This question has been worrying insolvency practitioners for years and much of the answer has been provided by the decision in the Brumark Investments case.
Banks have been lending to companies taking fixed charges over book debts since the 1970s on the basis that the bank has control of the bank account into which debts are paid.
A challenge to the fixed charge was imminent, but no practitioner was brave enough to take a case to the courts against the banks. The application by the Court of Appeal (New Zealand) to the Privy Council in England challenging the decision in the Brumark case has made that step unnecessary.
Brumark International’s debenture intended to confer a fixed charge on the book debts while they remained uncollected, and a floating charge over the proceeds of the debts.
The New Zealand Court of Appeal held that the debenture was merely a floating charge because the company was able to deal with its charged assets.
The Privy Council agreed saying the book debts, which had not been collected when the receivers were appointed, were subject to a floating charge.
The court said that the bank must be able to demonstrate that it can control the collection of the debts, subject to the fixed charge and the dealings with the proceeds. So the bank must exercise real control over the use of the proceeds of the book debts by the company, and can insist that the proceeds are paid into a account under their control.
So, what are the implications for insolvency practitioners and lenders?
The profession is in a state of flux. Most practitioners will not pay money to banks in respect of book debts. Instead, they will hold funds until the position has been clarified, although there is little doubt the decision will be upheld.
Lenders will now need to consider the security they take and may ask company directors to give personal guarantees to support lending. The problem here is that the guarantees might well be called upon on the demise of the company because of the lack of security available for the bank.
I can also see factors and discounters increasing their books considerably because they take assignments of book debts and hence would not be caught under the Brumark case.
Watch this space.