26 August 2005

In 2001, the Privy Council reached a controversial decision in the 'Brumark' case. It effectively overturned the right of creditors, usually banks, in possession of a 'fixed charge on books debts' agreement, to take precedence over other preferential creditors (like NIC, HMRC and employee claims)*

Relying on this precedent, Insolvency Practitioners have withheld payments to banks ahead of other creditors on the evidence of a fixed charge on book debts' alone.

But, according to licensed insolvency practitioner Edward Cook, a partner at our Manchester office, the referral of the parallel Spectrum Plus' case to the House of Lords has caused widespread uncertainty in the interim.

On Thusday (June 30th), however, the House of Lords reached what Cook regards as a very helpful conclusion on 'Spectrum Plus' case that clarified the issues:

"The Law Lords decided that a 'fixed charge on book debts' alone is unlikely to be effective way for banks to push their way to the front of the creditors' queue," explained Cook.

"It allows Insolvency Practitioners to pay the usual preferential creditors ahead of the banks and thus close a number of outstanding cases. This decision will enable them to distribute millions of pounds of funds held pending the ruling.

"Because this decision has retrospective effect, there is still uncertainty about how the Preferential Creditors will view payments made to the banks under the terms of 'fixed charge on book debts' agreements made before the 2001 Brumark decision.

"The Crown has said that they will not seek retrospective recompense from the banks for monies that would otherwise have been paid to the Exchequer but employees - through Trade Unions - may take a different view. Large sums are involved. We shall have to wait and see."

"In a nutshell," he adds, "a 'fixed charge on book debts' will still put the banks ahead of ordinary creditors - but behind the Preferential Creditors."

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