Part VIII

security interests created by non-corporate debtors and registration

Introduction

                    8.1               In Parts I-VII of this Consultation Paper we considered a notice-filing system for corporate debtors. In Parts VIII-XI we move to consider the second aspect of our reference, and deal with security and security interests over property other than land created by non-corporate debtors.[1] As we noted in Part I, this Consultation Paper has divided the treatment of corporate and non-corporate debtors for two main reasons.

                    8.2               First, given that the Steering Group’s primary concern was with company charges, it seems right, for consultation purposes, to separate security interests created by companies from those created by non-corporate debtors. Secondly, our understanding is that the DTI envisages that any new law governing company security interests will form part of, or be introduced by Regulations made under, a Companies Bill. To extend the system provisionally proposed for company security interests to security interests created by others would require separate legislation, either simultaneously with a Companies Bill or subsequently.

                    8.3               The purpose of this and the following Parts is therefore to consider whether the notice-filing system provisionally proposed for company security interests should be extended to cover the question of security interests over property other than land granted by non-corporate debtors. There is obviously a significant degree of overlap between this aspect and our discussion in respect of corporate debtors, and we will often refer back to earlier in this Consultation Paper. In this Part we discuss both security and quasi-security (rather than have separate Parts) as many of the latter forms have already been dealt with in detail earlier.

                    8.4               Non-corporate debtors include a wide range, from persons who borrow for private purposes not related at all to their business, trade or profession (we will refer to them as ‘consumers’) through sole traders and ‘solo’ professionals through to partnerships.In many cases partnerships are no longer limited by law to any particular size, and in some professions partnerships of several hundred partners are not unusual.

                    8.5               In contrast to our consideration of corporate debtors, for which our terms of reference were to consider charges of all types, the terms of reference for individuals and non-corporate debtors exclude security interests over land. This reflects similar limitations in the UCC and in the legislation of Saskatchewan and New Zealand[2] and also the fact that there already exist registration schemes for security over land.[3] There has been no call for security over land to be brought within any system for registration of other security interests created by non-corporate debtors.[4]

Security granted by non-corporate debtors

Possessory security

                    8.6               We limit the detailed explanation in this Part to non-possessory security. A non-corporate debtor may pledge goods or documents of title just as can a company.[5] We refer readers to the explanation given in Part II.[6]

Goods: bills of sale

Introduction

                    8.7               The rules of validity and registration of mortgages and charges over goods by non-corporate debtors are mainly governed by statute, principally the Bills of Sale Act 1878 (the ‘1878 Act’) and the Bills of Sale Act (1878) Amendment Act 1882 (the ‘1882 Act’).[7] The statutory provisions are complex and have been the subject of much criticism.[8] Curiously they apply to the document - the bill of sale - rather than the transaction itself, so a purely oral agreement for an equitable mortgage or charge over personal property is outside the scope of this legislation.[9]

                    8.8               The Bills of Sale Acts set out a scheme for the formal validity and the registration of certain bills of sale, and prescribe what can be severe consequences for failure to comply with the statutory requirements.[10] The purposes behind the 1878 Act and the 1882 Act were different. The 1878 Act was designed to prevent the rights of creditors from being affected by secret dispositions of property by persons remaining in possession of that property.[11] The purpose of the 1882 Act was to prevent people being entrapped into signing complicated documents which they might not understand, and so being subject to the enforcement of harsh and unreasonable provisions.[12] We will see that non-compliance with the requirements of each Act has different consequences: under the 1878 Act the bill is void as against the creditors or their representatives, under the 1882 Act the bill of sale is void also as between the parties.[13]

Application of the Bills of Sale Acts

                    8.9               The 1878 Act applies to every bill of sale whereby the holder or grantee has power[14] to seize or take possession of any personal chattels comprised in or made subject to such a bill of sale.[15] Although both the 1878 Act and the 1882 Act apply to bills of sale given by way of security for the payment of money (known as ‘security bills’[16]), the 1882 Act does not apply to bills given otherwise than by way of security for the payment of money (known as ‘absolute bills’[17]).[18]

                8.10               The 1882 Act is to be construed as one with the 1878 Act so far as is consistent with the tenor of the 1882 Act, but enactments contained in the 1878 Act which are inconsistent with the 1882 Act are repealed.[19]

Meaning of bill of sale

                8.11               Section 4 of the 1878 Act provides a detailed list of what the expression “bill of sale” covers, including assignments, transfers and declarations of trust without transfer. It also includes any agreement conferring a right in equity to, or a charge or security on, any personal chattels.[20] The 1878 Act also provides that certain instruments are deemed to be bills of sale of any personal chattels which may be seized or taken under powers of distress under powers given by the instrument.[21] The 1882 Act states that “bill of sale” has the same meaning for the 1882 Act as it does for the 1878 Act (save that the 1882 Act does not apply to such bills given otherwise than by way of security for the payment of money).[22]

                8.12               However, section 4 of the 1878 Act also expressly excludes a number of transactions, including documents relating to assignments for the benefit of the creditors; transfers or assignments of any ship or vessel; transfers of goods in the ordinary course of business; bills of sale of goods in foreign parts or at sea; bills of lading; warrants or orders for the delivery of goods, and other documents used in the ordinary course of business as proof of the possession or control of goods.[23]

                8.13               Section 1 of the Bills of Sale Act 1890[24] additionally provides that:

An instrument charging or creating any security on or declaring trusts of imported goods given or executed at any time prior to their deposit in a warehouse, factory, or store, or to their being reshipped for export, or delivered to a purchaser not being the person giving or executing such instrument, shall not be deemed a bill of sale within the meaning of the Bills of Sale Acts 1878 and 1882.[25]

Meaning of “personal chattel”

                8.14               The phrase “personal chattel” is used several times in both the 1878 Act and the 1882 Act.  Section 4 of the 1878 Act provides a definition that covers goods, furniture, and other articles that can be transferred completely by delivery, but does not include interests connected with land,  shares  or  interests in the stock,

funds or securities of any government, or in the capital or property of companies, or choses in action.[26]

Seizure of personal chattels under a security bill

                8.15               Personal chattels assigned under a security bill are not liable to be seized or taken possession of by the grantee except in certain specified situations, including the grantor’s default in payment or performance of any necessary covenant or agreement.[27] The other specified causes are the bankruptcy of the grantor, or her suffering the chattels to be distrained for rent, rates or taxes; the grantor fraudulently removing the goods (or suffering to be removed) from the premises; failure by the grantor, without reasonable excuse, to produce to the grantee (following written demand) her last receipts for rent, rates and taxes; or if execution has been levied against the grantor’s chattels under any judgment at law.[28]

                8.16               Following seizure or possession on the above grounds, the grantor has five days to apply to the High Court, and if satisfied that by payment of money or otherwise the cause for the seizure or possession no longer exists, the judge can restrain the grantee from removing or selling the chattels, or may make such other order as may seem just.[29] In order to prevent circumvention of this provision by a grantee forcing an early sale, all personal chattels seized or taken possession of under any bill of sale must remain on the premises where they were seized or taken possession of, and are not be removed or sold until after five clear days from the day of seizure or possession.[30]

Formal requirements

                8.17               Both absolute bills and security bills falling within section 3 of the 1878 Act are subject to certain requirements as to their form. The requirements are particularly stringent in respect of security bills.

                8.18               The 1878 Act does not set out a detailed form for an absolute bill of sale. However, there are a number of requirements that must be complied with. In addition to the requirement of attestation and registration,[31] section 8 of the 1878 Act requires that every absolute bill of sale[32] must set out the consideration for which it was given. Failure to do this renders the bill void as against all trustees or assignees of the estate of the person whose chattels are comprised in the bill (in relation to bankruptcy or insolvency law), or under any assignment for the benefit of the creditors of that person. It is also rendered void as against any person executing a court-authorised seizure of any chattels comprised in the bill.[33] However, the absolute bill is not avoided as between grantor and grantee.

Security bills

                8.19               A security bill is subject to strict requirements as to its form. Such a bill must be made in accordance with[34] the form in the schedule to the 1882 Act,[35] and the execution of such bills must be attested by one or more credible witnesses (who are not party to the bill).[36] In summary, the form in the schedule requires that the bill of sale must state:

                                            (1)          the date of the bill of sale,

                                            (2)          the names of the grantor and grantee,

                                            (3)          the consideration,[37] which must be at least £30 or the bill is void,[38]

                                            (4)          an acknowledgement of the receipt of that consideration,

                                            (5)          an assignment by one party to the other (and her executors, administrators and assigns) of the chattels described in a schedule annexed to the bill of sale,[39]

                                            (6)          that the assignment be by way of security for the payment of a specified sum of money, together with interest at a specified agreed rate,

                                            (7)          that the grantor agrees and declares that she will pay the grantee the principal sum together with interest at a stipulated time or times,

                                            (8)          any other terms as to “insurance, payment of rent or otherwise” that the parties may have agreed to for the maintenance or defeasance of the security, and

                                            (9)          a provision that the chattels assigned by the bill are not liable to seizure or possession by the grantee for any cause other than those specified in section 7 of the 1882 Act.

Failure to comply with these requirements renders the bill void.[40] The security bill must be by deed signed by the grantor in the presence of a witness, whose name and address and description must be included.[41]

                8.20               The schedule required to be annexed to, or written on, the bill of sale must contain an inventory of the personal chattels comprised in the bill. The bill will be effective only in respect of the personal chattels specifically described, and will be void, except as against the grantor, in respect of personal chattels not specifically described.[42] In addition, the personal chattels described in the schedule must be ones of which the grantor was the true owner at the time of the execution of the bill, otherwise the bill will be void, except as against the grantor, in respect of such personal chattels.[43] This provision prevents ‘after-acquired’ property being covered by a security bill for personal chattels (and hence generally prevents floating charges being granted by non-corporate debtors).[44]

Registration requirements

                8.21               There are requirements set out in the Bills of Sale Acts to register bills of sale. The registration schemes differ slightly between absolute and security bills. It should be noted that a bill that is registered may still be void if it has failed to comply with the formal requirements for validity.[45]

The register

                8.22               The registrar[46] is required to keep a register and to enter the name, residence and occupation of the grantor, together with other particulars set out in Schedule 2 to the 1882 Act.[47] The registrar has certain duties concerning transmission of entries to county courts.[48]

                8.23               In respect of absolute bills, office copies or extracts of the bill and any affidavits can be obtained by any person, upon payment of a fee.[49] For security bills, a person is entitled to search the register and to inspect, examine and make extracts[50] from any such bill without having to make a written application or having to specify any particulars in reference thereto, on payment of a fee.[51]

Registration of absolute bills

                8.24               For absolute bills, under the 1878 Act, the requirements for registration are set out in section 10.[52] These are that:

                                            (1)          the execution of every bill must be attested by a solicitor, and such attestation must state that before execution of the bill the effect of it has been explained to the grantor by that solicitor,[53]

                                            (2)          certain documents are required to be presented to, and filed with,[54] the registrar within seven clear days after the making or giving of the bill. The documents concerned are:

                                                                   (a)          the bill, together with every schedule annexed or inventory referred to therein,

                                                                   (b)          a true copy of the bill, schedule or inventory, and of the attestation of execution,

                                                                   (c)          an affidavit of the time of such bill being made or given, and of its due execution and attestation, and a description of the residence and occupation of the person making or giving the bill[55] and of every attesting witness,[56]

                                                                   (d)          in the case of a bill made or given subject to any defeasance or condition, or declaration of trust not contained in the body thereof, the defeasance, condition or declaration is deemed to be part of the bill, and is required to be written on the same paper therewith before the registration, and is required to be set out in the copy filed. Failure to do this will render the registration void.[57]

A transfer or assignment of a registered bill does not need to be registered.

                8.25               The registration of a bill of sale has to be renewed once at least every five years, failing which the registration becomes void.[58]

Registration of security bills

                8.26               Section 15 of the 1882 Act repeals enactments in the 1878 Act that are inconsistent with the 1882 Act. As a result, there are some differences in the registration requirements between absolute and security bills.

                8.27               Every bill of sale must be duly attested and registered under the 1878 Act within seven clear days after the execution of the bill,[59] and it must “truly set forth the consideration for which it was given”.[60] Failure to do this renders the bill void in respect of the personal chattels comprised within it.

                8.28               The requirements for registration of a security bill[61] are that:

                                            (1)          the execution of every bill of sale by the grantor is to be attested by one or more credible witnesses, not being party to the bill,[62]

                                            (2)          the following documents must be presented to, and some filed with,[63] the registrar within seven clear days after the making or giving of the bill:[64]

                                                                   (a)          the attested bill, together with every schedule annexed or inventory referred to,[65]

                                                                   (b)          a true copy of the bill, schedule or inventory, and of the attestation,

                                                                   (c)          an affidavit of the time of the bill being made or given, and of its due execution and attestation, and a description of the residence and occupation of the person making or giving the bill[66] (and of every attesting witness),[67]

                                                                   (d)          in the case of a bill made or given subject to any defeasance or condition, or declaration of trust not contained in the body thereof, the same requirements as for an absolute bill as noted above.[68]

                8.29               A transfer or assignment of a registered bill does not need to be registered, and the same renewal provisions relating to absolute bills apply to security bills.[69]

Rectification of the register

                8.30               A judge of the High Court may order (on such terms and conditions as thought fit) that the time for registration be extended or that there be rectification of an omission or mis-statement of the name, residence or occupation of any person. The omission to register or the omission or mis-statement of the name, residence or occupation must have been accidental or due to inadvertence.[70]

Entries of satisfaction

                8.31               Where the debt for which the bill was made or given has been discharged, the registrar may order a memorandum of satisfaction to be written upon any registered copy of a bill of sale.[71]

Failure to register

Absolute bills

                8.32               As we noted earlier, failure to attest and register an absolute bill does not avoid the bill as between grantor and grantee, although it does render it void as against all trustees or assignees of the estate of the person whose chattels are comprised in the bill (in relation to bankruptcy or insolvency law), or under any assignment for the benefit of the creditors of that person. In addition, it is rendered void against a person executing a court-authorised seizure of any chattels comprised in the bill.[72]

Security bills

                8.33               A failure to attest and register a security bill in accordance with the requirements of the 1878 Act and the 1882 Act renders the bill void in respect of the personal chattels comprised therein.[73]

Priority of security bills

                8.34               Section 10 of the 1878 Act (which appears to apply to security bills as well as to absolute ones) provides that priority between bills of sale comprising the same chattels is in the order of their date of registration.

Aircraft and ships

                8.35               Security interests created by non-corporate debtors over aircraft and ships are exempt from the Bills of Sale Acts but must be registered in the appropriate specialist register.[74]

Receivables

                8.36               A non-corporate debtor may create security over intangible property such as book debts, including future book debts. Intangible property is not within the Bills of Sale Acts, so that assignment of particular debts or debts coming due under particular contracts need not be registered.[75] However, a general assignment by a person in business of existing or future book debts is registrable as if it were a bill of sale. If it is not registered the assignment is void against the trustee in bankruptcy as regards any debts not already paid.[76]

                8.37               The assignment is filed in a separate register of assignments of book debts. Assignment of debts by way of security is perfected by notice to the debtor, and priority will depend on the date of notice to the debtor save that a person who took her assignment with actual or constructive notice of an earlier assignment cannot gain priority by giving notice first.[77]

                8.38               We note that it is possible for a debtor to create a fixed charge over its book debts, provided that the chargee maintains control over the payments received as well as the debts before they are paid.[78] If the debtor assigns all its book debts in this way, then the assignment will be registrable as explained above. However if the assignment is limited in some way it fall outside the provisions of the Insolvency Act 1986, section 344. There will be no easy way for subsequent creditors to discover the existence of the charge. Nor, apparently, does registration of a general assignment of book debts secure priority.[79]

Security over intellectual property rights

                8.39               Security interests created by non-corporate debtors over intellectual property rights must be registered in the appropriate specialist register: the rules for registration and priority are the same as for corporate debtors.[80]

Agricultural charges

                8.40               The restrictive nature of the Bills of Sale Acts has been overcome by the provision of specific legislation in the case of farmers.[81] Leaving aside legislation that relates more to charges over land (which are outside the scope of this aspect of our Consultation Paper), the Agricultural Credits Act 1928 (the ‘1928 Act’) provides that a farmer can, by a written instrument, create a charge in favour of a bank on her farming stock and other agricultural assets.[82] Such charges are known as “agricultural charges”, and may be fixed, floating or both a fixed and a floating charge. Agricultural charges are not deemed to be bills of sale, and take effect notwithstanding anything in the Bills of Sale Acts.[83]

                8.41               The 1928 Act sets out certain rights and obligations in the case of fixed and floating charges. In the case of a fixed charge, the chargee bank has the right to seize the charged property upon the happening of any event specified in the charge as one that authorises the seizure, and has the right (where such possession is taken) to sell the property by auction after five clear days.[84] The bank also has the obligation to apply the proceeds of sale to discharge the secured liability and to pay any surplus to the farmer.[85] A fixed charge does not prevent the farmer selling the charged property, but she is obliged to pay the bank the proceeds in respect of any sale of the charged property or money received under certain insurance payments (except insofar as the charge or bank allows otherwise).[86]

                8.42               A floating charge:

shall have the like effect as if the charge had been created by a duly registered debenture issued by a company.[87]

However, the charge will become a fixed one on the occurrence of certain events specified in the 1928 Act.[88] As with a fixed charge, the farmer is obliged to pay over sale or insurance money received (but not where the money received is used by the farmer to purchase farming stock which becomes subject to the charge).[89]

                8.43               Unlike a ‘normal’ floating charge, the 1928 Act provides that where the agricultural charge is a floating one, any subsequent fixed agricultural charge or a bill of sale comprising property in the floating charge that is purportedly created is void as respects that property, so long as the floating charge remains in force.[90]

                8.44               The 1928 Act provides that every agricultural charge must be registered within seven clear days after its execution, failing which it is void as against any person other than the farmer.[91] The Land Registrar is required to keep a register of agricultural charges. Registration is deemed to constitute actual notice of the charge, except for the purposes of further advances being made, where the original charge is made for securing a current account or further advances and the other agricultural charge was not registered at the time the first charge was created or when the last search was made by the bank.[92] The priority of agricultural charges is governed by the times at which they are registered under the 1928 Act.[93] However, specific priority is given in relation to an agricultural charge comprising growing crops as against an earlier mortgage of the land.[94]

Quasi-security granted by non-corporate debtors

                8.45               Quasi-security interests are widely used as a way of providing secured purchase-money or loan finance to non-corporate debtors. Indeed the difficulty in complying with the technicalities of the Bills of Sale Acts is said to have contributed to the development of transactions such as hire-purchase, conditional sale, and sale and lease-back.

                8.46               We discussed quasi-security transactions in some detail earlier, in Parts VI and VII of this Consultation Paper. The basic transactions used are available just as much to non-corporate debtors and their creditors as they are to companies, and no separate discussion is required save for one thing. This is that many such agreements entered into by debtors who are individuals (including partnerships and other non-corporate bodies[95]) will be regulated by the Consumer Credit Act 1974. This Act, which was passed as a result of the recommendations of the Crowther report, has a major impact on contracts such as hire-purchase and conditional sale. However, the impact is mainly on the rights as between the parties; the Act has little to say about the effect of such contracts on third parties such as purchasers, other secured parties or creditors, which is the prime concern of most of this Consultation Paper. We may therefore deal with it very briefly at this stage. We will return to some of the provisions of the Consumer Credit Act 1974, notably those in Parts VII (Default and Termination) and VIII (Security), when we consider partial codification of the law of security in Part XI and Appendix B of this Consultation Paper.

The impact of the Consumer Credit Act 1974 on good faith purchasers

                8.47               The one effect of the Consumer Credit Act 1974 that we need to consider at this stage is in fact contained not in that Act but in the Sale of Goods Act 1979. It concerns a purchaser of goods from a person who herself has agreed to buy them under a regulated conditional sale. In general a buyer who has obtained possession of goods under an agreement to sell but who is not yet owner of the goods has power to pass title to a person who takes the goods under a sale, pledge or other disposition in good faith and without notice of the rights of the original seller, provided that the sale is made in circumstances that, were the first buyer a mercantile agent, would be within her ordinary course of business.[96] In contrast, the hirer under a hire-purchase agreement cannot pass good title to a buyer.[97] However, if the conditional sale agreement is a “consumer credit agreement” within the meaning of the Consumer Credit Act 1974, the buyer does not have the power to pass title - in other words, the buyer is treated in the same way as a hirer.[98] A “consumer credit agreement” is a “personal credit agreement” (that is, a credit agreement between a creditor and an individual debtor) by which the creditor provides the debtor with credit not exceeding £25,000.[99]

Factoring and block discounting

                8.48               We have referred in Part VI to assignments of book debts and other receivables by corporate debtors by way of security. Equally, non-corporate debtors may dispose of receivables outright as a way of raising money, for example under a factoring or block discounting agreement. For reasons given in Part VI, there is a good case for treating such ‘sales’ as security devices. An outright assignment of book debts would require registration as a bill of sale were it ‘general’,[100] but we understand that factoring and block discounting agreements usually apply to only selected receivables and thus will not require registration.

Extended retention of title clauses

                8.49               We saw in Part VI that contracts for the supply of goods frequently contain retention of title clauses that go further than allowing the supplier to retake the goods supplied if they have not been paid for. The clause may apply to ‘all monies due’ or may purport to give the supplier rights over new or mixed goods created from the goods supplied or to the proceeds of sale. An ‘all monies’ clause does not turn it into a charge and thus it will be valid against a company without registration.[101] Extended clauses are in practice unlikely to be effective against a company: the courts have usually held clauses that give a right to new or mixed goods, or to proceeds, to be charges.[102]

                8.50               Whether such clauses are more likely to be more effective against an individual is unclear. This is because the debtor has express or implied authority to dispose of the goods. Thus the charges must be floating. It is very doubtful whether an individual can validly create such a charge. It is the prohibition on non-corporate debtors creating bills of sale over property they do not yet own that is normally thought to prevent them creating floating charges,[103] and in the case of new or mixed goods the goods are the debtor’s property by the relevant time. In any event, however, the charge would have to be registered as a bill of sale, which would not be practical.

                8.51               A charge over the proceeds of goods supplied created by a non-corporate debtor in favour of the supplier might, it seems, be a valid assignment by way of security, providing it conforms with the statutory form.[104]