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Understanding Fixed and Floating Charges in Commercial Law

In today's session, we will delve into the differentiation between fixed and floating charges, exploring key cases such as Re Spectrum Plus Ltd [2005] and its implications on the standard bank debenture over book debts. We will discuss the operation of crystallisation in floating charges, the effectiveness of Retention of Title (ROT) as security, and whether English law favors secured creditors. Group activities and relevant questions will facilitate a comprehensive understanding of these essential concepts in commercial contracts.

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Understanding Fixed and Floating Charges in Commercial Law

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  1. LL202 Commercial Contracts Chris von Csefalvay

  2. Agenda for today • Session 10: Credit • Recap • Class questions

  3. Q1: differentiation between fixed and floating charges 10’ work in groups please

  4. Q1: differentiation between fixed and floating charges • Re Spectrum Plus ltd[2005] 2 AC 680 overruling Siebe Gorman v Barclays [2979] 2 Lloyd’s Rep 142: the charge created by the standard bank debenture over book debts is floating, not fixed

  5. Q1: differentiation between fixed and floating charges • Assets subject to fixed charges require the bank’s consent before they can be sold/dealt with (as assets are subject to the charge) • Enterprise Act 2002: • Holders of post-2003 floating charges cannot appoint receivers • A prescribed part of floating charge receipt goes to unsecured creditors

  6. Q2: operation of crystallisation 10’ work in groups please

  7. Q2: operation of crystallisation • Crystallisation is pure magic. • At the event that triggers crystallisation (insolvency), the floating charge becomes a fixed charge and control over the goods is no longer the debtor’s.

  8. Q2: operation of crystallisation • Crystallisation is effectively the mechanism that allows for floating charges: it permits a hybrid charge that is a proper security, but also able to apply to rotating goods.

  9. Q3: ROT as security 5’ work in groups please

  10. Q3: ROT as security • If ROT were a proper security, it ought only bind third parties only if title were registered somewhere. • Charges (securities) are conceptually different – they are equitable interests in property (layer cake), ROT is absolute ownership (unity)

  11. Q4: Artificial transactions 5’ work in groups please

  12. Q4: Artificial transactions • Example: HP – in function, it’s a sale on credit, but they are structured to retain title as security for the lender. • Does that matter?

  13. Q5: Is English law too favourable to secured creditors? 5’ work in groups please

  14. Q5: Is English law too favourable to secured creditors? • Secured creditors with fixed charges have top priority. They are usually banks. Why protect their priority? • Because capitalism is contingent on credit, and capitalism absolutely rocks!

  15. Q6: registration of company charges 5’ work in groups please

  16. Q5: Is English law too favourable to secured creditors? • Probably. It permits creditors to make a more accurate assessment of the status/security of their debts. • The big problem, I think, is that it’s not comprehensive: ROTs, unsecured debts – “unknown unknowns”

  17. End of session 10 See you on Tuesday morning in the same place. – Please do the recommended readings and think about the questions.

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