Flaws in the implementation of Goode’s Theory on global company formation UK

05 Oct

At the time of founding a company in UK, one must study the laws and verdicts passed in past cases of England companies. For it gives a wider vision about the problems that may be faced and the best possible solutions to them.

  • Book debts

Book debts are often taken as the current assets of a company. One who has create a company in London must need financiers in the form of creditor. Those creditors may take hold of the book debts to secure themselves. The Book debts are the liabilities that are to be paid to the company. They may be because of any supply made by the company. However, it must be noted that as long as these liabilities are unpaid, they fall under the category of Book debts. As soon as they are paid they are rather termed as the earnings of those book debts or more commonly, “the proceeds”. It is an interesting fact that book debts, are those assets that have value in real time as they are unpaid. Yet they can be presented to the creditor as a guarantee of returning the debt.

Debate on Charged Book debts

  • As the book debts may be used to guarantee the creditor, they are subjected to charge.
  • There has remained a debate on the characterisation of that charge, some parties conclude that the charge implemented on the book debts can be of any nature, whereas the others term it to be of any specific nature.
  • New Bullas Trading case

For anyone who wants to create a company in London, it becomes necessary to study different cases of UK based companies. As going through the case studies help in grasping the concepts of better business management. Moreover, it is beneficial to learn from the past experiences of UK based companies.

In the New Bullas trading case, a company wanted to take a loan on a condition that a fixed charge would be covering the debts and floating charge would be covering the proceeds.  Professor Goode figured some doctrinal and policy flaws in the judgement passed on the issue. This article discusses the criticism presented by Professor Goode on the case of New Bullas Trading. Hence the article provides a critical analysis of Professor Goode’s views so that one may understand how to analyse judgements before starting a company in England.

  • Berg analysis of Re Goode
  • Goode believed that the approach of considering Book debts and the proceeds as two unique assets was quite impractical in nature. For a debt unless paid is a non-existing entity and has no real worth. Hence, a fixed charge is imposed on it in the agreement. But after the payment the free withdrawal from the accounts should not be an option given to the company. Because a fixed charge remains implemented on it since the time of agreement. And does not change into a floating charge. Professor Goode built his critique on the foundation of the following theory:
  • A security interest does not change in nature, i.e. it continues as the same throughout.

In the view of Professor Goode, the basic problem is that the debenture offers either of the two securities:

  •  A security that remains single from being charged on debts to being charged on earnings of those debts.
  • Two separate securities that differ in nature and are charged on assets at two different instants. For example, the interest charged while signing the debenture and the charge applied when the debts are paid.

An important concept that is supportive to Goode’s critique is that when any belonging is charged justly, and the charge is to be collected by the charger later, it is more like a fair right of guarantee given to the charger. However, this right may become active at the time the debts are paid.

No matter how straightforward the concept may seem, it brings along certain flaws:

Fails to distinguish between book debt and its earnings
Book debt and proceeds are quite different in nature. The former is the asset that has to be collected and the latter is the collected asset. When the collected assets i.e. the proceeds are paid to the Bank, they are treated as separate assets. It may seem odd but logically, the different identity, regulations of any belonging may vary. And in such a situation charge subjected to them should also vary. Hence, it cannot act singular and continuous on the varying assets.

The ruling in Dearle case governs that a debt is subjected to a security interest that differs from the charge of its earnings.

Lack of cases favouring Goode’s theory
The Goode’s theory provides no case in its support. Hence there is no practical example elaborating the practicality of this theory.

Contradicting to Re Brightlife
The assets in bank account of the firm, which included proceeds were subjected to floating charge separately. So the rule that a fixed charge does not allow a company to manage the earnings of debts freely could not be implemented in this scenario. The verdict of Hoffman J. never at any point stated that the fixed charge could only relate to uncollected receivables and had not link with the proceeds. This is because a charge that could cover the uncollected loans and the earnings alone was the centre of Hoffman’s verdict.

Counter case: CCG International
The case of CCG International contradicts the theory of the constantly singular guarantee interest. However, Professor Goode paid no heed to it.

Although the concepts of Goode’s theory seem quite logical at first, but one who is starting a company in England, must understand that no judgement can be marked fair unless it is implemented and found practically fair.

Professor Goode believed that a Bank cannot possibly charge the balance of a firm which is on credit. And in case it is done, it is merely a right in the debenture used for setting forward the arrearage of company against the balance on credit. The Goode’s theory states that book debts when paid transform into proceeds. In both the forms, the subjected charge is single and remains constant. Both the views of Goode contradict each other.

Considering the case of New Bullas Trading in the light of above mentioned views, it can be observed that:

If the proceeds were obliged to be paid into the account owned by the creditor, there would have been a discontinuation in fixed charge from book debt to paid earnings in the account.

Hence, it is quite evident that there is no real time worth of Goode’s theory as it fails to prevent the implementation of two different charges at debts and proceeds. Thus, the two legitimate concepts are:

  • Uncollected debts may be subjected to a fixed charge as per the will of creditor
  • After collection payment of debts, the proceeds may be taken over by a floating charge and the fixed charge is given away.

Professor Goode’s theory cannot prevent the realisation of these concepts. If pondered over, the concepts are utterly logical. A debt can be subjected to different interests before and after the payments. Provided that the first type of security interest is discharged upon the payment of debts and then a new charge is imposed on it. Thus, proving that the verdict by court on New Bullas case was fair.

Critique on policy of Re New Bullas

The analysis of policies proposed by New Bullas verdict reveals no such basis upon which the verdict can be prone to disagreement. A situation where the creditor, a bank usually, has no issues in taking over security interest on book debts in the form of fixed interest and the company is eagerly demanding to keep the cash flow, under its control a compromise has to be made. And that compromise may result in the form of a verdict similar to New Bullas. So that the Bank has the fixed charge over debts that are yet to be paid and the debenture changes the fixed charge into floating for the account which keeps the proceeds. Hence, taking care of the concerns of both the parties. Siebe Gorman provides some kind of security to the clearing Banks. The policy in it cannot be argued upon. Although the charge that was implemented on both, the debt and the account of proceeds, was fixed in Siebe Gorman, the fact that it cannot be objected proves that New Bullas cannot be objected either. The reason is that New Bullas was just an attempt to promise the Bank, which in this case was non-clearing, a security similar to that in Siebe Gorman.

Certainty about New Bullas

Nourse L.J’s view on New Bullas is stated as follows:

  • As long as there is no law that nullifies the implementation of different type of charges on Debts and their proceeds, the implementation remains valid.
  • Even the principle by Goode, the presence of a constantly same charge over debts and proceeds, does not invalidate it.
  • Hence, if every condition falls within the limits of the law, the parties are at liberty to devise any condition.
  • This statement terms New Bullas held as just. So Goode’s theory inclusive, no company law in England annuls the concept of using different security interests for book debts and their proceeds.
  • Comparison of New Bullas Trading case verdict and Goode’s theory
  • The verdict in New Bullas case allows the following actions to the parties:
  • A fixed charge can be created over the assets without making an official agreement that no withdrawal of money would be made from the bank accounts which keeps the paid debts without the permission of the creditor.

Whereas Goode’s theory only allows the following:

  • A fixed charge to cover the debts when the company signs such an agreement whereby the charge’s permission becomes must to make any withdrawal from bank’s account after the debts are paid. However, it is more unlikely to take place in practical scenario. For it may give rise to problems like criminal law.

Validity of Siebe Gorman     

A fixed charge becomes lawful in either of the two scenarios provided that the Siebe Gorman verdict is unfair:

  • When the company has to transfer its proceeds into a designated account. the fixed charge covers the unpaid debts and receivables after payment. Moreover, the company is not granted permission to freely make us of paid receivables in the account unless the creditor allows to.
  • When a New Bullas structure is followed provided that there is a fixed charge covering debts to be paid and either the proceeds have floating charge or the earnings are transferred in the designated account with fixed charge. The bank is given the right to put the credits in account counter to the firm’s debts.
  • Moreover, the assignment of the credit balance cannot be done without the consent of Bank.

However, the there are cases such as Brightlife that implement strict rules of fixed charges and cases like CCG International that provide verdicts presenting a freedom of contract. By observing the nature of both the types of cases, it can be deduced that apparently Siebe Gorman may seem a case belonging to the strict test group, but it is rather verdict of freedom of contract. As stated by Cork Committee. Hopefully, founding a company in UK and making it grow prosperously has been made easier by the analysis presented in this article. For it gives an insight about the extent of freedom that one can enjoy legally while placing its debts as the security for creditor.

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