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The Re Spectrum case has paralysed the insolvency profession. Anthony Elleray QC and Mark Cawson QC report
The ruling by Vice Chancellor Sir Andrew Morritt in Re Spectrum Plus in January this year overturned a conventional wisdom which helped put banks at the front of the queue of creditors in insolvency cases. An appeal has been held and a decision is awaited.
The case has also paralysed the insolvency profession, with practitioners holding up the distribution of funds to creditors while they await the outcome. Apart from the direct impact on the banks, the judgment could have wider implications for the business community should lenders become more reluctant to provide finance for expansion.
At the heart of the issue is the banks' ability to secure a fixed charge on book debts. Although the Spectrum case was an unpleasant surprise to the banking industry, fixed charges on book debts have been the subject of debate for a quarter of a century.
Book debts - typically income that is awaited from sales - are considered to be part of a company's standard assets. For many years banks, when lending money to businesses, have taken a fixed charge over their book debts for the sake of their own financial security.
If the company becomes insolvent, a fixed charge gives the bank the right to get paid first, before the insolvency practitioners and the preferential creditors such as the Inland Revenue and Customs & Excise.
The principle of a fixed charge was confirmed in the case of Siebe Gorman & Co Ltd v Barclays Bank Ltd (1979). The terms of its agreement with Barclays insisted that the company paid all its book debts into its Barclays bank account. The company was not allowed to assign them to a third party and, if...