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United Kingdom

The Privy Council (with judgment delivered by Lord Millett) has overruled the Court of Appeal decision of In re New Bullas Trading Limited [1994] I BCLC 449 by stating that it is not possible to obtain a fixed charge on uncollected book debts by treating the uncollected debts and their proceeds as two separate assets and creating a fixed charge over the uncollected debts with a floating charge over the proceeds.

The problem that New Bullas sought to address was the considerable body of case law which establishes that, where a lender has a charge over the assets of a borrower, and the borrower has freedom to deal with those assets without seeking the consent of the lender, any such charge must be a floating charge and not a fixed one. Banks clearly prefer to hold a fixed charge because preferential creditors have a priority in payment out of the proceeds of realization of floating charge assets.

Although it was established in cases such as Siebe Gorman & Co Ltd v Barclays Bank Ltd [1979] 2 Lloyd's Rep 142 and in the Irish decision Re Keenan Bros Ltd [1986] BCLC 242 that it is possible to obtain a fixed charge on book debts, it is very difficult to do so in practical terms since these decisions established that the lender needs to control both the uncollected debts and their proceeds. This involves requiring the borrower to pay the proceeds into a designated bank account and prohibiting the borrower from making any withdrawals without the written consent of the lender: clearly quite impossible to implement in practice because borrowers need to access the proceeds of their book debts in order to run their businesses. It is not sufficient merely to include restrictions on the use of the proceeds in the debenture: it is essential that they are observed in practice in order to create an effective fixed charge.

The New Bullas solution, the separation of the uncollected debt from its proceeds and the creation of a floating charge over the proceeds, would have been a useful mechanism to enable the lender to have its fixed charge and the borrower to run its business without interference. However, the case has been heavily criticized and the Privy Council made a clear statement in Brumark to the effect that the New Bullas approach is untenable. The proceeds of a book debt are not a separate asset but the traceable proceeds of the same asset. If the borrower can convert its debts into cash and dispose of the proceeds without the consent of the lender, then the lender's charge can only be a floating charge.

This case is of immense importance since banks routinely attempt to take fixed charges over book debts and the essence of the Brumark case is that the concept of a fixed charge is incompatible in most situations with the nature of such assets.

Celia Gardiner

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