On the subject of charges over book debts: BHT (UK) Ltd

In an interesting aside to the main debate on fixed and floating charges over book debts, the court recently gave judgment in the case of Re BHT (UK) Ltd [2004] EWHC 2001. Mr Kevin Garnett QC, sitting as deputy judge of the High Court, decided that where proceeds of book debts have been distributed to a debenture holder on the basis that the charge over book debts was fixed, a subsequent liquidator of the company could not claim the proceeds back from the debenture holder on the grounds that the debenture holder has been unjustly enriched.

Facts

BHT (UK) Limited (the "Company") went into receivership in 1991. The receivers took the view that the debenture created a fixed charge over the Company's book debts and paid the proceeds of the book debts to the debenture holder as a distribution under the fixed charge. There were insufficient floating charge realisations to pay preferential creditors in full.

A winding-up order was subsequently made in respect of the Company in 1993 and a liquidator appointed. The liquidator subsequently issued this application to establish whether the debenture holder was liable to repay the proceeds of book debts to the Company.

In the intervening period between payment of the book debt proceeds to the debenture holder and the application, the case of Re Brumark Investments Ltd [2001] 2 A.C. 710 caused practitioners to revisit their views on the question of the nature of the charge on book debts. The Brumark case also shed uncertainty on the status of the decision in Siebe Gorman & Co Ltd v Barclays Bank Ltd [1979] 2 Lloyds' Rep. 142, in which Slade J (as he then was) had decided that the charge over book debts was fixed and not floating. Most recently the Spectrum [2004] EWHC 9 (Ch) case went further and decided that a debenture drafted in similar terms to that in the Siebe Gorman case did not, in that case, create a fixed charges over the book debts. The Spectrum case is, we understand, subject to appeal.

The liquidator's argument in this case was that "what may have appeared to have been a doubtful claim to a fixed charge before Brumark appears even less plausible in the light of the judgment in Brumark." He argued that if the charge was, in fact, a floating charge, the proceeds had been paid to the debenture holder under a mistaken view of the law. The debenture holder should therefore return them to the Company because it had been unjustly enriched.

Judgment

Mr Kevin Garnett QC managed to dispose of the case without deciding the controversial fixed/floating question by finding that even if the proceeds had been wrongly paid to the debenture holder, the Company had suffered no loss. If the charge was in fact floating and not fixed, then the proceeds should have been applied towards liquidation expenses and payment of the preferential creditors instead of the debenture holder. In no circumstances would the Company have been entitled to receive any part of the book debt realisations. As it is a crucial element of any party wishing to rely on the principle of unjust enrichment that it must have suffered a loss, and because the Company had demonstrably suffered no loss, the liquidator's application failed.

Comment

The debenture holder in this case relied upon a fundamental flaw in the liquidator's argument. Following Brumark, there was general concern that distributions of book debt proceeds that had already been made by receivers might be re-opened by the preferential creditors. As a result of this, the Inland Revenue, HM Customs and Excise, and the Redundancy Payments Service jointly issued a policy statement saying, in effect, that they would not seek to challenge distributions made before 5 June 2001 solely for a Brumark related reason. Therefore, in this case, even though it would be the Crown as a preferential creditor, that would be the main beneficiary if the liquidator's application succeeded, the Crown did not take any part in the case.

This judgment has provided a small amount of certainty in the fixed and floating charge over book debts debate. However, there are still many unclosed cases where insolvency practitioners are unable to distribute book debt proceeds because of the uncertainty that remains. The Spectrum appeal will, we hope, provide some more answers.

If you would like more information, please contact Inga West on 020 7367 3478 or at [email protected]