appendix b

a restatement of the law of security

Introduction

                  B.1             In Part XI we noted the possible implications for the general rules on security of introducing a notice-filing system that took a functional approach. We pointed out that the overseas systems all contain a degree of codification or restatement of the rules relating to such matters as default, and that both the Crowther and Diamond reports recommended a similar approach.[1] We gave a brief outline of what such a restatement might cover, and then asked consultees whether they considered that such a restatement should be included in legislation that might ultimately apply notice-filing to security interests created by all debtors. We also asked whether it should apply to any more limited scheme applying only to companies. 

                  B.2             In this Appendix we give more detail of the relevant provisions of the SPPSA and the NZPPSA, and compare their effect to the current law in England and Wales. We also refer to the recommendations of the Crowther and Diamond Reports. We ask consultees to tell us whether they consider that it would be useful to include rules equivalent to those of the SPPSA and the NZPPSA, or equivalent to those proposed by Crowther or Diamond, in any restatement of the law of security. (In some cases we indicate our preliminary view.) We also invite comment on the substance of the rules, though we envisage that, were it to be decided to create a ‘restatement’ of the law of security, a draft would be circulated for comment. The very short time frame for production of this Consultation Paper has prevented us from completing a draft for consultation at this stage, and indeed has prevented us from reviewing fully either the current law or the policy questions that would be involved in any provisions that would go beyond the current law.

Effectiveness of the security agreement

Creation

                  B.3             As we noted in Part XI,[2] under the SPPSA and the NZPPSA a security agreement is effective as between the parties according to its terms,[3] but it is not enforceable against third parties unless either the collateral is in the possession of the secured party or the debtor has signed a security agreement that specifies the collateral.[4] (This is a separate question from either whether the security interest has attached to the property or whether it must also be perfected in order to preserve its priority or to be valid as against purchasers or unsecured creditors in the event of the debtor’s insolvency. Even a security interest that would otherwise have attached and that does not require filing for perfection will not be enforceable if these rules are not complied with.)

                  B.4             Similarly, the Crowther report recommended that a security interest should not be enforceable against the debtor or a third party unless its creation was evidenced by a memorandum in writing signed by or on behalf of the debtor (or possession was taken of the security or documents representing it).[5] The Diamond report recommended that, for non-possessory security interests, there should be a written security agreement, or a note or memorandum, signed by or on behalf of the debtor, identifying the secured property and indicating (expressly or implicitly) that the creditor is to have an interest in that property.[6] In the absence of such writing, the security agreement would be unenforceable against third parties; as between the creditor and debtor, such non-compliance would render the security unenforceable, but would not preclude the enforcement of the personal obligations of the agreement (such as the repayment of the debt with interest).[7] For possessory security interests, the Diamond report considered separately the question of pledges of tangible property and of documents representing incorporeal property, and suggested that neither sort of pledge should be subject to a requirement for writing.[8]

                  B.5             The law of England and Wales has some requirements relating to the creation of a security agreement.[9] No formality is required for a pledge but there are specific rules relating to formalities for certain types of collateral. For example, a written, signed document for a security agreement is required when the interest charged is itself an equitable interest,[10] and legal assignments of choses in action[11] also require signed writing (although the agreements will be effective in equity without it). Transactions regulated by the Consumer Credit Act 1974 are required to be in writing and signed by the debtor.[12]

                  B.6             We provisionally think that existing requirements should continue to operate (so that, for example, an agreement regulated under the Consumer Credit Act 1974 would still have to comply with the formalities set out in that statute). We assume that in practice most security agreements (particularly those entered into by businesses) will be in writing and signed on behalf of the debtor.[13] We are not aware that the lack of any requirement for writing or signature causes problems, but given the existing requirements as to form and current practice, we provisionally think that it would be sensible to require a written agreement signed by the debtor for all non-possessory security interests.

                  B.7             We have an open mind on whether it would be useful to draw up specimen forms, as had been suggested in the Diamond report.[14]

                  B.8             Under the current law an agreement for a non-possessory security cannot be effective even as between the parties unless it gives a sufficient description of the property to enable the court to determine what assets fall within it.[15] We think that a statement that a sufficient description of the property is required should be included in any restatement.

Attachment

                  B.9             The SPPSA, section 12 provides that a security interest attaches when:

unless the parties have agreed to postpone attachment. There are also rules for crops, the young of animals, minerals and trees. The NZPPSA, section 40 is in broadly similar terms. The Crowther report recommended a very similar approach.[16]

               B.10             Under current law in order for a security interest to attach, the following conditions must be satisfied: there must be agreement between the debtor and creditor that the security interest shall attach to the asset; the asset must be identified; the debtor must have a present interest in the asset or the debtor must have the power to give the asset as security; and there must be an obligation owed by the debtor to the creditor which the asset is designed to secure. An agreement for a non-possessory security can only be effective between the parties where a sufficient description of the property is given in order to enable the court to ascertain which assets come within the security.

               B.11             Save for the reference to lessees and consignees, who under present English law are not regarded as creating security interests, the Saskatchewan provision is effectively a restatement of the current English law except in one regard. This is the point noted earlier,[17] that the rights of an execution creditor differ under the two approaches. Under current English law an execution creditor may take goods that are subject to an uncrystallised floating charge, as the secured creditor is not regarded as having rights that have attached to any specific item.[18] In the UCC Revised Article 9 the implication is that the ‘judgment lien’ takes priority, as Section 9-317(a)(2) renders an unperfected security interest subordinate to a person who becomes a ‘lien creditor’ before the security interest is perfected.[19] The same result has been reached under the Ontario PPSA.[20] However these results seem to follow from the definition of attachment that covers all goods currently owned by the debtor, rather than from the adoption of notice-filing in itself: neither section 10 nor section 12 of the SPPSA, for example, explicitly require that the secured party have a right to any specific piece of collateral. Clearly thought would have to be given to the rights of execution creditors were a similar definition of attachment to be included in any restatement of the law. We think that attachment is so central to the notion of security that it would be worth including such a restatement of the rules on attachment. We ask whether, if under the security interest the debtor remains free to dispose of assets in the ordinary course of business, judgment creditors should be able (as at present) to seize goods before the charge has ‘crystallised’.

Rights and remedies on default[21]

               B.12             Under current law, the main remedies that are used by a secured creditor where default has occurred are possession, sale, foreclosure and the appointment of a receiver.[22]

Secured party requiring payment

               B.13             Under the SPPSA and the NZPPSA, in the case of default of a debt or chattel paper, the secured party may require the party liable to pay it, whether or not collections were being made before such notification.[23] Equally, if the secured party is entitled to ‘take control’ of proceeds of collateral it may require that they be paid to it.[24] The secured party enforcing its security interests must also give notice to the debtor within 15 days of doing so.[25] It may then apply the money received, or equally any “account, instrument or security in the form of a debt obligation[26] taken as collateral” to the satisfaction of the secured obligation.[27] Where the collateral is a licence, the secured party may ‘seize’ it by giving notice to both the debtor and the grantor (or successor) of the licence.[28] The secured party may deduct reasonable expenses of collection from amounts so collected or money held as collateral.[29]

               B.14             Under the law of England and Wales the assignee of a debt may notify the debtor of the assignment and thereafter the debtor must pay her, not the assignor.[30] Equally, if the assignee can trace the proceeds of collateral she may claim them.[31] She can apply the money received or negotiable instruments towards satisfaction of the obligation secured.

               B.15             We ask whether it would be useful to include rules on when the secured party can require payment.

Taking possession

               B.16             The SPPSA and NZPPSA provide that possession can be taken where there has been default[32] or, under the New Zealand system, where the collateral is ‘at risk’.

Collateral at risk

               B.17             Under the NZPPSA, a secured party with priority over all other secured parties may take possession of and sell collateral when the collateral is ‘at risk’.[33] Collateral is ‘at risk’ if the secured party has reasonable grounds to believe that the collateral has been or will be:

destroyed, damaged, endangered, disassembled, removed, concealed, sold, or otherwise disposed of contrary to the provisions of the security agreement.[34]

               B.18             English law seems to have no equivalent to this. Such a provision would seem to be useful, and we provisionally propose that an equivalent should be included.

On default

               B.19             Under the current law, where it has been agreed in the security agreement, all creditors are permitted to sell the security. Under a legal or equitable mortgage or charge by deed a mortgagee or chargee has a power of sale.[35] This power of sale exists even where there are no express provisions in the security agreement.[36]

               B.20             Under the current law of England and Wales, where the right to take possession is expressly provided for in the security instrument it may be exercised regardless of the nature of the security interest (so it may be exercised where the creditor is the holder of a legal mortgage, an equitable mortgage or a charge).[37] In the absence of such provision, a legal mortgagee[38] is entitled to possession upon execution of the mortgage whether there has been default by the mortgagor or not, a rule that seems to bear little relation to modern practice. This is due to the ownership of the security vesting in the creditor.[39] In contrast an equitable chargee, with an encumbrance over the asset but no proprietary interest in it, is not permitted to take possession unless there is a contractual right to do so or a court order has been made.[40]

               B.21             Where the security interest comprises goods that can be seized without the need for entry onto the debtor’s property the creditor may take the goods without the need for a court order. However, if the agreement is regulated by the Consumer Credit Act 1974 different provisions apply. Thus, for example, the creditor cannot enforce any security or repossess any goods without first serving a ‘default notice’;[41] and if the contract is one of hire-purchase or conditional sale and the debtor has paid more than one-third of the price, the goods are protected. The creditor then cannot recover possession without a court order.[42]

               B.22             The Crowther report suggested that the system it proposed should have a number of rules relating to the rights of the secured party on default, including giving the secured party the right (in the case of business goods) to enter peaceably and to render the secured goods unusable pending payment or repossession, and recommended giving the secured party the right to dispose of secured property from the defendant’s premises.[43] The Diamond report agreed.[44]

               B.23             The SPPSA provides that, on default, the secured party[45] may take possession or otherwise enforce the security agreement by any method permitted by law.[46] There are provisions dealing with property that cannot readily be moved from the debtor’s premises or of a kind for which adequate storage facilities are not readily available. In such a case, the secured party may seize or repossess the collateral without removing it in any way in which a sheriff acting pursuant to a writ of execution could seize without removal. The secured party can also dispose of the goods on the debtor’s premises, but without causing any greater inconvenience and cost than is necessarily incidental to this.[47] Where the secured asset is a document of title, the secured party may proceed either as to the document itself or as to the goods covered by it, and a method of enforcement available with respect to the document of title is also available with respect to the goods covered by it.[48]

               B.24             The provisions as to possession or enforcement seem to state an obvious principle but one that should be included in a restatement. The provisions as to seizure and disposal may be useful. We would welcome the views of consultees.

Powers and duties of receivers

               B.25             Under the current law, the powers of an administrative receiver - that is, a receiver or manager of the whole, or substantially the whole of a company’s property, appointed by a floating charge-holder[49] - are comprehensively set out in Schedule 1 to the Insolvency Act 1986,[50] but are also generally set out in the debenture. The powers of administrative receivers can be separated in two categories. First, there are the rights that are derived from the security created by the debenture.[51] Secondly, there are the powers which the receiver has which are executed as agent of the company.[52] These powers are used in order to facilitate the continuance of the business, such as the power to employ and dismiss members of staff.[53] The powers as a company agent come to an end when the company goes into liquidation. The receiver is also personally liable for any contract entered into by her in the carrying out of her functions but is entitled to an indemnity out of the assets of the company in respect of the liability incurred.[54] However, we noted in Part II that the Enterprise Bill currently before Parliament proposes to prohibit the appointment of an administrative receiver by floating charge holders save in particular situations.[55]

               B.26             A receiver may also be appointed to receive income from the secured property or to manage just part of a company’s property. The powers of such a receiver are set out in the Law of Property Act 1925, section 109.

               B.27             Under the SPPSA, a security agreement may provide for the appointment of a receiver and, except as provided in that or any other Act, for the rights and duties of a receiver.[56]

               B.28             A receiver is required to take custody and control of the collateral in accordance with the security agreement or order pursuant to which she is appointed, but unless appointed as a receiver-manager or unless the court orders otherwise, she should not carry on the debtor’s business. The receiver must open and maintain in her name an account for the deposit of all money coming under her control; must keep records of all receipts, expenditures and transactions that involve collateral or other property of the debtor (which may be examined by the debtor on written demand); prepare financial statements of the receivership; indicate on business correspondence used or executed in connection with the receivership that the receiver is acting as a receiver; and on completion of her duties, prepare a final account of the administration.[57]

               B.29             The debtor, a sheriff, a person with an interest in the collateral in the custody or control of the receiver, or the authorised representative of any of them, may, by written demand require the receiver to provide copies of the financial statements or the final accounts or to make them available for inspection.[58]

               B.30             In addition to any other powers the court may exercise in its jurisdiction over receivers, on application by an interested person, the court may do one or more of several things. It may appoint a receiver; remove, replace or discharge a receiver, whether appointed by a court or pursuant to a security agreement; give directions on any matter relating to the duties of a receiver; approve the accounts and fix the remuneration of a receiver; notwithstanding anything contained in a security agreement or other document providing for the appointment of a receiver, make an order requiring a receiver, or a person by or on behalf of whom the receiver is appointed, to make good a default in connection with the receiver’s custody, management or disposition of the collateral of the debtor or to relieve the person from any default or failure to comply with the relevant Part of the SPPSA; and exercise with respect to receivers appointed pursuant to a security agreement the jurisdiction that it has over receivers appointed by the court.[59]

               B.31             Unless the court orders otherwise, a receiver is required to comply with sections 59 and 60 only where the receiver disposes of collateral other than in the course of operating the business of a debtor.[60]

               B.32             In New Zealand the Receiverships Act 1993 and the amending Acts[61] set out the powers[62] and duties of receivers. The receiver has the powers and authorities that are either expressly or impliedly conferred by the agreement, deed or order of the court by which the appointment of the receiver was made.[63]

               B.33             We ask consultees whether a restatement should set out the powers and duties of receivers, and the powers of the court, more fully than does the present legislation.

               B.34             Under the current law, all secured creditors are permitted to sell the security if it has been agreed in the security instrument. There are various statutory restrictions, for example under the Bills of Sale Acts and Consumer Credit Act 1974.[64] A mortgagee or chargee under a legal or equitable mortgage or charge by deed has a power of sale under the Law of Property Act 1925,[65] even in the absence of any express provision in the security instrument.[66] A legal mortgagee[67] of goods also has an implied right of sale, at common law, upon the mortgagor’s default. This is exercisable even where the mortgage is not by deed.[68] As far as other securities are concerned a pledgee also has an implied right of sale at common law upon the default of the pledgor.[69]

               B.35             A power of sale may be granted by the court for the sale of mortgaged property despite the dissent of others or the mortgagee where the mortgagee does not appear in the action.[70] This power of the court is used mainly where there is no power of sale out of court but the courts in some cases are sometimes inclined to make such an order even where there is a power outside of the court.[71]

               B.36             Both the SPPSA and the NZPPSA give the secured creditor the power of sale[72] or disposal of the seized or repossessed goods.[73] In addition to this, they set out several rules relating to the exercise of that power of sale.

               B.37             The secured party may delay disposition of all or some of the collateral,[74] and is allowed to buy it, but only at a public sale, and only for a price that bears a reasonable relationship to its market value.[75]

               B.38             Not less than 20 days before the disposition of the collateral, the secured party (or a receiver) must give a notice[76] to the debtor or any other person known by the secured party to be an owner of the collateral; a creditor or person with a security interest whose interest is subordinate who has registered a financing statement in the debtor’s name or according to serial number (where appropriate), or who has perfected by possession at the time of seizure or repossession; and any other person with an interest in the collateral who has given written notice to the receiver of that interest before notice of disposition is given to the debtor.[77]

               B.39             The notice is not required where the collateral is perishable; the secured party reasonably believes that the collateral will decline substantially in value if not disposed of immediately; the cost of care and storage is disproportionately large in relation to the collateral’s value; it is of a type that is to be disposed of by sale on an organised market that handles large volumes of transactions between many different sellers and many different buyers; it is foreign currency; after default, each person entitled to receive a notice of disposition consents in writing to the disposition of the collateral without compliance with the notice requirements; or for any other reason, a court on an ex parte application is satisfied that a notice is not required.[78]

Good faith and a commercially reasonable manner

               B.40             The Crowther report proposed requiring the sale to be commercially reasonable in time, price and manner.[79] The SPPSA and NZPPSA both provide that all rights, duties or obligations arising pursuant to the security agreement or the Act concerned are to be exercised or discharged in good faith and in a commercially reasonable manner.[80] Both also provide that a person does not act in bad faith merely because she acts with knowledge of another’s interest.[81] Under the NZPPSA there is a duty to sell for the best price reasonably obtainable.[82]

               B.41             Under current law a secured creditor (or receiver appointed by it) does not owe a general duty to use reasonable care when exercising its powers and in dealing with the assets of the mortgagor.[83] However equity imposes certain duties including a duty on the secured creditor to take reasonable care to obtain a proper price[84] and a duty to exercise its power in good faith for the purpose of obtaining repayment.[85] This duty is owed to the mortgagor and to a subsequent encumbrancer. 

Effect of disposition on subordinate security interests

               B.42             If seized or repossessed collateral has been sold, all security interests in the collateral and its proceeds that are subordinate to that of the secured party who sold the collateral are extinguished on that sale.[86]

Effect of non-compliance on purchaser/disponee

               B.43             A purchaser who acquires the interest for value and in good faith and who takes possession of it, acquires the collateral free from the debtor’s interest, an interest subordinate to that of the debtor, and an interest subordinate to that of the secured party, whether or not the other requirements of section 59 of the SPPSA have been complied with by the secured party.[87]

Guarantors and others who take transfer of collateral

               B.44             A person who is liable to a secured party pursuant to a guarantee, endorsement, covenant, repurchase agreement or the like and who receives a transfer of collateral from the secured party or who is subrogated to the rights of the secured party has thereafter the rights and duties of the secured party; the transfer of collateral is not a disposition of the collateral.[88]

Expenses and application of proceeds

               B.45             After seizing or repossessing the collateral, a secured party may either dispose of it in its existing condition or after repair, processing or preparation for disposition. The proceeds of the disposition are then applied consecutively to the reasonable expenses of seizing, repossessing, holding, repairing, processing or preparing for disposition and disposing of the collateral and any other reasonable expenses incurred by the secured party; and the satisfaction of the obligations secured by the security interest of the party making the disposition; with any surplus being dealt with in accordance with the SPPSA, section 60.[89]

               B.46             We think that the provisions relating to the power of sale set out above are so central to the remedies of the secured party that they should be included in a restatement, and suggest that each of the points described above should be covered.

Surplus or deficiency

               B.47             Following the sale of repossessed goods, the SPPSA, section 60(2) provides for the payment of any surplus (unless otherwise provided by law or by agreement) in the following order (but without prejudice to the priority of any claimant): first, a person who has a subordinate security interest and who has registered a financing statement using the debtor’s name or the serial number (if of that kind), or one who has perfected by possession at the time of seizure; secondly, any other person with an interest in the surplus, provided they have given a written notice of the interest to the secured party[90] prior to the distribution; and thirdly, the debtor or any other person known by the secured party to be an owner of the collateral.[91] Unless otherwise agreed or provided for by statute, the debtor is liable to pay any deficiency to the secured party.[92]

               B.48             On the Crowther report recommendations, the debtor was also to remain liable for any deficiency remaining after resale (except where this was caused by the secured party failing to act in a commercially reasonable manner).[93] The Diamond report agreed with these views and recommended that they should be implemented.[94]

               B.49             Currently where the secured asset is sold by the creditor it must account to the debtor for any surplus above the amount of the secured sum including costs, charges and expenses which have been properly incurred by the secured party by virtue of the sale.[95] The creditor is not entitled to keep any surplus after these expenses have been accounted for.[96] Where the transaction involves a quasi-security there is no obligation to account for any surplus from the sale of repossessed goods. The creditor under a quasi-security agreement is therefore in some ways better off than the holder of a fixed charge over the property would be. We noted in Part VI that this has sometimes led the courts to make some efforts to prevent the creditor being able to take property worth more than the amount owed, or if the property re-possessed was worth more, to retain the excess.[97]

               B.50             Any restatement forming part of a system that included quasi-securities should clearly set out the rights and duties in respect of surplus.

Statement of account

               B.51             The SPPSA provides that the secured party (including a receiver) shall, within 30 days of receiving a written request, give a written accounting of the amount received from the disposition; the manner of disposal; the amount applied to expenses; the distribution of the amount received; and the amount of any surplus.[98] The NZPPSA contains a similar provision, although the only information required is the gross proceeds, the amount of costs and expenses, and the balance owing by either the secured party or the debtor. The requirement to supply the account is not dependent upon a request being made, and the time for compliance is 15 days.[99]

Payment of surplus into court

               B.52             Under the SPPSA and the NZPPSA, in the case of dispute as to entitlement to the surplus, the secured party can pay the surplus into court to await application by those claiming entitlement to it.[100]

               B.53             We think that provisions on statement of account and the payment of surplus into court would be useful.

Foreclosure

               B.54             Foreclosure involves the termination by order of the court of the right to redeem, the effect of which is to vest the mortgaged property in the mortgagee. In England and Wales, foreclosure requires a court order. The mortgagee is then completely free from the equity of redemption.[101] The remainder of the debt is extinguished by foreclosure and the mortgagee is assumed to have taken the property in satisfaction of the debt owing.

               B.55             Under the SPPSA, after default, the secured party may propose to take the collateral in satisfaction of the secured obligation, but must give notice of such a proposal to the debtor or any other person known by the secured party to be an owner of the collateral; to a creditor or person with a security interest in the collateral whose interest is subordinate, and who has either registered a financing statement using the debtor’s name or according to serial number (if appropriate), or who has perfected by possession when the collateral was seized or repossessed; and to any other person with an interest in the collateral who has given written notice to the secured party of that interest prior to the notice is given to the debtor.[102]

               B.56             If any person who is entitled to such a notice and whose interest would be adversely affected by the secured party’s proposal objects within 15 days after the notice was given, the secured party is required to dispose of the goods in accordance with section 59 of the SPPSA (for example, by sale).[103] Failure to object within 15 days results in the secured party being deemed to have irrevocably elected to take the collateral in satisfaction of the secured obligation, and it is entitled to hold or dispose of the collateral free from all rights and interests of the debtor and from the rights and interests of any person entitled to receive notice who has been given that notice.[104]

               B.57             Again, we think that foreclosure is such a central topic that it should be covered in a restatement.

               B.58             With respect to mortgages, the mortgagor has a right to redeem, at any time before sale or foreclosure, by tendering payment of the sum due, but this power is sometimes postponed by the terms of the contract.[105]

               B.59             The SPPSA provides that, prior to the secured party or receiver disposing of the collateral or before the secured party has irrevocably elected to retain the collateral, a person that is entitled to notice of disposition[106] may redeem the collateral by tendering fulfilment of the obligations secured by the collateral[107] and paying a sum equivalent to reasonable expenses of enforcing the security agreement.[108] The NZPPSA contains similar provisions.[109] The New Zealand legislation does goes further by stating that the debtor’s right to redeem the collateral has priority over any other person’s right to redeem the collateral.[110]

               B.60             The Crowther report recommended that in a transaction relating to personal property the secured party should have the same right as under the current law to postpone the debtor’s contractual right to redeem a mortgage, providing that it did not cause oppression or render the right to redeem illusory.[111] The Diamond report agreed with these views and recommended that they should be implemented.[112] We agree that the right of redemption should be included in any restatement.

Reinstatement of security agreement

               B.61             The debtor may reinstate the security agreement prior to the secured party disposing of the collateral or being deemed to have taken the collateral in satisfaction of the obligation secured by it.[113] Reinstatement may occur where the debtor pays the sums in arrears “exclusive of the operation of an acceleration clause in the security agreement”;[114] remedies any default “by reason of which the secured party intends to sell the collateral”[115] and pays reasonable expenses incurred by the secured party in enforcing the security agreement.[116] There are limits on the frequency with which the debtor may reinstate the agreement.[117]

               B.62             There do not appear to be direct equivalents of these provisions in current English law. The nearest equivalents appear to be the restrictions placed upon a mortgagee’s power to take possession and of sale contained in the Bills of Sale Acts,[118] the restrictions on the mortgages power of sale under the Law of Property Act 1925[119] and the power of the court to make a ‘time order’ under the Consumer Credit Act 1974.[120]

               B.63             We invite views on whether a restatement should include a right for the debtor to reinstate the security.

Powers of court

               B.64             The Saskatchewan system provides that, on the application of a debtor, secured party, creditor, sheriff or person with an interest in the collateral, the court may make orders (including declarations and injunctions) to ensure compliance; to give directions regarding the exercise of rights or the discharge of obligations; to relieve a person from compliance; to stay enforcement of rights; or may make any order necessary to ensure protection of the interest of any person in the collateral.[121] The NZPPSA does not have a specific section referring to applications to court; these are found in individual provisions and are more specific. For example a debtor, judgment creditor or a person with a security interest in personal property of the debtor can apply under section 181 to the court to ensure compliance on behalf of the secured creditor to provide certain information relating to the security interest if they fail to do so under section 177. Under section 128, if a debtor has refused to allow the secured party to remove accession then the latter may apply for a court order to allow it to do so.

               B.65             The SPPSA provides that, on the application of an interested person, the court may make an order determining questions of priority or entitlement to collateral, or direct that an action be brought or an issue tried.[122] It also provides that where a time limit is prescribed for the doing of something, the court may extend or abridge the time (conditionally or otherwise) for compliance. The application may be made before or after the time limit has expired.[123]

               B.66             Under the present law, the Law of Property Act 1925, section 91(2) provides that a power of sale may be granted by the court for the sale of mortgaged property even where there is dissent among other creditors or from the mortgagee. This only applies where the mortgagee does not appear in the action. This power is mainly used where there is no power of sale out of court.[124]

               B.67             We ask consultees whether it is desirable to set out the powers of the court along the lines of the provisions in the Saskatchewan and New Zealand PPSAs.

               B.68             Under a notice-filing system, if a security interest has not been perfected, third parties such as judgment creditors or liquidators are entitled to seize the property that is subject to the security interest. Where the underlying security agreement is a loan, the debtor will still be liable for the outstanding balance and can recover the sums due from the debtor or prove in the insolvency. If however the underlying agreement was a lease or a consignment, the amount payable by the debtor is not so obvious. The SPPSA, section 21 provides that in each case the measure of damages is the value of the leased or consigned goods at the date of seizure plus any further loss suffered as a result of the termination of the lease or consignment.

               B.69             We ask whether similar provisions would be useful in a restatement.

               B.70             The SPPSA contains provisions for security interests in fixtures and in growing crops. Section 49 provides for notices to be registered in the land titles office; these are subject to similar rules as financing statements (for example, they can be filed before the security interest has been created).[125] Sections 36 and 37 contain rules on priority of security interests over fixtures and crops. Broadly speaking, the security interest in the fixtures or crops will have priority over security interests in the land. However, those who without fraud and after the goods have become fixtures or while the crops are growing, acquire an interest in the land or make a further advance under an existing mortgage of the land,[126] will take priority over the security interest in the fixtures or crops if it has not been registered at the time.

               B.71             The Diamond report notes that the UCC and the Canadian legislation contains provision for including goods which are attached to land, and which class as “fixtures”.[127] These provisions perhaps reflect the fact that these systems, as well as those proposed in the Crowther and Diamond reports, apply only to security interests in personal property, and do not cover security interests in land. If a new system of notice-filing for company charges is to reflect the current requirement to register (at least) charges over land, it is probably unnecessary to have separate provisions dealing with the question of fixtures. This situation might be different if there were to be a system that excluded interests over land from its scope. (The Australian Law Reform Commission recommended that goods that are fixtures should not be subject to the regime it proposed, and that they should be governed by land law. There should however be provision for the case were the item to become detached again.[128])

               B.72             Chattels which are subject to hire-purchase or consumer credit agreements and which have been attached to land as fixtures become subject to the mortgage even though they have been affixed after the date of the mortgage. However if the chattel is a business chattel then it may be removed prior to the mortgagee taking possession.[129]

Accessions

               B.73             The SPPSA, section 38 has parallel rules in relation to goods that are installed in or affixed to other goods, giving priority to security interests over the accession as against security interests over the goods as a whole unless the security interest in the accession had been perfected. There are detailed provisions governing the removal of accessions.

               B.74             Under the doctrine of accession where a dominant chattel is attached to another chattel, ownership then rests in the owner of the dominant chattel. The most prevalent areas in which the accession rules are invoked in England and Wales are in cases of retention of title and hire-purchase cases.[130] Retention of title clauses are often used in order to prevent the supplier of goods from losing title to goods because of the doctrine of accession. In the context of retention of title, where a good is added to another good and is easily removable, without serious injury or destruction to the whole that has been formed, the proprietary rights of the seller are unaffected.[131] Where goods have been attached without the knowledge or consent of the supplier there is a possibility of a claim against the buyer of the goods for breach of contract. This claim does not affect the rules of priority if the buyer becomes insolvent.[132]

Processed and commingled goods

               B.75             The SPPSA, section 39 sets down priority rules for cases in which goods over which there are security interests are processed or become commingled so that their separate identity is lost.

               B.76             Under the law of England and Wales there are different types of mixing of goods. The main types are accession, confusion and commingling, which does not involve a loss of physical identity of the goods, and processing which does involve a loss of physical identity of the goods. Cases in this area, in the main, relate to ownership of commingled goods where there has been no loss of identity. These cases suggest that the owners of the goods become tenants in common of the mass in proportion to their respective contributions to the whole. Property in the mass is not lost.[133]

               B.77             We ask whether a restatement of the law of security (which would be largely concerned with personal property) should set out rules on fixtures, accessions and processed or commingled goods.

General and miscellaneous provisions

               B.78             Both the SPPSA and the NZPPSA contain a number of general and miscellaneous provisions.

Transfer by debtor of ownership of collateral

               B.79             The SPPSA, section 33 states that the debtor’s rights in collateral may be transferred, with consent or by the operation of law, notwithstanding a provision in the security agreement that prohibits transfer or declares a transfer to be a default. A transfer by the debtor does not however prejudice the rights of the secured party pursuant to the security agreement.[134] The Crowther report recommended that the debtor should have the right (until sale or foreclosure by the secured party) to dispose of the security subject to the secured party’s security interest.[135]

               B.80             The owner of property may confer on a third party all the rights of ownership including the power of alienation. These rights can be transferred by consent or by operation of law. The owner then no longer has the full rights of ownership but still retains the general property.[136] Any restriction which substantially takes away the power of alienation is void as it is contrary to the principles of ownership.[137] A restraint which is only partial which does not deprive the owner of the power of alienation may be good.[138] These rules apply equally to equitable interests and legal interests.[139]

               B.81             We ask whether the right to transfer ownership of the collateral should be included in a restatement.

No exclusion or limitation of liability

               B.82             The SPPSA provides that (unless otherwise provided in the Act), a provision in a security agreement or any other agreement purporting to exclude any duty or onus imposed by the Act, or purporting to limit either the liability of, or amount of damages recoverable from, a person who has failed to discharge any duty or obligation imposed by the Act, is void.[140]

               B.83             We ask whether a provision preventing exclusion or limitation of liability is needed.

               B.84             The SPPSA, section 68 sets out detailed rules for the service of documents.[141] The rules set out which people may have documents served on them, the means by which service is permitted and where the documents should be served.[142] The rules also set out when service is deemed to be effected.[143] The NZPPSA sets out rules on the service of documents, which focus upon the method of service, and includes service by electronic mail.[144]

               B.85             We ask whether consultees share our view that special rules on service of documents would not be necessary in a restatement.