Brumark makes its mark on the channel

The Brumark Investments ruling concerning charges over book debts is giving increased impetus to sales ledger financing, writes Nitin Joshi.

Traditionally, banks have accepted fixed and floating charges over a company's assets as security for their lending. In cases when receivers have been called in, frequently book debts have been the main source of recoveries.

For the past 30 years, charges over book debts granted to lending bankers have been classified as 'fixed', so that the realisations after costs have gone straight to the lending bank.

In the case of floating charge realisations, preferential creditors must be paid ahead of the floating charge holder and, understandably, lenders are keen for as much as possible to be categorised as fixed charge.

In June 2001, the Privy Council decision regarding Brumark Investments sent shivers through the banking world.

This case was an appeal from a New Zealand court and, while decisions of the Privy Council are persuasive only in England and Wales, it is likely the House of Lords would follow this ruling.

The issue centred on whether a charge over uncollected book debts, which permits a company to collect and use the proceeds during the ordinary course of its business, should be classified as either a fixed or floating charge.

The court concluded that it was possible to have a fixed charge over book debts, but it is not enough to make the account a blocked account if it is not operated as one.

What is in doubt is the extent of control that a bank must operate over an account into which the book debt proceeds are deposited.

Nitin Joshi is a partner at accountancy and business advisory firm.The problem is, the more control a bank exercises over an account, the less flexible it becomes. There is already a trend towards asset-based lending, and Brumark is likely to accelerate this.

The impact for the channel is that factors and discounters have new friends: VARs.

Their biggest asset is their sales ledger. Brumark provides added impetus for sales ledger financing. And there is no shortage of asset-based lenders.

Administrative receivership has been the most commonly used weapon for banks for a long time.

Judging by recent receiverships it seems that it is being used increasingly by factors. Usually the book debt proceeds have been sufficient only to repay the factor, which suggests the sales ledger is weak.

So are sales ledgers in the channel worth the credit risk as far as factors are concerned? It will take a few years yet for them to decide whether they want to stay in the market.