The Gazette 1988

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

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 • 307

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