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A fixed charge over book debts

The House of Lords' judgment in the Spectrum Plus case in summer 2005 marks an important landmark in settling a much-contested English common law position on book debts. Specifically, the case clarifies the requirement that a secured creditor must have control over a debtor's asset (in this case, the debtor's receivables) for it to have a fixed charge over that asset; and the conceding of control over the asset in question for use by the debtor in the ordinary course of its business is at best compatible only with a floating charge over that asset.

This judgment has important consequences for English legal advisers to investment banks and prime brokers in their dealings with Irish incorporated investment funds and structured finance vehicles.

The judgment also marks the close alignment between the English and Irish courts on this topic by referring with approval to the approach adopted by the Irish Supreme Court to the same question more than 20 years ago in the Keenan Brothers case; and affirms in no small way Ireland's deserved reputation as a practical and creditor- friendly jurisdiction for cross-border secured transactions.

The nub of the issue is this: if you, as a secured creditor, reserve for yourself a fixed charge under English law over your client's assets held in custody with a custodian bank, and stipulate that the client's assets can only be removed with your prior consent; and you then proceed to allow your client to deal in the custody assets in line with the business and investment strategy of the fund vehicle; your status as a fixed charge holder over the custody assets will be placed in jeopardy as a consequence of this judgment. In other words, if you, as a secured creditor agree in writing with your Irish client that the asset is to stay in custody and in practice you allow your Irish client to dispose of the asset in the normal course of business, then you do not have a fixed charge.

The Irish legal position on the point at issue in the Spectrum Plus case has long since moved on by way of statutory amendment with the result that the threat posed by statutory preferential creditors that would lead a secured counterparty to claim a fixed charge over custody assets of an Irish incorporated client is not a real concern that may not be overcome for a secured creditor of an Irish incorporated SPV or investment fund.

The point to note is that what looks good on paper (that is, a fixed charge) might prove worthless if the essential condition of control over the asset is not in fact maintained for or on account of the secured creditor; and the failure to reserve a concurrent floating charge/lien over the same assets might well result in a loss of status as a secured creditor on insolvency.

It might now be timely to review all those standard terms dealing with this point in light of this judgment.

Joseph M Gavin

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