The decision by the law lords in the case, brought by National Westminster bank (Nat West) to clarify a confusing ruling in 2001, will make it more difficult for banks to attach fixed charge to a company's receivables - the money owed to the firm by its customers - and will rob SMEs of a valuable form of security.

The judgment will also push banks with similar forms of debenture down the ranking of creditors to be repaid in an solvency. Banks are now expected to ask for additional security, such as personal guarantees or larger assets, before lending money.

John O'Connor, a litigation partner at Allen & Overy, the law firm that advised Nat West, said "Banks are going to have to reassess the terms on which they'll lend and look at taking further or enhanced security.

"It's an uncommercial decision that's difficult to square with the much-vaunted enterprise culture."

Stephen Alambritis, head of parliamentary affairs at the federation of Small Businesses, said: "We hope the banks won't have a knee-jerk reaction and that they'll look at the risk posed by the individual entrepreneur and small to medium size business rather that seeking a arm and a leg in security."

A fixed charge is secured on an asset that cannot be used by the debtor without the charge-holder's consent, while a floating charge sits over fluctuating assets that the debtor is free to use until the charge owner intervenes.

Fixed-charge holders are the top creditors when repayments are made by administrators but floating-charge holders rank below preferential creditors.

Since 1979 banks have assumed that if they arrange for a debtor company to have its receivables paid into one of the bank's accounts, this will give the bank a fixed charge over the receivables.

But the ruling in 2001 found that this practice gave banks only a floating charge over the assets. As many as 550 insolvencies had been stalled, awaiting the recent clarification.

David
Small Business Resource