The company in question (Brumark) went into receivership owing their bank a considerable sum, but the Privy Council ruled that the bank did not have, as previously assumed, a fixed charge over Brumark’s book debts, but only a floating charge, meaning that preferential creditors were given priority. The bank was left with a shortfall, which it had no choice but to pursue through the director’s personal guarantees.
As the ‘floating charge’ ruling will in future become law in the UK, banks are already seeking ways to protect themselves. In most cases, a personal guarantee is inadequate security for the scale of lending most businesses require, leading to reluctance by banks to offer overdraft funding at the same levels as before the Brumark ruling. As a result, factoring or invoice discounting is increasingly being seen as the way in which both banks and companies can safeguard their business.
A recent landmark financial case in
New Zealand (whose law is based on English law) will soon be having a significant
effect on the ability of UK companies to use bank overdraft funding.
