Richard Dale Agnew and Another v The Commissioner of Inland Revenue and Another

[Delivered by Lord Millett]

The question in this appeal is whether a charge over the uncollected book debts of a company which leaves the company free to collect them and use the proceeds in the ordinary course of its business is a fixed charge or a floating charge.

The company which granted the charge in question, Brumark Investments Limited, is in receivership. The only assets available for distribution to creditors are the proceeds of the book debts which were outstanding when the receivers were appointed and which they have since collected. If the charge is a fixed charge, as the receivers contend, the proceeds are payable to the company's bank Westpac Banking Corporation as the holder of the charge. If, however, it was a floating charge at the time it was created then, by the combined effect of the Seventh Schedule to the Companies Act 1993 and section 30 of the Receiverships Act 1993, they are payable to the employees and the Commissioner of Inland Revenue as preferential creditors. In a carefully reasoned judgment the judge (Fisher J) held that it was a fixed charge, but his decision was reversed by the Court of Appeal. A curiosity of the case is that the distinction between fixed and floating charges, which is of great commercial importance in the United Kingdom, seems likely to disappear from the law of New Zealand when the Personal Property Act 1999 comes into force.

The debenture is dated 9th August 1995. It is closely modelled on the instrument which was the subject of the controversial decision of the English Court of Appeal in In re New Bullas Trading Ltd [1994] 1 BCLC 449 and may have been deliberately drafted in order to take advantage of that decision. The relevant provisions of the debenture are set out in full in the judgments below and their Lordships can state them shortly. It is expressed to create a fixed charge on the book debts of the company which arise in the ordinary course of trading and their proceeds, but not those proceeds which are received by the company before the charge holder requires them to be paid into an account with itself (which it could do at any time but never did) or the charge created by the deed crystallises or is enforced whichever should first occur. Subject thereto, the charge is expressed to be a floating charge as regards other assets of the company. The debenture prohibits the company from disposing of its uncollected book debts, but permits it to deal freely in the ordinary course of its business with assets which are merely subject to the floating charge; these include the money in its bank accounts and the proceeds of the book debts when collected.

Thus the deed purports to create a fixed charge on the book debts which were outstanding when the receivers were appointed and the proceeds of the debts which they collected. Prior to their appointment, however, the company was free to collect the book debts and deal with the proceeds in the ordinary course of its business, though it was unable to assign or factor them. The question is whether the company's right to collect the debts and deal with their proceeds free from the security means that the charge on the uncollected debts, though described in the debenture as fixed, was nevertheless a floating charge until it crystallised by the appointment of the receivers. This is a question of characterisation. To answer it their Lordships must examine the nature of a floating charge and ascertain the features which distinguish it from a fixed charge. They propose to start by tracing the history of the floating charge from its inception to the present day, paying particular attention to charges over book debts.

The floating charge originated in England in a series of cases in the Chancery Division in the 1870's: In re Panama, New Zealand, and Australian Royal Mail Co(1870) 5 Ch App 318 (generally regarded as the first case in which the floating charge was recognised); In re Florence Land and Public Works Co, Ex p. Moor (1878) 10 Ch D 530; In re Hamilton's Windsor Ironworks Co., Ex p. Pitman & Edwards (1879) 12 Ch D 707; and In re Colonial Trusts Corporation, Ex p. Bradshaw (1879) 15 Ch D 465. Two things led to this development. First, the possibility of assigning future property in equity was confirmed in Holroyd v Marshall(1862) 10 HL Cas 191. The principle was of general application and made it possible for future book debts to be assigned by way of security: Tailby v Official Receiver (1888) 13 App Cas 523. Secondly, the Companies Clauses Consolidation Act 1845 sanctioned a form of mortgage for use by statutory companies by which the company assigned "its undertaking". It was natural that this formula should afterwards be adopted by companies incorporated under the Companies Act 1862.

The debenture in In re Panama, New Zealand, and Australian Royal Mail Co. was in this form. It charged "the undertaking" of the company "and all sums of money arising therefrom". This was taken to mean all the assets of the company both present and future including its circulating assets, that is to say, assets which are regularly turned over in the course of trade. From the word "undertaking" Giffard LJ derived the inference that unless and until the charge holder intervened the parties contemplated that the company was to be at liberty to carry on business as freely as if the charge did not exist, which it would not be able to do if the circulating assets were subject to a fixed charge.

The thinking behind the development of the floating charge was that compliance with the terms of a fixed charge on the company's circulating capital would paralyse its business. This theme was repeated in many of the cases: see for example In re Florence Land and Public Works Co. at p. 541 per Sir George Jessel MR; Biggerstaff v Rowatt's Wharf Ltd.[1896] 2 Ch 93, at p.101 per Lindley LJ and p. 103 per Lopes LJ. A fixed charge gives the holder of the charge an immediate proprietary interest in the assets subject to the charge which binds all those into whose hands the assets may come with notice of the charge. Unless it obtained the consent of the holder of the charge, therefore, the company would be unable to deal with its assets without committing a breach of the terms of the charge. It could not give its customers a good title to the goods it sold to them, or make any use of the money they paid for the goods. It could not use such money or the money in its bank account to buy more goods or meet its other commitments. It could not use borrowed money either, not even, as Sir George Jessel MR observed, the money advanced to it by the charge holder. In short, a fixed charge would deprive the company of access to its cash flow, which is the life blood of a business. Where, therefore, the parties contemplated that the company would continue to carry on business despite the existence of the charge, they must be taken to have agreed on a form of charge which did not possess the ordinary incidents of a fixed charge.

The floating charge is capable of affording the creditor, by a single instrument, an effective and comprehensive security upon the entire undertaking of the debtor company and its assets from time to time, while at the same time leaving the company free to deal with its assets and pay its trade creditors in the ordinary course of business without reference to the holder of the charge. Such a form of security is particularly attractive to banks, and it rapidly acquired an importance in English commercial life which the Insolvency Law Review Committee (1982 Cmnd. 8558 at para. 1525) later considered should not be underestimated. It was, however, not available to individual traders because of the doctrine of reputed ownership in bankruptcy. That doctrine did not apply to companies. It was abolished in England by the Insolvency Acts 1985-6 following a recommendation of the Insolvency Law Review Committee. It had already been abolished in New Zealand by Section 42 of the Insolvency Act 1967.

Valuable as the new form of security was, it was not without its critics. One of its consequences was that it enabled the holder of the charge to withdraw all or most of the assets of an insolvent company from the scope of a liquidation and leave the liquidator with little more than an empty shell and unable to pay preferential creditors. Provision for the preferential payment of certain classes of debts had been introduced in bankruptcy in 1825 and was extended to the winding up of companies by section 1(1)(g) of the Preferential Payments in Bankruptcy Act 1888.Section 107 of the Preferential Payments in Bankruptcy Amendment Act 1897 now made the preferential debts payable out of the proceeds of a floating charge in priority to the debt secured by the charge.

A second mischief arose from the very nature of the floating charge which allowed a company to continue to trade and incur credit despite the existence of the charge. This put the ordinary trade creditors of the company at risk, even though they would not normally know of the existence of the charge; for the holder of the charge could step in without warning at any time and obtain priority over them. Such trade creditors would include the suppliers of goods which the charge holder could appropriate to the security and realise for its own benefit leaving the suppliers unpaid. This was seen by many judges as an injustice and by Lord...