Part X

Extending the notice-filing system

Introduction

                10.1               In Part IV we provisionally proposed that a notice-filing system for charges created by companies be introduced to replace the current registration scheme. This would require that charges over most assets be registered by means of a financing statement in the Company Charges Register, and the priority of such registered charges would generally date from the time of registration, rather than of creation (except in the case of purchase-money interests). An exception would be for charges over land and other assets (such as ships and aircraft) that have to be registered in a specialist register anyway. In Part VII we considered - and were provisionally in favour of - extending that proposed system to make registrable not just charges but any transaction that fulfilled the function of a security (subject to a few exceptions). However, all of this was considered only in respect of corporate debtors.

                10.2               As we have noted before, the systems proposed by the Crowther and Diamond reports, and the legislation in force in America, Canada and New Zealand, all apply the same system to security interests over personal property whether the debtor is corporate or non-corporate.

                10.3               In this Part we consider whether the notice-filing system we provisionally proposed in respect of companies should be extended[1] to cover non-corporate debtors. However, in doing this, we think it is necessary to give separate consideration to the case of non-corporate business debtors - comprising sole traders, partnerships and other unincorporated businesses or associations - on the one hand, and consumers, on the other. Our provisional views on how the notice-filing scheme should apply differ in respect of the two groups.

Non-corporate business debtors

Replacement of the Bills of Sale Acts

                10.4               As we suggested in Part IX, there are strong reasons for replacing at least the old and very technical system of registration of charges over goods and general assignments of book debts under the Bills of Sale Acts with a system that is less technical and therefore easier to use. We see no reason why the new, simple system of notice-filing of financing statements provisionally proposed for company charges should not in general be applied to charges created by non-corporate business debtors, allowing repeal of the Bills of Sale Acts (at least as far as security bills are concerned).

                10.5               It would follow that an individual or partnership would be able to create a fixed charge over its assets and the creditor would be able to protect it from invalidity in the event of the debtor’s insolvency, and to secure its priority, by filing a financing statement just as in the case of a corporate debtor.

Floating charges

                10.6               It would follow naturally from the abolition of the restrictions contained in the Bills of Sale Acts that (unless the replacement legislation were also to contain restrictions on non-corporate business debtors from charging their after-acquired property[2]) sole traders and partnerships would be able to create floating charges. We think that there is a good case for permitting non-corporate business debtors to create floating charges. As we pointed out in Part IX, this was recommended by the Cork Committee (subject to certain safeguards relating to the debtor’s personal possessions[3]).  In Part IV we explained that under the notice-filing system floating charges as they are currently known would probably disappear over time, to be replaced by what we have provisionally called the ‘floating lien’. The floating lien would operate in very much the same way as the old floating charge, save that priority would be determined by the date of filing.[4] Equally we see no reason why non-corporate business debtors should not be allowed to use this kind of security interest. We think, however, that there should be a limit to the extent of such a charge, as was suggested by the Cork Committee.

                10.7               We ask consultees whether they agree with our provisional view that non-corporate business debtors (comprising sole traders, partnerships and other unincorporated bodies) should be able to create a floating charge or ‘floating lien’. If they do agree with us, we ask them whether there are any safeguards that they would like to see in place (such as not permitting a floating charge to extend to property or assets not used or acquired for use in connection with the debtor’s business, trade or profession).

What should be registrable

Non-registrable charges

                10.8               We have pointed out that under the current law certain charges created by non-corporate debtors are not registrable anywhere. This applies to assignments of receivables that do not amount to a general assignment of book debts. We do not know whether in practice this causes difficulty to third parties, but we see it as a possible advantage of applying the notice-filing system to non-corporate business debtors that it would be easy to require the filing of a financing statement for such charges, which would then become a matter of public record.[5] We provisionally propose that the same types of charge should be registrable when created by unincorporated businesses as when created by companies.

Quasi-securities

                10.9               Equally, we have pointed out that both the functional approach to what amounts to a security interest, and the policy of avoiding the public being misled by the ‘appearance of wealth’ of a business, suggest that it would be advantageous to bring quasi-securities entered into by non-corporate business debtors within the system of notice-filing. As we discussed in relation to corporate debtors, it is also our view that priority of security interests should be determined not by their form as true security or quasi-security but according to the date of filing and whether the security interest was a purchase-money interest. We provisionally propose that quasi-security interests created by unincorporated businesses should be registrable.

             10.10               In Part V we discussed which charges should be registrable (principally under a notice-filing system), and in Part VII we discussed which forms of quasi-security should be subject to notice-filing. The comments we made in those two Parts are relevant to our discussions at this stage. We provisionally proposed that a certain limited number of charges and quasi-securities should not be registrable, and, insofar as the proposed exceptions would be relevant to charges created by non-corporate business debtors, we would repeat them here. We provisionally propose that charges and quasi-security interests that, under our earlier proposals, would not be registrable when created by companies should equally be exempt when created by an unincorporated business.

Consequences of bringing quasi-securities into the notice-filing system

             10.11               In Part VII we discussed extending the notice-filing system for security interests created by companies so that it would apply to quasi-securities, and we noted that the alteration to the rules of priority giving priority to purchase-money interests (as discussed in Part IV) would have more effect where a system included quasi-securities. We pointed out that the overseas systems subject quasi-securities (with some exceptions) to the rules generally applicable to security of the traditional kind. For example, any surplus obtained on realisation of the security is generally returnable to the debtor. This is achieved by subjecting security interests in general to a new, partial codification of the law of security.

             10.12               We pointed out that for the purposes of security interests created by companies, such a codification is probably not necessary. Although we suggested that it would be possible simply to create a relatively short provision to the effect that all ‘security interests’ that come within the definition provisionally proposed in Part VII and that are created by companies should be treated as if they were securities for a number of purposes, we did not recommend it for a system that applied simply to corporate debtors.

             10.13               Were any new system to be widened to include non-corporate debtors, it might be better to include in the new legislation a partial codification of security law as in the Saskatchewan and New Zealand models. We return to this question in Part XI and Appendix B.

             10.14               We noted in Part VIII that the restrictive nature of the Bills of Sale Acts has been overcome in the case of charges granted to banks by farmers, and that floating charges are permitted in certain cases under separate legislation.[6]

             10.15               In his report Professor Diamond stated that:

My impression is that the fundamental reason for having separate registers under the Agricultural Credits Acts is that the legislation permitted farmers to grant charges that other individuals could not grant and … to avoid the stigma of the Bills of Sale Acts.[7]

It was suggested that with the creation of the registers proposed in the Diamond report that there would be no need for separate registers against farmers, and that contact with what was then the Ministry of Agriculture, Fisheries and Food should be initiated to see if the policy of closing the separate agricultural credits register would be acceptable.

             10.16               It seems to us that, as the Diamond report suggested, a notice-filing system that covered all forms of debtor would enable the separate legislation relating to agricultural charges to be repealed. However, we have not been able to investigate this area in as much depth as we would have liked in the time available for the preparation of this Consultation Paper, and we would therefore welcome the views of consultees on this point. Certainly the provisions of the 1928 Act are not identical to those that we are proposing,[8] and there is a greater degree of overlap between personal and real property where this area is concerned (such as the priority given to growing crops over a mortgage over land); however, subject to receiving the views of interested consultees we provisionally think that it may be possible to repeal this legislation.

             10.17               We ask consultees whether they think a system of notice-filing that covers all forms of debtor should replace the current law in respect of agricultural charges.

Priorities

             10.18               We would envisage the system of priorities of a notice-filing system that we proposed in Part IV applying in the same way to non-corporate business debtors. This would include the favourable treatment given to purchase-money interests.

             10.19               As with priorities, we would envisage the rules we outlined in Part IV relating to purchasers from companies applying to purchasers from non-corporate debtors.[9] However, at this point we need to return to the question of the purchaser of a vehicle subject to a hire-purchase or conditional sale agreement, which raises an additional problem. The law relating to purchasers of such vehicles, and the operation of the HPI register, was described in Part VII.[10] The Hire-Purchase Act 1964 applies whether the vehicle was sold by a company or by a non-corporate debtor.

             10.20               When we discussed the position of purchasers of vehicles subject to hire-purchase or conditional sale agreements in respect of security interests granted by companies, we provisionally considered that such purchasers should be outside the system we proposed, given the difficulties we anticipated regarding the legal personality of the ‘rogue’ vendor of the vehicle.[11] However, there would still be a problem if the system were extended to cover security interests granted by all business debtors, but not to consumers, as the person selling the vehicle which was subject to the hire-purchase agreement or conditional sale might be an individual who was a consumer. If the system were to cover all forms of debtor, this difficulty would not apply. We therefore defer this issue again until we have considered whether consumers should be able to file financing statements. We then deal with the case of purchasers of vehicles as a separate issue.[12]

Conclusion

             10.21               We ask consultees whether they agree with our provisional view:

Consumers

             10.22               Whether security interests created by consumers should be registrable like security interests created by companies and non-corporate business debtors is a difficult question. We think it is best to consider it after we have considered the types of security interests that might be created by consumers.

             10.23               In Part VIII we pointed out that the restrictions on individuals creating bills of sale over after-acquired personal property under the 1882 Act were a consumer protection measure, and we note that many of the systems adopted or proposed overseas prevent consumers charging after-acquired personal property. We suggested that any new system for security interests over personal property should maintain this prohibition.[13] We think that a power to create security interests over after-acquired property would be open to serious abuse as between lenders, not all of whom are scrupulous, and consumers, many of whom would not understand the significance of creating such a charge.[14]

Purchase-money interests

             10.24               We have discussed above the concept of the purchase-money interest. Security interests falling into this class involve security over property acquired by the debtor with the funds provided by the secured party (as opposed to security granted over an existing item of the debtor’s property). The whole purpose of the loan is to enable the secured property to be acquired.[15] Consumer transactions involving quasi-security over the goods supplied (such as hire-purchase or conditional sale agreements) are very common. They constitute a valuable means of consumers being able to use their anticipated future income to cover present needs. We think it is important that there should be no undue hindrance to such transactions and no unwonted degree of risk to the creditor who employs this form of transaction.

             10.25               Normally a consumer will obtain the goods at the same moment that the purchase-money-interest is created. However, on occasion the goods will be acquired shortly after the money is advanced and the advance would be for that purpose. We think that where consumers seek to create purchase-money interests in such after-acquired goods, such security interests should be permissible.[16]

             10.26               We ask whether consultees agree with our provisional view that consumers should not be permitted to grant security over their after-acquired property, except where the security is a purchase-money interest created shortly after the goods were acquired.

             10.27               It seems that the Crowther report would have gone further than simply preventing security interests over after-acquired consumer property. After discussing after-acquired consumer goods, it stated - without distinguishing between present and future goods - that it should not be permissible to take a security interest in consumer goods unless the loan secured was for the purpose of acquiring the goods (in other words, a purchase-money secured loan).[17] The Diamond report was explicit on the point. It was noted that the Director-General of Fair Trading had expressed concern that consumers were already frequently over-committed in their borrowing, and it suggested that if it were possible simply to take security over even existing consumer goods, some less responsible lenders might do this as an alternative to making a careful evaluation of the consumer’s prospects.[18]

             10.28               We have stated our provisional view that consumers should not be able to create security interests in after-acquired goods save where they amount to purchase-money interests. However, we wonder whether it is necessary or right to prevent consumers from creating security interests over existing personal property, as the Diamond report recommended.

             10.29               It seems right that creditors should not be able, by means of a simple clause in, say, a loan agreement, to take a security interests over all a consumer’s existing assets. That might easily lead to consumers surrendering ‘all they then own’ to the creditor without realising the implications of their action (assuming the small print is even read), and might lead to abuse by less scrupulous creditors. On the other hand, to exclude the possibility of any security interest being created over existing personal property may be unduly restrictive.

             10.30               It is probably the case that only a relatively small percentage of consumers have personal property of any great value (other than vehicles and boats, which we would treat separately in any event), but we suspect that the number who do is increasing. So many household items that once were merely ‘old’ are now treated as ‘antiques’, and have a considerable value (toys, books, and even kitchen tools, let alone the pictures, silver, china and jewellery long prized by wealthier families), which must mean that many people of quite modest means in fact have quite valuable personal property. However, those with such property may well wish to keep it for themselves or their children to enjoy if they can do so but may need cash for immediate expenses. Particularly if the expenses are unlikely to recur (for example, university fees or the cost of a wedding) it may well make sense to borrow against the property now and to repay the money later rather than to sell the property outright. They are currently able to pawn the property; it is legally possible even for the consumer to enter a sale and lease-back transaction; should it become possible for them to create a non-possessory charge over the property, so that they can continue to enjoy it, if a lender was willing to take such a charge?

             10.31               To permit consumers to pawn items of personal property may be seen as less ‘risky’ than to permit non-possessory charges over it. The need to hand the property over to the pawnbroker is likely to bring home to the consumer the significance of what she is doing and the risk that, if she defaults in payment, the property may be lost. We think this ‘cautionary’ function is important but we also think that it would be possible to build sufficient safeguards into any notice-filing system for non-possessory consumer security interests over existing property. In particular, we consider that it would be possible for consumers to be permitted to create security interests over their existing personal property if the items concerned are individually listed in the security agreement (and, in this context, a description along the lines of ‘all existing property’ should not be sufficient).[19] It might be desirable also to require the secured party to use documents containing prescribed warning notices, rather as is done at present for some consumer credit agreements.[20] We certainly think that there should be some form of safeguard, for we expect that a credit lender operating against a simpler system than the Bills of Sale Acts will seek to take security from a consumer wherever possible.

             10.32               We ask consultees whether consumers should be able to create security interests over their existing personal property. If consultees do consider that consumers should be able to create such security interests, what safeguards (if any) would they wish to see?

Consumer security interests and notice-filing

             10.33               Whilst we think that consumers should be able to create purchase-money interests over personal property, and perhaps should be permitted to create security interests over individually-specified items of existing personal property,[21] it does not necessarily follow that such interests would have to be registrable under a notice-filing system. The Crowther report recommended that security interests over consumer goods[22] should not be registrable except for those over vehicles and the like.[23]

             10.34               The Crowther report stated that:

With the exception of motor and other vehicles, boats, light aircraft and fixtures to land[24] … purchase of most types of consumer goods involves relatively small sums of money and the repossession value of such goods is small. Mandatory filing of security interests in consumer goods would thus involve expense and inconvenience disproportionate to the sums involved. Further, many consumer goods do not lend themselves to precise identification, so it would be difficult, if not impossible, to determine whether a particular article was the self-same article as that described in the security agreement. Moreover, most consumer goods [other than vehicles and the like] are of a household nature which are unlikely to be resold, and the necessity of giving notice of a security interest to third parties will therefore rarely arise. Finally, we doubt whether it is reasonable to expect the consumer to search a register before making a purchase, even where he is buying from another consumer rather than from a retail supplier.[25]

In the Crowther Committee’s view, the interest of the secured party should nonetheless be effective against the debtor’s general creditors in a bankruptcy.[26]

             10.35               The Crowther report considered that in addition to not being mandatory,[27] filing of security interests over consumer goods should not be permissible. As purchasers could not be expected to search the register if filing were not obligatory, to permit it would risk clogging up the register to no good purpose. The Diamond report noted that the UCC does not require filing in the case of purchase-money security interests but does permit it, and that “this has some advantages for the secured creditor”.[28] However it was also thought that to permit filing might lead to a vast number of entries in the register with no useful purpose being served, and concluded that, on balance, security interests over consumer goods should not be registrable.[29]

             10.36               Despite this unanimity, we think the question needs careful consideration, particularly as recent PPSAs do not exempt consumer security interests from the need to file a financing statement.

             10.37               In our view the principal issue is actually not about whether the unfiled (and unfileable) consumer security interest should be valid in the event of the consumer’s bankruptcy. The principal reason for making an unregistered company security invalid in the event of the company’s insolvency is to protect unsecured creditors, who might otherwise be misled by seeing the company with apparently unencumbered assets. We doubt whether creditors of consumers are likely to be misled by the consumer’s appearance of having personal property that is unencumbered.[30] From that point of view we think it would not be necessary to require filing in order to protect the security interest (as the UCC puts it, a consumer security interest could be treated as perfected without filing). It is the position of innocent purchasers (including subsequent encumbrancers) of the goods subject to the security interest that seems more important.

             10.38               Under the current law an innocent purchaser of consumer goods that are subject to a hire-purchase agreement, conditional sale or finance lease will not obtain title to the goods unless she falls within the protection provided by Part III of the Hire-Purchase Act 1964. The Diamond report considered that the rules about transfer of title by a non-owner were in need of radical reform, and proposed as part of a minimum set of proposals[31] that a consumer buyer of goods from another consumer should take free of any security interest over the goods. The Diamond report does not state a view on trade buyers, but as the recommendation was made that consumer security interests should not be filed it may have been intended that a trade buyer would also take free unless it had actual knowledge of the security interest. This seems to have been the view of the Crowther Committee, which recommended that the secured party’s interest would be subordinated to the rights of a bona fide buyer for value, as a buyer would take free of the security interest unless she knew of it. For this purpose, the Crowther report stated that “buyer” includes “subsequent encumbrancer”.[32]

             10.39               Since the Diamond report was published a number of factors may have changed significantly. These may make a change to the law even more desirable but mean that it need not necessarily take the form that the Diamond report envisaged.

             10.40               The first change is at this stage a matter of our impression rather than of evidence that we have received as yet. Still leaving on one side vehicles and boats, it is our belief that consumers are obtaining increasing numbers of high value items on hire-purchase or conditional sale. In particular, we have in mind electronic equipment and sports equipment of various kinds.

             10.41               Associated with this is a second change that is again only a matter of impression: namely, that there is a developing second-hand market in such equipment. It seems that consumers frequently ‘upgrade’ their equipment well before it has reached the end of its working life. That may occur also before any hire-purchase or conditional sale agreement has been paid off. This creates risks for buyers who, under the present law, would obtain no title to the goods even if they acted in complete good faith.[33]

             10.42               Thirdly, the very rapid development of computer technology means that registers can be much larger than before without becoming cumbersomely ‘cluttered’. Whereas in 1970 (the time of the Crowther report) it was clearly right to worry about registers being filled with data, this may no longer be a major concern. There may have been particular concern that the register might become cluttered with out-of-date financing statements. However, as consumer transactions of the kind in question are usually for a set initial period, it might be possible to provide that financing statements of consumer security interests must state the period and will be automatically removed from the register within a stated time after the expiry of that period unless renewed by the secured party (for instance, if the consumer is in arrears so that the security interest is still effective).

             10.43               Fourthly, the Crowther report considered that filing would be of little value if it were optional, because purchasers could not be treated as having constructive notice of filed interests. Whilst the point on constructive notice may be true, in our view it does not necessarily follow from it that filing would be of little value. Even if buyers of consumer goods subject to a security interest will obtain a good title, knowledgeable buyers would prefer not to take any chances, particularly if they in turn may wish to resell.[34] If the relevant information is easy to look up, potential buyers may well check it. We suspect that even consumer buyers are becoming more sophisticated and thus more likely to wish to check. At the same time they are better able to do so now that registers can be searched on-line and access to the Internet is so widespread.

             10.44               Fifthly, one of the changes in the way that expensive electronic items, at least, are produced is that each manufacturer seems to use unique serial numbers for items of any size or value.[35] This makes it far easier to identify consumer goods and it can make any register more useful. When goods are readily exchanged second-hand, the question is not just whether the immediate seller has created a security interest over the goods but whether that has been done by a previous owner. Previous owners’ names may not be known to the potential buyer, so a search by name of debtor may not produce the relevant information. If the unique serial number is entered on the register, a quick and simple search will quickly reveal if there is a registered security interest. We suggested in Part IV that such a detail be one of the required particulars for a financing statement. We suspect that most buyers would prefer to check (particularly if this can be done cheaply and easily)., They may discover that what looks like a good deal is not necessarily a safe deal.

             10.45               Lastly, we suggested earlier that perhaps consumers should be enabled to create security over individual items of their existing property.[36] Whereas hire-purchase agreements and the like are usually confined to fairly new items, we envisage security being created over valuable artefacts that may be far from new (such as antiques). That might make it all the more desirable to have such interests filed. First, filing would enable third parties to discover that the debtor does not have full rights over all that is in her possession (the original purpose of the Bills of Sale Acts). Secondly, it would give the secured party more protection against subsequent buyers or other parties taking security interests in the same item. Such items are unlikely to be identifiable by serial number, but filing should offer the hope that at least the first potential purchaser will discover the security interest.

             10.46               We think that these factors combined mean that reform is needed but that it could either take the form recommended by the Crowther and Diamond reports - leaving consumer security interests outside the filing system - or it could give parties holding security interests over consumer goods the right to file if they so wish. The filed interest would then be protected against subsequent buyers, who would be expected to search the register. This is obviously different to the approach of the earlier reports, which thought that this would be an unreasonable burden, but it may be justified by advances in technology and the sophistication of buyers.

             10.47               There is a third possibility, which is to provide that a filed security interest will be protected against a trade buyer but not against a private purchaser. That is more-or-less the pattern used by the Hire-Purchase Act 1964, Part III, for motor vehicles.

             10.48               We noted that the other statutory systems do not exempt consumer security interests from filing. Under the New Zealand and Saskatchewan legislation, for example, security interests over consumer goods are not effective against creditors unless a financing statement is filed, just as for security interests over other goods. There are, however, a number of special rules for consumer goods. In the NZPPSA:

                                            (1)          consumers may not create security interests over their after-acquired property except where the security interest is a purchase-money interest or the goods are replacements for goods under an earlier, valid security interest;[37]

                                            (2)          a security agreement that specifies merely that the security interest is over ‘consumer goods’ will not be effective as against third parties;[38]

                                            (3)          a buyer or lessor of consumer goods takes free of even a registered security interest if the goods are worth less than $2000 and the buyer or lessee (a) gave value and (b) bought or leased the goods without knowledge of the security interest; [39] and

                                            (4)          if the obligations under a security interest relating to consumer goods are performed, the registration must be discharged by the secured party within 15 days.[40]

             10.49               The net effect of these rules appears to be that security interests over consumer goods can be created and notice must be filed to protect them in the event of bankruptcy; but

             10.50               We ask consultees whether they think it better that:

Motor vehicles

             10.51               The reason for our preference for permitting filing and treating a filed interest as good against trade purchasers but not private purchasers is that, as against purchasers, this in effect replicates the system already used as far as motor vehicles are concerned.[41] In other words, security interests in vehicles, whoever the debtor, could also be fileable on the register of security interests; and, following our earlier proposal, the security interest would be fileable (and searchable) against the vehicle by its unique serial number as well as against the debtor. The filed interest would then be binding on a trade purchaser but a private buyer would take free of the interest unless she knew of it.

             10.52               This system has, so far as we are aware, worked reasonably well. The Crowther report did note that private purchasers who bought without knowing of the hire-purchase or conditional sale agreement over the vehicle, and who thus in law take free of it, may nonetheless find that their ‘statutory title’ is not fully marketable.[42] However, there would be nothing to prevent a private purchaser from searching the register and, we suggested earlier that, even if private buyers are not to be affected by filed interests of which they do not know, we think that more sophisticated buyers will do a search in order to avoid trouble.

             10.53               In Part IV we asked whether all consumers who buy goods that are not the seller’s stock-in-trade should take free of the security interest unless they know of it. If that rule were adopted, then private purchasers of motor vehicles would be treated no differently to private purchasers of other goods. If, however, it is thought that private purchasers of other capital goods should be expected to check the register, and should be bound by registered security interests, private purchasers of vehicles would be treated more favourably. We think this could be justified on the basis that vehicles are traded so regularly by both companies and consumers that special rules are needed. The special rules could if necessary be expanded to cater for other goods that are regularly purchased and sold by consumers and that have unique serial numbers, such as caravans and small boats.[43]

             10.54               We provisionally propose that:

                                           (5)          a filed interest should not be binding on a person who buys the vehicle for private use unless she knows of the security interest.[44]

Small transactions

             10.55               It will be apparent that one feature of the New Zealand legislation is that goods worth less than $2000 are treated differently from those over that value. The Crowther report suggested that filing should not be available for any security interest unless the sum secured exceeds or may exceed £300, or no secured sum is stated.[45] The reason given was again to avoid burdening the register with small items. In contrast, the Diamond report rejected a complete exemption for small transactions, on the ground that there was no justification for exempting security interests created by businesses, and thus rendering them enforceable even if the business becomes insolvent, just because the amounts were small. Further, there might be several transactions between the same parties, each one small but of a significant amount in aggregate.[46] In the context of a notice-filing system that would apply only to companies we provisionally proposed that there should be no exclusions for small transactions, because we are of the view that a company’s secured debt is unlikely to be of the amount that would qualify as small.[47] However, even for individuals and unincorporated businesses, we agree that it is not necessary or desirable to exempt all small transactions. As the Diamond report pointed out, the creditor may choose not to file but in such a case the consequences in the event of the debtor’s bankruptcy are the result of the creditor’s own decision.[48]

             10.56               We have suggested that there is a case (contrary to the recommendations of the Crowther and Diamond reports) for permitting filing of consumer security interests; and we have asked whether filing should normally be compulsory. It does not necessarily follow that all consumer security interests should be fileable no matter how small. We do not expect the cost of filing a financing statement to be high but it is a burden that business does not carry at the moment (there are voluntary filing schemes relating to the HPI register but applicable only to vehicles, caravans and boats) in order to preserve its rights. We think that it may be the case that even notice-filing would be disproportionately burdensome for transactions of less than, say, £1000.

             10.57               If this is correct, we see two possibilities. One is to prevent filing of small consumer transactions. This would mean that the secured party’s interest would be effective against the debtor’s general creditors in bankruptcy but would be subordinated to the rights of a bona fide buyer for value, as a buyer would take free of the security interest unless she knew of it. The other is to follow the approach of the NZPPSA: in the event of the consumer’s insolvency the security interest will not be valid unless filed, but purchasers of goods worth less than the limit will take free of the security interest unless they knew of it.

             10.58               We invite consultees’ views on whether the filing of small consumer transactions should be prevented. Alternatively, if consumer security interests should be filed, should the system provide that in the event of the consumer’s insolvency purchasers of goods worth less than a certain limit will take free of the security interest unless they knew of it?

The security register

             10.59               When we discussed notice-filing in the context of corporate debtors, we suggested that Companies House could still administer such a system using the Company Charges Register. The relevant registers in the ‘unified’ systems in Saskatchewan and New Zealand are, for obvious reasons, referred to as the Personal Property Register (or a similar title), but essentially they operate in the same way as we envisage that the Company Charges Register would operate under a notice-filing system: a financing statement is filed against the name of the debtor for existing or future security interests. If the system were to be expanded to cover all forms of debtor, the implication would be that the Company Charges Register would be replaced by a register of security interests in property other than land (such a register might also refer to security interests over land, though neither the validity nor the priority of such interests would be governed by registration.[49]) Presumably there would still have to be a separate Companies Register for purposes other than the recording of security interests.

conclusion

             10.60               We noted in Part I that we had split the treatment of this Consultation Paper into two, dealing first with companies, and secondly with non-corporate debtors. We noted that we did this because it seemed likely that the DTI would implement reform by way of secondary legislation under any forthcoming Companies Bill. However, our provisional view is that a unified system of security interests relating to debtors of all forms of legal personality would be more logical than to leave the law relating to security granted by non-corporate debtors unreformed.

             10.61               Our provisional conclusion is therefore that the notice-filing system we provisionally proposed for security interests granted by companies should be extended to cover security interests granted by non-corporate debtors, although there should be appropriate protection for consumers.

             10.62               We also think that it would be sensible to combine such an extended system with a codification of the rules of security, to incorporate security interests, although this is a point we go on to develop in the next Part.