The Search of True Definition of Fixed and Floating Charge on Book Debts for a Company Setup UK

04 Oct

There is a great financial need before and after set up company London. For a small scale business to flourish a lot of capital is required. Generally, small businesses do not earn enough profit to fund their own companies and grow prosperous. Hence, they have to seek monetary help from the creditor. The creditor might be a bank or any company or partner. One who is to establish company in UK should know that nobody gives a loan without any guarantee. Hence, the security given is in form assets that are subjected to certain rules. This article puts an effort to present certain case studies that may help the readers in deducing the rulings on Book Debt.

  • Book Debts
  • Anyone who desires to set up a new company UK has to know about the sources of generating revenue of the company. Amongst these sources is Book Debt. The present assets of a company may also include Book debts. Book debts relate to any earning of the company that is due to be receivables. This earning may arise from successful transactions and sale of supplies of the company. Book debts are liable to get charged. This may happen when a guarantee is required by the creditor before giving some financial aid. This guarantee may be subjected to different laws. Hence the article discusses different cases that help determine the type of charge most suitable to Book debts. 
  • General Definition
  • Fixed Charge
  • A form of charge that is subjected to assets that do not alter with the passage of time.
  • Floating Charge
  • The second form of that is usually takes over belongings that face alteration with the course of time.
  • Vague notion about the definitions
  • The definitions mentioned above are not clear in their understanding. The difference of the two charges may not be sufficiently defined by the above mentioned definitions. Hence different case studies are presented to develop the true concept of both, fixed and floating charge.

There is a need of a lot of financial investment to establish company in UK, the case of Siebe Gorman is about such a company. A company wanted to lend some money from the Bank. The bank, as a creditor demanded book debts of the company to be mentioned in the pact as a guarantee for the bank. So that at the time of any monetary crises of the company, the book debts could secure the bank. It was mentioned in the agreement that the bank would own an account and each proceed of the book debt would be directly transferred into that account. The agreement also provided that the company would not be at liberty to set those book debts at auction without the permission of bank. But the company did have enough liberty to use the funds in the account for normal business transactions.

  • The parties entitled this kind of liability as “first fixed charge” on the book debt

The text that follows elaborates different point of views regarding the liability implemented in Siebe Gorman:

Berg point of view over Siebe Gorman liability
The charge has been regarded as fixed charge in Siebe Gorman. However, it is quite unsound of Siebe Gorman to take such a decision about a situation where the company is at freedom to use the accounts and has not been clearly stopped from withdrawal of money. The following two reasons set a solid ground for the argument:

First Reason

  • The British Columbian verdict had set the basis for Siebe’s decision.
  • Both the verdicts had been formed via merely considering internal linguistics.
  • Moreover, the facts were ignored that informed about scenarios for giving protection in issue.

Second Reason

  • The basic inference that one may get from Woolcombers case is that if a company has some present assets, they are the cash flow of any company. It is known that Book Debts are often termed as the current belongings of the company. Charging them, or the future debts with a specific charge has been marked as an effort of the both the bank and the directors of the company to stop the cash flow of the company by the Court.
  • Outside the reign of England, some decisions taken have put Siebe Gorman’s verdict about fixed charge on debts in a doubtful position.

Hence after a company setup UK , the main challenge is to finance the business. And the conditions in the agreement must guarantee a degree of freedom to the borrower. For it might get tough to run the business if any creditor has to pursued for every action that the borrower wants to take.

Taking another case into consideration. In the case of Re Keenan, there was a company that had taken financial aid from a bank. The agreement between the company and the bank had very strict terms. The company had to transfer all of its cash flow i.e. the proceeds of book debts to an account which been blocked by the Bank. Blocked in a sense that, the company was not given the freedom to use the money from that account without obligation on routine business matters. Hence, the withdrawal of money could not be unless the bank allowed the company for it. Moreover, it had to be a written consent.

Ireland’s SC Held:

  • The charge was fixed in nature.
  • The degree of freedom given to the company was definitely insufficient to term it as floating charge.
  • In fact, the company did not even have the right to use its proceeds freely.

PC Held:

  • The view of SC of Ireland was fair enough.
  • The company did not have access to its debts which were the source of generating cash for the company.
  • Hence, the charge could only be termed as a fixed one.
  • The terms and conditions in in the agreement did not allow to consider the charge as a floating charge.

In the case of Re Brightlife, when a company wanted to seek monetary assistance from a Creditor, the Creditor agreed to provide aid but on certain conditions. The creditor demanded all the debts of a company, including book debts to be subjected to First Fixed Charge. Moreover, all the rest of the belongings of the company were taken under floating charge. The agreement stated that the company was unable to use the debts, book debts inclusive, for any reason apart from the collection of debts freely. However, to work with debts for any reason other than the collection of debts, a permission could be taken by the creditor. The terms did not end there. The creditor was given the right to change the floating charges on the assets of the company into fixed charge under certain circumstances.

The company had to be liquidated. An argument was presented by the Customs and Excise. According to it, merely a floating charge was presented by the agreement. And hence, the importance was given to preferential loans. In contrary, the creditor debated that the nature of charge was specific, so as a consequence it should be prioritized.

HC Held:

According to Hoffman J,

  • Despite of the fact that it was tried to demonstrate the charge as a first fixed charge, it was more inclined towards a floating charge. The reason is that the assets that were subjected to the charge were time varying.
  • However, it should also be noted that the restrictions limited the company in many of its actions.
  • Yet, the company had the liberty to gather the debts from the debtors and transfer them into the account of the company.
  • The company was granted allowance to deal with the debts in a way that could not be allowed via Fixed charge.

However, there was no such way mentioned in the agreement by which the company could prevent the conversion of floating charge into fixed charge or by which the company had to be notified before any such action was taken by the charge holder, the creditor was at liberty to change it in to fixed charge. Hence, it’s an fixed charge was made the final decision.

J. Hoffman, Held:

  • Free use of accounts is not allowed by fixed charge.
  • Hence, a book debt taken over by a claimed fixed charge was actually a floating charge.
  • This assumption is supported by the fact that the once the company collected and transferred debts in its account, it could then freely use it for regular business.

Goode analysis on the matter
When the cases of Siebe Gorman, Keenan Bros and Brightlife are compared and contrasted, it is inferred that unlike the other two, Brightlife allowed the company for the collection and payment of debts into an account. The company was permitted to handle the account with freewill. Infact, there was no restriction of any particular account where the payments had to made. Based on this scenario the claim of Hoffman J. seems justified. It says that as the company is authorised for managing accounts as its own, it is a trait found in agreements imposing floating charge.

From the analysis done so far on the debate of fixed charge or floating charge on Book debts, a clear notion has been deduced. A charge can be termed as fixed only when the company is obliged to seek permission of the creditor for the collection of book debts and also when it has to seek permission for any dealing done with the debts after collection. Else it is a floating charge. The article studies some more cases to know more about the scenario:

The Re Atlantic Computer Systems case states that the distinguishing factor of a specific and floating charge on a book debt can be specified via the difference in obligations for protection over asset in future and asset in the present. There was no attention given to verdicts taken in advance on the debts charged with specific charge.

Moving back to the Siebe Gorman and Re Keenan cases, it can be seen that the debts that may only exist in future can be subjected to fixed charge. However, a condition must be fulfilled for a valid fixed charge. It must be evident from the debenture no freedom will be given to the company in regard of its future debts and proceeds. As far as the floating charge is concerned, it gives a hold on current assets as well as the future assets of the same class.

The Berg analysis over Re Atlantic Computer Systems case 
According to Atlantic Computer, a charge is fixed if it takes over any existing property and does not depend upon the contractual freedom. This statement does not hold in many cases. Such as, this statement is insufficient to explain the discrimination in Brightlife caseAlso it mistreats the floating charge traits described by Romer L.J in Woolcombers.

The Atlantic Medical case is also related to floating charge. It is tough to accept the restrictions presented in Atlantic Computers upon the discriminating factor of fixed and floating charge. As the reason for the classification based on existing or future asset is unclear. It is stated that the future assets are liable to floating charge. Hence, a deduction is that the use of fixed or floating charge is a more important question. 

According to the case of William Gaskellthe extent of contractual freedom given while the management of debts and their earnings is the true trait sufficient to discriminate between the class of charge. The case gave an in depth analysis of the behaviour of both the charges.

After going through a series of cases it becomes clear that a number of approaches were made to find the true definition of fixed and floating charges. The classification of charge on book debts continues as the newcomers continue to set up a new company UK. With every new case, a new aspect of the problem may arise.

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