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    83.  The question for decision, therefore, is whether a charge over present and future book debts, where the chargor cannot dispose of or charge the uncollected book debts but can deal with its debtors and collect the debts and where the chargor is obliged to place the payments made to it by its debtors in a designated account with the chargee bank but can freely draw on the account for its business purposes provided the overdraft limit is not exceeded, is capable in law of being a fixed charge.

    84.  The events that have led to this litigation can be shortly stated. After the opening of the current account in September 1997 Spectrum collected its book debts, paid them into its current account and drew on the account as it wished for its business purposes. The overdraft limit of £250,000 was never exceeded but nor was the account ever in credit. There is no evidence that any instructions regarding Spectrum's drawings from the account or how the account could be used by Spectrum were ever given by the bank or that the bank ever sought to exercise any control over the use made by Spectrum of its withdrawals from the account. But Spectrum's business fortunes did not prosper and on 15 October 2001 it went into voluntary liquidation. At the date of liquidation £165,407 was due to the bank. Spectrum's uncollected book debts at that date had a face value of £291,293, but the liquidators estimated their realisable value to be £156,544. Spectrum's unsecured debts included the £16,136 due to preferential creditors, mainly the Crown creditors. There was a deficiency with regard to creditors in the region of £650,000.

    85.  The liquidators have so far collected £113,484 in respect of book debts but, pending a resolution of the issue as to the correct categorisation of the charge granted over the book debts, have not accounted for these payments to the bank. Bearing in mind, however, that even if the charge created only a floating charge the bank would be entitled to priority over ordinary creditors and that the amount due to preferential creditors is only £16,136, it seems a little surprising that the liquidators have not accounted to the bank for the balance of the £113,484. But no doubt there is some explanation for this.

    86.  The issue as to the correct categorisation of the charge created by Spectrum over its book debts has been presented, both in the courts below and before your Lordships, as requiring a choice between rival lines of judicial authority. In Siebe Gorman & Co Ltd v Barclays Bank Ltd [1979] 2 Lloyd's Rep 142 Slade J held that the Barclays Bank debenture had created a fixed charge over the chargor's book debts. There are no material differences between the Barclays Bank debenture in issue in the Siebe Gorman case and the bank's debenture in the present case, at least so far as concerns the charge of book debts. The Siebe Gorman decision was followed by Knox J in Ex p Copp [1989] BCLC 13 and has been referred to without dissent in other cases at first instance (see eg. In re Portbase Clothing Ltd [1993] Ch 388 at 395/6). Moreover in In re New Bullas Trading Ltd [1994] 1 BCLC 485 the Court of Appeal took Siebe Gorman a step further. The New Bullas debenture was expressed to grant a fixed charge over the chargor's present and future book debts but a floating charge over the proceeds of the debts when collected and paid into the chargor's bank account. Collection of the debts was left to the chargor. The chargor went into liquidation and Nourse LJ, with whose judgment the other two members of the court agreed, held that the charge over the book debts owing at the date of liquidation was, as the debenture had stated, a fixed charge. If a charge over book debts can be a fixed charge even though the money received by the chargor in payment of those debts is to be subject to only a floating charge, it becomes difficult to quarrel with the proposition that the charge over uncollected book debts in the present case (or in Siebe Gorman) can be a fixed charge even though the chargor can freely use for its business purposes the money it receives from its debtors in payment of the debts subject to the charge.

    87.  However Hoffmann J's judgment in In re Brightlife Ltd [1987] Ch 200 cast some doubt on Siebe Gorman. Hoffmann J was presented with a debenture expressed to grant a "first specific charge" of the chargor's book debts, present and future. The debenture did not allow the chargor to dispose of or charge the uncollected book debts but left the chargor free to collect the debts, pay the proceeds into its bank account and draw as it wished on that account. Hoffmann J held that the charge was a floating charge. He distinguished Siebe Gorman principally on the ground that the Siebe Gorman debenture holder was a bank and the debenture had required the collected debts to be paid into the chargor's account at the chargee bank. In Brightlife the debenture holder was not a bank and there was no similar restriction. I must revert to this point of distinction. It suffices for the moment to notice that, despite the description of the charge as a "first specific charge", the Brightlife charge was held to be a floating charge because the chargor had been left free to collect the debts, to pay the proceeds into its bank account and to use the account as it wished (see p.209). In the New Bullas Trading Ltd case Knox J [1993] BCLC 1389, at first instance, followed In re Brightlife Ltd, but was reversed by the Court of Appeal. In re Brightlife Ltd was followed also by Millett LJ in In re Cosslett (Contractors) Ltd [1998] Ch 495.

    88.  In Supercool Refrigeration and Air Conditioning v Hoverd Industries Ltd [1994] 3 NZLR 300 Tompkins J, sitting in the High Court of New Zealand, declined to follow Siebe Gorman. The debenture in question, as in Siebe Gorman and the present case but unlike the debenture in In re Brightlife Ltd, was a bank debenture. It was expressed to grant a "fixed charge" over, among other assets, the chargor's book debts present and future. The debenture did not allow the chargor to dispose of or charge its uncollected book debts and required the collected debts to be paid into the chargor's account with the bank. There does not appear to have been any restriction on the ability of the chargor to draw on the account for its trading purposes. Tompkins J noted that "the relevant provisions of the securities in Siebe Gorman and the present case are, for practical purposes, the same" (p 318) but held that the charge over the book debts was a floating charge because

"… a requirement to pay the proceeds of the book debts into the company's account without any restriction on how the company may use those proceeds does not give effective possession of those proceeds to the Bank. It does not, without more, fasten the charge onto those proceeds".(p 321)

    89.  And, finally, the same point came before the Privy Council on an appeal from the Court of Appeal of New Zealand in Agnew v Commissioners of Inland Revenue [2001] 2 AC 710. This case concerned a bank debenture closely modelled on the New Bullas Trading Ltd debenture, that is to say, it purported to grant the bank a fixed charge over the chargor's book debts present and future but only a floating charge over the proceeds collected by the chargor (see p 716). The judgment of the Board, delivered by Lord Millett, held that the critical feature which distinguished a floating charge from a fixed charge lay in the chargor's ability, freely and without the chargee's consent, to control and manage the charged assets and withdraw them from the security. In re Brightlife Ltd, In re Cosslett (Contractors) Ltd and the New Zealand Supercool Refrigeration case were approved and applied. New Bullas Trading Ltd was held to have been wrongly decided. Siebe Gorman was treated, in rather guarded terms, as a case in which Slade J had found sufficient restrictions on the use to which the chargor could put the collected debt payments to warrant the categorisation of the charge as a fixed charge (p 727). But Lord Millett expressed the opinion, at para 36, that

"A restriction on disposition [of book debts] which nevertheless allows collection and free use of the proceeds is inconsistent with the fixed nature of the charge; it allows the debt and its proceeds to be withdrawn from the security by the act of the company in collecting it"

    90.  The issue has, in the present case, been litigated between the bank on the one side, arguing for a fixed charge, and the Crown creditors on the other side, arguing for a floating charge. Spectrum in liquidation and its liquidators, although parties to the proceedings, have taken no active part.

    91.  The Vice-Chancellor, having reviewed the cases, said that he was persuaded by Lord Millett's reasoning in Agnew that Siebe Gorman had been wrongly decided. He held that the charge granted to the bank over Spectrum's book debts was, notwithstanding that it was expressed to be a fixed charge, in law a floating charge. The test, he held, was whether the rights and obligations conferred and imposed by the debenture "disclosed an intention that the company should be free to deal with the book debts and withdraw them from the security without the consent of the Bank" (para 39). The application of this test should, said the Vice-Chancellor, have led to the conclusion in Siebe Gorman that the charge was a floating charge: he said "the collection and free use of the proceeds of book debts through the ordinary operation of the bank account was not only permitted but envisaged" (para 39).

    92.  The Vice-Chancellor referred in his judgment to the criticisms of the Court of Appeal decision in In re New Bullas Trading Ltd that had been made by Lord Millett in Agnew and to earlier criticisms of that decision made by Professor Roy Goode in an article, "Charges Over Book Debts: A Missed Opportunity" (1994) 10 LQR 592, but did not himself address Nourse LJ's reasoning or conclusions.

    93.  The Court of Appeal did so, however, when the present case reached them. The Master of the Rolls, Lord Phillips of Worth Matravers, pointed out, correctly in my respectful opinion, that the Vice-Chancellor's test of a floating charge was in conflict with the Court of Appeal decision in New Bullas Trading and concluded that the rules of binding precedent enabled neither the Vice-Chancellor nor a subsequent Court of Appeal to rule that that case had been wrongly decided (para 58). This conclusion would, I think, have made it inevitable that the appeal against the Vice-Chancellor's judgment would have been allowed but the Master of the Rolls went on to consider whether, assuming the Agnew test of a floating charge to be applicable, the bank's debenture had had the effect that the company had been left free to use the proceeds of its book debts in the normal course of its business. He concluded that the restrictions imposed by the debenture (and the restrictions imposed by the Siebe Gorman debenture) had been sufficient to justify the categorisation of the charge as a fixed charge:

"It seems to me that it is at least arguable that a debenture which prohibits a chargor from disposing of book debts before they are collected and requires him to pay them, beneficially, to the chargee as and when they are collected properly falls within the definition of a fixed charge, regardless of the extent of his contractual right to draw out sums equivalent to the amount paid in. Strictly speaking the chargor is neither entitled to dispose of the book debts before they fall due for payment, nor to dispose of the proceeds. What he does enjoy are contractual rights to payments, whether as lender or borrower, from the bank" (para 94).

    94.  On this appeal, therefore, the main issue depends on two questions. First, what is the right test to be applied in order to categorise a charge as a floating charge? Second, if that test is applied in the present case, how should the bank's charge be categorised?

    95.  It is helpful in answering this question to bear in mind the juridical history of floating charges and the reasons why a degree of statutory intervention became necessary. By the middle of the 19th century industrial and commercial expansion in this country had led to an increasing need by companies for more capital. Subscription for share capital could not meet this need and loan capital had to be raised. But the lenders required security for their loans. Traditional security, in the form of legal or equitable charges on the borrowers' fixed assets, whether land or goods, could not meet the need. The greater part of most entrepreneurial companies' assets would consist of raw materials, work in progress, stock-in-trade and trade debts. These were circulating assets, replaced in the normal course of business and constantly changing. Assets of this character were not amenable to being the subject of traditional forms of security. Equity, however, intervened. Holroyd v Marshall (1862) 10 HLC 191 was a case in which a debtor had purported to grant a mortgage not only over his existing machinery but also over all the machinery which, during the continuance of the security, should be placed in his mill. The question arose whether the equitable title of the chargee in respect of new machinery that had been placed in the mill prevailed over the rights of a judgment creditor of the chargor/debtor. Could the chargee assert an equitable interest in the new machinery? Lord Campbell LC held that he could not. But the House of Lords reversed the decision, holding that

"…immediately on the new machinery and effects being fixed or placed in the mill, they became subject to the operation of the contract, and passed in equity to the mortgagees" (per Lord Westbury at p 211)

and that

"… in equity it is not disputed that the moment the property comes into existence, the agreement operates on it" (per Lord Chelmsford at p 220).

    96.  Holroyd v Marshall opened the way to the grant by companies of security over any class of circulating assets that the chargor company might possess. Acceptance that it was possible to do this became established by the 1870s. In In re Panama New Zealand and Australian Royal Mail Co (1870) 5 Ch App 318 the company simply charged its "undertaking and all sums of money arising therefrom". Gifford LJ held, at p 322, that "undertaking" meant

"… all the property of the company, not only which existed at the date of the debenture, but which might afterwards become the property of the company."

He said also that the word "undertaking"

"… necessarily infers that the company will go on, and that the debenture holder could not interfere until either the interest which was due was unpaid, or until the period had arrived for the payment of his principal, and that principal was unpaid".

(see also In re Florence Land and Public Works Co [1878] 10 Ch D 530, 540).

The two features mentioned by Gifford LJ became the hallmark of the new form of security, namely, (1) a charge on the chargor company's assets, or a specified class of assets, present and future and (2) the right of the chargor company to continue to use the charged assets for the time being owned by it and to dispose of them for its normal business purposes until the occurrence of some particular future event. In In re Colonial Trusts Corporation (1879) 15 Ch D 465 Jessel MR referred to this form of security as a "floating security" (see at pp 468, 469 and 472) and in Moor v Anglo-Italian Bank (1879) 10 Ch D 681, 687 he contrasted the new form of security with a "specific charge" on the property of the company.

    97.  By the last decade of the 19th century this form of security, Jessel MR's "floating security", had become firmly established and in regular use. This new form of security, the floating charge, did not derive from statute. It had been bred by equity lawyers and judges out of the needs of the commercial and industrial entrepreneurs of the time. But the new form of security, notwithstanding its convenience for both borrowers and lenders, had its drawbacks for others. Those dealing with a company could not tell whether its circulating assets were subject to a charge that, if the company became insolvent or ceased business, would allow a debenture holder to "step in and sweep off everything" (Lord Macnaghten in Salomon v Salomon & Co. Ltd (1897) 10 AC 22, 53). And if a debenture holder did "step in and sweep off everything" there would be nothing left for unsecured creditors including, in particular, the company's employees to whom wages arrears might be owing.

    98.  Statutory intervention began in 1897 with the Preferential Payments in Bankruptcy Amendment Act. Where a company was being wound-up or was in receivership sections 2 and 3 of the 1897 Act gave preferential creditors, a class which included employees as well as Crown creditors, priority over the chargee under a floating charge, so far as payment of debts out of the assets subject to that charge was concerned. Preferential creditors had priority anyway over ordinary creditors and the sections did not disturb the priority over ordinary creditors to which the charge holder was entitled by virtue of the charge. These statutory provisions, with very little alteration, are now to be found in sections 40 (receivership) and 175 (winding-up) of the Insolvency Act 1986. And in 1900 further statutory interventions required floating charges to be registered: (see now sections 395 and 396, Companies Act 1985) and provided for floating charges created by an insolvent company within a short period before the commencement of its winding-up to be invalid except to the extent of new money provided by the chargee (see now section 245 Insolvency Act 1986). The statutes which first introduced these reforms did not attempt any definition of a "floating charge". Nor have any of their statutory successors done so. The expression has been taken to be self-explanatory. It bears the meaning attributed to it by judicial decision. But the judicial process over the years whereby the concept of a "floating charge" has been developed must, in my opinion, keep in mind the mischief that these statutory reforms were intended to meet and, in particular, that on a winding-up or receivership preferential creditors were to have their debts paid out of the circulating assets, sometimes referred to as "ambulatory" assets, of the debtor company in priority to a debenture holder with a charge over those assets.

    99.  The classic and frequently cited definition of a floating charge is that which was given by Romer LJ in the Court of Appeal in the Yorkshire Woolcombers Association case [1903] 2Ch 284, 295.

"I certainly think that if a charge has the three characteristics that I am about to mention it is a floating charge.

(1)  If it is a charge on a class of assets of a company present and future; (2) if that class is one which, in the ordinary course of the business of the company, would be changing from time to time; and (3) if you find that by the charge it is contemplated that, until some further step is taken by or on behalf of those interested in the charge, the company may carry on its business in the ordinary way as far as concerns the particular class of assets I am dealing with."

But it is important to notice that Romer LJ prefaced his definition with a qualification. He said -

"I certainly do not intend to attempt to give an exact definition of the term 'floating charge', nor am I prepared to say that there will not be a floating charge within the meaning of the Act, which does not contain all the three characteristics …".

The case came to this House under the name Illingworth v Houldsworth [1904] AC 355. In short ex tempore speeches their Lordships upheld the Court of Appeal. Lord Macnaghten described the case as "clear" and offered the following definition of a floating charge in contrast to a "specific charge" -

"A specific charge, I think, is one that without more fastens on ascertained and definite property or property capable of being ascertained and defined; a floating charge, on the other hand, is ambulatory and shifting in its nature, hovering over and so to speak floating with the property which it is intended to affect until some event occurs or some act is done which causes it to settle and fasten on the subject of the charge within its reach and grasp"(p 358).

    100.  And a few years later Buckley LJ in Evans v Rival Granite Quarries Ltd [1910] 2 KB 979, 999 similarly contrasted a "floating security" with a "specific security".

"[A floating security] is not a specific security; the holder cannot affirm that the assets are specifically mortgaged to him. The assets are mortgaged in such a way that the mortgagor can deal with them without the concurrence of the mortgagee. A floating security is not a specific mortgage of the assets, plus a licence to the mortgagor to dispose of them in the course of his business, but is a floating mortgage applying to every item comprised in the security, but not specifically affecting any item until some event occurs or some act on the part of the mortgagee is done which causes it to crystallise into a fixed security".

    101.  It is in the nature of commercial lenders to want the most effective security that they can get. It is in the nature of commercial borrowers to want to be able to carry on the business for the purposes of which they are borrowing money with as much freedom from restrictions imposed by their lenders that negotiation can achieve for them. But the lenders are usually in the stronger bargaining position and able to stipulate the terms to be included in the debenture which will constitute their security. So it is not in the least surprising to find attempts by lenders to obtain fixed charges as security rather than floating charges, thereby avoiding the need, if financial misfortune were to visit their borrowers, to yield priority to preferential creditors and also avoiding possible vulnerability under section 245 of the 1986 Act or its statutory predecessors. And it is not surprising to find borrowers agreeable to co-operate in these attempts provided their ability to carry on business in the normal way were not unduly impeded.

    102.  There was never any doubt that it was possible to create a fixed charge over a specific, ascertained book debt. And Tailby v The Official Receiver (1888) 13 App Cas 523 established that an assignment of future book debts would be effective to vest in the assignee an equitable interest in the future debts at the moment they became owing to the assignor. So there was no reason why a debenture should not be expressed to assign to the debenture holder, by way of security, the company's future book debts. But the question would still remain whether such an assignment, not being an out-and-out assignment as in Tailby v The Official Receiver but an assignment by way of security, could be said to constitute a fixed security.

    103.  There was nothing much that the lenders could do about the third of the characteristics that Romer LJ had regarded as typical of floating charges. Most commercial borrowers would be unlikely to agree to grant charges over their circulating assets that did not enable them to use those assets for their normal business purposes. So it was natural for the quest for fixed charges to be concentrated on the prominence given by Lord Macnaghten in the Yorkshire Woolcombers case to the characteristic of a fixed charge as being a charge on "ascertained and definite property" As soon as a book debt is incurred and becomes owing to the chargor it constitutes an item of "ascertained and definite" property and would qualify as a possible object of a fixed charge. So a debenture expressed to grant a fixed charge over present and future book debts would be capable of creating a fixed charge over all such debts as and when they accrued due to the chargor company. Slade J so held in Siebe Gorman and no-one has suggested that in that respect he was wrong.

    104.  Moreover, the debenture could fortify the apparently fixed character of the charge by including a provision entitling the chargee to call for a formal written assignment by the chargor of the debts as they accrued. Such an assignment unaccompanied by written notice to the debtor would constitute the chargee equitable proprietor, and not simply equitable chargee, of the debt. The appearance of a fixed security would be fortified. It is not surprising, therefore, to find debentures containing provisions of this sort. The Siebe Gorman debenture did so. So did the bank's debenture in the present case. But the intention of the parties that the charge over book debts created and fortified in this way would be a fixed charge has to take account also of Romer LJ's third characteristic of a floating charge, namely, that until some further step by way of intervention is taken by the chargee the chargor company can use the assets in question for its normal business purposes and, in using them, remove them from the security. The fact that a valid fixed charge over present and future book debts is capable of being created does not answer the essential question whether a fixed charge over assets that remain at the disposal of the chargor can be created.

    105.  Slade J in Siebe Gorman [1979] 2 Lloyd's Rep 142, 158 inclined to the opinion that if the chargor of book debts, having collected the book debts,

"… [had] had the unrestricted right to deal with the proceeds of any of the relevant book debts paid into its account, so long as that account remained in credit … the charge on such book debts could be no more than a floating charge."

Hoffmann J in In re Brightlife Ltd [1987] Ch 200, 209, in a passage cited with approval by Lord Millett in Agnew v Commissioners of Inland Revenue [2001] 2 AC 710, 723, said that the significant feature of the Brightlife debenture was that the company was free to collect its debts and pay the proceeds into its bank account. He went on

"Once in the account, they would be outside the charge over debts and at the free disposal of the company. In my judgment a right to deal in this way with the charged assets for its own account is a badge of a floating charge and is inconsistent with a fixed charge."

Similar conclusions were expressed in In re Keenan Bros Ltd [1986] BCLC 242 in the Supreme Court of Ireland and by Tompkins J in the Supercool Refrigeration case [1994] 3 NZLR 300, in New Zealand.

    106.  The Privy Council in the Agnew case agreed with these decisions. Lord Millett pointed out, in para 13 of the Board's opinion, that Romer LJ's first two characteristics, although typical of a floating charge, were not distinctive of it. They were not necessarily inconsistent with a fixed charge. It was the third characteristic, Lord Millett said, which was the hallmark of a floating charge and distinguished it from a fixed charge.