This month's cover story explains why the House of Lords' decision in Spectrum Plus is bad news for banks. The ruling by the UK's highest court renders obsolete the fixed charge used by banks as a standard form of security agreement for book debts. This has effectively removed banks' right to jump to the front of the queue to recover the money when a company becomes insolvent. Banks will now have to join the same queue as preferential creditors such as company employees, the Inland Revenue or, potentially, secured bondholders to recover their money. Despite the disappointment for lenders, at least some of the confusion over priority of payments is now resolved and the 550 or so insolvency proceedings delayed by the case can now continue. Going forward, banks may seek to more thoroughly structure their lending or seek explicit guarantees from companies over debenture lending. Geoffrey Yeowart's article on page 19 explains the ramifications of the decision for commercial banks and argues that clarification is needed on precisely how much control a lender must have over a receivable to characterize a charge as fixed rather than floating. The lack of clarification could lead banks to protect themselves by lending through special purpose vehicles, potentially raising borrowing costs. A lack of clarification is also causing problems for lawyers in Asia, specifically corporate and private equity lawyers advising funds on investing in China. Two opaque regulatory statements from the Chinese government are bringing private equity investments to a standstill due to fears that traditional exit strategies through offshore vehicles might no longer be legal. Filip Moerman and colleagues comment on page 13 that, although the State Administration of Foreign Exchange's attempts to stop Chinese residents offshoring capital and state assets are understandable, the market needs more detail on how to operate the new system or genuine foreign investment in Chinese companies might dry up.
July 31 2005
