A New Zealand lawsuit (the Brumark case) heard in June by the judicial committee of the Privy Council, could put loan security at risk for UK banks.
In the case, the Privy Council raised doubts over the existence of guarantees on uncollected book debts for banks, overturning a decision made in a 1994.
Prior to the ruling, such debts fell under fixed charges which meant that lenders were secured creditors and were guaranteed rights over specific assets. Debtors were not allowed to deal with unless they were given permission to do so by the creditor.
As secured creditors, banks would be paid back first when the company went into liquidation.
But if – as the Privy Council has ruled – book debts fall under floating charges, debtors will be able to deal with their assets until a receiver is appointed.
Under these charges, banks are no longer secured creditors and so they can only get paid after preferential creditors – such as Customs & Excise and the Inland Revenue – have been paid off.
Gerald Krasner, senior insolvency partner at Bartfield and Co, said this could mean banks would only receive a dividend of what they are owed.
This, in turn, could affect directors. He said: ‘Banks could say “the company is not paying us but you (the director) will”. As far as I know banks have not done this so far, but it will only be a matter of time.’
Although Privy Council decisions are not binding in English law, UK courts will be expected to follow the decision, as the judicial committee is made up predominantly of members of the House of Lords.
The case has sparked controversy. Keith Goodman, president of the Insolvency Practitioners’ Association, said: ‘As I understand it the British Bankers’ Association do not accept that (Brumark) binds IPs here and they are expecting monies to go to them. Preferential creditors will be seeking a different decision.’
According to Goodman, it would be up to the government to decide how the ruling will work in the UK.
There will possibly be some negotiation, but he believes the final decision will come after a lawsuit makes the decision binding. This process could take a long time.
Brumark, combined with the proposed changes to the insolvency laws, could change the face of lending in the UK altogether. Goodman said: ‘We think that banks will move away from normal lending and go in to some sort of invoice discounting system or financing arrangement.’
– For the full text on the case go to www.privy-council.org.uk
– The Insolvency Practitioners Association can be found at www.ipa.uk.com.