https://en.wikipedia.

org/wiki/Siebe_Gorman_%26_Co_Ltd_v_Barclays_Bank_Ltd
Siebe Gorman & Co Ltd v Barclays Bank Ltd

Siebe Gorman & Co Ltd v Barclays Bank

Ltd

A Siebe Gorman rebreather.

Court High Court of Justice
Citation [1979] 2 Lloyd’s Rep 142
Court membership
Judge sitting Slade J
Keywords
Floating charge

Siebe Gorman & Co Ltd v Barclays Bank Ltd [1979] 2 Lloyd's Rep 142 is a UK insolvency
law case, concerning the definition of a floating charge. It was an influential decision for
many years, but is now outdated as authority in light of the House of Lords decision in Re
Spectrum Plus Ltd.

Facts

Siebe Gorman, a diving equipment company, granted a debenture in favour of Barclays

Bank to secure a loan. The document was expressed to create a ‘first fixed charge’ over
all present and future book debts. It required Siebe Gorman to pay the proceeds of its
book debts into a Barclays Bank account, and prohibited Siebe Gorman from creating
any other charges on those book debts, or assigning the book debts to anyone else. So
there was a prohibition on dealing with the book debts before collection of them.
Barclays also had the right to obtain absolute control by giving notice, but that right was
never exercised.

Judgment

Slade J held that it was a fixed charge. The restrictions on Siebe Gorman's power gave
the bank enough control to be inconsistent with being a floating charge.

Authority

Although the case remained good law for many years, it was doubted by the Privy
Council in Re Brumark Investments Ltd [2001] UKPC 28, and then formally overruled by
the House of Lords in Re Spectrum Plus Ltd [2005] UKHL 41.
 Re Spectrum Plus Ltd - Wikipedia
Re Spectrum Plus Ltd
Re Spectrum Plus Ltd

Court House of Lords

Full case National Westminster Bank
name plc v Spectrum Plus Limited
and others
Citations [2005] UKHL 41
[2005] 2 AC 680
[2005] 3 WLR 58
[2005] BCC 694
Transcript Full text of judgment
Court membership
Judges Lord Nicholls of Birkenhead
sitting Lord Steyn
Lord Hope of Craighead
Lord Scott of Foscote
Lord Walker of
Gestingthorpe
Baroness Hale of Richmond
Lord Brown of Eaton-under-
Heywood
Case opinions
• Lord Nicholls
• Lord Hope
• Lord Scott
• Lord Walker
Keywords
• floating charge
• recharacterisation
• prospective overruling

Re Spectrum Plus Ltd [2005] UKHL 41 was a UK company law decision of House of
Lords that settled a number of outstanding legal issues relating to floating
charges and recharacterisation risk under the English common law. However, the House
of Lords also discussed the power of the court to make rulings as to the law that were
"prospective only" to mitigate potential harshness when issuing a ruling that was
different from what the law had previously been understood to be.

Facts
Spectrum Plus Ltd ("Spectrum") carried on the business of a manufacturer of dyes, paints,
pigments and other chemical products for the paint industry. Spectrum opened an
overdraft facility, and made an agreement with, National Westminster Bank
Plc ("NatWest") that said it was granting a fixed charge, or in the words of the contract, a
"specific charge [of] all book debts and other debts… now and from time to time due or
owing to [Spectrum]" to secure a £250,000 overdraft. Spectrum was prohibited from
charging or assigning debts, and was required to pay the proceeds of collection into a
NatWest account. But there were no restrictions on Spectrum’s operation of the account.
Spectrum’s account was always overdrawn but it used the proceeds of the debts as and
when it was necessary. When Spectrum went into liquidation, NatWest argued that the
charge was a fixed charge over book debts and proceeds. The Inland Revenue, which was
a major creditor, argued the debenture was merely a floating charge, so its claim for tax
owed took priority over the bank under Insolvency Act 1986 section 175. At stake was
merely £16,136, but the case was a test case.

It was apparent that if the House of Lords decided in favour of the Inland Revenue, the
expectations of a significant number of banks, who had relied on being able to have
"fixed charges" and thus absolute priority in insolvency, would be defeated. Many
people had assumed, or at least argued they had assumed that the law since Siebe
Gorman & Co Ltd v Barclays Bank Ltd[1] was that if book debts were paid into a separate
account, then a charge over them would be deemed to be fixed. Accordingly, it was
submitted that if the Lords were to overrule Siebe Gorman, they should only do so
prospectively, and not retrospectively.

Judgment
In the High Court, the Vice Chancellor held, applying the ruling of Lord Millett in the Privy
Council decision of Agnew v Commissioners of Inland Revenue (Re Brumark) and
declining to follow Re New Bullas Trading Ltd, that because the charge allowed Spectrum
to use the proceeds of the debts in the normal course of business it must have been a
floating charge (therefore not following Siebe Gorman & Co Ltd v Barclays Bank
Ltd either). In the Court of Appeal, Lord Phillips MR held that he was bound by Bullas and
where a chargor is prohibited from disposing of receivables before they are collected
and must pay them into a chargee’s account, the charge must be construed as fixed. He
said Siebe Gorman was correctly decided given that the debenture there clearly
restricted the company’s ability to draw on the bank account into which the proceeds of
the book debts were paid. The Siebe Gorman form of debenture had been followed for
25 years, and therefore had acquired meaning. Jonathan Parker LJ and Jacob
LJ concurred.

House of Lords
The House of Lords, with seven members given the constitutional issue of retrospective
rulings, held that the charge over Spectrum Plus Ltd's book debts was floating, because
the hallmark of a floating charge is that the business is free to deal with the assets
in business as usual. Also relevant, but not determinative were the extent of the
restrictions imposed by the debenture, the rights retained by Spectrum to deal with its
debtors and collect the money owed by them, Spectrum's right to draw on its account
with the bank into which the collected debts had to be paid, provided it kept within the
overdraft limit, the description "fixed charge" attributed to the charge by the parties
themselves. Even though the money was put into a separate account, that was the case
here. The decision of Slade J in Siebe Gorman & Co Ltd v Barclays Bank[2] had been
subject to serious academic criticism, and had been doubted by Hoffmann J in Re
Brightlife Ltd.[3] Although Siebe Gorman was followed and extended by the English
Court of Appeal in Re New Bullas Trading Ltd[4] it was wrong and was overruled.
Recognising freedom to deal with assets as the hallmark of a floating charge was
necessary to give effect to the purpose of the legislation on floating charges, and the
statutory system of priority.
52. ...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 [1986] 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 [2001] 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 [1986] 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 [1979] 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.

[...]

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.
Lord Scott gave a concurring opinion and said the following.

107. Indeed if a security has Romer LJ's third characteristic I am inclined to

think that it qualifies as a floating charge, and cannot be a fixed charge,
whatever may be its other characteristics. Suppose, for example, a case
where an express assignment of a specific debt by way of security were
accompanied by a provision that reserved to the assignor the right,
terminable by written notice from the assignee, to collect the debt and to
use the proceeds for its (the assignor's) business purposes, ie, a right,
terminable on notice, for the assignor to withdraw the proceeds of the
debt from the security. This security would, in my opinion, be a floating
security notwithstanding the express assignment. The assigned debt would
be specific and ascertained but its status as a security would not. Unless
and until the right of the assignor to collect and deal with the proceeds
were terminated, the security would retain its floating characteristic. Or
suppose a case in which the charge were expressed to come into existence
on the future occurrence of some event and then to be a fixed charge over
whatever assets of a specified description the chargor might own at that
time. The contractual rights thereby granted would, in my opinion, be
properly categorised as a floating security. There can, in my opinion, be no
difference in categorisation between the grant of a fixed charge expressed
to come into existence on a future event in relation to a specified class of
assets owned by the chargor at that time and the grant of a floating charge
 over the specified class of assets with cystallisation taking place on the
occurrence of that event. I endeavoured to make this point in In re Cosslett
(Contractors) Ltd [2002] 1 AC 336, 357, para 63. Nor, in principle, can there
be any difference in categorisation between those grants and the grant of
a charge over the specified assets expressed to be a fixed charge but where
the chargor is permitted until the occurrence of the specified event to
remove the charged assets from the security. In all these cases, and in any
other case in which the chargor remains free to remove the charged assets
from the security, the charge should, in principle, be categorised as a
floating charge. The assets would have the circulating, ambulatory
character distinctive of a floating charge.

[...]

111. In my opinion, the essential characteristic of a floating charge, the

characteristic that distinguishes it from a fixed charge, is that the asset
subject to the charge is not finally appropriated as a security for the
payment of the debt until the occurrence of some future event. In the
meantime the chargor is left free to use the charged asset and to remove it
from the security. On this point I am in respectful agreement with Lord
Millett. Moreover, recognition that this is the essential characteristic of a
floating charge reflects the mischief that the statutory intervention to
which I have referred was intended to meet and should ensure that
preferential creditors continue to enjoy the priority that section 175 of
the 1986 Act and its statutory predecessors intended them to have.
Prospective rulings
Regarding the prospective ruling issue, Lord Nicholls said that judges had been described
as "developing" the law for some time when making novel decisions, and that a judge is
not free to repeal laws or distance themselves from bad laws; their only power is to
impose a new interpretation. He also noted the new "dynamic" power to
interpret statutes under section 3 of the Human Rights Act 1998. He then went on to
rule:

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.
He held that in exceptional cases, it would be open to the court to hold that a new
interpretation of the law should be applied only prospectively. However, on the facts of
the case before him, Lord Hope felt that it was "miles away from the exceptional
category in which alone prospective overruling would be legitimate" (para 43) and so
relegated his comments upon prospective only rulings to obiter dictum. However, given
the strength and number of the court, and that the court specifically invited the Attorney
General to appoint leading counsel to address them on that point, it seems clear that the
decision on that point will be treated as binding precedent.

Significance
In relation to the substantive issues, the Revenue had already indicated that it would not
seek to reopen recent liquidations that had been distributed in compliance with the
understandings of the old law so in many senses, the ruling took prospective effect only
with respect to the largest preferred creditor. The drafting of security documents has
also been modified by the legal profession, and debentures now usually contain
provisions stating that the proceeds of book debts may not be assigned and must be
paid into a blocked account.

Prior to the decision, "prospective only" rulings were not favoured under English law.
In Launchbury v Morgans [1973] AC 127 (at 137), Lord Wilberforce had expressed that
view that "We cannot, without yet further innovation, change the law prospectively
only". More recently, in Kleinwort Benson Ltd v Lincoln City Council [1999] 2 AC 349 (at
379), Lord Goff of Chieveley had said the system of prospective overruling "has no place
in our legal system".