The New Zealand case of Brumark has sparked serious concern among banks and lawyers, warns Frances Coulson
The New Zealand case of Brumark (Agnew & Anor v Commissioner of Inland Revenue & Anor-Re: Brumark Investments Ltd Privy Council [PC] 5.6.01) has already caused serious concern among banks, insolvency practitioners and lawyers. Furthermore, it could have assisted in the forthcoming demise of the administrative receivership and the floating charge, as well as the long awaited demise of the preferential claim. The position as between 5 June and whenever such new legislation may come in may yet give rise to litigation.
In a judgment delivered by Lord Justice Millett, the PC determined that the controversial case of In re New Bullas Trading Ltd [1994] 1 BCLC 449 was decided wrongly.
Brumark secured funding from Westpac Banking Corporation in return for a debenture modelled in substance on the one the New Bullas draftsman had put forward. That case had approved a debenture, which for the first time set out to draw a contractual distinction between book debts and their proceeds, with a fixed charge on the former and a floating charge on the latter.
In March 1997 Agnew and Bearsley, two partners in Coopers & Lybrand, were appointed receivers, and on 2 April, 1998, they applied to court for directions, including a declaration that “the following book debts… were, as at the date of receivership, subject to a fixed charge in terms of the debenture granted by Brumark… to Westpac…”, and that they could account to Westpac for these debts in priority to the preferential creditors on grounds that the book debts were subject to a fixed charge and so not subject to Section 30 of the Receiverships Act 1993.
The sole asset in the receivership was the book debt proceeds, a net nz$157,000 (£45,844) available for distribution. The Inland Revenue was owed nz$178,875 (£52,231) and the employees unpaid wages of nz$2200 (£642.40). Westpac had nz$292,018 (£85,259) remaining due under its debenture and, while it had personal guarantees from the members, they were both bankrupt.
The receivers agreed that if the debenture created a floating charge over the book debts, then the preferential creditors should be paid first. Section 30 of the NZ Receiverships Act is similar in effect to S40 of the Insolvency Act 1986, stating that if the charge is a floating one then preferential creditors must be paid before the debenture holder.
The courts at each stage of the case rehearsed a history of the floating charge and considered the relevant precedent case law.
