A book debt is an amount of money owed to a company in the normal course of business. It’s been described as a debt that would ordinarily be recorded in a company’s accounts, regardless of whether it is actually recorded. Sums owed as a result of loans may also be classified as book debts.
Is book debts same as debtors?
IS THERE A DISTINCTION BETWEEN DEBTORS AND BOOK DEBTS? The first part, book debts, refers to the amount owed by the company to its clients. As a result, trade receivables (debtors and bills receivable) are the business’s book debts. Debtors, on the other hand, are all those who are obligated to pay money to the firm.
What is book debt in company law?
Money that a firm has not yet received from consumers who owe it money, as documented in the company’s accounts: meaning of book debt in English A corporation can use its book debts as collateral for a loan.
The issue
When lenders are attempting to enforce their security, the question of what is and isn’t a book debt frequently arises. A standard debenture promises to generate a fixed charge on a company’s assets “debts on the books” Any monies due and owing to the company for goods and services delivered or work performed in the ordinary course of business are usually referred to as “due and owing.”
A fixed charge can only be formed over book debts since the House of Lords judgement in Re Spectrum Plus Ltd2 AC 680, if the money received is put into a blocked designated account over which the lender has authority (both on paper and in practice). If all of the conditions of control are not met, the charge will only be a floating charge, regardless of the debenture’s stated charge classification.
The significance of this distinction is that, in the event of an insolvency, the proceeds of a floating charge are payable to the secured creditor only after the proceeds of preferential creditors’ claims have been paid out “As a matter of law, a “prescribed part” is set aside to pay unsecured creditors and the costs of administration and/or liquidation. These factors can significantly reduce the amount of money available to repay the secured creditor from the proceeds, in some cases to zero.
In Plant and others v Vision Games 1 Ltd and othersEWHC 108, the issue of seeking security over book debts was revisited (Ch). The case discusses what constitutes a book debt and serves as a reminder that security documents must be prepared in such a way that they are compatible with the transactional agreements they relate to. Trying to rely on generic security documents or provisions for security procedures that aren’t actually implemented can result in undesirable or at least unintended consequences.
Background to the case
The insolvency of Relentless Software Ltd, a video game developer, was the subject of this case. The company received funding from Vision Games 1 Ltd to help fund the development of its games (the Funder). The terms of the financing were outlined in three development and sales agreements (DSAs), each of which was specific to a particular game.
The actual development of the games was to be carried out by a subsidiary of the company dubbed Relentless Vision 1 Ltd, according to the DSAs (RVL). The Funder would advance money into a ‘production account’ held by RVL on each time that pre-defined’milestones’ were met, while the company would provide the staff and expertise that RVL required. RVL would subsequently put this money toward the development costs. Importantly, any tax credits earned by the corporation have to be deposited into the production account as well. Receipts from the game’s exploitation, on the other hand, were to be deposited into a ‘exploitation account,’ which was also controlled by RVL.
The company entered into a ‘deed of charge’ with the Funder, granting the Funder a set charge over all of its ‘book debts,’ which were described as ‘all present and future book and other obligations and monetary claims due or owing toin respect of the’. Furthermore, the corporation agreed to deposit the proceeds of all such book debts into a “designated account” and to retain the money on trust for the Funder until it did so.
The terms of the paperwork were not followed in practice. The games were created by the corporation rather than RVL. RVL was left as a Funder subsidiary rather than the corporation it was supposed to be. There was never a ‘dedicated account,’ and it’s unclear if the Funder deposited the money for the games’ production into the production account or straight to the company.
As a result of the company’s financial difficulties, administrators were appointed. The administrators and the Funder disagreed on whether the Funder had any security rights over specific tax credits totaling £190,000 that had been given to the company as a result of the development of the games under the DSAs.
The Funder claimed that the tax credits were ‘book debts’ as defined under the deed of charge, and that as a result, they were either subject to the fixed charge or held on trust pending payment into a ‘designated account.’
What did the court decide?
Because the tax credits constituted monetary claims payable to the corporation, the court agreed that they might fall under the category of book debts. They are, nevertheless, excluded from the term in this case due to a valid construction of the deed of charge. This is because the deed of charge had to be read in conjunction with the DSAs, and the DSAs required the tax credits to be paid into the production account (an account of RVL), whilst the deed of charge required the book debts to be paid into a specified account (an account of the firm).
Insofar as tax credits received by the corporation were concerned, there was an obvious conflict between the precise provisions of the DSAs and the deed of charge. This conflict had to be rectified by understanding the deed of charge’s general phrasing (which merely referred to ‘book debts’ as a wide category) as subject to the DSA regulations governing the application of any tax credits received. The tax credits had to fall outside the scope of that specified word because the DSAs obliged the company to deal with them in a way that was inconsistent with either the fixed charge or trust applied to ‘book debts’ under the deed of charge.
The court also considered whether the charge on the book debts amounted to a fixed fee, given that the Funder had the authority to designate a blocked account into which the book debts were to be paid at any moment, but never did so. Despite mentioning the Spectrum Plus case, the judge remained silent on whether or not a fixed charge had been established.
Summary
To summarize, security documents must be prepared in such a way that they are consistent with transactional records, so that misunderstandings do not arise, allowing assets to slip through the security net. If the tax credits and other payments, such as VAT rebates or loss reliefs, are related to the company’s activity, they can be secured by a fixed charge if the security holder has adequate control over the account into which they are deposited.
What is book debts example?
A book debt is an amount of money owed to a company in the normal course of business. Sums due to a business for goods or services provided or work completed are referred to as book debts. Sums owed as a result of loans may also be classified as book debts.
What is loss of book debts?
Following the destruction of accounting records as a result of an occurrence, Book Debts Insurance covers the costs of replicating records and pursuing debtors. Imagine your business is devastated by a major flood or fire: at first, you may only be concerned with replacing your destroyed property and getting back to business as soon as possible; nevertheless, you will rapidly realize the importance of restoring your lost records and chasing unpaid invoices. Here’s where book debts insurance comes in handy.
How do you calculate book debt?
The following step is to use the aforesaid formula to calculate the book value of debt.
- Long-Term Debt + Notes Payable + Current Portion of Long-Term Debt = Book Value of Debt
As a result, we can observe that XYZ Corporation’s debt is USD $ 210,000, which is different from the market value of debt.
Advantage
When compared to the market value of Debt, it offers numerous advantages. The following are the key benefits that can be seen with it:
- Easy to Compute: It is simple to calculate, and using the above method, we can do so by looking at the company’s balance sheet. We must aggregate all long-term and current liabilities to arrive at the Book Value of Debt.
- It tells us how much a corporation owes its lenders or other stakeholders, and how much of that debt is documented in the books.
- This Book value changes only when the company’s financial accounts are updated quarterly or annually, and it does not fluctuate in response to market conditions.
Can you have a fixed charge over book debts?
It is conceivable to take an effective fixed charge over current and future book debts if the nature of the rights given to the lender or reserved to the borrower over the charged asset are consistent with a fixed charge.
Are dividends book debts?
A charge over all rights and dividends received, receivable, attaching to, originating from, or exercisable by virtue of the ownership of such shares is a common type of share charge. As previously stated, it is customary practice to treat these rights as book debts that are registrable as such.
