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Financial Services Quarterly
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Fixed charges over book debts - law clarified by the House of Lords
The House of Lords has overturned the decision of the Court of Appeal in National Westminster1, determining that the charge, granted over the customer's book debts in favour of the bank, was a floating charge and not a fixed charge.
In reaching their decision, their lordships relied on the fact that the customer was allowed to operate its bank account (into which the cash proceeds from the realisation of its book debts were paid) in an unrestricted way and therefore had the ability to remove the book debts from the charge.
For the charge to be fixed, the account has to be operate as a blocked account controlled by the creditor where the customer cannot withdraw funds from the blocked account without the creditor's consent.
Following enactment of New Zealand's Personal Property Securities Act 1999, the issue of whether or not a charge over book debts in New Zealand is fixed or floating has become largely irrelevant. However, the English cases on charges over book debts may still have some relevance in New Zealand post-PPSA in determining whether or not an assignment of accounts receivable takes effect as a "transfer" for the purposes of section 17 of the PPSA and therefore defeats preferential creditors.
1 National Westminster Bank Plc v Spectrum Plus Limited and Others (HL) Times, July 1, 2005
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For more information on any of the cases, articles and features in Financial Services Quarterly, please email Rachel Gowing or call on 64 9 916 8825.
Disclaimer
This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.
