Puff Ltd: Preference in Distributable Assets

NB: We do not resell your papers. Upon ordering, we do an original paper exclusively for you.

NB: All your data is kept safe from the public.

Table of Contents

Introduction
Facts
Deliberations
Results
Conclusion
Cited Works

Introduction

Legally speaking, the most important aspect between a fixed charge and a floating charge has been concerning the fact that, in the event of dissolution, the fixed charges assume priority over floating charges. The essential difference between fixed and floating may not necessarily be in terms of the terminologies, viz., fixed or floating, but the contextual meaning attached to it and more importantly, the conduct of the parties concerning the assignment of these charges.

Which bank has the first preference in distributable assets of puff Ltd? Premier or Bridge Bank?

Facts

In this context, it is seen that this Company, puff Ltd. has preferred floating charges on assets to the extent of £300,000 from Premier Bank. By enforcing a clause in the registered document to the effect that it had priority over any future charge, it has, in effect, reinforced its status.

Deliberations

In this context, it needs to be said that this charge on assets of Puff Ltd. does not, in effect, confer any control by Premier Bank over the assets of Puff Company. This has been the deciding factor in the case law of National Westminster Bank Plc. V.Spectrum Plus Ltd. (2005) in which the House of Lords overruled the ruling of the Court of Appeals. The HOL stated that the Bank could not be said to have a fixed charge over the assets of the defendant since they did not exercise any control over it, “A fixed charge holder has priority over statutorily preferred creditors, such as the employees of the company. On the other hand, the rights of a floating charge holder in receiving payment are subordinate to those of these preferential creditors. ” House of Lords Judgment clarifies the distinction between Fixed Charge and Floating Charge in “Spectrum Plus“.

Results

Therefore, it could be seen that with the decentralisation of the debt due to insolvency, the position of the parties would be as follows:

Premier Bank would rank first in the preferential list since their charges have been converted from a floating charge into a preference charge upon dissolution and a “special arrangement has been made with the borrower to create a new arrangement where a valid fixed charge can be created.” Pitmans: Natwest v. Spectrum Plus Limited-HL brings clarity to debate on book.
Bridge Bank could only assume second preference since they are fixed charge holders, having priority for payments over unsecured and floating charges creditors.

“A fixed charge has certain other advantages, such as priority over earlier floating charges over the same collateral unless, at the time of grant, the fixed charge holder had had notice (actual or constructive) of a prohibition on the grant of the fixed charge.”

(Cadwalader (2004) Clients & Friends Memo: Spectrum update: Court of Appeal: Spectrum Update: Court of Appeal Upholds Brumark: Analysis of Charges over Book Debts.

In the event of fixed charge holder having constructive or actual notice:

In this case, it is seen that Bridge Bank (fixed charge holder) had constructive notice about the existence of a restriction on the grant of fixed charge. Under such circumstances, he would not be able to exercise his advantage of priority over earlier floating charges.

In the event of fixed charge holder having no constructive or actual notice:

However, in case the fixed charge holder did not have constructive notice about the existence of the restraint on grant of fixed charge, he would be able to exercise his priority over the earlier floating charges and could claim priority.

Conclusion

It is seen that both Premier bank and Bridge Bank are exerting equal preferential treatment over the distribution of assets of the dissolved puff Ltd. Although there have been decided case laws on the aspects of fixed and floating charges, a lot of practical difficulties continue to haunt legal opinions over the exercise of judicial pronouncement on these intricate issues.

While a lot would depend upon the special circumstances surrounding each case, it could be said that constructive knowledge also plays an important part in determining the extent of exercisable preferential treatment by charge holders.

However, It could be ultimately opined that, had Bridge Bank, no knowledge about the existence of the first charge, it could have claimed priority over assets; but since it did have such notice, its priority would be after that of Premier Bank.

Premier Bank has priority over Bridge Bank.

Cited Works

House of Lords Judgment clarifies the distinction between Fixed Charge and Floating Charge in “Spectrum Plus“. Web.

Pitmans: Natwest v. Spectrum Plus Limited-HL brings clarity to debate on book debts. Web.

Cadwalader (2004) Clients & Friends Memo: Spectrum update: Court of Appeal: Spectrum Update: Court of Appeal Upholds Brumark: Analysis of Charges over Book Debts. Web.

Click Here To Order Now!