National Westminster Bank plc (Respondents) v. Spectrum Plus Limited and others and others (Appellants)
29. In short, this argument raises this issue: would a decision by this House on a point of law having only prospective effect be so substantial a departure from established judicial procedure that it should be regarded as outside the function discharged by the judiciary under this country's constitution?
30. In answering this question the Appellate Jurisdiction Act 1876 (39 & 40 Vict, c 59) provides no assistance. The appellate jurisdiction of the House is formally regulated by this Act. Section 4 provides that appeals shall be brought by petition to the House praying that the order appealed may be reviewed 'before Her Majesty the Queen in her Court of Parliament' in order that this court 'may determine what of right, and according to the law and custom of this realm, ought to be done in the subject-matter of such appeal'. When Part III of the Constitutional Reform Act 2005 comes into force the new Supreme Court will have power 'to determine any question necessary to be determined for the purposes of doing justice in an appeal to it': section 40(5). These general statements do not point either way on the issue now under consideration.
31. The next point to note is that, broadly stated, the constitutional separation of power between the legislature and the judiciary in this country is that the legislature makes the law, the courts administer the law. Parliament makes new law, by enacting statutes having prospective and varying degrees of retrospective effect: see Wilson v First County Trust Ltd (No 2)  1 AC 816, 831-832, para 19. When disputes arise, whether between citizens or between a citizen and the government, they are to be resolved in accordance with the law, and that is a matter for the judicial arm of the state. In this regard it is for the judiciary to decide what is the law, not the legislature or the executive.
32. This broad generalisation is a good starting point but, like most constitutional generalisations in this country, it calls for qualification. The boundary between making and administering the law is not in all respects quite so clear-cut as this general statement suggests. Contrary to the broad generalisation and within strict bounds, judges themselves have a legitimate law-making function. It is a function they have long exercised. In common law countries much of the basic law is still the common law. The common law is judge-made law. For centuries judges have been charged with the responsibility of keeping this law abreast of current social conditions and expectations. That is still the position. Continuing but limited development of the common law in this fashion is an integral part of the constitutional function of the judiciary. Had the judges not discharged this responsibility the common law would be the same now as it was in the reign of King Henry II. It is because of this that 'the common law is a living system of law, reacting to new events and new ideas, and so capable of providing the citizens of this country with a system of practical justice relevant to the times in which they live': see Lord Goff of Chieveley in Kleinwort Benson Ltd v Lincoln City Council  2 AC 349, 377.
33. Changes in the common law made by judges are usually described as 'development' of the common law. This is a helpful description, not a misleading euphemism. Judges do not have a free hand to change the common law. Judicial development of the common law comprises the reasoned application of established common law principles, of greater or less generality, in current social conditions. Development of the common law by the judges in any one case is usually marginal. Occasionally it is more far-reaching, as in Donoghue v Stevenson  AC 562. In all cases development of the common law, as a response to changed conditions, does not come like a bolt out of a clear sky. Invariably the clouds gather first, often from different quarters, indicating with increasing obviousness what is coming. Justice Cardozo's colourful summary, in his 'The Nature of the Judicial Process' (1921), p 141, merits repetition:
34. At one time the judicial function of overruling previous common law decisions was sought to be rationalised by the 'declaratory' theory. Sir William Blackstone said that 'if it be found that the former decision is manifestly absurd or unjust, it is declared not that such a sentence was bad law, but that it was not law': 'Commentaries on the Laws of England' 1st ed, (1765), vol 1, p 70. If 'law' is given one of its several possible meanings, this theory is still valid when applied to cases where a previous decision is overruled as wrong when given. Most overruling occurs on this basis. These cases are to be contrasted with those where the later decision represents a response to changes in social conditions and expectations. Then, on any view, the declaratory approach is inapt. In this context this approach has long been discarded. It is at odds with reality.
35. For present purposes the distinction between these two types of cases is not important. Nor is the declaratory theory. For present purposes what matters is the practical impact overruling may have in both types of cases. The question now under consideration is whether, having regard to this practical impact, it is necessarily and always beyond the competence of the House as the supreme court in this country ever to limit the temporal effect of its ruling.
36. Before answering this question I must mention the judicial role in respect of statute law. Under section 4 of the Human Rights Act 1998 the court has an evaluative role in respect of primary legislation when considering whether to make a declaration of incompatibility. That apart, the essential function of the courts in respect of statutes is to apply and give effect to them. In cases of dispute the courts decide what, properly understood ('interpreted'), the legislation means. From time to time cases arise where changed social conditions dictate that a statutory provision should have a different and wider meaning than when enacted. Fitzpatrick v Sterling Housing Association Ltd  1 AC 27 is an instance of this. The House decided that by 1994 the long term homosexual partner of a Rent Act tenant was 'a member of the original tenant's family' even though that phrase would not have been so interpreted when the statutory provisions were first enacted in 1920. Such cases, arising out of changed circumstances, are exceptional.
37. There is another way courts can find themselves obliged to give a 'dynamic' interpretation to statutes. Section 3 of the Human Rights Act 1998 requires courts to read and give effect to legislation in a way which is compatible with Convention rights so far as it is possible to do so. When interpreting Convention rights courts must take into account decisions of the European Court of Human Rights: section 2(1). As already noted, that court gives an evolving interpretation to the principles embedded in the European Convention on Human Rights. Thus, indirectly, through changes in the interpretation and application of Convention rights, the courts of this country may find it necessary to give legislation a changed meaning.
38. Cases of these types are of increasing importance. But leaving these aside, the interpretation the court gives an Act of Parliament is the meaning which, in legal concept, the statute has borne from the very day it went onto the statute book. So, it is said, when your Lordships' House rules that a previous decision on the interpretation of a statutory provision was wrong, there is no question of the House changing the law. The House is doing no more than correct an error of interpretation. Thus, there should be no question of the House overruling the previous decision with prospective effect only. If the House were to take that course it would be sanctioning the continuing misapplication of the statute so far as existing transactions or past events are concerned. The House, it is said, has no power to do this. Statutes express the intention of Parliament. The courts must give effect to that intention from the date the legislation came into force. The House, acting in its judicial capacity, must give effect to the statute and it must do so in accordance with what it considers is the proper interpretation of the statute. The House has no suspensive power in this regard. In Ha v State of New South Wales (1997) 189 CLR 465, 503-504, 515, the High Court of Australia unanimously considered 'it would be a perversion of judicial power to maintain in force that which is acknowledged not to be the law'. This would especially be so where 'non-compliance with a properly impugned statute exposes a person to criminal prosecution'.
39. The objections in principle and difficulties in practice mentioned above have substance, particularly in respect of the traditional interpretation of statutes. These objections are compelling pointers to what should be the normal reach of the judicial process. But, even in respect of statute law, they do not lead to the conclusion that prospective overruling can never be justified as a proper exercise of judicial power. In this country the established practice of judicial precedent derives from the common law. Constitutionally the judges have power to modify this practice.
40. Instances where this power has been used in courts elsewhere suggest there could be circumstances in this country where prospective overruling would be necessary to serve the underlying objective of the courts of this country: to administer justice fairly and in accordance with the law. There could be cases where a decision on an issue of law, whether common law or statute law, was unavoidable but the decision would have such gravely unfair and disruptive consequences for past transactions or happenings that this House would be compelled to depart from the normal principles relating to the retrospective and prospective effect of court decisions.
41. If, altogether exceptionally, the House as the country's supreme court were to follow this course I would not regard it as trespassing outside the functions properly to be discharged by the judiciary under this country's constitution. Rigidity in the operation of a legal system is a sign of weakness, not strength. It deprives a legal system of necessary elasticity. Far from achieving a constitutionally exemplary result, it can produce a legal system unable to function effectively in changing times. 'Never say never' is a wise judicial precept, in the interest of all citizens of the country.
42. Moreover, in one particular context the courts' ability to give a ruling having only prospective effect seems irresistible. As noted above, at times the Strasbourg court interprets and applies the European Convention on Human Rights with prospective effect only. It would be odd if in interpreting and applying Convention rights the House was not able to give rulings having a comparable limited temporal effect: see Lord Rodger of Earlsferry, 'A Time for Everything under the Law: Some Reflections on Retrospectivity', (2005) 121 LQR 57, 77.
43. I turn to the present case. In my view it is miles away from the exceptional category in which alone prospective overruling would be legitimate. No doubt over the years the clearing banks, including the respondent bank, have to some extent relied upon the Siebe Gorman decision when formulating and using their standard forms of charges on book debts. But banks and others who lend money on the security of charges on a company's undertaking are sophisticated operators. There is no reason to suppose this decision lulled them into a false sense of security. Siebe Gorman was a first instance decision. It cannot have been regarded as definitively settling the law in this field. Moreover, if the firm and unanimous decision now being given by the House were given prospective effect only, the result would be that in many existing liquidations preferential creditors would be deprived of the priority Parliament intended they should have. I would reject the bank's submission that this decision of the House should have only prospective effect. I would allow this appeal accordingly.
44. I have had the advantage of reading the opinions of my noble and learned friends, Lord Hope of Craighead, Lord Scott of Foscote and Lord Walker of Gestingthorpe. I am in full agreement with their opinions.
45. In regard to prospective overruling I see the good sense of not saying "never" as explained by my noble and learned friend Lord Nicholls of Birkenhead. On the other hand, like Lord Scott, at present I find it difficult to see how it could be possible to permit prospective overruling in a dispute about the interpretation of a statute.
46. I would also make the order which Lord Scott proposes.
LORD HOPE OF CRAIGHEAD
47. As so often happens when a company goes into creditors' voluntary liquidation, the assets which are available to pay Spectrum's general creditors are insufficient to pay those creditors in full after payment of the preferential debts of the company. Section 175(2)(b) of the Insolvency Act 1986, re-enacting a rule that was first introduced over 100 years ago by the Preferential Payments in Bankruptcy Amendment Act 1897, (60 & 61 Vict, c 19), provides that, so far as the assets of the company available for payment of general creditors are insufficient to meet them, preferential debts have priority over the claims of holders of debentures secured by, or holders of, any floating charge created by the company, and that they shall be paid accordingly out of any property comprised in or subject to that charge. It is notorious that this state of affairs operates to the disadvantage of creditors whose claims are secured by a charge which takes the form of a floating charge and not that of a fixed security. From the creditor's point of view, it deprives the floating charge of much of its utility.
48. Section 251 of the 1986 Act provides that the expression "floating charge" means "a charge which, as created, was a floating charge and includes a floating charge within the meaning of section 462 of the Companies Act (Scottish floating charges)." Section 462(1) of the Companies Act 1985, which makes provision for the creation of floating charges in Scotland, states:
That provision must be read together with section 463(1)(b) of the 1985 Act, which declares that where a Scottish company goes into liquidation within the meaning of section 247(2) of the Insolvency Act 1986 a floating charge created by the company attaches to the property then comprised in the company's property and undertaking or, as the case may be, in part of that property and undertaking, but does so subject to the rights of any person who holds a fixed security over the property or any part of it ranking in priority to the floating charge. It must also be read together with section 464(6) the 1985 Act as amended by section 439(1) of and Schedule 13 to the 1986 Act, which states that the order of ranking set out in that section is subject to sections 175 and 176 of the 1986 Act as to the ranking of preferential debts in winding up. So the rule that was first introduced by the 1897 Act for England and Wales applies to Scottish floating charges too.
49. Prior to 1961 it was impossible for a Scottish company to create a floating charge over the whole or any part of its property and undertaking. In In re Bank of Credit and Commerce International S A (No 8)  AC 214, 226 Lord Hoffmann, speaking of English law, said that a charge is a security interest created without any transfer of title or possession to the beneficiary. But a charge could not be created without any transfer of title or possession in Scotland. In Carse v Coppen, 1951 SC 233, it was conceded that a company registered in Scotland could not create a valid and effectual floating charge over its assets in Scotland, but it was contended that it had done so over its assets in England. This argument was rejected. Lord President Cooper said at p 239 that a floating charge was utterly repugnant to the principles of Scots law, which did not recognise it as creating a security at all. At p 241 he referred to that fact that the reforms in the law which had been effected because of the many criticisms that had been directed against the injustices capable of being inflicted on the trade creditors by the use of floating charges had been expressly confined to companies registered in England. He said that it was unthinkable that this could have been done except upon the view that companies registered in Scotland and subject to Scots law could not create floating charges.
50. This situation was thought to be to the disadvantage of Scottish companies. So the law of Scotland was amended by the Companies (Floating Charges) (Scotland) Act 1961, later extended by the Companies (Floating Charges and Receivers) Act 1972, to enable Scottish companies to give security in this way. The result, in the words of Professor W A Wilson, "Floating Charges", 1961 SLT (News) 53, was that there was now in the law of Scotland a completely new form of security which could be effectively granted over corporeal moveables without relinquishing possession, over incorporable moveables without giving intimation and over heritage without recording a deed in the Sasine Register. It was, if I may respectfully borrow this phrase from the speech of my noble and learned friend Lord Walker of Gestingthorpe, a cuckoo in the nest of Scots property law - as your Lordships were to discover in the case of Sharp v Thomson, 1997 SC (HL) 66, which revealed some of the problems caused by introducing this form of charge into a legal system to which it did not belong naturally.
51. It is, of course, possible under the statutory regime that now applies in Scotland - it is currently to be found in Part XVIII of the 1985 Act - for a company to create a floating charge over its book debts. Indeed, a creditor seeking to secure his debt by means of a floating charge will usually wish to see to it that the property over which the charge extends includes the book debts of the company. But subjecting book debts to a security which will be effective as a fixed charge in Scots law, and will thus escape from the priority which section 175 of the 1986 Act gives to preferential debts, is far less convenient in practice. This is because the law of Scotland still insists that a fixed charge can be created only by delivery of the property which is to be subjected to it into the hands of the creditor or by the equivalent of delivery. The only way in which this can be done in the case of book debts is by obtaining an assignation in security of the right to receive payment of the debt, which is then intimated to the party who is liable to pay the debt to the company. A company which wishes to continue to trade is unlikely to find this method of creating a charge over its book debts acceptable: Fletcher and Roxburgh, The Law and Practice of Receivership in Scotland, 3rd ed (2005), para 2.10. In practice, therefore, a creditor who wishes to obtain a security from a Scottish company over its book debts will only be able to do this by way of a floating charge.
52. The creation of a charge over book debts which will be effective in English law as a fixed charge does not present the same difficulties. As Slade J said in Siebe Gorman & Co Ltd v Barclays Bank Ltd  2 Lloyd's Rep 142, 158, the decision of the House of Lords in Tailby v Official Receiver (1888) 13 App Cas 523 showed that it is competent for anyone to whom book debts may accrue in the future to create for good consideration an equitable charge upon those book debts which will attach to them as soon as they come into existence. But if this is to be effective as a fixed security everything depends on the way the security agreement ensures that the charge over the book debts is fixed. It is not easy to reconcile the company's need to continue to collect and use these sums for its own business purposes with the lender's wish to escape from the priority which section 175(2)(b) gives to preferential debts over the claims of the holder of a floating charge by subjecting the uncollected book debts to a security which will operate as a fixed charge over them.
Did Spectrum's debenture create a fixed charge?
53. My noble and learned friend, Lord Scott of Foscote has described the facts of the case and summarised all the relevant authorities. I adopt with gratitude all that he has said about them, and I agree with him that the charge which the company granted by way of what the debenture described as a specific charge over its book debts and other debts then and from time to time owing to the company was in law a floating charge. It was not a fixed charge, so section 175(2)(b) applies to it. The preferential creditors have priority over the bank's claims under the debenture to the sums realisable from the book debts and other debts of the company.
54. There are, as Professor Sarah Worthington has pointed out, a limited number of ways to ensure that a charge over book debts is fixed: An 'Unsatisfactory Area of the Law' - Fixed and Floating Charges Yet Again, (2004) 1 International Corporate Rescue, 175, 182. One is to prevent all dealings with the book debts so that they are preserved for the benefit of the chargee's security. This is the only method which is known to Scots law which, as I have said, insists upon assignation of the book debts to the security holder and its intimation to the company's debtor as the equivalent of their delivery. One can, of course, be confident where this method is used that the book debts will be permanently appropriated to the security which is given to the chargee. But a company that wishes to continue to trade will usually find the commercial consequences of such an arrangement unacceptable. Another is to prevent all dealings with the book debts other than their collection, and to require the proceeds when collected to be paid to the chargee in reduction of the chargor's outstanding debt. But this method too is likely to be unacceptable to a company which wishes to carry on its business as normally as possible by maintaining its cash flow and its working capital. A third is to prevent all dealings with the debts other than their collection, and to require the collected proceeds to be paid into an account with the chargee bank. That account must then be blocked so as to preserve the proceeds for the benefit of the chargee's security. A fourth is to prevent all dealings with the debts other than their collection and to require the collected proceeds to be paid into a separate account with a third party bank. The chargee then takes a fixed charge over that account so as to preserve the sums paid into it for the benefit of its security.
55. The method that was selected in this case comes closest to the third of these. It was selected, no doubt, because it enabled the company to continue to trade as normally as possible while restricting it, at the same time, to some degree as to what it could do with the book debts. The critical question is whether the restrictions that it imposed went far enough. There is no doubt that their effect was to prevent the company from entering into transactions with any third party in relation to the book debts prior to their collection. The uncollected book debts were to be held exclusively for the benefit of the bank. But everything then depended on the nature of the account with the bank into which the proceeds were to paid under the arrangement described in clause 5 of the debenture. As McCarthy J said in In re Keenan Bros Ltd  BCLC 242, 247, one must look, not at the declared intention of the parties alone, but to the effect of the instruments whereby they purported to carry out that intention. Was the account one which allowed the company to continue to use the proceeds of the book debts as a source of its cash flow or was it one which, on the contrary, preserved the proceeds intact for the benefit of the bank's security? Was it, putting the point shortly, a blocked account?
56. I do not see how this question can be answered without examining the contractual relationship in regard to that account between the bank and its customer. An account from which the customer is entitled to withdraw funds whenever it wishes within the agreed limits of any overdraft is not a blocked account. In Agnew v Commissioners of Inland Revenue  2 AC 710, 722, para 22 Lord Millett said that the critical feature which led the Irish Supreme Court in In re Keenan Bros Ltd  BCLC 242 to characterise the charge on book debts as a fixed charge was that their proceeds were to be segregated in a blocked account where they would be frozen and unusable by the company without the bank's written consent. I respectfully agree. Elsewhere in his judgment he appears to have assumed that the account into which the proceeds of the book debts were to be paid under the debenture in the Siebe Gorman case  2 Lloyd's Rep 142 was also a blocked account: p 727, para 38; p 730, para 48. In para 38 he said that the company could collect the money but was not free to use it as it saw fit. The question whether he was right when he made that assumption is at the heart of this case.
57. For the reasons which have been explained much more fully by Lord Scott and Lord Walker, I too would hold that it is impossible to conclude that the debenture in the Siebe Gorman case had that effect. As I read the critical passage in Slade J's judgment at pp158-159, he appears to have reached that conclusion in two stages. First, he said, the effect of the debenture was to create a specific charge on the proceeds of the debts as soon as they were received which prevented the company from disposing of an unencumbered title to them without the mortgagor's consent. Second, he said that the bank would have had the right, if it chose, to assert its lien under the charge on the proceeds of the book debts, even at a time when the account into which they were paid was temporarily in credit.