Case No: HC000145
NEUTRAL CITATION NUMBER: [2007] EWHC 1443 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

Royal Courts of Justice
Strand
London
WC2A 2LL

Date: Friday, 9th March 2007
BEFORE:

THE HONOURABLE MR JUSTICE MANN

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BETWEEN:

	THE RUSSELL COOKE TRUST 
COMPANY LIMITED	
Claimant	
	- and -		
	ELLIOTT	Defendant	

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Wordwave International, a Merrill Communications Company
PO Box 1336, Kingston-Upon-Thames KT1 1QT
Tel No: 020 8974 7305 Fax No: 020 8974 7301 
Email Address: Tape@merrillcorp.com
(Official Shorthand Writers to the Court)
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MR OAKLEY appeared on behalf of the Claimant

COUNSEL UNKNOWN appeared on behalf of the Defendant

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 Judgment

MR JUSTICE MANN: 
1.	This is an application which arises in the context of the sorting out of the consequences of an unsatisfactory and failed lending scheme operated once upon a time by Mr Elliott, a solicitor, and subsequently by Elliott’s Solicitors plc, a company which succeeded to the business.  The essence of the business can be put shortly.  Elliotts have a number of clients with money.  It operated a scheme under which the clients provided their money for onward lending to various borrowers, secured on property.  The clients were divided into batches, and the monies provided by a group of clients was aggregated in order to create a larger pool of money which could then be lent.  Money was then lent to a variety of lenders on security.  In the vast majority of cases the monies were lent to entities which were effectively single purpose vehicles, and the repayment obligation was secured on a single property.  In that vast majority of cases the property turned out to be inadequate security for the loan, and there was a shortfall.  

2.	There were a number of lenders and a number of transactions.  I am concerned only with seven different charges.  They were all made to secure borrowing by Causeway Investments UK Limited, a company whose registered office was in Torquay.  These seven charges, or these seven instances of loans, have a distinguishing feature from all the other loans made by Elliotts.  That distinguishing feature is this.  In other cases, as I have indicated, there was no security other than the principal security for the loan.  In the case of the seven loans with which I am concerned, the loan documentation not only provided for some additional security, it has also turned out there actually is some additional security.  I will come to the nature of the additional security in a moment.

3.	The scheme came to an end when the Law Society intervened in 2000.  No more lending took place.  There was then a process of realisation, and a process of disappointment of lenders.  The action within which the present application was made was commenced in order to determine a number of issues.  One of the prime issues was determined within a year or two by Laddie J.  He ruled that each of the loans that was effected, and each of the securities provided by the borrowers, was held for the individual lenders whose money was aggregated in order to effect the loan.  In other words, the process of realisation was not divided amongst a large pool of all the clients who provided monies.  The proceeds of realisation of any of the securities, or the proceeds of the repayment of any individual loan, were divisible between, and only between, the lenders whose funds were aggregated in order to make that loan.

4.	I turn now to the issues which arise in the matter before me.  In respect of the seven Causeway loans, the principal security has been realised.  By principal security I mean this.  As I have indicated, all the loans made by Elliotts were secured.  It is the case that there was a principal security for each of the loans, in the sense that the money was provided in order to purchase a specific property, or to refinance a mortgage on a specific property, and that particular property was the subject of a fixed charge under the loan documentation.  It was obviously regarded as the primary security, and as I have indicated, in respect of most of the loans it was effectively the only security.  

5.	The lending was, or should have been confined to 66.6 per cent of the valuation of that security.  However, the loan documentation provided for additional security over certain other property in terms to which I will come.  Happily for the lenders in respect of the seven loans with which I am concerned, or at least less unhappily for them, in the case of Causeway there is some additional property.  As well as the principal security for each of the loans there is now a fund of just over £800,000 plus accrued interest which arises from the following sources.  

6.	In one case Causeway itself had lent money to a person who had also borrowed money from the Elliott funds, and that loan was secured by a second mortgage over property.  The realisation of that second mortgage has produced some £210,000.   There were two other instances where Causeway had a second charge on two properties to secure a loan that Causeway had made and the realisation of those second charges has produced another £42,000 odd.  Causeway also owned seven other properties, and there were equities of redemption in those properties ranging from £373,000 at the top to £3,700 at the bottom.  Those properties have been realised and the funds are to be distributed, the manner of that distribution being the subject of the application before me.  All those property interests give rise to the aggregate fund in the sum which I have referred to, which is to say £800,000.

7.	The question which arises before me is how that sum should be distributed between the lenders under the seven discrete charges to which I have referred.  Under each of the seven charges the lenders, whose money was provided to make the loan under that charge, take the benefit of the primary security.  That primary security is in no sense shared between the charges, because it was discrete to each of the charges.  However, each of the charges in question contains what I can call for these purposes a secondary charge, which catches the pool of money of £800,000 to which I have just referred.  The question which arises is how that money is to be distributed pursuant to the competing charges as between those seven groups of contributors.

8.	In order to have the point decided a representation order has been made.  A 95th defendant has been joined to these proceedings, a Fiona J McKenzie.  She is a contributor to one of the loans, which is described in the papers before me as the Fort Bovisand loan, taking its name after the property which was the primary security for that loan.

9.	The primary issue which arises in the application before me is whether the secondary security in the seven loans is a fixed or a floating charge.  The Fort Bovisand lenders, or contributors, would, on the facts and figures, benefit from the charge being determined to be floating and not fixed.  The extra benefit they would receive from the fund is -- I am told now by Mr Oakley, who appears for the claimant -- £55,000.

10.	On the application before me Mr Oakley appeared for the claimant in these proceedings.  The claimant is a court appointed trustee which stepped in in order to become trustee of the various loans as a result of the Law Society intervention.  If this matter had been come before me on the basis of full argument between counsel, I would have heard argument by counsel for Ms McKenzie arguing in favour of a floating charge, and also arguing certain crystallisation points, and there would have had to have been argument from a party arguing in favour of a fixed charge, and that argument might have been placed before me by another representative claimant from one of the other loans.  However, it might also have been advanced in the interests of economy by the claimant.  It seems to me that there is nothing wrong with the claimant, albeit technically neutral, arguing a position so the court can reach a conclusion. 

11.	As it happens, Ms McKenzie has not been represented before me, and what has happened is this.  She has instructed independent solicitors, Messrs Wright Son & Pepper, and those solicitors have themselves instructed counsel.  I have had placed before me counsel’s instructions (there are several of them) and counsel’s opinion in the matter.  Counsel is Mr Thomas Leech, a senior and experienced Chancery junior.  

12.	Mr Leech’s careful opinion deals with a number of points.  On the point which I have to decide first in this application, that is to say whether the secondary charge in the seven charges is fixed or floating, he has come to the conclusion that the charge is a fixed charge.  That conclusion is clearly expressed in his opinion.  The conclusion is technically against his client’s interests, because, as I have indicated, his client would have benefited from the charge being determined to be a floating charge.  It is no doubt in those circumstances that Ms McKenzie and her solicitors, assisted by counsel where appropriate, have decided that it would not be worthwhile spending money having counsel argue the point.  In those circumstances I have not heard full argument in favour of the floating charge aspects of this case.  

13.	Mr Oakley has presented this case to me fully and fairly, and made sure that I am aware of all relevant authorities and material, but effectively arguing the fixed charge point.  In the conclusion I reach hereafter, however, I have had firmly in mind the arguments which can be advanced in favour of the charge being a floating charge.

14.	With that introduction behind me, I now turn to consider the actual documentation in this case, and how and why it is that that documentation matters.  The seven charges can, for these purposes, be divided into two groups.  The first is the first charge in time, which is a charge dated 9th August 1999 made between Causeway Investments UK Limited, and Alan Elliott, under which the primarily charged property is a property known as land at the rear of Mill Walk, Wellington, Somerset and east of High Street, Wellington, Somerset.  The second group of charges are charges in identical terms of which I have seen one example, namely one dated 30th September 1999, which charges a parcel of land known as Moss View Camp, Segar’s Lane, Ainsdale in West Lancashire.  I have been shown two sets of charges, because they are slightly differently worded, though it is the submission of Mr Oakley that the difference in the wording is, at the end of the day, immaterial.  

16.	I will take first the single charge of the Somerset land.  The principal charging provision is clause 3.  Clause 3.1(a) creates a first legal charge over what I am calling the primary security, and it is in these words.  Clause 3 bears a heading, “Deed.”  At 3.1 it says this:
“The Borrower, with full title guarantee and as a continuing security for the payment and discharge of the Secured Liabilities hereby charges in favour of the Lender:

(a) by way of first legal mortgage all its right title estate and other interests of the Borrower in the Property referred to in Schedule 1A and the moveable assets referred to in schedule 1B...”

17.	That provision requires a small amount of cross-referencing.  The Secured Liabilities are effectively all liabilities of Causeway to Mr Elliott, and nothing more needs to be said about them than that.  The property referred to in schedule 1(A) is the primary security property, that is to say the Somerset land.  Schedule 1(B) does not identify any moveable chattels.  Thus far therefore we have what is plainly on its face a first fixed legal mortgage and nothing turns on that point.  

18.	The difficulties in this matter start to come in because of the description of what I am calling the secondary security in clause 3.1(b).  After the introductory words at 3.1, that clause reads as follows;  
“(b) by way of floating deed: 

(1) all rights title estate and other interests of the Borrower in any of the Properties not effectively mortgaged under clause 3.1(a)...”

	And I need not read any more of 3.1(b) which otherwise deals with certain machinery and chattels.  

19.	The expression, floating deed, is an odd expression, as to which I have not been shown authority.  It is, in my view, an inapt expression.  It leaves open the question of whether what is intended to be created is a fixed or floating charge.  The expression “Properties” takes one back to the definition clause, which is clause 1 where the following definition appears:
“‘Property and/or properties’ means the leasehold or immovable property referred to in Schedule 1, and any other freehold leasehold or immovable property now or at any time vested in or held by or on behalf of the Borrower together with in all cases building structures fixtures fittings...” (Quote unchecked)

	I need not read any more of that.

20.	The effect therefore of clause 3.1(b) is to create a charge of a nature which I need to determine over property other than the primary security.  The definition of Property and/or properties is, in my view, sufficient to catch the property interests which I have referred to as giving rise to the fund which is in issue in this application, that is to say the fruits of three second charges, plus the equity of redemption in the seven properties.  So far as the properties are concerned they will be freehold or leasehold properties.  So far as the fruits of securities is concerned Mr Oakley submits, and I accept the submission, that they would be immovable property, so those items are caught by s.3.1(b).

21.	In addition to those charges clause 3.3 contains in more traditional wording something which is clearly intended to be a floating charge:  
“3.3 The borrower with full title guarantee, and as a continuing security for the payment and discharge of the secured liabilities charges in favour of the lender by way of floating charge all the undertaking and all the assets, rights and income of the borrower, both present and future not otherwise effectively mortgaged, charged or assigned under clause 3.1 or 3.2.” (Quote unchecked)
	
22.	Clause 3.4 purports to deal with the nature of some of the charges created by the preceding clauses of the document, including clause 3.1(b).  It reads as follows:
“3.4 A charge created by clauses 3.1(b), 3.2 and 3.3 shall be a floating charge unless and until it is converted into a fixed charge pursuant to clause 5 or by operation of law.” (Quote unchecked)

	On its face, therefore, that document seems to clarify any issues which might have arisen in relation to clause 3.1(b) and the use of the expression “floating deed” by making it clear that the charge thereby created is a floating charge.  However, Mr Oakley points out that there are various other provisions of this deed which seem to be inconsistent with the idea that the charge over the property contained in 3.1(b) is a floating charge.  Clause 4 of this document contains certain restrictions and they are severe.  It reads as follows:
“4. RESTRICTIONS  The borrower shall not, without the prior written consent of the lender:

(a) create or permit to subsist or arise any Encumbrance or any right or option on the Property or any part thereof.  Subject as aforesaid, any mortgage of or charge on the Property created by the Borrower (otherwise than in favour of the Lender) shall be expressed to be subject to this Deed;

(b) sell, convey, assign or transfer the Property or any interest therein or otherwise part with or dispose of any Property or assign or otherwise dispose of any moneys(sic) payable to the Borrower in relation to the Property or agree to do any of the foregoing;

(c) exercise any of the powers of leasing or agreeing to lease vested in or conferred on mortgagors by common law or by statute or accept the surrender of any lease, under-lease or tenancy or agree to do any of the foregoing;

(d) part with or share possession or occupation of the Property or any part of it or grant any tenancy or licence to occupy the Property or agree to do any of the foregoing.”

23.	It will be noted that the expression used in that clause is “Property,” and not “properties”.  Nevertheless, it seems to me on a proper reading of this document as a whole, and taking into account other references to properties in this document, to which I will not refer in the judgment, it is clearly capable of catching the property interests which I have referred to above.  

24.	In addition to that there is clause 23.  23 reads as follows:
“23.1 If the Borrower or any nominee on its behalf acquires any Property the title to which is registered or required to be registered under the Land Registration Acts 1925-86, the Borrower will notify the Lender of the relevant title number(s) as soon as it obtains such information and will procure that title thereto is duly and promptly registered and that this Deed is entered on the register.

23.2 In relation to Properties registered or to be registered under the Land Registration Acts 1925-86 the Borrower hereby applies to the Chief Land Registrar for a Restriction in the following terms to be entered on the register of the Borrower’s title relating to such Property hereby charged:

“Except under an order of the Registrar no disposition by the proprietor of the land to be registered without the consent of the proprietor for the time being of the mortgage hereby created.”

23.3 In respect of any part of the Properties registered or to be registered as aforesaid the Borrower hereby certifies that the charge created by this Deed does not contravene any of the provisions of its Memorandum of Articles of Association.”

25.	All those provisions contain serious restrictions on the powers of Causeway to dispose of, or deal with the various properties, the interests in which gave rise to the fund which is in issue in this application.  I shall come in a moment to the effect of those provisions on the question of whether the charge created by clause 3.1(b) is a fixed or floating charge.  

26.	Before I do that, however, I should turn to the second group of charges, that is to say the six charges which are in the alternative form.  It seems historically speaking that this second group of charges arose from an update of the terms of the charge, which took place when the solicitor’s partnership was incorporated and when the lender became, not Mr Philip Elliott, but Elliotts Solicitors plc.  In some ways the wording is the same; in particular it contains a clause 3.1 whose terms are exactly the same as those in the first deed.  However, the property is slightly differently defined.  Clause 1 of those six deeds, of which I have seen a sample, contains a definition which reads as follows:
“Property means (a) the scheduled property and (b), any additional property”   

27.	Both those terms, (scheduled property and additional property) are themselves, defined terms.”  Scheduled property means, as one would otherwise have guessed, the property specifically identified in schedule 1.  That is the primary security in this case.  Additional property is defined as follows:
“Additional property means any freehold, leasehold or immovable property, other than the Scheduled Property, now, or at any time, vested in or held by or on behalf of the Borrower, together with in all cases...”

However, although the wording is different, the overall effect seems to be the same, that is to say that there is a charge under clause 3.1(a) of the primary security, and another charge expressed to be again by way of “floating deed” of the secondary property.  The secondary property charge, whatever it is, it is capable of catching the property interest which I have referred to earlier in this judgment.

28.	There are then other provisions of this document, which have precise counterparts in the wording of the first document, which I have already set out.  Thus clause 3.4 provides that the charge created by inter alia clause 3.1(b) shall be a floating charge unless converted by other provisions of the document, or by operation of law.  There are similar, or indeed identical, restrictions on powers of disposal and dealing, and clause 23 again provides for the entry of a restriction in the Land Registry in the case of any property acquired other than the primary property.

29.	The point raised by Mr Oakley and dealt with by Mr Leech in his opinion is this: the charge created over the secondary security is in a clause which describes the security as created by way of “floating deed.”  That tends to suggest that the charge is not, or might not be intended to be, a fixed charge.  So far as the document itself is concerned in terms of labels, clause 3.4 of each charge clearly purports to make the charge over the secondary security a floating charge.  However, when one looks at the restrictions imposed on disposing of and dealing with the property, Mr Oakley says one sees a series of restrictions which are simply inconsistent with the notion of a floating charge, and which indicates that the parties have in fact applied the wrong label.  He says on the basis of those restrictions and their inconsistency with the notion of a floating charge, the charge created over the secondary property was actually a fixed charge and not a floating charge.  That is a conclusion which, as I have already indicated, Mr Leech agrees with, notwithstanding that the conclusion is against the interest of his client.

30.	The question for me is whether that submission is correct.  For very many years people have been seeking to argue that charges on book debts, described as fixed charges are, in fact, and on analysis, floating charges.  There has been a whole series of cases in the last 30 years, in which the point was taken in a variety of different circumstances, and resolved in a number of different ways.  The matter has, in commercial terms, probably largely been put to rest by the decision in Re Spectrum Plus Limited (in Liquidation) [2005] 2AC 680.  I shall come shortly to some of what was said by members of the House of Lords in that case.

31.	The present case is the only case of which Mr Oakley is aware, and for what it is worth, it is the only case I have ever heard of in which the point is being argued the other way, that is to say it is being argued there is something which purports to be a floating charge is in fact a fixed charge.  It matters in this case because whether it is fixed or floating is capable of affecting the priority of the various claims of the various contributors, through the seven various deeds, to the money which is in issue in this application.  Whether this case remains unique will remain to be seen, but at any rate the reverse of the traditional question has arisen in this case and I have to decide it.

32.	Mr Oakley has drawn to my attention four of the cases in the canon.  He relies on the proposition, which I accept without hesitation, that it does not matter what label the parties have put on a particular transaction; what matters is its true nature as it emerges from a proper consideration of the documents in question, together with such of the facts as may be relevant and admissible in order to arrive at the relevant conclusion.

33.	The essence of Mr Oakley’s submission is that when one looks at the nature of the rights created by the charges in question in the present case, one sees that the rights of the owner of the property, that is to say, Causeway, are so circumscribed that on analysis and in truth, the charge created by 3.1(b) is actually a fixed charge.  The restrictions that exist have already been set out by me in this judgment.  They are indeed very significant; in particular Causeway is simply not free to dispose of any of the assets the subject of the secondary security without the consent and participation of the mortgagee, that is to say Mr Elliott or Elliotts Solicitors as the case may be.  That, says Mr Oakley, is simply inconsistent with the whole notion of a floating charge, and means that this charge must be a fixed charge.

34.	The first of the cases which Mr Oakley drew to my attention is the well-known Yorkshire Wool Combers Association Limited case [1903] 2 Ch 284.  At page 295 Romer LJ set out the oft quoted threefold definition of a floating charge.  He said this:
“...it is a floating charge. (1) If it is a charge on a class of assets of a company present and future; (2) if that class is one which, in the ordinary course of the business of the company, would be changing from time to time; and (3) if you find that by the charge it is contemplated that, until some future step is taken by or on behalf of those interested in the charge, the company may carry on its business in the ordinary way as far as concerns the particular class of assets I am dealing with.”

	Mr Oakley points out that criteria (2) and (3), and in particular criterion (3), are not fulfilled in the case of the secondary security and the charges which I have before me.

35.	The next case is Re Coslett Contractors Limited [1998] Ch 495.  At page 509 Millett LJ dealt with the characteristics of a floating charge and he referred to the Yorkshire Wool Combers case.  At 509(D) he said this:
“Accordingly the charge is a charge on present and future assets of the company which, in the ordinary course of the business of the company, would be changing from time to time. The dispute has centered on the third characteristic. The administrator submits that, until the council takes steps under clause 63(1) to enter upon the site and expel the company therefrom, the company is free to carry on its business in the ordinary way with the plant and materials on the site.”

He then deals with the judge’s findings, and he sets out another passage from Yorkshire Wool Combers and from In re Bond Worth Limited.  Then at 510, dealing with certain inconsistencies he says this:
“The essence of a floating charge is that it is a charge, not on any particular asset, but on a fluctuating body of assets which remain under the management and control of the chargor, and which the chargor has the right to withdraw from the security despite the existence of the charge. The essence of a fixed charge is that the charge is on a particular asset or class of assets which the chargor cannot deal with free from the charge without the consent of the chargee. The question is not whether the chargor has complete freedom to carry on his business as he chooses, but whether the chargee is in control of the charged assets.”
            If I apply those remarks to the property interests in the case in question, it is quite clear that they do not amount to assets which the chargor can deal with without the consent of the chargee.  The restrictions imposed by the documentation simply prevent that.  The chargor has no right to “withdraw from the security,” the asset despite the charge.  It simply cannot be withdrawn from the charge.
36.	Next there is Agnew v. Commissioner of Inland Revenue [2001] 2AC 710.  This is a decision of the Privy Council, and at page 725 Lord Millett, who gave the opinion of the Board, said this (at paragraph 32):
“In deciding whether a charge is a fixed charge or a floating charge, the court is engaged in a two-stage process. At the first stage it must construe the instrument of charge and seek to gather the intentions of the parties from the language they have used. But the object at this stage of the process is not to discover whether the parties intended to create a fixed or a floating charge. It is to ascertain the nature of the rights and obligations which the parties intended to grant each other in respect of the charged assets. Once these have been ascertained, the court can then embark on the second stage of the process, which is one of categorisation. This is a matter of law. It does not depend on the intention of the parties. If their intention, properly gathered from the language of the instrument, is to grant the company rights in respect of the charged assets which are inconsistent with the nature of a fixed charge, then the charge cannot be a fixed charge however they may have chosen to describe it.”

	If I apply that approach to the present case then I can see first of all that, strictly on the limited wording of the documents in question, the parties claim to have apparently created a floating charge.  However, if I then go and look further and see whether the rights that they have created are consistent with a floating charge, or whether they are consistent only with a fixed charge, then for the reasons that I have given it is quite apparent that the rights created are consistent only with a fixed charge.  The restrictions granted are simply inconsistent with the notion that the property in question was caught by merely a floating charge.

37.	The last case to which I need refer is in Re Spectrum Plus [2005] 2AC 680.  This was another case concerning whether a charge on book debts was fixed or floating.  The lender sought to maintain that it was a fixed charge, and others maintained it was a floating charge.  At page 722 Lord Scott of Foscote defined a floating charge as follows:
“In my opinion, the essential characteristic of a floating charge, the characteristic that distinguishes it from a fixed charge, is that the asset subject to the charge is not finally appropriated as a security for the payment of the debt until the occurrence of some future event. In the meantime the chargor is left free to use the charged asset and to remove it from the security.”

	That definition again makes it quite clear that the net effect of rights and obligations affecting the secondary security in the seven deeds before me is such as to create fixed and not floating charges, because the chargor is simply not “left free to use the charged asset and to remove it from the security.”

38.	The exercise that I have to conduct on the authorities is not one which involves acceding to the labelling of the parties.  That is no more appropriate in a fixed charge/floating charge case than it is to a lease/licence case.  The exercise I have to conduct is to ascertain the nature, the true legal nature, of the interests which the parties have managed to create looking at the totality of the wording of the documents, and looking at the rights and obligations created by those documents.

39.	For the reasons that I have given, it seems to me that those rights are plainly not those which are appropriate to a floating charge, but they are rights which, when one takes them globally, are consistent only with a fixed charge.  I suppose that one could have a floating charge with certain restrictions on alienation, but there comes a point where the restrictions on alienation and disposal and dealing are such that the charge can no longer be said to be floating so far as that is a meaningful concept.  In the circumstances, for the reasons that I have given, I agree with the opinion of Mr Leech, that the nature of the charge created in respect of the second security in this case is a fixed charge and not a floating charge.  That potentially has consequences for the determination of the priority of the claims to that fund.  Had I determined that the charge was a floating charge then the priority of claims to the funds would, or might have, depended upon when the charges were crystallised, which might in turn depend on the effect of certain automatic crystallisation charges.  As it is, it seems clear that the priority of the claims to the secondary fund is going to be dependant upon the date of creation of the charges over that secondary security through the seven documents with which I am concerned. 

40.	In those circumstances I do not need to go on and consider questions related to crystallisation, and how priority would operate were the charges in issue in this case floating charges and not fixed.

41.	Accordingly I shall determine the first of the questions which arises before me in the sense that the charges created over the secondary security in this case are fixed and not floating charges, and I will now hear further from Mr Oakley as to what I next have to consider and determine in this case, which as I understand it is likely to be the mathematics of distribution.
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