Security charge over book debts

Section 1001 fixed charges on book debts guidelines for. Key cases on fixed charges over book debts the issue of whether charges over book debts are fixed or floating has been the subject of. Jan 17, 2020 an amendment made by the finance act 2019 enacted 22 december 2019 but only recently published has created a new security filing which transferees of fixed charges on book debts should consider. A charge means an interest or right which a lender or creditor obtains in the property of the company, by way of security that the borrower will pay back the. The clients who rely on fixed security over book debts may be about to change says neil james. A recent house of lords decision on how to characterise security over book debts will have wide implications for banks and insolvency. Legal issues in the creation of security part 2 wealth. In daily business life it is common for corporate entities to give security to lenders over their assets either by way of mortgage, lien or charge. There still remains some doubt concerning how such a security should be framed in the debenture so as to ensure that what is created is indeed a fixed charge over the book debts and not a floating charge. The terms were that its security was a fixed charge, but a floating charge when proceeds.

That expression is usually taken to mean any sums due. Case law on fixed charges over book debts has the following history. It is only converted into a fixed charge if, for example, the company fails to repay the loan. If a book debt were to be charged as security but with an accompanying. In practice, in the majority of situations of fixed charges being claimed over book debts which the official receiver is likely to encounter, will involve the collection of the book debts by the. Historically, preferential creditors such as the ird and employees had priority over secured claims in respect of floating charge assets. There still remains some doubt concerning how such a security should be framed in the debenture so as to ensure that what is created is indeed a fixed charge over the book debts and not a. The note looks at how to take security over various types of choses in action such as rights under contracts, debts. Limited 1978 4, when banks in ireland provided in their debenture that a fixed charge would be taken over present and future book debts rather than a floating charge. This necessarily implies that, in ascertaining the nature of a charge over book debts, the court would consider the parties respective rights and obligations in respect of not only the uncollected debts, but also their realised proceeds. Is a charge confined to existing debts necessarily a fixed charge. If the charge over the uncollected book debts floated, then the uncollected book debts would go to the preferential creditors in priority to the chargeholder. It is perfectly possible to create a fixed or specific charge in equity over present and future book debts. The decision is necessary because statute has given statutory priority to preferential creditors over debenture holders so far as payment of debts out of assets subject to a floating charge is concerned.

A missed opportunity n 71 that this enables a creditor taking security over book debts to drive a coach and horses through. Securing moveable assets in scotland morton fraser. The pledge over economic enterprise creates security over all elements of the commercial or professional business including its intangible elements goodwill and customer database and its tangible elements including its movable assets, rights receivables and book debts as well as the location where commercial activities are carried out. How to write off bad debt effects, and how to reduce bad. Taking security over choses in action practical law. The terms were that its security was a fixed charge, but a floating charge when proceeds were collected the same as drafted as in re new bullas trading ltd. It is not surprising therefore that spectrum availed of such to secure a loan from nat west bank. Ltd v barclays bank ltd 1979, agnew v inland revenue 2001. If contained within a debenture, the floating charge should cover all of the borrowers scottish assets, whether or not separate fixed charges have also been granted over. The elusive floating charge the student journal of law. A bank will generally take security over the assets and undertakings of the borrower in order to increase its chances of being repaid. Book debts and the need for careful drafting of security.

A typical debenture will purport to create a fixed charge over a companys book debts. It is not easy to reconcile the companys need to continue to collect and use these sums for its own business purposes with the lenders wish to escape from the priority which section 1752b gives to preferential debts over the claims of the holder of a floating charge by subjecting the uncollected book debts to a security which will operate as a fixed charge over them. However, a charge over a book debt may be created in many ways and, for it to operate as an equitable assignment or charge, no particular form of words is required in the. Sep 23, 2004 a company executing a charge over its assets will commonly include its present and future book debts. In the decision of the house of lords in national westminster bank plc v spectrum plus limited in voluntary liquidation and others 2005 ukhl 41 it was suggested that a fixed charge over book debts could be created in one of four ways. Accounts receivable much more than just book debts. Dec 01, 2005 the point to note is that what looks good on paper that is, a fixed charge might prove worthless if the essential condition of control over the asset is not in fact maintained for or on account of the secured creditor. Certain types of security interests such as a charge on uncalled share capital of the company, a charge on book debts of the company, or a charge on calls. In this case, the house of lords found that a charge over book debts and receivables was in fact a floating charge even though the charge document stated it to be a fixed charge because the chargor was free to use the proceeds of the book debts once collected. Judgments national westminster bank plc respondents v. Tax credits and other payments such as vat rebates or loss reliefs can be classed as book debts if they relate to the business of the company and these can be secured by a fixed charge if the security holder has sufficient control over the account into which they are paid. This document usually creates fixed charges over certain assets of the company land, plant and machinery, goodwill, uncalled capital, intellectual property rights, book debts, nontrading account bank balances and a floating charge over all the other assets.

Charge document a contains the following provisions. A floating charge is a security interest over a fund of changing assets e. As a consequence the position of fixed charges over book debts remains. Debate about the differences between fixed charges and floating. Where a fixed charge over book debts provides that the collection of debts are paid into a separate bank account and the company is not free to deal with the proceeds in the ordinary course of business the official receiver may be. Hong kong, whose law on security interests over personal properties mirrors. Section 1001 provides that the revenue commissioners of ireland revenue can hold a chargeholder liable for the fiduciary taxes of a company over whose book debts it holds a fixed charge. Book debts and the need for careful drafting of security documents print publication.

Impact of decision on security over book debts newsletters. If a charge over book debts can be a fixed charge even though the money received by the chargor in payment of those debts is to be subject to only a floating charge, it becomes difficult to quarrel with the proposition that the charge over uncollected book debts in the present case or in siebe gorman can be a fixed charge even though the. Requirements of section 1001 of the tca section 1001 prior to the 2019 act. Is a charge over future book debts necessarily a floating charge. New security filing for transferees of fixed charges on book. Jan 10, 2006 although the charge over the companys present and future book debts was expressed to be a fixed charge, the house of lords held that the banks debenture only created a floating charge and the commissioners of inland revenue and customs and excise had priority over the proceeds of the companys book debts.

Examples of such property are receivables and stocks. The proceeds of the book debts are put beyond the control of the company so that they cannot be used in the course of its normal daytoday operations. Briefing notes on part 8 of the new companies ordinance. For a business which is actively trading, book debts are con tinually incurred and repaid. However, a charge over a book debt may be created in many ways and, for it to operate as an equitable assignment or. Hence, we may resort to secured debts that require offering some asset investment as security for the advance. It discusses bearer shares and debt securities, registered shares and debt securities and shares and debt securities held in a clearing system. Book debt meaning in the cambridge english dictionary.

Dealings with accounts, or book debts or receivables as they are known by some market participants, are important financing tools for firms and companies, whether the dealings are by way of the factoring of debts, securitisation of mortgaged debts, or the trading in the distressed debt. Strictly speaking, the security will be over either the. Where the official receiver is of the opinion that the charge over the book debt is a valid fixed charge having considered whether the required elements of control over the collection and disposition of the debts are present, for example whether the company was able to recycle receipts from the trade debts purportedly subject to the fixed charge or whether they were in some way retained by the chargeholder bank, with the companys access to them being denied or severely restricted. However, a charge over a book debt may be created in many ways and, for it to operate as an equitable assignment or charge, no particular form of words is required in the document1. How do the courts classify charges over book debts. This article discusses the use of fixed charges over book debts as a form of security in the context of the decision of the privy council in the case of agnew v commissioner of inland revenue. A fixed charge is over a nonchanging asset like property whereas a floating charge is where the security is on assets that can change like a debtor book or stock. Cersai, vide their notification dated 18052016 has made it mandatory to file satisfy security transactions secured movables, intangibles and immovable other than equitable mortgage. Even if the customer goes bankrupt, his trustees cannot deprive the bank of his right of claiming the amount form the third party debtors. It considers taking security by way of fixed and floating security by way of a charge or assignment of receivables. Is the fixed charge over book debts a viable security. The clients who rely on fixed security over book debts may be about to change, says neil james. A prohibition on disposing of book debts prior to collection together with an obligation to pay the proceeds into an account, in the judgment of the court of appeal was sufficient to give rise to a. Charges over company book debts finance and banking australia.

The question of what is or isnt a book debt often raises its head when lenders are looking to enforce their security. Book debts as a security for the loanadvance borrowers can take advances by assigning book debts in favour of the bank. The present case requires a decision as to whether the banks charge over spectrums book debts was a fixed charge or a floating charge. Books debts are, therefore, not accepted as main security but are taken as collateral security along with the principal security. Floating charge assets were typically book debts and stock in trade, but were not limited to those categories. As a consequence, where a bank has taken a charge over book debts and is relying on that security to provide value, the bank may need to reduce its credit line to the borrower. The inland revenue, which was a major creditor, argued the debenture was merely a floating charge, so its claim for tax owed took priority over the. The significant question however, is how this charge is treated. A chose in action is an asset that can only be claimed or enforced by action at law or equity, rather than by taking physical possession of the asset. Ownership of the book debts remains with the company and 2. Mar 01, 2014 if the book debts are subject to a prior charge or a counterclaim of the debtor, the banker will not be able to get the full benefits of the book debts. Taking security over receivables lexispsl, practical. Charge over book debts the question of control 229 loan facilities.

A charge secured on nonspecific assets or generic categories e. Can security be created over all a companys future debts. Banking law charges over book debts may no longer be fixed. Where a fixed charge or assignment has been created by a company, a section 1001 notice in relation to book debts. A charge over cash deposits could arguably beregistrable under section 802e of cap. Floating charges have lower priority than fixed charges in the context of liquidation. With the existence of corporations act 2001 sections like 433, 443e and 556, there are motives for ensuring that the charge over book debts is fixed rather than floating, especially if book debts make up a significant propo. Plus ltd was a great victory for banks in their efforts to keep fixed security over book debts alive. Following the decision of the privy council in agnew v inland. To any banker wishing to take security over the book debts of his corporate customer the signals that the house of lords have sent out are very clear.

Book debts by their very nature generally come and go in the normal routine of business operations. A fixed or floating charge the spectrum case uk house of lords august 2005 a companys book debts maybe a valuable asset to have available as security. Fixed and floating charges are a type of security that a lender has over assets. In real terms, a floating charge holder has very little security, especially when the charged assets are book debts and recycling proceeds by which the company. Section of the transfer of property act, permits assignment of actionable claim and the procedure to be followed is. A problem that has troubled the courts for at least a century is the concept of security over present and future debts. Book debts are an asset which typically change from time to time and would normally in that sense be appropriate for a floating charge. If, as i think, the hallmark of a floating charge and a characteristic inconsistent with a fixed charge is that the chargor is left free to use the assets subject to the charge and by doing so to withdraw them from the security, how should the charge over book debts granted by the banks debenture be categorised. Book debts are a current asset and whether or not there can be a valid fixed charge on book debts has been the subject of much legal discussion. The issue to be decided is whether there can be a fixed charge over book debts where the proceeds of those book debts can be freely used by the chargor in its business. The process of secured lending is done through charging of securities. Security interests over movable property can be created by way of mortgage, pledge, hypothecation, lien and charge. But if this is to be effective as a fixed security everything depends on the way the security agreement ensures that the charge over the book debts is fixed.

The house of lords, with seven members given the constitutional issue of retrospective rulings, held that the charge over spectrum plus ltds book debts was floating, because the hallmark of a floating charge is that the business is free to deal with the assets in business as usual. Significant developments take place this century in law by the courts in relation to one particular type of charge frequently used by companies as security for repayment of a loan, namely, a charge over a companys book debts. What are fixed and floating charges company rescue. Taking security over choses in actionby practical law financerelated contenta note on taking security over choses in action. A fixed security over a book debt for the purposes of s1001 is described as one where. Any debt due or to become due at some future time to any personcompany on account of or in connection with any profession, trade or business carried on by such personcompany whether entered in a book or not. Specifically as regards book debts, the court of appeals decision was approved by the house of lords if there is an intention that a debtor should be free to use the proceeds of charged debts, the charge over those receivables will take effect as a floating charge.

Security over bank accounts created by companies are registered within 21 days of the creation of the security by filing the appropriate form with the companies registration office. Apr 09, 2014 a charge is one of the methods of taking security recognised by english law. Is the fixed charge over book debts a viable security arrangement. In assessing the value of the security they hold, banks may need to reduce the value they place on the borrowers book debts. It is therefore natural for banks to want their charge to cover not only the firms existing book debts, but also its future book debts. Book debts and the need for careful drafting of security documents. However, mortgage is usually a method of creating security interest over immovable properties, and its only in certain specified cases that it is coupled with a mortgage on moveable properties thereon. Assignments of book debts outright transfers of rights or. It analyses the views expressed in the judgement in the light of the historical development of charges and the theoretical frameworks within which. Brumark investments ltd gave security over debts to its bank, westpac. The end of an era re spectrum plus despite romer ljs classic statement identifying the usual characteristics of a floating charge, 1 it has long been clear that the essential difference between a fixed and a floating charge turns upon the extent to which the chargor is free to deal with the charged assets in the ordinary course of business. When spectrum went into liquidation, natwest argued that the charge was a fixed charge over book debts and proceeds.

Charges over book debts in the united kingdom and australia. When the debtors are given notice of such assignment, they become dutybound to pay the money to the bank. House of lords national westminster bank plc respondents v. Notwithstanding the terms of any charge over book or other debts contained in any security document and any covenant by the chargors to pay those debts into any particular account, the par. This has led to a search for the exclusive the concept of control over the last 20 years or so, the tide began to turn in favour of recognising the validity of the. Jan 22, 2020 for the purpose of section 1001, a section 1001 notification is only required where i security is created by an irish company, and ii the security contains a fixed charge over book debts. Taking security over shares and debt securities practical law. Feb 09, 2012 the article sets out to argue that it is possible to create a sustained workable fixed charge or even a multiple combination of fixed and floating charge over book debts and argues that this would be the only way for both the financiers and the companies to do business together, in respect to the use of book debts as security for a loan. If the charge covers all assets, the assets charged by the floating charge therefore change throughout the duration of the security.

Accounting for bad debt expenses can be timeconsuming and costly. Download citation is the fixed charge over book debts a viable security arrangement. For a toolkit identifying practical law materials that give. Book debts are furnished as security by assigning them to the bank. Following the decision of the privy council in agnew v inland revenue commissioner,2 it seemed that any fixed charge over book debts had to contain two separate controls over the chargors freedom to use the charged book. Taking security in the context of a loan 3 please sign up for the course before starting the lesson. If you use accrual accounting, you mark owed payments as accounts receivable. Where there is a valid fixed charge over the book debts one of the four criteria as set out in t2705 is fulfilled and there is no prospect of any funds becoming available for the estate once the charge holder has been paid, the official receiver would not usually be expected to realise the book debts on behalf of the charge holder. In particular, an agreement between a debtor and a creditor that the debt owing shall. If the wording created a fixed charge then the book debts would go to the chargeholder in priority to the preferential creditors. This practice note explains how to take security over receivables eg book debts and amounts due under a loan. For a toolkit identifying practical law materials that give guidance on some key issues that need to be considered when taking, perfecting, enforcing or releasing security over shares, see toolkit. Unlike a fixed charge, which is created over ascertained and definite property, a floating charge is created over property of an ambulatory and shifting nature. Taking security over shares and debt securitiesby practical law financerelated contentthis note looks at the legal nature of shares and debt securities and how to take security over them.