Courtesy of

NOT FOR PUBLIC DISTRIBUTION Professor Sarah Worthington,

University of Cambridge
COMMERCIAL LAW
Security Interests
_____________________________________________________________________

PART I: NATURE OF SECURITY

1. WHAT IS “SECURITY”?
Bristol Airport plc v Powdrill [1990] Ch 744, 760
“Security is created where a person (‘the creditor’) to whom an obligation is owed
by another (‘the debtor’) by statute or contract, in addition to the personal promise
of the debtor to discharge the obligation, obtains rights exercisable against some
property in which the debtor has an interest in order to enforce the discharge of the
debtor’s obligation to the creditor.”

A fixed, or specific, consensual legal security interest possesses the following

characteristics:
1. It is a right given by a debtor/obligor to a creditor/obligee in an asset;
2. The right is by way of grant of an interest in the debtor’s asset, not by way of
reservation of title to the creditor;
3. The right is given for the purposes of securing an obligation;
4. The asset/right in the asset is given by way of security only, not by way of
outright transfer;
5. The agreement restricts the debtor’s right to dispose of the asset free from
the security interest [contrast a floating charge].

Contrast: legal security and functional security (or quasi-security); proprietary

and personal security; consensual security and security arising by operation of
law.

2. WHY DOES SECURITY EXIST?

Goode, Legal Problems of Credit and Security (3rd ed, 2003), 11
“The primary purpose of security is to reduce credit risk and obtain priority
over other creditors in the event of the debtor’s bankruptcy or liquidation.
[…] A secondary, but important, consideration is that security gives the
creditor a certain measure of influence or control over events.”

Buchler v Talbot [2004] 2 AC 298 at [29]

“When a floating charge crystallises, it becomes a fixed charge attaching to all the
assets of the company which fall within its terms. Thereafter the assets subject to
the floating charge form a separate fund in which the debenture holder has a
proprietary interest. For the purposes of paying off the secured debt, it is his fund.
The company has only an equity of redemption; the right to retransfer of the assets
when the debt secured by the floating charge has been paid off. It is this equity of

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redemption which forms part of the fund held on trust for the company’s
[unsecured] creditors.”

[Further reading:
Finch, Corporate Insolvency Law: Perspectives and Principles (2nd ed, 2009),
631-641
Schwarcz, “The Easy Case for the Priority of Secured Claims in Bankruptcy”
(1997) 47 Duke LJ 425
Mokal, “Priority as Pathology: The Pari Passu Myth” [2001] CLJ 581
Armour, “Should we redistribute in insolvency?” in Getzler & Payne (eds),
Company Charges: Spectrum and Beyond (2006) 189.]

3. POSSESSORY vs. NON-POSSESSORY SECURITY INTERESTS

In re Cosslett (Contractors) Ltd [1998] Ch 495, 508
“There are only four kinds of consensual security known to English law: (i)
pledge; (ii) contractual lien; (iii) equitable charge and (iv) mortgage.”

PART II: POSSESSORY SECURITY INTERESTS

In re Cosslett (Contractors) Ltd [1998] Ch 495, 508

“A pledge and a contractual lien both depend on the delivery of possession to the
creditor. The difference between them is that in the case of a pledge the owner
delivers possession to the creditor as security, whereas in the case of a lien the
creditor retains possession of goods previously delivered to him for some other
purpose.”

1. PLEDGES
Sealy & Hooley, Commercial Law: Text, Cases and Materials (4th ed, 2009), 1092:
“The essential characteristics of a pledge are that: (a) it is created by contract, (b)
possession of the property pledged (or of documents of title thereto) must be
delivered (actually or constructively) to the pledgee, (c) the pledgor has a right of
redemption on discharge of the debt or obligation secured – the pledgee has no
right of foreclosure, and (d) the pledgee is given a ‘special property’ in the subject
matter of the pledge, including a power of sale at common law, which he can assign
or sub-pledge.”
(i) Delivery of Possession
(a) Tangibles vs. intangibles
(b) Delivery of tangibles

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 Actual delivery

 Constructive delivery: Keys

“Larking has the key, which I place entirely at your disposal.”
Hilton v Tucker (1888) 39 ChD 669, 676
“the delivery of the key in order to make constructive possession must be
under such circumstances that it really does pass the full control of the place
to which admission is to be gained by means of the key; as, for instance,
where timber is deposited in a warehouse. […] the delivery of a key giving
exclusive control is regarded as delivery of possession itself.”

Wrightson v McArthur & Hutchisons (1919) Ltd [1921] 2 KB 807

Dublin City Distillery (Great Brunswick St, Dublin) Ltd v Doherty [1914] AC 823, 843-
844:
“a contract to pledge a specific chattel, even though money be advanced on
the faith of it, is not in itself sufficient to pass any special property in the
chattel to the pledgee. Delivery is, in addition, absolutely necessary to
complete the pledge; but of course it is enough if the delivery be
constructive, or symbolical, as it is called, instead of actual. […] I doubt
whether, owing to the dual control over this whisky exercised by the
distillers and the Revenue officer, it would not be necessary in the present
case that both keys should be delivered.”

 Constructive delivery: Attornment

Dublin City Distillery (Great Brunswick St, Dublin) Ltd v Doherty [1914] AC 823, 852:
“possession may pass to the pledgee without actual delivery, for example,
whenever there is some agreement between the parties the effect of which
is to change the possession of the pledger [sic] from a possession on his own
account as owner into a possession as bailee for the pledgee: […] Such an
agreement operates as a delivery of the goods to the pledgee and a
redelivery of the goods by the pledgee to the pledger as bailee for the
purposes mentioned in the agreement. A mere book entry cannot,
however, have this effect.”

 Constructive delivery: Bills of lading

(ii) Pledgee’s “special property”
(a) Repayment by pledgor
(b) Sale
Mathew v T M Sutton Ltd [1994] 1 WLR 1455, 1461

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“In my view there is a fiduciary relationship: the pawnee [i.e., the

pledgee] holds the surplus upon trust for the pawnor [the pledgor].
This follows, I think, from the nature of a pawn or pledge of personal
property. A pawn or pledge involves a transfer of the possession of
personal property from the pawnor to the pawnee by way of security;
the ownership in the property remains in the pawnor subject only to
the ‘special interest’ to which the pawnee is entitled for the purpose
of protecting and realizing his security”
Consumer Credit Act 1974, ss 8, 116 & 121

(c) Sub-pledge
Donald v Suckling (1866) LR 1 QB 585, 610
“although [the pledgee] cannot confer upon any third person a better title
or a greater interest than he possesses, yet, if nevertheless he does pledge
the goods to a third person for a greater interest than he possesses, such an
act does not annihilate the contract of pledge between himself and the
pawnor; but that the transaction is simply inoperative as against the original
pawnor, who upon tender of the sum secured immediately becomes entitled
to the possession of the goods, and can recover in an action for any special
damage which he may have sustained by reason of the act of the pawnee in
repledging the goods”

(d) Re-delivery
Reeves v Capper (1838) 5 Bing (NC) 136, 140-141 (132 ER 1057, 1059)
“in the case of a simple pawn of a personal chattel, if the creditor
parts with the possession he loses his property in the pledge: but we
think the delivery of the chronometer to Wilson under the terms of
the agreement [that Capper would ‘allow him the use of it for the
voyage’] itself was not a parting with the possession, but that the
possession of Captain Wilson was still the possession of Messrs
Capper.”
Mercantile Bank of India Ltd v Central Bank of India Ltd [1938] AC 287
Babcock v Lawson (1880) 5 QBD 284, 286
“The plaintiffs had only a special property as pledgees, that property they
gave up under a fraud, and had the pledgors still retained the goods, they
could have resumed them. They might have said, You the pledgors have got
these goods by a fraud, and our special property in them is not divested; but
they cannot say that against a person who has obtained possession of them
from the pledgors bonâ fide. The case is somewhat analogous to that where
a person is induced to part with his goods by fraud, the contract is voidable
and he can recover back the goods; but if the person who has fraudulently
obtained the goods part with them to a bonâ fide purchaser, the purchaser
can hold the property against the person defrauded.”

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2. COMMON LAW LIENS AND CONTRACTUAL LIENS (NOT QUITE THE SAME)
Tappenden v Artus [1964] 2 QB 185, 194-195:
“Because it arises in consequence of a contract, it is tempting to a twentieth-
century lawyer to think of a common law lien as possessing the characteristics of a
contractual right, express or implied, created by mutual agreement between the
parties to the contract. But this would be to mistake its legal nature. Like a right of
action for damages, it is a remedy for breach of contract which the common law
confers upon an artificer to whom the possession of goods is lawfully given for the
purpose of his doing work upon them in consideration of a money payment. […] the
remedy is the exercise of a right to continue an existing actual possession of the
goods, […] A common law lien, although not enforceable by action, thus affords a
defence to an action for recovery of the goods by a person who, but for the lien,
would be entitled to immediate possession. Since a common law lien is a right to
continue an existing actual possession of goods (that is to say, to refuse to put an
end to a bailment) it can only be exercised by an artificer if his possession was lawful
at the time at which the lien first attached.”

(i) Examples of common law liens

(a) Artificers
Hatton v Car Maintenance Co Ltd [1915] 1 Ch 621, 623-624:
“whenever an article is repaired, the repairer gets a lien on the article for
the amount of his charges. […] But certainly I cannot find anything in the
authorities which have been cited to me to show that, if what the contractor
does is not to improve the article but merely to maintain it in its former
condition, he gets a lien for the amount spent upon it for that maintenance.
The cases with regard to horses seem to point entirely the other way,
because it is clear that a jobmaster has no lien at all for the amount of his
bill in respect of feeding and keeping a horse at his stable, whereas, on the
other hand, a trainer does get a lien upon a horse for the improvement
which he effects to the horse in the course of training it for a race. […] Here
all that was to be done by the contractor was for the purpose of maintaining
the car in the condition in which it was sent to him, and in my judgment he
would have no lien, that is no common law lien, in respect of the amount
owing to him for that service.”
Spencer v S Franses Ltd [2011] EWHC 1269 (QB) at [245]-[262]

(b) Common callings

(c) Professional services
(d) Statutory liens
Sale of Goods Act 1893, ss 41-43

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Cf. Contractual liens

(ii) Rights of the lienee

(a) Retention of possession
 Voluntary delivery
In re Cosslett (Contractors) Ltd [1998] Ch 495, 509:
“The council comes into possession of the plant and materials when it
expels the company from the site leaving the plant and materials
behind. But this does not amount to a voluntary delivery of possession
by the company to the council. It is rather the exercise by the council of
a contractual right to take possession of the plant and materials against
the will of the company.”

 Continuing right of possession

Forth v Simpson (1849) 13 QB 680 (116 ER 1423)
Hatton v Car Maintenance Co Ltd [1915] 1 Ch 621, 624:
“even if he had such a lien originally, that lien would be lost by
virtue of the arrangement under which the owner was to be at
liberty to take the car away, and did take the car away, as and
when she pleased. The existence of a lien seems to me to be
inconsistent with an arrangement under which the article is from
time to time taken entirely out of the possession and control of
the contractor”
Abermarle Supply Co Ltd v Hind & Co [1928] KB 307

 Possession legally obtained

Tappenden v Artus [1964] 2 QB 185, 195-196:
“Since a common law lien is a right to continue an existing actual
possession of goods (that is to say, to refuse to put an end to a
bailment) it can only be exercised by an artificer if his possession
was lawful at the time at which the lien first attached. To entitle
him to exercise a right of possession under his common law lien
adverse to the owner of the goods, he must thus show that his
possession under the original delivery of the goods to him was
lawful […] and continued to be lawful until some work was done
by him upon the goods. Where, therefore, as in the present case,
possession of the goods was originally given to the artificer not by
the owner himself, but by a bailee of the owner, the test whether
the artificer can rely upon his common law lien as a defence in an
action for detinue brought against him by the owner is whether

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the owner authorised (or is estopped as against the artificer from

denying that he authorised) the bailee to give possession of the
goods to the artificer.”
Abermarle Supply Co Ltd v Hind & Co [1928] KB 307
Bowmaker Ltd v Wycombe Motors Ltd [1946] 1 KB 505

(b) Sale
Sale of Goods Act 1893, s39(a)

PART III: NON-POSSESSORY SECURITY INTERESTS

In re Cosslett (Contractors) Ltd [1998] Ch 495, 508:

“Neither a mortgage nor a charge depends on the delivery of possession. The
difference between them is that a mortgage involves a transfer of legal or
equitable ownership to the creditor, whereas an equitable charge does not.”

1. MORTGAGES
(i) Nature of mortgages
Santley v Wilde [1899] 2 Ch 474, 474-475
“The principle is this: a mortgage is a conveyance of land or an assignment of
chattels as a security for the payment of a debt or the discharge of some
other obligation for which it is given. This is the idea of a mortgage: and the
security is redeemable on the payment or discharge of such debt or
obligation […] The right to redeem is not a personal right, but an equitable
estate or interest in the property mortgaged.”
(ii) Intention to create a security interest
Swiss Bank Corpn v Lloyds Bank Ltd [1982] AC 584, 595-6 Buckley LJ (aff’d by the HL):

“It follows that whether a particular transaction gives rise to an equitable charge of
this nature must depend upon the intention of the parties ascertained from what
they have done in the then existing circumstances. The intention may be expressed
or it may be inferred. If the debtor undertakes to segregate a particular fund or asset
and to pay the debt out of that fund or asset, the inference may be drawn, in the
absence of any contra indication, that the parties' intention is that the creditor
should have such a proprietary interest in the segregated fund or asset as will enable
him to realise out of it the amount owed to him by the debtor … But
notwithstanding that the matter depends upon the intention of the parties, if upon
the true construction of the relevant documents in the light of any admissible
evidence as to surrounding circumstances the parties have entered into a
transaction the legal effect of which is to give rise to an equitable charge in favour of

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one of them over property of the other, the fact that they may not have realised this
consequence will not mean that there is no charge. They must be presumed to
intend the consequence of their acts. … A binding obligation that a particular fund
shall be applied in a particular manner may found no more than an injunction to
restrain its application in another way, but if the obligation be to pay out of the fund
a debt due by one party to the transaction to the other, the fund belonging to or
being due to the debtor, this amounts to an equitable assignment pro tanto of the
fund …

(iii) Types of mortgage (and distinguishing between equitable mortgage and

equitable charge)

2. EQUITABLE CHARGES
(i) Equitable vs. “Legal” Charges
(ii) Nature of equitable charges
National Provincial & Union Bank of England v Charnley [1924] 1 KB 431, 449-450:
“It is not necessary to give a formal definition of a charge, but I think there can be
no doubt that where in a transaction for value both parties evince an intention that
property, existing or future, shall be made available as security for the payment of a
debt, and that the creditor shall have a present right to have it made available, there
is a charge, even though the present legal right which is contemplated can only be
enforced at some future date, and though the creditor gets no legal right of
property, either absolute or special, or any legal right to possession, but only gets a
right to have the security made available by an order of the Court. If those
conditions exist I think there is a charge.”
In re Bank of Credit & Commerce International SA (No 8) [1998] AC 214, 226:
“There are several well known descriptions of an equitable charge […] but
none of them purports to be exhaustive. Nor do I intend to provide one. An
equitable charge is a species of charge, which is a proprietary interest
granted by way of security. Proprietary interests confer rights in rem which,
subject to questions of registration and the equitable doctrine of purchaser
for value without notice, will be binding upon third parties and unaffected by
the insolvency of the owner of the property charged. A proprietary interest
provided by way of security entitles the holder to resort to the property only
for the purpose of satisfying some liability due to him (whether from the
person providing the security or a third party) and, whatever the form of the
transaction, the owner of the property retains an equity of redemption to
have the property restored to him when the liability has been discharged.
The method by which the holder of the security will resort to the property
will ordinarily involve its sale or, more rarely, the extinction of the equity of
redemption by foreclosure. A charge is a security interest created without
any transfer of title or possession to the beneficiary. An equitable charge can
be created by an informal transaction for value (legal charges may require a
deed or registration or both) and over any kind of property (equitable as well

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as legal) but is subject to the doctrine of purchaser for value without notice
applicable to all equitable interests.”
Is there a limit on the types of property over which a charge may be granted?
In re Bank of Credit & Commerce International SA (No 8) [1998] AC 214, 226-
227
“The [bank] depositor’s right to claim payment of his deposit [from the bank]
is a chose in action which the law has always recognised as property. There is
no dispute that a charge over such a chose in action can validly be granted to
a third party. In which respects would the fact that the beneficiary of the
charge was the debtor himself be inconsistent with the transaction having
some or all of the various features [of a charge] which I have enumerated?
The method by which the property would be realised would differ slightly:
instead of the beneficiary of the charge having to claim payment from the
debtor, the realisation would take the form of a book entry. In no other
respect, as it seems to me, would the transaction have any consequences
different from those which would attach to a charge given to a third party. It
would be a proprietary interest in the sense that, subject to questions of
registration and purchaser for value without notice, it would be binding upon
assignees and a liquidator or trustee in bankruptcy. The depositor would
retain an equity of redemption and all the rights which that implies. There
would be no merger of interests because the depositor would retain title to
the deposit subject only to the bank’s charge. The creation of the charge
would be consensual and not require any formal assignment or vesting of
title in the bank. If all these features can exist despite the fact that the
beneficiary of the charge is the debtor, I cannot see why it cannot properly be
said that the debtor has a proprietary interest by way of charge over the
debt.”

(iii) Intention to create a charge

Swiss Bank Corpn v Lloyds Bank Ltd [1982] AC 584, 595-6 Buckley LJ (affirmed by
the HL) (cited above)

(iv) ‘Perfection’ by registration (to note only)

Bills of Sales Acts 1878-82 (individual debtors)
Section 99 of Companies Act, Chapter 388 of the Laws of Zambia

(v) Fixed vs. Floating charges (corporate debtors only)

(a) Importance of distinction (in outline)
 Subordination to preferential creditors (employees etc)
Companies Act, section 346(1) as read with section 346(5)
 Avoidance of “past value” floating charges

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Companies Act, section 348

 Subordination to expenses of winding up
Companies Act, section 346(1)(a) as read with section 346(5)
(b) Drawing the distinction
The key decision is **In re Spectrum Plus Ltd (in liq) [2005] UKHL 41; [2005] 2
AC 680 (7 Law Lords). This case overruled Re New Bullas and Siebe Gorman
(both below).
 Development
Holroyd v Marshall (1862) 10 HLC 191, 210-211 (11 ER 999, 1006-1007) (on
how future property is bound)

In re Panama, New Zealand, & Australian Royal Mail Co (1870) 5 Ch App 318,
322-323:
“the word ‘undertaking’ had reference to 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. […] under these
debentures [the debenture holders] have a charge upon all property of
the company, past and future, by the term ‘undertaking,’ and that they
stand in a position superior to that of the general creditors, who can
touch nothing until they are paid.”

Illingworth v Houldsworth [1904] AC 355, 358. This case is discussed in The

Attorney General v Zambia Sugar Co. and Nakambala Estates Ltd. [1977]
“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.”

 Characteristics of floating charges

In re Yorkshire Woolcombers Association Ltd [1903] 2 Ch 284, 295
“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 [Companies] Act, which does
not contain all the three characteristics that I am about to mention, but 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

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from time to time; and (3.) if you find that by the charge it is
contemplated that, until some future 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.”
Re Brumark Investments Ltd (also known as Agnew v Commissioner of Inland
Revenue) [2001] 2 AC 710 (PC) at [13]
“This [ie the words in the previous quotation] was offered as a description
and not a definition. The first two characteristics are typical of a floating
charge but they are not distinctive of it, since they are not necessarily
inconsistent with a fixed charge. It is the third characteristic which is the
hallmark of a floating charge and serves to distinguish it from a fixed
charge. Since the existence of a fixed charge would make it impossible
for the company to carry on business in the ordinary way without the
consent of the charge holder, it follows that its ability to [do] so without
such consent is inconsistent with the fixed nature of the charge.”

Re Brumark Investments Ltd [2001] 2 AC 710 at [32]

“The question is not merely one of construction. In deciding whether a charge is
a fixed charge or a floating charge, the court is engaged in a two-stage process.
At the first stage it must construe the instrument of charge and seek to gather
the intentions of the parties from the language they have used. But the object
at this stage of the process is not to discover whether the parties intended to
create a fixed or a floating charge. It is to ascertain the nature of the rights and
obligations which the parties intended to grant each other in respect of the
charged assets. Once these have been ascertained, the court can then embark
on the second stage of the process, which is one of categorisation. This is a
matter of law. It does not depend on the intention of the parties. If their
intention, properly gathered from the language of the instrument, is to grant the
company rights in respect of the charged assets which are inconsistent with the
nature of a fixed charge, then the charge cannot be a fixed charge however they
may have chosen to describe it. A similar process is involved in construing a
document to see whether it creates a licence or tenancy. The court must
construe the grant to ascertain the intention of the parties: but the only
intention which is relevant is the intention to grant exclusive possession: see
Street v Mountford […] So here: in construing a debenture to see whether it
creates a fixed or a floating charge, the only intention which is relevant is the
intention that the company should be free to deal with the charged assets and
withdraw them from the security without the consent of the holder of the
charge; or, to put the question another way, whether the charged assets were
intended to be under the control of the company or of the charge holder.”

In re Spectrum Plus Ltd (in liq) [2005] UKHL 41; [2005] 2 AC 680
LORD HOPE: . . . [I]t 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

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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) of the 1986 Act gives to preferential debts . . .
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. . . . 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.
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 be 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?
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 Comr of Inland Revenue [2001] 1 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

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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. . . . [He then considered the arrangements
in Siebe Gorman and in this case, and decided that neither were effective to
block the account in the way required.]

LORD WALKER: [Describing the essential difference between a fixed charge and
a floating charge:] Under a fixed charge the assets charged as security are
permanently appropriated to the payment of the sum charged, in such a way as
to give the chargee a proprietary interest in the assets. So long as the charge
remains unredeemed, the assets can be released from the charge only with the
active concurrence of the chargee. The chargee may have good commercial
reasons for agreeing to a partial release. If for instance a bank has a fixed charge
over a large area of land which is being developed in phases as a housing estate
(another example of a fixed charge on what might be regarded as trading stock)
it might be short-sighted of the bank not to agree to take only a fraction of the
proceeds of sale of houses in the first phase, so enabling the remainder of the
development to be funded. But under a fixed charge that will be a matter for the
chargee to decide for itself.
Under a floating charge, by contrast, the chargee does not have the same power
to control the security for its own benefit. The chargee has a proprietary
interest, but its interest is in a fund of circulating capital, and unless and until the
chargee intervenes (on crystallisation of the charge) it is for the trader, and not
the bank, to decide how to run its business. . . .
[He therefore held Siebe Gorman was wrong and should be overruled, and
allowed the appeal.]

Comments on charges intended by the parties to be fixed, but held by the HL in Spectrum
(overruling earlier cases) to be floating:
(i) Re Brumark Investments Ltd [2001] 2 AC 710 at [49]-[50] on the New Bullas case (Re
New Bullas Trading Ltd [1994] 1 BCLC 485):
“the debenture was so drafted that the company was at liberty to turn
the uncollected book debts to account by its own act. Taking the relevant
assets to be the uncollected book debts, the company was left in control
of the process by which the charged assets were extinguished and
replaced by different assets which were not the subject of a fixed charge
and were at the free disposal of the company. That is inconsistent with
the nature of a fixed charge. Their Lordships consider that the New Bullas
case […] was wrongly decided.”

(ii) On the Siebe Gorman case (Siebe Gorman & Co Ltd v Barclays Bank Ltd [1979]
2 Lloyd’s Rep 142)
Charge clause 5(c): “... During the continuance of this security the
Company... (c) shall pay into the Company’s account with the Bank all
monies which it may receive in respect of the book debts and other debts

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hereby charged and shall not without the prior consent of the Bank in
writing purport to charge or assign the same in favour of any other
person and shall if called upon to do so by the Bank execute a legal
assignment of such book debts and other debts to the Bank.”

Siebe Gorman & Co Ltd v Barclays Bank Ltd [1979] 2 Lloyd’s Rep 142, 158
(Slade J):
“if I had accepted the premise that [the Company] would have had the
unrestricted right to deal with the proceeds of any of the relevant books debts
paid into its account, so long as that account remained in credit, I would have
been inclined to accept the conclusion that the charge on such book debts could
be no more than a floating charge.”

National Westminster Bank plc v Spectrum Plus Ltd [2005] UKHL 41 at [117] (Lord
Scott):
“Slade J in Siebe Gorman […] thought it might make a difference whether the
account were in credit or in debit. I must respectfully disagree. The critical
question, in my opinion, is whether the chargor can draw on the account. If
the chargor’s bank account were in debit and the chargor had no right to
draw on it, the account would have become, and would remain until the
drawing rights were restored, a blocked account. […] But so long as the
chargor can draw on the account, and whether the account is in credit or
debit, the money paid in is not being appropriated to the repayment of the
debt owing to the debenture holder but is being made available for drawings
on the account by the chargor.”

 Is it possible to have a commercially workable fixed charge over

receivables? – see the previous quotation.

 Characterisation problems and consequences?

Re Cosslett (Contractors) Ltd [1998] Ch 495 (CA), 506, 508-11 per Millett LJ

(c) ‘Crystallisation’ of floating charges

A floating charge will crystallise when:
(i) a receiver is appointed;
(ii) the company goes into liquidation;
(iii) the company ceases to carry on business: Re Woodroffes (Musical
Instruments) Ltd [1986] Ch 366; or
(iv) the conditions for crystallisation specified by the parties in the
debenture are met (the terms may require ‘notice of conversion’ [to a
fixed charge] to be given by the creditor, or may provide for ‘automatic
crystallisation’ on the happening of a specified event).

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(d) Nature of floating chargee’s rights

S Worthington, “Floating charges – an alternative theory” [1994] CLJ 81, 102 (this is
an early version of the ideas in Proprietary Interests in Commercial Transactions
(1996, OUP):

“The "defeasible charge" theory of floating charges proposes that the chargee
has a fixed charge over all the charged assets, but that this charge is subject to
defeasance. Defeasance, or extinguishment of the chargee's interest, occurs
whenever, and to the extent that, a third party acquires an interest in the
charged assets through a transaction which falls within the chargor's licence to
deal. When this happens, the third party acquires an interest free of the floating
charge. On the other hand, if the third party's interest is acquired outside the
terms of the licence to deal, then the chargee's interest is not extinguished: the
dispute between the two competing interests must be resolved according to the
priority rules to determine which interest prevails. The ambit of the licence to
deal is therefore of crucial importance. Its precise definition is the central issue
in resolving disputes with third parties. The licence is created by contract
between the chargor and chargee, and is particular to their security.”

Nolan, “Property in a Fund” (2004) 120 LQR 108, 126 and 129-30
“if, for example, the company sells an asset which was subject to the floating
charge, the purchaser will acquire title to the asset free of the charge; yet there
would have been no disposition of the rights comprising the charge. The
purchaser’s title is not derived in part from the company and in part from the
chargee; nor does it depend on any permission or ‘licence’ of the chargee to
deal with the asset free of the charge. The purchaser simply derives title from
the company, and the chargee’s interest in the asset is so limited that it gives
the chargee no claim against either the company or the purchaser in the
circumstances. Of course, if the company deals with property subject to the
charge at a time when it has no immunity from the chargee – in other words,
when the charge has crystallised – there will be no such overreaching. The
charge is then capable of binding the purchaser in accordance with the
applicable rules of priority, just as if it had been created as a fixed charge.”

“Nevertheless, for good theoretical and practical reasons it is better to describe

the floating charge not as “defeasible” but as an interest which is inherently
limited, because it may be overreached. … Defeasance of a charge may explain
why the charge ceases to affect an asset. However, defeasance of a charge over
a particular asset cannot explain why the chargee, whose rights in that asset
have been defeated by sale or exchange, then has prima facie equivalent rights
to any substitute(s) for the asset. Overreaching, by contrast, can explain just
that. Furthermore, defeasance is focused on a particular time: the time at which
an interest in an asset is terminated. Until it is defeated, a defeasible interest is
perfectly valid and capable of taking its full effect. A floating charge, however, is
not capable of taking full effect until it crystallises and becomes enforceable. By
contrast, understanding a floating charge as a charge that may be overreached,
rather than defeated, explains this fact precisely. A floating charge is an interest
which is limited ab initio by the mere existence of the chargor's rights to deal

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with charged assets free of the charge, and so until the charge crystallises, the
chargee's rights to have recourse to assets within the charge to discharge a debt
or other obligation are subordinated to the chargor's power to deal with the
assets in the ordinary course of its business.”

PART IV: QUASI-SECURITY INTERESTS

Law Commission, Registration of Security Interests: Company Charges and Property other
than Land (Consultation Paper No 164, 2002) [This is the first publication on this Law
Commission project, followed by a Consultative Report and then a rather less
ambitious Final Report (see http://lawcommission.justice.gov.uk/areas/company-
security-interests.htm).]

– E.g., Retention of Title Clauses

Sale of Goods Act 1979, ss 17 (property passes when the parties intend it to
pass; presumptions in s 18) & 19 (reservation of right of disposal)
Armour v Thyssen Edelstahlwerke AG [1991] 2 AC 339, 353
“In all cases where a right of security is conferred the debtor retains an
ultimate right over the subject matter in question. The creditor, having
realised out of that subject matter a sufficient sum to meet the debt, is
obliged to account to the debtor for any surplus. Where, however, the seller
of goods retains title until some condition has been satisfied, and on failure
of such satisfaction repossesses them, then he is not obliged to account to
the buyer for any part of the value of the goods. Where the condition is to
the effect that the price of the goods shall have been paid and it has not been
paid, then in the situation where the market price of the goods has risen, so
that they are worth more than the contract price, the extra value belongs to
the unpaid seller.”
Aluminium Insustrie Vaassen BV v Romalpa Aluminium Ltd [1976] 1 Lloyds Rep
443, 454, 456 (CA)
Clough Mill Ltd v Martin [1985] 1 WLR 111, 119 and 123-124 (CA), and at 120:
“the difficulty of construing the [products clause] as simply giving rise to a
retention by the plaintiff of title to the new goods is that it would lead to the
result that, upon the determination of the contract under which the original
material was sold to the buyer, the ownership of the plaintiff in the new
goods would be retained by the plaintiff, uninhibited by any terms of the
contract which had then ceased to apply; and I find it impossible to believe
that it was the intention of the parties that the plaintiff would thereby gain
the windfall of the full value of the new product […] the [clause] must be read
as creating either a trust or a charge.”
Re Bond Worth [1980] Ch 228
Borden (UK) Ltd v Scottish Timber Products Ltd [1981] Ch 125

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E Pfeiffer Weinkellerei-Weineinkauf GmbH & Co v Arbuthnot Factors Ltd [1988] 1

WLR 150, 159
Associated Alloys Pty Ltd v ACN 001 452 1026 Pty Ltd [2000] HCA 25 (Aust HCt)

PART V: REFORM

Law Commission, Company Security Interests: A Consultative Report (Consultation Paper No.
176, 2004) paras. 1.1 to 2.137
Law Commission, Company Security Interests (Law Com No 296, 2005)

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