Book Debt: The Current Asset of a business formation UK


A businessman may require financial assistance at different stages of his business. Especially, when someone is to open a company in London where the expenses are unbearable by a moderately rich businessman. As a result, he may take financial aid from any creditor. It may be that his business faces a sheer downfall. And as a result, he fails to pay the debts and is liable to certain charge. The charge may vary depending upon the contractual terms and obligations.  Hence, another asset that can be presented as a guarantee to the creditor is the Book Dept. This article gives an insight about what a Book Debt is and how is it liable to fine.

Cash Flow of a Company

For someone looking for a guide to setting up a limited company or a company with unlimited liabilities, it is important to understand book debts. As they are an important source of income for every type of company. At the time of bankruptcy, the firm may have some payments left to be received. Hence, the bankrupt company is said to have book debts at the time of insolvency. Literally, the book debts are the receivables of any business. They may generate from any transaction that has been made by the company before or at the time insolvency. It also may include the amount to be received as a payment for the supplies, goods or services, sold by the company to the customers on credit. If any business partner or director or any other company owes some loan to bankrupt company, this loan will also fall under the term Book debts. It will be absolutely correct to term the book debts as the cash flow of a company. They are what keep the company in a running state.

Claim of Book Debts

Moving another step forward in a guide to setting up a limited company or a company of any other form, the debtor should know about the right of claim that he has for book debts. It is known that a company which is ruined financially, has to give away its assets to the Creditor under certain circumstances. The company has full right over its book debts. Although the creditor is entitled to provide the debtor a monetary help necessary after company formation services UK. The Creditor may or may not necessarily claim for it or seize it at the time of insolvency.

Moreover, the people who are to pay the book debts are not relieved from the book debts if the company falls in crises. They have to pay their debt even if their creditor, that is the firm, becomes bankrupt.  If they fail to pay their debts, the company is at liberty to use contractual rights for justice against their debtors.

Another important point is that a company may use the claim against its debtors to retrieve a loan from their creditor, which is more commonly a bank. As mentioned above, it may be possible that in return of this loan, the Creditor, which in this case will be a Bank, decides to take the book debts of the company as a security.

Situations suitable for keeping book debts as security

It depends on the source of earning of a company that whether a Bank will obtain book debts as a security or not. If most of the cash flow of a company generates from its invoices, the Bank may find the option of Book debts better. Otherwise it may opt for any other form of security.

Fixed Charge over a Debt

It is the type of charge where the asset being charged remains fixed. Moreover, it is stricter in its terms. For instance, the debtor is not at freedom to sell the asset when required for any normal transaction.

Floating Charge over a Debt

It is the type of charge where the asset being charged may change its value and size with respect to time. In contrary to specific charge or fixed charge, it gives more relaxation to the debtor. Such as, its terms allow the debtor to make use of the asset within any normal business deal. The debtor can sell it and replace the asset with any other asset. It may float over all the property owned by the firm. After benefiting from company formation services UK, the company may benefit from this kind of freedom if it chooses wisely the security plan for the Creditor.

Type of Charge over Book Debt

It should be noted that book debts fall under the present belongings of any firm. Hence, there is a great rivalry between fixed or floating charge to be used over book debts. This has remained a topic of debate for many that whether a fixed charge is valid upon Book Debt.

However, it is also known that fixed charge used for securing a debt has preference over the debt secured by a floating charge. This statement is logically supported by the fact that at the time of insolvency, the fixed charge can be paid faster than the floating charges. But this does not mean that the latter form of charge has no benefits over the former. A floating charge gives more leverage than a fixed charge.

Hence, it is a trade-off between security and relaxation in terms. A bank has to choose either the flexibility of the terms in agreement or guaranteed speedy return of the debt.

Collection of Book debts

If any of the earnings or receivables of book debts have not been collected they are termed as Uncollected Book Debts. The official receiver of the company collects the due proceeds of Book debts on behalf of the company.

Criteria to classify Charge

The extent to which the charge is allowed to intervene with the accounts determines the type of Charge being implemented on the debt. These accounts hold the proceeds of book debts. Hence it has to be observed that how easy is the withdrawal or transfer of money from the account for the charger.

Consider the Illingworth case.

Held:

  • The Re Yorkshire was ratified.
  • Lord Macnaghten stated that:
  • A fixed charge is that is applied on a property that has some definite worth. The property remains unchanged over time. Its future worth can be ascertained.
  • A floating charge is applied on an asset which may change its value corresponding to time. Moreover, it is implemented on a class of assets. That class of assets can be replaced by any other with time. It is more like floating with the asset. It may hover over all the assets that a company owns.
  • However, a floating charge may take the form of a fixed charge in case of insolvency or any event that causes it to become fixed on the asset.

The article will be discussing some other cases to give a better understanding of the topic.

Consider the next example, the Siebe Gorman case.

In the case under consideration, the Bank wanted to keep book debts as a security for the debt. This had to be mentioned in the company’s debenture. The following conditions were set:

  • All the earnings from the book debts had to be transferred in the account owned by the Bank.
  • The charger, which is the company in this case was allowed to make use of the funds from that account.
  • However, the charger was not at liberty to auction those proceeds if the bank did not assent to it. Also, they were not allowed to assign those proceeds without bank’s affirmation.
  • The liability implemented on the Book debts was termed as “First Fixed Charge” by the parties. HC Held:
  • The restrictions on the debtor, i.e. the company, were enough to term the charge as fixed. For it gave a great degree of control on the assets to the creditor.
  • Such a control could not be given via a floating charge.

 Slade J spoke on the matter with these words:

  • The continuation of security for forthcoming debts is legal in a scenario where:
  • The mortgagor gives the mortgagee a liability applicable on the book debts beforehand.
  • However, it should be done in a way that these debts fall under a fixed charge, upon the receipt of proceeds.
  • As a result, the mortgagor may not be able to dispose any of the charged debt unless the mortgagee allows him.
  • This may happen before the implementation of laws protecting mortgagee’s security.
  • For a better understanding analyse the Evans Coleman and the Evans Ltd cases.
  • Hence, Slade J found it correct for the court to put in to practice what the parties intended for. That is, the book debts should be subjected to a charge that is “First Fixed”.
  • In the light of definitions of fixed and floating charges that were explained by Lord Macnaghten, Slade J believes that:
  • In the case under consideration, if the company was given enough liberty to use the earnings of the Book debt transferred to the account and the account was kept in credit; It would have been more genuine to term the charge as a floating charge.
  •  
  • From the above mentioned statements, it is inferred that:
  • The courts are terming fixed charge to be implementable on changeable assets such as invoices.
  • Ottley is of the view that the parties termed the charge in Siebe as First fixed charge. However, this term is not sufficient to elaborate the type of charge created in Siebe.
  •  
  • The Goode analysis on the nature of charge:
  • It was a widely accepted assumption that a fixed charge could only be created upon an asset or property which remains same in worth with the passage of time. The reason for this assumption was that the nature of floating charge was described more often as a charge that hovers or floats over the assets. And the assets are changeable with the passage of time. However, after late 1970s, the vague assumption became clear. The credit goes to Slade J who figured the flaw in the past approach towards classifying the charges. A floating charge was not distinguished by the quality to hover over assets. Rather it was the extent of liberty given by the floating charge to the debtor that made it unique. The liberty allowed to exercise the right of using charged assets in normal business transactions. And may get replaced for the purpose of disposition. The debtor may not be forced to take permission from the creditor for any such transaction. Hence, this point gave people a chance to think in a new direction. And that new direction was that Fixed charge was not only limited to unchangeable assets. Rather they could be implemented on assets that are subjected to change in time.

Hence, the next step after business formation UK is to make the business grow rapidly. And for this purpose, wise decisions at the right time need to be made. This also requires for the owner of the newly set business to be able to forecast the trends in business. And take decisions not only in accordance to the current scenario, but also according to the near future. Hence, important part in this process is the selection of financial aid and the type of security liable on it.

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