| MORTGAGE — Security — Fixed or floating charge — Investment scheme involving provision of loans secured by mortgages on properties — Mortgage deeds providing for secondary assets secured by “floating” charges — Deeds containing stringent restrictions on chargor’s ability to deal with or dispose of assets — Whether charges in reality floating or fixed
The Russell-Cooke Trust Co v Elliott and others
Ch D: Mann J: 9 March 2007
{It was possible, in appropriate circumstances, that a legal charge, labelled and described as “floating”, was in reality a fixed charge, having regard to the totality of the documentation creating the charge and the rights and obligations arising from that documentation.
Mann J so held in the Chancery Division on hearing an application by the claimant, The Russell-Cooke Trust Co, for an order, inter alia, as to the correct distribution of a fund, held by the trust company as trustee of a number of trusts, the beneficiaries of which made up the majority of the defendants. The trustee was appointed by the court in place of the first defendant, Allen Phillip Elliott, and the second defendant, Elliott Solicitors plc, of which Mr Elliot was a director, after the Law Society had intervened into their practices as solicitors.
Mr Elliott, and later his firm, ran an investment scheme which operated by aggregating funds invested by clients in order to make loans to borrowers secured on the properties acquired by the loans, by way of a first fixed charge supported by floating charges. Each loan formed the subject matter of a different trust whose beneficiaries were the investors. One borrower, Causeway Investments (UK) Ltd, the 94th defendant, took out seven loans under the scheme. The mortgage deeds for the seven loans provided not only for a fixed charge over the property acquired by the loan, but also secondary security over other assets owned by Causeway, secured by “floating deeds”. Although the charges were described as “floating” in the documentation creating them, there were a number of severe restrictions on Causeway’s ability to dispose of or deal with the various assets which were inconsistent with the nature of a floating charge. In each of the seven loans, the value of the primary security was insufficient to cover the principal sums advanced, but the proceeds of the realisation of the secondary assets made up a fund of approximately £800,000, held by the trustee, caught by the secondary charge. The claimant applied to the court for an order as to how that fund should be distributed pursuant to the competing charges between the seven groups of lenders, which in turn depended on whether the secondary charge was fixed or floating.MANN J said that a series of previous authorities had established that charges on book debts, described as fixed, could actually be floating charges: see In re Yorkshire Woolcombers Association Ltd [1903] 2 Ch 284, Farwell J and CA; In re Cosslett (Contractors) Ltd [1998] Ch 495, CA; Agnew v Comr of Inland Revenue [2001] 2 AC 710, PC; and In re Spectrum Plus Ltd [2005] 2 AC 680. The instant case was the first one in which the converse had been argued, in that charges expressed as “floating” were in their true nature fixed. However, the proposition advanced by the earlier authorities applied in the same way, so that the nature of the rights created by the charges in question was more important than the label given to the transactions. The court had to ascertain the true nature of the charges, looking at the totality of the documentation and the rights and obligations arising from that documentation. Under that exercise, the labeling of the charge was inconclusive. Applying the principles advanced by the earlier authorities, the characteristics of the charges in question were clearly that of fixed charges since the restrictions were very significant in that Causeway could not deal with the charged property without the consent of the chargee. Since the charges were fixed in nature the priority of the claims for the fund depended on the dates that the charges were created, not the date of crystallisation of the charges, as would be the case if the charges were floating.
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