Judgments - National Westminster Bank plc (Respondents) v. Spectrum Plus Limited and others and others (Appellants)

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    58.  As to the first point, I would agree that the effect of clause 5(c) of the debenture (the equivalent of clause 5 in our case) was that the company was prevented from doing anything with the proceeds of the book debts when collected other than paying them into its account with the bank. But it seems to me that second point - that the bank could assert a lien over the proceeds - overlooks the fact that the account into which the proceeds were to be paid was the company's current account with the bank which the company was to continue to be free to operate for its own business purposes within the agreed limit of its overdraft.

    59.  As May LJ said in Lipkin Gorman v Karpnale Ltd [1989] 1 WLR 1340, 1353, the money which a customer deposits with a bank becomes the bank's money, but the bank is prima facie bound to meet its debt when called upon to do so by the customer. In Westminster Bank Ltd v Hilton (1926) 43 TLR 124, 126 Lord Atkinson explained the relationship in this way:

    "It is well established that the normal relation between a banker and his customer is that of debtor and creditor, but it is equally well established that quoad the drawing and payment of the customer's cheques as against money of the customer's in the banker's hands the relation is that of principal and agent. The cheque is an order of the principal's addressed to the agent to pay out of the principal's money in the agent's hands the amount of the cheque to the payee thereof."

    The general rule is that a banker is bound to honour his customer's cheque so long as he has funds in his hands if the account is in credit, or up to the agreed limit of any overdraft. He may determine the contract at any time on giving notice to the customer. But he cannot refuse to honour cheques drawn before the notice of determination is received.

    60.  A banker has a general lien over all bills, notes and negotiable instruments belonging to the customer which his customer may have deposited with him in security of the customer's indebtedness to the bank. But a lien is a right to retain possession of property that belongs to someone else, and the banker has no lien over funds which, when deposited in its account by the customer, become his own property. Moreover the relationship is one where, if the account is in credit, the banker is indebted to his customer. So it was a misuse of the word lien to say that the bank could assert a right of that kind over the proceeds: see Buckley LJ in the Court of Appeal in Halesowen Presswork and Assemblies Ltd v Westminster Bank Ltd [1971] 1 QB 1, 46, and Viscount Dilhorne and Lord Cross of Chelsea in the same case in the House of Lords [1972] AC 785; Lord Hoffmann in In re Bank of Credit and Commerce International S A (No 8) [1998] AC 214, 226. This is not to say that it is impossible to conceive of the creation of an equitable charge over the proceeds of book debts paid into an account in the name the chargor. But the ordinary relationship of banker and customer does not permit the banker, without notice, to refuse to allow his customer to operate a current account as and whenever he wishes while it is credit or is within the limits of any agreed overdraft. The debenture in the Siebe Gorman case, which provided for the payment of the proceeds into an account of that kind, lacked any provision which qualified that relationship.

    61.  In the Court of Appeal Lord Phillips of Worth Matravers MR [2004] Ch 337, 383, para 94 said that, in the determination of the question whether the charge over the book debts was fixed, the extent of the customer's contractual right to draw out sums equivalent to the amounts paid in must be disregarded. But the relationship between a bank and its customer is founded in contract. The company's undertaking in clause 5 of the debenture to pay the proceeds of the book debts into its account with the bank has to be seen and understood in that context. This was a current account into which the company paid money drawn from a variety of other sources as well as the proceeds of its book debts. In my opinion the company's continuing contractual right to draw out sums equivalent to the amounts paid in is wholly destructive of the argument that there was a fixed charge over the uncollected proceeds because the account into which the proceeds were to be paid was blocked.

Should Siebe Gorman be overruled?

    62.  Lord Phillips of Worth Matravers MR said that, even if Slade J's construction of the debenture in Siebe Gorman & Co Ltd v Barclays Bank Ltd [1979] 2 Lloyd's Rep 142 had appeared to him to be erroneous, he would have been inclined to hold that the form of the debenture had, by custom and usage, acquired the meaning and effect that he had attributed to it: [2004] Ch 337, 383, para 97. This was because the form had been used for 25 years under the understanding that this was its meaning and effect. Banks had relied upon this understanding, and individuals had guaranteed the liabilities of companies to banks on the understanding that the banks would be entitled to look first to their charges on book debts unaffected by the claims of preferred creditors. The respondents say that this is the course that ought now to be followed in the interests of commercial certainty.

    63.  The House's Practice Statement of 26 July 1966 reminds us that the use of precedent is an indispensable foundation on which to decide what is the law and how it should be applied in individual cases: Practice Statement (Judicial Precedent) [1966] 1 WLR 1234. It promotes the degree of certainty that is needed for the guidance of those who must regulate their affairs according to the law. It is hard to think of an area of the law where the need for certainty is more important than that with which your Lordships are concerned in this case. The commercial life of this country depends to a large extent on the reliability of the security arrangements that are entered into between debtors and their creditors. The law provides the context in which these arrangements are entered into, and it lays down the rules that have to be applied when the arrangements break down. Mistakes as to the law can make all the difference between success and failure when the creditor seeks to realise his security. So a heavy responsibility lies on judges to provide the lending market with guidance that is accurate and reliable. This is so that mistakes can be avoided and transactions entered into with confidence that they will achieve what is expected of them.

    64.  These are powerful considerations, but I am in no doubt that the proper course is for the Siebe Gorman decision to be overruled. It is a tribute to the great respect which Slade LJ's outstandingly careful judgments, both at first instance and the Court of Appeal, have always commanded that his decision in that case has remained unchallenged for so many years. But the fact is that it was a decision that was taken at first instance, and it has now been conclusively demonstrated that the construction which he placed on the debenture was wrong. This is not one of those cases where there are respectable arguments either way. With regret, the conclusion has to be that it is not possible to defend the decision on any rational basis. It is not enough to say that it has stood for more than 25 years. The fact is that, like any other first instance decision, it was always open to correction if the country's highest appellate court was persuaded that there was something wrong with it. Those who relied upon it must be taken to have been aware of this. It provided guidance, and no criticism can reasonably be levelled at those who felt that it was proper to rely on it. But it was no more immune from review by the ultimate appellate court than any other decision which has been taken at first instance.

Should Siebe Gorman be overruled prospectively?

    65.  Changes in the law do not occur in a vacuum. Much is likely to depend on whether the change affects situations before the change occurs or whether it affects only situations that come afterwards. On the whole legislation affects the future only and not the past, although awareness of what is to come may well influence the way people conduct their affairs before its commencement. The reverse is true of judicial decisions.

    66.  In Hindcastle Ltd v Barbara Attenborough Associates Ltd [1997] AC 70, 95, my noble and learned friend Lord Nicholls of Birkenhead said that prospective overruling was not yet a principle known in English law. Certainly it is as true today as it was then that it has not yet been adopted as a practice in this country: see para 12 of his speech in this case. But in Kleinwort Benson Ltd v Lincoln City Council [1999] 2 AC 349, 378-379, Lord Goff of Chieveley declared that it had no place in our legal system. He said:

    "Subject to consideration by appellate tribunals, and (within limits) by judges of equal jurisdiction, what [a judge] states to be the law will, generally speaking, be applicable not only to the case before him but, as part of the common law, to other comparable cases which come before the courts, whenever the events which are the subject of those cases in fact occurred.

    It is in this context that we have to reinterpret the declaratory theory of judicial decision…. when the judges state what the law is, their decisions do, in the sense I have described, have a retrospective effect. That is, I believe, inevitable. It is inevitable in relation to the particular case before the court, in which the events must have occurred some time, perhaps some years, before the judge's decision is made. But is also inevitable in relation to other cases in which the law as so stated will in future fall to be applied. I must confess that I cannot imagine how a common law system, or indeed any legal system, can operate otherwise if the law is to be applied equally to all and yet be capable of organic change."

Later in the same paragraph he said that a system of prospective overruling, although it had occasionally been adopted elsewhere, had no place in our legal system.

    67.  In Ha and another v State of New South Wales (1997) 189 CLR 465, 503-504 the High Court of Australia was just as firm in its rejection of the invitation that it should, if it came to the conclusion that the tobacco wholesalers' and retailers' licence fees were invalid, overrule the franchise cases prospectively, leaving the authority of those cases unaffected for a period of 12 months:

    "This Court has no power to overrule cases prospectively. A hallmark of the judicial process has long been the making of binding decisions of rights and obligations arising from the operation of the law upon past events or conduct. The adjudication of existing rights and obligations as distinct from the creation of rights and obligations distinguishes the judicial power from non-judicial power. Prospective overruling is thus inconsistent with judicial power on the simple ground that the new regime that would be ushered in when the overruling took effect would alter existing rights and obligations. If an earlier case is erroneous and it is necessary to overrule it, it would be a perversion of judicial power to maintain in force that which is acknowledged not to be the law."

    68.  I do not think that these declarations can be taken as the last word on this issue, at least so far as the powers of your Lordships' House are concerned. The ability of courts to make prospective rulings, if they have power to do so, can no longer be said to be in question. Section 102 of the Scotland Act 1998 provides that, where a court declares that any provision in an Act of the Scottish Parliament is not within the competence of the Parliament, it may make an order removing or limiting the effect the decision. Equivalent provisions are to be found in section 110 of the Government of Wales Act 1998 and section 88(1) of the Northern Ireland Act 1998. This power is a limited one, as it is available only where legislation is held to be invalid because it is outside the devolved institution's legislative competence. But it is nevertheless significant. The European Court of Justice has acknowledged that the interpretation it gives to a rule of Community law is limited to clarifying and defining the meaning and scope of that rule as it ought to have been understood and applied from the time of its coming into force: R (Bidar) v Ealing London Borough Council, Case C-209/03, [2005] 2 WLR 1078, 1112, para 66. But, as the court said in the same case, it has in exceptional cases limited the temporal effect of its judgments, having regard to the principle of legal certainty, where it is satisfied that those concerned acted in good faith on the basis of the rules considered to be validly in force and that for it not to do so would give rise to serious economic difficulties: paras 67-69; see also the opinion of Advocate General Jacobs in Banco Populare di Cremona v Agenzia Entrate Ufficio Cremona, Case C-475/03, para 75. This power has been developed by judicial decision notwithstanding the fact that there is no express treaty base in articles 230-231 EC for its exercise.

    69.  The fact that the Judicial Committee of the Privy Council has been given this power in devolution cases by statute and that a similar power has been developed by the European Court of Justice does not, of course, answer the question whether the House has the power, in exceptional cases, to do likewise. But it is for the House, as the ultimate court, to define the limits of its own jurisdiction. It can take as its starting point the inherent power which it has under the common law to do whatever is necessary to serve the interests of justice. That power is, of course, subject as our constitution requires to the doctrine of Parliamentary sovereignty. It must respect any limits on its jurisdiction that have may been imposed by Parliament, so long as these are compatible with our treaty obligations under Community law and with the rights that are defined by section 1(1) of the Human Rights Act 1998 as the Convention rights. A statutory limitation which was found to be incompatible would have to be read down under the doctrine of direct effect or under section 3(1) of the 1998 Act to remove the incompatibility. Subject to these exceptions, its jurisdiction is limited only by the fact that the inherent power which is vested in the House in its appellate capacity is a judicial power, not a legislative one.

    70.  Authority for this approach, if it is needed, is to be found in R v Bow Street Metropolitan Stipendiary Magistrate (No 2), Ex p Pinochet Ugarte [2000] 1 AC 119 in which, in the exercise of its power as the ultimate court of appeal to correct any injustice caused by one of its own orders, the House set aside the decision which it had reached in the first appeal, [2000] 1 AC 61. The respondents did not dispute that the House had jurisdiction in appropriate cases to rescind or vary one of its earlier orders. But Lord Browne-Wilkinson, who delivered the leading speech, went further. At p 132D-E he said that in his judgment that concession was rightly made both in principle and on authority:

    "In principle it must be that your Lordships, as the ultimate court of appeal, have power to correct any injustice caused by an earlier order of this House. There is no relevant statutory limitation on the jurisdiction of the House in this regard and therefore its inherent jurisdiction remains unfettered. In Broom v Cassell & Co Ltd (No 2) [1972] AC 1136 your Lordships varied an order for costs already made by the House in circumstances where the parties had not had a fair opportunity to address argument on the point."

The circumstances in that case were, of course, quite different. But the principle which the House was applying there is capable of a much wider application.

    71.  The question then is whether it can ever be consistent with the exercise of its judicial power for the House to declare that a decision which it takes which changes the law is not to affect events or things done in the past but only events or things done in the future. While I recognise the force of Lord Goff's argument to the contrary in Kleinwort Benson Ltd v Lincoln City Council [1999] 2 AC 349, I think that it would be unwise to say that the power to do this can never be available in any circumstances. The speeches that were delivered in R v Governor of Brockhill Prison, Ex p Evans (No 2) [2001] 2 AC 19 show how reluctant your Lordships have been to engage in this debate. It is no doubt true that in almost every case that can be imagined the exercise of the judicial power will require the House simply to declare what the law is, with the inevitable result that it will apply to other comparable cases whenever the events occurred. But it is not possible to predict the future with complete confidence, and it seems to me that the question whether this technique should be adopted remains an open one. Richard H S Tur, "Time and Law" (2002) Oxford Journal of Legal Studies, 463, 473, has observed that to apply an admittedly new rule retrospectively is blatantly legislative however fair or otherwise normatively appealing this may be. At p 474 he said that commentators can agree that prospective overruling has, in Lord Goff's words, "no place in our legal system" but disagree as to whether it should have a place, adding that it might be that in exceptional circumstances, where justice was served thereby, the effect of a judicial decision could expressly be declared to be prospective only. I do not think that we can say that there will never be cases when the interests of justice may require the removal of the retrospective effect of a judgment by making a declaration to that effect.

    72.  The question whether such a declaration will ever be consistent with the exercise of judicial power must, in the end, depend on the issue that the House is being called upon to decide. In Arthur J S Hall & Co v Simons [2002] 1 AC 615, 726H, for example, I said that I was of opinion that the decision in that case which changed the law about the immunity from suit of the advocate should take effect only from the date when the House delivered its judgment. That was a highly unusual case. In the Court of Appeal it was held that the solicitors had not acted as their clients' advocate and their conduct was not so intimately connected with the conduct of the case in court as to attract the immunity. I said at the outset of my speech that the grounds which the Court of Appeal had given for its decision were entirely sound, sufficient and satisfactory and that it was unnecessary for the disposal of the appeal to examine the fundamental question whether the core forensic immunity which the House had recognised in Rondel v Worsley [1969] 1 AC 191 could still be justified on grounds of public policy. But the opportunity had been taken of arranging for the case to be heard by seven Law Lords so that it could be considered whether the rule that was established by that case could still be said to be justified. The focus of attention was shifted, quite deliberately, to this issue. The House was no longer interested in the question whether the Court of Appeal had been right to say that the solicitors' conduct was such as not to attract the core immunity. So I did not regard it as necessary for the disposal of the appeal to say that any change as regarded the immunity rule should operate retrospectively. On the contrary, as I said at p 710B:

    "I consider it to be a legitimate exercise of your Lordships' judicial function to declare prospectively whether or not the immunity - which is judge-made rule - is to be available in the future and, if so, in what circumstances."

    73.  I continue to think that this approach to the exercise of the judicial power in that case was legitimate. There was no need, in order to do justice between the parties to the disputes, for the decision in Arthur J S Hall & Son v Simons [2002] 1 AC 615 to be applied retrospectively. Advocates had arranged their affairs since the decision in Rondel v Worsley on the basis that in their conduct of cases in court the core immunity was available. Recognising the importance that is to be attached to legal certainty, there was much to be said for the view that in their case the decision to remove the immunity should operate prospectively only and not retrospectively.

    74.  Where the future may lead us we cannot tell. So, like my noble and learned friend Lord Nicholls of Birkenhead, I would not rule out the possibility that in a wholly exceptional case the interests of justice may require the House, in the context of a dispute about the state of the common law or even about the meaning or effect of a statute, to declare that its decision is not to operate retrospectively. But I would not consider that approach to be appropriate in this case. The single most important point which indicates the contrary is that, if the decision to overrule Siebe Gorman were to be applied prospectively only, it would deprive the preferential claimants of the priority to which, on a correct view of the law, they are entitled under section 175(2)(b) of the 1986 Act. I do not think that it is open to your Lordships in the exercise of the judicial power to deprive a party to the litigation of a legitimate remedy that has undoubtedly been given to him by statute.


    75.  For the reasons given by Lord Scott and Lord Walker, and for these further reasons of my own, I would hold that the decision in Siebe Gorman & Co Ltd v Barclays Bank Ltd [1979] 2 Lloyd's Rep 142 was wrong and should be overruled. I would allow the appeal.


My Lords,

The issues

    76.  The issue in this case is whether the charge over book debts, present and future, granted by Spectrum Plus Ltd ("Spectrum") to National Westminster Bank Plc ("the bank") under a debenture dated 30 September 1997 was a fixed charge, which it was expressed to be, or merely a floating charge. The bank, naturally, says that it was a fixed charge. Customs & Excise, the Inland Revenue and the Secretary of State for Trade and Industry ("the Crown creditors") say that it was a floating charge. If it was a floating charge Spectrum's preferential creditors are entitled to have their debts paid out of the proceeds of the book debts in priority to the bank (see section 175, Insolvency Act 1986). If it was not a floating charge the preferential creditors have no such priority and the bank will be entitled to the whole of the proceeds. The amount at stake is relatively trivial, no more than £16,136 odd. But this is a test case. Your Lordships have been given to understand that several hundred liquidations are being held up pending the resolution of the issue (see the judgment of the Vice-Chancellor Sir Andrew Morritt [2004] Ch 337, 342). Your Lordships have been told also that the debenture granted by Spectrum was in the bank's normal form and that many other banks and other commercial lenders have taken security over their borrowers' book debts using a similar form of debenture. It is of commercial as well as legal importance that the issue should be resolved.

    77.  There is a subsidiary issue. The bank has invited your Lordships, if your Lordships conclude that the debenture created merely a floating charge over the book debts, so to rule with prospective effect only. That raises the question whether your Lordships have power to deliver prospective rulings, applicable only in the future, or only to debentures not yet executed. There is also, of course, the question whether, if your Lordships do have such a power, the power should be exercised in the present case. But these are issues for later. The first and main issue is whether the bank's debenture created a fixed charge or only a floating charge over Spectrum's book debts.

The debenture

    78.  Spectrum carried on the business of a manufacturer of dyes, paints, pigments and other chemical products for the paint industry. In the autumn of 1997 Spectrum changed banks. It opened an account with the bank, obtained an overdraft facility of £250,000 and, on 30 September 1997, executed the debenture to secure its indebtedness to the bank. The security created by the debenture was expressed to include -

    "… [a] specific charge [of] all book debts and other debts … now and from time to time due or owing to [Spectrum]" (para. 2(v))


    "[a] floating security [of] its undertaking and all its property assets and rights whatsoever and wheresoever present and/or future including those for the time being charged by way of specific charge pursuant to the foregoing paragraphs if and to the extend that such charges as aforesaid shall fail as specific charges but without prejudice to any such specific charges as shall continue to be effective." (para.2(vii))

    79.  The expression "specific charge" is potentially ambiguous. It may mean a charge over specific ascertained property or it may mean a fixed charge in contrast to a floating charge, depending on the context. It is clear that in this debenture, as in most others, the expression is intended to bear the latter meaning.

    80.  There is no doubt that, as Slade J held in Siebe Gorman & Co Ltd v Barclays Bank Ltd [1979] 2 Lloyd's Rep 142, it is in law possible for a company to create a security consisting of a fixed charge over all its present and future book debts. Nor is there any doubt that the question as to how a particular charge should be categorised depends upon the nature of the rights over the charged asset that have been granted to the chargee or reserved to the chargor. The label that the parties have attributed to the charge may be some indication of the rights the parties were intended to have but is not conclusive.

    81.  Paragraph 5 of the debenture supported the grant of the charge over books debts -

    "5.  With reference to the book debts and other debts hereby specifically charged [Spectrum] shall pay into [Spectrum's] account with the Bank all moneys which it may receive in respect of such debts and shall not without the prior consent in writing of the Bank sell factor discount or otherwise charge or assign the same in favour of any other person or purport to do so and [Spectrum] shall if called upon to do so by the Bank from time to time execute legal assignments of such book debts and other debts to the Bank."

This provision barred Spectrum from dealing with its book debts in any of the ways specified but left Spectrum free to deal with the debtors who owed the debts and, in particular, to collect the debts in the normal course of business.

    82.  Paragraph 5 required that the debts once collected be paid into Spectrum's account with the bank. This account was a current account. It enjoyed the overdraft facility of £250,000 to which I have referred. Provided that overdraft limit were not exceeded, Spectrum was free to draw on the account for its business purposes. The Bank's Borrowing Terms allowed the bank, by notice, to withdraw or reduce the facility. And amounts outstanding on the account were repayable on demand. These are the normal terms on which overdraft facilities are made available by banks to their customers. This account was in all respects a normal bank current account with an overdraft facility.

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