Lords reverses 25-year-old ruling on creditor payment

The House of Lords has overturned a decision made 25 years ago that has governed the way creditors are paid in insolvency cases.

As first reported on www.thelawyer.com (30 June), the Lords handed down a unanimous judgment in the landmark case of National Westminster Bank (NatWest) v Spectrum Plus, reversing a previous Court of Appeal decision that ranked the bank as a preferred creditor. In doing so, the unusually large panel of seven Law Lords found that Mr Justice Slade had erred in the case of Siebe Gorman v Barclays Bank in 1979.

In Siebe Gorman, Slade J held that a standard form debenture created an effective fixed charge over the book debts of insolvent companies.

In 2002, the Vice-Chancellor Sir Andrew Morritt decided that NatWest's charge over Spectrum Plus's debts was a floating charge, meaning it ranked behind Government creditors. He was using a Privy Council decision in the Brumark case as precedent.

The Court of Appeal overturned Sir Andrew's ruling in June 2004, but last month's Lords decision reversed that judgment and cancelled Siebe Gorman. It means that insolvency practitioners will now be able to release funds to the Crown relating to around 550 cases.

However, there is not expected to be a rush of appeals relating to cases decided using Siebe Gorman, as the Crown will not challenge any distributions made before 2002.

Allen & Overy senior associate Michelle de Klyver, who advised NatWest alongside partner John O'Conor, said that, as a result of the ruling, lenders will now need to consider whether they will need to obtain additional security, such as guarantees from a company's directors.

Serle Court's Michael Briggs QC and 3/4 South Square's Gabriel Moss QC acted for the Crown and NatWest respectively.