Cash at bank: fixed or floating… and when to give it back

Cash at bank is traditionally considered a circulating or floating charge asset available to administrators and receivers and managers for payment of priority entitlements.¹  But is this always the case?

The facilities and securities held by a lender, together with related transaction documents, will affect the classification of cash at bank as either a non-circulating/fixed or a circulating/floating asset.  Although a general security agreement/charge may purport to classify cash at bank as one type of asset or the other, the legal classification of the asset as either non-circulating or circulating, requires deeper investigation and a two stage analysis:²

  • first, ascertaining the parties’ intentions in relation to their respective rights and obligations to deal with the cash at bank; and

  • second, characterising the legal relationship of each party based on those rights and obligations.

Moreover, usually:³

  • A non-circulating asset can be readily identified, is capable of having the security interest affix to it and is such that the company is unable to deal with the secured property without the lender’s consent.

  • A circulating asset is not so limited by the security interest, which does not attach until crystallisation, allowing the company to deal with the charged asset until that time.

If facilities require a company to pay the proceeds of sales into, or to direct its debtors to pay the proceeds of book debts into, a nominated account confined to the collection of those amounts, it’s likely the cash at bank is a fixed asset.  Hallmarks of such arrangements include references to nominated, restricted or blocked accounts, the operation of which is tightly regulated by the lender’s charge provisions together with a blocked account agreement.  To be effective and enforceable, such accounts will almost always be additional to a company’s trading account and will limit, if not remove, the company’s right to withdraw funds from the account.

As to book debts, today’s blocked account agreements perhaps trace their origins to Re Spectrum Plus Ltd [2005] 2 AC 680 where the House of Lords found that book debts were a floating charge asset, despite their identification as a fixed charge asset in the lender’s security.  There, the lender’s control over the book debts and the collection of their proceeds was central to the House of Lords’ determination that the book debts were a floating charge asset.

More recently, the enactment of the Personal Properties Securities Act 2009 (Cth) and particularly, the effect of section 340, has influenced the scope of lenders’ facilities and securities, together with detailed transactional documents tailored to a company’s business operations, to ensure a non-circulating security interest attaches to specified goods together with their proceeds including, so far as possible, cash at bank derived from such means.

Lavan Legal comment

At face value, the classification of cash at bank as a non-circulating/fixed or circulating/ floating asset may seem definitive.  Be wary of transactional documents additional to standard facility and security provisions which may alter the nature of the asset, and its availability in respect of priority entitlements.

¹ Sections 433 and 556 Corporations Act 2001.

² Agnew Commissioner of Inland Revenue [2001] 2 AC 710

³ B and B Budget Forklifts Pty Ltd v CBFC Ltd and Ors [2008] NSWSC 271 citing Re Spectrum Plus Ltd [2005] 2 AC 680.

Disclaimer – the information contained in this publication does not constitute legal advice and should not be relied upon as such. You should seek legal advice in relation to any particular matter you may have before relying or acting on this information. The Lavan team are here to assist.