Agnew and Kevin James Bearsley v. The Commissioner of Inland Revenue and Official Assignee for the estate in bankruptcy of Bruce William Birtwhistle and Mark Leslie Birtwhistle (New Zealand)

Factual and Procedural Background

Company A granted Company B a debenture dated 9 August 1995 purporting to create a fixed charge over its present and future book debts and a floating charge over other assets. Although the instrument described the book-debt charge as fixed, it allowed Company A to collect those debts and use the proceeds in the ordinary course of business unless and until the charge-holder intervened—something that never occurred. Company A later entered receivership; the only material assets were the proceeds of uncollected book debts subsequently realised by the receivers.

The receivers (the Appellants) asserted that the charge was fixed, which would entitle Company B to the proceeds. The Commissioner of Inland Revenue and other preferential creditors (the Respondents) contended that, at the moment of creation, the charge was in law floating, so the proceeds belonged to them under New Zealand insolvency legislation. Judge Fisher at first instance held the charge to be fixed; the Court of Appeal reversed him. The Appellants appealed to the Judicial Committee of the Privy Council, whose judgment—delivered by Judge Millett—forms the subject of this summary.

Legal Issues Presented

1. Whether a charge over uncollected book debts that allows the company to collect those debts and use the proceeds freely is, in law, a fixed charge or a floating charge.
2. Whether parties can, by drafting, validly separate book debts (subject to a fixed charge) from their proceeds (subject to a floating charge) so as to avoid the consequences attaching to a floating charge.

Arguments of the Parties

Appellants' Arguments (Receivers / Company B)

• The drafting of the debenture expressly created a fixed charge over uncollected book debts; contractual freedom should allow that intention to prevail.
• Any conversion of the fixed charge occurred automatically on collection, not “at the will” of Company A, so the charge remained fixed until payment.
• Precedent such as In re New Bullas Trading Ltd supported treating the charge on uncollected debts as fixed even though the proceeds floated.

Respondents' Arguments (Preferential Creditors)

• Substance, not labels, governs classification; because Company A could collect debts and deploy proceeds without restriction, the charge lacked the necessary control to be fixed.
• The attempt to split debts from their proceeds was commercially artificial and contrary to long-established authority distinguishing fixed from floating charges.
• In re New Bullas was wrongly decided and should not be followed.

Table of Precedents Cited

Court's Reasoning and Analysis

The Board undertook a two-stage enquiry. First, it construed the debenture to determine the parties’ substantive rights: Company A could, without consent, collect book debts and use the proceeds. Second, applying established legal principles, it categorised the charge. Key steps were:

• Control test. A fixed charge requires the charge-holder to control the charged asset or its proceeds. Freedom for the company to withdraw value is “inconsistent with the nature of a fixed charge.”
• Separation of debts and proceeds illusory. While conceptually distinct assets, the value of a receivable lies wholly in its proceeds; attempting to label one fixed and the other floating is commercially artificial.
• Authority overrides drafting. From Yorkshire Woolcombers through Brightlife, cases show that the hallmark of a floating charge is the company’s ability to deal with assets in the ordinary course of business. The Board reaffirmed that labels chosen by the parties cannot displace this substantive test.
• Rejection of first-instance distinctions. Limiting alienation (e.g., assignment or factoring) is insufficient; unrestricted collection and use of proceeds likewise undermines any claim to a fixed charge.
• Express disapproval of New Bullas. The Court of Appeal’s reasoning in that case—based on contractual freedom and descriptive labels—was held to be “fundamentally mistaken” because it collapsed the vital distinction between fixed and floating charges.

Holding and Implications

APPEAL DISMISSED.

The charge over Company A’s uncollected book debts was a floating charge at creation. Consequently, under New Zealand insolvency statutes, the realised proceeds are payable to preferential creditors (including the Commissioner of Inland Revenue) rather than to Company B. The Board’s express overruling of In re New Bullas Trading Ltd realigns New Zealand and United Kingdom jurisprudence, emphasising that control over both debts and their proceeds is indispensable to a fixed charge and that substance prevails over drafting ingenuity. No new form of security was created; instead, the decision reinforces existing doctrine and curtails attempts to evade preferential-creditor protections.