"Are Book debts fixed or floating charges?"

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Due to the lower priority of floating charges the lending party (through the debenture) has often sought to place fixed charges on as many assets as possible. However, due to the nature of some assets these fixed charges have later been re-characterised as floating charges by the courts.

 

Whether a charge is characterized as fixed or floating is not often clear and for many years book debts had caused much confusion and several contradicting decisions from the courts as to whether the charge on book debts was a floating charge or a fixed charge.

 

The argument for book debt being a floating charge is that in many cases book debt will change in the day-to-day course of normal business and so by definition should only be subject to floating charges. However in some cases the holder of the charge has significant control over the charge, in which case the book debt is subject to a fixed charge.

 

The re-characterisation of floating charges to fixed charges particularly in the case of book debt was finally clarified by the House of Lords in the case of National Westminster Bank plc v Spectrum Plus Ltd [2005].

 

The legal focus of the case was whether book costs granted by Spectrum Plus ltd to National Westminster Bank plc in the debenture was a fixed charge (which it was expressed to be) or a floating charge. The outcome of the case was that Spectrum Plus plc was free to deal with its debtors and the proceeds of the debts and so in this case the book cost was inconsistent with a fixed charge and so would be re-characterised as a floating charge.

 

The House of Lords clarified that a charge over book debt could in fact be a fixed charge as long as the holder of the charge had a significant level of control over the proceeds of the book debt, normally meaning that the proceeds are paid into a blocked account or are directly paid to the secured creditor.

 

One significant change that the case bought about was how security documents and debentures are drawn up, now many debentures will state, where they did not previously, that proceeds from book debt must be paid into a blocked account.
 

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