Re Spectrum Plus

Re Spectrum Plus [2005] UKHL 41 click here for transcript is an important case about fixed charges.

In a Nutshell™

Yes, you can take a fixed charge over book debts, but if you want to it to be enforceable, you must have practical control of the item, and a legal right to stop the chargor walking off with it.

Issues

• Stare decisis: Does a newly decided strand of common law apply to contracts pre-dating its development, which were concluded on the assumption of contrary rules?
• Fixed and floating charges: If you call it a fixed charge, you know, is it?

Stare decisis

Re Spectrum Plus overruled the earlier decision of Siebe Gorman & Co Ltd v Barclays Bank Ltd [1979] 2 Lloyd’s Rep 142. This meant charges drafted as fixed charges on honest reliance on that principal were suddently questionable. Given the time value of charge registration this potentially invalidated or at the very least severely weakened a whole lot of security documents. so could the court apply “prospective overruling” such that existing charges entered into in good faith in reliance on Siebe Gorman would be upheld?

For one thing, that would be a real bummer from Spectrum Plus’s point of view — fancy winning a landmark House of Lords case but — well, hard lines fellas. But Little old book-debt securitisers make bad law, right?

The traditional approach was stated crisply by Lord Reid in West Midland Baptist (Trust) Association Inc v Birmingham Corporation [1970] AC 874, 898-899, a case concerning compulsory acquisition:

“We cannot say that the law was one thing yesterday but is to be something different tomorrow. If we decide that [the existing rule] is wrong we must decide that it always has been wrong, and that would mean that in many completed transactions owners have received too little compensation. But that often happens when an existing decision is reversed.”

Later on, Lord Nicholls said:

“Whatever its faults the retrospective application of court rulings is straightforward. Prospective overruling creates problems of discrimination. Born out of a laudable wish to mitigate the seeming unfairness of a retrospective change in the law, prospective overruling can beget unfairness of its own.

“This is most marked in criminal cases, where ‘pure’ prospective overruling would leave a successful defendant languishing in prison.”

While the court didn’t rule out the idea of prospective overruling —“‘Never say never’ is a wise judicial precept, in the interests of all citizens of the country” — this present case was “miles away from the exceptional category in which alone prospective overruling would be legitimate”.

So no, fellas. Natwest, you are shit out of luck.

Fixed and floating charges

Whether a charge over present and future book debts, where:

• the chargor cannot dispose of or charge the uncollected book debts but
• the charger can deal with debtors and collect the debts and
• the chargor must deposit collected debts in a designated account with the charge, but
• the chargor can then freely draw on the account as long as it doesn't exceed the overdraft

is capable in law of being a fixed charge.

The facts

• Spectrum had an overdraft with the NatWest.
• NatWest took a fixed charge over its book debts to secure the overdraft. it required Spectrum to pay the debts into the overdraft account. It did not prevent Spectrum withdrawing them.
• The bank never sought to exercise any control over Spectrum’s withdrawals from the account.
• Spectrum never exceeded its overdraft. Nor did Spectrum ever go into credit.

You can see where this is going, can’t you.

When Spectrum, inevitably, went bust, it owed NatWest £165,407 on the account. Its uncollected book debts had a face value of £291,293, and a likely collection value of £156,544. You know, like roughly. Other unsecured creditors wanted a piece of the action.

So ...?

Ruling

“The correct conclusion, in my opinion, is that the debenture, although expressed to grant the bank a fixed charge over Spectrum's book debts, in law granted only a floating charge.

In other words

“Beware of magic words.”

See also

Re Lehman Brothers International