Re Spectrum Plus

Re Spectrum Plus [2005] UKHL 41^[1]^[2] is an important case about fixed charges and the doctrine of precedent, that golden stream^[3] of precedent that warmly nourishes the common law.

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Issues

Fixed and floating charges: If you call it a fixed charge, you know, is it?
Stare decisis: Does a “newly decided”^[4] strand of common law apply to contracts pre-dating its development, which were concluded on the assumption of contrary rules?

In a Nutshell™

Fixed and floating charges: 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.
Stare decisis: Yes, newly decided cases which overturn old ones do apply retrospectively. By the jurisprudence of the law, the old one was always wrong, even when the law said it was right. So if you organised your affairs in reliance on a tributary of the golden stream that later turns out to have been piss and wind, well that’s tough. But you therefore you can’t rely on this statement of the law either, because it might turn out to be wrong later. Which means you can rely on the old precedent, as it might turn out not to have been piss and wind after all. But at long as this ruling isn’t considered to be piss and wind, you can’t. O tempora! O mores! O paradox!

Stare decisis and the possibility of prospective overruling

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 principle — that it didn’t matter so much if you didn’t have practical control — were suddenly questionable. Given the “time value” of charge registration — the first-in-time prevails, so if you have to re-take your charge you are going right to the back of the queue — this potentially invalidated — or at least 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) Assn v Birmingham [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.^[5]

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. Spectrum’s 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 ...?

Choice snippets

Lord Hope of Craighead:

“An account from which the customer is entitled to withdraw funds whenever it wishes within the agreed limits of any overdraft is not a blocked account. In Agnew v Commissioners of Inland Revenue [2001] 2 AC 710, 722, para 22 Lord Millett said that the critical feature which led the Irish Supreme Court in In re Keenan Bros Ltd [1986] BCLC 242 to characterise the charge on book debts as a fixed charge was that their proceeds were to be segregated in a blocked account where they would be frozen and unusable by the company without the bank’s written consent^[6]. I respectfully agree.”

Did Barclays in Siebe Gorman have a lien over a current account balance? No.

“Lipkin Gorman v Karpnale Ltd [1989] 1 WLR 1340, 1353, the money which a customer deposits with a bank ecomes the bank’s money, but the bank is prima facie bound to meet its debt when called upon to do so by the customer.” [...]

“A banker has a general lien over all bills, notes and negotiable instruments belonging to the customer which his customer may have deposited with him in security of the customer’s indebtedness to the bank. But a lien is a right to retain possession of property that belongs to someone else, and the banker has no lien over funds which, when deposited in its account by the customer, become his own property^[7]. Moreover the relationship is one where, if the account is in credit, the banker is indebted to his customer. So it was a misuse of the word lien to say that the bank could assert a right of that kind over the proceeds” [...]

“This is not to say that it is impossible to conceive of the creation of an equitable charge over the proceeds of book debts paid into an account in the name the chargor. But the ordinary relationship of banker and customer does not permit the banker, without notice, to refuse to allow his customer to operate a current account as and whenever he wishes while it is credit or is within the limits of any agreed overdraft. The debenture in the Siebe Gorman case, which provided for the payment of the proceeds into an account of that kind, lacked any provision which qualified that relationship^[8].” [...]

“In my opinion the company’s continuing contractual right to draw out sums equivalent to the amounts paid in is wholly destructive of the argument that there was a fixed charge over the uncollected proceeds because the account into which the proceeds were to be paid was blocked.”

Lord Scott of Foscote:

“But the intention of the parties that the charge over book debts created and fortified in this way would be a fixed charge has to take account also of Romer LJ’s third characteristic of a floating charge, namely, that until some further step by way of intervention is taken by the chargee the chargor company can use the assets in question for its normal business purposes and, in using them, remove them from the security^[9].” [...]

“Romer LJ’s first two characteristics, although typical of a floating charge, were not distinctive of it. They were not necessarily inconsistent with a fixed charge. It was the third characteristic, Lord Millett said, which was the hallmark of a floating charge and distinguished it from a fixed charge^[10].

“I respectfully agree. Indeed if a security has Romer LJ’s third characteristic I am inclined to think that it qualifies as a floating charge, and cannot be a fixed charge, whatever may be its other characteristics.”

Here’s a kicker hypothetical obiter dicta:

“Suppose, for example, a case where an express assignment of a specific debt by way of security were accompanied by a provision that reserved to the assignor the right, terminable by written notice from the assignee, to collect the debt and to use the proceeds for its (the assignor’s) business purposes, i.e., a right, terminable on notice, for the assignor to withdraw the proceeds of the debt from the security. This security would, in my opinion, be a floating security notwithstanding the express assignment. The assigned debt would be specific and ascertained but its status as a security would not. Unless and until the right of the assignor to collect and deal with the proceeds were terminated, the security would retain its floating characteristic.”

This hypothetical example assumes the chargor can withdraw all the assets from the account in the meantime. But what if the withdrawal is conditional on substitution with other assets?

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.

Relevance to stock lending

Can a Borrower create a fixed charge over collateral you have pledged to a Lender under a Pledge GMSLA, if the Borrower retains a right to substitute and replace collateral it has posted with other collateral. Conservative souls suggest Re Spectrum Plus calls this into question. Your humble correspondent suggests the cases are not exactly on all fours:

No possession: In a Pledge GMSLA the borrower delivers the collateral to a third party custodian who is a security trustee - that is, the chargor is not in possession of the collateral day to day.
Restriction on right of substitution: The return of collateral is at the security trustee's pleasure, and is in any case subject to rigid rules requiring substitution of replaced collateral with other assets having an equivalent value. So while the chargor can take the collateral out, it cannot diminish the value of the security pool.
The collateral is not cash: it is physical assets over which one can and customarily does grant a lien.

In other words

“Beware of magic words.”