Fixed and Floating Charges after Re Spectrum Plus
The seminal case of Re Spectrum Plus has arguably clarified the law on company charge characterisation – the chargee's degree of control is the only relevant criterion. The bright line drawn by the House of Lords has led some to argue for the conflation of fixed and floating charges, on the basis that the distinction is unjustified in principle and unworkable in practice. This article seeks to explore, and ultimately reject this proposal, while attempting to resolve the pockets of uncertainty in the law that still subsist.
Re Spectrum Plus sets a high bar for the creation of fixed charges over book debts – there must be control over the proceeds, usually by payment into a blocked account. The position, however, is less clear for other income-generating assets such as chattel leases and long-term contracts. Should the analogy be drawn with book debts so that control of income is required, or are the assets sufficiently distinct? Re Spectrum Plus does not answer this question, but it is submitted that the same analysis should apply. Leases are directly comparable to book debts, as the income generated comprises the whole value of a lease. Although payment does not immediately destroy a lease, this is also true of receivables due in instalments (and for long-term contracts). As Gullifer notes, the likely outcome of a floating charge is unpalatable, especially to trading businesses requiring free cash flow.
Normatively, the distinction between fixed and floating charges has been described as artificial. Worthington and Nolan contend that a floating charge is a proprietary interest, albeit one that is defeasible or over-reachable. After Re Spectrum Plus, it is virtually impossible to distinguish between a floating charge and a fixed charge with a licence to deal. The registration of negative pledge clauses means that a second chargee could take subject to an earlier floating charge, which is the same priority position as between two fixed charges. A charge with extensive restrictions is still floating as long as the chargor has some ability to dispose. It is also unsettled if reasonability can constrain a chargee's independent will – if allowed, the chargee's power is arguably no longer absolute, pointing towards a floating charge. Gullifer admits that "there seems little reason why the law could not be reformed to recognise only one type of security interest". Although Gough sees a floating charge as merely conferring contractual rights, this is hard to reconcile with the tide of recent developments (see e.g. Re F2G Realisations).
However, it could be jumping the gun to assimilate the two – there are important practical and conceptual differences between fixed and floating charges. For one, the latter does not attach to any asset in specie until crystallisation (Re Brumark Investments). Second, crystallisation is not retrospective as the charge only becomes fixed from that moment onwards. More importantly, there are broader concerns involving insolvency consequences. If floating charges were to become fixed charges without the incursions, such as in the US, there would be significant ramifications for unsecured creditors. Under the current regime, floating chargees are disadvantaged as expenses, preferential creditors and the 'prescribed part' rank ahead, and administrators are free to use such assets without leave of court. As Hoffmann J stated in Re Brightlife, "public interest requires a balancing of the advantages to the economy of facilitating borrowing of money against the possibility of injustice". Conversely, re-characterising fixed charges as floating charges is equally, if not more unattractive. Floating charges are usually taken over substantially all property, as a qualifying floating charge holder is given the power to control the identity of the administrator (Paragraph 26, Schedule B1, Insolvency Act 1986). As Paterson notes, administrators are "repeat players in the market, and this appointment power provides considerable soft incentives to comply with the wishes of the floating charge holder". This is unavailable to fixed charors, as security is usually only taken over some property. Unless and until the insolvency regime is changed, there are good reasons for maintaining the status quo.
In conclusion, the commercial impracticalities of Re Spectrum Plus, at least in relation to book debts, do not justify the conflation of fixed and floating charges. A single security interest must operate harmoniously within the broader secured lending ecosystem. A promising solution could be to determine priority by the date of filing rather than the type of security interest. This aligns more with the American model, arguably providing more certainty and simplicity.