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Cite as: [2002] EWLC 164(2)

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Part II

security and the registration of company charges

Introduction

2.1 In this Part we first describe the various types of security that can exist over property other than land, whether the security is created on a consensual basis or arises by operation of law.[1] We limit our discussion to interests over property other than land because, as we make clear in Part IV, our provisional reform proposals would mean that registration or non-registration would not affect either the validity or the priority of company charges over land.[2]

2.2 We then examine the registration of company charges under the Companies Act 1985 [3] and the role registration plays in the priority of competing charges and other claims over the same asset.

Security

2.3 This topic is complex, leading one commentator to state that:

The nature of security rights in property is an issue that has engendered countless debates and declarations over the years and contributed to the creation of countless paper mountains.[4]

This Part does not attempt to do more than provide an outline of the law and explain the points that are directly relevant to the choice between the current scheme of registration and a system of notice-filing.[5] It is merely descriptive, so readers who are familiar with the types of security available and the registration procedure for company charges may wish to turn to the next Part.

The purpose of security

2.4 It has been noted that a financier who insists on security is not content with the normal remedy for breach of the debtor’s obligation to pay.[6] As the Diamond report stated, the purpose of security is to improve the creditor’s chances of obtaining performance of the contract with the debtor.[7] Simply the threat to the debtor of the creditor enforcing its security may be sufficient to secure performance. However, if the debtor becomes insolvent without having paid, the creditor who has taken security should be able to ensure that the debtor’s monetary obligations are met, since the creditor will have a more favourable claim to the assets charged than most unsecured creditors[8] and may be able to prevent other creditors seizing the assets by way of execution following judgment. Other advantages are the ability to exercise self-help remedies rather than having to rely on judicial intervention; the right of the security holder to follow the asset or its products or proceeds, and, in the case of companies, the measure of control given to the chargee over the chargor company.[9]

Creation, attachment and perfection

2.5 In this and the following Parts we will refer regularly to the ‘creation’, ‘attachment’ and ‘perfection’ of securities. These concepts are not new to the law of security of England and Wales, although the terminology is not in as widespread use as it is in the overseas legislative systems that deal with security and notice-filing. The creation of a security refers simply to the agreement for a security itself. By itself, an agreement to grant security may not be sufficient to ensure that the security holder can rely on it as being fully effective: the security must also attach and be perfected. Attachment and perfection may not occur until later. Attachment occurs when a security fastens on an asset so as to be enforceable against the debtor.[10] So, for example, a charge created over a debtor’s ‘present and after-acquired property’ may attach to the property then owned by the debtor immediately, but will not attach to any other property unless and until it comes into the debtor’s ownership. Perfection occurs when third parties are also bound; for example, when the additional steps are taken to give public notice of the security or when the creditor takes possession of the asset.[11] This Consultation Paper is by-and-large not concerned with the mechanics of particular security devices or when they are created, although we do discuss some aspects of attachment.[12] Perfection interacts closely with the question of registration (whether under a scheme of registration of the type currently used or a system of notice-filing) with which we are concerned, and will be referred to more frequently. The overseas notice-filing systems generally set out provisions dealing with the creation, attachment and perfection of security interests: this is something that could be considered as part of the general codification that we discuss below, in Part XI and Appendix B.

Traditional forms of security

Pledge

2.6 A pledge is a bailment of an asset by way of security. A pledge can be of goods, of documents of title to goods (such as a bill of lading) or of instruments that embody a monetary obligation (such as a bill of exchange). Possession by the creditor is essential for attachment and also perfects the pledge against other parties. Possession can be actual or constructive, as where the goods are under the control of a third party who attorns to the creditor.[13] Ownership of the asset remains with the debtor but the pledgee’s possession gives it a legal title to its interest (which will be good against third parties),[14] with an implied power of sale on default.[15] It is possible for the goods to be returned to the debtor for limited purposes without destroying the pledge.[16] A pledgee who takes possession of goods or the documents of title to them may release them to the debtor so that the debtor holds them as a trustee-agent for the creditor.[17]

2.7 Goode has described the pledge as:

the most powerful form of security interest known to English law.[18]

However, he also notes the limitations of the pledge as a security device. These limitations are the inconvenience to the creditor in having to hold the pledged asset, the inability of the debtor to pledge an asset that may be needed in its business to generate income, and the confinement of the pledge to physical assets[19] rather than intangibles.[20]

Lien

2.8 In simple terms, a lien is a right to keep possession of property until a claim has been met. Liens can take several forms, and can arise either by agreement or by operation of common law, equity or statute.[21] A lien differs from a pledge in that possession is given for a purpose other than security (for example, goods may have been delivered for custody or repair) and the holder of a lien, unlike a pledgee, generally has no implied power of sale on default, although such a power can arise through agreement or operation of law.[22]

2.9 Liens may be legal or equitable. The legal lien is:

a right at common law in one man to retain that which is rightfully and continuously in his possession belonging to another until the present and accrued claims of the person in possession are satisfied.[23]

2.10 In contrast, the equitable lien is not dependent upon possession. The equitable lien is exercisable as a charge upon personal and real property until such time as specific claims have been met. Although equitable liens do arise in circumstances where there is a contract, this is not a prerequisite for the creation of an equitable lien.[24]

Mortgage

2.11 A mortgage of property other than land [25] is a transfer of ownership to the creditor, with an express or implied condition that the asset will be reconveyed to the debtor when the amount secured by the asset has been paid (the right of redemption). Delivery of possession of the mortgaged asset to the creditor is not a requirement, and this is one aspect of its flexibility that has led the mortgage to be widely used: a mortgage can be taken over all types of asset.

2.12 An equitable mortgage [26] creates a charge on the property but no legal estate or interest is conveyed to the creditor. An equitable mortgage transfers equitable ownership to the creditor by way of security, with an express or implied retransfer to the debtor when the secured obligations have been discharged. An agreement to create a legal mortgage may constitute an equitable mortgage and it is this that makes it possible for a debtor to mortgage after-acquired property (that is, property that it does not yet own but may acquire at a later date). The debtor cannot transfer legal title until it acquires ownership but an equitable mortgage can attach to the property the moment the property is acquired by the debtor.

2.13 The two main characteristics of a mortgage are a personal contract for the payment of a debt and a disposition or charge of the mortgagor’s estate or interest for the purpose of securing payment of that debt.[27] A legal mortgage may be taken over land or over personal property. Where the mortgage is taken over personal property the mortgagor’s legal interest is made on a conditional assignment. It is a general rule that all property, either personal or real, which can be the subject of a legal mortgage can equally be charged in equity: an equitable mortgage is a specifically enforceable contract to create a legal mortgage.[28] The delivery of possession is not an essential feature of the mortgage but it is not incompatible with a mortgage.

Equitable charge

2.14 The main difference between a mortgage and a charge is that a mortgage involves a conveyance of property, which is subject to a right of redemption, whereas in the case of a charge there is no conveyance and the chargee is given rights over the property as security for the loan.

2.15 A charge does not involve a conveyance or assignment at law,[29] and can only exist in equity[30] or by statute.[31] A charge constitutes the right of a creditor to have a designated asset appropriated to the discharge of the indebtedness, the right being satisfied out of the proceeds of sale of the asset.[32] A charge can be either fixed or floating.[33] A fixed charge attaches as soon as the charge has been created or the debtor has acquired rights in the asset to be charged, whichever is the later. Therefore without the consent of the chargee the debtor cannot dispose of the asset free from the charge, except by satisfying the secured indebtedness.

2.16 In the case of a floating charge - which can only be created by companies [34] - the chargee’s interest is over a changing fund of assets, not in any fixed asset in particular.[35] The three characteristics of a floating charge are that the charge is over a class of present and future assets of a company; that the class of assets is one which would be changing from time to time in the ordinary course of the business; and that it must be contemplated by the parties, as evidenced in the charge, that the company may continue to use the assets in the ordinary way until some future event occurs.[36]

2.17 If and when certain events occur the charge will ‘crystallize’. This means that from that point the charge is converted from a floating charge into a fixed charge. There are three general categories into which crystallizing events can be placed.[37] The first category is where the company commences winding up or ceases trading in some other way.[38] The second category is where, in order to protect or enforce the security, the chargee can enforce the floating charge using the powers of intervention contained in the charge. This is generally enforced by obtaining the appointment of an administrative receiver or by the chargee taking possession, in which case the company is no longer able to deal with the charged assets for the purpose of its business.[39] The floating chargee also has the right to prevent an administration order being made by the court without consent being given by the chargee, through its own appointment of an administrative receiver (although, as we discuss below, it is proposed under the Enterprise Bill to remove the power of floating charge-holders to appoint administrative receivers[40]).[41] The third category is where crystallization occurs as a result of an express term contained in the contract,[42] which specifies that upon occurrence of a certain event the charge is to crystallize.

2.18 In the case of the fixed charge the debtor is not free to dispose of the asset without the creditor’s consent at the time (consent ‘in advance’ would make the charge floating). Thus fixed charges are useful for land and capital equipment but are not practical for charges over assets that will be constantly traded such as stock-in-trade. However it was held in 1978 that it is possible to create a fixed charge over a company’s book debts, although these debts will be coming into existence and being paid all the time, provided that the creditor retains control over the proceeds (for example because the debtor has to pay the proceeds into a blocked account with the creditor).[43] This principle has recently been confirmed by the Privy Council in Agnew v Commissioner of Inland Revenue.[44]

2.19 Because of concern about an administrative receiver’s lack of accountability, the DTI recently recommended the abolition of administrative receivership,[45] and the Enterprise Bill currently before Parliament proposes to prohibit the appointment of an administrative receiver by floating charge holders. Floating charges granted in respect of certain capital market and other transactions would be exempt.[46] In all other cases, the veto of the floating charge-holder to an administration petition would be removed. In addition, it was proposed that Crown preference should be abolished, with the benefit going to unsecured creditors even where there is a floating charge.[47] The Enterprise Bill contains similar provisions.[48]

Registration of company charges

2.20 A scheme for the registration of company charges dates back to 1900.[49] The registration scheme was originally developed to give public notice of certain charges and to penalise the concealment of secured credit. The current provisions are set out in sections 395-409 (Part XII, Chapter I) of the Companies Act 1985. This Act imposes various obligations both on the registrar of companies (the ‘registrar’) and on companies themselves and lays down the consequences of failure to comply with those requirements.

2.21 The registration scheme was not developed as a deliberate means of determining priorities between competing charges, and the Companies Act 1985 does not address the question of priority in express terms. However, the requirement to register certain charges, with the sanction that an unregistered charge will be invalid as against the administrator, liquidator and other creditors,[50] does have an incidental effect on the priority of a registrable charge, and this aspect will be considered later in this Part.[51] Commentators now recognise that registration fulfils several purposes:[52]

(1) it provides information on the state of the encumbrances on a company’s property to those who may be interested (for example, creditors and those considering or advising on dealing with the company, including credit reference agencies, financial analysts and potential investors);

(2) it assists companies in enabling them to give some form of assurance to potential lenders that their property is unencumbered;

(3) it provides a degree of protection to a chargee, in relation to the validity and priority of its registered charge; and

(4) it assists receivers and liquidators in deciding whether or not to acknowledge the validity of a mortgage or charge.

The duty to register charges

2.22 It is the duty of a company to send to the registrar for registration:

the particulars of every charge created by the company and of the issues of debentures of a series requiring registration under sections 395 to 398.[53]

Section 397 provides for formalities of registration in the case of debentures.[54] Although the duty is on the company, registration may also be effected on the application of any person interested in it (in practice it is often the secured creditor who will send the particulars).[55]

2.23 The duty to send particulars to the registrar is not limited just to charges that a company creates. A company may also acquire property that is already subject to a pre-existing charge. If the charge is one that would have required registration if it had been created by the company after the acquisition of the property, then the company has to cause to be delivered to the registrar for registration the prescribed particulars and a certified copy of the instrument (if any) creating or evidencing the charge. This must generally be done within 21 days after the date on which the acquisition is completed.[56] However, it should be noted that failure to comply with this requirement to register a charge already existing on property acquired by a company does not invalidate the charge in the way that, as we will see later, non-registration of a charge created by a company would.[57]

The register of charges and the certificate of registration

2.24 The registrar is required to keep, with respect to each company, a register of all the charges requiring registration under Part XII, Chapter I, and is required to enter certain particulars in that register. The register is open to inspection by any person.[58]

2.25 Where a charge is registered pursuant to Part XII, Chapter I, the registrar is required to give a signed or sealed certificate of the registration, which states the amount secured. The certificate is conclusive evidence that the requirements of Part XII, Chapter I as to registration have been satisfied.[59] The conclusive nature of the certificate is considered to be an important element of the registration scheme in its present form.[60]

Registrable charges and the consequences of non-registration

2.26 The list of charges to which the registration provisions of the Companies Act 1985 applies is set out in section 396. The charges which have to be registered are:[61]

(1) a charge for the purpose of securing any issue of debentures,[62]

(2) a charge on uncalled share capital of the company,

(3) a charge created or evidenced by an instrument which, if executed by an individual, would require registration as a bill of sale,[63]

(4) a charge on land (wherever situated) or any interest in it,[64] but not including a charge for any rent or other periodical sum issuing out of the land,[65]

(5) a charge on book debts of the company,[66]

(6) a floating charge on the company’s undertaking or property,

(7) a charge on calls made but not paid,

(8) a charge on a ship or aircraft, or any share in a ship,[67]

(9) a charge on goodwill, or on any intellectual property.[68]

2.27 The Companies Act 1985, s 395(1) sets out the consequences of failing to comply with the registration provisions:

Subject to the provisions of this Chapter, a charge created by a company registered in England and Wales and being a charge to which this section applies is, so far as any security on the company’s property or undertaking is conferred by the charge, void against the liquidator or administrator and any creditor of the company, unless the prescribed particulars of the charge [69] together with the instrument (if any)[70] by which the charge is created or evidenced, are delivered to or received by the registrar of companies for registration in the manner required by this Chapter within 21 days after the date of the charge’s creation.[71]

2.28 The charge is invalid only as against the liquidator, administrator [72] and creditors of the company, rather than for all purposes: section 395(2) states that section 395(1) is without prejudice to any contract or obligation for repayment of the money secured by the charge and that when a charge becomes void under section 395, the money secured by it immediately becomes payable.[73]

Late registration and rectification of the register

2.29 There is a time limit of 21 days after the date of the charge’s creation for delivery to the registrar of the particulars of a registrable charge.[74] However, a court may order that the time for registration be extended, or that there be rectification of an omission or mis-statement of any particular with respect to such a charge or in a memorandum of satisfaction.[75] The order may be made on such terms and conditions that seem to it to be just and expedient, but a normal term is that registration is without prejudice to the rights of parties acquired during the period between the date of creation and the date of its actual registration. An order can be made on the application of the company or a person interested. The court must be satisfied that the omission to register or the omission or mis-statement of the particular was accidental, or due to inadvertence or to some other sufficient cause; or that it is not of a nature to prejudice the position of creditors or shareholders in the company; or that on other grounds it is just and equitable to grant relief.[76] Failure to register in time is not uncommon, and leave to register out of time will almost invariably be given if there is no pending winding up petition or meeting to pass a resolution for voluntary winding up.[77]

The company’s own register of charges and copies of instruments creating charges

2.30 In addition to the requirements set out in Part XII, Chapter I in relation to the registration of certain charges, a company is required to keep additional records at its registered office.[78] A copy of every instrument creating a charge requiring registration under Part XII, Chapter I must be kept there,[79] as must, in the case of a limited company, a register of charges, into which the company is required to enter all charges specifically affecting property of the company and all floating charges on the company’s undertaking or property.[80] The entry should give a short description of the property charged, the amount of the charge, and (except in the case of securities to bearer) the names of the persons entitled to it.[81]

2.31 The copies of instruments kept and the company’s register of charges are required to be open to the inspection of any creditor or member of the company without a fee. Any person can inspect the company’s register of charges (but not copies of the instruments) on payment of a nominal fee.[82] It should be noted that, unlike failure to register in accordance with section 395(1), failure to comply with the requirements of section 407 does not render the charge void against anyone.

Memoranda of satisfaction

2.32 Following the receipt of certain information, the registrar may enter on the register a memorandum of satisfaction in whole or in part, or of the fact that part of the property or undertaking has been released from the charge or has ceased to form part of the company’s property or undertaking (as the case may be). The entry in the register can be made where the registrar has received a statutory declaration in the prescribed form [83] to the above effect, as appropriate.[84]

Registration of enforcement of security

2.33 A person obtaining an order for the appointment of a receiver or manager of a company’s property, or appointing such a receiver or manager under powers contained in an instrument, has to give notice in the prescribed form to the registrar of that fact within seven days of the order or appointment, and the registrar is required to enter the fact in the register of charges. Notice must be given, and an entry recorded, where the receiver or manager ceases to act.[85]

Charges on property in England and Wales created by an ‘oversea’ company

2.34 Section 409(1) extends the provisions of Part XII, Chapter I to charges on property in England and Wales which are created by a company incorporated outside Great Britain (an ‘oversea’ company) which has an established place of business in England and Wales.[86] The provisions also apply to charges on property in England and Wales that is acquired by such a company.[87] In practice, the interpretation of this provision has given rise to some difficulties that will be considered later in this Consultation Paper.[88]

Charges created by an English company over property situated outside the United Kingdom or in Scotland

2.35 The requirements for a company registered in England and Wales apply to charges it creates either inside or outside the United Kingdom, wherever the property is situated. Thus a registrable charge created by such a company will be subject to registration in the Companies Register whether the charged asset is located in England, Scotland or overseas (although where the property is outside the United Kingdom this may give rise to dual - or multiple - registration requirements, depending on the local registration schemes operating in the jurisdiction where the charged property is located). For the purposes of English law, Scots companies are not regarded as ‘oversea’ companies under the Companies Act 1985,[89] and thus are not subject to the requirements of Part XXIII outlined above. There are separate provisions in the Companies Act 1985 for registration of charges created by companies registered in Scotland and the list of registrable charges is different.[90] For example, non-possessory charges over goods are not listed as registrable even if the goods charged by the Scots company are in England or Wales.[91]

Priority and the registration scheme

2.36 It is possible - indeed likely - that a company may be indebted to a number of different people or organisations. Some of these people or organisations may have been given some form of secured interest over an asset or group of assets of the company; others may have an absolute interest in an asset that is in the company’s possession; yet others may have no security at all in respect of the money or obligation they are owed. In the event of insolvency a company is unlikely to be able to satisfy all its creditors from its available assets. The question of the validity and priority of competing interests in the same asset or group of assets is therefore an important one.

2.37 Registration of a registrable charge under section 395 of the Companies Act 1985 is required to perfect the charge [92] in that, as we saw earlier, a charge that is not duly registered will be invalid against certain other parties. However, registration does not of itself guarantee priority over other interests. This is determined by the application of common law rules. The principal rule is that priority of competing charges is determined by the order of their creation. The combination of this and the 21-day period allowed for registration has given rise to what has been called the ‘21-day invisibility’ problem. A person who searches the Companies Register, finds no record of an earlier charge and takes and registers her own charge immediately, may nevertheless be postponed to an earlier chargee who registers after the taking, or even the registration, of the second charge but within the 21 days allowed. But while registration is not itself a priority point, failure to register has priority effects in that an unregistered charge will be subordinate to a second charge taken after expiry of the time allowed for registration of the earlier charge and will be void against the liquidator, administrator and creditors in a winding up or administration. Where registration has taken place, it will amount to constructive notice of a charge affecting the asset.[93]

An outline of priority of company charges

2.38 While there is neither the space nor the need in this Consultation Paper for a full account of the rules governing the priority as between registrable company charges, a brief explanation may help the non-specialist reader to understand the complexity of the present system.

2.39 It will be recalled that registrable charges may be either fixed or floating. ‘Fixed charge’ for this purpose includes both legal and equitable charges and mortgages; floating charges are necessarily equitable.

Floating charges

2.40 It is the nature of a floating charge that, until crystallisation, it leaves the company free to dispose of assets in the ordinary course of business. This means not only that a buyer of property subject to a properly registered floating charge will take free of it even if the buyer knows of the charge, but that (unless otherwise provided) the company may create fixed charges that will rank ahead of the floating charge.[94] This is treated as being part of the ordinary course of business.[95]

2.41 Further, a receiver appointed under the floating charge or, in insolvency, the liquidator, is under a statutory duty to pay preferential creditors before meeting the claims of the floating charge holder: these are basically debts owed to relevant public authorities, claims for salary and wages and certain benefits.[96] Thus in insolvency the order of priority generally will be (1) holders of fixed charges; (2) preferential creditors[97] and (3) the holder of the floating charge. Further an uncrystallised floating charge has no priority against execution creditors, landlord’s distress, set-offs and possessory liens.

2.42 Floating charge holders employ strengthening clauses to try to improve their position. We will describe two. The first is the negative pledge clause, forbidding the company to create any charge that will rank ahead of or equally (‘pari passu’) with the floating charge. The clause works simply by limiting the company’s authority. A creditor who with knowledge of this provision takes a fixed charge will take subject to it - in other words, will not gain priority over the floating charge.[98] However, a negative pledge clause is itself not registrable, and even if particulars of it are included in the registration, subsequent creditors will not have constructive notice of it, as the doctrine of constructive notice applies only to those items which must be registered.[99] Thus the clause does not provide reliable protection to the floating charge-holder.[100]

2.43 The second is the automatic crystallisation clause. Until the Insolvency Act 1986 came into force, what mattered vis-à-vis the preferential creditors was whether the charge had crystallised at the moment the receiver was appointed or the company went into liquidation. Clauses were inserted which either gave the right to the floating charge-holder to crystallise the charge by notice (by withdrawing the company’s authority to dispose of its assets in the ordinary course of business) or provided that this should happen automatically in certain events, for example, if the company’s debts exceeded a certain level. As between the charge-holder and the company such clauses were held to be effective, and (if the crystallising event occurred before the appointment of the receiver) to achieve the result that the charge-holder’s claims were no longer postponed to those of the preferential creditors, as the receiver was not appointed under a floating charge.[101]

2.44 This result was reversed by the Insolvency Act 1986, which now requires that the preferential creditors be paid before the holder of any charge that was a floating charge “as created”.[102] This might seem to make automatic crystallisation clauses redundant, but we understand that they are still sometimes employed. Presumably the aim is now different: to preserve the priority of a floating charge as against subsequent fixed charges. If the floating charge is made to crystallise on any attempt by the company to create a charge that would rank above or pari passu with the floating charge, that might seem to withdraw the company’s authority to create subsequent fixed charges. However, it is extremely unlikely that such a device will be effective unless the subsequent chargee has actual knowledge of the automatic crystallisation clause. If she does not, the company will still have apparent authority to dispose of its assets in the ordinary course of business.[103] Nor will the subsequent chargee be fixed with constructive notice of the clause, even if particulars of it are on the Companies Register. [104]

Fixed charges

2.45 The priority as between different fixed charges over personal property depends on the nature of the charge and the doctrine of notice. In general a fixed charge has priority over a subsequent fixed charge so long as the first charge was registered (a) within 21 days of its creation or (b) within any extended period allowed by the court and before the grant of the subsequent fixed charge. Even if the second chargee did not know of the first charge she is treated as having constructive notice of it by virtue of the registration. Conversely, if the first charge is not registered at the time of the second charge, and was created more than 21 days earlier, it will be void as against the second chargee even if the latter knows of it.[105] The second charge will therefore gain priority. Thus registration is necessary to protect the first charge against third persons (‘perfection’).

2.46 However, the 21-day period allowed for registration has the result that registration is not sufficient to ensure priority. This is shown by the ‘21-day invisibility’ problem that we have referred to above.[106]

2.47 Conversely, the first chargee who registers within the 21-day period cannot be sure that her charge will always prevail. If the first charge is only equitable and the second charge is a legal charge or mortgage, it is probable that the second charge will have priority. This is because the second chargee will not have constructive notice of the first charge, as it was not registered at the time. The rule that an earlier equitable interest may be defeated by a subsequent purchaser (or chargee) of a legal estate who takes for value and without notice of the earlier interest will apply and the second, legal charge will have priority.

Exceptions to the general rules regarding priorities

2.48 These general rules do not apply to charges over all types of property. Where the assets charged are debts, provided again that the charge is registered in the Companies Register within 21 days of its creation, priority depends on the date of notice to the debtor.[107] Nor do the general rules apply to charges over certain assets that can be registered in specialist asset registers.

Charges that are registered in specialist registers

2.49 The Companies Register is not the only register of interests. There are a number of specialist asset-based registers, wherein details of ownership of, or charges over, particular assets have to be recorded.[108] Some of the specialist registers are registers of title, rather than just of charges or other encumbrances, and failure to register therein can affect the validity of the title or charge itself (unlike failure to register in the Companies Register).

2.50 Under the current company charges registration scheme, a charge taken over many of the assets that would feature in a specialist register would also be registrable in the company charges register.[109]However, the specialist registers have their own rules on priority, although invalidity caused by failing to register in the Companies Register will affect a charge that would otherwise be validly registered in the other registers.

2.51 Where a charge over land is created by a company, it must be registered under the Companies Act 1985.[110] Where the property is registered land, a charge by way of legal mortgage must be registered at the Land Registry in accordance with the Land Registration Act 1925.[111] Until it is registered, such a charge operates as a minor interest and can be protected by way of notice or caution being entered on the register.[112] Fixed charges that do not constitute a charge by way of legal mortgage, and floating charges, can only be minor interests and therefore need to be protected by entry of a notice or caution on that register. Where a charge created by a company is over registered land, an application to register at the Land Registry must be accompanied by the conclusive certificate issued by the Companies Registry.[113] However, where no conclusive certificate accompanies such an application, the Land Registrar will still register the charge, but will make a note on the register that it is subject to the Companies Act 1985, section 395.[114]

2.52 Where the charge relates to unregistered land, it needs to be registered as a land charge under the Land Charges Act 1972 in the Land Charges Register if it is to be effective against a purchaser or subsequent chargee.[115] However, if the charge is, as created, a floating charge it need not be registered in the Land Charges Register if it is registered in the Companies Register (it will be treated as having been registered in the Land Charges Register).[116]

2.53 Where the asset is a ship, a charge can be created but a legal mortgage can only be acquired through registration. Otherwise it exists as an equitable interest and is not registrable. We understand that floating charges will not be registered in the Shipping Register. A charge can be created over an aircraft,[117] and the mortgage or charge may be registered on the Register of Aircraft Mortgages.[118] However, a mortgage created as a floating charge cannot be registered in that register.[119] All charges, including floating charges, over patents, trademarks or registered designs are registrable transactions at the Patent Office.[120]

2.54 Under each system priority will depend on its own rules. For land, priority between registered charges is determined by date of registration rather than date of creation.[121] For mortgages of ships and aircraft, priority is by date of registration irrespective of the date of creation of the security agreement.[122] A registered mortgage will take priority over any other mortgage or charge that is not registered or is subsequently registered.[123] It is irrelevant whether the mortgagee has had constructive notice of an earlier charge through registration of it at the Companies Registry because the doctrine of constructive notice is excluded by the legislation.[124]

2.55 With the patent and trademark registers, actual knowledge of an earlier registered charge in the Companies Register will prevent a subsequent chargee from taking priority, even if the earlier charge is the second to be registered (or is not registered at all) in the patent and trademark registers. The question of constructive notice is less than clear and seems to vary as between the registers.[125]

Security for further advances

2.56 Where two charges exist over an asset, the chargee with priority cannot necessarily make further secured advances that will add to the amount covered by security [126] (for example, by extending further credit on an overdraft which is secured by the charge) once she knows of the second charge. At common law, once the first chargee had been given notice of the second charge, any further advances by the first chargee would rank behind the second charge.[127] This rigid rule was unfortunate because it applied even if the first chargee had a contractual obligation to make further advances to the debtor. It was altered by the Law of Property Act 1925, section 94(1), which provides that if the first chargee is under a contractual obligation to make further advances, these may be added to the secured sum despite knowledge of the second charge.

2.57 Section 94(1) provides two other exceptions to the ‘no tacking’ rule. One is where there is agreement with the subsequent mortgagee. The other confirms the common law rule that tacking is permitted where the prior mortgagee had no notice of the subsequent mortgage.[128]

Charges and purchasers of company property

2.58 Although a charge that is not properly registered under the Companies Act 1985 will be invalid as against the administrator, liquidator or creditors, other parties are not affected. Thus it will be valid against a purchaser.[129] Whether the purchaser takes free of the charge will depend on the nature of the charge and the general rules of priority.

2.59 It is in the nature of a floating charge that the company retains, until crystallisation, the power to dispose of its assets in the ordinary course of business free of the charge, and thus a purchaser will take free of the charge unless she has actual knowledge [130] that it has crystallised or that the disposition is not permitted because of some explicit restriction in the charge.

2.60 If the charge is a fixed charge the purchaser will take subject to it unless the doctrine of bona fide purchaser of a legal estate without notice applies. This may happen because it is possible that a purchaser (as opposed to a subsequent chargee) of the company’s assets will not be put on notice of the charge merely because it has been registered. This is because a buyer of goods in the ordinary course of business cannot be expected to search against her seller in the Companies Register.[131]

2.61 It may be that in this context a distinction should be drawn between the purchaser of an item of the company’s normal stock (which is in any event unlikely to be the subject of a fixed charge) and the purchaser of a capital asset which is sold by the business. It might seem reasonable to expect the purchaser to check for charges against capital assets.[132] However, it seems to be assumed that, in the context of floating charges, sales of capital assets are in the ordinary course of business as much as sales of inventory; and in the context of the Sale of Goods Act 1979, section 14, the sale of a capital asset has been held to be in the course of business.[133] Thus it is not clear that this distinction between purchasers of capital assets and purchasers of inventory can be maintained.

Particular issues on what is registrable

2.62 There are a number of areas of doubt surrounding the list of registrable charges in the Companies Act 1985, section 396.

Shares and ‘registered securities’[134]

2.63 Charges over shares [135] are not included within the list of registrable charges in section 396, but in practice a charge over shares will be often be registered as a charge over book debts because of the continuing debate as to whether the right to receive dividends is a book debt. As later we will be considering the question whether charges over shares should be registered in any event, we note here some particular points about them. If the security is a floating charge then this is registrable under the Companies Act 1985 anyway.

2.64 Legal title in shares is transferred by registration in the issuer’s register of shareholders of the name of the transferee.[136] A legal mortgage takes effect when the shares are registered in the name of the creditor and a new share certificate is issued.

2.65 Parties may attempt to create a charge over certificated shares by depositing the share certificate and a blank stock transfer with the creditor. The security will be enforced by filling in the name of the transferee or selling on. This method may in fact be less than completely secure since it was established in Longman v Bath Electric Tramways Ltd[137] that the actual share certificate is neither a negotiable instrument[138] nor a document of title and the title evidenced by the share certificate will be liable to be defeated by a person with a superior title. Registered shares also constitute an exception to the general rule for priority of competing mortgagees of choses in action, that is priority is determined by whoever gave notice first to the ‘debtor’. In the case of shares the House of Lords decided that priority is determined by the usual rule of first in time.[139]

2.66 In modern practice the shares of many larger public companies may be traded without share certificates being re-issued to each new shareowner. The process used is sometimes referred to as ‘immobilisation’. The company issues its shares to a depositary.[140] All the paper shares are held by the depositary and the depositary is registered as the owner on the issuer’s register of shareholders. The depositary will then hold the shares on behalf of the Operator of a settlement system (who in turn holds it for the members of the settlement system) or directly for the members of the settlement system. The members who beneficially own the shares will be recorded in an account at the settlement system. This will also be the case if the member acts as an intermediary and sells on its interest in the shares. The ultimate investor will be registered in the books of the intermediary immediately above it in the chain. The depositary will only ever be the one with the legal interest in the shares.[141]

2.67 Typically an investor will have a securities account with a custodian; upon deposit of the securities the account is credited. The securities may be fungible or non-fungible. ‘Fungible’, in this context, means that the securities are held in an omnibus account for all investors holding accounts with the intermediary, without designation of the individual customer’s entitlement. Where the account is non-fungible, separate accounts or sub-accounts are maintained in the name of each customer.

2.68 When shares are held in a depositary, the investor can create a security interest in its shares in three ways. The first is by what is called (inaccurately) a ‘pledge’. The investor has an account with the intermediary that will remain in the ‘pledgor’s’ name but the intermediary agrees only to act on the instructions of the pledgee. We say ‘inaccurately’ called a pledge because this device does not operate in the same way as a normal pledge; it seems to create only a personal right against the ‘pledgor’. If the investor were to go insolvent or bankrupt then because the pledgee does not have a proprietary interest in the shares it cannot retain them. Secondly, the investor can mortgage the shares. In this case its account with the intermediary is transferred into the name of the mortgagee. Lastly, the investor can mortgage the shares to the intermediary itself and this will be reflected in the accounts of the intermediary.

2.69 Shares can now be issued wholly electronically, with no paper certificate: this is known as ‘dematerialisation’. These are currently settled through CREST (the ‘Operator’) and regulated by the Uncertificated Securities Regulations 2001. They do not involve the use of a depositary so members of CREST are registered directly on the issuer’s register of shareholders.

2.70 Title to shares is transferred through electronic instructions sent to CREST, which then reflects the transaction in member accounts and the Operator register of members.[142] Once the Operator’s register is updated, an automatic electronic instruction is sent to the participating issuer company who is then required by the Companies Act 1985 to update its register of members. As with certificated shares, legal title passes when the issuer’s register is updated.[143]

2.71 As with intermediaries, it is not possible to register security interests on the Operator’s or issuer’s register. There are two ways to create security interests with dematerialised shares. The first is by mortgage, when the shares will be transferred from the account of the mortgagor to that of the mortgagee. The second is by a similar mechanism to the ‘pledge’ mentioned above. With uncertificated shares it is obviously not possible to create an equitable mortgage by deposit of the share certificates along with a blank stock transfer form.[144] However the market’s need for a functional equivalent is obtained by means of an escrow balance. The chargor places the secured shares in a sub-account in its name but passes control to the chargee by means of a power of attorney. Again CREST does not concern itself with this and does not register this arrangement on the Operator register. A concern for the chargee (in the event of insolvency) is that the placing of securities in the escrow balance does not transfer a proprietary interest and would therefore not be enforceable upon the insolvency of the chargor. Parties therefore ensure that a proprietary security interest is conferred contractually.[145]

2.72 Financial markets now rely ever increasingly on collateral consisting of portfolios of securities held in book entry form in international clearing systems. In recent years this has led to a proliferation of proposals, Regulations and Directives at European Level.[146] There has also been discussion at international level, generated by the Hague Conference on Private International Law which has now produced a draft Hague Convention on the law applicable to securities held with an intermediary; we understand that this is likely to come before a Diplomatic Conference later in 2002. The specific issues of perfection have been focussed on by a proposed EU Collateral Directive,[147] the latest draft of which was circulated on 6 March 2002. We return to this Draft Directive later in this Consultation Paper.[148]

Charges over credit balances

2.73 In financing transactions it is common for a bank lending money to a customer to require the customer to make a deposit with the bank itself, and the bank may then take a charge over the deposit. The question is then whether the bank is able to take an effective charge over a deposit made to itself, that is, a credit balance. The balance represents a debt owed by the bank to the customer and there has been uncertainty in English law whether a valid charge can be taken in such a case.

2.74 In Re Charge Card Services Ltd[149] Millett J, as he then was, said that it was conceptually impossible for a person to have a charge over a debt which she owes to another because the relation between a debtor and creditor is not a species of property at all, merely a personal right to be paid. There is no res between the parties, and therefore nothing to which a security interest can attach.[150] The decision generated a great deal of controversy, with radically differing views being voiced among academics and practitioners. Lord Hoffmann’s statement in the House of Lords in Re Bank of Credit and Commerce International SA (No 8)[151] that a ‘charge back’ (as they are commonly called) is like any other charge except that instead of the beneficiary of the charge having to claim payment from the debtor, the realisation would take the form of a book-entry, has not ended the debate.[152]

2.75 If such a charge is possible it is unlikely to be registrable under the Companies Act 1985, a point made by Lord Hoffmann.[153] Charges over debts are normally registrable only if the debts are book debts or the charge is a floating charge.

Contractual liens over sub-freights

2.76 We discussed earlier the operation of the lien.[154]An issue arises in respect of a lien over sub-freights. A ship-owner may hire a ship out to a charterer under a time charter. The charterer may also hire out the ship to a subcharterer. A contractual lien over sub-freight is the right of a ship-owner to intercept freight[155] payable to the charterer under the subcharter, in order to secure payment due under the charter. This clause will be included in the main time charter. This right is created by contract; it does not exist in common law or equity nor by statute.

2.77 The contractual lien gives the ship-owner the right to stop the sub-freight from going to the charterer and to receive it. The ship-owner intercepts the sub-freight by giving notice to the sub-charterer. It does not give the ship-owner a right to follow the sub-freight once the charterer has received it.[156]

2.78 It is difficult to classify the right of the ship-owner over the sub-freights.[157] Traditionally, such a ‘lien’ was not registered as a charge over book debts or as a floating charge because the inability to trace the proceeds suggested that the lien did not create any proprietary right. However in Re Welsh Irish Ferries Ltd[158] it was held that the lien on sub-freights operated to create an equitable charge on the company’s book debts - and was therefore registrable - because the charterer has a chose in action against the subcharterer and the limited right to that chose in action is acquired by the ship-owner by some form of equitable assignment. This equitable assignment of the chose in action creates an equitable charge over it. The Annangel Glory[159] held that the lien created a floating charge because the charterers could deal with the sub-freights before the lien was exercised and thus was registrable. These cases are controversial, as a lien that has no tracing remedy does not seem theoretically similar to a charge. This argument was circumvented in Re Welsh Irish Ferries Ltd by stating that if a subcharterer paid a third party who had notice of the lien then the ship-owner would have a right to follow this money, thus there was a proprietary right.[160]

2.79 It is arguable whether a contractual lien over sub-freights creates an equitable assignment:[161] any equitable assignment by way of security would give the assignee a proprietary right and we have already noted that the ship-owner has no right to trace the proceeds of the book debts. The contractual lien may be more akin to a personal right to intercept the sub-freights and therefore not registrable. In the recent Privy Council case of Agnew v Commissioner of Inland Revenue, Lord Millett expressed the opinion that a lien over sub-freights was merely a personal right and that there were conceptual difficulties with classifying it as a charge as well as adverse commercial consequences.[162]

Ý
Ü Þ

[1]Although we go on to suggest that the system of notice-filing we provisionally propose should not apply in the case of security arising by operation of law: see below, para 4.18.

[2]See below, para 4.208. We consider whether, if there is to be a notice-filing system, charges over land should be registrable in the Companies Register for public notice purposes only: see below, paras 4.209-4.210.

[3]As we noted in Part I, substantial amendments to the scheme of registration were made under the Companies Act 1989, ss 92-104 but the relevant provisions have never been brought into force. These changes are not considered in great detail in this Part: reference to them can be found in many of the published works on company law, eg, Palmer’s Company Law (25th ed) paras 13.337-13.337.2, and Butterworths Company Law Handbook (15th ed 2001).

[4]G McCormack, Registration of Company Charges (1994) p 1.

[5]For further reading in this area, see, eg, W J Gough, Company Charges (2nd ed 1996) pp 3-9 and 16-32. Other specific works on the registration of company charges include G McCormack, Registration of Company Charges (1994), although most of the major works on company law include registration within their scope. See Palmer’s Company Law (25th ed) para 13.401 ff for a discussion of the position in Scotland.

[6]F Oditah, Legal Aspects of Receivables Financing (1991) p 4.

[7]Diamond report para 3.3.

[8]On preferential creditors see below, para 4.131.

[9]See, eg, Gower’s Principles of Modern Company Law (6th ed 1997) p 361; G McCormack, Registration of Company Charges (1994) p 2, and M Bridge, “The Quistclose Trust in a World of Secured Transactions” (1992) 12 Ox J LS 333, 334-342.

[10]Goode describes four conditions which are necessary in order for an interest to attach: (1) there must be an agreement between debtor and creditor that the interest shall attach; (2) the asset must be identifiable as falling within the scope of the agreement; (3) the debtor must have a present interest in the asset, or power to give the asset as security; and (4) there must be some current obligation of debtor to creditor which the asset is designed to secure. However, he also notes that for the purposes of the Companies Act 1985 a charge is treated as created on the date of the execution of the charge instrument. See R Goode, Commercial Law (2nd ed 1995) p 678.

[11]See R Goode, Commercial Law (2nd ed 1995) pp 673-674.

[12]There may be some change as to when a floating charge attaches, vis-à-vis an execution creditor: see below, para 4.141. For a general discussion of the law on attachment, see R Goode, Commercial Law (2nd ed 1995) pp 678-689.

[13]The courts have held that a pledge may even be created by the debtor himself attorning to the creditor. However if the attornment is in writing it will have to registered, under the Bills of Sale Acts 1878 and 1882 if the debtor is an individual or under the Companies Act 1985 if the debtor is a company. See R Goode, Commercial Law (2nd ed 1995) pp 701 and 703. See below, paras 4.15 and 8.6 n 5.

[14]The pledgee acquires a ‘special property’ (or interest), whilst the pledgor retains the general property in the asset.

[15]It is possible for the pledgee to re-pledge the goods without the consent of the pledgor and thus transmits its interest to a third party, as long as this power has not been expressly excluded. The amount must not exceed that of the original debt.

[16]R Goode, Commercial Law (2nd ed 1995) pp 701 and 1029. On the problems created by this see further below, para 4.15.

[17]Eg, the buyer of imported goods which are pledged to a bank, by a pledge of the shipping documents, may be allowed to take the shipping documents in order to sell them and thus pay the bank. This takes the form of a trust receipt by which the buyer agrees to hold the documents, the goods, and (if sold) the proceeds, on trust for the bank, thus preserving the bank’s notional possession of the pledge. See R Goode, Commercial Law (2nd ed 1995) p 1029, and see below, para 4.16.

[18]R Goode, Commercial Law (2nd ed 1995) p 644.

[19]Goode suggests that the subject matter of a pledge may be “documents embodying title to goods, money or securities such that the right to these assets is vested in the holder of the document for the time being and can be transferred by delivery of the document with any necessary indorsement.” See R Goode, Legal Problems of Credit and Security (2nd ed 1988) p 11.

[20]R Goode, Commercial Law (2nd ed 1995) p 644. We will see that certain forms of transactions involving intangibles (such as shares) are in some ways analogous to a pledge and to some extent may be treated similarly: see below, para 5.18 ff.

[21]These liens are sometimes known as legal, equitable, non-possessory, general, particular, contractual, statutory, judicial and subrogatory. For discussion of the different categories of lien, see, eg, R Goode, Commercial Law (2nd ed 1995) pp 668-670.

[22]See, eg, the unpaid seller’s lien arising under the Sale of Goods Act 1979: see ss 39, 41-43, and 47-48. See also the comments of Millett LJ, as he then was, in Re Cosslett (Contractors) Ltd [1998] Ch 495, 508.

[23]Halsbury’s Laws vol 28 para 702.

[24]Halsbury’s Laws vol 28 para 704.

[25]A legal mortgage over land no longer involves the outright transfer of ownership. It can be created in one of three ways: by demise, sub-demise or a legal charge. See the Law of Property Act 1925, ss 85-87.

[26]There are three ways by which an equitable mortgage may be created: (1) where a mortgage has failed to comply with the formalities for a legal mortgage; (2) where an equitable interest is mortgaged; or (3) by an agreement to create a legal mortgage.

[27]Halsbury’s Laws vol 32 para 302.

[28]Halsbury’s Laws vol 32 para 305.

[29]However, see the Companies Act 1985, s 396(4), where ‘charge’ is defined as including a mortgage: see below, para 2.26 n 61.

[30]See, eg, the comments of Lord Hoffmann in Re Bank of Credit and Commerce International SA [1998] AC 214, 226.

[31]See the Law of Property Act 1925, s 87.

[32]R Goode, Commercial Law (2nd ed 1995) p 646.

[33]It is possible for a creditor to take a fixed as well as a floating charge over the same asset. However this must be to secure different liabilities, not the same liability.

[34]Although there is a statutory exception allowing farmers to create floating charges: see the Agricultural Credits Act 1928, and see below, paras 8.40 ff.

[35]R Goode, Commercial Law (2nd ed 1995) p 646.

[36]See Re Yorkshire Woolcombers Association Ltd [1903] 2 Ch 284, 295. See also the Privy Council decision in Agnew v Commissioner of Inland Revenue [2001] 2 AC 710.

[37]W J Gough, Company Charges (2nd ed 1996) p 137.

[38]This includes the company ceasing to trade or carry on business but where it has not yet commenced winding up and the company disposes of its trading assets with a view to cessation of trading. The mere presentation of a winding up petition does not cause crystallisation: it crystallises at the time when the legal steps giving rise to liquidation are completed (upon the passing of a resolution or, if no resolution, upon the making of a winding up order): see W J Gough, Company Charges (2nd ed 1996) p 143, and the cases cited therein.

[39]W J Gough, Company Charges (2nd ed 1996) p 160.

[40]Although there would be exceptions to this proposed removal of power: see below, para 2.19.

[41]For further reading in this area, see, eg, W J Gough, Company Charges (2nd ed 1996) pp 954–955. The Insolvency Act 1986, s 19(5) allows an administrator to subordinate the priority of the floating charge to new monies advanced to finance the administration.

[42]The contract may also provide for partial crystallization over part of the assets of the company. This means that the remainder of the assets may continue to be subject to a security using a floating charge. The assets that are the subject of the partial floating charge must be clearly identified in the charge agreement. See R Goode, Commercial Law (2nd ed 1995) p 740.

[43]See Siebe Gorman & Co Ltd v Barclays Bank Ltd [1979] 2 Lloyd's Rep 142. See also Lord Millett in Agnew v Commissioner of Inland Revenue [2001] 2 AC 710, 722.

[44][2001] 2 AC 710.

[45]Productivity and Enterprise – Insolvency: A Second Chance (2001) Cm 5234 paras 2.2-2.3. A receiver does not have a duty to maximise the return on the sale of assets nor a duty to minimise her incurred costs. Instead, administration would be used more widely with concessions for the principal creditors on issues such as entitlement to administration orders, time limits for notices and choosing the identity of the administrator: ibid, paras 2.8-2.11.

[46]The proposed exceptions to the prohibition relate to capital market arrangements; public-private partnership projects; utility projects; where the company is a ‘financed project’ company, and certain financial market transactions: see cl 241 of the Enterprise Bill.

[47]Productivity and Enterprise – Insolvency: A Second Chance (2001) Cm 5234 paras 2.15 and 2.18-2.19.

[48]See cls 242-243 of the Enterprise Bill.

[49]The process began with the Companies Act 1900, s 14. See G McCormack, Registration of Company Charges (1994) pp 23-25 and the Diamond report para 21.1.

[50]See below, paras 2.27-2.28.

[51]See below, para 2.37. Registration can also give constructive notice; failure to register results in invalidity.

[52]See the Diamond report para 21.2. See also Gower’s Principles of Modern Company Law
(6th ed 1997) p 376.

[53]Companies Act 1985, s 399(1). Charges that arise by operation of law - and thus which are not “created” by the company - are not included within this provision.

[54]In the case of a series of debentures containing (or giving by reference to another instrument) any created charge to the benefit of which the debenture holders are entitled pari passu, it is sufficient for the purposes of the Companies Act 1985, s 395(1) to deliver to the registrar certain specified particulars in a prescribed form together with the deed containing the charge or one of the debentures in the series (if there is no deed). The particulars are the total amount secured by the whole series; the dates of the resolutions authorising the issue of the series and the date of the covering deed (if any) by which the security is created or defined; a general description of the property charged, and the names of any trustees for the debenture holders. For the prescribed form, see the Companies (Forms) Regulations 1985, SI 1985 No 854. See generally the Companies Act 1985, s 397.

[55]Where this is done, that person is entitled under the Companies Act 1985, s 399(2) to recover from the company the amount of any fees properly paid by her to the registrar. The consequences of a charge being void for non-registration are likely to be of more importance for the chargee trying to recover her debts against an insolvent company than for the company itself. Failure to comply with the duty renders the company and every defaulting officer liable to a fine (as well as to a daily default fine for continued contravention) unless the registration has been effected by some other interested person: Companies Act 1985, s 399(3). This is in addition to the invalidity consequences under s 395: see below, para 2.27.

[56]Companies Act 1985, ss 400(1)-(2). Where a company acquires property situated outside (and the property was already subject to a charge created outside) Great Britain, the period of 21 days after the date on which the copy of the instrument could in due course of post (having been despatched with due diligence) have been received in the United Kingdom is substituted: ibid, s 400(3).

[57]Again, default in compliance renders the company and every defaulting officer liable to a fine (and a daily default fine for continued contravention): Companies Act 1985, s 400(4).

[58]Companies Act 1985, ss 401(1) and (3). For the charges that require registration, see below, para 2.26. The register is required to be in the prescribed form: see the Companies (Forms) Regulations 1985, SI 1985 No 854. The particulars that must be entered vary, depending on the nature of the charge. In the case of a charge to the benefit of which the holders of a series of debentures are entitled, the particulars are those specified in s 397(1) (see above, para 2.22 n 54). For other charges, the particulars are the date the company created the charge or acquired the property subject to a pre-existing charge (as appropriate); the amount secured by the charge; short particulars of the property charged, and the persons entitled to the charge: see s 401(1). With respect to a different obligation under the Companies Act 1985, providing the required particulars in the prescribed form did not mean that it had to be on a prescribed form: see the judgment of Harman J in Re NL Electrical Ltd [1994] 1 BCLC 22.

[59]Companies Act 1985, s 401(2). For the requirement to endorse certain debentures or certificates of debenture stock with a copy of the certificate of registration, and the penalty for non-compliance, see ibid, s 402.

[60]See, eg, W J Gough, Company Charges (2nd ed 1996) pp 717-725. The non-conclusive nature of the certificate under the proposed reforms under Part IV of the Companies Act 1989 appears to have been a significant factor in the decision not to implement those reforms: see, eg,Registration of Company Charges para 3.14.

[61]Companies Act 1985, s 396(1)(a)-(j). Charges not on the list do not have to be registered although they would have to be entered into the company’s own register of charges kept at its registered office: see below, paras 2.30-2.31. We have noted that the scheme applies to ‘charges’. ‘Charge’ is defined to include mortgage: Companies Act 1985, s 396(4). The Companies Act 1989, s 93 inserted a new Companies Act 1985, s 395, under which ‘charge’ was defined as meaning any form of security interest (fixed or floating) over property, other than an interest arising by operation of law. However, this provision has not been brought into force.

[62]A debenture is defined by the Companies Act 1985, s 744 as including “debenture stock, bonds and any other securities of a company, whether constituting a charge on the assets of the company or not”. For fuller reference to the meaning and nature of debentures, see, eg, G McCormack, Registration of Company Charges (1994) pp 34-35; Gower’s Principles of Modern Company Law (6th ed 1997) pp 321-327; R Pennington, Company Law (7th ed 1995) pp 556-561, and W J Gough, Company Charges (2nd ed 1996) pp 645-655.

[63]For the law relating to the registration of bills of sale, see below, paras 8.7-8.34 and Halsbury’s Laws, vol 4(1). In practice this provision means that charges over most goods are registrable (the exceptions can be found in the Bills of Sale Acts 1878 and 1882: see below, paras 8.12-8.13).

[64]The holding of debentures entitling the holder to a charge on land is not for the purposes of the Companies Act 1985, s 396 deemed to be an interest in land: ibid, s 396(3).

[65]Certain charges over land must also be registered at the Land Charges Department for unregistered land and the Land Registry for registered land: see below, paras 2.51-2.52.

[66]For the purposes of the Companies Act 1985, s 395, the deposit of a negotiable instrument given to secure the payment of any book debts of a company, for the purpose of securing an advance to the company, is not to be treated as a charge on those book debts: ibid, s 396(2).

[67]As with charges over land, mortgages on ships and aircraft are also registrable at specialist registries: see below, paras 2.49 ff.

[68]The Companies Act 1985, s 396(3A) provides that the following are “intellectual property” for the purposes of this section: any patent, trade mark, registered design, copyright or design right; and any licence under or in respect of any such right.

[69]The particulars are prescribed by the Companies (Forms) Regulations 1985, SI 1985 No 854. The Companies Act 1985, s 397 provides details of what particulars must be supplied in relation to debentures: see above, para 2.22 n 54. Footnote not in original.

[70]Where a charge is created outside the United Kingdom comprising property situated outside the United Kingdom a verified copy of the instrument rather than the original is sufficient: Companies Act 1985, s 398(1). Footnote not in original.

[71]Where a charge is created by a company outside (and on property outside) the United Kingdom and a verified copy is supplied, a period of 21 days after the date on which the instrument or copy could, in due course of post (and despatched with due diligence), have been received in the United Kingdom is substituted: see the Companies Act 1985, s 398(2). For additional provisions relating to the verification of charges on property, including that outside the United Kingdom, see ibid, ss 398(2)-(4).

[72]Lord Hoffmann has said that “‘void against the administrator’ means void against the company in administration or (another way of saying the same thing) against the company when acting by its administrator.” See Smith (Administrator of Cosslett (Contractors) Ltd) v Bridgend County Borough Council [2002] 1 All ER 292, 300.

[73]Cf a bill of sale given by way of security, where non-registration or non-compliance with the statutory form renders the bill void as against the holder: see below, paras 8.18-8.19 and 8.32-8.33.

[74]Companies Act 1985, s 395(1). See above, para 2.27.

[75]Companies Act 1985, s 404(2).

[76]Companies Act 1985, s 404(1).

[77]See W J Gough, Company Charges (2nd ed 1996) pp 786-787 and generally ch 31. See, eg, Re Fablehill Ltd [1991] BCLC 830, and, for a recent example of the application of this section, Barclays Bank plc v Stuart Landon Ltd [2001] 2 BCLC 316.The granting of leave subject to the proviso that the intervening rights of secured creditors are not to be prejudiced would not assist unsecured creditors, since until the company is in winding up or administration they have no legal interest in the application of its assets.

[78]In the case of a company incorporated outside Great Britain which has an established place of business in England and Wales, the Companies Act 1985, s 409(2) substitutes “its principal place of business in England and Wales” in place of “registered office”.

[79]Companies Act 1985, s 406(1). In the case of a series of uniform debentures, a copy of one debenture of the series is sufficient: see ibid, s 406(2).

[80]Companies Act 1985, s 407(1). The scope of this requirement is wider than s 395(1): thus some charges that are not registrable at Companies House under s 395(1) may be required to be registered in the company’s register of charges. For this reason, the company’s own register may - at least in theory - be more informative for a creditor or interested person than that kept by the registrar. See Palmer’s Company Law (25th ed) para 13.301.

[81]An officer of the company who knowingly and wilfully authorises or permits the omission of a required entry is liable to a fine: Companies Act 1985, ss 407(2)-(3). The requirement for a company to keep some form of register of charges has a longer provenance than the requirement to send charges for registration with the registrar, which dates back to the Companies Act 1900 (see above, para 2.20). The requirement for a company to keep its own register of charges goes back to the Companies Clauses Consolidation Act 1845, s 45 and the Companies Act 1862, s 43: see W J Gough, Company Charges (2nd ed 1996) pp 450-451.

[82]The refusal to allow inspection can render the defaulting officer of the company liable to a fine, and to a daily default fine. A court can also order immediate inspection if there has been such a refusal in relation to a company registered in England and Wales: see the Companies Act 1985, ss 408(1)-(4).

[83]For that prescribed information, see the Companies Act 1985, s 403(1A). Alternatively, if no statutory declaration is received, the entry can still be made where the registrar receives a statement containing prescribed information made by a director, secretary, administrator or administrative receiver of the company which is contained in an electronic communication: Companies Act 1985, s 403(1A). A person making a false statement in such an electronic communication which she knows to be false or does not believe to be true is liable to imprisonment, a fine, or both: ibid, s 403(2A).

[84]Companies Act 1985, s 403(1). Where the memorandum is of satisfaction in whole, the registrar must, if required, furnish the company with a copy of it: Companies Act 1985, s 403(2).

[85]Default in compliance with these provisions renders the person liable to a fine, and to a daily default fine for continued contravention: Companies Act 1985, ss 405(1)-(3).

[86]Even if the company has not registered under Part XXIII, Chapter I as an ‘oversea’ company (defined by the Companies Act 1985, s 744), it is still required to register its charges if it has an established place of business in England and Wales: see NV Slavenburg’s Bank v Intercontinental Natural Resources Ltd [1980] 1 WLR 1076. We do not consider Part XXIII registration in this Part. For the problems associated with the Slavenburg decision, see below, paras 3.37-3.40.

[87]The requirements for a company to keep copies of instruments creating charges and a register of all its charges (see above, paras 2.30-2.31) also apply to such companies: see the Companies Act 1985, s 409(2).

[88]See below, paras 3.37-3.40. For a discussion of the problems of oversea companies see, eg, G McCormack, Registration of Company Charges (1994) pp 151-157.

[89]Nor are English companies so regarded for the purposes of Scots law.

[90]See the Companies Act 1985, ss 410-424.

[91]This is presumably because Scots law does not recognise non-possessory charges over goods; but the validity of the charge will depend on the law of the place where the goods are, so that the secured party will be able to enforce the charge.

[92]Perfection is the process of putting third parties on notice of the security interest, and may be achieved in different ways: see above, para 2.5. The consequences of perfecting an interest vary: see R Goode, Commercial Law (2nd ed 1995) pp 699-705.

[93]See, eg, Wilson v Kelland [1910] 2 Ch 306, 313.

[94]See, eg, Wheatley v Silkstone and Haigh Moor Coal Co (1885) 29 ChD 715.

[95]In contrast, it has been held that creating a second floating charge over the same assets was not, on the wording of the charge, in the ordinary course of business and thus the second floating charge was postponed to the first: Re Benjamin Cope and Sons Ltd [1914] 1 Ch 800. But a floating charge on a specific class of the assets within the first floating charge may be authorised: Re Automatic Bottle Makers Ltd [1926] Ch 412.

[96]Insolvency Act 1986, ss 40 and 175.

[97]For the categories of preferential debts, see the Insolvency Act 1986, ss 328(1) and 386 and Schedule 6. Clause 242 of the Enterprise Bill proposes to abolish Crown preference in part, but cl 243 will require that a certain proportion of the company’s net property (that is, property available for distribution after taking into account liabilities secured by fixed charges, preferential debts and various other matters) shall be distributed to unsecured creditors. See below, para 4.132.

[98]See R Goode, Commercial Law (2nd ed 1995) p 742.

[99]See the discussion in R Goode, Commercial Law (2nd ed 1995) pp 715-720. Cf the position in Scotland, where the negative pledge clause is registrable: consequently, subsequent creditors will have constructive notice of it.

[100]We are grateful to Dr John de Lacy for supplying us with a proof copy of his chapter on “Reflections on the ambit and reform of Part 12 of the Companies Act 1985 and the doctrine of constructive notice”, in a forthcoming book edited by him, The Reform of United Kingdom Company Law (‘de Lacy’). At pp 376-379 he argues that entry of the charge in the company’s own register might also put persons dealing with the company on constructive notice; and in particular that as creditors and members of the company have the right to inspect the charge instrument itself, this might put them on constructive notice of a negative pledge clause in the instrument. The last argument would not appear to apply to those who were not members of the company nor creditors before they took their charges.

[101]Re Brightlife [1987] Ch 200.

[102]Insolvency Act 1986, ss 40, 175 and 251. It was because of this redefinition of a floating charge so as to include a crystallised charge that Rimer J held in Re Leyland Daf Ltd [2001] 1 BCLC 419 that a liquidator could have recourse to assets covered by a crystallised floating charge to reimburse properly incurred liquidation expenses.

[103]R Goode, Commercial Law (2nd ed 1995) pp 743-744.

[104]Under the amendments which the Companies Act 1989, s 100 would have made to Part XII of the Companies Act 1985, the Secretary of State would have had power to require notice of automatic crystallisation. However, these amendments have not been brought into effect.

[105]Re Monolithic Building Co, Tacon v Monolithic Building Co [1915] Ch 643.

[106]See above, para 2.37.

[107]Dearle v Hall (1828) 3 Russ 1. However a subsequent assignee cannot gain priority over an earlier assignee by giving the first notice to the debtor if she had notice of the earlier assignment when she took her own assignment. Thus if the first one has been registered by this date it will be protected. See R Goode, Commercial Law (2nd ed 1995) p 705.

[108]These relate to registered land, unregistered land, ships (including fishing vessels), aircraft, patents, trademarks and registered designs. There is also the register of agricultural charges kept at the Land Registry, although this does not affect companies: see below, paras 8.40 ff.

[109]See, eg, the Companies Act 1985, s 396(1)(h), which makes registrable a charge on a ship or aircraft, or any share in a ship, and s 396(1)(j), which relates to a charge on any intellectual property.

[110]However it is not void against purchasers, so a charge registered in the specialist asset register but not validly registered in the Companies Register will still bind purchasers. See further below, paras 2.58-2.61.

[111]Land Registration Act 1925, s 26. Registration will also be required when the Land Registration Act 2002, s 27 is brought into force. The Land Registration Act 1925, s 60 states that it is not sufficient in the case of registered land for the charge to be registered under the Companies Act 1985 only.

[112]Land Registration Act 1925, ss 106(2) and 49(1)(f).

[113]Land Registration Rules 1925, SI 1925 No 1093 r 145(1).

[114]Land Registration Rules 1925, SI 1925 No 1093 r 145(2). It seems to be the case that there is no reliable way of creditors protecting charges over land that are acquired by the debtor after the date of the charge and which should be subject to the same fixed charge because of an after-acquired property clause. Although the charge may be registered validly at Companies House, the creditor will not necessarily know of the acquisition in order to register the charge at the Land Registry. It seems all that the creditor can do is to take a contractual stipulation from the debtor to inform the creditor of future acquisitions. As registration is by title, not by owner, there is no way of placing a caution on the register. See also Registration of Company Charges paras 3.12-3.29, and Ruoff and Roper, The Law and Practice of Registered Conveyancing para 34-08.

[115]Land Charges Act 1972, ss 2 and 4.

[116]Land Charges Act 1972, s 3(7).

[117]Mortgaging of Aircraft Order 1972, SI 1972 No 1268 art 3.

[118]Mortgaging of Aircraft Order 1972, SI 1972 No 1268 art 4.

[119]Mortgaging of Aircraft Order 1972, SI 1972 No 1268 art 2(2).

[120]Patents Act 1977, s 33(3)(b); Trade Marks Act 1994, s 25(2)(c); Registered Designs Act 1949, s 19.

[121]For registered land, this is the order of registration: Land Registration Act 1925, s 29 (which provision is continued by the Land Registration Act 2002, s 48). Section 29 states that an interest subject to a notice will take priority. The exact position for mortgages of legal interests in unregistered land seems to be in dispute as the Law of Property Act 1925, s 97 states that priority is in order of registration, and the Land Charges Act 1972, s 4(5) indicates it to be in order of creation subject to displacement of an earlier unregistered interest by a second purchaser. See R Goode, Commercial Law (2nd ed, 1995) p 711. The practical difference is in the case where the second charge is taken before the first is registered but registered after the first.

[122]See R Goode, Commercial Law (2nd ed 1995) p 723.

[123]Mortgaging of Aircraft Order 1972, SI 1972 No 1268 art 14 and Merchant Shipping Act 1995, Schedule 1 para 8.

[124]See the Mortgaging of Aircraft Order 1972, SI 1972 No 1268 art 14(4) and the Merchant Shipping Act 1995, Schedule 1, para 8(1). The priority rules mean that a registered mortgage will take priority over unregistrable charges as well as registrable charges that have not in fact been registered. The position for ships appears to be different. The Merchant Shipping Act 1995, Schedule 1 para 14 provides that “‘mortgage’ shall be construed in accordance with paragraph 7(2) above”; para 7(2) provides that “The instrument creating any such security (referred to in the following provisions of the is Schedule as a ‘mortgage’) shall be in the form prescribed by or approved under registration regulations”. Unlike with the Mortgaging of Aircraft Order 1972, floating charges are not specifically excluded (although we understand that they are not registered). However it seems unlikely that a chargee would attempt to rely on a floating charge over a ship or aircraft.

[125]Under the Patents Act 1977, s 33(1) priority is determined by the date of registration, but a later transaction will have priority over an earlier transaction if (a) it is not registered (b) notice has not been given to the comptroller, or (c) in any case the party to the later transaction was unaware of the earlier one. The Trade Marks Act 1994, s 25(3) provides that a later transaction will have priority over an earlier one if the party to the later transaction is ignorant of the earlier one. Thus neither set of legislation explicitly excludes constructive notice. They do not refer to the Companies Act 1985 as a means of constructive notice. The Registered Designs Act 1949 does not specifically refer to priority. It must be assumed that normal common law rules apply and so a party to a later transaction will be bound by an earlier one if she had notice of the earlier transaction. Such a party will have constructive notice from the Companies Act 1985 if the earlier transaction is validly registered.

[126]A process often described as the ‘tacking’ of further advances.

[127]Hopkinson v Rolt (1861) 9 HL Cas 514.

[128]If the first mortgage is expressed to secure further advances, the mortgagee is not deemed to have notice of the second mortgage merely by virtue of its registration in the Land Registry or, it is thought (though there is no express statutory provision), registration in the Companies Registry. Where there is a registered charge over land for securing further advances, the Land Registration Act 1925, s 30 provides that the registrar is required, before making any entry which would prejudicially affect the priority of any further advance, to give notice of the intended entry to the proprietor of the charge, and that proprietor will not, in respect of any further advance, be affected by such an entry, unless the advance is made after the date when the notice ought to have been received in due course of post. Where the proprietor of a charge is under an obligation that has been noted on the register to make a further advance, a subsequent registered charge takes effect subject to any further advance made pursuant to the obligation.

[129]Re Overseas Aviation Engineering (GB) Ltd [1963] Ch 24, 38; Stroud Architectural Systems Ltd v John Laing Construction Ltd [1994] BCC 18, 24; W J Gough, Company Charges (2nd ed 1996) p 733; R Goode, Commercial Law (2^{nd ed 1995)
pp 720-721. This rule would have been changed by the Companies Act 1989, s 95,
had it been brought into effect. The Companies Act 1985, s 399 would have been
amended to make a charge not registered within 21 days void against “any person
who for value acquires an interest in or right over property subject to the
charge” after the 21-day period.}

[130]The doctrine of constructive notice will not apply to restrictions in the charge as these are not registrable: see above, para 2.42.

[131]R Goode, Commercial Law (2nd ed 1995) p 719; cf W J Gough, Company Charges (2^{nd ed 1996)
p 840, who agrees that that this result is desirable in the case of a buyer of
stock-in-trade but who doubts whether the authorities produce this result.}

[132]See W J Gough, Company Charges (2nd ed 1996) p 840.

[133]Stevenson v Rogers [1999] QB 1028 (a sale by a fisherman of his old working boat was held to be made in course of business within the Sale of Goods Act 1979, s 14(2)).

[134]The term ‘registered securities’ also covers stock and bonds, as well as shares.

[135]We do not include bearer shares for the purposes of this section, as these are akin to possessory securities.

[136]Macmillan Inc v Bishopsgate Investment Trust plc and others (No 3) [1996] 1 WLR 387.

[137][1905] 1 Ch 646.

[138]Bearer shares are negotiable instruments. Security over these are effected by a pledge, not a charge or mortgage.

[139]Société Générale De Paris and Colladon v Walker (1885) 11 App Cas 20.

[140]For a more in depth discussion on electronic settlement of securities, see J Benjamin, Interests in Securities (2000) ch 1.

[141]The nature of the investor’s interest in the securities is the subject of intense debate internationally. See R Goode, “Security Entitlements as Collateral and the Conflict of Laws” JIBFL special supplement, September 1998 p 22.

[142]Uncertificated Securities Regulations 2001, SI 2001 No 3755 reg 27.

[143]The Uncertificated Securities Regulations 2001, regs 31(1)-(2) state that the transferor retains title until the issuer’s register denotes the transferee as the holder. Once the transferee is registered upon the Operator’s register of members, an equitable interest is created. These Regulations replaced the 1995 ones.

[144]Equally a pledge cannot be granted because there is no share certificate.

[145]J Benjamin, The Law of Global Custody (1996) p 187.

[146]See, eg, Council Regulation 1346/2000/EC (OJ L160, 30.6.2000, p 1) on insolvency proceedings (which came into force 31 May 2002). The general aim of this regulation is to establish mutual recognition of proceedings and co-operation for cross border insolvency proceedings. It does not harmonise substantive law between the states. See also Council Directive 98/26/EC (OJ L166, 11.6.1998, p 45) of the European Parliament and of the Council on settlement finality in payment and securities settlement systems.

[147]See Council of European Union, Interinstitutional file 2001/0086(COD); 5530/3/02.

[148]See below, para 5.25-5.27.

[149][1987] Ch 150.

[150]Millett J followed the reasoning set out in R Goode, Legal Problems of Credit and Security
(2nd ed 1988) pp 110 and 125, where it was suggested that a bank as debtor could not become its own creditor and that it was conceptually impossible for the bank to be given a charge over its own obligation.

[151][1998] AC 214.

[152][1998] AC 214, 226-227. See R Goode, “Charge-backs and legal fictions” (1998) 114 LQR 178, where it is argued that at the conceptual level Lord Hoffmann’s analysis does not withstand examination; it is entirely result driven.

[153][1998] AC 214, 227. Lord Hoffmann expressed no view on the point on whether such charges were book debts, but referred to the suggestion in Lord Hutton’s speech in Northern Bank Ltd v Ross [1990] BCC 883 that, in the case of deposits with banks, an obligation to register is unlikely to arise.

[154]See above, paras 2.8-2.10.

[155]Freight, in its ordinary mercantile usage, is the reward payable to the carrier for the carriage and arrival of cargo by ship.

[156]Tagart, Beaton & Co v James Fisher & Sons [1903] 1 KB 391, 395.

[157] For a fuller discussion see F Oditah, “The juridical nature of a lien on sub-freights” [1989] 191 LMCLQ.

[158]Re Welsh Irish Ferries Ltd (The Ugland Trailer) [1986] Ch 471, 478-479.

[159]Annangel Glory Compania Naviera SA v M Gobdetz Ltd (The Annangel Glory) [1988] 1 Lloyd’s Rep 45.

[160]Re Welsh Irish Ferries Ltd (The Ugland Trailer) [1986] Ch 471, 478.

[161]Care Shipping Corp v Latin American Shipping Corp (The Cebu) [1983] QB 1005.

[162]Agnew v Commissioner of Inland Revenue [2001] 2 AC 710, 727.

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