge over book debts. There still remains some doubt concerning how such a security should be framed in the debenture so as to ensure that what is created is indeed a fixed charge over the book debts and not a floating charge. The ramification for australian lenders is continued uncertainty. Books debts are, therefore, not accepted as main security but are taken as collateral security along with the principal security.
A general, or special, notarial bond cannot be created or registered over a. House of lords national westminster bank plc respondents v. The undersigned agrees that the collateral shall be held by the bank as a general and continuing collateral security for the payment of all obligations, indebtedness and liabilities, present or future, direct or indirect, absolute or contingent, matured or not, of the undersigned to the bank, wheresoever and howsoever incurred, and any ultimate unpaid balance thereof, and as a first and. It considers taking security by way of fixed and floating security by way of a charge or assignment of receivables. Is a charge confined to existing debts necessarily a fixed charge. Book debts by their very nature generally come and go in the normal routine of business operations. But if this is to be effective as a fixed security everything depends on the way the security agreement ensures that the charge over the book debts is fixed. Book debts and the need for careful drafting of security documents. Taking security over receivables lexispsl, practical. Taking security in the context of a loan 3 please sign up for the course before starting the lesson. Download citation is the fixed charge over book debts a viable security arrangement. As a consequence, where a bank has taken a charge over book debts and is relying on that security to provide value, the bank may need to reduce its credit line to the borrower.
Potential lender liability when taking security over an asset the subject of who can sue for book debts following their assignment was recently addressed by the court of appeal in the case of bexhill uk ltd v razzaq 2012 ewca civ 76. A recent house of lords decision on how to characterise security over book debts will have wide implications for banks and insolvency. Banking law charges over book debts may no longer be fixed. Debate about the differences between fixed charges and floating.
Where a fixed charge or assignment has been created by a company, a section 1001 notice in relation to book debts. A deed of priority is commonly used when the alternative provider wishes to take a second charge over certain specified assets of the sme. Section of the transfer of property act, permits assignment of actionable claim and the procedure to be followed is. Where a fixed charge or assignment has been created by a company, a. Following the decision of the privy council in agnew v inland. Taking security over choses in action practical law. 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. In our view, it is clear that business rescue practitioners may not lawfully suspend a cession of book debts or for that matter any security right which a bank may enjoy. If the book debts are subject to a prior charge or a counterclaim of the debtor, the banker will not be able to get the full benefits of the book debts. The end of an era re spectrum plus despite romer ljs classic statement identifying the usual characteristics of a floating charge, 1 it has long been clear that the essential difference between a fixed and a floating charge turns upon the extent to which the chargor is free to deal with the charged assets in the ordinary course of business.
Is the fixed charge over book debts a viable security arrangement. A chose in action is an asset that can only be claimed or enforced by action at law or equity, rather than by taking physical possession of the asset. For a business which is actively trading, book debts are continually incurred and repaid. Plus ltd was a great victory for banks in their efforts to keep fixed security over book debts alive. Adopting a jurisdiction by jurisdiction structure, each chapter examines the key matters to consider when taking security over debts in a particular region. A company is able to charge its book debts as security for. A general, or special, notarial bond cannot be created or registered over a ship. Taking security over choses in actionby practical law financerelated contenta note on taking security over choses in action. Moreover, the restrictions on spectrums right to deal with its uncollected book debts did not enable the bank to realise its security over those uncollected book debts. A floating charge is a security interest over a fund of changing assets e. Book debts and the need for careful drafting of security documents print publication. Is a charge over future book debts necessarily a floating charge. A company executing a charge over its assets will commonly include its present and future book debts.
A fixed security over a book debt for the purposes of s1001 is described as one where. The bank could not have sold the book debts without first taking some step or steps that would have given it the power to do so. Charges over company book debts finance and banking. The alternative finance provider will seek a waiver or release of the banks security over the receivables book debts that are assigned under the invoice finance or factoring agreement.
Lenders should also be careful when taking charges as security and ensure that the appropriate forms of debentures are properly drafted. Jun 29, 2008 this means that even though attachment does not happen until the assets are acquired, once they are acquired priority will be governed by the date of the original security agreement. A uk appeal court decision has reversed a recently decided case regarding security over book debts. Assignments of book debts outright transfers of rights or. Taking security over receivables legal guidance lexisnexis. Debt security refers to a debt instrument, such as a government bond, corporate bond, certificate of deposit cd, municipal bond or preferred stock, that can be bought or sold between two. Although, the charges over book debts frequently give rise to difficulties as the company act 1985 does not define book debt. What are fixed and floating charges company rescue.
The note looks at how to take security over various types of choses in action such as rights under contracts, debts. Is the fixed charge over book debts a viable security. An international handbook is a practical guide to the key issues involved in taking security over receivables in 39 jurisdictions. Taking security over shares and debt securities this note looks at the legal nature of shares and debt securities and how to take security over them. The pledge over economic enterprise creates security over all elements of the commercial or professional business including its intangible elements goodwill and customer database and its tangible elements including its movable assets, rights receivables and book debts as well as the location where commercial activities are carried out. Notwithstanding the terms of any charge over book or other debts contained in any security document and any covenant by the chargors to pay those debts into any particular account, the par. That expression is usually taken to mean any sums due. Impact of decision on security over book debts newsletters. Executive summary this study is designed to get a clear understanding of charges over a companys book debts and the courts role to develope it by judging the nature and volume of reported cases. Hong kong, whose law on security interests over personal properties mirrors. To any banker wishing to take security over the book debts of his corporate customer the signals that the house of lords have sent out are very clear. Charge over book debts the question of control 229 loan facilities. The question of what is or isnt a book debt often raises its head when lenders are looking to enforce their security. Examples of such property are receivables and stocks.
A typical debenture will purport to create a fixed charge over a. A fixed charge is over a nonchanging asset like property whereas a floating charge is where the security is on assets that can change like a debtor book or stock. It considers taking security by way of fixed and floating security by. A problem that has troubled the courts for at least a century is the concept of security over present and future debts. Book debts and the need for careful drafting of security. Charges over company book debts finance and banking australia. For a business which is actively trading, book debts are con tinually incurred and repaid. Insolvency law provides that any absolute assignment of book debts by an individual will be void against his trustee in bankruptcy if not registered at the bills of sale registry. In assessing the value of the security they hold, banks may need to reduce the value they place on the borrowers book debts.
A debt purchase agreement is a bill of sale because it assigns the clients title to book debts from its customers to the financier. The floating charge is used most often to take security over a companys book debts, leaving the company the freedom to deal with the book debts by collecting them in the ordinary course of its business. It is therefore natural for banks to want their charge to cover not only the firms existing book debts, but also its future book debts. Security over bank accounts created by companies are registered within 21 days of the creation of the security by filing the appropriate form with the companies registration office. How do the courts classify charges over book debts. It discusses bearer shares and debt securities, registered shares and debt securities and shares and debt securities held in a clearing system. The note looks at how to take security over various types of choses in action such as rights under contracts, debts, financial instruments and cash deposits in bank accounts. A missed opportunity n 71 that this enables a creditor taking security over book debts to drive a coach and horses through the provisions of the insolvency act 1986 designed to subordinate floating charges to preferential claims.
There still remains some doubt concerning how such a security should be framed in the debenture so as to ensure that what is created is indeed a fixed charge over the book debts and not a. A session on cessions of debtors in business rescue. For information on taking security over other types of intangible assets see practice. Can creditors come after your social security benefits.
The prescribed from is set out in the ship registration regulations 2002. A bank will generally take security over the assets and undertakings of the borrower in order to increase its chances of being repaid. Mar 01, 2014 if the book debts are subject to a prior charge or a counterclaim of the debtor, the banker will not be able to get the full benefits of the book debts. Each analysis is followed by a case study, to exemplify and elucidate the central. This means that even though attachment does not happen until the assets are acquired, once they are acquired priority will be governed by the date of the original security agreement. In practice, in the majority of situations of fixed charges being claimed over book debts which the official receiver is likely to encounter, will involve the collection of the book debts by the company, the payment of the proceeds of realisation into an account operated for the company by the bank debenture holder and then the drawing on that. Can security be created over all a companys future debts. Book debts as a security for the loanadvance borrowers can take advances by assigning book debts in favour of the bank.
If a book debt were to be charged as security but with an accompanying. A cession of book debts confers rights on the bank more generally on the cessionary without a corresponding obligation on the part of the cedent. Where a fixed charge over book debts provides that the collection of debts are paid into a separate bank account and the company is not free to deal with the proceeds in the ordinary course of business the official receiver may be. A typical debenture will purport to create a fixed charge over a companys book debts. Security over a south african ship or a share in a south african ship can only be created by a mortgage in the prescribed form under the ship registration act 1998. Any debt due or to become due at some future time to any personcompany on account of or in connection with any profession, trade or business carried on by such personcompany whether entered in a book or not. Sep 23, 2004 a uk appeal court decision has reversed a recently decided case regarding security over book debts. The house of lords, with seven members given the constitutional issue of retrospective rulings, held that the charge over spectrum plus ltds book debts was floating, because the hallmark of a floating charge is that the business is free to deal with the assets in business as usual. Fixed and floating charges are a type of security that a lender has over assets. Mar 23, 2019 debt security refers to a debt instrument, such as a government bond, corporate bond, certificate of deposit cd, municipal bond or preferred stock, that can be bought or sold between two. It is perfectly possible to create a fixed or specific charge in equity over present and future book debts. Judgments national westminster bank plc respondents v. Security may be taken over a book debt either by a mortgage or a charge.