Privy Council, Agnew and Bearsley v. The Commissioner of Inland Revenue [2001] B.C.C. 252 Floating and Fixed Charge
Authors: Van Erp Sjef , Bisping Christopher , Leunen Charles-Antoine 
Published: April 2022

Abstract: The most frequent method by which companies borrow money takes the form of debentures, which are usually accompanied by a charge on the company’s assets. One of the features of the company law which applies in Common Law countries, and which distinguishes it from that which prevails in most codified law systems on this issue, is the distinction made between the “fixed charge” and the “floating charge”.

Fixed charges normally take the form of legal mortgage over specified company assets, e.g. its land and buildings. A charge may also be fixed on the company’s present and future book debts, which prevents the company from using the debts without the consent of the chargee. On the other hand, companies may also give a lender a “floating charge”, being an equitable charge on some or all of the present and future property of the company. Normally such a charge relates to those assets which are constantly changing, such as the company’s stock-in-trade. The company thus remains free to deal with the assets as it sees fit in the course of its business. The floating charge only becomes attached to an item if and when the charge “crystallizes”, whereupon it becomes a fixed charge on all the current assets which it covers. A charge crystallises where the company is about to be wound up or in such other conditions as are specified in the trust deed or debentures – e.g. failure by the company to pay the agreed interest or to redeem the debentures as agreed.

In the majority of cases, the category to which a particular charge belongs is clear beyond reasonable doubt; however, there are some charges which admit of some doubt in this respect. It was precisely such a borderline charge which is the subject-matter of the case under review, which landed before the Privy Council from the New Zealand Court of Appeal. Here, a company granted a charge over its uncollected book debts, which left it free to collect them and use the proceeds in the ordinary course of its business, but prevented the company from assigning or from factoring them. The underlying debenture was expressed in such a way as to create a fixed charge over the book debts. When the company went into receivership, the only assets available for distribution to creditors were the proceeds of the book debts which were outstanding when the receivers were appointed.

The question arose whether the right of the company to collect the debts and deal with their proceeds free from security meant that the charge on the uncollected debts, although described in the debenture as being fixed, was nevertheless a floating charge until it crystallised through the appointment of the receivers. It was argued by the receivers that the charge was fixed and that the proceeds were accordingly payable to the company’s bank, acting as the holder of the charge. However, of the charge was a floating charge at the time when it was created, then, through the combined effects of Schedule VII to the Companies Act 1993 and Section 30 of the Receiverships Act 1993, the proceeds were payable to the employees and the Inland Revenue Commissioner as preferential creditors.

The judge at first instance ruled that the charge in question was a fixed charge. However, this decision was reversed by the Court of Appeal (New Zealand). The receivers appealed to the Privy Council. The question to be settled on appeal was whether a charge over the uncollected book debts of a company which left the latter free to collect them and use the proceeds in the ordinary course of its business was a fixed or a floating charge.

The Council dismissed the appeal. It traced the history of the floating charge from its inception to the present day, paying particular attention to charges over book debts, and arrived at the following conclusions: (a) the characteristics of the floating charge as specified by Romer LJ in the landmark decision of Re Yorkshire Woolcombers Association