National Westminster Bank plc v Spectrum Plus Limited
Encyclopedia
Re Spectrum Plus Ltd [2005] UKHL 41 was a UK company law decision of House of Lords
which settled a number of outstanding legal issues relating to floating charge
s and recharacterisation
risk under the English common law. However, the House of Lords also considered at some length the power of the court to make rulings as to the law which were "prospective only", so as to mitigate potential harshness when issuing a ruling which was different from what the law had previously been understood to be.
It is often referred to simply as the Spectrum case.
over present and future book debts, granted by Spectrum to National Westminster Bank Plc under a debenture
was a fixed charge (which it was expressed to be), or merely took effect as a floating charge
. The bank argued that it was a fixed charge, and the Crown creditors (mainly the Inland Revenue
and Customs) argued that it was a floating charge. If held to a floating charge, Spectrum's preferential creditor
s (including the Crown creditors) would be entitled to have their debts paid out of the proceeds of the book debts in priority to the bank's claims (Insolvency Act 1986
s 175). If the court declared it not a floating charge, the preferential creditors have no such priority, and the bank would be entitled to the whole of the proceeds.
. It is likely that the higher number of Law Lords was a feature of the prospective ruling point, as was the request to the Attorney General
to appoint advocates to the court to address their Lordships on this issue.
.
The law relating to the characterisation of floating charges had been in a state of uncertainty for some time. The leading authority had been a decision of Slade J in Siebe Gorman & Co Ltd v Barclays Bank [1979] 2 Lloyd's Rep 142. That decision had been subject to serious academic criticism, and had been doubted by Hoffmann J
in In re Brightlife Ltd [1987] Ch 200. But Siebe Gorman was followed (and arguably extended) by the English Court of Appeal
in In re New Bullas Trading Ltd [1994] 1 BCLC 485.
In the Court of Appeal, it had been suggested that, notwithstanding the failings of Siebe Gorman
, it should be allowed to stand as it had been relied on as a judicial precedent
for nearly 25 years. None of the speeches in the House of Lords suggested that precedents that were otherwise flawed should be upheld for commercial expediency.
Their Lordships held that 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 scope of the security. Lord Scott indicated that following features of the debenture under consideration should be taken into account.
However, Lord Scott immediately qualified his own list by indicating that restrictions on Spectrum's right to deal with its uncollected book debts would go very little way in supporting the characterisation of the charge as a fixed charge.
Although Lord Scott did not set out these factors as a "shopping" list to determine the validity of fixed charges over book debts, it seems likely (based on similar judicial pronouncements) that in time they may come to have that effect.
In the final analysis it was held that because Spectrum was free to deal with its debtors and utilise the proceeds of the debts, these were inconsistent with fixed security, and that the charge would characterised as a floating charge despite being described as a fixed charge. Siebe Gorman was formally overruled. The fundamental legal question in relation to characterisation was defined as whether the charge holder in Spectrum had exercised enough control over the proceeds of the book debts to sustain a fixed charge.
had expressed that view that "We cannot, without yet further innovation, change the law prospectively only". More recently, in Kleinwort Benson Ltd v Lincoln City Council [1999] 2 AC 349 (at 379), Lord Goff of Chieveley
had said the system of prospective overruling "has no place in our legal system". The question clearly concerned Lord Nicholls (para 29):
Lord Nicholls then went on to note that judges had been described as "developing" the law for some time when making novel decisions, and that a judge is not free to repeal laws or distance themselves from bad laws; their only power is to impose a new interpretation. He also noted the new "dynamic" power to interpret statute
s under section 3 of the Human Rights Act 1998
. He then went on to rule:
He held that, in exceptional cases, it would be open to the court to hold that a new interpretation of the law should only be applied prospectively. However, on the facts of the case before him, Lord Hope felt that it was "miles away from the exceptional category in which alone prospective overruling would be legitimate" (para 43), and thus relegated his comments upon prospective only rulings to obiter dictum
. However, given the strength and number of the court, and that the court specifically invited the Attorney General to appoint leading counsel to address them on this point, it seems clear that the decision on this point will be treated as binding precedent.
s which had been distributed in compliance with the understandings of the old law, so in many senses the ruling took prospective effect only with respect to the largest preferred creditor.
The drafting of security documents has also been modified by the legal profession, and debentures now usually contain provisions stating that the proceeds of book debts may not be assigned, and must be paid into a blocked account.
On constitutional law
Judicial functions of the House of Lords
The House of Lords, in addition to having a legislative function, historically also had a judicial function. It functioned as a court of first instance for the trials of peers, for impeachment cases, and as a court of last resort within the United Kingdom. In the latter case the House's...
which settled a number of outstanding legal issues relating to floating charge
Floating charge
A floating charge is a security interest over a fund of changing assets of a company or a limited liability partnership , which 'floats' or 'hovers' until conversion into a fixed charge, at which point the charge attaches to specific assets...
s and recharacterisation
Recharacterisation
Recharacterization in law means the treatment of a certain course of conduct in a different manner to which the participants describe it....
risk under the English common law. However, the House of Lords also considered at some length the power of the court to make rulings as to the law which were "prospective only", so as to mitigate potential harshness when issuing a ruling which was different from what the law had previously been understood to be.
It is often referred to simply as the Spectrum case.
Facts
The central legal issue in the case is whether the chargeSecurity interest
A security interest is a property interest created by agreement or by operation of law over assets to secure the performance of an obligation, usually the payment of a debt. It gives the beneficiary of the security interest certain preferential rights in the disposition of secured assets...
over present and future book debts, granted by Spectrum to National Westminster Bank Plc under a debenture
Debenture
A debenture is a document that either creates a debt or acknowledges it. In corporate finance, the term is used for a medium- to long-term debt instrument used by large companies to borrow money. In some countries the term is used interchangeably with bond, loan stock or note...
was a fixed charge (which it was expressed to be), or merely took effect as a floating charge
Floating charge
A floating charge is a security interest over a fund of changing assets of a company or a limited liability partnership , which 'floats' or 'hovers' until conversion into a fixed charge, at which point the charge attaches to specific assets...
. The bank argued that it was a fixed charge, and the Crown creditors (mainly the Inland Revenue
Inland Revenue
The Inland Revenue was, until April 2005, a department of the British Government responsible for the collection of direct taxation, including income tax, national insurance contributions, capital gains tax, inheritance tax, corporation tax, petroleum revenue tax and stamp duty...
and Customs) argued that it was a floating charge. If held to a floating charge, Spectrum's preferential creditor
Preferential creditor
A preferential creditor is a creditor receiving a preferential right to payment upon the debtor's bankruptcy under applicable insolvency laws....
s (including the Crown creditors) would be entitled to have their debts paid out of the proceeds of the book debts in priority to the bank's claims (Insolvency Act 1986
Insolvency Act 1986
The Insolvency Act 1986 is an Act of the Parliament of the United Kingdom that provides the legal platform for all matters relating to personal and corporate insolvency in the UK.-History:...
s 175). If the court declared it not a floating charge, the preferential creditors have no such priority, and the bank would be entitled to the whole of the proceeds.
Judgment
Unusually, the case was heard by seven sitting Lords of Appeal in OrdinaryLord of Appeal in Ordinary
Lords of Appeal in Ordinary, commonly known as Law Lords, were appointed under the Appellate Jurisdiction Act 1876 to the House of Lords of the United Kingdom in order to exercise its judicial functions, which included acting as the highest court of appeal for most domestic matters...
. It is likely that the higher number of Law Lords was a feature of the prospective ruling point, as was the request to the Attorney General
Attorney General for England and Wales
Her Majesty's Attorney General for England and Wales, usually known simply as the Attorney General, is one of the Law Officers of the Crown. Along with the subordinate Solicitor General for England and Wales, the Attorney General serves as the chief legal adviser of the Crown and its government in...
to appoint advocates to the court to address their Lordships on this issue.
The floating charge point
As Lord Scott remarked, the amounts at stake were relatively trivial: approximately £16,136. But the case was a test caseTest case (law)
In case law, a test case is a legal action whose purpose is to set a precedent. An example of a test case might be a legal entity who files a lawsuit in order to see if the court considers a certain law or a certain legal precedent applicable in specific circumstances...
.
The law relating to the characterisation of floating charges had been in a state of uncertainty for some time. The leading authority had been a decision of Slade J in Siebe Gorman & Co Ltd v Barclays Bank [1979] 2 Lloyd's Rep 142. That decision had been subject to serious academic criticism, and had been doubted by Hoffmann J
Leonard Hoffmann, Baron Hoffmann
Leonard Hubert "Lenny" Hoffmann, Baron Hoffmann, PC is a retired senior British judge. He served as a Lord of Appeal in Ordinary from 1995 to 2009...
in In re Brightlife Ltd [1987] Ch 200. But Siebe Gorman was followed (and arguably extended) by the English Court of Appeal
Court of Appeal of England and Wales
The Court of Appeal of England and Wales is the second most senior court in the English legal system, with only the Supreme Court of the United Kingdom above it...
in In re New Bullas Trading Ltd [1994] 1 BCLC 485.
In the Court of Appeal, it had been suggested that, notwithstanding the failings of Siebe Gorman
Siebe Gorman
Siebe Gorman & Company Ltd was a British company which developed diving equipment and breathing equipment and worked on commercial diving and marine salvage projects...
, it should be allowed to stand as it had been relied on as a judicial precedent
Precedent
In common law legal systems, a precedent or authority is a principle or rule established in a legal case that a court or other judicial body may apply when deciding subsequent cases with similar issues or facts...
for nearly 25 years. None of the speeches in the House of Lords suggested that precedents that were otherwise flawed should be upheld for commercial expediency.
Their Lordships held that the hallmark
Hallmark
A hallmark is an official mark or series of marks struck on items made of precious metals — platinum, gold, silver and in some nations, palladium...
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 scope of the security. Lord Scott indicated that following features of the debenture under consideration should be taken into account.
- The extent of the restrictions imposed by the debenture.
- The rights retained by Spectrum to deal with its debtors and collect the money owed by them.
- Spectrum's right to draw on its account with the bank into which the collected debts had to be paid, provided it kept within the overdraft limit.
- The description "fixed charge" attributed to the charge by the parties themselves.
However, Lord Scott immediately qualified his own list by indicating that restrictions on Spectrum's right to deal with its uncollected book debts would go very little way in supporting the characterisation of the charge as a fixed charge.
Although Lord Scott did not set out these factors as a "shopping" list to determine the validity of fixed charges over book debts, it seems likely (based on similar judicial pronouncements) that in time they may come to have that effect.
In the final analysis it was held that because Spectrum was free to deal with its debtors and utilise the proceeds of the debts, these were inconsistent with fixed security, and that the charge would characterised as a floating charge despite being described as a fixed charge. Siebe Gorman was formally overruled. The fundamental legal question in relation to characterisation was defined as whether the charge holder in Spectrum had exercised enough control over the proceeds of the book debts to sustain a fixed charge.
The prospective rulings point
Prior to the decision, "prospective only" rulings were not favoured under English law. In Launchbury v Morgans [1973] AC 127 (at 137), Lord WilberforceRichard Wilberforce, Baron Wilberforce
Richard Orme Wilberforce, Baron Wilberforce, PC was a Lord of Appeal in Ordinary in the House of Lords from 1964 to 1982....
had expressed that view that "We cannot, without yet further innovation, change the law prospectively only". More recently, in Kleinwort Benson Ltd v Lincoln City Council [1999] 2 AC 349 (at 379), Lord Goff of Chieveley
Robert Goff, Baron Goff of Chieveley
Robert Lionel Archibald Goff, Baron Goff of Chieveley PC DCL FBA is a retired British Judge.Lord Goff, High Steward of the University of Oxford, retired in 1998 as Senior Law Lord after more than a decade as a Lord of Appeal in Ordinary in the House of Lords...
had said the system of prospective overruling "has no place in our legal system". The question clearly concerned Lord Nicholls (para 29):
Lord Nicholls then went on to note that judges had been described as "developing" the law for some time when making novel decisions, and that a judge is not free to repeal laws or distance themselves from bad laws; their only power is to impose a new interpretation. He also noted the new "dynamic" power to interpret statute
Statute
A statute is a formal written enactment of a legislative authority that governs a state, city, or county. Typically, statutes command or prohibit something, or declare policy. The word is often used to distinguish law made by legislative bodies from case law, decided by courts, and regulations...
s under section 3 of the Human Rights Act 1998
Human Rights Act 1998
The Human Rights Act 1998 is an Act of Parliament of the United Kingdom which received Royal Assent on 9 November 1998, and mostly came into force on 2 October 2000. Its aim is to "give further effect" in UK law to the rights contained in the European Convention on Human Rights...
. He then went on to rule:
He held that, in exceptional cases, it would be open to the court to hold that a new interpretation of the law should only be applied prospectively. However, on the facts of the case before him, Lord Hope felt that it was "miles away from the exceptional category in which alone prospective overruling would be legitimate" (para 43), and thus relegated his comments upon prospective only rulings to obiter dictum
Obiter dictum
Obiter dictum is Latin for a statement "said in passing". An obiter dictum is a remark or observation made by a judge that, although included in the body of the court's opinion, does not form a necessary part of the court's decision...
. However, given the strength and number of the court, and that the court specifically invited the Attorney General to appoint leading counsel to address them on this point, it seems clear that the decision on this point will be treated as binding precedent.
Signficance
In relation to the substantive issues, the Revenue had already indicated that it would not seek to reopen recent liquidationLiquidation
In law, liquidation is the process by which a company is brought to an end, and the assets and property of the company redistributed. Liquidation is also sometimes referred to as winding-up or dissolution, although dissolution technically refers to the last stage of liquidation...
s which had been distributed in compliance with the understandings of the old law, so in many senses the ruling took prospective effect only with respect to the largest preferred creditor.
The drafting of security documents has also been modified by the legal profession, and debentures now usually contain provisions stating that the proceeds of book debts may not be assigned, and must be paid into a blocked account.
See also
On company law- Floating chargeFloating chargeA floating charge is a security interest over a fund of changing assets of a company or a limited liability partnership , which 'floats' or 'hovers' until conversion into a fixed charge, at which point the charge attaches to specific assets...
- Voidable floating chargeVoidable floating chargeIn law, a voidable floating charge refers to a floating charge entered into shortly prior to the company going into liquidation which is void or unenforceable in whole or in part under applicable insolvency legislation....
- Re Yorkshire Woolcombers Association [1903] 2 Ch 284 and Illingworth v Houldsworth [1904] AC 355
- Agnew v IRC (Re Brumark) [2001] UKPC 28, [2001] 2 AC 710
On constitutional law
- PrecedentPrecedentIn common law legal systems, a precedent or authority is a principle or rule established in a legal case that a court or other judicial body may apply when deciding subsequent cases with similar issues or facts...
- Stare decisisStare decisisStare decisis is a legal principle by which judges are obliged to respect the precedents established by prior decisions...
- Bush v Gore, where the US Supreme Court decided its decision was effective for the 2000 Republican victory, but not necessarily otherwise.