Fixed Charges Plus Book Debts = Mild Ambiguity

In July of last year an unusually large panel of seven law lords delivered a judgment in the case of Spectrum Plus regarding charges over book debts.  The decision was hailed as clarifying a twenty-five year era of uncertainty, and was welcomed both legally and commercially.  One year on, Mark Lewis, a partner in Wright Hassall’s company and commercial department, examines the aftermath not only of what the case decided, but also what it did not decide.

In Spectrum, it was confirmed that it is conceptually possible to create a fixed charge over book debts, both present and future.  Their Lordships noted, however, that the borrower must not be allowed to have the free use of the proceeds of the book debts.  Therefore these must be placed in a “blocked account”.

Unfortunately, little practical guidance was given on how lenders can properly structure their arrangements. For example, no guidance was given as to how often the proceeds from blocked accounts can be transferred into borrower's trading accounts.  Moreover, it was not made clear what level of authorisation and intervention is required to be exercised by the lender so that a charge amounts to a fixedcharge.

Mark Lewis notes that a well drafted document should achieve this by requiring the borrower:

• to collect the book debts
• to pay the proceeds into a blocked account
• not to withdraw the money from the account without the lender's consent.

Further, and crucially, these arrangements must actually be observed in practice.  That is, the lender must actually exercise control over the blocked account.  There have been many incidents post-Spectrum of lenders falling foul of this requirement.

It appears that legally the above is (relatively) clear, but there remain many live areas of debate.  In particular, commentators still argue over the implications of Spectrum on other forms of income-producing contracts, such as large-scale asset finance or project finance agreements and leases.  Currently, lenders are treating such matters in the same way as security over book debts, but since Spectrum only involved book debts it is questionable whether it applies in such circumstances.

Mark Lewis notes that he would like to see more certainty on this issue.  He comments, “whether or not this occurs (and Parliament does legislate on the issue) it is certain that the judiciary have not said everything that they have to say on this topic!”

This article first appeared in NewsBrief, Summer 2006