Deciding whether a charge is a fixed charge or a floating charge
1. “32 Their Lordships consider this approach to be fundamentally mistaken. The question is not merely one of construction. 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."
Lord Millett in Agnew v CIR (Re Brumark)  2 AC 710
In the course of your discussion ensure you compare and contrast the concept of freedom of contract with the related concept of freedom of disposition.
2. Read In the Matter of CKE Engineering Limited (In Administration)  WL 2573895 (available through Westlaw).
Consider how the decision illuminates the use of the law concerned with quasi-securities as that term is used by the Law Commission in Company Security Interests, consultation paper 164.
Evaluate the role played by informal security interests in corporate insolvency law.
3. “If there are good reasons to treat particular rights as property rights, the conceptualisation of the appropriate’ thing’ will rarely provide an obstacle. “ Alison Clarke & Paul Khohler Property Law (2005) p. 18.
Explain what the authors mean in the quoted passage and consider whether, and if so how, the readiness to recognise new sets of rights as things capable of being owned is related to the idea of fragmentation of ownership as that expression is used by F H Lawson & B Rudden The Law of Property.
4. On the assumption that you are a High Court Judge who has found the facts as given below, draft a judgment disposing of the following case. Ensure you deal with all of the arguments raised by the parties in the course of your judgment.
Carl and Mark are twin brothers and joint owners in law and in equity of 15 Station Road. The brothers, who are now in their mid thirties, have always lived together and neither is married. Each is financially independent of the other. Carl is a hairdresser. Mark is a plumber.
Fifteen years ago, shortly after the death of their parents, Carl needed money to set up in business. He wanted to lease premises in central Nottingham, and he needed to pay the premium on the lease (£25,000) and refurbish the premises as an up-market hairdressing salon (£75,000).
Carl approached Abbeyroad Bank for a business loan. The Bank was willing to lend Carl up to £150,000 under a business overdraft facility, but it required security beyond the possibility of a charge over the new leasehold premises, the tenancy of which they estimated would be worth £20,000. Abbeyroad wanted a charge over 15 Station Road also.
Carl knew that Mark would be reluctant to charge the house to secure Carl’s business debts. Mark was a very cautious man who valued the independence that being an outright owner of the house gave him. Therefore, Carl told Mark a rather different story about the need for a charge over the house to secure £100,000 of lending. Carl told Mark that the premises were to be bought freehold, and were valued at £250,000. That the Bank was lending Carl £200,000 as a business loan (unsecured) but that the Bank wanted some security for a further loan of £100,000. Thus, the charge would be for £100,000 over 15 Station Road. It would allow Carl to buy a property worth more than twice that amount outright. If there were any problems down the line then Carl could sell the freehold of his business premises and pay off the charge over 15 Station Road outright.
Mark remained reluctant to agree to this plan. However, Carl worried at him day and night, reminding him of the words of their dead father who had often said: “As long as you two boys stick together then you can do anything". Eventually Mark agreed to sign the papers and charge the house for repayment of a loan of £100,000.
Abbeyroad Bank issued an offer letter for Carl and Mark to sign. Carl signed it and returned it to the Bank. Nobody queried the absence of Mark’s signature. The Bank then wrote to Carl asking him and Mark to come into their local branch to sign the charge deeds. They duly came.
Carl and Mark were taken into a side room and an employee of the Bank explained to them that the charge was a formality required by the Bank, and that provided the business overdraft was kept within the agreed limits there would be no question of enforcement. The charge was in the form of an all monies charge. Mark asked about this and the employee told him that it meant that if the business wanted to borrow any more money then it could avoid legal costs by adding any new loans onto the existing charge deed. Mark and Carl each signed in the places indicated by the employee, who witnessed their signatures.
In evidence before the court Mark said that he had thought £100,000 had been secured by the charge deed. He had understood it was a charge over his house he was signing. He had not understood the all monies clause could be used to add new lending onto the original amount secured by the charge without the Bank first seeking and obtaining his agreement to the new lending. His evidence was believed.
Carl had great success and he pioneered a new style of floppy fringe that was all the rage. He wanted to open up new hairdressers on a franchise basis and approached Abbeyroad Bank for more finance. Abbeyroad were happy to lend him more money, and agreed that they would extend Carl’s secured overdraft limit (secured by the charge over 15 Station Road) to £500,000 to finance the expansion. Carl did not inform Mark of these negotiations, nor of the increase of the amount secured over the house. Abbeyroad did not inform Mark of the increase either.
In 2008 Carl decided to incorporate his business as Carl’s Cuts Co Ltd. In order to do this he needed to arrange for a transfer of the debts of the business from his personal account to that of the new company. Abbeyroad was willing to transfer the lending from Carl to the company on two conditions: that Carl gave a personal guarantee for the company’s debts; and, that the charge over 15 Station Road be redeemed and a new charge be granted to cover the debts of the company. Carl agreed and the Bank set its new procedures into motion.
Abbeyroad wrote to Mark explaining the need to grant a new charge as the liability for the debts was being shifted from Carl to the new company. Mark readily agreed to this. He was still under the impression that the amount secured was £100,000 less repayments, when in fact it was over £400,000 at that date.
The letter asked Mark if he had a preferred solicitor. Mark replied that he had retained Smith & Bailey Solicitors before and that he was happy with them. The bank wrote to Smith & Bailey and sent them details of the original charge, subsequent activity on the secured account, details of the negotiations between the Bank and Carl, and the written agreement by Carl to grant an equivalent charge if the Bank consented to release the first charge over 15 Station Road, as well as a charge deed creating a new charge over 15 Station Road. The Bank retained Smith & Bailey to give advice to Mark, and to oversee the execution of the new charge deed by Mark on the Bank’s behalf. The instructions required that a written report be returned to the Bank together with the executed charge deed.
Ms Bailey of Smith & Bailey met with Mark and advised him about the new charge over 15 Station Road. Specifically she warned Mark that because it was an all monies charge any future borrowing by the company would be added to the debt. She asked Mark why he was using his house as security for the debts of a company Mark had no interest in. Mark became confused and angry and Ms Bailey did not pursue the matter. However, in her report to Abbeyroad Bank she stated that she was not sure that Mark was fully aware of the potential risks he faced despite Ms Bailey’s best efforts to explain them to him. Although Mark knew he was charging his house with the debt, he seemed surprised when told of the potential liability under the charge. Nevertheless, Mark had knowingly agreed to execute the deed. Ms Bailey confirmed that Mark had signed the deed with full knowledge of what it was he was signing.
Mark believed that he was obliged to execute the new charge, because of his earlier actions in granting the first charge, and then agreeing to grant a replacement if the Bank released Carl from the liabilities the first charge secured. If Mark had refused to sign the charge over 15 Station Road then he would have jeopardised all the plans and business activities of his brother Carl.
In evidence Mark confirmed that Ms Bailey had explained things as she claimed. Mark had for the first time become aware of the effect of the charge when she explained the documents and the underlying transactions to him. He had not felt able to escape from his earlier actions, and felt it better to press ahead, and try and get Carl to negotiate some other arrangement with the Bank in the future.
In 2009 the first litigation alleging personal injury (specifically a nasty squint) from Carl’s trademark floppy fringe haircut was filed. Within three months the business was insolvent and Carl faced personal bankruptcy. Abbeyroad started possession proceedings against Carl and Mark under the charge over 15 Station Road granted in 2008 to secure the debts of Carl’s Cuts Co Ltd.
Mark made the following arguments:
That he was misled by Carl into believing that the charge was for a far smaller amount than was the case;
That he had been unduly influenced by Carl and that was why he had granted the two charges;
That Abbeyroad Bank had notice of all of these events of misrepresentation and undue influence;
That Abbeyroad Bank never rid itself of the effects of this notice;
That the second charge was void as it was infected by the defects of the first;
That Ms Bailey had been in a situation in which her duties to him and the Bank were in conflict and she should have declined to offer him advice in such circumstances;
That Ms Bailey failed to provide adequate advice to Mark.
Abbeyroad Bank made the following arguments:
That the facts as found do not reveal any misrepresentation or undue influence;
That the original transaction was not so adverse to the interest of Mark that it required explanation;
That the Bank had no notice of any wrongdoing or risk of wrongdoing in the circumstances of the first charge;
That the explanation of the transaction given by the Bank employee was enough to rid the Bank of any notice it did have;
That in any event the second charge was not affected by any wrongdoing by Carl or anyone else;
That if there had been misrepresentation by Carl that affected the Bank then it was still entitled to enforce the charge for the repayment of the £100,000 Mark had thought he was securing under the charges;
That if there was any notice raised by the circumstances of the second charge then the Bank was entitled to rely upon the report of Ms Bailey that Mark had understood what he was doing.
Ms Bailey made the following arguments:
That there was no such conflict of interests between the Bank and Mark that she had been required to decline to act in giving Mark advice;
That she had in fact given Mark independent advice;
That in the circumstances she had given proper and full advice to Mark.