Haque, AKM Masudul --- "The Floating Charge as a Security Device" [2006] UWSLawRw 2; (2006) 10(1) University of Western Sydney Law Review 25

THE FLOATING CHARGE AS A SECURITY DEVICE

A.K.M. Masudul Haque^[∗]

Introduction

The ‘floating charge’ had its origins in a series of decisions in the English Courts of Chancery in the 1870s.^[1] As noted by Hoffman J in Re Brightlife Ltd^[2] ‘(t)he floating charge was invented…to enable manufacturing and trading companies to raise capital on debentures. It could offer the security of a charge over the whole of a company’s undertaking without inhibiting its ability to trade.’^[3]

While most of the case law and academic discussion concerning floating charges relates to ‘chargor companies’, floating charges may also be given over the property of individuals,^[4] partnerships^[5] and joint venture participants.^[6] However, the discussion in this paper is limited to a consideration of the law as it affects floating charges under s 262 (1)(a) of the Corporations Act 2001 (CA), which requires registration, taken over the property of Australian companies.

The definition of ‘floating charge’ in the Corporations Act 2001 is used as a starting point for the discussion in this paper. Part B of the paper discusses the nature of a floating charge, Part C discusses the nature of security devices and Part D the relative strengths and weaknesses of the floating charge as a security device.

Nature of a floating charge

Definitions

A ‘charge’^[7] (hypothecation) is commonly recognised as arising^[8] from an agreement between two parties in the following circumstances:

(a) in a transaction for value (ie. a contract) between two parties, (‘the chargor’ and ‘the chargee’);

(b) where both parties evince an intention that existing or future property;

(c) shall be appropriated (ie. made available) to the chargee in order to discharge the payment of a debt therefrom in priority to the claims of other creditors.^[9]

The essence of a charge is that certain property is ‘appropriated’ or ‘made available as security’ for the payment of a debt. Once property is appropriated in this manner, the charge is said to ‘fix’. Where the subject property is appropriated immediately to the chargee upon the chargor’s acquiring an interest therein, the charge is known as a ‘fixed charge’.

Where at its commencement the chargee’s rights attach not to any specific assets but to a shifting fund of assets, with the chargor being left free to manage the fund in the ordinary course of business until some later event occurs or act is done whereupon specific assets are appropriated to it (referred to as ‘crystallisation’ of the charge), the charge is known as a ‘floating charge’.^[10]

It follows that charges may either be ‘fixed’ or ‘floating’ with respect to particular assets but not at the same moment of time.^[11]

Evolution of the ‘floating charge’ - contractual and implied terms

The courts have implied various terms into floating charges in order to give them efficacy (ie. in the absence of agreement otherwise) and the draftsmen have employed a number of contractual devices to enhance the usefulness of the floating charge as a security. The significant features of the floating charge are discussed below:

Nature of property charged

Where the courts found an intention to create a floating charge,^[12] the charge was held to relate to the property of the company of the nature described in the charge^[13] both present and future.^[14] Consequently, upon crystallisation the charge becomes fixed, catching all property in which the company then has or subsequently acquires^[15] an interest. Provided the intention to create a floating charge is expressed, the parties are free to specify the particular assets or classes of assets to be subject to a floating charge.

The trading power

As floating charges relate at their inception to a shifting fund of assets, the courts held that the parties intended to enable the chargor to manage the assets subject to such a charge as a going concern.^[16]

The distinguishing feature of the floating charge is that the chargor could carry on its business in the usual way as regards the assets charged, and the asset subject to the charge was not finally appropriated as a security for the payment of the debts until the occurrence of some future event. This right to carry on dealing with the charged property prior to crystallisation, referred to as the ‘trading power’, is considered to be ‘the essence of the floating charge’^[17] and was held by the courts to give power to the charger to deal with the subject property in the ordinary course of business and hence to include the power to:

a) buy, sell, exchange or lease the charged property. This power was generously interpreted by the courts to encompass even the sale of the undertaking of a business as falling within ‘the ordinary course’ of the business;^[18] and

b) create subsequent specific (ie. fixed) charges over the charged property in priority to the floating charge.^[19]

c) Concede a right to set-off.^[20]

It appears that ‘trading power’ is properly characterised as the chargor’s freedom to deal with the charged property in the exercise of its property rights therein subject to the contractual restrictions implied or expressed in the charge, such as the prohibition on dealing with the property outside the ordinary course of business.^[21]

In order to avoid loss of priority by the floating chargee to subsequent chargees the draftsman of the 1890s introduced into the floating charge what has become known as ‘restrictive clause’ or ‘negative pledge’ to the effect that the chargor was prohibited from creating a subsequent charge ranking in priority or pari passu. The restrictive clause proved to be of limited value however as the courts would only give it effect if it could be established that the subsequent chargee had notice of the terms thereof.^[22]

The use of restrictive clauses was more effective when coupled with ‘automatic crystallisation’ clauses, discussed below.

When crystallisation may occur

In Illingworth v Houldsworth^[23] Lord Macnaghten described a floating charge as, ‘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 as fasten^[24] on the subject of the charge within its reach and grasp’^[25] (emphasis added).

The courts have recognised a limited number of such events or acts will result in crystallisation of floating charges, in situations involving the chargor’s inability to deal with its assets,^[26] namely:

i) upon the winding-up of a company;^[27]

ii) upon cessation of trading^[28] or on sale of the undertaking with a view to cessation of trading;^[29]

iii) upon the appointment of a receiver^[30] by the chargee or upon the taking of possession by the chargee following default of the chargor.

For convenience these will be referred to as ‘traditional crystallising events’.

Contractual provisions: The draftsmen of the 1960s were particularly innovative in this area and courts have upheld provisions for:

(a) ‘automatic crystallisation’^[31] upon intervention by the chargee;^[32]

(b) ‘automatic crystallisation’ not necessitating intervention by the chargee, for example upon the appointment of a receiver under a previous debenture,^[33] upon default under the charge^[34] or upon breach or attempted breach^[35] of a restrictive clause upon dealing with the charged property other than in the ordinary course of its ordinary business.^[36]

There seems no reason from a contractual point of view why charges may not make provision for the de-crystallisation^[37] and re-crystallisation in relation to specified charged assets.^[38] This of course is subject to any public policy limitations that may be imposed by the courts as discussed below.

The ‘floating mortgage’

As noted, the statutory ‘floating charge’ recognised under the Corporations Act 2001^[39] includes transactions which, apart from their statutory nature, are correctly described as ‘floating mortgages.’^[40]

The nature of a security device

In a strict legal sense a ‘security device’ is one which gives to a party (the ‘secured party’) rights over the property owned by another party (‘the surety’) in order to obtain payment of a debt or performance of an obligation by the surety or some other party. Such property rights may be given to the secured party:

(a) by way of an assignment of, or a promise to assign, legal or equitable title in the property to the secured party (eg. legal and equitable mortgages); or

(b) by way of possessory rights in the property conferred upon the secured party (eg. pledges and possessory liens).

When considering strengths and weaknesses of the floating charge as a ‘security device’ traditional securities conforming to the above definition and a number of ‘quasi security’^[41] devices will be considered.

The charge has traditionally been regarded as conferring proprietary rights,^[42] hence conferring upon the chargee a ‘security interest’. An agreement creating a charge (fixed or floating) does not however necessarily involve either assignment of title^[43] or the right to obtain possession of the charged property. Where such rights are absent the charge gives rise only to contractual rights enforceable in equity as ‘mere equities’ or ‘rights in personam’.

In the absence, therefore, of an express contractual (or statutory) right to enter into possession^[44] of the charged property,^[45] the chargee’s only rights involve taking action personally against the charger to enforce the charge.^[46] Strictly speaking therefore, such transaction is unsecured.^[47]

On the other hand the courts have effectively treated equitable charges as conferring proprietary rights in the application of equitable priority rules. Under these rules, the holder of a subsequent equitable mortgage or charge and even a purchaser for value of the legal estate in the charged property will take his interest ‘subject to’ a prior equitable charge of which he has actual notice.^[48]

The strengths and weaknesses of the floating charge relative to other security devices

This issue is considered from the perspective of the chargee under a floating charge. It is assumed that the chargee has taken all steps to protect its position as may be suitable in the chargee’s circumstances^[49] and has registered the charge^[50] and lodged notice of any restrictive clause in accordance with s 279(3) Corporations Act 2001.

The primary strength of a floating charge is its ability to secure assets of a ‘circulating’ nature^[51]. However the security provided by a floating charge is of limited or no value to the extent that such assets, while used in the chargee’s business are not owned by it or are subject to dispositions of a voluntary or involuntary^[52] nature prior to crystallisation.

The protection offered by the floating charge is further diminished by the various statutory preferential payments to be made in priority to the charge upon realisation of the security.

These matters tend to weaken the security value of a floating charge, and the extent to which they may be avoided by an appropriately drafted crystallisation clause and other measures are discussed below.

The capacity of a floating charge to secure ‘circulating assets’ used in a business

The floating charge is one of the few traditional security devices which is effective to operate as security over ‘circulating’ (ie. non-fixed) assets such as book debts, chattels, stock in trade, raw materials and other such assets of a kind that in the ordinary course of business would be changing from time to time.

The advantage of a floating charge over a fixed charge is that the chargee’s consent or release need not be required or sought in respect of the disposal of each item of charged property in order to avoid a breach of the terms of the charge. The floating charge is clearly less likely to inhibit turnover of stock and efficient conduct of the business. It is wholly impracticable to give a new fixed charge upon each new purchase by the charger.

However, in some circumstances it was possible to draft an effective fixed charge/mortgage over shifting and circulating assets by providing that the charge/mortgage extends to future property and that the chargee/mortgagee maintains control over the charged asset. This was illustrated by the Siebe Gorman case ^[53] where the courts upheld as valid an attempt to create a fixed charge over book debts. By the terms of that charge, the chargee exercised sufficient control over the book debts (including requiring the chargor company to pay all proceeds into his account with the chargee bank) that the vital element of the floating charge, namely, the chargor’s freedom to manage its assets in the ordinary course of business, was missing.

However, such attempts have not succeeded where they have been construed by the courts as ‘disguised floating charges’, notwithstanding the parties’ describing the charge/mortgage as ‘fixed’, where legally or in practice^[54] the chargor is given the power to deal with the assets in the ordinary course of business. The House of Lords in National Westminster Bank v Spectrum Ltd^[55] overturned the decision in Siebe Gorman retrospectively.

Thus the use of a fixed charge/mortgage in securing ‘circulating assets’ is in practice limited. First, such assets are not normally susceptible to such rigorous control by the chargee without undue interference with the chargor’s business. Secondly, the risk of uncertainty as to the true legal nature of such transaction is commercially undesirable. However, the House of Lords decision in National Westminster Bank Plc v Spectrum^[56] has now brought a degree of certainty as to the true nature of floating charges. The decision in the above case made it clear that the central feature which distinguished a floating charge from fixed charge lay in the chargor’s ability to control and manage the charged assets and withdraw them from security freely and without the chargee’s consent. However, their Lordships agreed that it is still conceptually possible to create a fixed charge over book debts. Lord Hope listed the possible ways^[57] of creating a fixed charge over book debts. The ways are:

1. To assign the book debts to the chargee;

2. To require the charger to pay the collected proceeds to the chargee in reduction of the outstanding debt;

3. To require the charger to pay the collected proceeds into a blocked account^[58] with the chargee’s bank; or

4. To require the charger to pay the collected proceeds into a separate account with a third party bank over which the chargee has a fixed charge.

In other words, ‘in order to create a fixed charge over book debts there must be a restriction in the debenture forbidding their disposal; a requirement that that they be paid into a blocked account and that such account is operated as a blocked account in fact. If the blocked account was never intended to be operated as one in fact and in practice the chargor was free to apply the book debt realisations as it wished then the charge will be construed to be [a] floating charge’.^[59]

Factors reducing the value of the security prior to crystallisation

Over the last 30 years, following the famous English decision in Aluminium Industries Vaasen B.V v Romalpa Aluminium,^[60] the use by trade suppliers of ‘Romalpa clauses’^[61] in various forms has become an increasingly common retention of title ‘security’ device^[62] employed by suppliers of goods.

Such clauses which normally allow the buyer to sell or deal with the supplier’s goods (subject to a duty to account for the proceeds), have often been construed by the courts as disguised floating charges arising by way of ‘implied grant back to the sellers’.^[63] Consequently these have proved ineffective against a receiver, official manager or liquidator for want of registration.^[64]

However a wide form of Romalpa clause referred to as the ‘All accounts Romalpa clause’ has received recognition in the two significant decisions - the House of Lords in Armour v Thyssen Edelstahwerke A.G^[65] and in the Queensland Supreme court in Puma Australia Ltd v Sportsman’s Australia Ltd.^[66] Under this clause the supplier retains title in the goods supplied until it has received payment for those goods and all other payments due from the buyer to the supplier.^[67]

These decisions considerably strengthen the position of a trade supplier at the expense of the floating chargee, particularly in retail operations.^[68] Another development with potential to reduce the pool of assets traditionally available to the floating chargee in the increasing use of the financial technique known as ‘securitisation’.^[69] As this financing technique is being increasingly used by Australian companies^[70] as a way of accessing capital^[71], its use may result in a substantial shrinkage of the pool of assets traditionally available to a floating chargee.^[72]

Upon securitisation, the assignee of the securitised asset may take priority over a prior registered floating chargee provided the former has no actual notice of any restrictive clause in the floating charge.^[73] However where the asset is a future debt there may be practical difficulties for the assignee in complying with the requirement to give notice a large number of debtors in order not to lose priority under the role in Dearle v Hall.^[74]

The factoring of book debts^[75] is a simpler and more commonly used technique that may similarly defeat the security interest of the chargee. As noted above,^[76] while the charge floats the charger company may be given very wide ‘powers’^[77] to make a variety of other dispositions of charged assets in the ordinary course of the chargee’s business perhaps resulting in a substantial de-valuation of the charged assets.^[78]

It is suggested that the chargee’s remedies are very limited even in the case of dispositions outside the ordinary course of business.^[79] There is some authority^[80] for the proposition that a chargee whose security is ‘in jeopardy’ may apply to the court for an injunction to restrain the chargor from dealing with the charged assets.

Recent authoritative judicial statements^[81] are to the effect that the holder of a floating charge has no proprietary interest in the charged property prior to crystallisation. It is therefore difficult to see how the court exercising equitable jurisdiction could grant an injunction to restrain a chargee from alienating the property as the underlying bargain does not involve an assignment of or a promise to assign to the chargee the legal or equitable title to the charged property.^[82]

Finally, there are various types of garnishee orders^[83] that may be obtained in respect of the chargor’s property and debts subject to a floating charge.^[84] The party serving the garnishee order will gain priority over the chargee with respect to such property where the garnishee party has been served with the relevant notice^[85] prior to crystallisation of the charge.

Factors reducing the value of the security after crystallisation

Upon crystallisation the charge will fix on the charged assets, subject to any prior registered charges and to set-offs arising prior to crystallisation. The chargee will then take steps to realise the security subject to the making of various preferential payments in accordance with the Corporations Act.

Where a receiver is appointed pursuant to the powers in the charge or where the chargee goes into possession they are obliged to account first to priority creditors under s 433 (in respect of insurance monies payable to third parties and certain monies owing to employees). The receiver may also be liable to pay the Commissioner of Taxation an amount representing unremitted group tax collected by the chargor, in accordance with s 221P^[86] of the Income Tax Assessment Act 1936 (Cth) whereby a ‘trustee’ (which includes a receiver) who exercises ‘control’ over a company’s property is obliged to pay the amount owing to the Commissioner in priority to all other payments. This section should not cause further problems for chargee in light of the decision in Deputy Commissioner of Taxation v Chant ^[87] that held that where a receiver was not appointed over all of the assets (referred to as a partial appointment), s 221P is ineffective against him.

Where a liquidator is appointed to the chargor company prior to the appointment of a receiver, the liquidator must account to priority creditors (similar to those in s 433) under s 561 before the floating chargee is entitled to payment. Section 566 is a final hurdle for the floating chargee. This section provides that any floating charge ‘created’ by the company within six months’ of the commencement of winding up shall be invalid,^[88] unless it can be shown that the company was insolvent immediately before granting the charge.

Making the most of ‘automatic crystallisation’

A carefully drafted crystallisation clause will maximise the value of the security. In most circumstances it would be prudent to charge separately each of the assets subject to the charge. Provisions for automatic crystallisation without intervention can be drafted so as to fix the charge onto specific assets upon the happening of various ‘threatening events’:

(a) the chargor’s debts or goods become subject to ‘garnishee’ orders referred to above upon the happening of some ascertainable event preceding the receipt of the relevant notices by the garnishee party;

(b) any assets dealt with outside the ordinary course of business;

(c) upon the entering into of such assignments involving sale and lease-back transactions and factoring arrangements^[89] and depending upon the circumstances;

(d) the whole of the assets subject to the charge where, for example, a crystallising event occurs under another charge.

One question which arises in drafting these ‘self-executing’ provisions, is whether crystallisation should be expressed to occur upon the ‘attempt’ to charge or transfer the relevant assets (for example in (a) to (d) above)? Such a provision was upheld in the New Zealand case of Re Manurewa Transport Limited.^[90] This would seem in theory the only way to ensure that the transferred property does not pass to a third party out of the control of the fund of charged assets before crystallisation takes place.^[91]

The decision of the full court in the Fire Nymph case^[92] also has some conceptual problems. The crystallising event in that case was a dealing by the chargor with the charged property ‘other than in the ordinary course of its ordinary business’ not as an ‘attempt’ to do so. Yet the court held that although the charge could not become fixed retrospectively (as held at first instance), it could fix simultaneously.

This takes no account of the scintilla temporis^[93] doctrine according to which the property in the heating units would have passed immediately after the transfer (i.e., after the crystallising event), by which time the chargor had no property in the heating units to which the charge could attach. It remains to be seen how this question will be dealt when it is further considered directly by the courts. A provision should be made for automatic crystallisation with intervention by the giving of a notice by the chargee to allow the flexibility to act in unforseen circumstances.^[94]

One further drafting technique currently adopted is to make provision for de-crystallisation^[95] (and subsequent re-crystallisation) of particular assets by the giving of a further notice by the chargee so that the charge ‘floats’ once more with respect to those assets.

The use of this device could have some undesirable consequences for the chargee for example, there may be a resultant discharging of a guarantee or receivers could be personally liable (although they will in practice be indemnified by the chargee) for failing to deal with the assets on the basis of the earlier crystallisation.

Finally, there appears to be some uncertainty as to the date upon which such ‘floating charge’ would be created the purposes of invalidation within the six-month period specified in s 566 of the Corporations Act.

Conclusion

The strength or weakness of any security device must be measured by its ability to compete for priority with other security devices. Using this measure, the real strength of a floating charge (its ability to secure circulating assets of the chargor) is clearly its greatest weakness.

First, because company financing is becoming increasingly sophisticated with the result that circulating assets relating to both payables and receivables may not be in the ownership of the chargor, therefore outside the scope of the very property sought to be charged.

Secondly, concerning assets that are in the ownership of the chargor, these are most vulnerable while the charge is ‘floating’, so that the chargee must protect itself by a closely drawn crystallisation clause. Even then if the charge does crystallise, the chargor may be defeated by a legal assignee for value without actual notice that may be difficult to establish unless the parties are related.

Therefore the floating charge is perhaps to be regarded as a supplementary security, most useful when taken in conjunction with a fixed charge.

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^[∗] LL.M (Hons) (Int Law) Kiev, Ukraine, LL.M (Law in Dev) & PhD, Warwick, UK;

Lecturer, School of Law, University of Western Sydney.

^[1] See Re Panama, New Zealand and Australian Royal Mail Co (1870) 5 Ch App 318. This case is also regarded as the first judicial recognition of the floating charge.

^[2] (1987) 1 Ch.200.

^[3] Ibid, at 214. For a discussion on the origins and evolution of the floating charge see the opinion of the Privy Council, delivered by Lord Millett, in Agnew v Commissioner of Inland Revenue [2001] UKPC 28; [2001] 2 AC 710, 717 – 721, paras 5 – 15.

^[4] In Tailby v Official Receiver (1888) 13 App Cas 523 at 541 it was recognised that natural persons are capable of giving a floating charge. However, natural persons are practically denied the right to give floating charge because of various statutes governing securities provided by natural persons. See Ford H A J, Austin RP and Ramsay I M, 12^th ed, Ford’s Principles of Corporations Law, Lexis-Nexis Butterworths, Australia, 2005, 912.

^[5] Partners may grant floating charges over partnership property or over their interests in the partnership. See Everett D, ‘Security over a Partnership’, a paper delivered at the C.L.E. Securities IV Seminar, 16 – 18 November 1990, published by the Queensland Law Society, 46.

^[6] It is a common practice for joint venture participants to enter into floating cross-charges given by each participant to each of the others in order to secure mutual obligations owed under the joint-venture agreement.

^[7] The term ‘charge’ has multiple meanings in relation to companies. Ford’s Principles of Corporations Law mentions three meanings based on general usage (a wide meaning), strict use (a narrow meaning), and a wide meaning provided in the CA. See Ford H A J, Austin RP and Ramsay I M, above n 5, 909. Charge is often referred to as an ‘equitable charge’. ‘(T)he charge is a creature of equity; there is no such thing as a legal charge, except as provided by statute’. See Goode R, Legal Problems of Credit and Security, 3^rd ed, Sweet Maxwell, London, 2003, p36. According to Goode, ‘[A] charge (also sometimes termed hypothecation) does not depend on either the delivery of possession or the transfer of ownership, but represents an agreement between creditor and debtor by which a particular asset or class of assets is appropriated to the satisfaction of the debt, so that the creditor is entitled to look to the asset and its proceeds to discharge the indebtedness, in priority to the claims of unsecured creditors and junior encumbrances. The charge does not transfer ownership to the creditor; it is merely an encumbrance, a weight hanging on the asset which travels with it into the hands of third parties other than a bona fide purchaser of the legal title for value and without notice.’

^[8] In other cases charges may arise as part of a trust under a settlement or will. However such charges are not strictly regarded as security interests. See Sykes E I and Walker S, The Law of Securities, 5^th ed., The Law Book Co., Sydney 1993 at 19.

^[9] These elements may be derived from Lord Atkin’s analysis of the nature of a charge in National Provincial and Union Bank of England v Charnley [1924] KB 431 at pp 449-450 which was referred to by Buckley LJ in Swiss Bank Corporation v Lloyd Bank Ltd (1982) AC 584 at 597.

^[10] Romer LJ in Re Yorkshire Woolcombers Association Ltd [1903] 2Ch 284 at 295 mentions three widely accepted characteristics of a floating charge: 1. A charge over a class of present or future assets of a company; 2. In the ordinary course of business of the company the assets within that class would change from time to time; and 3. It is contemplated that until some further step is taken by the charger the company may carry using those assets in its business in the usual way.

^[11] (a) See Gough W J, Company Charges, Butterworths, London 1978 at 69. ‘The fundamental axiom is that the floating charge is the antithesis of a specific charge: by definition, the existence of one excludes the other.’ (b) That is not to say that a charge cannot provide that it is specific as to some assets and floating as to others – see note 50 (b) below. (c) Also, the terminology of the ‘floating charge’ may be used to refer to such charge after it has become fixed, see for example the definition of ‘floating charge’ in the Corporations Act.

^[12] The courts easily inferred such an intention where the charge was expressed to be over the ‘undertaking’ or ‘property’ to be floating in order to ‘avoid the paralysis of the business of the company as a going concern, which a charge on any other view of the nature, i.e. specific, would otherwise have had’ see Gough, ibid, 77 and Re Panama, New Zealand, and Australian Royal Mail Co (1870) 5 Ch App 318.

The intention of the parties in creating a floating charge acts only as an indication of the rights of the parties and is not conclusive in determining the nature of the charge. If the chargee not only leaves collection of the debts in chargor’s hand but also allows the chargor to deal with the sums collected as chargor’s own, the chargee’s interest, even if labelled fixed by the terms of the security agreement, will be characterised by the court as floating charge. See Agnew v Commissioners of Inland Revenue [2001] UKPC 28; [2001] 2 AC 710; Re Brightlife Ltd (1987) 1 Ch 200; Hart v Barnes [1983] VicRp 111; (1982) 7 ACLR 310. In National Westminster Bank Plc v Spectrum Plus Ltd [2005] UKHL 41, the House of Lords decided that a charge which left the chargor free to deal with the book debts and withdraw them from security without the consent of the chargee was a floating charge despite the parties describing it as fixed charge.

^[13] That is, the entire property of the company in the case of a charge over the ‘undertaking’, or ‘property’ of the company and property of the class or classes referred to in the charge in other cases, eg book debts.

^[14] See Re Yorkshire Woolcombers Association Ltd [1903] 2 Ch 284 at 295 per Romer LJ.

^[15] See N. W. Robbie & Co Ltd v Witney Warehouse Ltd [1963] 3 All ER 613.

^[16] See Gough W J, ‘The Floating Charge: Traditional Themes and New Directions’ in Finn P D (ed) Equity and Commercial Relationships, The Law book Co., Sydney 1987 242. See also note 9.

^[17] See National Westminster Bank Plc v Spectrum Plus Ltd [2005] UKHL 41.

^[18] See Re Borax Co Foster v Borax Co (1901) 1 Ch D 326 which held that a sale of substantially all of the company’s undertaking for the purposes of amalgamation was in the ordinary course of the company’s business as first the transaction was not ultra vires the company’s powers and secondly the company has not ceased to be a going concern.

^[19] See Wheatley v Silkstone and Haigh Moor Coal Co (1885) 29 Ch D 465.

^[20] See Biggerstaff v Rowatt’s Wharf Ltd [1896] 2 Ch D 93.

^[21] The suggestion that the ‘trading power’ is a licence to deal with assets the subject of a specific mortgage has been firmly rejected by the courts – see the case of Fire Nymph Products Ltd v The Heating Centre Pty Ltd (in liq) (1992) 7ACSR 365.

^[22] See English & Scottish Mercantile Investment Co Ltd v Brunton [1892] 2 QB 1.

^[23] [1904] AC 355.

^[24] i.e. crystallise.

^[25] Illingworth v Houldsworth [1904] AC 355 at 358.

^[26] i.e. those assets then subject to the terms of the floating charge: see Gough, above n 12, 85.

^[27] The appointment of a provisional liquidator is not however enough to crystallise a charge as the company is not thereby disabled from carrying on its business. This was decided in Re Obie Pty Ltd (No2) 8 ACLR 574 where Thomas J made the point at 581 that the appointment of a provisional liquidator seeks to ‘secure preservation of the status quo and the express continuation of the company business at least to a limited extent’.

^[28] See Edward Nelson & Co Ltd v Faber & Co [1903] KB 367.

^[29] See Hubbuck v Helms (1887) 56 L.T. 232.

^[30] (a) See Evans v Rival Granite Quarries Ltd [1910] 2 KB 979. (b) Crystallisation will occur upon the appointment of a receiver, before he goes into possession.

^[31] i.e. crystallisation in accordance with an express contractual term in circumstances in addition to the traditional crystallisation events referred to above. For a discussion of automatic crystallisation see Yeomans N, Automatic crystallisation clauses: The way forward, Journal of Banking and Finance Law in Practice, vol 17, No 1, March 2006, 5-14.

^[32] See Re Brightlife Ltd (1987) 1 Ch 200, which recognised a provision for converting the floating charge into a fixed charge through the giving of notice in writing at any time to the chargor as regards any assets specified in the notice.

^[33] See Stein v Saywell [1969] HCA 16; [1969] 121 CLR 529.

^[34] See Deputy Commissioner of Taxation v Horsburgh and Anor [1983] VR 591 at 601 where Murphy J held that the floating charge crystallised in accordance with the terms of the charge upon default in repaying monies borrowed.

^[35] See Re Manurewa Transport Ltd [1971] NZLR 909, which provided for crystallisation upon the creation or attempt to create a further mortgage, charge or encumbrance without the chargee’s written consent.

^[36] See Fire Nymph Products Ltd v The Heating Centre Pty Ltd (in liq) (1992) 7ACSR where the transfer by the charger of the whole of its stock back to its supplier was held not to be in the ordinary course of the chargor’s business.

^[37] See Part D below where ‘de-crystallisation’ is considered in further detail.

^[38] (a) As discussed by Goode, above n 8, 150 – 151. (b) Cf, Evans v Rival Granite Quarries Limited [1910] 2KB 979 per Fletcher Moulton LJ in obiter ‘(it) is inconsistent with the nature of a floating security that the holder should be able to pounce down on particular assets’. In that case however there was no express contractual term providing for crystallisation of specified assets.

^[39]By virtue of the definitions of ‘charge’ and ‘floating charge’ under s 9, CA.

^[40]See Gough, above n 12, 75.

^[41]It is relevant to consider such devices as they are often employed to the same end as traditional ‘security’. See, for example Puma Australia Ltd v Sportsman’s Australia Ltd, Supreme Court, Qld, Moynihan J, No 346, 7 December 1990.

^[42](a) Although the recent authority suggests that prior to crystallisation, a chargee under a floating charge obtains ‘no proprietary right even in equity’ to the charged assets, see Tricontinental Corporation Ltd v FCT [1988] 1 Qd R 474 per Williams J at 485. (b) Cf. Re Margart Pty Limited (in liq) (1984) 9 ACLR 269; Hamilton v Westpac Banking Corporation and Anor (1984) ACLC 709 where Helsham J held that prior to crystallisation the chargee acquired a ‘beneficial interest in the property the subject of the charge’.

^[43]Cf, A ‘floating mortgage’ which is clearly proprietary in nature.

^[44]If on the one hand the parties transfer or agree to transfer title in the ‘charged assets’ the resulting transaction will be a mortgage, rather than a charge.

^[45]Such a provision will usually be found in well-drafted charges and will give rise to crystallisation in a floating charge.

^[46]For example by seeking an injunction to restrain the chargor from dealing with the charged assets outside the chargor’s ordinary course of business as discussed at Part D.2 below.

^[47]See Everett D, The Nature of Fixed and Floating Charges as Security Devices, monograph published by Monash Law Press, Monash University, July 1988, at 5, 33.

^[48](a) See for example, Fire Nymph Products Ltd v The Heating Centre Pty Ltd (in liq) (1992) 7ACSR 365, where the purchaser of the legal estate in property acquired the property subject to an equitable charge of which the purchaser, in the absence of evidence to the contrary was deemed to have notice. (b) See also Goode, above n 8, 14.

^[49]Including the following as necessary: (a) ‘separate charge’ on each asset; (b) power of sale; (c) power to appoint receiver/ enter into possession; (d) express prohibition on dealing outside cause of business; (e) restrictive clause; (f) provision for automatic crystallisation with/without intervention/ de-crystallisation/re-crystallisation.

^[50](a) i.e. Registration under s 262 Corporations Act 2001; and (b) Registration under other State legislation where non-registration there under affects validity or priority of the charge. This will be necessary as the priority conferred by s 273(1)(b) Corporations Act is limited in light of the decision in Re Bauer Securities Pty Ltd & Anor (1990) 8 ACLC 230 (ie. the equivalent provision under the previous Companies (Queensland) Code was held ‘not to add to or improve validity or effect’ if it is otherwise invalid or ineffective under the Bills of Sale and Other Instruments Act 1955-1981).

^[51](a) On the other hand a fixed charge offers better ‘security’ over ‘fixed assets’ as such assets are susceptible to control by the chargee unlike circulating assets and the chargee will enjoy a better priority position than a floating chargee, as will be discussed below. (b) As the two forms of charge are complementary the ‘composite charge’ which has both fixed and floating elements is in common use. (c) For the purpose of this paper ‘circulating assets’ includes stock in trade.

^[52]For example, the various forms of garnishee orders discussed below.

^[53]This may occur upon execution of the charge or in the case of ‘future’ property of the chargor, when the property comes into existence or into the ownership of the chargee. For example a fixed charge may include future book debts, see Siebe Gorman & Co Ltd v Barclays Bank Ltd [1979] 2 LR 142.

^[54]The courts are prepared to have regard to the conduct of the parties ‘subsequent’ to and inconsistent with terms of the charge in controlling the charged asset in determining whether the charge is fixed or in reality a ‘disguised floating charge’ – see, for example, Norgard v Deputy Federal Commissioner of Taxation [1984] VicRp 41; [1984] VR 503.

^[55] 2005] UKHL 41.

^[56] Ibid.

^[57] National Westminster Bank Plc v Spectrum Plus Ltd [2005] UKHL 41 at 54.

^[58] A blocked account is an account from which withdrawals cannot be made, or can only be made with permission of the deposit-taker, or can only be made on conditions, or can only be made for identified purposes.

^[59] Bannon D, ‘The End of Fixed Charges on Book Debts?’, Business Law Review, October 2005, 247.

^[60] [1976] 1 WLR 676.

^[61]The so-called ‘Romalpa clause’ named after the case is one under which the supplier of goods under its contract gives the buyer a defeasible right to retain and deal with the goods until the terms of the contract are fulfilled. Upon breach of contract, the supplier is entitled to return of the goods.

^[62]Other similar devices are commonly used. I.e. where the supplier retains title yet gives the company possession of the goods as bailee or lessee, for example, in sale and lease-back transactions, consignment plan and floor plan arrangements.

^[63]For example, Re Bond Worth [1979] 3 All ER 919.

^[64]Under the equivalent of s.262 CA.

^[65] [1990] 3 WLR 810.

^[66]Unreported, Supreme Court, Qld, Moynihan J., No. 346, 7 December 1990.

^[67]Such a clause was upheld in Puma Australia Ltd v Sportsman’s Australia Ltd [1990] 3 WLR 810 notwithstanding the court’s acceptance that its true purpose was to supply the supplier with a form of security (i.e.: to protect the supplier from the consequences of insolvency or financial difficulty of the purchaser company).

^[68](a) However, the position is likely to be different where the goods supplied are used by the purchaser company in a manufacturing process and are converted into other goods even where the Romalpa clause provides for title to the manufactured product to vest in the supplier. The courts are likely to conclude that the parties’ true intention was to create a floating charge over the manufactured product in favour of the supplier unless the contract makes provision to compensate the purchaser for the costs of manufacture. (b) The supplier’s ‘title’ in the component good may also be extinguished in accordance with the doctrine of accession whereby title to the integrated product passes to the holder of the principal component. (c) See Everett, ‘Mortgages over Future Goods: Debts and Manufactured Goods’, School of Law, Bond University, September 1989.

^[69]See Bonsall D.C, Securitisation, Butterworths, London 1990, at 2: ‘ ‘Securitisation’ is a process under which pools of individual loans or receivables are packages, underwritten and distributed to investors in loans or receivables in the form of securities. These securities are collateralised by the assets themselves and/or the cashflows arising therefrom which represent the primary source of repayment to the investor.’

^[70]In Australia the securitisation of mortgage receivables is common and the technique is becoming increasingly widely used in relation to other assets (eg: credit card receivables) following developments in the financial markets of the United States and the United Kingdom over the past decade.

^[71]Following trends in the development of this financing technique in the United States and the United Kingdom over the past decade.

^[72]For example, assets which have the potential to be securitised are those which generate a ‘cash flow’ such as credit and charge card receivables, trade receivables and lease and hire purchase receivables.

^[73]The fact of an assignee’s ‘actual notice’ may be difficult for the chargee to establish. It appears that the assignee will not be fixed with constructive notice of any restrictive clause since constructive notice under the Corporations Law will only be effective in this context in relation to subsequent charges and not absolute assignments – ss 165, 279(3).

^[74] (1828) 3 Russ 1, 38 ER 475.

^[75]i.e. Transfer by the creditor company to a third party at a discount.

^[76]See examples of dealings falling within the ‘trading power’ above.

^[77]i.e. subject to the any contrary stipulation in the contract including a restrictive clause.

^[78]Another incident of the ‘trading power’ is that prior to crystallisation, debtors from the charger are able to establish rights of set-off arising from their mutual trading with the chargor.

^[79]Interestingly, there are few authorities on this point, possibly because the courts have given such a liberal interpretation to dealings that are within the ordinary course of the chargor’s business. i.e.: Just about any transaction outside ‘the ordinary course’ will result in the cessation of the business, one of the traditional grounds for crystallisation of the charge. Therefore, the chargee was able take action to appoint a receiver.

^[80]See Re Borax Co Foster v Borax Co (1901) 1 Ch D 326 and Tricontinental Corporation Limited v FCT [1988] 1 Qd R 474 at485 where Williams J remarked that ‘certainly….that the holder of a mortgage debenture has the right prior to crystallisation to intervene and obtain an injunction to prevent the company from dealing with its assets otherwise than in the ordinary course of its business’ although Williams J also noted that he had some difficulty in defining precisely the nature of that right. See also In re Woodroffes (Musical Instruments) Ltd [1986] 1 Ch D 366 at 378 per Nourse J.

^[81]The court in Tricontinental Corporation Limited v FCT [1988] 1 Qd R 474held that prior to crystallisation the holder of a ‘mortgage debenture’ (i.e.: the charge) had no interest even in equity in the property subject to the charge.

^[82]See on this point Everett, The Nature of fixed and Floating Charges as Security Devices. Also, as noted above there would be grounds for the granting of an injunction if the charge is in reality a ‘floating mortgage’.

^[83]For example, (a) a notice to pay the Commissioner of Taxation an amount under s 218 of the Income Tax Assessment Act 1936 (Cth) – see Tricontinental Corporation Limited v FCT [1988] 1 Qd R 474 ; (b) a notice to pay the Commissioner of Taxation an amount under s 38 of the Sales Tax Assessment Act (No. 1) 1930 – see Norgard and ors v. The Deputy Commissioner of Taxation and anor (1986) 86 ATC 4947; (c) a writ of execution (fieri facias); (d) a garnishee order obtained by a judgement creditor in respect of a debt – see Relwood Pty Ltd v Manning Homes Pty Ltd Underreported, Supreme Court of Qld (full court) No. 1325 of 1987, 21 March 1991.

^[84]It is interesting to note the remarks of Mason C.J. of the High Court when refusing to grant an application for special leave to appeal from the decision in Tricontinental Corporation Limited v FCT [1988] 1 Qd R 474. He cited with approval the following passage from Evans v Rival Granite Quarries Limited (note 37): ‘the right of a company to carry on its business as it wills pending.(crystallisation) … means that it may carry it on in accordance with law, including a liability to the process of the law if it does not pay its debts’.

^[85]In Relwood Pty Ltd v Manning Homes Pty Ltd, Underreported, Supreme Court of Qld (full court) No. 1325 of 1987, 21 March 1991 Derrington J in obiter said that the floating chargee would not lose priority until debt subject to the garnishee notice was actually paid to the third party by the debtor. He questioned the finding in Tricontinental Corporation Limited v. FCT [1988] 1 Qd R 474 on this basis (see the judgement of Derrington J at 20).

^[86]There are also similar provisions under the Income Tax Assessment Act 1936 (Cth) concerning withholding tax and prescribed payments tax.

^[87](1991) 91 ATC 4734

^[88]However in the case of such ‘invalid’ charge, the chargee is entitled to recover the amount of money actually paid to the company at the time of and in consideration of the granting of the charge with 8per cent interest thereon.

^[89] (a) This possibility was referred to in the judgement of Sheller JA in the Fire Nymph Products Ltd v The Heating Centre Pty Ltd (in liq) (1992) 7ACSR 365 at 377, where he stated that in practice charges commonly included negative pledges prohibiting the entering into of such arrangements but that ‘the effect of the breach by the charger of such restrictive clauses against dealings is the same as that of the traditional restrictive clauses against subsequent charges. In the absence of express words breach does not cause crystallisation.’ (b) However as noted above, the chargee will not gain priority over an assignee for value of the legal interest without actual notice of the floating charge and the restrictive clause.

^[90]Re Manurewa Transport Ltd [1971] NZLR 909. This aspect of the decision was cited with approval by Sheller JA in Fire Nymph Products Ltd v The Heating Centre Pty Ltd (1992) 7ACSR 365:’crystallisation is a matter of contract….(t)he contract may provide that the charge will crystallise if the charger attempts to deal with any of its property or assets otherwise than in the ordinary course of business without prior written consent of the lender.’

^[91]However, the use of this device could potentially lead to unintended (and probably undiscovered) consequences if, for example, an ‘aborted attempt’ is made to transfer assets where an attempt to do so is a crystallising event.

^[92] Fire Nymph Products Ltd v The Heating Centre Pty Ltd (in liq) (1992) 7ACSR 365

^[93]i.e. where there is a notional instant in time when title passed to the assignee before the charge became fixed. This doctrine has been rejected as ‘no more than a legal artifice’ in the House of Lords decision of Abbey National Building Society v. Cann [1990] UKHL 3; [1990] 2 WLR 832 and was rejected also in the decision of the Supreme Court of New South Wales in Composite Buyers Ltd v. State Bank of N.S.W. and Anor, Supreme Court, N.S.W., Hodgson J, No. 5495, 14 September 1990. It is fairly apparent that the scintilla temporis doctrine was rejected in these cases (rightly it is suggested) on policy grounds (ie. to protect mortgagees who take purchase money securities without which the relevant asset could not have been acquired).

^[94]Or, for example, upon default by the debtor in the payment of monies secured.

^[95]Sometimes referred to as a ‘refloatation’ clause. It is unclear whether the courts would uphold such a provision – see Purcell D, ‘Automatic Crystallisation of Floating charged’, edited by J O’Donovan, April 1989 Company and Securities Law Journal, 131.