2. Whether it is possible to charge back debts to the debtor

Thomson, a subsidiary of Darling, gave a fixed charge on the company’s deposit account with Southern as a security for Darling’s debt to Southern. This practice is called charge-backs. There was much debate whether it is conceptually possible to create such charge. This issue was considered in Re Bank Credit and Commerce. This decision appears to confirm the validity of charge-backs as a form of security, although this was not essential to the decision (it can be viewed as obiter). It was stated that the courts should be very slow to declare a practice of the commercial community to be conceptually impossible. I agree with this view and I think that such charge-backs perform an important function: they give a lender a choice whether and when to enforce a security, rather than having it operate automatically be insolvency set-off. Thus, it makes perfect commercial sense to create such security. What is the registration position in respect of this charge?

3. What are the consequences of the breach of a negative pledge covenant?

The charging document contained a negative pledge covenant, whereby Darling must not create any other security over its assets. In breach of this covenant Darling charged a portfolio of shares in favor of Brown. This constitutes an event of default that triggers automatic crystallization of the charge. An effect of crystallization is that it ranks as a fixed charge and has priority against any other interests in Darling’s property which was created after crystallization. In our case creation of a new fixed charge triggered a crystallization of the floating charge: thus, two events occurred simultaneously.

The rules in Cox v Dublin and Rother Iron Works suggest that provided Brown had notice of the existence of the negative pledge covenant, it will take a fixed charge subject to the previous floating charge (which has now crystallized and became fixed). The problem is that negative pledge covenant is not a prescribed particular of charge that should be included in the register and therefore is not covered by a constructive notice. However, information about the negative pledge covenant is often included in the register voluntarily. Therefore, Brown having searched the register (which he would be reasonably expected to do as a chargee), would know about the negative pledge covenant. This knowledge, however, might not be enough to constitute a constructive notice because constructive notice does not cover the information that parties voluntarily included in the register (Welch v Bowmaker (Ireland)). This undermines the protection of the floating charge holder and the court would more likely take into account the fact that Brown knows about the negative pledge covenant. Thus, Southern will have priority over Brown’s claim.

Even if negative pledge covenant was not included in the register, Southern can try to argue that since negative pledge covenant is almost always included in floating charges, the persons taking subsequent charges have inferred knowledge of negative pledge covenant (discussed by Gullifer, Payne). This argument was not directly considered by English court. However, it was rejected by Irish and Hong Kong courts.

The fact that the fixed charge over portfolio of shares was not registered does not matter for determining the priority, because this kind of charge is not in the list of charges which are void unless registered (s860 Companies Act 2006).√

(b)

As a result of analysis of the part (a) it can be clearly seen that the law in this area in unsatisfactory and needs a reform. Several main problems arose in the part (a):

1. Distinction between fixed and floating charge is unclear

2. System of registration and priority rules are complicated and unclear: in particular, in the part (a) we faced the difficulty to identify who has priority in case of crystallized floating charge, and whether constructive notice covers negative pledge covenant.√

Besides these problems, Gullifer and Payne also identify the following problems of English law:

1. It is difficult to access because the rules contain not in statutes but in case law dating back to the XIX century

2. System of registration is flawed: the risk of mistake is on those who subsequently search the register; register does not include all non-possessory interests; the requirement of registration within a 21 days period leads to the invisibility period of 21 days; law relating to constructive notice is unclear.

In my opinion, the rules governing fixed and floating charges are so uncertain and complex, that only a wholesale reform of English system can bring a positive result. I think that the reform should move in two ways: 1) disappearance of distinction between fixed and floating charge; 2) making registration and priority rules clear and simple.