Understanding Laws for the Book Debts of Great Britain company register via case study of Re New Bullas Trading case


The receivables of any business are known as book debts. For a better understanding of problems faced in seeking loans and laws of book debts after the company registration United Kingdom, this article discusses the case study and provides an analysis of the cases in the light of views of different statesmen.

Before proceeding towards the case the need of debts and the methods of taking debts should be revised. After companies house set up a new company, the company needs money to flourish and become a vastly growing network. This debt is provided by different parties known as creditors. Provided that the company has gone through the process of Great Britain company register. For the loan would only be provided to UK registered companies. The return of debts is subjected to different laws. One of them has been discussed in this article.

Re New Bullas case

This case is an example of a UK bankruptcy law case. Hence, the laws deduced from these cases are applicable on companies with company registration United Kingdom. In this case, the company sought a loan from a creditor. The conditions that were set in the agreement were quite different. The debts that were yet to be collected by the company were taken over by a fixed charge. However, as soon as the debts were gained from the debtors and transferred to an account, the fixed charge would change into floating charge. This could allow the company to use the debts with liberty after the collection. But the debts could only be used for normal routine business.  Hence, the ruling may be known as the “Two charges approach”.

The agreement allows two different types of charges to be implemented on the same assets. The fixed charge covered the book debts, whereas the floating charge covered the proceeds of the book debts. Hence, the case presented a new concept that proceeds and book debts could be considered as two separate assets by subjecting each to a different form of charge.

FI Held:

  • The debenture holder was given a right of directing the way proceeds were used.

 Knox J. expressed that:

  • Such a right that just exists in the debenture but is not exercised in practical scenario is not enough to term the charge as a fixed charge.
  • The debenture holder should actually give the directions of earnings’ application in case of a fixed charge.
  •  Hence, there was no fixed charge covering the book debts. The charge on book debts was a form of floating charge.

 CA Held:

  • The explanation presented by FI was incorrect.
  • The book debts and proceeds could be subjected to different charges.
  • Hence the book debts and proceeds were divisible into two separate assets.
  • A fixed charge could be retained on the uncollected book debt and a floating charge on the proceeds.
  • The contractors are at liberty to cover uncollected debt with fixed charge and after realisation with floating charge.

The case presents the concept of separation of book debts and their earnings. The parties could choose freely fixed charged for uncollected debts and floating charge for their earnings. This freedom became a source of inspiration for the Companies Act.

Berg’s point of view

The remedy provided by 3i in New Bullas case was:

  • Apply separate charge on book debts i.e. fixed charge
  • Apply Floating charge on proceeds after they were paid
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Goode analysis

The decision about Brightlife case’s solution was not as per expectations. Especially for those who had believed that the decision would provide a clearer understanding of the case. The court had not taken into consideration of the cases related to the problem.

  • Unrealistic discrimination between book debt and proceeds

As the above mentioned case considered book debt and its proceeds as two different entities, the case did not provide a valid and strong reasoning for this assumption. The argument was presented that the separate treatment given to book debts and its proceeds was non-genuine. There is no value of a debt as long as it remains debt. Its value matters when it is paid.

Vaughan Williams stated in Re Yorkshire,  

  • The specific security needs that once the debt has been realised and identified as a security, the mortgagor is not allowed to take the title of security from it.

A judgement was passed by the court of appeal. It said that the fixed charge on the asset in the relevant case was not removed because the company wanted it to happen. It was done because the company along with the creditor had agreed to release the debt into the account after payment. Moreover, it was assented upon by both the parties that no direction would be required for the release.

Fallacy of the statement:

The false notion about the judgement is as follows:

  • The idea that the discrimination of security can be freed from the obligation on application of book debts mentioned in the contract.
  • For if it is true, it becomes evident that the control of chargee on the proceeds will have no value.
  • The security interest of both the forms of asset, i.e. the uncollected book debt and the earnings are of different nature.
  • And it becomes highly irrelevant to mark one form of the asset on the basis of the other form of the asset.

Here, the drawback of the judgement becomes quite clear. There are two ways by which a creditor can collect a fixed security:

  • Take an assignment 
  • The first step he may take is to assign the debts. However, it is necessary to inform the debtors about the assignment of debt. This may assist them in knowing who or when to make the payment to. The Creditor can then collect the debts form the borrowers on his own.
  • Authorise the assignor
  • The Creditor can appoint an assignor. It means that the creditor transfers all the rights and obligation of the debenture along with the debt to a third party, which in this case is the assignor. The creditor can take over the charge. However, authorise the assignor for the collection of debts. The assignor may then have the freedom to gather the debts on the behalf of creditor and deal with it
  • as per the directions.
  • Problem with this approach: Giving the debtor a freedom of gathering the debt on his own for his own self definitely questions the presence of a fixed security on the book debts.
  • Hoffman J. pointed the same problem in Re Brightlife. Unfortunately, nobody took notice of the judgement passed by Hoffman J.

The uniqueness of the book debts when taken as a guarantee is that they have no real time value unless they are paid by the debtors. And upon payment, they no more remain debts, they become proceeds. Hence, if any charger collects the book debts as per the authority bestowed upon him, the security interest of the chargee can only be retained via one method. That is, if the security interest is asserted as a fixed interest via the earnings.

The proceeds can be controlled by the creditor if he maintains this obligation in the contract that the debts will be collected by the debt collector for the account of the creditor.

It should be known that if one fails to incorporate this rule in the agreement, then the fixed security of the creditor becomes nil and baseless. It is because any debt collected by the charger will benefit him only.

Deductions:

From the above discussed case and the critics on the judgement of that case many important deductions have been made. Although the idea of treating book debts and their earnings as separate assets seemed a remarkably easy solution. However, when pondered over, the logic for this idea seems unsatisfying. There is no reasonable base that why charge on debts is assumed to be fixed. The existence of debts is imaginary, unless realised in form of proceeds. Hence, it does not matter that which charge is subjected to something that does not have any existence in real time. All that matters is that to what degree the debtor is given freedom after the realisation of the debt. Whether he is allowed to make use of the proceeds freely in ordinary business dealings. Hence this the main flaw in the doctrine of the judgement passed in New Bullas case.

Thus, Knox J. judged the case New Bullas upon the above mentioned deduction. He believed merely giving the creditor an authority to interrupt the application of proceeds was not adequate to term it as a fixed charge. Probably if this notion was considered in the case, the decision would have gained support.

  • Unexpected Consequences of the Policy
  • The judgement passed in New Bullas, gives results that are quite undesirable. Hence depicting that the policy is flawed. If any companies house set up a new company, the policy for that company should be made correctly and closely checked for its flaws.

The creditors can weaken the effect of Insolvency Act as the floating charges are placed under the claims of secured creditors at the time liquidation by the judgement. Moreover, it is quite unrealistic that a security interest is taken to be different from the security interest at the time the debts are paid. Because of it the debenture is treated as a conditional pact relative to the earnings. The following may be the consequences:

  • When the debts are paid, the debenture would be reformulated. Additionally, the situation where no transfer took place in reality via mortgage would be considered.
  • Priority would be given to the earnings’ security interest since the moment the needs were fulfilled. And no consideration would be taken of the time when original pact was signed.
  • There would be no need of completing the formalities of registration mentioned in Section 395, Companies Act as long as the debts do not realise in the form of proceeds.
  • Upon the conversion of unpaid debts into paid ones, the worth of new security may remain undecided for some time. Under Section 239 of the Insolvency Act, the security may become illegal.

It can be noticed that the judgement gives a debtor freedom to use its proceeds in any way possible or subjects it to some restrictions such as taking permission from the creditor. The creditor just has to check that the charge over the book debt is termed as fixed and prevent the debtor from changing the form of the charge. The creditor can be dependent on the definition presented by Insolvency Act for the floating charge.

Hence, the results depict that the ruling passed in New Bullas case leads to consequences that were not aimed for. The charge sets the security as fixed before the payment of debts and later changes it in to floating security. The charger may freely take the control of proceeds, whereas the chargee keeps no authority in this regard and is also subordinate to the floating charge.  The main goal of the verdict in New Bullas was that, at the time of liquidation, when the floating charge crystallises, the creditor does not have to act subordinate to the floating charge. However, the verdict produces results quite opposite to the expected results.

However, the policies keep developing over years, they may not necessarily change every time a new company formation UK takes place. However, the change in trend of the laws over years helps the entrepreneur take better decisions in favour of his business.

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