Two Way Approach of Classification of Security Interest on Book Debts for a UK incorporation

05 Oct

Re Brumark: A UK incorporation Case Study on the Issue of   Classifying Charge on Book Debts

For the best company formation UK, the most important step is to create a peaceful environment in the company. Also, to maintain good relations with the contractors. However, contracts may result in disputes when either of the parties fails to have a clear understanding of the statements. Since the first ever business registration UK, the issues in agreements have remained prevalent. Among them is the issue of charging a Book Debt.

  • Debate of Book debt and Proceeds
  • First of all, one must know the definition of Book debts and proceeds to be able to classify both of them. This may help in understanding the worth of both the forms of asset.
  • Book Debts
  • When a company supplies its goods on credits, the amount of money that has to be collected falls under the term “Book debt”. The book debts may also include any loan that has been taken from the company. It is the expected cash flow of a company.
  • Proceeds
  • When a company receives its cash flow or earning it is termed as proceed of the book debts. The loans paid to the company are also a part of its proceeds. Hence, the realisation of debt is proceed. The faster the retrieval of these book debts the better it gets for the fast company formation UK. Hence sometimes the companies may assign an official collector who may go to each debtor and collect the debts. It may also happen that the creditor takes over the task of debts collection from the company. This will be discussed later in the article. Also another possible solution is that the creditor assigns a collector and allows him to collect the debts in his account.
  • Characterisation of Book Debts and their Proceeds
  • The characterisation of Book debt and proceeds has remained a topic of debate for many years. Each verdict or case presents a different point of view on it. New Bullas distinguishes between book debts and proceeds and considers it valid to subject both of them to the two types of charges separately. Goode’s analysis on it considers it illogical to consider book debts and their proceeds as separate assets of the company. But Nourse L.J. passed the verdict as fair and valid. Hence the debate goes on. Every judgement made on it has a different and seemingly logical basis.
  • This article considers an example of a case to present another view on the topic under consideration. The text that follows explains how it is illogical as well as impossible to take loans and the money returned as two separate categories.
  • Criteria of judgement
  • It should be checked that what is the debenture about and what rules does the debenture devise for the collection of debts.
  • True problem
  • The true problem has been misunderstood. It is mistaken to be the compulsory treatment of debts and proceeds as inseparable parts of an asset. Rather it is that, the degree of freedom for the debtor cannot be decided unless the debenture is checked in terms that if it allows the debtor any dealing of the receivables on his own account or on the creditor’s account. This point was missing in the judgement of New Bullas case.
  • The Approach of Re Brumark
  • This approach is classified into two levels:
  • The first level is that the court analyses the case in term of the rules and rights being given to each other by both the parties over the belonging.
  • The second level that follows the completion of first one is the issuance of lawful division by the court.
  • An important question to be answered is if the debtor is allowed withdrawal from the account.
  • The case is mentioned in the following text:
  • The Case of Re Brumark
  • The company wanted to take a loan from a bank and devised the following conditions:
  • The fixed charge would cover the book debts of the firm. This was suggested to favour the bank. However, only those book debts that originated from normal routine business dealings.
  • There was no fixed charge applicable on the proceeds.
  • And they would not remain free from fixed charge as long as the company was not ordered by the bank to pay the earnings into an account.
  • Nevertheless, in case of no such orders from the bank, floating charge would be implemented on the proceeds.

As a consequence, there was no demand made by the bank to pay the proceeds into an account. However, there was a disagreement upon determining what kind of charge was imposed on unpaid book debts.

NZCA Held:

  • The uncollected debts were subjected to a floating charge and to secure creditors’ claims as well

Preferential Creditors Held:

  • The verdict of NZCA was just.
  • The charged imposed could be categorized as floating charge.
  • The charged belongings could be dealt with, freely, by the company without asking for permission from the Bank. This is a trait associated with floating charge only.
  • The company could benefit from the earnings of unpaid loans. This is trait that cannot be associated with a fixed charge.

Lord Millet’s views on Brumark 

The following points are the deductions of Lord Millet about the case:

  • Main principle of New Bullas
  • The parties were given the freedom to design an agreement according to what suited them as long as the intention of the parties remained truthful and lawful.
  • Otherwise the will of the parties would not be allowed to overcome the laws. The intention of creation of charges on book debts and proceeds was clearly demonstrated by both the parties. Fixed charge was for the debts and floating for the proceeds. As both the parties were willing for this agreement and there was nothing unlawful in it, the will of parties prevailed and got acceptance. Basically the approach is flawed.
  • The judge claimed that the floating charge and fixed charge could be distinguished upon the right of company to give away the liable assets to third parties. If the company was free to do it, the charge was floating. However, the debts were subjected to the fixed charge and hence could not assigned or charged by the debtor without permission. But because of this condition, there was no requirement left for putting any restriction on the way company dealt with the proceeds.
  • Nevertheless, this makes the approach unacceptable and contradictory to authority and law.
  • Parting the ownership from the proceeds
  • Debts are the loans or money that has to be collected from the debtors. They may result from supplies and goods of a company. It may not be wrong to term them as mere rights for collection of the money. For they are imaginary and do not exist in real time. Upon the receipt of payments, they are termed as proceeds. A debt cannot be benefitted from monetarily. It can just be assigned to any other party or collected from the debtors. Hence, if the right of receipt is not given to the company, there is nothing left with the debt to be benefitted from. It becomes worthless. And useless to be presented as a security. Hence, even if it is possible, there is no sense in separating the ownership of book debts from their earnings.
  • Bi-Level test of Re Brumark
    The Re Brumark test suggested two stages approach for the determination of the nature of charge. The two levels are as follows:
  • Determination of Expanse of Rights
  • This the first level of the two stage approach. Logically, the first stage should check the intention associated with each kind of charge liable to the assets. By intention it means the description given by the parties for each charge. Nevertheless, this stage has a different purpose. It rather measures the extent of freedom by which any asset could be dealt by the debtor. Or in more general wordings, the freedom and obligations that both parties present each other in the agreement. This stage analyses the nature of those rights and regulations.
  • Definition of Charge
  • This is the second tier of this approach. After the court analyses the rules and regulations mentioned in the debenture, the court has to decide the type of the charge being enforced on the assets. An interesting point is that the description of the charge given by the parties is not set as the basis for taking this decision. And the intentions of the parties are least considered.
  • The analysis done by the judge’s sets the base for defining the kind of charge. Depending upon the nature of charge, it is lawfully termed as either fixed or floating. If the nature demands it to be termed as fixed, it will be termed as fixed, even if the parties describe it as a floating charge.
  • It can be seen that no intention of the parties matter in determining the nature of charge imposed by the debenture.  However, the intention in terms of the rights and regulations mentioned in the pact may help in knowing the actual nature of the charge. As the distinguishing factor of both the charges is the extent of freedom that a debtor is granted to use his accounts. Or the fact that who intends to have control over charged belongings, the company or the creditor.

English Courts and the decision

Notice should be taken of the fact that this decision given by preferential creditors is not obligatory on the courts of England. For it is related to a particular UK incorporation and does not need to be made a compulsion on all the cases. It just gives an insight of how to deal with cases similar to Re Brumark. According to the decision, the intention of the parties regarding the regulations and rights of agreement is relevant according to ZCT. Hannigan believes that preferential credentials never argued that book debts could not be subjected to a Fixed Charge. rather, the charge is fixed if the firm cannot freely collect the debts.

For instance, Re Keenan casewhere an agreement being signed between the company and the creditor had imposed fixed charge on the book debts. It was especially mentioned in the conditions that the collected debts would have to paid into an account. the company was not allowed to make any withdrawal from that account. However, if it intended to withdraw proceeds from the account, the company had to seek permission from the creditor via a written consent. This restriction is generally associated with a fixed charge. Hence, the point to be observed is the effect of regulations under that charge. To what extent the charge imposes restrictions on both the parties. Hence, the intention expressed by the parties was of no value. And the fact that whether the account will remain within the reach of the company freely or be entirely taken over by the Bank will determine the true class of the charge being implemented.


Avoid the conflicts


The issue of charged Book debts is complex. And the problem in making a clear understanding about the difference between the implementation of a fixed and a floating charge. The article has undergone some case studies. With each case study it becomes evident that even the minute details of an agreement can cause trouble for the companies and lead them to the courts. Hence anyone who wants to have a fast company formation UK and business growth must be careful about these details while signing a contract. For they may later cause conflicts. Even if the issue is taken to the court, the process is time consuming. Hence such conflicts may slow down the progress of a company. One may have known that for best company formation UK the best agreements should be made.

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