Fixed and Floating Charge for a UK Company Incorporation and the case study of Re Spectrum Plus


Setting up a business UK was never an easy task. It requires a loyal and competent team willing to contribute in the company. Moreover, for further establishment of the company, financial assistance is required. Especially in cases of small businesses, where the capital generated by the company itself is not sufficient to support the company’s growth. One should know the details about how to raise funds for the company before practically starting a company UK. When any debt is taken, the agreement signed has certain terms upon the return of the money. One may call it security or guarantee for the creditor. The security may be in the form of a charge on the company’s assets. Hence, the assets may be confiscated by the creditor when the company fails to return the debt. There are two different types of charges, Fixed and Floating.

The definition of floating charge and fixed charge evolved from case to case. This article presents the case study of Re Spectrum.

Recall the typical definitions of fixed and floating charges.

Fixed Charge

An asset that may not vary with time when charge has a fixed charge over it.

Floating Charge 

Floating charge is implementable on a group of assets that can be varied with respect to time. In order words, their size, amount or worth is changeable with the passage of time. 

For setting up a business UK, it is crucial to know the pros and cons of every financing method. This debate has evolved over cases about how to charge Book Debts. Book Debts, considered as current assets, are the receivables of a company that have to be collected yet.

The article may now proceed towards a case study. A new concept regarding the definition of types of charges will be explored.

  •  Re Spectrum Plus

Re Spectrum Plus was a case of a company having England formation and was taken to the court “House of Lords”. The company was a producer of products related to painting. The company took a loan from a Bank for the growth of UK company incorporation. A debenture was signed between both the parties and the conditional requirements of the debenture were as follows:

  • Debts of the company, inclusive of the book debts, would fall under the fixed form of security. This may include the current and future debts of the company.
  • No liberty would be granted to the company for the assignment or charging of debts without a written permission by the Bank. Moreover, all the collected payments would be transferred into an account owned by the Bank.
  • The company was given the leverage to use the account freely in ways apart from the above mentioned.

The company had an overdrawn account, however, the proceeds would be collected and paid to the account time to time and used by Spectrum at the time of need. Spectrum had to windup and the Bank claimed against the company stating that the charge on the debts along with their proceeds was fixed.

High Court Held

  • The Vice Chancellor of High Court deduced the decision from the rulings in Re Brumark.
  • The decision was that the judgement given by Siebe Gorman was not right and the charge on the proceeds was of a floating nature.

CA Held

  • High Court was incorrect. There were enough obligations to be observed by the company that made the charge fixed in nature. The creditor had adequate control over the account.

An initial discrimination between both the charges was made.

  • When the charger assented to abandon the right of distributing the charged belongings with freedom, the charge was identified as fixed. Also, the assets were designated as the security of creditor.
  • When the charger was granted permission to use its assets in routine business matters, the charge was floating in nature. However, when it was required to present to the preferential creditors, the assets as a security, the company would stop using them for business purpose.
  • The floating charge was also defined as the case where company could freely use its charged assets in ordinary business. As long as the creditor did not interfere, the charge remained floating.
  • House of Lords Held
  • The description of the charge was more inclined towards fixed charge, but the nature depicted that it was a floating charge merely.
  • The unique factor about a floating charge was that it covered an asset which was not given as security at the present moment, but rather would become a security in future. Meanwhile, the asset could be freely used by the charger and the asset could be replaced when needed.
  • The definition of floating charge was ambiguous. As an asset that was to be subjected to a fixed charge in future could not be differentiated from grouped assets which were taken over by a floating charge that would likely crystallise after some future event.
  • The company had been granted rights like free use of proceeds for routine business dealings. Moreover, before ceasing the right of overdraft and demanding the payment of debts, the bank had to give a notice to the company.
  • Such rights could not be associated with the floating charge.

Floating Charge’s vital traits

The decisions made by House of Lords were supported by Privy Council. While giving Board’s views, it was noticed by Lord Millet, that the first two traits of floating charge, explained by Romer L. J., were not the factors that made the floating charge unique. Though they constituted the standard definition of a floating charge, the two traits could be found in a fixed charge as well. However, as stated by Lord Millet, it was the third trait that differentiated floating charge from the fixed charge.

 Lord Scott agreed with Lord Millet. According to Lord Scott, the unique factor about floating charge that also marks it different from the fixed charge is that it covers an asset that has not been finalised as a security. It may be finalised after some incident occurs in future. It can be replaced when needed and used freely by the debtor for any ordinary business.

As a conclusion, Lord Scott stated:

  • The charge should be taken as floating in nature, whenever a charger is given the liberty to change any charged asset when needed and remove it from security. Thus the assets under floating charge change with time.
  • Spectrum was allowed to use the account’s balance in any way. Slade J. thought that the account’s nature i.e. debit or credit mattered. However, it is disagreeable.
  • The thing that matters is the ability of charger to make any withdrawals from the account.
  • The account would become blocked if the debtor was not given any right to draw money from his debit account. Thus, resembling the Keeton Bros case scenario. However, if the charger has the option to draw from the account which may be either debit or credit, the payments being made to the account would not be used for returning the debts to the creditor. Rather it is being utilised by the charger, for the purpose of regular business transactions.

Lord Walker’s judgement about the matter

Lord Walker commented on the test proposed by Sir Andrew for recognising the class of charge. The test is mentioned in the text below:

  • The terms and conditions of the debenture determine the true behaviour of the charge being imposed via that debenture. Hence, the degree of freedom or subjection being given to either of the parties by the other party would classify the charge.

Lord Walker’s opinion about Sir Andrew’s test is as follows

  • Every point stated by Sir Andrew was unobjectionable excluding one point. That point was not hindering the Lordships.

View of Pettet about the decision

The charger must be fully restricted when dealing with the assets, if the assets are to be subjected to fixed charge. Also, the assets must remain unchanged by the charger. This should be done to give the charge an advantage. Hence, the verdict makes the law more certain.

An overview of different case studies and their verdicts

Siebe Gorman

Conditions in the debenture:

The assets were subjected to a fixed charge. The earnings of the book debt would be paid to a selected account. Moreover, the book debts could not be assigned freely by the charger.

Held

The charge subjected to both, the book debts and their proceeds was specific in nature.

Re Keenan 

Conditions in the debenture

After the collection of the debts, the proceeds would be paid into an account chosen by the creditor. After being paid, the balance in the account could not be used by the charger.

Held

It was a fixed charge as it did not allow the free use of account’s balance to the charger.

Re New Bullas

Conditions in the debenture

The book debts and the proceeds were taken as two separate assets. A two charge approach was introduced. The charge on book debts were said to be specific in nature whereas the proceeds were taken over by a floating charge.

Held

High Court termed it as a floating charge

Whereas CA marked it as a fixed charge arguing that the liberty being given by both the parties to one another should determine the nature of charge.

Re Brumark

Conditions in the debenture

It introduced fixed charge on the book debts. A floating charge was introduced on the proceeds. However, the proceeds had to be transferred to an account upon the order of the bank.

Held

The judgement was given after subjecting the case to a bi-level test. The charge on proceeds was termed as a floating one.

Re Spectrum

Conditions in the debenture

The debenture imposed a fixed charge on the debts and the proceeds had to be transferred to an account. However, could be drawn freely from the account after the transfer.

Held

The charge was said to be floating in nature as the mere restriction of paying proceeds to an account was not enough to term the charge as fixed. For a fixed charge, there should be a restricted utilisation of balance in the account.

Development of the defining factors of charge’s classes

As the overview demonstrates, there has been a development in the judgement from the first case to the last case discussed. The cases led to the refinement of the definitions of fixed and floating charges.  Initially, it was believed that the uniqueness of a fixed charge was it would cover fixed assets and the uniqueness of a floating charge was that it had changeable assets and could float over all the assets of a company. Though these were very unclear definitions. The confusion remained there when it came to charge book debts. The debentures of each case gave a different definition for the charge on debts. Sometimes book debts and proceeds were taken as two different assets, and subjected to different charges. The other time they were argued to be considered as a single asset and subjected to a single charge. The final judgement mentioned that the true definition of a floating charge must include the fact that it allows the debtor to draw on the proceeds or make use of the asset as per their will. They are only taken under security when any event such as liquidation takes place. Conversely, a fixed charge restricts the use of assets and the debtors are not at liberty to bring the paid debts into use for any ordinary or special business transaction. Hopefully, those who intend for starting a company UK may have understood how to bring it towards the road of progress as well.

Comments: Leave Comment

* The email will not be published on the website.