Brumark case, Inland Revenue, bank security, borrowings UK

What is Brumark?

For those of you with a legal bent we have a detailed explanation of:
Brumark Investments Limited
(in receivership) v
Inland Revenue Commissioners (1999).

The plain mans guide to the case is as follows:

Prior to 'Brumark' UK banks secured their lending by taking a debenture incorporating a fixed and floating charge over all their customers assets. The debenture included a fixed charge over book debts, i.e. invoices issued but not yet paid.

For the charge to be effective the proceeds of those invoices should have been paid into a separate bank account (from the current account). However, the banks did not want the hassle of monitoring the accounts on a daily basis and having to give consent every time a withdrawal was made. They therefore allowed their customers to pay the proceeds directly into the current account. It made life a lot easier for the banks.

This cosy arrangement changed with the Brumark case which stated that unless the proceeds of invoices were placed into a separate (blocked) account the banks could not rely on their fixed charge and such debtors were only covered by a floating charge.

The affect of all this is that in any receivership these assets i.e. debtors are subject to the prior claims of preferential creditors including the Inland Revenue, H M Customs & Excise and former employees, (for arrears of wages and holiday pay) see Crown Departments statement.

These claims will reduce the net amount collected by a receiver to satisfy the banks claims leaving it only one other avenue to recover its debts - directors through their guarantees!!

The Brumark case is a Privy Council ruling and hence not yet law in the UK. It will only become so when someone takes a test case to the House of Lords. This is not likely to happen in the short term. However, the decision is already having a considerable impact on the UK banks who are seeking ways to protect themselves by changing the wording of their debentures and switching huge numbers of customers to their own factoring/invoilcalce discounting subsidiaries.

What affect does this have on my business?

1. The debenture you gave to the bank is to protect their interests alone, not yours
2. The debenture, as the Brumark case shows, no longer gives the bank the security it thought it had. This could result in:
   1. The bank reducing the previously agreed level of borrowing facilities
   2. It may withdraw them completely
   3. The interest rate might be increased because of the perceived greater risk
3. The bank seeking additional security to support borrowing including directors guarantees
4. The bank switching the bulk of your borrowings to factoring (i.e. to their own factoring company) without giving you any say in the decision

Any of two a, b, or c would have a major impact on a company's prospects for growth and profitability. Three could seriously affect your wealth and whilst four would be a step in the right direction, whatever happened to freedom of choice?

What affect does this have on me?

There are two main dangers for business owners.

The first is the bank takes control of the situation as highlighted above and every negative impact on the company has a knock-on affect on you. But there is an even greater danger and that is if you have already given the bank a guarantee or you are subsequently asked to do so.

In the past the banks "sold" the idea of giving guarantees to directors by suggesting that they were unlikely to ever be called upon because in all probability the debenture security would cover any debts.

As a result of the Brumark case this is no longer true and there is now an increased risk of them calling on guarantors to make up the shortfall. That means you!!

You have a simple choice:

1. Be re-active and let your bank call the shots
2. Be proactive and make your own mind up on what suits your company best

What should I do next?

Any business that has given security to a bank by way of a debenture either with or without the support of directors guarantees needs to urgently review the position. The primary aim should be to reduce the level of bank borrowing to an absolute minimum and ideally do away with it completely. At the same time, any guarantees should be cancelled.

Switching to a factoring or invoice discounting facility will often provide all the funding you need to clear the overdraft and more. Any property loans should be re-financed with a different lender and finance for plant, machinery and vehicles can be funded through leasing or lease purchase facilities.

Instead of having all your eggs in the banks basket and the risks that entails using these different types of lending spreads the risks and allows you to sleep better at night.

Contact Nationwide Asset Finance for expert help in this area - factoring and invoice discounting are not affected by the Brumark decision.