Company Security Interests (Consultation Paper) [2004] EWLC 176(3) (13 August 2004)

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You are here: BAILII >> Databases >> The Law Commission >> Company Security Interests (Consultation Paper) [2004] EWLC 176(3) (13 August 2004)
URL: http://www.bailii.org/ew/other/EWLC/2004/176(3).html
Cite as: [2004] EWLC 176(3)

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PART 3

THE SCHEME IN FULL

In Part 2 we explained the critical features of the legislative scheme we provisionally recommend. This Part contains a detailed discussion of the features of the scheme for registration (filing) and priority of SIs over personal property in general (where these have not been dealt with in Part 2), and is intended to indicate how we anticipate the scheme as a whole operating.

3.2

There are two significant aspects of the scheme that we do not deal with in any detail in this Part. One is how the scheme will operate in relation to financial collateral. This is a complicated area, often of specialist interest, and for reasons of clarity of exposition we have chosen to separate it out as a whole in Part 4 (although cross-references will be made to Part 4 when appropriate in this Part).

^[1]

In Part 2 we sought consultees' views on the question of whether the notice-filing system we provisionally recommended should include quasi-securities.

^[2]

Structure of this Part

In this Part we begin by addressing the scope of the scheme we provisionally recommend, in terms of the persons and interests affected. We then deal with questions of attachment and perfection, and explain in detail the different methods of perfection over collateral other than financial collateral (which is dealt with separately in Part 4 due to the complexity of the issues involved). We then explain the scheme of priorities, the relationship of our scheme to the 'specialist registries'; how the scheme will apply to SIs created over assets outside the jurisdiction by companies registered here and to SIs created by companies registered in Scotland or incorporated outside Great Britain; and the transitional provisions envisaged for the scheme. An explanation of the rules forming part of the statement of the rights, duties and remedies of the parties will be dealt with in Part 5.

3.5

In this Part -and others- we highlight in bold text our provisional recommendations and also questions on which we would particularly welcome assistance from consultees. We would welcome views on any aspect of the scheme or the draft regulations.

Scope of the scheme

3.6

In essence the scheme applies to SIs over personal property created or provided for by companies (and which will by consequential amendment extend to LLPs, as do the current company charge registration provisions). We take each of these elements in turn, dealing with 'companies' and 'personal property' in this section and 'security interests' in the next.

Companies

3.7

The effect of the draft regulations is that they apply to SIs created or provided for by a debtor who is one of the following persons:

^[3]

(1) a company registered in England and Wales (as defined under the Companies Act 1985 or its successor),

(2) an LLP,^[4] or

(3) a company registered in Scotland or a company that is incorporated outside Great Britain, if the relevant assets are in England and Wales (or to which the law of England and Wales would apply, for example a bank account that is governed by English law).^[5]

For the remainder of this Part we shall refer to such persons collectively simply as 'companies'.

Unregistered companies

The draft regulations have been drawn up to apply only to registered companies. In the CP we provisionally proposed that unregistered companies should be included within the scheme,

^[6]

^[7]

We would welcome views on whether the scheme we provisionally propose should be limited to registered companies and LLPs, or should apply also to other corporate bodies; and if so, as to which corporate bodies should be included.

The person creating the SI and the 'debtor'

It is important to note that the scheme is one that applies to SIs created or provided for by registered companies (and LLPs). It is the legal personality of the person creating the SI that is critical to the application of the draft regulations. The secured party can have any form of legal personality.

^[8]

For the most part the scheme will apply to SIs when the debt or obligation secured is owed by a company, but this will not always be the case. A person may create an SI in order to secure a debt or other obligation owed by a third party. If the person creating the SI is a company, the scheme will apply, whether or not the person who owes the debt or obligation is also a company.

^[9]

^[10]

This is linked to the definition of 'debtor'. In the majority of cases the party creating the SI and the person owing the obligation secured will be one and the same. However, 'debtor' is defined as a person who owes payment or who is liable to perform the obligation secured, whether or not that person owns or has rights in the collateral;

^[11]

^[12]

^[13]

The situations covered by the scheme may involve a third type of debtor. Where security is taken over a company's accounts receivable, for instance, there are two 'debtors': the company and the party who is liable on the receivable. We use the term 'account debtor' when referring to a person who is obligated under an account.

^[14]

The definition of debtor also covers expressly those persons who create 'deemed' SIs, which do not secure payment or performance of an obligation: for example, the outright sale of an account receivable. We deal with this point in more detail later in this Part.

^[15]

We would welcome advice on whether we should continue to use a definition of 'debtor' that may refer to either the party creating the SI or the party whose obligation is secured, where they are not the same person, or both.

^[16]

If not, should we refer to the first as 'the debtor' and the second as 'the obligor', as does the UCC; or do consultees have other suggestions?

Agents and trustees

The scheme set out in the draft regulations applies not only to parties that act on their own behalf but also to those who act as agents or trustees for others. Thus a company that creates an SI may be the title holder for assets of a group of companies which the group as a whole seeks to use to raise money. In such a case there may be questions as to whether the company is the 'debtor' in both of the senses above or whether each of the companies in the group is separately liable for its share of the obligation secured.

3.16

Equally, a secured party may hold an SI for its own benefit or for the benefit of others. The definition of 'secured party' covers a person who holds an SI beneficially and one who holds an SI for the benefit of others including, where the SI is embodied in a security trust deed, the trustee for the holders of debt obligations.

^[17]

Personal property

In the draft regulations we use the term 'collateral' to refer to personal property that is subject to an SI. Personal property can comprise different types of asset, including goods, documents of title, instruments, accounts, money, investment property, bank accounts and intangibles. Each of these categories is defined in the draft regulations.

Goods

3.18

Goods are defined as tangible personal property

^[18]

^[19]

^[20]

Many types of goods now incorporate software without which the goods cannot be used. To date English law does not have specific rules on this; the software is treated as goods, at least where it is already embedded in the goods or comes on a disk or other tangible medium.

^[21]

^[22]

Instruments and documents of title

'Instrument' refers to negotiable instruments. The definitions of instruments and documents of title are limited to paper documents although for other purposes, a document can be in electronic format.

Accounts

3.21

An 'account' is defined as being a monetary obligation (whether or not earned by performance), and will cover book debts and other receivables.

^[23]

^[24]

Intangibles and money

'Intangibles' form a residual category defined on an exclusionary basis: it is personal property that is not goods, a document of title, an instrument, investment property, an account, a bank account or money. Licences are expressly included.

3.23

'Money' means coins and notes in valid currency.

^[25]

The definitions of investment property and bank accounts are dealt with in Part

'Chattel paper'

3.25

Unlike the UCC and PPSAs, our provisionally recommended definition of personal property does not refer to 'chattel paper', nor does our scheme have special rules for it. Parties who have disposed of inventory by way of conditional sale, hire-purchase or finance lease may use the income stream as a form of collateral as under a block discount arrangement. In North America it appears that the transaction is often effected by a physical transfer of the document recording the agreement; the effect of the North American legislation is that physical transfer of the chattel paper to the secured party transfers both (a) the right to the payments due and (b) the transferor's right (by virtue of its retained ownership) to repossess the goods on default.

^[26]

Security interests

The concept of the 'security interest' is fundamental to the scheme. The definition in the draft regulations is wide enough to capture both those interests that are currently regarded by the law as being security and interests that are not so regarded, but which have a security purpose. As we noted in Part 2, the question of whether the term should include quasi-securities divided consultees; quasi-securities have been included in the draft regulations so that consultees may evaluate the scheme properly.

^[27]

The definition is intended to be sufficiently flexible to accommodate the emergence of new forms of transaction that have a security purpose, and therefore does not simply comprise a closed list of particular transactions or devices currently used by business. Commentators sometimes refer to those interests that have a security purpose (whether comprising what would currently be 'traditional' security or quasi-securities) as 'in-substance' SIs.

3.28

The definition of an SI in the draft regulations also includes sales of accounts and promissory notes, as well as those commercial consignments and leases for a term of more than one year that do not have a security purpose. These are sometimes referred to by commentators as 'deemed' SIs (although neither the term 'in-substance' nor 'deemed' appears in the draft regulations). The distinction between 'in-substance' SIs and 'deemed' SIs is important in relation to the application of the scheme's rules relating to the rights and remedies of the parties on default under the security agreement. As we discuss later, these provisions apply only to 'in-substance' SIs and not 'deemed' SIs.

^[28]

For the purposes of discussing our proposed definition of 'security interest', we consider the position of 'in-substance' SIs and 'deemed' SIs in turn.

'In-substance' SIs

3.30

As drafted for the purposes of consultation, the definition of an SI means 'an interest in personal property which secures payment or performance of an obligation'.

^[29]

For the avoidance of doubt, DR 3(2) sets out in paragraph (a) those transactions that clearly have a security purpose and in paragraph (b) those that may or may not. For example, a lease may have a security purpose if it is what is commonly termed a finance lease, but an 'operating' lease does not have a security purpose.

^[30]

Whether the interest secures payment or performance of an obligation is not a question of the intention of the parties or merely of interpretation; it is one of characterisation of the transaction to which they have agreed.

^[31]

^[32]

^[33]

On the assumption that the scheme should apply to quasi-securities, we provisionally recommend that the definition of 'security interest' should encompass all those transactions that have a security purpose, irrespective of the form of the transaction or who has title to the collateral.

'Deemed' SIs

3.34

In addition to providing the 'in-substance' test for an SI, the definition in the draft regulations also provides that the following are SIs:

(1) sales of accounts and promissory notes;

(2) leases for a term of more than one year that do not secure payment or performance of an obligation, and

(3) commercial consignments that do not secure payment or performance of an obligation.

The common feature is that none of the above transactions secures payment or performance of an obligation. They would fail the 'in-substance' test, and unless they were expressly brought within the definition, they would not be SIs.^[34] Thus they are informally said to be 'deemed' rather than 'in-substance' SIs.

This means that a transfer of accounts receivable, for example, is a 'security interest' within the meaning of the scheme whether it is a transfer by way of charge (when it will be an 'in substance' SI) or an outright sale of the accounts (when it will be a 'deemed' SI). However, it is very important to note that although these 'deemed' SIs will be subject to the rules of the scheme in relation to attachment, perfection and priority, they fall outside the rules on surplus and the scheme of remedies that we discuss and provisionally recommend in Part 5. Thus if the lessee (the debtor) under an operating lease defaults, the remedies of the lessor (the secured party) will be those provided by the lease agreement and even if the re-possessed equipment is worth more than the outstanding debt, there will be no question of the lessor having to pay any surplus to the lessee. For the avoidance of doubt, we have made this point plain on the face of the draft regulation dealing with the meaning of SI.

^[35]

The reason for including these types of interest within the scheme for perfection and priorities is that first, they are difficult to distinguish from transactions that give rise to an interest that has a security purpose; and, secondly, if they are not given 'publicity', they may be equally misleading to third parties, including other secured parties and buyers, who may not realise that the asset in question is not the property of the company. All the overseas schemes include provisions relating to sales of accounts and commercial consignments, but they vary over leases. We take leases first.

Leases that do not have a security purpose

3.37

The UCC Article 9 does not apply to leases that do not have a security purpose, but we are told that in practice leasing companies find it easier to register all leases of any length, since it costs little and can do no harm.

We provisionally recommend that leases for over one year that do not have a security purpose should be brought within the definition of 'security interest' for the purposes of perfection and priority.

3.39

The definition in the draft regulations of 'lease for a term of more than one year' includes not just the obvious lease of goods for a term of more than one year, but also leases for an indefinite term; leases for one year or less where the lessee, with the lessor's consent, actually remains in possession of the goods for more than a year,

^[40]

^[41]

^[42]

We have said that leases (and consignments) that do not have a security purpose fall outside the scheme of remedies. Moreover, some of the other non-default based rules will only apply to 'in-substance' SIs, such as the right of the debtor to demand certain information from the secured party.

^[43]

We ask whether consultees agree with the way 'lease for a term of more than one year' has been defined in the draft regulations.

Commercial consignments that do not have a security purpose

The issues relating to consignments are parallel to those for leases. As we noted in the CP,

^[44]

A commercial consignment is, in effect, one where both the consignor and consignee in the ordinary course of their businesses deal with goods that are delivered for sale, lease or other disposition by way of consignment.

^[45]

We provisionally recommend that commercial consignments that do not secure payment or performance of an obligation should nonetheless be 'deemed' to be SIs.

Sales of accounts and promissory notes

3.44

We have explained in Part 2

^[46]

^[47]

^[48]

We have already noted that some transactions involving accounts have a security purpose. A charge over book debts, for example, would satisfy the 'in-substance' test of an SI. In contrast, a true sale of accounts does not have a security purpose, and would fall outside the 'in-substance' test described earlier. It will fall within the overall definition of an SI and be subject to the perfection requirements (that is, it will need to be filed) and to the rules of priority.

^[49]

^[50]

^[51]

For the purposes of consultation we also include sales of promissory notes within the 'deemed' SIs. It is not even necessary to file in order to perfect such a sale (they are 'automatically perfected'

^[52]

^[53]

^[54]

If promissory notes are to be included, we would welcome views as to whether sales of bills of exchange should be similarly treated. For the present, we have not included such sales within the definition of an SI.

^[55]

We provisionally recommend that sales of accounts should be treated as SIs for the purposes of perfection and priority.

3.49

We ask consultees whether, for the purposes of priority, sales of promissory notes should also be treated as SIs that are automatically perfected. We also ask consultees whether sales of bills of exchange should be treated as SIs in the same way as sales of promissory notes.

'Deemed' SIs and the definition of 'debtor'

3.50

The definition of 'debtor' in the draft regulations reflects our provisional recommendation that certain interests should be treated as ('deemed') SIs even though they do not secure payment or performance of an obligation. 'Debtor' includes a person who receives goods under a commercial consignment, a lessee under a lease for a term of more than one year, and the seller of an account or promissory note.

^[56]

SIs in 'supporting obligations'

Although it is hard to find clear authority, we understand the current law to be that, if a right to payment is guaranteed or supported by an indemnity or letter of credit, and the right is assigned, the assignee is entitled to the benefit of the guarantee or indemnity, or to the proceeds of the letter of credit, without showing a separate assignment of the 'supporting obligation'.

^[57]

^[58]

Such a rule has been included in Revised Article 9 of the UCC through the concept of the 'supporting obligation.' In essence, the UCC provides that if a monetary obligation such as an account is supported by a guarantee or indemnity from a third party, or by a letter of credit from a bank, then an SI created over the monetary obligation should of itself also create one over the 'supporting obligation'. There is no need for a separate assignment of rights over the guarantee or under the letter of credit, nor of separate filing or other means of perfection. Under the UCC there are specific rules on attachment, 'automatic' perfection and priority for supporting obligations.

3.53

For purposes of consultation we have included equivalent provisions within our scheme. The term 'supporting obligation' is defined in the draft regulations.

^[59]

^[60]

^[61]

Where an SI attaches in collateral, an SI attaches automatically in a supporting obligation for the collateral.

^[62]

^[63]

The draft regulations also provide that for the purposes of the 'residual' priority rules (which we explain below,

Since we did not raise this issue in the CP or, in any detail, the subsequent informal seminars, we would particularly welcome the views of consultees. Before responding on this point they may wish to read the last section of Part 4, which deals with 'control' over the proceeds of letters of credit.

^[68]

We provisionally recommend that:

(1) where an SI attaches to a monetary obligation an SI attaches automatically to any supporting obligation for the collateral;

(2) perfection of an SI in the collateral also perfects an SI in the supporting obligation.

Partial and total exclusions from the overall scheme

3.58

The draft regulations exclude some interests from the application of the scheme, even though they would, or might arguably, fall within the wide definition of SI. All the overseas schemes have a similar list of excluded interests.

^[69]

Some of these exclusions, for example, of interests over land, are total. Others are partial, in that the scheme applies only to the extent that it gives priority to such interests over conflicting SIs that are wholly within the scheme.

3.60

The complete exclusions are made for a number of reasons. Some are excluded for the avoidance of doubt even though, for example, we think there is no question of a proprietary interest arising; another group because they do not really have a 'financing purpose'; and the last group because SIs over the type of asset, or at least some SIs over them, are registrable in a specialist registry.

3.61

The interests that are partially excluded comprise:

(1) Interests arising through operation of law, such as liens. A common feature of all the overseas schemes we have looked at is that they apply to consensually-created SIs. We suggested having this exclusion in the CP.^[70] Consultees who addressed the question were unanimous that security created by operation of law should be excluded.^[71]) An issue that this exclusion does not settle is whether a special purpose trust - a Quistclose trust - is a consensual SI. We provisionally suggested in the CP that special purpose trusts should be 'outside the requirement to register', either because no security arises, or alternatively because any security arises through operation of law.^[72] A clear majority of those who addressed the question agreed with our provisional proposal, although there was disagreement amongst consultees as to the nature of a special purpose trust. This issue has been the subject of debate,^[73] and on further reflection we do not think our draft regulations should seek to determine the issue one way or the other. It should be left to the courts to determine the issue if and when it should arise in litigation. As the 'secured party' will in any event be able to preserve its position by filing a financing statement 'just in case' it is held to be a consensual SI,^[74] we do not think our position on this will cause significant problems.

(2) Rights of set-off. In the CP we proposed to exclude these because they do not purport to create proprietary rights.^[75] Almost all those who responded on the point agreed.^[76] The concept of set-off is referred to in relation to bank accounts.^[77]

Interests that are wholly excluded because the transactions do not have a 'financing purpose' are:

(1) Interests created or provided for by the transfer of an unearned right to payment under a contract to a person who is to perform the transferor's obligations.^[78] A further reason for this exclusion is that there is no risk of misleading third parties that the transferor retains rights under the contract.^[79]

(2) The assignment of accounts or promissory notes solely to facilitate collection on behalf of the person making the assignment.

(3) The assignment of a single account or promissory note to an assignee in full or partial satisfaction of a pre-existing indebtedness.^[80]

(4) The sale of accounts or promissory notes as part of the sale of a business.

Interests that are excluded because there is a specialist register are:

(1) The creation or transfer of any interests in land, including a lease.^[81] However, it is important to note that transfers of rights to payment arising in connection with an interest in land are not excluded, so that where, for example, the debt secured by a mortgage over land is factored by the land mortgagee, an SI would exist over that receivable which would fall within our scheme.^[82]

(2) Interests in ships, where the ship has been registered in the UK or abroad.^[83]

(3) Interests in aircraft, where the aircraft has been registered in the UK or abroad.

(4) Interests in intellectual property, where the intellectual property has been registered in the UK or abroad.

Lastly, there will be an exclusion for interests arising from the three categories of trust deed that underwriting corporate members of Lloyd's are required to enter in support of their underwriting business. In the CP we provisionally proposed that these should be exempted from the need to file because no potential creditor of the member would think that the member owned the assets outright.

^[84]

There are several exclusions found in the PPSAs which we have not sought to follow.

We ask consultees whether there are there other interests that should be wholly or partially excluded from the application of the draft regulations.

3.67

We provisionally recommend that the interests listed in DR 12 should be excluded from the scheme. We provisionally recommend that SIs over insurance policies and tort claims should be within the scheme.

Effectiveness of a security agreement, attachment and perfection

3.68

Under current law an agreement for an SI such as a charge may have various effects according to what has been agreed and the circumstances.

(1) There may simply be an agreement that a security will be granted in favour of the creditor at some future date. This will give the creditor no more than a personal right against the debtor.

(2) There may be an agreement for a 'present' SI to cover property that the debtor acquires in the future. Obviously this cannot give the creditor the right to any piece of property until the debtor has acquired it; but it is more than a merely contractual right. Thus in Re Lind^[89] the debtor granted the creditor a mortgage over his expectant share in his mother's estate. The debtor then became bankrupt and was discharged. The discharge had the effect of releasing him from existing contractual obligations. Later he acquired the share. The Court of Appeal held that the mortgagee was entitled to the property; its rights were not affected by the discharge in bankruptcy.

(3) Where the debtor has the relevant collateral at the time of the security agreement, or has subsequently acquired it, and the creditor has given value, the creditor may have a right, as against the debtor and some third parties such as judgment creditors, to satisfy its claim from the collateral. This depends on whether the charge has attached to the collateral. A fixed charge will attach when the conditions just stated are satisfied; a floating charge will attach only when the charge crystallises, for example on the appointment of a receiver.

(4) However, where the debtor is a company, the creditor's rights may be invalidated as against a liquidator or adminstrator if the creditor has not 'perfected' the charge by registering it within the statutory period. Equally a charge that has not been duly registered will be ineffective against another creditor claiming the same piece of collateral. However, the first creditor's rights over the collateral are only ineffective to the extent provided by legislation. If the debtor defaults and the creditor enforces its rights without the debtor becoming insolvent or a second creditor acquiring enforceable rights to the same collateral, the creditor's actions are perfectly proper since it had an otherwise valid interest.

(5) Even a charge that has attached and that was properly perfected may of course not have priority.

As we explained in Part 2, the introduction of a notice-filing scheme would change these rules to some extent. Thus the distinction between a fixed charge and a floating charge would for practical purposes disappear, and the rules of priority would be altered. In other respects, however, the scheme would replicate the current position. In particular, a security agreement would be effective to give the secured party not just a contractual right against the debtor but rights that can be enforced against third parties, except to the extent that the scheme provides otherwise – for example, because the SI has not attached to the collateral or has not been perfected.

Effectiveness of security agreement

3.70

DR 14(1) states explicitly that a security agreement is effective according to its terms as between the parties, against purchasers of the collateral and other creditors and as against an administrator or liquidator, except as the draft regulations provide.

Attachment of SIs

3.71

For the secured party to have a right to any particular piece of collateral, it is necessary for the SI to 'attach'. We have explained that though this concept is used by some lawyers in England and Wales, consultation revealed that it was not a familiar concept. We provisionally recommend that it (and perfection) should be defined in the draft regulations.

^[90]

Attachment is the point at which the secured party acquires a proprietary right in the collateral, and is a necessary step for perfection to occur. For clarity, the provision dealing with attachment is drafted so that three conditions have to be fulfilled; they can occur in any order.

^[91]

^[92]

^[93]

We have noted in Part 2 that under our scheme an SI may attach despite the fact that the debtor is given licence to dispose of the collateral free of the SI. This effects a change to what is currently the 'floating' charge.

^[94]

It is perfectly possible under our scheme for the parties to agree that attachment will occur at a later time, for example, only in the conditions under which a floating charge would crystallise under current law. It is not clear, however, that it would be in either party's interest to do so. For the avoidance of doubt the draft regulation makes it clear that simply referring to a 'floating charge' in the security agreement does not amount to an agreement to defer the time of attachment.

Should the security agreement have to be in writing?

3.75

There is one significant difference between our provisional recommendations and the UCC and PPSA schemes. Those schemes require that before an SI can attach, either the debtor must have signed a written security agreement

Present law does not require writing for every kind of non-possessory security agreement. In the CP we provisionally proposed that a written security agreement signed by the debtor

^[99]

^[100]

If a signed writing were to be required, we do not think it would be necessary that all the terms of the security agreement be included in it.

^[101]

^[102]

^[103]

The Saskatchewan and New Zealand PPSAs differ in their requirements on this point, but have this in common: neither requires precise identification of the collateral. Commentators say:

The … description requirement is intended only to provide evidence consistent with a claim that a security interest has been taken in particular collateral. Extrinsic evidence may be necessary to identify individual items of collateral.^[104]

We can see the argument that an SI should not fail when it is quite clear that it was agreed and what it covered, but the written description of the collateral was only in general terms. However it is hard to see what useful purpose is served by this attenuated writing requirement. The secured party will have to prove that there was a security agreement that covered the particular item of collateral that it claims. If it can do that by using parol evidence, why should it matter that there is no writing signed by the debtor, when the debtor will be personally liable in any event, and when third parties will not be relying on the existence of a writing that in practice they will never see? In practice the secured party will file a financing statement or take possession or control; the fact that it has done one of those things and that the debtor has not objected seems to provide evidence of the existence of a security agreement of some kind. To require in addition a signed writing that does not have to identify the collateral precisely adds very little. It is just as likely that the formal requirement might – like so many formal requirements – work to defeat meritorious claims. We think that it is better not to include any formal requirement for security agreements created by companies but, when we consider the extension of the scheme to other debtors, to reconsider whether we need formal requirements that will protect the debtor from personal liability as well as affecting the position of third parties.

3.80

The Law of Property Act 1925, section 53(1)(c) does require a signed writing for the disposition of an equitable interest. As we will see in Part 4, this has already been disapplied in financial collateral arrangements, though 'writing' is required. We see no reason to retain section 53(1)(c) for SIs over other forms of property. That would merely perpetuate a distinction between legal and equitable interests when one of the aims of our scheme is to reduce the differences. This will not affect requirements for writing made by other legislative provisions, such as for the assignment or mortgage of certain sorts of intellectual property (where it comes within the scheme).

^[105]

We provisionally recommend that for a non-possessory SI to attach there should be no requirement that a security agreement should be, or be evidenced, in writing (whether signed or not), and that the Law of Property Act 1925, section 53(1)(c) should, so far as it would otherwise apply, cease to apply to SIs under our scheme.

^[106]

The draft regulations have also not replicated the provision in the SPPSA that obliges the secured party, where a security agreement is in writing, to deliver a copy of it to the debtor within 10 days after its execution. The NZPPSA does not have any such requirement though there is an equivalent one under the Credit Contracts Act 1981. In England and Wales there are requirements for agreements regulated by the Consumer Credit Act 1974; we see no need for further provisions.

Returned and repossessed goods: reattachment

3.83

As we will explain later, there are circumstances where a buyer or lessee of goods will take free of an SI in the goods.

^[107]

^[108]

^[109]

However, we understand that a similar provision to that contained in the PPSAs was originally included in former Article 9 of the UCC, but no longer forms a specific section of Revised Article 9.

^[110]

^[111]

We ask whether the scheme should contain a provision dealing with the reattachment of an SI to goods which have been returned or repossessed.

Perfection of SIs

3.86

An SI will be perfected when it has attached and all the steps (if any

^[112]

^[113]

caveat

^[114]

Some commentators have remarked that in the overseas systems the word 'perfection' is used in two senses: (1) the steps that need to be taken in order to perfect an SI (for example, making a registration/filing, taking possession etc.) and (2) the status that is thereby achieved ('a perfected SI').

^[115]

The draft regulations provide several ways in which an SI may be perfected. We have listed these in a single draft regulation,

^[116]

(1) filing, or

(2) possession, or

(3) for financial collateral only, delivery or control.

There are a few cases in which an SI is treated as being perfected as soon as it attaches; in other words the secured party need take no further steps to perfect.

In certain situations an SI that has been perfected may continue to be treated as perfected for a short 'grace period' after the perfection has ceased, provided that the SI is re-perfected or perfected by another method within that period. An example is where a documentary intangible is released from the secured party's possession and handed to the debtor for certain limited purposes.

^[121]

It is possible that an SI may be perfected initially by one method and subsequently by another – for example, a secured party might take possession of collateral and later file and hand the collateral back to the debtor. For priority purposes, provided that the SI has not been unperfected at any time, the SI is regarded as having been 'continuously' perfected, so that priority dates back to the start of the first form of perfection.

^[122]

^[123]

Methods of perfection in detail

In this section we go through the steps that can be taken to perfect an SI over collateral in general: in particular, possession and filing. (We refer to 'filing' rather than 'registration' to signal a clear break from the transaction registration approach currently used in relation to company charges. Some of the overseas schemes refer to one, some the other.) The forms of perfection applicable only to financial collateral are dealt with in Part 4.

3.93

It should be borne in mind that an SI achieves the status of a 'perfected SI' only when it has both attached and the steps necessary to perfect it in one of the ways detailed below have been taken.

^[124]

^[125]

Perfection by filing

Following our general recommendations in Part 2, we provisionally recommend that the filing of a financing statement should be capable of perfecting an SI that has attached (whether before or after filing) over any type of collateral.

^[126]

^[127]

Temporary perfection

The draft regulations contain several provisions under which an SI, having been perfected, will remain perfected for a short period of time despite the occurrence of events that would otherwise result in it becoming unperfected (or for which there is a short period of 'grace'). At the end of that period of time the SI will indeed become unperfected unless it has been perfected in the meantime. This is usually referred to as 'temporary' perfection (although some of the overseas schemes are not consistent in their usage of this term

^[128]

^[129]

^[130]

Automatic perfection

In a limited number of cases in the draft regulations an SI is perfected without any particular step such as possession or filing having to be taken. Apart from sales of promissory notes and SIs over supporting obligations, which we discussed earlier,

^[131]

^[132]

There is one instance of automatic perfection which is found in the UCC but on which we have not for the present included in our draft regulations. The UCC provides that an assignment of accounts 'which does not by itself or in conjunction with other assignments to the same assignee transfer a significant part of the assignor's outstanding accounts…' is perfected when it attaches (in other words, is automatically perfected).

^[133]

ex post facto

^[134]

Should the scheme provide that an assignment which does not by itself or in conjunction with other assignments to the same assignee transfer a significant part of the assignor's outstanding accounts will be automatically perfected on attachment?

Perfection by possession and goods in possession of bailees

3.99

In the CP we provisionally proposed that possessory securities should be left 'out of the scope of the notice-filing system', in the sense that filing would not be needed, save where the creditor's possession was constructive and resulted from the debtor attorning to the creditor.

^[135]

The vast majority of consultees who responded on this point agreed that registration should not be required for possessory securities. Those who disagreed argued that requiring filing would make the register more complete, and that creditors might lend on the basis of the known existence of the asset in question without checking that it was in the debtor's possession. We do not think that taking such a risk would be reasonable and we therefore recommend that possessory SIs should not be registrable; or, to put it in the terms used in the other schemes, possession should be an alternative method of perfection to filing. We provisionally recommend that actual possession of collateral by the secured party (or its agent) should perfect an SI in goods, an instrument, a negotiable document of title or money.

^[136]

The draft regulations do not provide a definition of 'possession', but there are specific provisions dealing with certain forms of what might be said to constitute constructive possession.

Possession by a debtor who has attorned to secured party

3.102

In the CP we pointed out that where the collateral is in the possession of the debtor or debtor's agent, an attornment by the debtor will not suffice to perfect the SI: at least if it is in writing, it will require registration under the Companies Act 1985, section 396(1).

^[137]

We provisionally recommend that where the goods are in the possession of the debtor or its agent, attornment to the secured party will not amount to possession by the secured party.

^[138]

Possession of goods by bailees

We also provisionally proposed in the CP that where the goods are in the possession of a third party who attorns to the secured party, that should be treated as possession by the secured party. There was no dissent from this but on further reflection we think it is better to provide separately for such cases, so that, for the purposes of perfection, goods that are in the possession of a bailee are not regarded as being in the possession of the secured party.

^[139]

We provisionally recommend that, where the goods are in the possession of a bailee other than the debtor, the SI may be perfected in three ways:

(1) by the bailee attorning to the secured party;

(2) by the bailee issuing a document of title in the name of the secured party; or

(3) by the secured party perfecting an SI in a negotiable document of title to the goods, where the bailee has issued one.^[140]

An SI can also be perfected by filing a financing statement, in accordance with the relevant rules.

Seized or repossessed goods

3.106

The PPSA schemes exclude from 'perfection by possession' the situation where the secured party comes into possession of the collateral as a result of seizure or repossession, typically after the debtor's default.

^[141]

^[142]

^[143]

We provisionally recommend that a secured party who has not perfected its SI by filing but who has seized or repossessed the goods should not be excluded from having possession of them for the purposes of perfection.

Trust receipts and temporary perfection

3.108

A pledgee of goods or documents of title may release them to the pledgor (the debtor) for a limited purpose, such as for sale as agent of the creditor, without losing its proprietary rights over the goods; the debtor signs a trust receipt agreeing to hold the proceeds for the pledgee. This is currently regarded as a method of securing the continuance of the pledge rather than as an independent security device, and trust receipts are not registrable under the current company charges registration scheme.

3.109

The treatment of this situation under the comparable schemes is rather different. They normally contain a specific rule that applies where there is an SI over an instrument that was perfected by possession, or over goods that were in the possession of a bailee who issued a negotiable document of title or attorned to the secured party. If the collateral is then returned to the debtor for specified purposes, the SI remains perfected for a limited period of time (for example, 15 days) but thereafter will become unperfected unless steps are taken to perfect it before the end of that period. (In practice, this will mean filing a financing statement, which can be done before the goods are returned.) As we have noted, the effect of temporary perfection is that the SI will maintain its priority against other SIs over the same collateral and will be effective in the event of the debtor's insolvency.

^[144]

^[145]

In the CP we asked whether we should adopt a similar rule.

This provision applies to instruments and certificated securities, negotiable documents of title, or goods held by a bailee that are not covered by a negotiable document of title, that are made available to the debtor to enable the debtor to sell or exchange them or, in the case of instruments or certificated securities, for enforcement and registration.

^[150]

We provisionally recommend that where an SI over instruments or certificated securities has been perfected by possession, or one over goods in the possession of a bailee has been perfected by the bailee issuing a negotiable document of title or otherwise, if the collateral or document of title is returned for specified purposes, the SI should remain perfected for a limited time thereafter. We ask whether 15 business days is an appropriate period.

Filing

3.113

Perfection by filing is likely to be the most common form of perfecting an SI over collateral other than financial collateral.

^[151]

^[152]

There was almost unanimous support for the introduction of wholly electronic filing.

^[153]

^[154]

It should be noted that the draft regulations set out the framework for the filing system, but do not set out every detail. We think that many of the details would be more appropriate for the Rules to be made by the Registrar under the power given in the enabling clauses under any Companies Bill. The Rules are likely to reflect the sort of detail contained in the subordinate legislation of the overseas PPSA schemes. In any event, the precise nature of the filing system cannot be determined or provided for until the system is commissioned and the necessary software is created. However, we anticipate the system operating very much along the lines of the wholly electronic register introduced under the NZPPSA. Contact between Companies House (or whoever is to run the registry) and some of the existing overseas registries that have an electronic capability would no doubt be a sensible step.

^[155]

It may help to give a brief description of the filing process for those filing via the internet (large volume users would have a slightly different system that we outline below), under the draft regulations and the Rules that we anticipate being made:

(1) Someone wishing to file a financing statement (in practice, the secured party) would first have to register as a 'user' with the registry, which would probably include registering a payment method (such as establishing a direct debit facility or entering credit card details). The user would then be given an identification number and password that could be used to gain access to the system for this and future filings. (This process would be all on-line.)

(2) In order to register a financing statement, the user would enter data onto a series of 'screens'. Once the information has been transmitted and received by the system, a financing statement registration number would be generated by the system, as would a 'debtor personal identification number' (PIN). These numbers would appear on the 'verification statement', which would be sent automatically to the secured party, and a copy of which would be sent by the secured party to the debtor.^[156]

(3) In addition to these two numbers, a 'financing statement PIN' would also be generated. This would be sent to the secured party separately; it should be kept private by the secured party. The financing statement PIN would be used to access the system to make changes to the financing statement.^[157]

For regular users who may wish to file large numbers of financing statements, such as finance houses or firms that regularly supply goods subject to a retention of title clause, we anticipate that Companies House would develop a system akin to the New Zealand Government's G2B

^[158]

Financing Statement

A financing statement is defined in the draft regulations as meaning the data which is transmitted to the Registry in accordance with the Rules to effect a filing.

^[159]

Debtor's name and registration number

The financing statement has to contain the name of the debtor and, where it has one, its Companies House registration number. The name and the number will both be searchable fields. From discussions we have had with Companies House, we understand that it should be possible for the system to check automatically that the name and number entered match the number recorded for that company on their existing records, and that a warning could be given, or the system could reply that it will not accept the filing, if the name and number did not match. This should go some considerable way to reducing the risk of making a mistake in recording the details of the debtor.

3.120

We will see below that, as drafted, the scheme will apply to SIs created by companies incorporated outside England and Wales where the SI is over assets here (or to which English law applies).

^[160]

^[161]

In the CP we provisionally proposed that where the debtor is acting as a trustee, this should be recorded, and our provisional proposal to this effect

^[162]

^[163]

We would welcome views on whether the financing statement should record that the debtor is a trustee and, if so, whether the beneficiary of a bare trust should also be identified

Name and address of the secured party

Although a few consultees thought it was unnecessary to include details of the secured party, the majority thought that the name and address of the secured party, and of its agent, if any, should be required in the financing statement. Even though these are not searchable fields, it was thought to be essential that enquirers should know who the secured party is in order to know whom to approach for further information.

^[164]

^[165]

The financing statement will not be ineffective if the information relating to the secured party is wrong or not up-to-date. That would be unnecessary given that the debtor can supply the information if need be. However, as we noted above, it is in the secured party's interest to ensure these details are accurate, as in some cases information has to be sent to the secured party using the details recorded.

^[166]

A description of the collateral

The financing statement must also contain 'a description of the collateral'. A large majority of consultees agreed with the provisional proposal that the description should be 'brief'.

^[167]

The draft regulations require the financing statement to contain 'a description' of the collateral. 'Description' is not defined further in the draft regulations;

^[168]

'Sufficient' collateral descriptions

Revised Article 9 of the UCC attempts to give some guidance as to what will suffice by way of a collateral description. In other words, the description does not have to comply with what is set down in the UCC provision but, if it does, the validity of the filing cannot be challenged on the basis of inadequate description. This is termed a 'safe harbor' approach.

^[169]

^[170]

What we think is important to get across is that a financing statement will be effective to perfect the SI even if the collateral description is broader than the underlying security agreement. Thus a security agreement over photocopiers may be perfected by a filing that refers to 'office equipment' – though of course the filing will not give the secured party the right to any office equipment other than the photocopiers covered by the security agreement. As we shall see, the debtor will be able to require that the financing statement be changed to reflect the security agreement;

^[171]

Collateral type as a searchable field

The New Zealand scheme requires the collateral to be put into one of a number of collateral types that are, in conjunction with the name, then made searchable fields. Consultees from New Zealand pointed out that this can very easily lead to errors that prevent the financing statement being discoverable.

^[172]

The draft regulations provide that where collateral is of the type that has a 'unique identifying number' (at this stage, principally motor vehicles), that number can be included on the financing statement and a search can be made by unique number. We deal with this in more detail below.

^[173]

Duration of the filing

The financing statement will also state the intended duration of the filing. On the issue of maximum duration, there is no common approach taken by all the overseas systems. The UCC provides generally for a period of validity of five years after date of filing, renewable by the filing of a continuation statement within six months before the expiration of the five-year period. On the expiration of the period, an SI becomes unperfected.

^[174]

^[175]

^[176]

In the CP we argued that a fixed period would create too great a risk that creditors would lose by an inadvertent failure to register, and provisionally proposed that the filing be effective for the period indicated on the financing statement.

^[177]

Thus we provisionally recommend that a filing (unless discharged) should be effective either indefinitely or for such period as has been indicated on the financing statement.

^[178]

Other matters

A small number of consultees argued that the amount secured, or the maximum amount, should have to be stated on the financing statement; and some that the financing statement should state whether or not an SI has actually been created. We have already explained our reasons for rejecting these suggestions.

^[179]

We provisionally recommend that the financing statement should contain:

(1) the name of the debtor and its registered number (if any);

(2) the name and address of the secured party or its agent;

(3) a description of the collateral;

(4) whether the filing is to continue indefinitely or for a specified period; and

(5) such other matters as may be prescribed by the Rules.

We ask consultees to identify any additional information that they consider should be provided or any information that should not be required.

3.135

We note at this stage that we have drawn up the draft regulations in such a way that it should be clear that, subject to one qualification, the Registrar should have no 'discretion' to decide whether or not to accept for filing a financing statement that contains information in the required fields. There is no requirement for the Registrar to check the information supplied as part of the filing, nor any power to reject a purported filing on the ground that it is not believed, for example, that the information is accurate. Accuracy or otherwise of the information supplied goes to the effectiveness of the filing to perfect the SI or determine its priority, rather than to whether the filing should be accepted by the system in the first place. (As we shall see, the Registrar will have power to correct or discharge an incorrect financing statement at the debtor's demand; that is a different issue.

^[180]

The one qualification is that we have included a provision that is intended to enable the removal of filings on the Registrar's own initiative where they are libellous, vexatious or similarly improper. We understand from the staff at Companies House that false or libellous statements contained in information sent to them is a real issue at present, and so we have sought to address it in the draft regulations.

^[181]

Who files?

There is no restriction on who may file. In practice we think it will invariably be the secured party who files: it is the secured party who will lose from the SI being unperfected. Unlike with the Companies Act 1985, there will no obligation on the debtor to send anything for registration, nor any criminal sanctions for not filing.

^[182]

We provisionally recommend that any person should be able to file a financing statement.

Filing for future SIs

The notice-filing scheme is not transaction-based. In other words, it does not operate on the basis of a filing being made for each SI after it has come into existence. Although, as we explain below, the consent of the debtor is needed as part of the filing process, it will be possible for the actual or potential secured party to file before the security agreement is entered into, either for a single SI or for any number of future SIs between the same parties. Providing that the information contained on the financing statement – particularly the collateral description – is sufficient to cover the future SIs, there will be no need for a new filing whenever a new SI is created. This will be of benefit to secured parties such as suppliers who conduct regular business with the same customer under separate transactions: where goods are supplied on retention of title terms, for example, one filing at the beginning of the business relationship may be sufficient to cover all future supplies to the same customer.

3.139

We have noted that our proposal to permit advance filing provoked some debate; in particular many consultees were concerned that the register might become cluttered with unwanted filings. We have already explained our reasons for concluding that this is not a serious risk and for recommending that filing may be made before or after the SI has been created.

^[183]

We provisionally recommend that it should be possible to file before or after a security agreement has been made.

Consent of the debtor to filing

The draft regulations provide that a filing of a financing statement or a financing change statement which either adds collateral or a debtor to a filing is ineffective unless the debtor consents to the filing.

We provisionally recommend that a financing statement that is filed before a security agreement is made should be ineffective if it is made without the debtor's consent (whether before or after the filing).

We do not anticipate that unauthorised filings will be a problem in a companies-only scheme.

^[188]

^[189]

We ask consultees whether they think a power should be taken to impose a criminal sanction on those who file without the debtor's consent when there is no security agreement in existence.

'Last-minute' filing

A large majority of those who responded agreed with our provisional proposal in the CP that – unlike the current '21-day' rule for company charges - there should be no requirement to file a financing statement within a certain time after creation of the SI.

^[190]

However, we noted that the Insolvency Act 1986, section 245 provides for the partial or entire avoidance of floating charges given in various situations, including where the charge was given within the last two years to a 'connected person' who did not give 'new value' and where the charge was given to anyone else within the last 12 months before insolvency, unless new value was given or the company was solvent at the time. We pointed out that the Company Law Review Steering Group thought that in general there was no need to invalidate charges that were registered only a short time before insolvency, and that we saw no reason to disagree (although the question was raised for consultation). However, we thought that 'connected persons', and in particular directors, should be prevented from last-minute filing. Directors are particularly likely to know that a company is approaching insolvency and might be tempted to take a charge at that point. Therefore we provisionally proposed that there should be a provision to prevent last-minute filing by connected persons.

^[191]

Section 245 is confined to floating charges for two reasons: because these normally cover the whole, or substantially the whole, of a company's assets and because, despite this broad reach, they allow the company to continue trading. If the first of these reasons is thought to be the critical one, the equivalent avoidance provisions under our proposed scheme might be confined to 'general' SIs, that is, those that cover the whole, or substantially the whole, of the company's assets. (Like section 245, the provisions should not apply if the chargee gave 'new value'.)

3.145

However, we see no particular reason to confine any such provision to 'general' charges, nor to ones that contain a licence to deal. It seems to us that any 'last minute' charge that does not represent 'new value' given to the company may create the same mischief as a floating charge.

3.146

We provisionally recommend that, when our scheme is introduced, section 245 of the Insolvency Act 1986 be amended to apply to any SI in favour of the persons mentioned in that section that is filed within the times stated before the onset of insolvency, save when new value is given or the company is not insolvent at the time, as provided in section 245(3) and (4).

Verification statement

3.147

A large majority of respondents agreed with the CP proposal that there should be a mechanism to ensure that that the debtor is aware of the filing after it has been made.

^[192]

Some argued that the notice should be sent by the Registrar, but that has its difficulties. First, although all filing will be electronic, so that each filer – the secured party or its agent – will presumably be required to give an e-mail address to which Companies House can send confirmation of the filing, and although Companies House will have an address for each debtor that is a registered company, not all companies have e-mail addresses recorded with Companies House. It would therefore be necessary to send notification to at least some debtors by post. Companies House have expressed reservations about taking on responsibility for sending notices that a filing has been made to the debtor. Secondly, later in this consultative report we provisionally recommend that SIs created by overseas companies over assets in England and Wales should be brought within the scheme.

^[193]

Thus, once a financing statement has been filed, the Registrar should send a 'verification statement' to the person making the filing. The draft regulations provide that the verification statement must contain the date and time of filing, the financing statement number assigned by the Registrar, and the information contained in the financing statement, together with any other prescribed data required by the Rules. We anticipate that the verification statement will be sent electronically (it would presumably be an automated action).

^[194]

^[195]

^[196]

We provisionally recommend that, when a financing statement has been filed, the Registrar must send the secured party a verification statement. The secured party must then send a copy of the statement to the debtor within 10 business days, unless the debtor has waived the right to receive a copy.

Effect of failure to file or perfect by other means

3.151

Except for financial collateral,

^[197]

^[198]

Consultees were almost unanimous in agreeing with our provisional proposal in the CP

^[199]

^[200]

Thus we provisionally recommend that it should not be compulsory to perfect an SI by filing or any other means; but that an unperfected SI should be:

(1) at risk of losing priority to one that has been perfected;

(2) ineffective against a liquidator or administrator on insolvency and other secured parties;

(3) ineffective against an execution creditor who completes execution before the SI is perfected;

(4) ineffective against some purchasers (whether a buyer or subsequent secured party) in certain circumstances.

We will return to these points in more detail during the course of this Part.^[201]

(a) Financing change statements

Amendments to an existing filing are made through filing a financing change statement. A financing change statement is defined in the draft regulations as the data transmitted to the registry in accordance with the draft regulations and the Rules to amend a financing statement or discharge a filing.

^[202]

As we noted above, we anticipate that the Rules will establish a system whereby the 'original' filing will generate a financing statement number, a debtor PIN and a financing statement PIN. The financing statement number and financing statement PIN will be necessary for making changes to the filing. The system should automatically allocate a number to the financing change statement that is linked to that of the financing statement. Thus the financing statement and any financing change statements will form a 'family' and a search that is appropriate to reveal one of them will reveal the others.

3.156

The draft regulations provide that an amendment or renewal of a filing may be done by filing a financing change statement any time before the filing expires.

^[203]

Correction of errors and removal of unwanted filings

In the CP we provisionally proposed that there should be provisions allowing the debtor to demand that a change to an inaccurate financing statement be made, or an outdated financing statement be removed, by the secured party within a certain period, failing which the debtor may make the change.

^[204]

To enable the debtor to demand formally - and if necessary enforce – the removal of unwanted filings or changes to incorrect or out of date information on the register, the draft regulations provide that the debtor (or any person with an interest in property that falls within the collateral description) may require the secured party to file a financing change statement. This applies where the obligations under the security agreement have been discharged or no security agreement exists; where the secured party has agreed to release some of the collateral described in the financing statement; or where the description of the collateral is too extensive.

^[205]

The draft regulations enable the debtor, or any person with an interest in the property described on the financing statement, to issue a 'requirement notice', requiring that the necessary changes be made by a financing change statement. The secured party must then either make the changes or commence proceedings for a court order

^[206]

^[207]

The 'mechanics' of how the requirement notice be served, and how if necessary the debtor may make any change, will be left to the Rules. One way it could operate would be to follow the New Zealand approach (as we understand it). A formal demand for a financing change statement can be made electronically, through the debtor accessing the system and entering on the system a 'financing change demand' (in the New Zealand terminology), using the financing statement number and debtor PIN. This would indicate the changes demanded to the financing statement. The entry of this demand will generate an automatic notice to the secured party that the changes demanded will take effect to alter or discharge the filing at the end of 15 days, unless a court order (this is required in the New Zealand system; we would substitute an indication of commencement of proceedings) to maintain the filing is received by the Registrar. If no such indication is received, the changes are automatically incorporated into the financing statement and take effect to amend or discharge it.

Transfer of secured party's interest

3.161

Consultees agreed with our provisional proposal in the CP that it should be possible to amend the financing statement when the creditor's interest has been transferred to another creditor, but that this should not be necessary in order to maintain the effectiveness or priority of the SI.

^[208]

We provisionally recommend that the creditor should be able to make amendments to the financing statement by means of a financing change statement. The debtor should be able to demand that an incorrect or out of date financing statement is, as appropriate, corrected or removed.

Errors in the financing statement

3.163

The proposals in the CP on the effects of errors in filing were, with hindsight, not formulated clearly and consultees found it difficult to provide straightforward answers. However, there seemed to be a general consensus that the system should be broadly that of the other schemes. This is that an SI is not perfected in respect of a particular piece of collateral unless the item is covered by the collateral description in the financing statement, but that an error in the description will not prevent the financing statement perfecting SIs over collateral that is properly described. A filing will only be ineffective as a whole if there is a mistake in a searchable field,

^[209]

^[210]

We think the scope for errors in the name and number of the debtor will be limited. While the scheme is limited to registered companies, LLPs and some overseas companies, most debtors will have a registered name and number. We understand that Companies House would be able to cross-check the name and number entered as part of the financing statement. The system might be set up so that it would not accept a filing unless either the name and number of the debtor company correspond (and each is complete and correct), or the filing party acknowledges that it is filing against an overseas company that is not registered at Companies House. Thus when a filing is to be made against a company (or LLP) registered in England and Wales the risk the company's name is entered incorrectly should be eliminated. The chief risk will be that the filing is made against the wrong company entirely, for example, against another company that has a similar name because it is in the same group. A careful check of the number should prevent this. In any event, when the company is notified of the incorrect filing it is likely to demand a change.

3.165

In practice a searcher

^[211]

It is immaterial, however, whether a search has actually been carried out. The question is what a searcher would have found had a reasonable search been made. The majority of consultees agreed with this 'objective' approach.

^[212]

An error in describing the collateral so that it purports to cover more than is actually covered by the security agreement will not prevent the SI being perfected but it will not, of course, give the secured party additional rights. The remedy here would lie in the debtor making a financing change demand to correct the error, as explained above.

3.168

We provisionally recommend that the effectiveness of a filing should not be affected by a defect, irregularity, omission or error in the financing statement unless it would have the result that a reasonable search, conducted in accordance with the requirements of the draft regulations and the Rules relating to searches, would not reveal the financing statement.

^[213]

An error in the collateral description will result in the SI remaining unperfected in relation to collateral that was omitted but will not affect it as regards other collateral that is described in the financing statement.

^[214]

Effect of unauthorised or accidental discharge

We noted earlier that a financing statement will be effective either indefinitely or for such shorter period as is indicated on the financing statement. Given that specific periods of effectiveness are permissible, it is possible that a filing will lapse through inadvertent failure to renew it. It is also possible – although less likely – that a filing could be discharged either inadvertently by the secured party or by the secured party's agent without the secured party's authorisation.

^[215]

We provisionally recommend that where there has been mistaken or unauthorised lapse or discharge of a financing statement, the secured party should be able to re-activate the financing statement within 30 days of the lapse or discharge. Where this is done, the lapse or discharge should not affect the priority ranking of the SI as against those SIs which, prior to the lapse or discharge, were subordinate in priority to it. However, this should not be the case as against SIs that are perfected by filing after the lapse or discharge but before the financing statement was re-activated, nor to the extent that the competing SI secures advances made or contracted for in that period.

^[216]

The Rules should deal with the procedure for re-activation of the financing statement

Searching

We have explained the information that has to be contained on the financing statement.

^[217]

^[218]

It will be possible to search by company name or company number. The searcher will then have to check the search result to ensure that it has 'found' the correct company. Alternatively the searcher may enter both. Companies House tell us that they should be able to configure the system so that when a name and number is entered an automatic check is run to ensure that the name and number tally with each other according to the records that they hold on registered companies. If they do not, some form of warning will appear on-screen to this effect, perhaps offering alternatives. It seems to us that this would go far to reducing the risks of identifying the wrong debtor. We have already pointed out that where a company is incorporated outside Great Britain,

^[219]

The NZPPSA has provisions linked to New Zealand's Privacy Act 1993, and there is a requirement that a person searching the register make a declaration that the search is being made in accordance with that legislation.

^[220]

We provisionally recommend that it should be possible to search the register on-line by the company name; the company registered number (where it has one – overseas companies may not be registered at Companies House); the financing statement number (the number allocated by the registry on filing); and (for collateral prescribed in the Rules) the unique identifying number.

System failure

3.175

We think the risk of major loss being caused by a system failure is rather low: if the system 'goes down' it will be evident to both filers and searchers, so that they will know that they must wait and try again. This would certainly cause inconvenience but it is unlikely to cause serious loss unless the secured party is unwise enough to advance the funds before filing, in which case it has only itself to blame.

^[221]

^[222]

We ask consultees whether there should be a statutory, no-fault compensation fund for system failures; and fault-based liability for loss caused by errors in the system.

SIs over vehicles

At this point it is appropriate to deal with SIs over vehicles and other types of goods that have unique serial numbers (the vehicle identification number or VIN, and/or the registration number). We explained in Part 2 the advantages that would result from permitting these to be filed using the unique serial number (or numbers – whether it is just the VIN or also the registration number is a matter for the Rules).

3.177

If collateral is of this type (that is, motor vehicles and other types of serial-numbered collateral to be identified in the Rules), then the number may be included in the financing statement. There is no obligation to include it, so that someone financing, say, a fleet of vehicles could perfect its SI by describing the collateral as 'motor vehicles' rather than recording each individual serial number, but consequences may follow from not using the serial number. A filing that is made without using the serial number, where one could have been recorded, will preserve the effectiveness of the SI as against the administrator or liquidator. In other cases the consequences will depend on whether the goods are held by the debtor as equipment or as inventory.

3.178

Where the goods are equipment, a buyer or lessee of them will take free of any SI perfected by filing, if they were serial numbered goods and the serial number was not used in the collateral description as part of the filing.

^[223]

^[224]

Where the goods are held as inventory, a buyer or lessee of the goods will normally take free of any SI created over them by the seller or lessor, as the disposition will in most cases be authorised.

^[225]

^[226]

We provisionally recommend that where goods are of a type that is designated by the Rules as having a unique serial number, the financing statement may include that serial number. If it does not, a buyer of the goods who does not know of the SI will normally take free of it, and, where the goods are equipment, the SI will not be treated as perfected for the purposes of priority as against other SIs over the same goods.

3.181

Where the uniquely identifiable number has purportedly been included, but there is an error in it, a search by using the number would not reveal the existence of any SI over the collateral. In this case, there is a question: should the filing be treated as ineffective, even though the debtor's name was entered correctly; or should it be effective provided there was an adequate description of the collateral in general terms (for example, as a vehicle of a particular make, model and year)?

^[227]

^[228]

(1) The fact that the serial number was correct should not 'save' a filing that stated the debtor's name incorrectly, except where, as previously suggested, the system would in fact reveal the filing as a 'near miss'. It would be unreasonable to expect those who are concerned with whether there are SIs over the company's property as a whole to search against individual vehicles. It is true that this might occasionally mean that an SI over a vehicle will be unperfected when a person searching on the vehicle number alone could in fact discover it; but this will rarely cause a windfall to the searcher. This is because the most usual searcher will be an intending buyer of the vehicle and, if the buyer conducts the search and discovers that there is an SI over it, the buyer will have knowledge of the SI and will not take free of it.

(2) Where the name of the debtor is correct but the serial number is incorrect, the financing statement should be treated as if it did not contain the serial number.^[229] The advantages of the scheme as regards vehicles would not be fully realised unless a potential buyer of the vehicle or (where the vehicle is not inventory) a subsequent secured party can rely on a search by serial number alone. In practice there will be adequate safeguards against the secured party making a mistake. We anticipate that most SIs over vehicles will be entered by one of the existing registration organisations as agent for the secured party. Those organisations are able to check that the various items of data submitted tally - most obviously, that the registration number and VIN match, but also that these match any other details of the vehicle supplied by secured party.

Proceeds

Definition of proceeds

The concept of proceeds is an important and difficult one. Under the schemes we have examined and under our draft regulations, 'proceeds' refers to three different situations. The first is where the debtor receives income from the collateral (for example, dividends or interest from financial collateral) or collects on it (thus, the sums received from payment of a book debt). The second is when proceeds arise from a disposition of the collateral by the debtor. The SI will normally continue into such proceeds. The third is where the debtor has a claim arising out of damage to or interference with the collateral.

^[230]

Right to proceeds of disposition

The CP dealt only with proceeds in the second sense. A large majority of consultees agreed with the provisional proposals made as to the perfection of proceeds in the CP.

^[231]

We provisionally recommend that where collateral is disposed of by the debtor, unless the secured party has authorised the dealing free of the SI or the case is one in which the buyer will take free of the SI, the SI should continue in the collateral and attach to the proceeds.

^[232]

If a disposition of the collateral was authorised (whether by the security agreement or by a subsequent authorisation from the secured party) or, though unauthorised, it was made in circumstances in which the buyer

^[233]

^[234]

^[235]

We ask consultees whether the scheme should include a provision to limit the secured party's recovery from original collateral and proceeds to the market value of the collateral.

Whether something will be proceeds will depend on it being identifiable and traceable. We do not think this should depend on there being a fiduciary relationship between whoever has the SI in the proceeds and a person having rights in, or who has dealt with, the collateral. We provisionally recommend that whether proceeds are identifiable and traceable should not depend on the presence of a fiduciary relationship. We have accordingly included a provision to that effect in the draft regulations.

^[236]

Perfection of right over proceeds

The rules just stated apply to 'proceeds' that arise on disposition of the collateral by the debtor. We consider that, as in the other schemes, it is appropriate to apply the general rules that we are about to describe to the other types of proceeds also.

3.187

At this point we are concerned with perfection of any SI in the proceeds. On this we confirm the proposal in the CP. We provisionally recommend that an SI in proceeds should be continuously perfected if the SI in the original collateral is perfected by filing, and

(1) the financing statement contains a description of the proceeds that would be sufficient to perfect an SI in original collateral of the same kind; or

(2) the financing statement covers the original collateral, if the proceeds are of a kind within the description of the original collateral; or

(3) the proceeds consist of money, cheques, deposits in or money credited to a bank account or insurance payments.^[237]

In other cases, the secured party should have a short period in which to perfect against the proceeds.^[238]

Obtaining additional information about the SI

The filing scheme introduced by the draft regulations is intended to supply a warning that an SI may exist over the debtor's apparent property.

^[239]

^[240]

To cover the case where the secured party is reluctant to release information on a voluntary basis, we have included in the draft regulations, for the purposes of consultation, provisions enabling a debtor to make a written request to its secured party to be provided with certain information in relation to a security agreement. If the secured party receiving such a request does not comply with the requirements of the draft regulation, or if it supplies inaccurate information, it could face potentially serious consequences.

^[241]

One important issue is who should be entitled to make a request (thereby putting the secured party at risk of penalty for non-compliance). In the CP we suggested that anyone with an existing interest in the company's property should be entitled to make a request for further information.

^[242]

A number of consultees expressed concerns about confidentiality issues that would be involved in allowing persons other than the debtor (for example, competing secured parties) the right to demand information without the express consent of the debtor. Balanced against this is the question of how judgment creditors can be expected to find out which of the debtor's assets are subject to an SI. Potential lenders can expect the debtor to provide the information or get it sent to them by the secured party. However judgment creditors may need information to identify what property they can safely seize. Where the debtor is nearing insolvency, it may have no incentive to respond to a request for information from a judgment creditor. In our view, however, this is a lesser concern than the confidentiality issue. There is no way at present by which judgment creditors can readily discover which of a debtor's inventory is subject to a retention of title clause, or which of its equipment is subject to a finance lease. Under our scheme, even if they are not entitled to obtain further details from the secured party, their position will be improved since they may discover the possible existence of such agreements from the register and may seize any goods that are subjected to an unperfected SI.

3.192

Therefore we provisionally recommend that, if the scheme is to contain a provision dealing with the obtaining of further information, only the debtor should be permitted to make an 'information request. We have drawn up the draft regulations accordingly. However, it should be noted that the right to obtain information is limited to 'in-substance' SIs; it does not apply if the SI is a 'deemed' one. This is because a potential secured party will be less interested in 'deemed SIs', as there is no question of the debtor having a right to a difference between the value of the collateral and the sums outstanding.

3.193

Adopting such an approach would mean that those interested in lending to or dealing with the debtor will have to direct their enquiries through the debtor, who can request that the information be sent directly by the secured party to a third party at a specified address. This will enable the third person to rely on the information as coming from the secured party; and if the third person does so rely, the secured party will be estopped from claiming that it was in fact owed more, or was entitled to more collateral, than it stated in the information it gave.

^[243]

The debtor will be able to ask how much it still owes, or ask the secured party to confirm the debtor's estimate; and to ask the secured party to confirm which personal property is subject to an SI. The debtor can be expected to have a copy of the security agreement, so this item has not been included in the list.

3.195

We think that having a provision enabling the debtor to request information in the way outlined above would be useful, but we recognise that this goes beyond what we understand the current position to be. Given that more than half of consultees who responded to the CP proposal were in favour of the wider approach that we provisionally recommended at that stage (allowing both the debtor and those with an interest in the company's property to make a demand), we think we would be justified in making a provisional recommendation that the scheme contain such a provision. However, given that this issue is controversial, we leave the matter open and seek the views of consultees.

3.196

Where, without reasonable excuse, the secured party does not comply with the information request within 10 business days of receiving it, the draft regulation provides that the debtor can apply to court for an order requiring the secured party to comply.

^[244]

^[245]

^[246]

We conclude from the point of view of obtaining information about security that there is little point in maintaining the company's own register of charges. We ask whether the scheme should contain a provision enabling the debtor to require the secured party to supply information relating to the amount owing and the collateral subject to the SI. In particular, we seek views on whether:

(1) only the debtor should be entitled to make an 'information request',

(2) the secured party should be obliged, at the debtor's request, to supply the information to a named third party,

(3) the court should be able to order the sanctions set out in DR 18, including extinguishing the SI.

Priority between competing SIs

3.198

The establishment of a clear set of priority rules is a fundamental feature of the overall scheme we are provisionally recommending. The CP made provisional proposals or asked questions on a number of specific issues relating to priority, but did not contain a set of detailed proposals or questions on the general rules. However, the topic was the subject of a subsequent informal discussion paper, presented at one of our seminars.

^[247]

In this section we deal with questions of priority as between competing SIs. The rules dealing with buyers and similar transferees are for the most part treated separately,

^[248]

^[249]

The draft regulations dealing with the priority of conflicting SIs take the form of a set of rules that apply in specific situations and 'residual' rules that apply otherwise. There are several specific (and important) rules that apply only to financial collateral; these are dealt with in Part 4. We start with the general, 'residual' rules.

'Residual' priority rules

3.201

There was broad agreement on the 'residual' rules that should apply in the absence of a more specific priority provision. We provisionally recommend the following residual rules:

(1) Perfected SIs take priority over unperfected ones.

(2) As between secured parties with perfected SIs, priority is determined by whoever was first to file or perfect.

(3) As between unperfected SIs, priority is determined by date of attachment.^[250]

(4) The priority that an SI has under the rules above applies to all advances, including future ones (whether or not made under an obligation).^[251]

The rule that, as between conflicting perfected SIs, priority is determined by the 'first to file or perfect' means that where the conflict is between two SIs that have both been perfected by filing, priority will go to the secured party who filed a financing statement first, regardless of the date that the SIs came into existence or attached. Thus if SP1 files its financing statement on 1 February and its SI attaches on 10 February, and SP2 files its financing statement on 2 February, which is also the date on which its SI attaches, as of 10 February SP1 will have priority. If SP2 had perfected by taking possession on 2 February the same result would follow.

^[252]

As we noted above, if collateral is of a type prescribed in the Rules as having a 'unique identifying number', this number can be included on the financing statement. If it is not included in the filing, and the collateral is equipment, whilst the SI will be perfected and effective against the administrator or liquidator, the 'residual' priority rules provide that this will not be sufficient to preserve priority as against other perfected SIs.

^[253]

Specific priority rules

Purchase-money SIs

The most important specific rule is that giving priority to purchase-money SIs (PMSIs). In essence, a PMSI is an SI taken either by a seller to secure payment of the purchase price of the collateral, or by a lender to secure repayment of funds it has provided to enable the debtor to acquire rights in the collateral, for example, where a bank lends a sum of money to a company to buy a particular asset, securing the loan on that asset. In the CP we repeated the argument made by the Crowther committee that it would be unfair to allow the security for this additional loan to be subordinate in priority to the earlier SI:

In this case, it is [the later creditor's] money that has led to the increase in the dealer's inventory, and it would be quite wrong that this increase should become a windfall added to the security of the original party … simply because he had filed a prior financing statement.^[254]

The great majority of consultees agreed that PMSIs should, subject to certain conditions to be discussed later,

^[255]

^[256]

Definition of PMSI

Under the draft regulations, a PMSI is an SI in collateral

^[257]

^[258]

^[259]

The definition of PMSI also expressly includes the interest of a lessor of goods for a term of more than one year and the interest of a consignor who delivers goods to a consignee under a commercial consignment.

^[260]

^[261]

Subject to a number of conditions to be explained below, we provisionally recommend that an SI in collateral, to the extent that it secures all or part of the collateral's purchase price, and an SI taken by a person who gives value for the purpose of enabling the debtor to acquire rights in the collateral, to the extent that the value is applied to acquire those rights, should have priority over any other SI given by the debtor in the same collateral. Interests of lessors and consignors of goods should have the same priority.

3.209

The UCC provides for PMSI status only in relation to goods.

^[262]

^[263]

We ask consultees whether our scheme should limit PMSIs to SIs over goods or whether it should include an SI over any type of collateral other than investment property.

We have included in the definition of PMSI an element contained in the UCC, but not the PPSAs, to the effect that a PMSI does not lose its status as such even if the obligation has been renewed, refinanced, consolidated or restructured.

^[264]

Conditions for PMSI status

The CP dealt only rather briefly with the question of the conditions that must be fulfilled for an SI to achieve and retain PMSI status. Several consultees responded that they could not comment without more detail. We set out our provisional recommendations below.

3.212

When collateral is supplied subject to a PMSI, the UCC and the PPSAs draw a distinction between inventory and other collateral. In each case PMSI status will apply only if certain steps are taken, but the steps differ according to the type of collateral.

Inventory

3.213

When inventory is supplied to a company it is quite likely that other secured parties (existing or prospective) may rely on the inventory as collateral. There are, for example, stock financiers who on a regular basis advance funds on the security of the debtor's inventory, and who therefore check the value of the inventory regularly. It seems right that if such a lender has already perfected its SI by filing, it should be warned before it makes any further advances that the debtor may be receiving inventory that will be subject to a PMSI. Therefore the UCC and the PPSA require that, for an SI in inventory to have PMSI 'super-priority', as it is sometimes termed, the PMSI must be perfected and other secured parties who have filed to perfect SIs over inventory should be given notice, before the inventory is delivered.

^[265]

We provisionally recommend that for an SI over inventory to have PMSI status, it must be perfected, and a notice must have been given to any other secured party who has filed a financing statement covering the same type of collateral, before the debtor (or another person on its behalf, if earlier) obtains possession of the collateral. The notice must state that the person giving the notice expects to acquire an SI in inventory, and describe the inventory by item or kind.

^[266]

Non-inventory collateral

Where the PMSI is over collateral that is equipment rather than inventory it is much less likely that other secured parties whose SIs would include the equipment will advance funds on the security of the new equipment within a short period; and they can be expected to search before doing so. Therefore the other schemes do not require notice, and there is a 'grace' period for filing of 10-15 days after delivery of the equipment.

3.216

Incorporating a period of 'invisibility' into the scheme might at first be thought to be problematical. However, we do not think in practice that this period will cause significant problems, for the following reasons. First, the PMSI priority rules only operate to give priority as against other secured parties. A buyer of the collateral during the period before which a filing is made to perfect the PMSI will be subject to the 'usual' rules of buyers and unperfected SIs: it will take free providing it bought the collateral without knowledge of the SI.

^[267]

We had wondered whether the 'grace' period was appropriate in the case of a wholly electronic filing system, but we understand that it has proved useful in the overseas systems where a business handles its filings centrally rather than in each of its individual offices or shops: time is needed for the dealer to inform the head office that an SI has arisen. Consequently, we see benefit in retaining the grace period.

3.218

As we explained earlier, in the draft scheme it is possible to have a PMSI over intangible property such as a licence. With intangible property the grace period could not run from the date of delivery; it therefore runs from the date the SI attaches.

3.219

We provisionally recommend that a PMSI over goods that are not inventory should have priority over any other conflicting SI provided that it is perfected not later than 10 days after the debtor obtains possession of the collateral. In the case of a PMSI over intangibles, the 10 day period should date from attachment.

Cross-collateralisation

3.220

The current law allows a retention of title supplier under an 'all-monies' or similar clause, if the buyer defaults in paying, to repossess any original goods supplied under retention of title, even if the particular goods seized have already been paid for. This is sometimes referred to as 'cross-collateralisation'. In practice it will be possible only if the SI has PMSI status even over the goods that have been paid for. Revised Article 9 defines a PMSI so that it applies to cross-collateral. We think this is a valuable provision; without it, there would be great practical difficulties in establishing which of several batches of identical goods all supplied by a single supplier have been paid for, and which not. We provisionally recommend that PMSI status in one piece of inventory should extend to other inventory supplied by the same supplier, even if the particular item claimed has been paid for.

^[268]

Conflicting PMSIs

A debtor may have financed the purchase of collateral partly by credit from the vendor and partly by borrowing from another secured lender. Each will have a PMSI. It seems useful to have a rule to deal with the conflict in priority. We provisionally recommend that where two PMSIs in goods or proceeds conflict, a PMSI taken by a seller, lessor or consignor has priority over any other PMSI, providing that it is perfected, in the case of non-inventory, within 10 days of the debtor obtaining possession of the collateral or, in the case of inventory, at the time the debtor obtains possession of the collateral.

^[269]

PMSIs over proceeds and conflicting SIs

An important issue arises in respect of PMSI inventory claimants and receivables financiers. If inventory that is subject to a PMSI is sold to produce receivables, those receivables will amount to proceeds of the PMSI and the PMSI will accordingly continue over them. However, before entering into the PMSI arrangement, the debtor may also have created an SI over its receivables, for example by factoring them. The factor would want to claim the PMSI receivables as its original collateral. Who should have priority? Under the rules outlined above for inventory, the PMSI claimant would have priority. However, if the PMSI in inventory were permitted to continue into the proceeds without more, then it would be difficult for receivables financiers to secure priority over receivables arising from the sale of inventory.

Policy in this area needs to reflect the relative commercial importance of receivables financing as against supplier-financing (for example, by sale on retention of title clause). Receivables financing is a very significant method of raising finance within the UK economy

^[274]

^[275]

Dearle v Hall

^[276]

We provisionally recommend that a secured party claiming an account as original collateral should have priority over a secured party claiming the account as the proceeds of a PMSI, provided that the receivables financier perfected its SI by filing before the PMSI secured party supplied the goods in question or filed in respect of its SI.^[277]

Priority rules for farming?

Some of the other schemes contain additional PMSI provisions relating to the farming industry. For the purposes of this consultation, we have not replicated these in the draft regulations, but we would welcome the advice of consultees as to whether equivalent provisions would be appropriate for our scheme.

3.225

The first issue concerns livestock. It may be hard to determine whether livestock should be treated as 'equipment' or as 'inventory' for the purposes of the PMSI priority rules. The UCC treats a PMSI in livestock in the same way as it does a PMSI in inventory, requiring notice to be given to other holders of conflicting SIs within a certain time before the debtor receives possession of the livestock.

^[278]

For the purposes of the priority rules, should the scheme provide that a PMSI in livestock be treated in the same way as a PMSI in inventory?

3.227

The second issue relates to those who finance the production of crops, for example by supplying fertiliser on credit. The SPPSA contains a provision that a perfected SI in crops or their proceeds that is given for value to enable the debtor to produce the crops, and that is given while the crops are growing or within the six months prior to their planting, has priority over any other SI in the same collateral.

^[279]

^[280]

We ask whether the scheme should provide that an SI taken by a secured party who effectively enables a crop to be produced should have priority over competing SIs in the resulting crop or its proceeds. If so, should there be time limits or notice requirements in relation to this?

Protection of transferees of 'negotiable' collateral

3.229

In the CP we made the provisional proposal that the priority rules of a notice-filing system should not disturb the protection currently given to a holder in due course.

^[281]

This is a matter that affects any transferee of a negotiable instrument, whether a buyer or a person who takes an SI over it. The draft regulations deal with several situations involving negotiable collateral together in one provision. At this point it is important to note the way in which the terms 'buyer' and 'purchaser' are used in the draft regulations. The definition of 'purchaser' is drawn widely – it includes someone who takes by sale, lease, discount, assignment, mortgage, pledge and gift. The term will thus cover both a buyer and other secured parties, and any provision in the draft regulations that applies to 'purchasers' will apply to both these types of person, whereas some of the provisions are expressly limited to 'buyers' (or lessees).

^[282]

We provisionally recommend that a purchaser of an instrument for value, without knowledge of the SI, and who takes possession of the instrument should have priority over any SI in the instrument, whether or not the SI was perfected, unless the purchaser not only knew of the SI but knew that the transaction would violate the terms of the security agreement.

^[283]

^[284]

Transferees of money

Transferees of money should also be protected, as should those who receive payment in some other form.

^[285]

Where a creditor has received payment of a debt owing by the debtor through an electronic funds transfer or certain types of written payment mechanisms (via a 'debtor-initiated payment'), it will take priority over an SI in the funds paid, the intangible which was the source or the instrument used to effect the payment, whether or not it knew of the SI at the time of payment.

^[286]

^[287]

We think that, for holders of money, protection should extend to a holder who either receives the money without knowledge of the SI or who, though knowing of it, gives value.

3.235

We provisionally recommend that:

(1) holders of money (that is, notes and coins in any currency ^[288]) which is subject to an SI, whether perfected or not, should have priority over that SI if the holder acquired the money without knowledge that it was subject to an SI, or is a holder for value, whether or not the holder acquires the money without knowledge of the SI;^[289]

(2) a creditor who has received payment of a debt owing to it by the debtor other than by payment in cash,^[290] should have priority over an SI in the funds, intangible or instrument used to effect the payment, whether or not it knew of the SI at the time of payment.^[291]

Transferees of negotiable documents of title

We provisionally recommend that a holder to whom a negotiable document of title is negotiated, and who gave value, should have priority over an SI in the document of title, whether or not the SI was perfected, unless the holder not only knew of the SI but knew that the transaction would violate its terms.

^[292]

Priority in transferred collateral

Transfers by the secured party

An SI may be assigned by the secured party to a new secured party. We have said that, if the SI was perfected by filing, no new filing will be required.

^[293]

(a) Transfer by the debtor

In contrast, if the debtor company transfers the collateral, the SI will continue in the collateral unless the transfer is authorised or the situation is one in which the buyer will take free.

^[294]

One question of priority arises where, for example, the debtor receiving the transfer (the transferee) has already created a general SI over all its present and future assets, or subsequently creates one. The other systems have a series of priority rules relating to this scenario, which we think we will have to address. The difficulty is that the three schemes we have looked at differ in substance and in drafting.

3.240

Let us assume that Company A has created an SI over a machine in favour of SP1, and Company B either has created one or (before SP1 has filed against Company B or taken possession of the collateral) creates one over collateral of the same type (or a broader description, for example, all goods) in favour of SP2. Company A transfers the machine to Company B, without SP1's authority and not in the ordinary course of business (that is, it does not normally sell machines of that kind

^[295]

Another priority issue arises if Company B subsequently creates an SI over its property. Parties who carry out a search to find out what of the transferee's property may be subject to SIs will not discover the SI over the property that was transferred because the relevant financing statement will have been filed against the transferor.

3.242

The UCC rule is simple: provided SP1's interest was perfected at the time of transfer and has remained so, SP2's interest is subordinate, so SP1 has priority over SP2. This is so whether SP2's interest was created or filed before or after SP1's.

^[296]

The SPPSA and NZPPSA take a different approach. In essence, once SP1 knows that the machine has been transferred to SP2, it has a limited period of time in which to file against SP2. If it does not do so within the time, its SI will lose its priority as against any SI subsequently created by SP2 and perfected first.

3.244

The PPSAs have a further provision dealing with advances made by SP2 under an already perfected SI.

^[297]

Consultees expressed a wide variety of views on this question, some of which did not take into account the nature of the notice-filing system. We think that SP1's interest should have priority when it did not know of the transfer; that is common to all the schemes and seems incontestable. The policy question is whether SP1 should always retain priority over SP2's SI, whenever filed (as in the UCC), or should it lose priority to SIs perfected after it knows and has had 15 days in which to file against Company B but does not do so (as in the PPSAs)? After further consideration we provisionally recommend the UCC's approach. It seems an unnecessary burden on the secured party to have to file a second time. The PPSA rule does not offer SP2 much greater practical protection. Since SP2 will be bound by SP1's interest if SP2 did not know of the transfer, SP2 will, before it takes a new SI over a used machine, have to check its provenance and search against prior owners in any event.

^[298]

We provisionally recommend that if collateral is transferred by the debtor to a party who takes subject to the SI, then provided the secured party's interest was perfected at the time of transfer and has remained so, it should have priority over any SI created by the transferee. This is so whether the SI created by the transferee was created or filed before or after the SI created by the transferor.

^[299]

Changes in the debtor's name

There are also issues if the debtor company changes its name. Under the current provisions of the Companies Act 1985 a company can change its name by special resolution. However, the change of name does not have effect until the Registrar has entered the new name on the register and issued an altered certificate of incorporation.

^[300]

Some of the other systems have rules relating to the priority position of SIs when the debtor changes its name.

^[301]

Liens

Although interests arising by operation of law, such as liens, are generally excluded from the scope of the draft regulations,

^[302]

We provisionally recommend that where a person in the ordinary course of business supplies materials or services with respect to goods which are subject to an SI, a lien that that person has with respect to those services and materials has priority over the SI (unless the lien is a statutory lien which expressly provides otherwise).

^[303]

Priority as against execution creditors

The 'residual' rules discussed above also contain provisions concerning the priority advances as against execution creditors. In essence an execution creditor will be subject to any SI that is perfected when the creditor attempts execution.

^[304]

^[305]

^[306]

However, we think that the secured party should not have priority in respect of further advances made after it knows that the execution creditor has acquired an interest in the goods, unless the secured party was under an obligation to make the advance.

3.252

We provisionally recommend that execution creditors should have priority over unperfected SIs

^[307]

and over a perfected SI in respect of further advances made after the secured party knows of the execution creditor's interest, unless the secured party was under an obligation to make the advance.

^[308]

Priority as against buyers or lessees

Earlier, we noted that if collateral is disposed of by the debtor, the SI continues in the collateral unless either the dealing was authorised by the secured party, in the agreement or otherwise, or the case is one in which the scheme provides that the transferee of the collateral takes free of the SI.

^[309]

It should be recalled that the scheme distinguishes between buyers and purchasers: the latter includes both buyers and those who merely take an SI in the collateral.

^[310]

Unperfected SIs

In the CP we provisionally proposed that an unperfected SI should be ineffective against any person who for value acquires an interest in or right over property subject to the charge even if the buyer had actual knowledge of the SI.

^[311]

^[312]

We provisionally recommend that a buyer or lessee of collateral should take free of an unperfected SI unless it had knowledge of the existence of the SI.

Sales of goods in the ordinary course of business

3.257

A buyer or lessee who deals with a company whose normal business is selling or leasing the kind of goods in question should not be expected to search to see if the seller or lessor has created an SI over the goods. The other schemes provide that where goods are sold or leased in the ordinary course of business, a buyer or lessee will take free of any perfected or unperfected SI unless it knew not just of the existence of the SI but that the sale or lease constituted a breach of the security agreement under which the SI was created. In the CP we explained that, in this context, 'ordinary course of business' must be interpreted more narrowly than, for example, under current law in relation to dispositions under a floating charge or even under the Sale of Goods Act 1979. In those contexts it seems to mean no more than that the sale must not be 'suspect' in some way; whereas under the UCC and PPSAs it means that the sale is one of goods of a type that the seller normally sells. Thus a buyer who buys a stock item from a dealer will take free of any SI created by the seller, and therefore does not need to search; but the person who buys, say, a used press from a printing company will be bound by any perfected SI over the press and thus should search the register before agreeing to purchase it.

3.258

In response to the CP, consultees expressed a wide variety of views on this proposal.

^[313]

^[314]

It should be noted that under this rule the buyer will only take free of SIs created by the immediate seller. If the goods are second-hand it is possible that they may be subject to an SI created by a previous seller, for example, if the previous seller held them under a hire-purchase agreement that has not been paid off. Under the general rules, if the earlier SI was perfected it will be binding on the buyer. (We have already noted the special rules for uniquely numbered goods such as motor vehicles

^[315]

^[316]

^[317]

We provisionally recommend that a buyer of goods from a seller who normally sells goods of that kind, or a lessee from a lessor who normally leases goods of that kind, should take free of any perfected SI created by the seller or lessor unless the buyer or lessee knows that the sale or lease is in violation of the security agreement.

^[318]

Low price goods bought for private purposes

In the CP we also asked whether a person who buys goods for private purposes, whether buying from a dealer or someone else, should take free of all SIs. This question divided consultees. Most of the other schemes have a similar provision, applicable to goods bought for less than a modest sum such as $1000. In other words, private buyers of low value second-hand equipment

^[319]

We ask consultees whether a person who

(1) buys goods for a purchase price of, say, £1000 or less (or leases them where they have that market value),

(2) does so primarily for personal, family or household purposes,

(3) and does not know that the goods are subject to an SI,

should take free of any perfected or unperfected SI in the goods. If so, is the figure of £1000 appropriate?

Motor vehicles and other serial-numbered goods

3.263

We noted earlier that where the collateral consists of what are prescribed by the rules to be uniquely identifiable goods, it is possible for the unique number to be included on the financing statement.

^[320]

^[321]

Other priority situations

There are several other areas where the UCC and PPSAs have rules addressing specific priority situations. In a number of cases we have decided not to replicate these.

Fixtures

3.265

Interests over land are excluded from the application of the draft regulations, as they generally are from the UCC and PPSAs.

^[322]

Under our proposals, an SI covering the goods that ultimately become fixtures would be within the scheme, until the point that they become fixtures.

^[323]

In order for the secured party to protect itself against purchasers of the land to which the goods have become affixed, it will have to take steps to register the right of entry at the Land Registry, as under the current law. Should the goods later be detached from the land, the SI in them will in revive. Whether it will be effective will depend on the usual rules of perfection. We have not thought it necessary to include specific provisions this effect.

3.268

We ask whether consultees agree that specific rules dealing with fixtures are not needed.

Crops

3.269

We have also included provisions to deal with growing crops. We would welcome the views of consultees on whether the approach we provisionally propose is an appropriate one.

3.270

We think that an SI over growing crops should fall within the scope of our proposed scheme, so that the crop can be secured separately from the land on which it is growing. However, under current land law, a mortgagee in possession could also claim growing crops within the scope of its mortgage over the farmland. The draft regulations therefore include a priority rule designed to address this potential conflict, by providing that a perfected SI in crops growing on land has priority over a conflicting interest in the land, if the debtor has an interest in or is in occupation of the land.

^[324]

This rule seems appropriate both to crops that have been planted (that is, what are sometimes referred to as fructus industriales: for example, a cereal crop) and to those naturally grown (fructus naturales: for example, fruit growing on trees). The definition however excludes trees other than crops forming part of trees, so that growing trees are neither crops nor goods, and interests over a growing stock of trees would fall outside our scheme. On this the overseas schemes vary, and we would welcome advice, particularly where the trees were planted as a crop.

3.272

We provisionally recommend that a perfected SI in growing crops (whether planted or natural) should have priority over a conflicting interest in the land, if the debtor has an interest in or is in occupation of the land.

3.273

We ask consultees whether growing trees should be treated like other crops or should be left outside the scheme.

Accessions and commingled/processed goods

3.274

The draft regulations - as with the PPSAs - provide that an SI can continue into the proceeds of goods.

^[325]

^[326]

Accessions

When a supplier retains an SI in components that it has delivered to a buyer, a question may arise whether the supplier's interest in a component continues after it has been installed in or fixed to other goods. Under the current law, where an article is added to another article but is easily removable, without serious injury or destruction to the whole that has been formed, the proprietary rights of the supplier are unaffected.

^[327]

This is different from the rule laid down in the other schemes, which we understand represent pre-UCC law, at least in the US. These permit the secured party to remove any item that has become an accession provided that it compensates the owner of the dominant article for the damage caused (other than the mere loss in value to the dominant article). The right to remove an accession is formally unlimited; but in practice it is limited by a cost-benefit test, in that a secured party will not seek to remove an accession if the accession is worth less than the damage that will be caused. We think that this difference in the pre-scheme law explains, at least in part, why the North American treat accessions in the way that they do.

3.277

When we discussed this in one of our informal seminars, those who spoke saw no reason to adopt this approach, nor to provide that a secured party whose goods have become an accession to other, dominant goods should have an automatic SI in the dominant goods. It suffices that it is possible - as we explain below - for the supplier and the buyer to agree that the supplier should have an SI in the goods to which the component has become an accession. Therefore the draft regulations do not contain a definition of 'accessions'; this question is left to the existing law. Nor do the draft regulations set out specific rules dealing with the priority of SIs over accessions as against SIs over the dominant goods. We provisionally recommend that specific rules on accessions are not needed.

Commingled goods

3.278

At common law, where goods belonging to one party are mixed with similar goods belonging to another (for example, if two parcels of loose grain are stored in a single silo), the two become co-owners of the bulk. Thus if two creditors each had an SI in one of the two parcels, they would each continue to have an SI over the owner's share of the bulk. The goods have not changed in their nature, so no new filing is needed; and any SI over the share in the commingled goods will have the same priority that it had before the goods were mixed. If, for example, grain that is subject to a PMSI is mixed into a mass of other grain that is subject to an 'all assets' SI in favour of a bank, the SI over the proportion that represents the 'PMSI' grain will continue to have PMSI status as against the general SI over the mass. We provisionally recommend that there is no need for our scheme to include special rules to deal with commingled goods.

'Processed' goods

3.279

Where goods of different natures are combined into a new article, for example resin and wood chips are combined into chipboard, it seems that any SI in the ingredients would disappear along with the identity of the ingredient.

^[328]

^[329]

Again, at the informal session the general view was that we should not change the common law rule that when the new product is made, the original goods and any SI over them disappear. It should be for the parties to agree expressly that the secured party should have an SI in the new goods as well as the original goods supplied.

^[330]

^[331]

Nor do we consider it necessary to have special priority rules for competing SIs that continue into the product; this can be left to the general priority rules. In what is probably the most common case – where several suppliers each have an SI over different ingredients and each secured party also takes an SI over the 'new goods', but the goods will have to be sold at an insolvency sale and fetch less than the unpaid prices of the ingredients – the secured parties would have priority according to the order of filing.

3.282

It should be noted that while the supplier will have a PMSI over the goods in their original state (assuming it has fulfilled the necessary conditions as to notice and filing

^[332]

^[333]

We provisionally recommend that there is no need for our scheme to include specific provisions on processed goods.

Liability in damages

In the CP we asked whether there should be a provision to the effect that a person failing to discharge any duty or obligation imposed by the system should be liable for reasonably foreseeable loss caused to those who could reasonably be expected to rely on performance of that duty or obligation.

^[334]

^[335]

There are several provisions in the draft regulations non-compliance with which might lead to an award of damages. These include:

(1) DR 17 (secured party's obligation to use reasonable care in the custody and preservation of collateral in its possession);

(2) DR 18 (secured party's obligation to send information about a security agreement to the debtor or someone named by the debtor);

(3) DR 47 (filing a financing statement without the debtor's consent);^[336]

(4) Part 5 (secured party's obligations relating to the giving of notices, disposal and distribution of the proceeds of disposal of collateral following default).

However, unlike some of the overseas schemes, there are no provisions awarding fixed-sum damages ('statutory damages') for breach of particular provisions. The damages provisions are also expressly without limitation to or effect on any other liability which may exist.

3.286

Do consultees agree with the approach we have set out in DR 71 of permitting damages for reasonably foreseeable loss? If not, what sanctions should exist for failing to carry out any obligation imposed by the draft regulations? Should the availability of damages be limited to those to whom the duty or obligation is owed? If damages are an appropriate sanction, should there be provision for fixed-sum awards for breach of particular provisions?

3.287

We would welcome views on whether the draft regulations should contain an equivalent to a provision found in the UCC, which in effect expressly provides that a secured party does not owe a duty based on its status as secured party:

(1) to a debtor, unless the secured party knows:

(a) that the person is a debtor,

(b) the identity of the person, and

(c) how to communicate with the person; or

(2) to another secured party that has filed a financing statement, unless the secured party knows:

(a) that the person is a debtor, and

(b) the identity of the person.

3.288

Should there be a provision effectively limiting any duty of a secured party towards debtors and other secured parties unless the secured party knows that the person is a debtor or secured party as appropriate, and their identities?

SIs and the 'specialist' registries

3.289

Under current law there are statutory provisions for the registration of certain assets at what are sometimes called 'specialist registries'. The assets concerned are land, ships, aircraft and certain forms of intellectual property, and the relevant legislative schemes allow for registration of an asset itself and, in some cases, of an interest affecting that asset (such as a charge, mortgage or assignment). A charge created by a company over such an asset must also be registered at Companies House, regardless of any other registration provisions relating to the specialist registry. Failure to comply with the company charge registration requirements will render the charge invalid against third parties on insolvency, even if the specialist registry registration provisions have been complied with.

^[337]

In the CP we noted that the Company Law Review Steering Group had proposed that neither the validity nor the priority of charges over land should depend on registration in the Companies Register, though it suggested that there should still be a penalty if the charge were not registered there, in order to ensure that the register gave a more accurate position. We suggested that the latter was unnecessary since the existence of a charge that is on a specialist register is readily discoverable from that register. We therefore made the provisional proposal that the validity and priority of charges over land, and over other assets if the charge is registrable in a specialist register, should not depend on filing a financing statement at Companies House.

^[338]

^[339]

The responses from consultees fell into three groups. Some, including the Land Registry, welcomed the proposal without reservation. A small group were wholly opposed, on the ground that it was important that the Companies Register should have complete information about charges over the company's property. Much the largest group agreed with the proposal that validity and priority should not depend on registration at Companies House on condition that information from the specialist registry were forwarded to Companies House and included on the register for information purposes. There was particular concern about this in relation to charges over land.

3.292

Since the CP we have developed our proposals in more detail. We have considered the relationship between the Companies Register and the specialist registers, in particular the ship and aircraft registers, if the scheme is to be extended to include quasi-securities. This aspect has caused us to rethink the policy issues, because it became apparent that simply to exclude charges that had been registered in the specialist registry from a scheme that includes quasi-securities would cause difficulties. There would be the confusing possibility of some SIs dropping in and out of the scheme, or interests over the asset being covered by two different schemes.

^[340]

^[341]

We have approached the question of aircraft, ships and intellectual property – for which there are, in most cases, specialist registries and mortgage registration provisions – on the basis that if a lender is really serious about taking security over such an asset, as opposed to just 'sweeping it up' together with the rest of the company's assets in general, it will ensure that all the necessary steps are taken to comply with any specialised 'asset' registration or mortgage registration requirements.

^[342]

Although our general policy approach to the specialist registers is similar there are differences, so we deal with each in turn. We deal first with land, and then turn to the specialist registers involving personal property.

Land

3.295

We continue to think that our scheme should exclude the creation or transfer of an interest in land, including a lease, from its scope, whether the land is registered or unregistered.

^[343]

We think there are two reasons for requiring all charges over a company's land to be registered at Companies House. One is to avoid the need to search two registers. The other is that the land register might not reveal every SI.

3.297

Under current law, a search at Companies House will reveal a charge over land. The land registry will not register the charge without a certificate of registration from Companies House, though a notice or caution may be entered. The exclusion of the creation or transfer of interests in land, without more, would mean that a search of the 'notice-filing' register at Companies House would no longer have this effect. A potential lender contemplating taking security from a company over its land would need to search at the Land Registry rather than at Companies House. If it were proposing to take security over both personal property and land it would have to search both registers.

3.298

We have been told by practitioners that it is common practice to search only the Companies Register, on the basis that the absence of any entry there of a charge over land will invalidate the charge against third parties on insolvency.

^[344]

Moreover, the absence of a Companies House registration might mean that an equitable interest over land that had not been registered at the Land Registry would not be revealed at all. We have also been told that sometimes where fixed charges are taken over a portfolio of real property, those charges are only registered at Companies House and not at the Land Registry. We understand that they are not registered at the Land Registry for commercial reasons, to avoid complications where it is anticipated that the property might be sold. We do not know how common this practice is, nor whether it relates to registered land, unregistered land or both. But they raise the question, how serious a risk is presented by charges that have not been registered at the Land Registry? How many parties dealing with companies might be put at risk if the link with Companies House were broken?

3.300

If the land is unregistered, a puisne mortgage or a general equitable charge will be void as against a purchaser of the land charged with it, or of any interest in such land, unless the land charge is registered in the appropriate register before the completion of the purchase.

^[345]

^[346]

If the land is registered, a legal charge is registrable at the Land Registry. Equitable interests can be protected by notice (under the old Land Registration Act 1925, as a 'minor interest' by notice or caution), but such a notice does not affect their priority, this being determined by the first in time to create, rather than being linked to any date of notice being entered. Failure to protect by notice does not affect priority. Consequently, under current law, an equitable mortgage created by a non-corporate person that has not been protected by notice or caution can have priority over a second equitable mortgage,

^[347]

^[348]

However, we think that the dangers of 'invisible' equitable mortgages over registered land may soon be over. The Land Registration Act 2002 contains a provision allowing rules to be made allowing for electronic conveyancing, whereby the disposition of a registered estate or charge, or an interest which is the subject of a notice in the register (or a contract for such disposition) will only have effect if it is made by means of a document in electronic form and it is electronically communicated to the registrar.

^[349]

^[350]

E-conveyancing would solve the problem of invisible mortgages over registered land. With unregistered land there remains a risk for unsecured creditors, but we wonder how serious the risk is. First, we do not have information that many lenders rely on charges over unregistered land that are not registered under the Land Charges Act 1972. Secondly, the 'risk' faced by unsecured creditors depends not just on whether the charge is valid but on whether they can find out about it. This relates to the next point to be discussed.

3.304

In the CP we asked whether the specialist registry should forward information about charges created by a company to Companies House 'for public notice'. Most consultees who responded on the issue seemed to favour establishing some form of electronic link, and some even made support for notice-filing conditional on there being a link between the registries. It would clearly remove the need for dual searching, and would thus reduce the risk to unsecured creditors in particular, if the land registry could forward information to Companies House and the latter could display it on, or make it available through, the register of SIs.

3.305

For so long as the system of land law permits unregistered equitable interests to have priority over subsequent equitable interests, the usefulness of forwarding information to Companies House would be limited, in that it would reveal those charges and mortgages that had been registered, but not those that had not; and there would be no reason to register an equitable mortgage in order to preserve its priority.

^[351]

There are two ways in which information that is on the land registers could be made available to those searching the Companies House register.

(1) One would be by the Land Registry forwarding information to Companies House for display on the register. Under the Land Registration Act 2002 the Lord Chancellor already has power to make rules to provide for this.^[352]

(2) The other would be by establishing a 'hyper-link' between the on-screen information presented by Companies House and the electronic register of the Land Registry. This would depend on the Land Registry's e-conveyancing register being searchable by company name rather than the identity of the land, but we see no reason why this should not be technically possible.^[353] It would also depend on the Land Registry marking in some electronic fashion charges over land, so that the hyperlink would give access only to charges and not to all entries (for example, holdings of land that are not subject to a charge) in a company's name. We are sure that if this is not done already it would be possible.^[354]

Which system should be used seems to be a purely technical question.

We therefore think that the combination of e-conveyancing and establishing a link between two electronic registries will be sufficient to overcome the potential problems of removing the need to file charges over land at Companies House.

3.308

It is possible that, theoretically at least, another consequence of excluding the creation or transfer of interests over land would be that a floating charge over land would continue to be governed by the existing law rather than our scheme. However, we understand that it is far more usual to take fixed charges over land and floating charges over any property not covered by such fixed charges. We have not heard of problems arising in the PPSA schemes because of this theoretical possibility.

^[355]

We provisionally recommend that the creation and transfer of interests in land should be excluded from the scope of the draft regulations. Arrangements should be made to make available on or via the Companies House register information about charges over a company's land that are registered at the Land Registry.

Rights to payment arising in connection with land

3.310

Although the creation or transfer of interests in land are excluded from the scope of a personal property security scheme, it is very important to note that there is a distinction between interests in land and interests in any debt that that interest itself creates. The former is outside the scheme, the latter inside it. Thus if A grants a mortgage over Blackacre to B, the mortgage will be outside our scheme, and will be subject to the rules of land law relating to matters such as validity, registration and priority. However, if B then factors the income stream due to it as repayments under that mortgage to C, or otherwise creates a charge over its receivables, that arrangement between B and C will fall within our scheme.

3.311

We make this point because some of the PPSAs, in addition to excluding the creation or transfer of interests over land, also exclude transfers of rights to payment arising in connection with an interest in land, unless evidenced by a security or an instrument.

^[356]

^[357]

We provisionally recommend that interests over rights to payment arising from an interest in land should not be excluded from the scheme.

Aircraft

3.313

As a general rule, an aircraft cannot fly in or over the UK unless it is registered in some part of the Commonwealth (which includes the UK

The UK Register of Civil Aircraft is administered by the Civil Aviation Authority (CAA) and is governed by the provisions of the Air Navigation Order 2000, as amended.

Leasing is also extremely significant in the airline financing industry. We understand that in the late 1990's, in the world as a whole, about half of the more modern jet aircraft were owned, but about 30% were on finance lease and about 20% on operating lease.

^[368]

Bearing in mind that the scheme we provisionally recommend is one that covers quasi-securities and well as mortgages, we have considered three possible options:

(1) bringing all SIs over aircraft within our scheme and taking over the mortgage registration function from the CAA (effectively closing the aircraft mortgage register),

(2) excluding mortgages that have been registered in the aircraft mortgage register, but otherwise bringing all SIs within our scheme (which would be the effect of the provisional proposal we made in the CP); or

(3) excluding all interests over aircraft, where that aircraft - as opposed to any mortgage - has been registered at an aircraft registry (whether in the UK registry or elsewhere).

3.317

The first option, taking over the security registration function of the aircraft registry, is unlikely to be acceptable three reasons. First, the system of aircraft registration and registration of aircraft mortgages is well-established and accepted. There seems no reason to disturb it.

^[369]

^[370]

The second option, bringing all SIs within our scheme save for mortgages registered on the aircraft mortgage registry, is likely to cause problems or confusion when quasi-securities are considered. A mortgage over an aircraft would be governed by the MAO, a finance lease by our scheme. Which would have priority? It would be possible to devise rules of priority to deal with the conflict, but since title-retention devices over aircraft do not seem to cause any difficulty (because aircraft are sufficiently expensive that few will be bought or mortgaged without a careful investigation of the title to them) there seems little point in trying to include them in our scheme at the cost of introducing avoidable complications.

3.319

We think that it would be preferable to follow the third option, and exclude all SIs over registered aircraft. The existing law relating to security and quasi-security would continue to apply to interests over such aircraft. This would avoid any conflict between registered aircraft mortgages and SIs under our scheme. Materials and parts that become accessions will be governed by our scheme until they become accessions.

^[371]

Our scheme will apply to any SIs over aircraft that are not registered because they are in the course of construction. When the aircraft is registered, the SI over it will no longer be perfected under our scheme, nor its priority protected. If it amounts to a mortgage, the secured party will have to ensure that it is registered as soon as the aircraft is registered. We do not see that this will be unduly burdensome.

3.321

We would apply this exclusion whether the aircraft is registered in the UK registry or elsewhere in the world. It is true that not every aircraft registration system provides for the registration of mortgages and charges over the aircraft. To this extent our proposal would mean that if a company registered in England and Wales owns an aircraft registered in such a system and creates a charge over the aircraft, the charge will not be registrable. We have consulted experts in aviation finance and have been told that aircraft financing is so specialised that this will cause no problem. General lenders are most unlikely to think that they will be able to have recourse to an aircraft owned by a company if they have not taken a specific SI over it.

3.322

We provisionally recommend that SIs over aircraft registered in the UK or anywhere else in the world should be excluded from our scheme.

Ships

3.323

The 'ship registry' is administered in the UK by the Registry of Shipping and Seamen. As with aircraft, there are registration provisions for the asset itself, and a system of registering mortgages over ships, together with priority rules for such registered mortgages, based on date of registration. However, the mortgage provisions do not apply to all types of registered ship.

^[372]

The Merchant Shipping Act 1995 (MSA) and the Merchant Shipping (Registration of Ships) Regulations 1993

In addition to providing for a prescribed form of mortgage, the legislation also sets out a priority rule between two or more registered mortgages, based on the order of registration (although there is power to allow priority notices

^[378]

As with aircraft, we considered the three possible policy options of:

(1) bringing all SIs over ships within our scheme and taking over the mortgage registration function from the ship registry (effectively closing the ship mortgage register);

(2) excluding mortgages that are registrable at the ship registry, but otherwise bringing all SIs within our scheme (the CP proposal), and

(3) excluding all interests over ships, where that ship - as opposed to any mortgage - has been registered at a ship registry (whether in the UK registry or elsewhere).

3.327

The first option we again reject as being unlikely to be acceptable. The system of registration of ship mortgages is very well-established

^[379]

The second option (that provisionally proposed in the CP

^[380]

We therefore provisionally recommend taking a similar approach to that taken for aircraft, but with an additional qualification. Since a mortgage cannot be registered over every type of registered vessel, the exclusion should be limited to those where under English (or Scots) law registration of the mortgage is possible. Otherwise mortgages over those types of ships would be 'invisible.'

^[381]

^[382]

Thus we provisionally recommend that we should exclude from our scheme all interests in ships where the ship has been registered at the UK ship registry (or an equivalent one anywhere else in the world), provided that a mortgage is capable of being registered at the ship registry (that is, registrable), but otherwise bringing all SI's within our scheme.

^[383]

It follows that where the ship has been registered at the ship registry, and the registration is one to which the 'private law provisions' apply, so that a mortgage over the ship could (but does not have to) be registered, then any interest in the ship – whether by way of mortgage or quasi-security – is excluded from our scheme. Where such a ship has been registered, the current law will continue to exist more or less as it does at the moment (save that there would be no dual registration requirement), both for charges and for quasi-securities. We return to the point we made earlier that any lender serious about using a registered or registrable ship as security should ensure that the ship and mortgage registration provisions are complied with. Conversely, where the ship itself is not registrable either in the UK or elsewhere, or it has been registered where the mortgage registration provisions do not apply (for example, because the ship is a 'small' ship), then there is no way a lender can protect itself by registering a mortgage at the ship registry, or others find out about it. SIs over such ships fall within our scheme.

^[384]

It is possible that an SI could be perfected under our scheme whilst a registrable ship had not actually been registered, but then the ship becomes registered. In this case the interest over the ship 'drops out' of our scheme and is then governed by what is the 'current' law (under which the court will look to the form of the security agreement and see what sort of security or quasi-security exists outside our scheme). Hence there should never be a conflict between the priority rules of our scheme and the rules in relation to the 'excluded' interests. However, we do not think this situation will be common, and in any event it can be avoided by the lender insisting that all that can be done to register the ship is done before it takes its security.

3.333

We provisionally recommend that any SI over a ship that is registered in the UK and to which the 'private law provisions' apply, or over a ship registered anywhere else in the world, should be outside our scheme.

^[385]

Enforcement of ship mortgages

There is an additional matter to consider regarding the enforcement of mortgages. Under current law, it is probable that matters relating to the enforcement of ship mortgages will be dealt with by the Admiralty jurisdiction of the High Court, which applies to all mortgages or charges, whether registered or not, including those created under foreign law.

^[386]

in personam

in rem

^[387]

in rem

^[388]

Although the effect of our provisionally recommended policy in this area is that most company-owned or operated ships are likely to fall outside our scheme, the draft regulations contain a provision that the statement of rights and remedies is without prejudice to Admiralty practice relating to the enforcement of mortgages or charges on ships and interests in ships. We would welcome the views of consultees as to whether such a provision is necessary for those SIs over ships that fall within our scheme.

3.336

For those SIs in ships that fall within the scope of the draft regulations, we provisionally recommend that the statement of rights and remedies contained in Part 5 of the draft regulations should be made without prejudice to current Admiralty practice relating to the enforcement of charges and mortgages in ships.

^[389]

Intellectual Property

The position for interests over intellectual property is complicated by the fact that it does not comprise one particular type of asset, such as an aircraft or a ship, but rather takes several forms, each subject to its own statutory and common law provisions.

^[390]

The approach we provisionally recommend for SIs over the various forms of intellectual property follows the approach we took for aircraft and ships. We suggest that where the intellectual property right has been registered at an appropriate registry, either in the UK or anywhere else in the world, and where a mortgage or charge over that intellectual property is also capable of registration in that register (whether or not it actually has been) then any interest over that registered intellectual property will fall outside our scheme.

3.339

There are no legislative provisions affecting goodwill, and SIs over this will thus fall within our scheme. There are legislative provisions covering copyright and design rights, but no separate registration provisions with respect to either of them, or for the registration of any security affecting them (other than the Companies Act 1985 requirements).

^[391]

^[392]

There are registration provisions with respect to registered designs, under the Registered Designs Act 1949, which also allow for notices of interests such as assignments and mortgages of registered designs to be entered in the register.

^[393]

^[394]

At the moment the draft regulations refer to patents, trademarks and designs, as our understanding is that these are the only forms of IP that can be registered (all currently registrable at the Patents Office) and over which charges, mortgages (and other interests) are also capable of being registered. We have not referred to copyright in the draft regulations, as this is not subject to registration in the UK, although this would be necessary if copyright and charges over copyright can be registered elsewhere in the world. We would welcome the advice of consultees on this point.

3.342

We provisionally recommend that SIs over registered designs, patents and trade marks should be excluded from our scheme.

SIs over assets abroad or created by 'foreign' companies

3.343

Determining policy for whether and how the draft regulations should apply to SIs created by companies registered in England Wales over collateral outside the jurisdiction, and SIs created by companies incorporated or registered elsewhere over assets in England Wales, proved to be a difficult task. The CP considered some of the issues that arise,

^[395]

^[396]

Inspire Art

^[397]

Space precludes a full discussion of all the issues we have had to consider in reaching our conclusions. In a paper for an informal seminar

^[398]

^[399]

lex situs

After discussion at the seminar and with experts subsequently, we have concluded that it would not be sensible for us to try to regulate such issues of private international law. First, it seems unnecessary to do so. It is true that the some aspects of the current law - for example, on what law governs the assignment of receivables - seem either unclear or less than wholly satisfactory, but we have not heard that the problems cause serious difficulty in practice. Secondly, we think that it would not be practicable for England and Wales to alter its law in the way in which the law of North America has been altered. To put it simply, some of the rules adopted there make good sense if the 'foreign' jurisdictions that are likely to be involved have adopted broadly similar systems, but would not make sense in the European or wider context, in which there is enormous diversity. The necessary changes to English law would either be difficult to introduce, or would be ineffective because the 'new English rules' would probably not be followed in other jurisdictions.

3.346

Therefore we have reverted to a minimalist approach. We deal only with questions of how the scheme will apply to SIs created by companies registered in England and Wales over their assets outside the jurisdiction, and to SIs created by companies incorporated elsewhere, or registered in Scotland, over assets here.

Companies registered in England and Wales

3.347

In relation to SIs created by 'English' companies

^[400]

^[401]

^[402]

In practice, the effect of the scheme in relation to assets overseas will be limited. We illustrate this point by considering first possessory SIs and then non-possessory SIs over goods.

Possessory SIs

3.349

Questions of validity, priority and (so far as it can be separated from the issue of validity) perfection of possessory securities is traditionally left to the lex situs. In practice most issues relating to a possessory security created by an English company over its assets located in another jurisdiction will be determined in the local jurisdiction, which will apply the lex situs. Our scheme will not normally be relevant.

Non-possessory SIs over goods

3.350

Current law requires an English company to register at Companies House charges over its goods wherever the goods are located;

^[403]

^[404]

lex situs

The problem may be illustrated by considering the operation of the Regulation on Insolvency Proceedings.

^[405]

^[406]

lex situs

Even if the only proceedings are in a Member State other than that where the goods are located, under article 5 of the Insolvency Regulation the rights in rem of the creditor must be respected. Normally these rights will be governed by the lex situs.

3.353

Thus in many cases the relevant question will be decided by the lex situs. Whether or not the SI had been perfected according to English law would only be relevant if the law of the relevant Member State required non-possessory SIs created by companies registered in other Member States to be perfected by filing in their jurisdiction of company registration. This is unlikely to be common, particularly as regards quasi-securities.

3.354

Thus the Insolvency Regulation creates some weakness even in the current scheme of registration: the company is required to register charges wherever the goods are located but, provided that the charge is valid under the lex situs, the 'real' sanction that an unregistered charge will be invalid against other creditors is lost. This also has implications for our proposed scheme under which filing is voluntary. If the 'usual' sanctions of possible loss of priority and of ineffectiveness in the event of the company's insolvency do not apply, secured parties taking non-possessory SIs over goods outside England and Wales may not think it worthwhile to file under our scheme. Perfection under our scheme would really matter only if the goods (or their proceeds) were subsequently brought into England and Wales.

3.355

Where the non-possessory interest created by the English company is valid under the lex situs, and is one that would amount to an SI under our scheme, it might be thought that there is little point in applying the draft regulations. First, the secured party might need to perfect its SI under the local law, and so could not rely on filing in England and Wales to perfect its SI. To apply our scheme might result in a need for 'dual registration', a concept which we are trying to avoid if possible.

^[407]

This might suggest that the draft regulations should take the approach of the Canadian and New Zealand PPSAs, which is that an SI over goods in general should be perfected in a jurisdiction only if the goods are in the jurisdiction at the time, or are brought into it subsequently.

3.357

In fact this is not an end of the matter. The SI might be recognised by English law but give no rights under the lex situs (for example, because the lex situs does not recognise non-possessory SIs over that type of asset

^[408]

lex situs

However, where there are no competing secured parties or creditors who have yet levied execution, the outcome under current law seems to depend on whether the English company has an establishment in the jurisdiction where the goods are.

(1) If it does, then under the Insolvency Regulation secondary proceedings may be opened there in relation to the assets in the jurisdiction, and the proceedings will be governed by the law of the same jurisdiction.^[409] Again, perfection under English law is irrelevant since the lex situs will not recognise it.

(2) If it does not have an establishment where the goods are, the liquidator may be able to get hold of the assets for the benefit of the unsecured creditors, but it appears that secured party will be able to enforce its SI even though it is not recognised by the lex situs. The English court may exercise its jurisdiction in personam over the liquidator to enforce the contract between the secured party and the company, and may require the liquidator to pay the proceeds to the secured party, as it did in Re Anchor Line.^[410] This outcome under current law depends upon the charge being properly registered in England and Wales. We think that for our scheme to change this would be to risk misleading unsecured creditors and possibly subsequent secured parties.

We have concluded that the best course would be for the draft regulations to maintain the current approach, and accordingly they have the effect that non-possessory SIs created by English companies over their personal property must be perfected (by filing in the case of goods) wherever the assets are. We accept that secured parties who take SIs that they are confident will be enforceable in the lex situs, or who are dealing with companies that have an establishment where the goods are, will have little incentive to file. This means that other parties must realise that they will need to investigate whether or not there are SIs over the goods under local law, rather than rely merely on the register established under our scheme.

3.360

We think that it is not just the registration requirement that should apply in respect of assets overseas but the scheme as a whole. In a case like Re Anchor Line (admittedly a rare situation) a question may arise as to whether it was necessary for the secured party to file in order to perfect its SI, or whether it was perfected by possession or, in the case of financial collateral, 'control'. Questions of priority might also arise between competing secured parties neither of whom had an SI recognised by the lex situs. We think that in principle such issues should be governed by the rules of our scheme. This is so even though in practice the vast majority of issues involving assets outside England and Wales will fall to be decided by the lex situs and any provision of our scheme that purports to apply will be ignored.

3.361

We have considered whether it should be provided explicitly that where the collateral is located outside England and Wales, the application of the scheme is without prejudice to proprietary rights of a secured party or third parties under the law of that jurisdiction. We have been advised that this is unnecessary. However, we have provided that the application of the scheme is without prejudice to regulation 19 of the Financial Collateral Arrangements (No 2) Regulations 2003

^[411]

^[412]

the requirements for perfecting a financial collateral arrangement relating to book entry securities collateral ... and the completion of the steps necessary to render such an arrangement and provision effective against third parties shall be governed by the law of the country where the account is maintained.

We have provided that our scheme should be without prejudice to regulation 19 of the Financial Collateral Arrangements (No 2) Regulations 2003, which implement the Directive, to avoid our provisions being misleading.

3.363

We provisionally recommend that the scheme should apply to SIs created by companies registered in England and Wales over assets outside the UK.

^[413]

Companies incorporated outside the UK

For companies incorporated outside the UK ('oversea', or as they are termed in the draft regulations, 'foreign' companies) the draft regulations apply only to SIs over assets that are in England and Wales or to which the law of England and Wales would apply for the purposes of determining questions of perfection and priority (for example, when financial collateral is held in an account that has no physical location but is governed by English law). We think it is appropriate that the scheme should apply as the lex situs. This applies to any foreign company, not just one that has a place of business in England and Wales.

^[414]

We consider this approach to have advantages for all concerned. First, whether the company is a UK one or a foreign one, parties who are thinking of buying or taking SIs over the goods in England will want to able to check to see what SIs may exist over them already, as will unsecured creditors wishing to know whether they have any chance of being able to levy execution against the company's goods in England. Secondly, we think that secured parties taking SIs over the 'English' assets of foreign companies will appreciate the certainty of knowing that if they have perfected, their interest will be valid and (subject to the normal rules) its priority will be protected. Thirdly, this should help the debtor company, as it will be able to offer better security to creditors.

3.366

Revised Article 9 provides, in effect, that filing should take place in the jurisdiction in which the debtor company is registered. That approach has great attractions; a secured party will only have to file in that jurisdiction, and searchers will only have to search there. However, it is not a workable approach in our context in which most relevant jurisdictions have no directly equivalent registers and in which the relevant jurisdiction may also require other forms of registration of certain types of SI.

3.367

We think that our scheme, including the perfection rules, should apply to SIs created by any foreign company, not just one that has a place of business in England and Wales. We do not think that a scheme that applied only to companies with places of business here would offer sufficient protection to buyers or potential secured parties.

^[415]

^[416]

Where an SI has been created by a foreign company over goods that are subsequently brought into England and Wales, it would be harsh to require that it has to be perfected immediately if it is to be valid in the company's insolvency or to retain its priority as against other secured parties. Instead, the draft regulations adopt the Canadian approach of giving the secured party a 'grace' period

^[417]

^[418]

In the case of SIs over receivables where the lex situs of the receivable is English law, the draft regulations apply to the SI even though the debtor under the security agreement is a foreign company. Without this, those looking to buy or take security over English debts, or to take garnishee proceedings, would find it difficult to know whether there is an existing SI over them. The scheme will also apply to SIs created by foreign companies over investment property and bank accounts that are governed by English law.

^[419]

We note that our proposal fits with the EC Insolvency Regulation. We have said that article 5 of the Regulation requires that, whatever the law of the proceedings, as regards assets in another jurisdiction the creditor's rights under the lex situs must be respected.

^[420]

The right, recorded in a public register and enforceable against third parties, under which a right in rem within the meaning of paragraph 1 may be obtained, shall be considered a right in rem.^[421]

The meaning of this provision is not completely transparent but we believe its effect to be that the right in rem may be subject to local registration requirements. It does not appear to be limited to rules that require registration for the right in rem to come into existence (for example, in Scots law a security overland cannot exist without registration). The words 'may be obtained' seem to us to include registration that must be made for the right to be enforceable by the third party, which would be the case under our scheme.

We also note that the nature of our scheme, which may require the secured party to file if it wishes to perfect a non-possessory SI, appears wholly compatible with European Community company law. EC company law limits the restrictions that may be imposed on a company that is established in another Member State. Articles 43 and 46 of the EC Treaty prohibit restrictions on the freedom of establishment, including restrictions on the setting up of branches by nationals of one Member State in the territory of another Member State, unless the restriction can be justified on the grounds of public policy, public security or public health. In the Inspire Art case

^[422]

^[423]

^[424]

We provisionally recommend that SIs created by foreign companies over their assets in England and Wales, or to which the law of England and Wales would apply for the purposes of determining questions of perfection and priority, should be subject to the scheme.

Scotland

3.373

Issues parallel to those just discussed arise in relation to SIs created by companies registered in England and Wales over assets in Scotland and by companies registered in Scotland over assets in England and Wales.

3.374

The current position was described briefly in the CP.

^[425]

^[426]

^[427]

The SLC has not yet published its report.

^[428]

^[429]

This would seem to mean that even if English law remained unchanged, Scots law would no longer recognise a floating charge over assets in Scotland merely because particulars of it had been registered in Cardiff; the charge itself would have to be registered (presumably in Scotland since there is no facility for this in England and Wales). A change to a system of notice-filing would certainly mean the end of 'mutual recognition'; the filing of a financing statement would definitely not satisfy the proposed requirements for the charge to be constituted in Scotland. However, if Scots law were to be changed but not English law, there seems no reason why an English court should not enforce a floating charge created by a Scottish-registered company over its assets in England, provided that the requirements of Scots law as to 'constitutive registration' had been met.

3.377

Were Scots law to remain unchanged, so that particulars of charges created by Scottish companies remain registrable in Edinburgh, but our scheme adopted for England and Wales, Scots law would be faced with the questions (1) whether to recognise 'new style' SIs created by companies registered in England and Wales over assets in Scotland as forms of security recognised by Scots law, or otherwise valid transactions;

^[430]

In effect, if there is to be change on either side of the border, it may have the result predicted by the SLC in its discussion paper:

^[431]

In the light of this, we think that the approach we outlined above in relation to SIs created by companies registered in England and Wales over their assets outside the UK, and by companies incorporated outside the UK over their assets here, should in general terms be applied as between Scotland and England and Wales.

3.380

Thus an SI created by an English company over assets in Scotland should be subject to the scheme, including the normal rules of perfection. Whether the scheme will 'bite' will depend on what takes place. If the contest is between a party claiming rights under Scots law – for example, a judgment creditor or a buyer of the goods – and a party claiming an SI, the dispute will normally come before a Scottish court, which will apply Scots law. As we indicated earlier, it will be for Scots law to decide whether the SI is to be recognised and treated as enforceable. If the changes provisionally proposed by the SLC were to be implemented at the same time as our scheme, and the SI were to be the equivalent of a floating charge under Scots law, the secured party would presumably need to ensure that the charge document had been registered in Scotland. If, however, the contest were to be between two parties claiming interests under English law, and were to come before an English court, the English court would presumably apply the rules of our scheme even though the assets were in Scotland.

^[432]

Conversely, we think that a Scottish-registered company with assets in England and Wales should be able to create over them any of the full range of SIs recognised here, but should be subject to the normal rules of the scheme just like a foreign company. In other words, it should be possible for the Scottish company to file and the normal sanctions for not filing should apply. As was suggested to the SLC, and noted in its discussion paper, if it were not possible for the Scottish company to offer its English creditors the advantages of the notice-filing scheme, it might find itself at a competitive disadvantage.

^[433]

However, it should be possible to make administrative arrangements that may simplify the position for Scottish companies slightly. We understand that though companies registered in England and Wales are required to register particulars of charges in Cardiff and Scottish companies in Edinburgh, the information is in fact kept on the same computer database. Thus if charges created by Scottish companies (or, under the SLC's provisional proposals, floating charges) continue to be registered with Companies House in Edinburgh (or on any other electronic register), there seems no reason why the system should not be configured so that a search of the 'English' register would reveal the 'Scottish' floating charge. The registration could be treated as perfection by filing for the purposes of our scheme, so as to save the need to register also in Cardiff.

3.383

We provisionally recommend that an SI created by an English company over assets in Scotland should be subject to the scheme, including the normal rules of perfection. An SI created by a company registered in Scotland over assets in England and Wales, or to which the law of England and Wales would apply for the purposes of determining questions of perfection and priority, should also be subject to the scheme.

Transitional provisions

3.384

Two periods of time need to be considered: a period before commencement and a transitional period affecting both pre-commencement charges that are not currently registered and pre-commencement quasi-security transactions.

Commencement

3.385

There will have to be a period before commencement of the draft regulations for the electronic register to be commissioned, constructed and tested. During the course of this project we have worked on the basis that Companies House would administer the registry functions, building to some extent on its existing records, rather than a new registry being created (at least for so long as the draft regulations do not apply to non-corporate debtors). Even so, the time taken to construct the register is likely to be heavily influenced by factors outside our control, and this task should not be underestimated. We do note, however, that electronic registers of the type we envisage already exist, so it may be possible to 'buy in' at least the beginnings of a system. Nonetheless, it is likely that commissioning, constructing and bringing an electronic system to operational readiness would take at least two years.

3.386

The regime introduced by the draft regulations would effect a number of significant changes to existing law and practice. Whilst the register is being constructed we think that the registry or responsible government department would need to undertake a significant programme of 'education' for potential users, such as financial and legal practitioners, trade associations and representative organisations. This may also require something in the order of two years, although at least some of this education could be done concurrently with the construction of the register.

A transitional period?

3.387

The second possible period of time would be a transitional period, starting from the commencement of the draft regulations once the register is brought into operation. Any new SI created after commencement will be fully subject to the new scheme. The more difficult issue is how pre-existing interests - whether charges or quasi-securities created under the 'old' law - should be treated. In the following paragraphs we consider the position of (1) pre-commencement charges that have been registered at Companies House in accordance with the Companies Act 1985, (2) pre-commencement charges that are not registrable, and (3) pre-commencement quasi-securities.

Pre-commencement registered charges

3.388

For charges that have been registered under the Companies Act 1985 before the commencement of the draft regulations ('pre-commencement charges') there need be no transitional period.

3.389

At an earlier stage in this project we thought that it would be necessary for pre-commencement charges to be perfected by filing by the end of a transitional period if they were to remain effective thereafter. We received several representations that this would have had significant cost implications. We now think that this will not be necessary.

3.390

During our discussions with the Registrar's staff at Companies House, they indicated that they considered it feasible to establish an electronic link between the new register introduced under our scheme and their existing charge/mortgage records, which are held in electronic format. Previously we had thought this would not be possible. This would allow for the electronic system to be configured so that a search of the notice-filing register could locate the information currently held on the Companies House mortgage database and present it as a search result. The current mortgage details held at Companies House will contain most, if not all, the information that would be contained on a financing statement - indeed, somewhat more information, for example about the 'collateral description', than would be found on most financing statements. If a search of the notice-filing register can indeed locate and present the existing information held about company charges, it would make unnecessary any requirement that there be a transfer of information from one register to another, or that pre-commencement charges be re-registered (that is, perfected by filing) by the end of any transitional period. In effect, the existing registration will be treated as perfection by filing and therefore existing charges that were registered before commencement will continue to have effect indefinitely. The search result should carry an indication that it relates to a pre-commencement charge, so as to warn searchers that they should make enquiries on the point. We think that the Registrar's Rules could deal with this, and so it does not appear in the draft regulations.

3.391

In terms of priority, pre-commencement fixed charges that were properly registered before commencement will retain their existing priority as against other pre-existing charges. As against post-commencement SIs their priority will depend on the normal rules of priority of the new scheme. (In other words, if priority depends on date of filing they will have priority by virtue of having filed first, but they will not have priority over later-filed PMSIs.)

3.392

Pre-commencement floating charges will also retain their existing priority against other pre-commencement charges. In practice this priority will depend on the date of crystallisation and whether competing chargees had notice of any negative pledge clause in the agreement. From the moment of commencement the old floating charge will be treated as a 'new-style' SI: that is, it will be treated as attaching (and since it is already 'filed', being perfected) at the moment of commencement. The only exception would be if the provisions of the charge indicate that the SI is not to attach until some future event; but a mere description of the charge as 'a floating charge' will not have this effect.

^[434]

We provisionally recommend that pre-commencement registrable charges that were registered before commencement should be treated as perfected under the scheme. They should retain their existing priority as against other pre-commencement SIs. As against post-commencement SIs their priority should depend on the normal rules of priority of the new scheme.

Pre-commencement unregistrable charges

3.394

Those charges that are currently not registrable at Companies House will also become subject to the new scheme on commencement and will retain their existing priority position. However, with unregistrable charges there is a question whether the chargee should have to file a financing statement in order to perfect (or perfect their SIs in some other way under the draft regulations) before the end of a transitional period; or whether the charge should simply continue to be effective indefinitely without filing.

3.395

Our initial thought was that previously unregistrable charges should have to be registered within a transitional period. Without this, there would continue to exist a set of invisible but effective charges. In order to preserve the charge's priority for the future, the date and time of filing would be deemed to be the date of original creation of the charge. Again, the financing statement should make this clear.

3.396

It has been put to us, however, that this would have significant cost implications for secured parties, not so much in the filing itself but in determining whether financial institutions have previously unregistrable charges that need to be perfected. We are told that the records of many secured parties are incomplete or not in a form that makes it easy to determine such a question. Given that we expect the number of such unregistrable charges to be relatively small, as there are few types of charge that are currently not registrable that will need to be perfected by filing under the new scheme, it may be more cost-effective not to require filing. Users of the register would have to be warned that it will not reveal pre-commencement unregistrable charges; and these will have priority as from the date of creation, as under existing law.

3.397

We ask consultees whether there should be a transitional period during which pre-commencement charges that are not registrable under current law should have to be registered.

Pre-commencement quasi-securities

3.398

A transitional period

3.399

If there were to be a transitional period we think it should be of at least five years. Just as we sought to reduce the need to 're-register' existing company charges (in effect requiring it, if at all, only for currently unregistrable charges), so we would like to reduce the inconvenience and cost of having to re-register existing quasi-securities. We understand that many typical title-retention agreements (such as finance leases or hire-purchase agreements) are in the order of three to five years. Quasi-securities over aircraft and ships can be much longer, but these will generally be outside the scope of the draft regulations.

^[435]

In terms of priority, pre-commencement quasi-securities would continue to have the same priority, both among themselves and as against charges, as under existing law until the end of the transitional period. At the end of the period the new law would apply to them and, if they had not been perfected, the normal consequences would result. However, with a long transitional period most pre-commencement title-retention transactions would have expired before it ends, so that no action will be required. Where the quasi-security is older than this (for example, a long-term factoring agreement or a long equipment lease) and is duly perfected by filing within the period, its priority would continue to date from when the agreement was made. Again, when a financing statement was filed it should indicate that the SI dates from before commencement. Again, this is something for the Rules, and does not appear in the draft regulations.

3.401

As between conflicting pre-commencement quasi-securities and subsequent SIs over the same asset, the pre-commencement quasi-security would have priority over any post commencement SI, but would be at risk of losing any priority if not perfected by filing before the end of the transitional period.

No transitional period

3.402

The alternative is not to have a transitional period for some or all types of quasi-security. Pre-commencement quasi-securities would simply continue to be effective in insolvency, and to enjoy their existing priority position as against other-pre-commencement SIs, without any filing being made.

3.403

As against any post commencement SI, the rule for pre-commencement title-retention devices would be simple: they would have priority. They would also bind any buyer of the goods.

3.404

Pre-commencement sales of accounts would be more tricky. We think that their priority as against post-commencement purchasers (buyers or secured parties) should probably depend on whether the buyer had notified the account debtor before the date of filing for the post-commencement SI. The other possibility would be that it would depend on which party first notified the account debtor, but that would mean that post-commencement purchasers would have to notify the account debtor to protect the priority of their SI. That would not be consistent with our general scheme.

Conclusion on quasi-securities

3.405

Although it was put to us that the cost of identifying and filing for long-term pre-commencement quasi-securities would outweigh the benefits, as was argued also for pre-commencement unregistrable charges, we think there is a substantial difference between the two cases.

3.406

On the one hand, with quasi-securities the benefit of applying the normal perfection rules after the transitional period would be much greater. They are far more likely to occur. Requiring perfection by the end of the period would mean that those dealing with the debtor – whether potential buyers, secured lenders, unsecured creditors or (if things go badly) an administrator or liquidator – would not have to worry about 'hidden' pre-commencement quasi-securities.

3.407

On the other, while there would be many more long-term quasi-securities, the cost of identifying them should be lower than for charges. The cost is not in the registration itself, which is cheap and easy. We were told that the cost of identifying existing charges would be high because many financial institutions have inadequate records of their charges. We think that existing quasi-securities will be much simpler to track, if only because from each one there would normally be an income stream. It should also be borne in mind that it will not be necessary to identify every agreement precisely in order to file. The secured party can perfect any number of agreements with a debtor by a single filing in general terms. Even a party that is not sure whether it has any security agreement with a particular company can make a precautionary filing if it gets the other party's consent.

3.408

We think that there should definitely be a transitional period after which pre-existing sales of receivables should be filed, since such agreements may last for an indefinite period. On balance we think that the same should apply to title-retention devices; the potential benefits seem to us to outweigh the costs, at least if the transitional period is long enough (say five years) that the vast bulk of agreements will expire before the end of the period. We have therefore drawn up the draft regulations to include a transitional period for quasi-security devices.

3.409

We provisionally recommend that:

(1) Pre-commencement sales of receivables should retain their existing effectiveness and priority for a transitional period of [five] years. If they are perfected by filing within that period they will retain their priority (as from the date of creation). If by the end of that period they have not been perfected by filing they will cease to be effective in insolvency and will lose their priority as against other post-commencement SIs.

(2) We ask consultees whether they agree with our conclusion that a similar scheme should apply to post-commencement title-retention transactions and, if so, how long the transitional period should be.

Insolvency issues

3.410

As we noted in Part 2, the effect of our scheme on the 'floating' charge will have a number of consequences for the insolvency legislation, which at present treats fixed and floating charges differently.

^[436]

We are aware that our provisional recommendations will require consequential amendments to primary and secondary legislation dealing with insolvency matters. However, it has not been possible to include a list of the necessary amendments in the draft regulations at this stage. It is our intention that the draft regulations should be substantially neutral in their effect on insolvency (although clearly aspects such as the improved priority position under our scheme of what would currently be floating charges will mean the effect will not be entirely neutral). The Insolvency Act 1986 - and other pieces of insolvency legislation - contain references to a number of words, phrases or concepts that will or may be affected by our proposals, and which in turn will need to be considered for amendment. One obvious amendment that will be needed is in relation to references to the floating charge (and the knock-on effects for preferential creditors, for example). We note in passing that the determination of whether a charge is fixed or floating for the purposes of insolvency continues to trouble the courts. In National Westminster Bank PLC v Spectrum Plus Ltd and others,

^[437]

Priorities in the event of insolvency should not turn upon the technical skill with which the bank accounting arrangements have been set up. Professor Goode recommends 'structured personal property security legislation' of a type to be found in other common law jurisdictions. This appeal may underline the desirability of such legislation.

However, the need for amendments will go far beyond references to fixed or floating charges. For example, the terms 'secured creditor' and 'security' appear in the legislation; the definitions of these terms, and the instances of where they are used will need to be amended as appropriate (for example, the power of an administrator to deal with property of a company that is 'subject to a security').

^[438]

^[439]

Ý
Ü Þ

Note 1 Part 4 also covers SIs over the right to proceeds of letters of credit where these are perfected by ‘control’. [Back]

Note 2 See above, paras 2.135-2.137. [Back]

Note 3 DR 11. [Back]

Note 4 We did not deal with these in the CP, but as they are subject to the same charge registration requirements as registered companies, they are included within our scheme. They are not mentioned expressly, save that the consequential amendments make the necessary changes to the Limited Liability Partnerships Regulations 2001, SI 2001 No 1090, which currently apply various provisions of the Companies Act 1985 (including the charge registration provisions) to LLPs. [Back]

Note 5 DRs 11 and 13. On Scottish and overseas companies see below, paras 3.364-3.383. [Back]

Note 6 CP para 5.122. [Back]

Note 7 Industrial and Provident Societies Act 1967, s 1. We did not deal with this aspect in the CP. [Back]

Note 8 DR 2(1). [Back]

Note 9 DR 11. [Back]

Note 10 The extension of the scheme to unincorporated debtors is discussed in Part 2, paras 2.70-2.80. [Back]

Note 11 DR 5. [Back]

Note 12 See the discussion of this point of terminology above, para 2.12. ‘Debtor’ also includes the transferee of, or successor to, a person referred to as a debtor: DR 2(1). [Back]

Note 13 The UCC also contains the additional category of ‘secondary obligor’: see below, para 3.53 n 61. [Back]

Note 14 DR 2(1). [Back]

Note 15 See below, paras 3.34-3.50. [Back]

Note 16 As set out in DR 5. An alternative approach to that of using ‘debtor’ might be to adopt the language used in the FCAR, and refer to the ‘collateral provider’. [Back]

Note 17 DR 2(1). [Back]

Note 18 The definition includes fixtures, crops, trees which have been severed and the unborn offspring of animals. [Back]

Note 19 It also excludes certain minerals which, although severed from the land, fall within the definition of land under the Land Registration Act 2002 and the Land Charges Act 1972. [Back]

Note 20 DR 2(1). There is no scope under the draft regulations for a debtor to hold personal property as ‘consumer goods’, which is a term used in the other schemes, although there is the possibility of someone acquiring inventory or equipment from the company for its own private ‘consumer’ purposes: this is addressed in the rules relating to purchasers: see DR 31. [Back]

Note 21 See Chitty on Contracts (29th ed 2004) para 43-005 n 21. [Back]

Note 22 See UCC Section 9-102(a)(44). [Back]

Note 23 The UCC contains a separate category of ‘payment intangibles’, which covers not only accounts, monetary obligations evidenced by an instrument, bank accounts and investment property but all other types of monetary obligation. We have not included such a category in our draft regulations. Most of the collateral that would comprise payment intangibles under the UCC will comprise accounts under our draft regulations, or will fall into one of the other categories mentioned. We see no need to include the few that are not covered, such as loan participations. See further below, para 3.21 n 24. [Back]

Note 24 As a loan participation falls outside the definition of accounts, it would be caught within our definition of intangible. However, unlike the UCC (which includes sales of participation but provides that they are automatically perfected), we have not brought sales of intangibles within the scheme (unlike sales of accounts, which, as will be seen, fall within our definition of ‘security interest’). [Back]

Note 25 We note at this stage a distinction between ‘money’ and ‘cash’, the latter being wider than just notes and coins: see below, para 3.232 n 285. [Back]

Note 26 It is not clear to us whether this practice pre-dated the UCC Article 9 or was enabled by it. [Back]

Note 27 See above, para 2.132. [Back]

Note 28 See below, para 5.10. [Back]

Note 29 DR 3(1). [Back]

Note 30 Our list does not contain flawed asset arrangements (which are expressly included in the NZPPSA, s 17 definition), as we do not consider these contractual arrangements to involve the creation or retention of a property right. [Back]

Note 31 Compare the characterisation of a charge as fixed or floating: see, eg, Agnew and another v Commissioner of Inland Revenue [2001] UKPC 28; [2001] 2 AC 710, at para 32. [Back]

Note 32 FRS 5 already takes into account the economic effect of a number of transactions (such as sale and repurchase agreements, factoring of debts and securitised assets). Leases are governed by SSAP 21, which still defines two different types of lease: finance and operating leases. (The Accounting Standards Board have said that they ‘regard existing leasing standards as deficient because they omit material assets and liabilities arising from operating lease contracts…For some time, users have called for finance leases and operating leases to be treated consistently.’ Source: ASB website. We also understand that the ASB is currently undertaking a research project to inform the International Accounting Standards Board’s development of a new leasing standard.) [Back]

Note 33 UCC Section 1-201(37) contains a brief list though the factors stated are not directly applicable to England and Wales where practice differs. [Back]

Note 34 Of course, a lease – of whatever length – that does secure payment or performance of an obligation (ie, a finance lease) would fall within the ‘in-substance’ test for an SI. Similarly, if what purports to be a sale of accounts has a security purpose, it will be re-characterised as an ‘in-substance’ SI, just as under current law a mortgage disguised as a sale will be treated as a mortgage (see CP para 6.8). [Back]

Note 35 DR 3(3). [Back]

Note 36 Our draft regulations also include a similar provision that ‘registration is without prejudice…’ (DR 46(3)). We initially did not think it was needed, as one features only in the UCC and the Ontario PPSA, which both do not include operating leases within their scope. The SPPSA and NZPPSA, which do, do not have such a provision. However, we see no harm in including such a provision, and in any event, it may also allow other ‘disputed’ interests to be filed (eg, Quistclose trusts: see below, para 3.61(1)). [Back]

Note 37 Commentators note that in Ontario, which alone of the common-law provinces in Canada only includes ‘true’ leases, there has been litigation over the characterisation of leases, with the result that recommendations – as yet not accepted by the Ontario government - were made to include ‘one year plus’ leases within the Ontario PPSA. However, as with the UCC, lessors can ‘avoid unpleasant surprises’ as the Ontario system permits ‘precautionary’ filings: J Ziegel and D Denomme, The Ontario Personal Property Security Act Commentary and Analysis (2nd ed 2000) para 2.2.3 (pp 57-58). [Back]

Note 38 The benefit of moving the ‘litigation point’ in this way seems to us to outweigh any risk of ‘clutter’ on the register of filing all leases, which was a concern raised by a few consultees. [Back]

Note 39 Para 12.81. [Back]

Note 40 DR 8(1), although this is a slightly hybrid position: the lease does not fall within the definition until the lessee’s possession extends for more than one year. [Back]

Note 41 DR 8(1)(c). [Back]

Note 42 DR 8(2). [Back]

Note 43 See DR 18. [Back]

Note 44 CP paras 6.22-6.23 and 7.27. [Back]

Note 45 DR 9. [Back]

Note 46 See paras 2.87-2.88. [Back]

Note 47 CP para 12.82. There was equally strong support for the proposals that there should be exceptions for negotiable instruments and when book debts are sold as part of a larger transaction such as the sale of the overall business. [Back]

Note 48 See above, para 3.21. [Back]

Note 49 See above, paras 3.30-3.33. [Back]

Note 50 CP para 7.38. [Back]

Note 51 This is made very clear in NZPPSA, s 105(b)(i) and is the effect also of UCC Section 9-608(b). SPPSA, ss 3(2) and 55(2)(a) are less clear and it may be that the remedies in the SPPSA, Part V do apply to transfers of accounts that have a security purpose. [Back]

Note 52 See further below, para 3.89. [Back]

Note 53 UCC Section 9-109(a)(3). [Back]

Note 54 Bringing sales of promissory notes within the UCC seems to have the result that a person who knows of the SI over the promissory note will not be a holder in due course for the purposes of UCC Article 3, which deals with instruments (see Section 3-102), but under Article 9, a purchaser of an instrument will take free unless it knows the sale is in violation of the rights of the holder of the SI: Official Comment 7 to Section 9-330. [Back]

Note 55 Under the UCC they are automatically perfected: Section 9-309(3). [Back]

Note 56 See DR 5(1). We have not thought it necessary for the definition of ‘secured party’ expressly to include a consignor or a buyer of accounts or promissory notes, as these people will fall within the general definition of someone in whose favour an SI is created or provided for. [Back]

Note 57 R Goode, Commercial Law (2nd ed 1995) pp 695-696. [Back]

Note 58 The assignor would have no interest in retaining the supporting obligation, and it is not possible for the principal obligation to be assigned to one person and the supporting obligation to another [Back]

Note 59 DR 2(1). [Back]

Note 60 The UCC terms these ‘letter-of-credit rights’, but we have not adopted this terminology, preferring instead the ‘right to proceeds of a letter of credit’. [Back]

Note 61 Compare UCC Section 9-102(a)(77). We have not used the term ‘secondary obligation’, as the UCC does, for guarantees and indemnities. [Back]

Note 62 DR 15(11). Compare UCC Section 9-203(f). The Official Comments indicate that this seems to be the intended effect of the UCC, although the Article itself provides merely that ‘[t]he attachment of a security interest in collateral … is also attachment of a security interest in a supporting obligation for the collateral’. Official Comment 8 states that this result was ‘implicit’ under ‘old’ Article 9. [Back]

Note 63 DR 21(6). Compare UCC Section 9-308(d). [Back]

Note 64 See below, paras 3.201-3.203. [Back]

Note 65 Compare UCC Section 9-322(b)(2). [Back]

Note 66 Compare UCC Section 9-322(c)(1). (We have not thought it necessary to replicate UCC Section 9-310(b)(1), which provides that it is not necessary to perfect by filing an SI that has been automatically perfected in a supporting obligation under Section 9-308(d). That seems self-evident.) [Back]

Note 67 See below, paras 4.133-4.150. [Back]

Note 68 See below, paras 4.141-4.150. [Back]

Note 69 Ours is shorter because the scheme applies only to SIs created by companies. Thus we do not need to consider whether to exclude assignments of wages, for example. [Back]

Note 70 CP para 4.18. [Back]

Note 71 The draft regulations contain a priority rule giving liens that arise in the ordinary course of business for the supply of materials or services priority over a competing SI under our scheme: see below, para 3.249. [Back]

Note 72 CP para 7.54. [Back]

Note 73 See, eg, M Bridge, “The Quistclose Trust in a World of Secured Transactions” (1992) 12 OJLS 333, 345-346, and J Ziegel and D Denomme, The Ontario Personal Property Security Act Commentary and Analysis (2nd ed 2000) para 2.2.6.2 (pp 70-71). [Back]

Note 74 DR 46(3) provides for a ‘precautionary’ filing to be made, even if there is, in fact, no SI involved. [Back]

Note 75 CP paras 7.51-7.52. [Back]

Note 76 Our draft regulations on this point does not include the additional wording found in the NZPPSA also excluding ‘netting’ and ‘combination of accounts’ although we would welcome views on whether consultees think it necessary to have express exclusion of these practices: compare NZPPSA, s 23(c), and see DR 12(1)(b). [Back]

Note 77 See below, para 4.130. [Back]

Note 78 See DR 12(1)(c). [Back]

Note 79 See UCC Section 9-109(d)(6) (and Official Comment 12); SPPSA, s 4(d), OPPSA, s 4(1)(i) (also J Ziegel and D Denomme, The Ontario Personal Property Security Act Commentary and Analysis (2nd ed 2000) para 4.10 (p 87)) ,and NZPPSA, s 23(e)(iii) (also M Gedye, R Cuming and R Wood, Personal Property Securities in New Zealand (2002) para 23.7 (p 111)). [Back]

Note 80 Although such single assignments relating to pre-existing debt are excluded from the scheme, we return later in this Part to whether isolated or occasional assignments of accounts should be ‘automatically’ perfected so that there is no need to file: see below, paras 3.97-3.98. [Back]

Note 81 This is discussed in Part 2, paras 2.49-2.50. This express exclusion is for the avoidance of doubt: the definition of ‘collateral’, which is used in the draft regulations is in any event limited to personal property. [Back]

Note 82 See below, paras 3.310-3.312. [Back]

Note 83 The reason for this exclusion, and that of registered aircraft and intellectual property, is explained in detail below, see paras 3.289-3.342. In the case of ships and intellectual property, these exclusions are qualified by a requirement that it should be possible to register a mortgage in the same register as the substantive registration of the asset. [Back]

Note 84 See CP paras 5.78-5.86 and 12.70. [Back]

Note 85 In the case of interests relating to wages and salary for labour or personal services (SPPSA, s 4(c)) and assignments for the benefit of creditors (SPPSA, s 4(j)) this has been on the basis that such exclusions are not applicable for a scheme that - unlike the PPSAs - is limited to companies. [Back]

Note 86 CP para 5.39. [Back]

Note 87 One requirement relates to the contents of the security agreement, which we do not have rules about, and another provides that no SI attaches under an after-acquired property clause in a tort claim (UCC Section 9-204(b)). There are then several instances where certain provisions are disapplied. We do not think it necessary to follow this approach. [Back]

Note 88 The UCC refers to ‘commercial tort’ claims, although in the context of companies this means any tort claim: UCC Sections 9-109(d)(12) and 9-102(a)(13)(A). [Back]

Note 89 Re Lind, Industrials Finance Syndicate Ltd v Lind [1915] 2 Ch 345. [Back]

Note 90 See above, para 2.13. [Back]

Note 91 DR 15(1). [Back]

Note 92 Where the collateral is investment property or bank accounts, there would be sufficient appropriation if the secured party has ‘control’: see Part 4. [Back]

Note 93 DR 15(7) makes clear that a debtor has rights in goods that are leased (and – unlike the PPSAs – let on hire-purchase) or consigned, or sold under a conditional sale no later than when it obtains possession of the goods. [Back]

Note 94 See above, paras 2.56-2.60. [Back]

Note 95 UCC Section 9-203 requires ‘an authenticated security agreement’, which is designed to include digital signatures and the like: see Section 9-102(a)(7). [Back]

Note 96 Or in the case of financial collateral, if the secured party has ‘control’: see Part 4. [Back]

Note 97 SeeRe Lind, above, para 3.68(2). [Back]

Note 98 NZPPSA, s 36(2) states that a security agreement may be enforceable against a third party in respect of particular collateral even though it is not enforceable against a third party in respect of other collateral to which the security agreement relates. [Back]

Note 99 This would have included writing in the form of an e-mail or other electronic communication, even if it were ‘signed’ merely by the debtor placing its name at the end of the message or even clicking on a website button, provided that the form of ‘signature’ would reasonably indicate that the sender intended to authenticate the document. SeeElectronic Commerce: Formal Requirements in Commercial Transactions – Advice from the Law Commission, December 2001, para 3.39. If writing is to be required, we do not see the need to require greater formality, eg, a digital signature. [Back]

Note 100 CP para 12.121. [Back]

Note 101 If and when the scheme is extended to unincorporated businesses it will have to be decided whether to keep the requirements imposed under the Consumer Credit Act 1974. [Back]

Note 102 SPPSA, s 2(1)(pp); NZPPSA, s 16(1). The definition in our draft regulations is simply ‘an agreement which creates or provides for a security interest’. [Back]

Note 103 CP para 12.122. [Back]

Note 104 M Gedye, R Cuming and R Wood, Personal Property Securities in New Zealand (2002) para 36.6 (pp 145-148). [Back]

Note 105 See, eg, the Copyright, Designs and Patents Act 1988, s 90(3). [Back]

Note 106 See DR 14(3). [Back]

Note 107 See below, paras 3.253-3.262. [Back]

Note 108 Eg, SPPSA, s 29. [Back]

Note 109 DR 30. [Back]

Note 110 Former Article 9, Section 9-306(5). [Back]

Note 111 However, Official Comment 9 to UCC Section 9-330 of Revised Article 9 contemplates that returned or repossessed goods may constitute proceeds of chattel paper. We have not included the concept of chattel paper in our scheme, see above, para 3.25. [Back]

Note 112 In a limited number of cases, no steps are required. Perfection is then said to be ‘automatic’ when the SI attaches. See further below, paras 3.89 and 3.96-3.98. [Back]

Note 113 DR 19. Attachment and the taking of the steps to secure perfection can occur in any order. [Back]

Note 114 See below, paras 3.208 and 3.260. [Back]

Note 115 See, eg, J Ziegel and D Denomme, The Ontario Personal Property Security Act Commentary and Analysis (2nd ed 2000) para 19.1 (pp 158-159). [Back]

Note 116 DR 23. [Back]

Note 117 See below, paras 3.96-3.98. [Back]

Note 118 See above, paras 3.46 and 3.54. [Back]

Note 119 See below, paras 4.60 and 4.84. [Back]

Note 120 See below, paras 3.103-3.104. [Back]

Note 121 See below, paras 3.108-3.112. [Back]

Note 122 DR 33(2)-(3). [Back]

Note 123 See below, paras 3.182-3.187. [Back]

Note 124 Or where perfection occurs ‘automatically’ on attachment: see below, para 3.96. [Back]

Note 125 See below, para 3.202. [Back]

Note 126 Providing the interest has not been excluded by the scheme (eg, the creation or transfer of an interest in land, see below, para 3.309). However, compare the UCC, which does not permit filing as a perfection method for some forms of collateral, eg, ‘deposit accounts’ as original collateral: UCC Section 9-312((b)(1). [Back]

Note 127 See below, paras 3.113-3.181. [Back]

Note 128 The SPPSA, for example, refers to an SI being ‘temporarily’ perfected in some places, and ‘remains’ perfected for a period in others, and ‘continues’ perfected in others. [Back]

Note 129 See below, paras 3.108-3.112. [Back]

Note 130 See DRs 13(5) (goods brought into the country), 29 (proceeds), and 42(2) (PMSI in non-inventory collateral). [Back]

Note 131 See above, paras3.46-3.47 and 3.51-3.57. [Back]

Note 132 See below, paras 4.60 and 4.84. [Back]

Note 133 UCC Section 9-309(2). [Back]

Note 134 Official Comment 4, which goes on to note that any person regularly taking assignments of any debtor’s accounts should file. [Back]

Note 135 CP para 4.17. We envisaged that pledges would be affected by the priority provisions: CP para 4.145. [Back]

Note 136 DR 24. SIs in investment property that could be ‘possessed’ are dealt with in detail in Part 4. [Back]

Note 137 CP para 4.15. [Back]

Note 138 See DR 24(2). [Back]

Note 139 This fits with DR 17 (Preservation and use of collateral), which imposes certain duties of preservation etc. on a party who has possession. We think that any such duty should be imposed on the bailee (eg, a warehouse owner) rather than on the secured party. See further below, para 5.41. [Back]

Note 140 Perfecting the SI in this way will give the secured party priority over an SI in the goods perfected otherwise after the goods become covered by the negotiable document of title. [Back]

Note 141 See SPPSA, s 24(1); NZPPSA, s 41(b)(ii). [Back]

Note 142 See above, para 3.75. [Back]

Note 143 See below, para 3.201. [Back]

Note 144 See above, para 3.95. [Back]

Note 145 DR 31(6). See also below, para 3.236. [Back]

Note 146 CP para 4.17. [Back]

Note 147 Including the Law Society’s Company Law Committee and the Bar Council Law Reform Committee (joint response) and the British Bankers’ Association. [Back]

Note 148 See generally below, paras 3.113-3.117. [Back]

Note 149 DR 28(4). [Back]

Note 150 DR 28(1) and (3). [Back]

Note 151 On this see Part 4. [Back]

Note 152 CP paras 12.5-12.7. [Back]

Note 153 The one explicit dissenter was concerned at the risk of computer failure, and opposed notice-filing entirely. [Back]

Note 154 We have already dealt with the suggestion that the charge document be registered: above, para 2.45. [Back]

Note 155 Other systems also allow for electronic filing, but have a ‘paper’ system as an alternative. [Back]

Note 156 See below, paras 3.147-3.150. [Back]

Note 157 See below, para 3.155. [Back]

Note 158 ‘Government to Business’. [Back]

Note 159 DR 2(1). The term also includes a ‘financing change statement’ where the context allows. [Back]

Note 160 See below, paras 3.364-3.383. [Back]

Note 161 See below, paras 3.171-3.174. [Back]

Note 162 CP paras 12.67-12.68. [Back]

Note 163 See further below, paras 3.163-3.168. [Back]

Note 164 Third parties will have no right to obtain information from the secured party; only the debtor may insist on that, see para 3.192 below. However in practice secured parties are likely to be willing to give some information voluntarily, at least after obtaining the debtor’s consent. [Back]

Note 165 See below, paras 3.213-3.214. [Back]

Note 166 Such as the notice mentioned above that a person intends to take a PMSI in inventory that is subject to the secured party’s SI. [Back]

Note 167 CP para 12.5(3). [Back]

Note 168 DR 47(7)(d). [Back]

Note 169 See Section 9-504, Official Comment 2. [Back]

Note 170 Section 9-504, referring to Section 9-108. [Back]

Note 171 See below, paras 3.157-3.160. [Back]

Note 172 Which will mean that the filing is ineffective; see below, para 3.163. [Back]

Note 173 Paras 3.176-3.181. [Back]

Note 174 UCC Section 9-515. There are longer periods for certain transactions: see Section 9-515 (b), (f) and (g). [Back]

Note 175 NZPPSA, s 153. [Back]

Note 176 SPPSA, s 44. [Back]

Note 177 CP para 4.86. [Back]

Note 178 DR 49. [Back]

Note 179 See above, para 2.47. [Back]

Note 180 See below, paras 3.157-3.160. [Back]

Note 181 DR 48(6). However, more provisions may be necessary - possibly including criminal sanctions - relating to false filings if this proves to be a significant problem: see below, para 3.141. [Back]

Note 182 See further below, para 3.152. [Back]

Note 183 See above, paras 2.53-2.54. [Back]

Note 184 DR 47. A financing statement that is not ‘effective’ will not perfect an SI or protect its priority: see DR 46(2). A similar provision is found in the UCC, but not in the PPSAs. [Back]

Note 185 CP para 4.108. [Back]

Note 186 See above, para 3.138. [Back]

Note 187 See DR 71(2). [Back]

Note 188 We are told that in the US there have been some unauthorised, ‘nuisance’ filings but these have been mainly against prominent individuals, normally politicians. [Back]

Note 189 Modern Company Law for a Competitive Economy: Final Report URN 01/942, para 11.48. [Back]

Note 190 CP para 4.75. [Back]

Note 191 CP para 4.80. [Back]

Note 192 CP para 12.24(2). Some thought that this was unnecessary; the debtor should be aware that it has created an SI. With respect, this misses the point; the statement is needed as a safeguard against filings made against the wrong debtor or containing incorrect particulars (on which see further below, paras 3.157-3.160). [Back]

Note 193 See below, para 3.372. [Back]

Note 194 The Registrar could choose to follow the New Zealand approach, and give the secured party the option of an electronic verification statement (for free) or one in paper format (for a fee). [Back]

Note 195 DR 50(3). [Back]

Note 196 DR 71. [Back]

Note 197 See Part 4. [Back]

Note 198 See above, paras 3.46 and 3.51-3.56. [Back]

Note 199 CP para 12.12. [Back]

Note 200 A few consultees argued that an unperfected SI should nonetheless be effective as against the unsecured creditors in the debtor’s insolvency. This is the position under the NZPPSA but none of the other schemes. It is premised on the view that unsecured creditors never consult the register. We agree that unsecured creditors may seldom do this but we understand that the register of company charges is consulted by credit rating agencies and others on whose information unsecured creditors rely, so we do not recommend the New Zealand solution. As we discussed in Part 2, two consultees argued that registration should be a condition of the validity of a charge, and we have explained that we think this would be an unnecessarily radical change to our law and would also be incompatible with extending the scheme to quasi-securities: see above, para 2.45. [Back]

Note 201 See below, paras 3.201; 3.250-3.252 and 3.255-3.256. [Back]

Note 202 DR 2(1). As we have noted, where the context permits, a financing change statement is also included within the definition of financing statement, so that mention of a financing statement in a particular draft regulation might mean both a financing statement and a financing change statement. [Back]

Note 203 DR 52. [Back]

Note 204 CP para 12.21. To meet a concern raised by Companies House, we should make it clear that a financing statement that is ‘removed’ need not be removed from the Companies Register altogether, since that forms an historical record. It is simply that it will not be shown when the register is searched in the normal way: it may be removed to a separate electronic archive. [Back]

Note 205 DR 55. [Back]

Note 206 We have differed slightly from the approach taken by the PPSAs, in that we are not provisionally recommending that a court order be obtained within the time limit, but rather just a notification of commencement of proceedings. Unless consultees advise us to the contrary, it does not seem to us to be justifiable to put in a requirement that would mean such urgent court action to be taken and completed. However, for the purposes of consultation we have put in the ‘long stop’ provision that an order must be obtained within 90 days. [Back]

Note 207 DR 55(7). [Back]

Note 208 CP para 12.22. [Back]

Note 209 The secured party’s name and address are not a searchable field, so errors in these details would not prevent a searcher finding the financing statement. [Back]

Note 210 See paras 3.176-3.181. [Back]

Note 211 The question of searches is considered further below, paras 3.171-3.174. [Back]

Note 212 CP para 12.10. [Back]

Note 213 DR 51. [Back]

Note 214 See DR 51(2) and (5). [Back]

Note 215 Unauthorised discharge by anyone else is likely to be very uncommon, as the person discharging the filing would have to have access to the financing statement PIN, which the secured party should keep private. [Back]

Note 216 DR 43. [Back]

Note 217 See above, paras 3.118-3.136. [Back]

Note 218 See above, para 3.129. [Back]

Note 219 See above, para 3.120. [Back]

Note 220 NZPPSA, ss 173-174. [Back]

Note 221 Save, of course, where the scheme allows a grace period for filing, for instance with PMSIs over equipment: see below, paras 3.215-3.219. In such a case it may be desirable to allow additional time for filing if the system becomes unavailable during the last 24 hours before the deadline, for example by extending the deadline by 24 hours. [Back]

Note 222 See DR 71. [Back]

Note 223 DR 31(7)-(8). [Back]

Note 224 DR 33(4). [Back]

Note 225 The effect of DR 29(1)(a) is that an authorised dealing will prevent the SI continuing in the collateral. [Back]

Note 226 See below, paras 3.257-3.259. [Back]

Note 227 A similar issue can arise in the converse case in which the serial number is correct but the debtor’s details are incorrect – in other words, the filing has been made against the correct vehicle but the wrong company as debtor. [Back]

Note 228 Eg, Stevenson v GMAC Leaseco Ltd 2003 NBCA 26. [Back]

Note 229 See DR 51(6). [Back]

Note 230 See the definition in DR 2(1), which is derived from both SPPSA s 2(1)(hh) and UCC Section 9-102(a)(62). It should be noted that the definition excludes ‘products made from collateral’, so that a supplier of raw materials would have to agree expressly that its SI should extend to cover the products which were made from its raw materials: this would not happen automatically. See further below, para 3.280. [Back]

Note 231 CP para 4.172. [Back]

Note 232 DR 29. [Back]

Note 233 Or lessee: see below, para 3.253. A secured party will not take free of the SI and, provided the first SI was perfected, the second SI will normally be subordinate to it. [Back]

Note 234 For example, where the collateral comprises inventory that is sold in the ordinary course of business: see below, paras 3.257-3.260. [Back]

Note 235 DR 29(2). [Back]

Note 236 DR 2(3). [Back]

Note 237 DR 29(4). [Back]

Note 238 DR 29(5)-(6). [Back]

Note 239 An SI may not actually exist at the time a filing is made: see above, para 3.138. [Back]

Note 240 CP para 4.63. [Back]

Note 241 DR 18. [Back]

Note 242 CP para 4.63. [Back]

Note 243 See also UCC Section 9-625(g). [Back]

Note 244 We have not thought it necessary to replicate a provision found in the SPPSA, s 18 to the effect that a secured party who receives an information request purporting to be made by a person entitled to make it may act as if the person making it is, in fact, entitled to make it unless the secured party knows the person is not entitled to make it. This provision would be more appropriate for a scheme that allows persons other than the debtor to make such a request, and would seem to weaken any duty of confidentiality between the secured party and the debtor. However, we would welcome views. [Back]

Note 245 The UCC contains a more general provision that, in the event of the secured party not complying with Article 9, the court may order or restrain collection, enforcement or disposition of collateral on appropriate terms and conditions: Section 9-625(a). [Back]

Note 246 We think it unlikely that contempt of court proceedings for breach of any court order compelling compliance would be deemed to be appropriate in most cases, given the gravity of such a course and the procedural steps necessary to undertake such proceedings. [Back]

Note 247 Held at Norton Rose in September 2003. [Back]

Note 248 See below, paras 3.253-3.263. [Back]

Note 249 See, eg, the rules dealing with transferees of negotiable instruments, below, paras 3.229-3.236. [Back]

Note 250 Some consultees argued that priority between unperfected SIs should depend on the date of creation rather than of attachment. We have considered this carefully. When the SIs have not attached when they were created because the debtor did not acquire the property until later, it is true that the date of attachment rule does not provide a helpful criterion: both will attach simultaneously. However if it does not attach because the collateral has not been identified or because the relevant party has not yet advanced credit, not only does the date of attachment rule give a clear answer but the date of attachment seems more relevant than the date of creation. We have therefore followed the other schemes in adhering to the date of attachment as the criterion. The situation is likely to be a rare one in any event. [Back]

Note 251 See DR 33(6). [Back]

Note 252 This rule applies only as between perfected SIs. If SP1’s SI has not attached, the fact that it has filed before SP2’s perfected SI will not give SP1 priority for so long as it remains unperfected. Once SP1’s SI has attached, however, it will have priority. [Back]

Note 253 DR 33(4). [Back]

Note 254 CP para 4.155; Report of the Committee on Consumer Credit (1971) Cmnd 4596, para 5.7.73. [Back]

Note 255 See below, paras 3.211-3.219. [Back]

Note 256 This replicates the effects of current law. In practice the vast majority of PMSIs will be title-retention devices, and under current law the collateral in question would not be caught by an after-acquired property clause because it does not become the debtor’s property. [Back]

Note 257 Other than investment property, which is dealt with by a specific set of priority rules: see Part 4. [Back]

Note 258 See DR 4(1)(a). [Back]

Note 259 See DR 4(1)(b). [Back]

Note 260 See DR 4(1)(c) and (d). [Back]

Note 261 Our definition of PMSI is very similar to that of the SPPSA, s 2(1)(hh). It has been suggested to us that the PPSA formulation results in the possibility of a PMSI covering an advance used to buy a particular asset, when the advance was initially unsecured but later an SI was taken over the asset. We would welcome views on whether this is likely to be a concern. [Back]

Note 262 The UCC definition of ‘goods’ includes certain embedded computer programmes: see UCC Section 9-102(a)(44), and above, para 3.19. Section 9-103(c) allows a PMSI in software that is not embedded but was acquired in the same transaction as the goods and for the purpose of operating them. [Back]

Note 263 Under our provisional proposals, such an interest would probably fall outside the scheme: see below, paras 3.337-3.342. [Back]

Note 264 DR 4(4), and see UCC Section 9-103(f)(3). [Back]

Note 265 UCC Section 9-324; SPPSA, s 34(3); NZPPSA, s 74. [Back]

Note 266 DR 42(3). [Back]

Note 267 The PMSI will be effective in the event of the debtor’s insolvency within the grace period. [Back]

Note 268 DR 4(2). [Back]

Note 269 DR 42(5). [Back]

Note 270 We will see that under the scheme we recommend, this applies only to inventory that is resold in its original form. If material subject to an SI is made into ‘new goods’, the supplier may reserve an SI over these but it will not have PMSI status. This differs from the UCC and PPSA schemes. See further below, para 3.282. [Back]

Note 271 SPPSA, s 34(6). UCC Article 9 achieves the same result by excluding PMSIs over most forms of proceeds, so priority over receivables that are proceeds will depend on the normal ‘first to file or perfect’ rule. [Back]

Note 272 The New Zealand Personal Property Securities Amendment Act 2004, which came into force on the 15 April 2004, inserts a new s 75A into the NZPPSA effectively giving the receivables financier priority. [Back]

Note 273 Commentators have also noted the potential uncertainty of the former New Zealand position for factors, with the risk of restitutionary claims (where the proceeds are no longer identifiable) being brought against the factors who had collected debts by inventory suppliers who had priority, with factors possibly having to pay over receipts years after the relevant debts had been collected: see M Gedye, R Cuming and R Wood, Personal Property Securities in New Zealand (2002) para 74.3 (pp 293-294). [Back]

Note 274 We are told by the Factors and Discounters Association that they fund receivables and inventory in excess of £100 billion a year. [Back]

Note 275 This dates only from the late 1970s: see CP para 6.16. [Back]

Note 276 (1828) 3 Russ 1; see above, para 2.146. This was held to be the position in Pfeiffer (E) Weinkellerei-Weineinkauf GmbH & Co v Arbuthnot Factors Ltd [1988] 1 WLR 150. [Back]

Note 277 See DR 42(6). [Back]

Note 278 Although the period is reduced from five years to six months: UCC Section 9-324(d). [Back]

Note 279 SPPSA, s 34(11). (Section 34(11) contains an equivalent provision relating to those who fund the acquisition of feed, drugs or hormones relating to SIs in fowl, cattle or fish.) [Back]

Note 280 Model Section 9-324A, which requires notification to others before the ‘production-money’ party gives new value. Official Comment 2 to UCC Section 9-324 notes that ‘[model section 9-324A] is a model, not uniform provision. The sponsors of the UCC have taken no position as to whether it should be enacted, instead leaving the matter for state legislatures to consider if they are so inclined.’ [Back]

Note 281 CP para 12.48. [Back]

Note 282 See DR 31. [Back]

Note 283 DR 38(4) and (6). [Back]

Note 284 DR 2(1). [Back]

Note 285 The term ‘cash’ or ‘non-cash proceeds’ appears on several occasions in the draft regulations. ‘Cash’ is a wider term than ‘money’ (although colloquially they are sometimes used interchangeably): cash means money, cheques and bank accounts, whereas money is defined as coins and notes: DR 2(1). [Back]

Note 286 DR 38(2). [Back]

Note 287 M Gedye, R Cuming and R Wood, Personal Property Securities in New Zealand (2002) para 95.1 (p 344). [Back]

Note 288 DR 2(1). [Back]

Note 289 DR 38(1). [Back]

Note 290 The payment has to have been received through a ‘debtor-initiated payment’: see DR 38(2)-(3). [Back]

Note 291 DR 38(2). [Back]

Note 292 DR 38(5)-(6). [Back]

Note 293 See above, para 3.161. [Back]

Note 294 See below, para 3.253. [Back]

Note 295 See below, para 3.258. [Back]

Note 296 See UCC Section 9-325, Official Comment 3, Example 1. [Back]

Note 297 SPPSA, s 35(8). [Back]

Note 298 Except if the machine is within the special category of uniquely serial-numbered goods for which registration by serial number will be prescribed: see above, paras 3.176-3.181. [Back]

Note 299 DR 37. [Back]

Note 300 Companies Act 1985, s 28(1) and (6). [Back]

Note 301 See, eg, NZPPSA, s 90(1)(b). [Back]

Note 302 See above, para 3.61(1). [Back]

Note 303 DR 39. [Back]

Note 304 See above, para 3.153(3). [Back]

Note 305 The attempted execution may trigger an automatic crystallisation clause in the floating charge; see above, para 3.71. [Back]

Note 306 DR 33(7). [Back]

Note 307 DR 20(3). It has been suggested to us that it would be sufficient that execution was initiated by delivering a writ of execution, although we would welcome views on this point. [Back]

Note 308 DR 33(7). [Back]

Note 309 See above 3.183. [Back]

Note 310 See above, para 3.230. [Back]

Note 311 CP para 4.177. [Back]

Note 312 DR 20(4). [Back]

Note 313 CP para 12.40. [Back]

Note 314 DR 31(2)-(3). [Back]

Note 315 See above, paras 3.176-3.181. [Back]

Note 316 CP paras 4.185–4-185. [Back]

Note 317 None of the other schemes we have considered applies this as a general rule. [Back]

Note 318 DR 31(2)-(3). The provisions are limited to buyers or lessees who have taken delivery or possession, compare the Sale of Goods Act 1979, s 25. [Back]

Note 319 Buyers of inventory will take free of the seller’s SI under the rules outlined above. [Back]

Note 320 See above, para 3.180. Where the collateral was equipment, and where such a unique number could have been, but was not, included, the SI would be at risk of loss of priority to subsequent SIs. [Back]

Note 321 See above, para 3.178, and DR 31(7)-(8). [Back]

Note 322 See below, paras 3.309. [Back]

Note 323 The question of whether goods have become a fixture is left to the current law. [Back]

Note 324 DR 40. [Back]

Note 325 DR 29(1). [Back]

Note 326 CP para B.77. [Back]

Note 327 See Hendy Lennox (Industrial Engines) Ltd v Grahame Puttick Ltd [1984] 1 WLR 485. [Back]

Note 328 Clough Mill Ltd v Martin [1985] 1 WLR 111, CA. [Back]

Note 329 UCC Section 9-336; SPPSA, s 39(3); NZPPSA, s 83. [Back]

Note 330 Allowing the SI to continue by agreement can be seen as a necessary quid pro quo for a system that subjects retention of title clauses to the rules of the scheme, including perfection requirements. [Back]

Note 331 An alternative that has been suggested to us is to extend the definition of ‘proceeds’, so that processed goods would be held to be the proceeds of the SI in the component part, up to its proportional share. We have not followed this approach, but would welcome views. [Back]

Note 332 See above, paras 3.213-3.214. [Back]

Note 333 See above, para 3.201. [Back]

Note 334 CP para 4.221. [Back]

Note 335 DR 71. [Back]

Note 336 The provision on damages is drafted with a qualification that the person filing did not have an honest belief that the debtor has consented. This is intended to catch ‘malicious’ rather than ‘mistaken’ filing. A person who files genuinely (but mistakenly) believing that there is consent by the debtor (including consent through entering into a security agreement) should not be liable under this provision. For example, a supplier of goods might file thinking it has won the ‘battle of the forms’ to have its retention of title clause included in the contract, but in fact that clause was never incorporated, so that there is no security agreement. We do not think damages would be appropriate in this case; instead, the ‘debtor’s’ remedy would be to seek the removal of the financing statement under the procedure provided for in DR 55. [Back]

Note 337 For a fuller account see CP paras 2.49-2.55. [Back]

Note 338 CP para 4.211. [Back]

Note 339 Para 4.210. [Back]

Note 340 For example, if an exclusion were based just on the registration of a mortgage, this would mean that a finance lease would need to be perfected (invariably by filing) under our scheme, yet a mortgage over that same asset, which was registered in the specialist registry, would be outside it. There also seems little incentive for a secured party to register its mortgage at the specialist registry, when it could achieve all it wants – and arguably more – by perfecting under our scheme. Moreover, where one secured party chose not to register its mortgage at the specialist registry but another party did so choose to register, this would give rise to a clash of two priority schemes and a need to check two registers as a matter of course. [Back]

Note 341 We still think that it would be desirable to link the various registries, although in most cases this would simply be a question of establishing a ‘hyperlink’ from one website to another (which would depend on the other registries being accessible in this way to conduct a search, which currently they are not). [Back]

Note 342 Eg, ensuring, where possible, that the asset is registered at the appropriate specialist registry, and registering any necessary mortgage or interest that can be registered there (in addition to complying with any other requirements under the Companies Act 1985 or the Bills of Sale Acts 1878-1891). [Back]

Note 343 The overseas schemes all exclude the creation or transfer of an interest in land: eg, SPPSA, s 4; NZPPSA, s 23. [Back]

Note 344 We would have thought that a search would be made of the land register in any event for other purposes, eg, to confirm title, but from what we are told this is not the case. [Back]

Note 345 Land Charges Act 1972, s 4(5). (The charge has to have been created after 1926.) [Back]

Note 346 It has been argued that this provision does not displace the ordinary priority rules as between fixed and floating charges since floating charges do not fall within s 97, as they do not ‘affect a legal estate in land’ in the sense that they do not create any proprietary interest prior to crystallisation: W G Gough, Company Charges (2nd ed 1996) pp 876-877. [Back]

Note 347 But not a purchaser of a legal estate. [Back]

Note 348 For a discussion of this point, see Law Com No 254, Land Registration for the Twenty-First Century: A Consultative Document, para 7.17. [Back]

Note 349 Land Registration Act 2002, s 93. [Back]

Note 350 SeeE-conveyancing: A Land Registry Consultation; E-conveyancing: A Land Registry Consultation Report, andE-conveyancing: The Strategy for the Implementation of e-conveyancing in England and Wales. The Land Registry’s Defining the Service received Ministerial Approval in July 2004, Written Ministerial Statement, Hansard (HC) 16 July 2004, col 92WS. [Back]

Note 351 See above, para 3.01. At present, of course, those latter charges would be required to be registered under the Companies Act 1985. [Back]

Note 352 The Land Registration Act 2002, s 121 contains provision for the Lord Chancellor to make rules about the transmission by the land registrar to the registrar of companies of applications under Part XII of the Companies Act 1985, or Part XXIII, Ch 3 (the corresponding provision for oversea companies). [Back]

Note 353 A provision would be needed to take into account a change in the company name. [Back]

Note 354 It would only be necessary for post-commencement charges. Pre-commencement charges will already be registered and it will be possible to find them by a standard search: see below, para 3.390. [Back]

Note 355 However, in respect of unregistered land, our proposals may mean that the Land Charges Act 1972 will need to be amended to remove the ‘deemed’ registration provision contained in s 3(7), whereby registration of floating charges under the Companies Act 1985 is sufficient in place of registration under the Land Charges Act, and that once registered under the 1985 Act the charge has effect as though it had been registered under the Land Charges Act 1972. [Back]

Note 356 SPPSA, s 4(f); NZPPSA, s 23(e)(ii). The OPPSA, s 4(1)(e)(ii) seems to include such interests, although commentators have suggested clarification is needed: J Ziegel and D Denomme, The Ontario Personal Property Security Act Commentary and Analysis (2nd ed 2000) para 4.6 (pp 84-85). [Back]

Note 357 The UCC Section 9-109(b) states that: The application of this article to a security interest in a secured obligation is not affected by the fact that the obligation is itself secured by a transaction or interest to which this article does not apply. We have not thought it necessary to replicate this provision in the draft regulations. [Back]

Note 358 Air Navigation Order 2000 (ANO), art 129(1). [Back]

Note 359 ANO, art 3(1). [Back]

Note 360 See ANO, art 3(2). [Back]

Note 361 The types of aircraft that are unlikely to be registered in the UK are mainly those that are still being built, vintage aircraft (eg, those in museums and not flying) and certain small, unmanned aircraft. In addition, those that have been de-registered from a non-UK aircraft registry and are ‘between registers’ may also not appear. [Back]

Note 362 SI 2000 No 1562. [Back]

Note 363 SI 1972 No 1268. For a detailed treatment of this topic, see, eg, McBain, Aircraft Finance: Registration, Security & Enforcement (1988 with updates). [Back]

Note 364 MAO, art 3. [Back]

Note 365 Mortgage includes a mortgage which extends to any store of spare parts for that aircraft but does not otherwise include a mortgage created as a floating charge: MAO, art 2(2). [Back]

Note 366 MAO, art 14. [Back]

Note 367 MAO, art 5(1). [Back]

Note 368 See Aircraft Financing (ed Littlejohns and McGairl, 3rd ed 1998) p 8, citing GE Capital Aviation Services. [Back]

Note 369 Although logically there seems no clear need for a specialist registry for aircraft mortgages, the 1944 Geneva Convention and the Mobile Equipment Convention both uphold the principle of the registration of SIs in the same register as the aircraft register. The Canadian provinces and New Zealand have chosen a different solution: although all have separate aircraft registers, the SI aspects have been taken over by the PPSAs, with aircraft being identifiable by unique serial number. [Back]

Note 370 The Aircraft Protocol of the Mobile Equipment Convention is intended to establish an international scheme for SIs over aircraft, with an ‘international interest’, which would be registered on an international registry, with priority based on date of registration. The Protocol takes a functional approach, including quasi-securities within the definition of international interest (art 2). [Back]

Note 371 Interests arising from transactions involving such aircraft, such as factoring of the income streams related to their use, would fall within our scheme. [Back]

Note 372 The governing legislation for registration of ships and of mortgages is the Merchant Shipping Act 1995 and the Merchant Shipping (Registration of Ships) Regulations 1993 (SI 1993 No 3138, as amended). [Back]

Note 373 SI 1993 No 3138. [Back]

Note 374 These are: Part I for ships owned by qualified persons which are neither fishing vessels nor registered as small ships; Part II for fishing vessels; Part III for small ships (ie, less than 24 metres), and Part IV for ships which are ‘bareboat charter ships’. MSR, reg 2(1). The provisions relating to bareboat charters are covered in MSA, s 17, although we do not go into detail on this point here. [Back]

Note 375 If a ship is registered, any transfer must be effected by a ‘bill of sale’ satisfying the prescribed requirements, unless the transfer will result in the ship ceasing to have a British connection: MSA, Sched 1, para 2 . Where this is done, the transferee will not be registered as owner unless it has made the prescribed application to the registrar, and the registrar is satisfied that the ship retains a British connection. Where there is any transfer of a registered ship, the person ceasing to own the ship has to notify the Registrar and surrender the certificate of registry. The Registrar will then cancel the certificate of registry and ‘freeze’ the register pending the application for the registration of the transfer or transmission by the new owner: MSR, reg 50(1). The new owner has to apply to transfer the registration within 30 days. If this is not done, the Registrar may cancel the registration of the ship and the certificate of registry. [Back]

Note 376 The private law provisions do not apply to those registered as small ships (Part III) or to bareboat charter ships (Part IV). Registration of fishing vessels (Part II) can be either ‘simple’, in which case the private law provisions relating to transfers and the registration of mortgages do not apply, or ‘full’, in which case they do. [Back]

Note 377 Although registration at Companies House will of course be necessary in the case of companies. [Back]

Note 378 MSA, Sched 1, para 8. We understand that, where further advances are concerned, a second registered mortgage may rank ahead of a further advance secured by a first registered mortgage, on the ground that registration counts as notice to the first mortgagee of the second mortgagee’s interest. [Back]

Note 379 It pre-dates registration of company charges by many years. [Back]

Note 380 Para 4.211. [Back]

Note 381 There only seems to be one reported case of such a situation, The Shizelle [1992] 2 Lloyd’s Rep 444. This involved unincorporated parties. Thus we are probably not dealing with a common situation. [Back]

Note 382 See above, para 3.321. [Back]

Note 383 The relationship with the specialist registries is not an area where we have been able to derive particular assistance from the overseas schemes, given the different natures of the different national registers. The NZPPSA, s 23(e)(xi) excludes: A transfer, assignment, mortgage, or assignment of a mortgage of a ship (within the meaning of the Ship Registration Act 1992) that exceeds 24 metres register length (within the meaning of that Act), or any share of such a ship. This exclusion is based on ship length, rather than the fact or otherwise of registration, and commentators suggest that this leads to an ‘unsatisfactory’ position with regards to ships shorter than 24 metres, as they are not excluded from the PPSA but are also potentially subject to the Ship Registration Act 1992 (SRA), in that registration is possible but not mandatory. Consequently, if such a ship were to be registered, both the NZPPSA and the SRA could apply, giving rise to potential priority conflicts: see M Gedye, R Cuming and R Wood, Personal Property Securities in New Zealand (2002) para 23.15 (pp 113-115). The position in Canada varies. Neither the Saskatchewan nor the Ontario PPSAs have any exclusion for ships, based on length, fact of registration, or otherwise. However, other provinces do have an exclusion: British Columbia and New Brunswick both exclude mortgages under the Canada Shipping Act, although these exclusions seem to be based on the fact of registration rather than ship length or any other factor: BCPPSA, s 4(b)(i) excludes ‘a mortgage under’ the Act; NBPPSA, s 4(k) excludes ‘a mortgage registered under’ the Act. [Back]

Note 384 It is possible that ships bearing an International Maritime Organisation number could be treated in the same way as we propose for vehicles, by using that unique registration number as part of the filing process. [Back]

Note 385 DR 12(1)(h) and (2). [Back]

Note 386 Supreme Court Act 1981, s 20(2)(c) and (7)(c). [Back]

Note 387 Supreme Court Act 1981, s 21(1)-(2). [Back]

Note 388 See, eg, A Clarke in Interests in Goods (eds N Palmer and E McKendrick 2nd ed 1998) p 665. [Back]

Note 389 DR 56(4). [Back]

Note 390 The Companies Act 1985 makes a charge on goodwill or intellectual property registrable, and defines intellectual property for these purposes as comprising patents, trade marks, registered designs, copyright or design rights, and any licence under or in respect of such rights: s 396(3A). [Back]

Note 391 See the Copyright, Designs and Patents Act 1988. [Back]

Note 392 Copyright and design rights are transmissible by assignment as personal property, although an assignment is not effective unless it is in writing signed by or on behalf of the assignor: our scheme will not affect this requirement of writing. [Back]

Note 393 There is an overlap here with unregistered design rights: where a national unregistered design right subsists in a registered design, the Registrar shall not register an interest unless satisfied that the person entitled to that interest is also entitled to a corresponding interest in the national unregistered design right. Moreover, where a national unregistered design right subsists in a registered design and the proprietor of the registered design is also the design right owner, an assignment of the national unregistered design right is taken to be also an assignment of the right in the registered design, unless a contrary intention appears: Registered Designs Act 1949, s 19. [Back]

Note 394 Patents Act 1977, s 32; Trade Marks Act 1994, s 63(1). [Back]

Note 395 CP paras 5.87-5.120. [Back]

Note 396 Council Regulation (EC) No 1346/2000 of 29 May 2000, OJ L160/1, June 30, 2000. [Back]

Note 397 Case C-167/01,Kamer von Koophandel en Fabrieken voor Amsterdam v Inspire Art Ltd. [Back]

Note 398 Held at Allen & Overy on October 22, 2003. [Back]

Note 399 See, eg, SPPSA, ss 5-8. [Back]

Note 400 In using the shorthand term ‘English’ companies, we mean companies and LLPs registered in England and Wales: see above, para 3.7. [Back]

Note 401 SIs over assets in Scotland are considered below, para 3.380. It will be seen that we recommend that the same rules should apply as with assets outside the UK. [Back]

Note 402 Thus this will include goods, accounts, intangibles, investment property and bank accounts. [Back]

Note 403 We take this to mean both any of the charges listed in Companies Act 1985, s 396 when created under English law and also any transaction under foreign law that would be classified by an English court as creating such a charge: Re Weldtech Equipment Ltd [1991] BCLC 393, 395 (though there the assets were treated as being in England); Dicey & Morris, The Conflict of Laws (13th ed 2000) para 33-112. Under our proposals any transaction that had a security purpose would have to be perfected (by filing or otherwise) to be effective on the debtor’s insolvency. [Back]

Note 404 Companies Act 1985, s 395(1). [Back]

Note 405 Council Regulation (EC) No 1346/2000 of 29 May 2000, OJ L160/1, June 30, 2000. [Back]

Note 406 Ibid, art 4(1). [Back]

Note 407 This is of course already the case under the current law, but if our scheme includes title-retention devices this might increase the number of cases in which dual registration would be needed, if the lex situs required registration of such devices. [Back]

Note 408 Eg, Scots law does not recognise fixed non-possessory charges over goods. [Back]

Note 409 Arts 3(1) and 4. [Back]

Note 410 Re Anchor Line (Henderson Brothers) Ltd [1937] 1 Ch 483. This jurisdiction is described as ‘well-settled’ though also as ‘anomalous’: Dicey & Morris, The Conflict of Laws (13th ed 2000) paras 30-122 and 23-048. We did not consult on that question, but our impression is that the rule in fact serves the needs of practical justice. An English company may well have assets abroad and English creditors, secured or unsecured, may look to these as security or as assets that, if need be, may be taken to satisfy the company’s debts. They may well be unaware that the assets are overseas. If they are aware of that fact and choose to rely on forms of security that are not recognised in other jurisdictions, they take the risk that they will be ousted by secured parties who take SIs of a kind that are recognised there, and also of unsecured creditors having the goods seized under local procedures; but that does not seem to be any reason to deny the rights of a party who has taken an SI that is valid under English law as against the claims of unsecured creditors or competing secured parties under the same law – provided that the SI has been publicised in the normal way by filing. [Back]

Note 411 SI 2003 No 3226. [Back]

Note 412 DR 13(2). [Back]

Note 413 See DR 13(1). (Assets in Scotland are discussed below.) [Back]

Note 414 In the CP we suggested – at para 5.93 – limiting the scheme to those companies that had registered a place of business. Whilst all 17 consultees who responded on this point agreed with this approach, we now think that limiting the scheme in this way would not offer sufficient protection to buyers or potential secured parties. See below, para 3.367. [Back]

Note 415 Certainly not where motor vehicles and the like are concerned, for which we provisionally recommend filing in all cases. [Back]

Note 416 If it is not possible, then we would expect secured parties to require oversea companies to open a place of business here and register accordingly. We assume that opening a place of business here need only be nominal (perhaps merely registering a postal box?) and therefore not burdensome; but there seems little point in making the law depend on such an empty formality. [Back]

Note 417 60 days, or 15 days from when the secured party knows that the goods have been brought into England and Wales, or before perfection ceases under the law of the first jurisdiction, whichever is earlier. [Back]

Note 418 DR 13(5)-(6). [Back]

Note 419 For ‘immobilised’ shares held in the books of an intermediary, the current rule is that proprietary effects are governed by the domestic law of the country in which the relevant account is maintained: See the Directive on Financial Collateral Arrangements, 2002/47/EC of 6 June 2002, OJ L168/43, June 27, 2003, art 9. If the Hague Convention on the Law Applicable to Certain Rights in respect of securities held with an Intermediary (2002) comes into force it will in effect allow the parties to choose the law governing the proprietary aspects of the holding: art 4 of the Convention provides that the law applicable shall be that of the account agreement or such other law as is provided for in that agreement, provided that the relevant intermediary has an office of the designated type in the State whose law is so designated. [Back]

Note 420 See above, para 3.352. [Back]

Note 421 Art 5(3). [Back]

Note 422 Case C-167/01,Kamer von Koophandel en Fabrieken voor Amsterdam v Inspire Art Ltd. [Back]

Note 423 For similar reasons Eleventh Council Directive 89/666/EEC of 21 December 1989 is not an obstacle. Art 1 provides that if ‘a branch [is] opened in a Member State by a company which is governed by the law of another Member State’ the company must disclose various pieces of information. It has been held that Member States may not impose additional disclosure requirements unless these are authorised by the Directive, ‘since these may interfere with the exercise of the right to establishment and must therefore be eliminated’: Case C-167/01, Kamer von Koophandel en Fabrieken voor Amsterdam v Inspire Art Ltd, at para 68. The perfection requirement of our scheme is imposed on the secured party not the company. [Back]

Note 424 Further, it is hard to see that a rule that SIs must be perfected is a restriction on freedom of establishment. The Inspire Art case involved what may be called an ex-ante restriction. The perfection requirement, even if can be said to affect the company, is a rule affecting its operation not its establishment. [Back]

Note 425 CP paras 5.95ff. [Back]

Note 426 DP No 121. [Back]

Note 427 DP No 121, para 4.5. [Back]

Note 428 We understand that it is expected shortly. [Back]

Note 429 DP No 121, para 2.11. [Back]

Note 430 Eg, Scots law would presumably continue to recognise title-retention arrangements such as finance leases, and might recognise SIs over goods. [Back]

Note 431 DP No 121, para 6.19. [Back]

Note 432 CompareRe Anchor Line, above, para 3.358 n 410. [Back]

Note 433 DP No 121, paras 6.20-6.21; compare our remarks in relation to foreign companies, above, para 3.365. [Back]

Note 434 See DR 15(6); above, para 3.74. [Back]

Note 435 See above, paras 3.313-3.336. [Back]

Note 436 See above, para 2.60. [Back]

Note 437 [2004] EWCA Civ 670. [Back]

Note 438 See, eg, Insolvency Act 1986, ss 15 and 248. [Back]

Note 439 See, eg, Insolvency Act 1986, s 251. [Back]

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You are here: BAILII >> Databases >> The Law Commission >> Company Security Interests (Consultation Paper) [2004] EWLC 176(3) (13 August 2004) URL: http://www.bailii.org/ew/other/EWLC/2004/176(3).html Cite as: [2004] EWLC 176(3)