Re Brumark Investments Ltd
Encyclopedia
Re Brumark Investments Ltd [2001] UKPC 28 is a New Zealand and UK insolvency law
case, concerning the taking of a security interest
over a company's assets and priority of creditors in a company winding up.
. 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). Brumark was free to collect debts for its own account and to use proceeds in its business. Brumark went into receivership. The receivers collected the outstanding debts.
Fisher J held that uncollected debts were subject to a fixed charge, as the parties had agreed. So they were not subject to claims of preferential creditors. The NZ Court of Appeal overturned this and held that the fact Brumark could collect the debts for its own account (and hence remove them from the bank’s security) made it a floating charge. So the preferential creditors had a prior claim.
‘In construing a debenture to see whether it creates a fixed or floating charge, the only intention which is relevant is the intention that the company should be free to deal with the charged assets and withdraw them from the security without the consent of the holder of the charge; or to put the question another way, whether the charged assets were intended to be under the control of the company or of the charge holder.’
‘The question is not whether the company is free to collect the debts, but whether it is free to do so for its own benefit.’
He noted that in Siebe Gorman & Co Ltd v Barclays Bank Ltd and In re Keenan Bros Ltd the proceeds of the book debts were not at the free disposal of the company - that is why these were fixed charges - the proceeds were not available to the company as a source of its cash flow.
Lord Millett, [32] ‘The question is not merely one of construction. In deciding whether a charge is a fixed charge or a floating charge, the Court is engaged in a two-stage process. At the first stage it must construe the instrument of charge and seek to gather the intentions of the parties from the language they have used. But the object at this stage of the process is not to discover whether the parties intended to create a fixed or a floating charge. It is to ascertain the nature of the rights and obligations which the parties intended to grant each other in respect of the charged assets. Once these have been ascertained, the Court can then embark on the second stage of the process, which is one of categorisation. This is a matter of law. It does not depend on the intention of the parties. If their intention, properly gathered from the language of the instrument, is to grant the company rights in respect of the charged assets which are inconsistent with the nature of a fixed charge, then the charge cannot be a fixed charge however they may have chosen to describe it.’
Of Romer LJ’s formulation, [13] that it was a description, not a definition and ‘it is the third characteristic which is the hallmark of a floating charge and serves to distinguish it from a fixed charge.’
UK insolvency law
United Kingdom insolvency law deals with the insolvency of firms and individuals in the United Kingdom. The important statutes are the Insolvency Act 1986, as amended by the Enterprise Act 2002, as well as the Company Director Disqualification Act 1986 and the Companies Act 2006.Insolvency is a...
case, concerning the taking of a security interest
Security 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 a company's assets and priority of creditors in a company winding up.
Facts
Brumark Investments Ltd gave security over debts to its bank, WestpacWestpac
Westpac , is a multinational financial services, one of the Australian "big four" banks and the second-largest bank in New Zealand....
. 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). Brumark was free to collect debts for its own account and to use proceeds in its business. Brumark went into receivership. The receivers collected the outstanding debts.
Fisher J held that uncollected debts were subject to a fixed charge, as the parties had agreed. So they were not subject to claims of preferential creditors. The NZ Court of Appeal overturned this and held that the fact Brumark could collect the debts for its own account (and hence remove them from the bank’s security) made it a floating charge. So the preferential creditors had a prior claim.
Advice
The Privy Council advised that it was indeed a floating charge. It said the court’s task is not to ask whether the parties intended to create a fixed or floating charge, but to ask what rights the parties intended to create, and then decide as a matter of law whether it is fixed or floating. Lord Millett held that Nourse LJ’s approach in New Bullas based on freedom of contract was ‘fundamentally mistaken’.‘In construing a debenture to see whether it creates a fixed or floating charge, the only intention which is relevant is the intention that the company should be free to deal with the charged assets and withdraw them from the security without the consent of the holder of the charge; or to put the question another way, whether the charged assets were intended to be under the control of the company or of the charge holder.’
‘The question is not whether the company is free to collect the debts, but whether it is free to do so for its own benefit.’
He noted that in Siebe Gorman & Co Ltd v Barclays Bank Ltd and In re Keenan Bros Ltd the proceeds of the book debts were not at the free disposal of the company - that is why these were fixed charges - the proceeds were not available to the company as a source of its cash flow.
Lord Millett, [32] ‘The question is not merely one of construction. In deciding whether a charge is a fixed charge or a floating charge, the Court is engaged in a two-stage process. At the first stage it must construe the instrument of charge and seek to gather the intentions of the parties from the language they have used. But the object at this stage of the process is not to discover whether the parties intended to create a fixed or a floating charge. It is to ascertain the nature of the rights and obligations which the parties intended to grant each other in respect of the charged assets. Once these have been ascertained, the Court can then embark on the second stage of the process, which is one of categorisation. This is a matter of law. It does not depend on the intention of the parties. If their intention, properly gathered from the language of the instrument, is to grant the company rights in respect of the charged assets which are inconsistent with the nature of a fixed charge, then the charge cannot be a fixed charge however they may have chosen to describe it.’
Of Romer LJ’s formulation, [13] that it was a description, not a definition and ‘it is the third characteristic which is the hallmark of a floating charge and serves to distinguish it from a fixed charge.’