In a recent judgment arising out of the Belgard Motors case, the High Court considered the question as to whether notice served by the bank/mortgagee on the company/mortgagor purporting to crystallise the floating charge had the effect of converting the floating charge into a first fixed charge. Fixed charges generally apply to specific identifiable assets and a feature of fixed charges is that a mortgagor cannot deal with those specific assets without permission of the mortgagee.

The floating charge in question covered assets such as stock and book debts of the company, which are typical floating charge assets. The relevant debenture in this instance, however, was silent in relation to the company’s ability, following service of a crystallisation notice, to deal with those assets without permission of the mortgagee. Accordingly, the court held that the company had retained the right to dispose of, or otherwise deal with, those assets without consent or permission from the bank after the service of the crystallisation notice. Ultimately, the court held that the service of the crystallisation notice did not have the effect of converting the floating charge created by the debenture into a first fixed charge over the assets.

The impact of this decision appears to be that, unless the debenture provides that after service of the crystallisation notice the mortgagor is not at liberty to deal with the assets without the express permission of the mortgagee, the mere service of a crystallisation notice will not have the effect of converting a floating charge into a first fixed charge.

Both this decision and a related decision of the High Court are to be appealed to the Supreme Court. Pending the outcome of the appeal, the judgment highlights the necessity for considered drafting of debentures to capture the intention of the parties.  

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Contributed by Craig Sowman.

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