National Westminster Bank plc v Spectrum Plus Limited

"National Westminster Bank plc v Spectrum Plus Limited" [2005] UKHL 41 was a UK company law decision of House of Lords which 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 considered at some length the power of the court to make rulings as to the law which were "prospective only", so as to mitigate potential harshness when issuing a ruling which was different from what the law had previously been understood to be.

It is often referred to simply as the Spectrum Case.

Composition of the court

Unusually, the case was heard by seven sitting Lords of Appeal in Ordinary:
*Lord Nicholls of Birkenhead
*Lord Steyn
*Lord Hope of Craighead
*Lord Scott of Foscote
*Lord Walker of Gestingthorpe
*Baroness Hale of Richmond
*Lord Brown of Eaton-under-HeywoodIt is likely that the higher number of Law Lords was a feature of the prospective ruling point, as was the request to the Attorney General to appoint advocates to the court to address their Lordships on this issue.

The floating charge point

The central legal issue in the case is whether the charge over present and future book debts, granted by Spectrum to National Westminster Bank Plc under a debenture was a fixed charge (which it was expressed to be), or merely took effect as a floating charge. The bank argued that it was a fixed charge, and the Crown creditors (mainly the Inland Revenue and Customs) argued that it was a floating charge. If held to a floating charge, Spectrum's preferential creditors (including the Crown creditors) would be entitled to have their debts paid out of the proceeds of the book debts in priority to the bank's claims. [section 175, Insolvency Act 1986] If the court declared it not a floating charge, the preferential creditors have no such priority, and the bank would be entitled to the whole of the proceeds.

As Lord Scott remarked, the amounts at stake were relatively trivial: approximately £16,136. But the case was a test case.

The law relating to the characterisation of floating charges had been in a state of uncertainty for some time. The leading authority had been a decision of Slade J in "Siebe Gorman & Co Ltd v Barclays Bank" [1979] 2 Lloyd's Rep 142. That decision had been subject to serious academic criticism, and had been doubted by Hoffman J in "In re Brightlife Ltd" [1987] Ch 200. But "Siebe Gorman" was followed (and arguably extended) by the English Court of Appeal in "In re New Bullas Trading Ltd" [1994] 1 BCLC 485.

In the Court of Appeal, it had been suggested that, notwithstanding the failings of "Siebe Gorman", it should be allowed to stand as it had been relied on as a judicial precedent for nearly 25 years. None of the speeches in the House of Lords suggested that precedents that were otherwise flawed should be upheld for commercial expediency.

Their Lordships held that the hallmark of a floating charge and a characteristic inconsistent with a fixed charge is that the chargor is left free to use the assets subject to the charge, and by doing so to withdraw them from the scope of the security. Lord Scott indicated that following features of the debenture under consideration should be taken into account.
# 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.However, Lord Scott immediately qualified his own list by indicating that restrictions on Spectrum's right to deal with its uncollected book debts would go very little way in supporting the characterisation of the charge as a fixed charge.

Although Lord Scott did not set out these factors as a "shopping" list to determine the validity of fixed charges over book debts, it seems likely (based on similar judicial pronouncements) that in time they may come to have that effect.

In the final analysis it was held that because Spectrum was free to deal with its debtors and utilise the proceeds of the debts, these were inconsistent with fixed security, and that the charge would characterised as a floating charge despite being described as a fixed charge. "Siebe Gorman" was formally overruled. The fundamental legal question in relation to characterisation was defined as whether the charge holder in Spectrum had exercised enough control over the proceeds of the book debts to sustain a fixed charge.

The prospective rulings point

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". The question clearly concerned Lord Nicholls(para 29):

Lord Nicholls then went on to note 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:

He held that, in exceptional cases, it would be open to the court to hold that a new interpretation of the law should only be applied 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 thus relegated his comments upon propsective 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 this point, it seems clear that the decision on this point will be treated as binding precedent.


In relation to the substantive issues, the Revenue had already indicated that it would not seek to reopen recent liquidations which 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.

Where "Spectrum" does indeed transpire to be the "last word" on fixed charges over book debts remains to be seen.

ee also

*Floating charge
*Voidable floating charge
*"Stare decisis"


External links

* [ "Nat West Bank v Spectrum" - full case report]
* [ Fixed and floating charges after "Spectrum"]
* [ Ramifications of "Spectrum"]

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