Kwame Nkrumah University of Science and Technology College of Art and Social Sciences Faculty of Law Company Law

2: Law 356 Index Number: 1713807

Assignment 2

Question: The House of Lords decision in Re Spectrum Plus Ltd [2005] for All ER 209 has been touted as having settled a lot of controversies surrounding creation of charge over book debts or receivables. Are there any lessons that Ghanaian Company Law could learn from Re Spectrum Plus Ltd. [5 marks]

The House of Lords decision in Re Spectrum Plus Ltd [2005] for All ER 209 has been touted as having settled a lot of controversies surrounding creation of charge over book debts or receivables. Are there any lessons that Ghanaian Company Law could learn from Re Spectrum Plus Ltd? Much controversy exists surrounding the creation of charge over book debts or receivables. The crux of this controversy lies with the determination of whether a particular charge created over book debts is fixed or floating. The decision of the House of Lords in Re Spectrum Plus Ltd.1 is labelled as that which settled the contention surrounding the creation of charge over book debts. In discussing how Ghanaian law could benefit from this decision, it is important to briefly explain how this case settled the controversies over the subject of this discussion. A book debt is an uncollected debt owed to a company and the realised proceeds of such debts. It is because of the general priorities that fixed charges possess over floating charges that the controversy surrounding the creation of charges over book debts exist. This is because most creditors seek to create fixed charges over book debts to better secure their interest in case of insolvency. They have however been mostly unsuccessful as courts may discard the label of ‘fixed charge’ given in the debenture contract and after consideration of the true substance and nature of the charge re-characterise it as a floating charge to the dismay of lenders. A brief exposition of case law surrounding this subject matter is in good order. It is generally agreed that Re Yorkshire Woolcombers2 was the first case to deal specifically with the problem of book debts. The issue in that case was whether a charge on uncollected book debts was fixed or floating. At every level of the decision it was held to be a floating charge. The deciding factor in reaching this decision was the company’s freedom to receive the book debts for its own account and deal with the proceeds without reference to the charge holder. In Siebe Gorman & Co. v. Barclays Bank.3 , Siebe Gorman sued Barclays Bank and a company called R.H. McDonald (hereinafter referred to as “RHM”) in an attempt to recover the money RHM owed them. RHM had entered a debenture with Barclays which gave the bank a fixed charge over the company’s book debts and other debts, and also ensured that RHM would be unable to “dispose of” the charged assets except by a sale in the ordinary course of business. The issue was whether or not the debenture created a fixed charge over book debts and thereby gave Barclay’s Bank priority over Siebe Gorman’s assignment. The court held that It was possible to grant an equitable specific charge on the proceeds of book debts. Though the courts established that the chargee needed to have sufficient control over the disposal, collection and use of the proceeds so as to create a fixed charge over the debts, it failed to elaborate on what would qualify as sufficient and thereby increased the confusion. In Re Brightlife4 the court held that if the chargor was allowed to collect its book debts and place them outside in a bank account that was not within the control of the chargee, then the charge would be construed as a floating charge. This holding was evidence of movement away from favouring charges over book debts as in Siebe Gorman. In Re Keenan Bros5, it
1 [2005] All ER 209 2 [1903] 2 Ch 284 3 [1979] 2 Lloyd’s Rep 142 4 [1987] Ch 200 5 [1986] BCLC 242

was held that a mere terminology was not determinative of whether a charge was fixed or floating. Re New Bullas6 placed a slightly different spin on the law of fixed charges. It was held that the debenture was a contract, and the fact that there was a floating charge over the collected book debts did not undermine the fixed charge on the uncollected book debts. The decision was made on a right to contract theory, stating that “unless some authority of law prevents them from agreeing, the agreement must prevail.” If the parties wanted to create such a debenture, the court was going to allow the debenture to stand. In Re Brumark7 (Agnew v Commissioner of Inland Revenue), a case with similar facts as the Bullas case, the Privy Council disposed of the argument in New Bullas that it was possible to separate book debts and their proceeds. Their Lordships considered that New Bullas was wrongly decided and this further aggravated the contentions surrounding the creation of charges over book debts. This is until the House of Lords decision in Re Spectrum Plus Ltd. The main issue in the Re Spectrum Plus case was whether or not the debenture granted over book debts was secured with a floating or fixed charge. Most of its facts were on the same line as the Siebe Gorman case. At first instance it was concluded that the charge was a floating charge and that Siebe Gorman was wrongly decided. On appeal to the Court of Appeal it was held that the charge was a fixed charge. On further appeal, the House Lords held that Siebe Gorman was wrongly decided and should be overruled. The court concluded that the overdraft facility could be drawn by the company at will and this was inconsistent with the charge being a fixed charge. Accordingly, the debenture, although expressed to be a fixed charge over the company’s book debts, had in law only granted a floating charge. The essential point of all of these cases is that appropriate control must be exercised over the book debts at all stages – prior to collection and post collection to maximize a finding of a fixed charge. The important judgment in Re Spectrum Plus finally clears up the long debated issue of book debts and the certainty it creates is to be welcomed. The importance of the decision in the Re Spectrum Plus case to Ghanaian Company law is discussed. This case and all the many other cases surrounding it discuss into detail the concept of creating charges over book debts and the effect of labelling these charges as either fixed or floating. It is evidence that the courts will characterise a charge if deems it lawfully so. From this case it obvious that the concluding factor in deciding what labels to be attached to a charge over book debts depend on the element of control. A lender had to exercise much control (as in the form of a blocked account) for his charge to be labelled a fixed charge. Lenders in Ghana, especially the banks, are reminded through this decision that the charges they may hold over book debts could in law be found to the floating charges despite the label of fixed charge assigned to them. This is because Ghanaian case law and statute seem to be quite silent on this topic and thereby if need arises a Ghanaian court would only have this landmark English decision to follow. What lenders could do in order not to protect their interest would be to renegotiate the terms of the securities so they can exercise better control on the book debts granted to companies. In the alternative they may also insist that directors give personal guarantees for future overdrafts
6 [1994] 1 BCLC 449 7 [2001] 2 AC 710

The expected effect of any of these suggestions is to make it quite undesirable for banks to grant overdraft facilities to companies. The result of this would be that small companies would have problems in raising capital and operating freely in their normal cause of business. As this outcome would be detrimental to the development of Ghanaian Company law, it is suggested that Ghanaian legislators’ attention would be drawn to the problems encountered in this most unsatisfactory area of law through this case, for proper legislations to be enacted on the issue in order to create more precision and certainty in that area of Company law in Ghana. Though it may be argued that the Re Spectrum Plus decision is limited in value because it is confined to a special set of facts dealing with creation of charges over book debts, it is still invaluable as it an eye opener to Ghanaian company law.

Bibliography
1. Company Law in Ghana,

Professor

P.E. Bondzi- Simpson Second Edition 2. Mozley & Whiteley’s Law Dictionary J.E. Penner 12th Edition 3. Spectrum Plus And Book Debts: The Final Chapter? [2006] 1 WEB JCLI 4. The Spectrum Plus Case: Fixed or Floating Charges over Book Debts in England? North Carolina Banking Institute Journal. Volume 9. Lauren Pogue James Hanlon

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