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GAZETTE
DECEMBER 1988
Book Review
LEGAL PROBLEMS OF CREDIT
AND SECURITY, by Professor
R. M. Goode, London: Sweet &
Maxwell/Centre for Commercial
Law Studies, 1981 x 218pp.
Th i s is a s e c o nd e d i t i on of
Professor Goode's original title
published in 1982. It has been
revised and expanded to address
developments in commercial law in
the intervening period. Areas of the
l aw on secu r i t i es s pe c i f i c a l ly
treated in the book include —
attachment and perfection of a
security interest, fixed and floating
charges, security over book debts
and other receivables, set-off and
guarantees.
One of the first controversial
questions examined by Goode
relates to set-off. Can a bank take
a recognised security interest over
the credit balance on the account
of its customer to secure the
obligations of that customer on
foot of a separate obligation to the
bank? Professor Goode examines
the question and confesses to
having now bowed to the negative
view having, for some time, been
unconvinced that it was not legally
pos s i b l e. The issue enab l es
Professor Goode to refer for the
first time — but by no means the
last — to the decision in
Re Charge
Card Services Ltd.
[1986] 3 All E.R.
289, now generally regarded as the
authority on the matter. Later, at
page 128, he examines the decision
in
Re Jeavons, ex parte Mac Kay
(1873) 9 CH. App 127, wh i ch
supported the concept but wh i ch
was not cited in the
Charge Card
case or in the judgment, leaving the
question open to some doubt in the
case of a bank account. No t w i t h-
standing reservations expressed by
other legal academics — wh i ch
have been effective at least to
influence the practice in H. M.
C omp a n i es O f f i ce — Go o de
considers that Charge Card and an
earlier Australian case of
Broad -v-
Commissioner
of Stamp
Duties
(1980) 2 N.S.W. L.R. 4 0 were both
correctly decided and would not be
affected by the old judgment in
MacKay's
case.
Professor Goode analyses the
juridical nature of the negative
p l edge
and
e v a l u a t es
its
effectiveness in protecting the
lender's interest. He also considers
the merits of the automatic charge
— the conveyancer's device to
prevent breaches of nega t i ve
pledges.
The question of the efficacy of
provisions in debentures wh i ch
purport to create fixed charges on
future book debts has received
considerable a t t en t i on by the
Courts in recent years. Having
referred to the early recognition
given to the concept of a fixed
charge on after-acquired property
in
Re Ho/royd -v- Marshall
(1862) 10
H.L. Cas 191, Professor Goode
makes t he dec i s i on in
Siebe
Gorman & Co. Ltd. -v- Barclays
Bank Ltd.
[1979] 2 Lloyd's Rep.
142, his benchmark as regards the
modern law on fixed charges on
book debts and other debts. He
examines the decisions in both
Re
Bright life Ltd.
[1986] 3 All E.R. 6 73
and
Re Armagh Shoes Ltd.
[1982]
N.I. 59 and explains why the fixed
charges were struck down in the
t wo latter cases. It was surprising
to find no reference to the leading
Irish authority of
Re Keenan Bros.
Ltd.
(1986) ILT 49 in wh i ch the
Supreme Court, (reversing the
earlier decision of the High Court)
upheld a fixed charge on book
debts and indicated the appropriate
tests to be applied in reaching such
a conclusion. Goode sounds a note
of caution for those creditors who,
in perfection of a fixed charge,
wou ld assume such a degree of
control over the charged assets as
to amount to their exercising a
management function over the
borrower company 's undertaking
and bus i nes s, w i t h t he con-
sequence wh i ch that could have
under Company law for such
creditors.
Lawyers, whose wo rk involves
d r a f t i ng i n s t r ume n ts used in
connection w i th raising loan capital
or long term debt will find Goode's
treatment of subordination pro-
visions most informative. Such
provisions purport to alter the
ordinary rule governing the order of
priority of payments (or distri-
butions in the event of winding-up)
as between creditors and ultimately
the stockholders and shareholders.
Apart from a brief comment on this
subject in Wood's Law and Practice
of International Finance ((Sweet &
Maxwell) this is the first time I have
found the legal position, on the
legality and effectiveness of sub-
ordination provisions, fully debated
in a recognised text book.
Securitisation of financial assets
of companies — the current inter-
national vogue among banks and
financial institutions — is explained
and examined. This is a process by
wh i ch balance sheets are slimmed
down through selling off certain
kinds of financial assets. This is
u s ua l ly w i t h t he o b j e ct of
a d d r e s s i ng s t r i n g e nt
c a p i t al
adequacy requirements imposed by
regulators. The book offers good
advice on the legal and practical
implications of such transactions.
Goode examines the concept of
' a u t oma t ic c r y s t a l l i sa t i on ', i.e.
crystallisation of floating charges
w i t hout any positive intervention
by t he deben t u re holder and
concludes that such provisions can
be validly incorporated in security
documents and will be effective as
between the borrower and the
debenture holder. But what is the
position as regards third parties
dealing w i th the borrower w i t hout
notice of automatic crystallisation?
Goode offers his views.
The penultimate chapter, wh i ch
deals w i th set-off, is invaluable for
its t r e a t me nt and a t t empt at
simplification of this difficult area.
Goode pene t r a t es t he rarified
atmosphere of international finance
to deal w i th cross border and cross
currency set-offs, back to back
loans, parallel loans and currency
swaps. The final chapter wh i ch
deals w i t h guarantees and surety-
sh ip g i v es a c l ear and un-
complicated account of the law on
this subject. The Irish reader must
be careful not to assume that all
the material is entirely applicable to
the Irish situation.
P r o f e s s or Go o d e 's u n u s u al
approach and style makes his book
compulsive reading f r om the first
chapter. This, I believe, has much to
do w i t h the fact that most of his
material first saw light in the f o rm
of a script for his many public
lectures on various aspects of
commercial law. This book carries
my strong endorsement.
E. R. O'Connor
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