DEBT FINANCE 1: SECURED AND UNSECURED CREDIT - Substantive Law

Fixed Charges A specific charge which usually takes the form of a legal mortgage over specific assets of the
company such as land, buildings and fixed plant. It is a mortgage, legal or equitable, of company property to
which much or the general law of mortgages apply. The charge attaches to property as from the moment of the
creation of the charge. Cannot be created over current assets, but are confined to land, buildings, plant etc. which
the company will retain over its useful life. The company cannot dispose of the assets subject to the charge
without the consent of the debenture holder.
Book debts can also be subject to a fixed charge
1.

Nature of security
Re GE Turnbridge Ltd., [19951 1 BCLC 34; - The question arose, during the administration of the
company, as to the status of a charge it had created over its assets in the following terms: the debenture
sought to charge All other assets (not being floating assets) now owned or hereafter acquired by the
[Company] or in which it now has or in the future acquires an interest. Floating assets were defined else where in the charge so the parties clearly thought they were creating a fixed charge but were they?
Held No this definition of assets charged created a floating charge. Sir Mervyn Davies concluded that the
document read as a whole disclosed a floating charge despite what the parties to it may have contemplated.
He found that the three characteristics that Romer LI identified in Yorkshire Woolcombers were all present
and this overrode the parties stated contrary intention.
Siebe Gorman v Barclays Bank Ltd., [19791 2 Lloyds Rep. 148 - A company created a debenture secured
over its present and future book debts. The question arose was it a fixed or floating charge? Here it was
established that it is possible to create a fixed charge over future book debt owing to the company provided
that the charge requires that the company receive payment of the debt into a bank account, from which it may
not withdraw same without the approval of the holder of the charge. However, the trend is still to regard
treating a charge on book debts, however expressed, as a floating charge.
Slade J characterised this charge as a fixed charge. He said that, although it was more usual for a charge over
book debts to be a floating charge, this particular charge had the characteristics of a fixed charge since, once
the company had received the moneys in payment of its book debts, it was not then free to deal with it as it
liked but was subject to a requirement in the charge instrument to pay it into the companys account at the
chargeholder bank.
Re Cimex Tissues Ltd., [1995] 1BCLC 409 - The company concerned was a toilet paper manufacturer
which had purported to issue a fixed charge over its machinery pursuant to which it had agreed not to sell,
mortgage, or otherwise deal with the charged property, other than in the ordinary course of its trading
business, without the prior written consent of the lender.
Held This was a fixed charge - the restriction on the companys right to deal as it liked with the charged
property clearly gave it the characteristics a fixed charge. The judge said: The authorities on floating charges
to which I have been referred do not lead me to conclude that, in the case of a charge over specific
manufacturing machinery a liberty for the chargor to deal to some extent with that machinery without the
consent of the chargee is necessarily inconsistent with the creation of a fixed charge.
Re Armagh Shoes Ltd In August 1977 Armagh Shoes Ltd executed a security in favour of the Northern
Bank Ltd by which it purported to secure by way of fixed charge all receivables debts plant machinery
fixtures fittings and ancillary equipment now or at any time hereafter belonging to the mortgagor. The
company went into liquidation in April 1980 and the liquidator applied to the court to determine whether or
not the August 1977 deed created a fixed or floating charge.
Held The deed created a floating charge. The fact that a deed by its express words purported to create a
fixed or specific charge did not operate to prevent the charge from being a floating charge where the
remainder of the wording of the deed revealed the characteristics of a floating charge, that is, a charge on

present and future assets which, in the ordinary course of business, would be changing from time to time and
with respect to which the company could carry on business until some future step is taken by the charge
holder. In the present case, although not expressly provided, it was a necessary implication from the deed that
the company had a right or licence to deal with the charged assets in the ordinary course of business until the
bank took steps to enforce the charge and accordingly the deed created a floating charge.
Per Hutton J. The fact that a deed did not specifically provide for the circumstances in which a charge was to
crystallise did not prevent it from being a floating charge and in such a case the charge would crystallise on
winding up or the appointment of a receiver.
Re Atlantic Computer Systems plc (No.1) 1992 1 All ER 476 - A more advantageous realization of the
companys assets than would be effected by liquidation.
Re Atlantic Medical [1993] BCLC 386 characteristics of floating charge.
Re New Bullas Trading Ltd. [1994] BCC 36 - The company had sought to grant a fixed charge over its
book debts, the chargee was entitled to have the debts assigned to it if so required. It was also entitled to
direct as to how the company should deal with its book debts. The proceeds of the debt were to be paid into a
bank account designated by the chargee and only if the chargee failed to give directions as to how the
moneys paid in should be dealt with would the company then be free to deal with as it wished.
The Court reiterated the principle that whether the charge is fixed or floating depends on the intention of the
parties. The label given to the charge is not conclusive and may be upset if other provisions in the debenture
are inconsistent with the label given. It was held that a charge over book debts, which was expressed to be a
fixed charge was in fact a fixed charge while the debts remained uncollected and became a floating charge
when the debts are realized.

2.

Constitution of security

Siebe Gorman v Barclays Bank Ltd see above.

Re Bright1ife Ltd., [1987] Ch.200 - Brightlife Ltd went into creditors voluntary liquidation owing 200,000,
secured by debenture to Norandex, and 70,000 to the Commissioners of Customs and Excise, who are classed as
preferential creditors. A clause in the debenture stipulated that the chargee could crystallise the floating charge, if
it was believed the security was in jeopardy. The liquidator wanted guidance as to the effectiveness of the clause.
Held The court stated that crystallisation was possible in this instance and consequently the debenture holder did
not have to wait until the preferential creditors were paid. Mr Justice Hoffmann was urged to consider the
prejudice to other creditors that the operation of automatic crystallisation clauses could cause. However, he
rejected this consideration saying: I do not think that it is open to the courts to restrict the contractual freedom of
parties to a floating charge on such grounds. The floating charge was invented by Victorian lawyers to enable
manufacturing and trading companies to raise loan capital on debentures. It could offer the security of a charge
over the whole of the companys undertaking without inhibiting its ability to trade. But the mirror image of these
advantages was the potential prejudice to the general body of creditors, who might know nothing of the floating
charge but find that all the companys assets, including the very goods which they had just delivered on credit,
had been swept up by the debenture holder. The public interest requires a balancing of the advantages to the
economy of facilitating the borrowing of money against the possibility of injustice to unsecured creditors. These
arguments for and against floating charges are matters for Parliament rather than the courts.
Re New Bullas Trading see above
3.

Registration

S.237-250 Companies Act, Cap.308 Barbados

S.251 et seq Companies Act No.35 of 1995 T&T
Assess typically covered-Plant and machinery - Fixed
Book Debts, Consumable stock - Fluctuating
S.237 Cap.308, supra.
S.251 Companies Act, No.35 of 1995;
Note: Special consideration: Fixed charges over book debts

What are book debts?

Shipley v Marshall (1863) - book debts are debts connected with and arising in the course of trade of any
business due or growing due to the proprietor of that business and entered or commonly entered in books.
Independent Automatic Sales Ltd. v Knowles 11962] 1 WLR 974 a charge on future book debts is
registrable.
A company which carried on the business of manufacturing and dealing in automatic machines from time to
time entered into hire-purchase agreements for the disposal of its machines. On April 22, 1960, the company
opened an account with the defendants with a view to obtaining finance for its business, and signed a letter of
hypothecation in favour of the defendants whereby it was agreed that all bills of exchange and other
documents, securities and property whatsoever belonging to the company then or thereafter deposited with
the defendants by the company and the proceeds thereof should be and remain pledged to the defendants as
continuing security for the due payment to the defendants of all moneys and satisfaction of all liabilities for
which the company were then or might at any time thereafter be indebted or liable to the defendants. The
company deposited 53 hire-purchase agreements with the defendants and the defendants advanced 80 per
cent of the outstanding instalments under the agreements. No registration was ever effected under section 95
of the Companies Act, 1948,1 in respect of the letter of hypothecation or the deposit of hire-purchase agreements. On July 25, 1960, the company went into a creditors voluntary liquidation.
The company claimed delivery by the defendants of the hire-purchase agreements and an account of all
money received under and by virtue of them on the ground that the charge created by the deposit of the
agreements was void as against the liquidator for non-registration under section 95 of the Companies Act,
1948,1 since the debts under the agreements were beak-debts within paragraph (e) of subsection (2) of that
section.
At the hearing, the defendants took the preliminary point that the company could not sustain the action since
under section 95 (1) the charge was not void as against a company but only against the liquidator, and the
company contended that, since that point had not been taken in the pleadings, it could not be raised at the
hearing Held, (1) that the preliminary point being a pure point of law, the defendants were not precluded
from raising it by the fact that they had not expressly taken it in their pleading.
Held, (1) that a debt arising in the course of a business and due or growing due to the proprietor of that
business which would or could in the ordinary course of such a business be entered in well-kept books, could
properly be called a book-debt whether it was in fact entered in the books of the business or not.
Accordingly, the debts under the hire-purchase agreements already existed as book-debts at the date of the
deposits; and the fact that they were not immediately payable did not make them any the less debts nor any
the less book-debts.
(2) That it was competent for anyone to whom book-debts might accrue in future to create an equitable
charge upon them which would attach to them as soon as they came into existence; that although such a
charge would not be effective until a book-debt came into existence upon which it could operate it could
accurately be said to be created at the date of the instrument, deposit or other act giving rise to it; and that
there was nothing in the language of section 95 requiring paragraph (e) of subsection (2) to be construed in so

restricted a way as to confine it to the registratjon of a charge on existing book-debts alone. Accordingly, the
charges created by the deposit of the hire-purchase agreements were registrable under section 95 of the Act of
1948 and, not having been registered, were void as against the liquidator.

Efficacy of the fixed charge over book debts.

Siebe Gorman v Barclays Bank Ltd see above
Re Brightlife see above.
Re New Bullas Trading - see above

Floating Charges - does not immediately attach to the property charged but floats over it until the moment of
crystallization. Because, it does not impose an immediate encumbrance on the property charged and hence can apply
to current assets.
1.

Nature of Security - See the cases referred to under Fixed Charges above as well as
Re Panama, New Zealand and Australia Royal Mail Co. (1870) - The company had sought to grant a
fixed charge over its book debts, the chargee was entitled to have the debts assigned to it if so required. It
was also entitled to direct as to how the company should deal with its book debts. The proceeds of the debt
were to be paid into a bank account designated by the chargee and only if the chargee failed to give directions
as to how the moneys paid in should be dealt with would the company then be free to deal with as it wished.
The Court reiterated the principle that whether the charge is fixed or floating depends on the intention of the
parties. The label given to the charge is not conclusive and may be upset if other provisions in the debenture
are inconsistent with the label given. It was held that a charge over book debts, which was expressed to be a
fixed charge was in fact a fixed charge while the debts remained uncollected and became a floating charge
when the debts are realized.
Re Yorkshire Woolcombers Association Ltd [1903] - Romer LJ said that a floating charge had three key
characteristics:
o
o
o

If it is a charge on a class of
assets of a company present
and future
If the composition of the charge is not fixed it changes from time to time in the ordinary course of
the companys business
The charge contemplates that the company is free to carry on business normally and deal with the
assets subject to the charge in the ordinary course of business until such time as the charge-holders
[the lenders] enforce the charge, so the charge floats in suspense until that time of crystallization.

The advantage of the floating charge is that it takes in current assets which may be the most valuable assets
of the company.
The disadvantages are that there can be no certainty as to the assets and their value to which the floating
charge will attach when it crystallizes, and, it ranks behind unsecured preferential debts in most cases and
may also rank behind a fixed charge on fixed assets subject to the floating charge.
The court has often decided whether upon its true construction, a charge is fixed or floating. This will depend on the
wording of the debenture.
Evans v Rival Quarrries [1916] A debenture, constituting a floating security over the undertaking and
assets of a company, does not specifically affect any particular assets until some event occurs or some act on

the part of the mortgagee is done which causes the security to crystallize into a fixed security. A demand by
the debenture-holder of the payment by the company of the money secured by his debenture is not such an
act; nor is a notice by him to the companys bankers claiming payment to him of the companys bank balance
which has been attached by a judgment creditor of the company tinder a garnishee order; for there is no
equity in a debenture-holder, whose security is a floating charge, arising from his merely giving notice to
seize a particular asset of the company.
Re Bond Worth [1979] 3 All ER 919 - Raw fibre was sold to the company who manufactured carpets. An
attempt to create a valid retention of title clause was made by reserving equitable and beneficial ownership
in the fibre, until payment has been made. No mention of retaining the legal title was made. The clause was
held to be a floating charge because only equitable title had been retained by the supplier. Consequently,
since the charge had not been registered, it was void and so the suppliers could not claim their goods back.
(ii)

Constitution of security
Re Brightlife see above.

(iii)

Crystallisation
(a)
(b)

Events of crystallization
Default

Government Stock and Other Securities investments Co. v Manila Railway Co.[1987]A.C 81;
Mahabirsingh v Herde Civ. App 38 of 1988 see handout

Winding up

Re Crompton & Co. Ltd., [19141 1 Ch.954 In 1895 the company issued debentures secured by a floating
charge over all the assets of the company. The terms of the charge provided that the principal lent should
become immediately repayable (inter alia) if a winding up order was made or a resolution was passed to
wind up the company, save for the purposes of reconstruction, reorganisation or amalgamation. In 1913 a
resolution for the purposes of reconstruction of the company was passed whereby its assets were transferred
to a new company formed expressly for that purpose. The debenture holders applied to court for the
appointment of a receiver to enforce their security.
Held Notwithstanding the provision in the charge, the floating charge crystallised as soon as the old company
was wound up, and the security it provided was enforceable. Thus the plaintiffs could appoint a receiver.
(d)

Notice

Re Brightlife Ltd see above.

(e) Cessation of business
Re Woodroffes (Musical Instruments) Ltd (1986) - The company created two floating charges, one in
favour of the bank and the other in favour of Mrs Woodroffe. The latter charge contained a clause stating that
Mrs Woodroffe could change her charge into a fixed charge by giving the requisite notice. This she did on 27
August 1982. Receivers were appointed on 1 September 1982. The question was which charge took priority?
Held Mrs Woodroffes charge ranked before the banks. The notice given by Mrs Woodroffe did not have the
effect of crystallising the banks charge.

Appointment of a receiver
Taunton v Sheriff of Warwickshire [19851 2 Ch.319
Automatic crystallisation
Fire Nymph Products Ltd. v The Heating Centre Py Ltd., (1988) 14 ACLR 274;
Re Permanent Houses (Holdings) Ltd., [1988] BCLC 563 Permanent Houses (Holdings) Ltd (the
company) executed a debenture in favour of the Socit Gntale (the bank). The debenture granted the bank
a fixed charge over the companys book debts and a floating charge over all the companys other
undertaking ... and assets. The charge over the book debts required the company to pay all moneys received
in connection with such book debts into an account with the bank. The debenture set out various events of
default, one of which was the making of a demand by the bank for repayment of all moneys owing to it, and
provided that the floating charge was to crystallize on the happening of an event of default The bank made a
demand for repayment and when it was not paid it sought payment from Pakhocd BV (Pakhocd), a guarantor
of the companys debts. Pakhoed made payment, took an assignment of the banks security and appointed a
receiver. The receiver sought directions under S 492. of the Companies Act 2985 with respect to the
distribution of 486,166 which he had in his possession. That sum included (a) 6S,~6~ in a bank account
which the company maintained with the National Westminster Bank plc (the Natwest money) and (ii)
407,067 paid to the receiver pursuant to an indemnity agreement between the company and Credit and
Guarantee Insurance Co Ltd (the C & G money). It was argued, inter alia, that s 196 of the 985 Act required
the receiver to pay off the preferential I creditors before satisfying the claims of the floating charge holder.
Held The C & G money constituted a book debt and was therefore subject to thc fixed charge and
accordingly that money should be paid over to Pakhoed, the holder of the fixed charge. As regards the
Natwcst money, that did not constitute a book debt and was therefore only subject to the floating charge.
The debenture specifically provided that the floating charge was to crystallise on the happening of an event
of default and the court should give effect to that provision. As an event of default (the making of a demand
by the bank for repayment) had occurred before a receiver had been appointed, the floating charge was no
longer a floating charge at the time of the receivers appointment. Accordingly the Natwest money should
also be paid over to Pakhoed, the holder of the floating charge, and not to the preferential creditors, as S 296
only the latter a priority over the holders of a charge which was a floating at the time of the receivers
appointment.

Note:

Special Consideration - Effect of crystallisation

N.W. Robbie & Co. Ltd. v Whitney Warehouse Co. Ltd ., [19631 1 WLR 1324; - The plaintiff company
had issued a floating charge to a bank. The bank appointed a receiver in order to enforce the charge and to
this end the receiver continued to carry on the companys business. The defendants bought goods from the
company. When the receiver claimed payment of the purchase price, the defendants claimed to be able to setoff their liability to pay, against a debt due from the company.
Held Since the floating charge had ceased to float or had crystallised when the receiver was appointed, the
debt owed by the defendants became a chose in action subject to the floating charge in favour of the bank,
and the defendants were not thus entitled to any set-off.
Biggerstaffe v Rowatts Wharf Ltd. [1896] 2 Ch.93.

2.

Unsecured credit - general considerations Amelioration devices

(i)

Retention of title
Aluminium Industrie v Romalpa [1976] 2 All ER 552 A Dutch company supplied aluminium foil to an
English company. The contract between them contained a retention of title clause, which stated that legal title
to the foil did not pass to the English company until full payment had been made. Anything made from the
foil was to be held by the company as bailees and was to be kept separately from any other manufactured
goods. The company was entitled to deal in the ordinary course of business with any products manufactured,
but in such a case the company was acting as the agent of the supplier.
Held The clause was effective. The suppliers could claim any aluminium still in its original form, and they
could trace into any proceeds of sale from goods manufactured from their aluminium.
Clough Mill v Martin [1984] 3 All ER 985 Romalpa clauses was reaffirmed by CA here
The appellants agreed to supply yarn on credit terms to the buyers, a company which intended to use it for
the manufacture of fabrics. The contract provided that the risk in the goods was to pass to the buyers on
delivery but stipulated that the ownership of the yarn was to remain with the appellants, who reserved the
right to dispose of the yarn until payment in full for all the [yarn] has been received. The buyers became
insolvent before they had paid for or used all the yarn.
Held, upon appeal: On the true construction of the parties contract the appellants had retained title in the
yarn after delivery of it to the buyers until they were paid for it or the buyers resold the material to their
customers, the purpose of the appellants retention of title being to provide themselves with security. Since the
yarn claimed by the appellants was at the time of their claim identifiable, unused and unpaid for, the
appellants retained legal title to it and since the buyers had never acquired any title to it they were never in a
position to confers charge over the yarn in favour of the appellants. Accordingly, the question of whether any
such charge was void for non-registration did not arise.
Per curiam: If a seller in the exercise of his rights under a retention of title clause repossesses goods and
resells them while the contract still subsists he is only entitled to resell that amount needed to discharge the
balance of the outstanding purchase price and if he sells more he is accountable to the buyer for the surplus.
However, if the contract has been terminated, e.g., by an accepted repudiation, the seller can resell the goods
as the owner, uninhibited by any contractual restrictions and therefore while he would have to refund any part
of the purchase price paid by the buyer which would be recoverable on the ground of failure of consideration,
he is entitled to retain any profit on the resale.
If goods which are subject to a retention of title clause have been incorporated to, or used as material for,
other goods, it is to be assumed that the newly manufactured goods are owned by the buyer of the original
goods subject to a charge created in favour of the seller by the retention of title clause, unless (per Sir John
Donaldson MR) the use of the original goods leaves them in a separate and identifiable state, in which case it
is possible for the seller to retain ownership of them.

(ii)

Discounting of reeivables
Olds Discount Co. Ltd. v. John Playfair Ltd., [1983] 3 All ER 2
Chow Young Hong v Choong Fah Rubber [1962] 2 AC 209
(f) Non recourse financing against receivables
De Vigier v IRC [1964] 2 All ER 907

(iv) Sale and lease backs

McEntire v Crossley Bros Ltd., [19851 AC 457

(v) Set-off
Halesowen Presswork Ltd. v National Westminster Bank [19711 1 QB 1;
British Eagle International v Compagnie Nationale Air France [1975] - A number of international air
carriers had established a clearing house arrangement with the International Air Transport Association which
was designed to operate a collectivised netting-off arrangement of monies owing between all the members.
This had the effect that no one airline claimed monies from another but a monthly balance owing each one
was paid by the clearing house. When the plaintiff company went into liquidation and the liquidator claimed
monies allegedly owing it from the defendant company, the question arose as to the validity of the clearing
house arrangement in the context of a liquidation. Could such a mechanism take precedence over the
statutorily ordained rules on company liquidations?
Held Section 302 of the Companies Act (CA) 1948 states: Subject to the provisions of this Act as to
preferential payments, the property of a company, shall on its winding up, be applied in satisfaction of its
liabilities purl passu, and, subject to such application, shall, unless the articles otherwise provide, be
distributed among the members according to their rights and interests in the company.
That is the essence and fundamental purpose of the rules on company liquidation and so, in as much as it
sought to contract out of s 302 of the CA 1948 [now s 107 of the Insolvency Act (IA) 19861 this clearing
house arrangement for the payment of debts was void and contrary to public policy. Lord Cross said: The
question is, in essence, whether what was called in argument the mini liquidation flowing from the clearing
house arrangement is to yield to or to prevail over the general liquidation. I cannot doubt that on principle the
rules of the general liquidation should prevail.
(vi) Financial Covenants including the negative pledge.
Swiss Bank Corporation v Lloyds Bank Ltd., [1970] 2 All ER 853 see handout
(vii) Sales with rights of repurchase.
(viii) Hire Purchase.
3.

Subordinated debt.

DEBT FINANCING

16/05/2001

Fixed charges A specific charge which usually takes the form of a legal mortgage over specific assets of the
company such as land, buildings and fixed plant. It is a mortgage, legal or equitable, of company property to
which much or the general law of mortgages apply. The charge attaches to property as from the moment of the
creation of the charge. Cannot be created over current assets, but are confined to land, buildings, plant etc. which
the company will retain over its useful life. The company cannot dispose of the assets subject to the charge
without the consent of the debenture holder.
Book debts can also be subject to a fixed charge
Siebe Gorman v Barclays Bank Ltd A company created a debenture secured over its present and future
book debts. The question arose was it a fixed or floating charge? Here it was established that it is possible to create a
fixed charge over future book debt owing to the company provided that the charge requires that the company receive
payment of the debt into a bank account, from which it may not withdraw same without the approval of the holder of
the charge. However, the trend is still to regard treating a charge on book debts, however expressed, as a floating
charge.
See Re Brightlife [1986]. The debenture holder had given the company a notice converting the floating
charge into a fixed charge a week before a resolution for voluntary winding up was passed. A clause therein stipulated
that the chargee could crystallize the floating charge if it was believed that the security was in jeopardy. Hoffman J
upheld the clause which automatically crystallized a floating charge on the making of an unsatisfied demand for
payment. The debenture holder did not have to wait until the preferential creditors were paid.
Hence automatic crystallization clauses if appropriately worded now have a legal effect and any uncertainty over them
has been removed.
The fixed charge, unlike a floating charge has priority over preferential unsecured creditors.
In New Bullas Trading Ltd [1994] The company had sought to grant a fixed charge over its book debts,
the chargee was entitled to have the debts assigned to it if so required. It was also entitled to direct as to how the
company should deal with its book debts. The proceeds of the debt were to be paid into a bank account designated by
the chargee and only if the chargee failed to give directions as to how the moneys paid in should be dealt with would
the company then be free to deal with as it wished.
The Court reiterated the principle that whether the charge is fixed or floating depends on the intention of the parties.
The label given to the charge is not conclusive and may be upset if other provisions in the debenture are inconsistent
with the label given. It was held that a charge over book debts, which was expressed to be a fixed charge was in fact a
fixed charge while the debts remained uncollected and became a floating charge when the debts are realized.
Royal Trust Bank v National Westminister Bank plc [1994] Millett LJ: the proper characterization of a
security as fixed or floating depends on the freedom of the chargor to deal with the proceeds of the charged assets
in the ordinary course of business free from the security. A contractual right in the chargor to collect the proceeds and
pay them into his own bank account for use in the ordinary use of its business is a badge or a floating charge and is
inconsistent with the existence of a fixed charge.
Pearl Maintenance Services Ltd [1995] Carnwath J: The receiver remains under a duty to meet the claims
of the preferential creditors, so far as can be done out of the floating assets.
Floating Charges does not immediately attach to the property charged but floats over it until the moment of
crystallization. Because, it does not impose an immediate encumbrance on the property charged and hence can apply
to current assets.
Re Panama, NZ and Australian Royal Mail [1870] the instrument creating the charge had purported to
charge the whole undertaking and the question as to what this term included could it include all the property of the
company that was being realized now that the company was being wound up?

Lord Giffard LJ, in response to the question as to regarding the instrument creating the charge replied: under the
debentures, they have a charge upon all the property of the company, past and future by the term undertaking, and
that they stand in a position superior to that of the general creditors who can touch nothing until they are paid.
A charge however expressed is a floating charge if it meets the characteristics as set out by Romer LJ, in
Re Yorkshire Woolcombers Assoc. Ltd [1903]:
o
If it is a charge on a class of assets of a company present and future
o
If the composition of the charge is not fixed it changes from time to time in the ordinary course of the
companys business
o
The charge contemplates that the company is free to carry on business normally and deal with the assets
subject to the charge in the ordinary course of business until such time as the charge-holders [the lenders] enforce the
charge, so the charge floats in suspense until that time of crystallization.
The advantage of the floating charge is that it takes in current assets which may be the most valuable assets of the
company.
The disadvantages are that there can be no certainty as to the assets and their value to which the floating charge will
attach when it crystallizes, and, it ranks behind unsecured preferential debts in most cases and may also rank behind a
fixed charge on fixed assets subject to the floating charge.
The court has often decided whether upon its true construction, a charge is fixed or floating. This will depend on the
wording of the debenture.
In Re Cosslet (Contractors) Ltd [1996] licence to deal with charged property does not mean that the
charge is a floating charge. It depends on the licence and the nature of the assets charged. Although the failure to
register the charge rendered the security created by the power of sale void against the administrator, it did not affect
any right of the local authority which was not a security and which did not require registration, and therefore did not
invalidate the local authoritys contractual right to retain possession of the plant and materials and complete the works.
Crystallisation the holder of a floating charge is entitled to withdraw his consent to the unfettered disposal
of assets and to enforce his charge against the assets which the company then has as soon as the company ceases to
carry on its business in the usual way. At this point the charge is said to crystallise and becomes a fixed charge.
Hence, crystallisation occurs:
o
o
o

o
o
o

On the company going into

liquidation;
On the appointment of a
receiver;
By the debenture holder
service a notice on the
company that the charge has
crystallized
On the company ceasing to
carry on business
On the business of the
company being sold
On the automatic crystallization of a floating charge caused by an event provided for in the
debenture.

The receiver must be actually appointed for crystallisation to occur.

In Re Brightlife, Hoffman J held that automatic crystallization clauses are valid as long as the charge was
appropriately worded, his justification being freedom of contract. In the case, a clause in the debenture stipulated that
the chargee could crystallize the floating charge if it was believed that the security was in jeopardy.

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Gower and Pennington regard automatic crystallization clauses as valid

Registration Part 3 (Division A Registration of Charges), See s. 233 company must lodge with the
registrar within 28 days after the creation of the charge, a statement of the charge. If the provision is not complied
with, the charge shall be void so far as any security interest it thereby purported to create. However, the contract or
obligation to repay the sum secured by way of the charge is still valid, and the money received under the charge shall
become payable immediately.
S. 234 registered debenture to rank as mortgage whether so registered or not but must be published in Official
Gazette and one local newspaper not less than 7 days previous to the registration.
S.245 extension of registration and rectification or omission by court on just and equitable cause.

Priority of Debts

Priority in time with charges of equal validity, the charge that attaches first takes priority over a charge to the same
property that attaches later.
Notice by registration a registrable charge which is not registered within 28 days loses its priority over a subsequent
charge on the same property if that charge is duly registered.
A floating charge by its very nature allows the company pending crystallization, power to dispose of particular assets
free of encumbrance by the charge. If therefore, a company first creates a floating charge on all of its assets and
subsequently a fixed charge on a class of assets, such as book debts, then the later charge may have priority over the
earlier one.
Automatic Bottle Makers [1926] A debenture was issued with the company reserving the right to create a
later charge ranking in priority over an earlier one or pari passu. A later debenture was then issued which was
to take advantage of the reservation of the company.
Held: It was perfectly possible to change the order of priority if the contracting parties wished to do so.
S. 431 & 434 (3) - Liquidation expenses
S. 434 - Taxes, NIS and Employees wages up to 4 months preceding the relevant date.
Preferential creditors
Fixed charge holders
Floating charge holders
S. 437 Effect of winding up on floating charge.
Where the holders of floating charges and affixed charge enter into a deed of priority that the floating charge shall
rank in priority to the fixed charge, then the order of priority changes.
Retention of title clauses - These clauses have as their purpose the retention of the sellers ownership in goods
supplied until the buyer has paid for them, even though the buyer is given possession of the goods and may re-sell
them or use them in the manufacture of other goods which will be re-sold. These clauses may also extend to the
proceeds of sale.
If the clause is valid and if the purchasing company goes into an administrative receivership or liquidation, then the
seller may try to recover the goods which the purchasing company still has in stock, and sometimes even the proceeds
of resale by the purchasing company, on the basis that the purchaser is a mere bailee of the goods and not the owner,
the seller being the owner and bailor.
The Romalpa case - The decision in Aluminium Industrie Vaassen BV v Romalpa Aluminium [1976] 2 All ER 552 was
the first UK decision to alert the accountancy and legal professions to the problems which these clauses might cause in
insolvency practice. The plaintiffs in that case were successful in recovering aluminium foil supplied under a retention

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clause, together with the proceeds of resale of the foil which the clause also covered.
It should, however, be noted that any interest which the seller may claim in the proceeds of resale will, in view of
more recent case law, be regarded by the courts as a charge on book debts which will be void under s. 395 if not
registered at Companies House.
It does not matter what the sellers retention clause says, e.g. proceeds to be held on trust, the buyer acts as agent of
the seller, and so on. The courts have in recent times looked beyond the language to the reality and regarded the
relationship as that of debtor (buyer) and creditor (seller), which is not an equitable fiduciary relationship, so that the
equitable remedy of tracing is not available and recovery of the proceeds of sale is not possible without the creation
and registration of a charge over what are, in effect, book debts. Those in equitable relationships, such as trustee and
beneficiary, can trace trust property without the need for registration.
The recovery of the proceeds in Romalpa has been looked on in more recent times as not significant since the receiver
in that case conceded the proceeds and did not contest their recovery, so the court did not have to rule on the matter.
Subsequent cases - Since the decision in the Romalpa case the courts have, broadly speaking, had to deal with two
main types of actions, as follows
1. Those cases where the supplier has been solely concerned to implement that part of his retention clause to retain
title over goods supplied under a contract of sale where the goods have not been changed or added to in a process of
manufacture, as was the situation in Romalpa. These actions will probably succeed and insolvency practitioners will
normally release the stock to the supplier provided the goods can be identified with invoices unpaid. Otherwise the
insolvency practitioner faces an action in conversion by the supplier. However, should the insolvency practitioner
believe that either the clause has not been properly communicated and is therefore not part of the contract of sale (see
below), or that the goods have not been properly identified, he cannot be prevented from selling them as part of the
realization of assets. It is clear from the decision of the House of Lords in American Cyanamid Co v Ethicon
[1975], that an application for an injunction to prevent sale will fail because the supplier has an alternative claim for
damages in conversion, if his contention that the retention clause is enforceable is correct.
2. Those cases in which the supplier is trying to use a retention clause to cover goods supplied to be used in
manufacture, as in Borden (UK) Ltd v Scottish Timber Products Ltd [1979] 3 All ER 961 (Sellers resin used in
making chip board and mixed with the companys material). In these cases the supplier may well have difficulty in
recovering even those goods in stock and not yet used by the purchaser in the manufacturing process, because it is
difficult to construe a bailment where the purchaser can use the goods in manufacture. This must give the company
some sort of ownership of them. Without the relationship of bailment there can be no recovery of the goods.
Where the goods have been mixed with the purchasers goods, or where the purchasers workforce has added value by
skill and effort, the clause will not work unless the retention clause is registered at Companies House as a charge over
the purchasing companys assets. Such a charge is in fact registrable under the CA 1985. An example is provided by
Re Peachdart Ltd [1983] 3 All ER 204, where the sellers leather was converted into handbags by the skill of the
purchasers workforce and the purchaser supplied handles and other decoration The stock of leather was not
recoverable, nor were the finished handbags or work in progress, even though the retention clause purported to extend
to finished products and work in progress.
Other points to be borne in mind regarding retention clauses are
(a) the need to ensure that the clause has become part of the contract of sale. It is not enough to include the
clause on an invoice, because the contract has already been made by the time the invoice is issued and new
terms cannot be introduced unless there have been previous dealings, including retention clauses, which can
be incorporated;
(b) the need to identify the goods which it is sought to recover. Where goods have been supplied over a period of
time it is essential to be able, e.g. by serial numbers on the goods and unpaid invoices, to identify which
goods have not been paid for.
Directors responsibility Fiduciary duties

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 Company s. 96 Duty of Care - Director must act honestly and in good faith with a view to the best interest
of the company and not to further their own interests.
Foss v Harbottle individual minority shareholders brought action against directors for selling land to
company at an undisclosed profit. It was held that they were not the proper plaintiffs and as such could not sue. If a
wrong had been committed, it was committed against the company and therefore the proper plaintiff was the company.
Regal Hastings Ltd v Gulliver directors were in a fiduciary relationship with Regal and were liable to
account for the profits they made not withstanding that Regal could not have made the profit itself.
Cook v Deeks Three out of four directors of a Canadian railway company diverted a contract in which the
company was interested to another company that they had formed. The PC held that the opportunity to obtain this
contract had come to the directors in their capacity and by virtue of their position in the company as directors. The
new company and its three directors were held liable to account for the profits made.

Creditors - No fiduciary duty. Must

seek redress from company.
Shareholders No fiduciary duty.
Must seek redress from company.
Effect of Breach of Duty extent of liability. Directors may be liable to the company for any loss
which their negligence has caused.
S. 59(1) (a)&(b) Duty of director to manage company.
S. 65 Courts power to disqualify directors
S. 446 448

Re Bond Worth [1980] Raw fibre was sold to the company who manufactured carpets. An attempt to
create a valid retention of title clause was made by reserving equitable and beneficial ownership in the fibre, until
payment has been made. No mention of retaining the legal title was made. The clause was held to be a floating charge
because only equitable title had been retained by the supplier. Consequently, since the charge had not been registered,
it was void and so the suppliers could not claim their goods back.
Re Potters Oil [1985] Appointment of receiver A debenture holder is free to appoint his own receiver to
protect his interest and he was under no duty to restrain from exercising his rights even if to do so would cause a loss
to the company and its unsecured creditors.
Re Ebrahimi v Westbourne Galleries Just and equitable winding up.

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