The Law Commission

The Law Commission

(Consultation Paper No 164)

REGISTRATION OF SECURITY INTERESTS: COMPANY CHARGES AND PROPERTY OTHER THAN LAND

A Consultation Paper

London: The Stationery Office

The Law Commission was set up by section 1 of the Law Commissions Act 1965 for the purpose of promoting the reform of the law.

The Law Commissioners are:

The Right Honourable Lord Justice Carnwath CVO, Chairman
Professor Hugh Beale, QC
Mr Stuart Bridge
Professor Martin Partington
Judge Alan Wilkie, QC

The Secretary of the Law Commission is Mr Michael Sayers and its offices are at Conquest House, 37-38 John Street, Theobalds Road, London WC1N 2BQ.

This consultation paper, completed on 14 June 2002, is circulated for comment and criticism only. It does not represent the final views of the Law Commission.

The Law Commission would be grateful for comments on this consultation paper before 2 October. Comments may be sent either –

By post to:

James Robinson
Law Commission
Conquest House
37-38 John Street
Theobalds Road
London
WC1N 2BQ

Tel: 020-7453-1201
Fax: 020-7453-1297

By e-mail to:

james.robinson@lawcommission.gsi.gov.uk

It would be helpful if, where possible, comments sent by post could also be sent on disk, or by e-mail to the above address, in any commonly used format.

It may be helpful, either in discussion with others concerned or in any subsequent recommendations, for the Law Commission to be able to refer to and attribute comments submitted in response to this consultation paper. Any request to treat all, or part, of a response in confidence will, of course, be respected, but if no such request is made the Law Commission will assume that the response is not intended to be confidential.

The text of this consultation paper is available on the Internet at:

http://www.lawcom.gov.uk

CONTENTS

PART I: INTRODUCTION	Part I
Background to the Consultation Paper	1.12
Terms of Reference	1.16
Structure of the Consultation Paper	1.19
Terminology: security and security interests	1.26
Previous recommendations and attempts at reform	1.27
The Crowther report	1.29
The Halliday report	1.30
The Diamond report	1.31
The Companies Act 1989	1.32
DTI consultations	1.33
European proposals	1.36
Reform overseas	1.37
The United States of America	1.37
Canada	1.41
New Zealand	1.43
Australia	1.44
Other systems	1.45
Acknowledgements	1.48
Summary of provisional conclusions	1.49
The consultation process	1.58
The impact of our provisional proposals	1.60
PART II: SECURITY AND THE REGISTRATION OF COMPANY CHARGES	Part II
Introduction	2.1
Security	2.3
The purpose of security	2.4
Creation, attachment and perfection	2.5
Traditional forms of security	2.6
Pledge	2.6
Lien	2.8
Mortgage	2.11
Equitable charge	2.14
Registration of company charges	2.20
The duty to register charges	2.22
The register of charges and the certificate of registration	2.24
Registrable charges and the consequence of non-registration	2.26
Late registration and rectification of the register	2.29
The company's own register of charges and copies of instruments creating charges	2.30
Memoranda of satisfaction	2.32
Registration of enforcement of security	2.33
Charges on property in England and Wales created by an 'oversea' company	2.34
Charges created by an English company over property situated outside the United Kingdom or in Scotland	2.35
Priority and the registration scheme	2.36
An outline of priority of company charges	2.38
Floating charges	2.40
Fixed charges	2.45
Exceptions to the general rules regarding priorities	2.48
Charges that are registered in specialist registers	2.49
Security for further advances	2.56
Charges and purchasers of company property	2.58
Particular issues on what is registrable	2.62
Shares and 'registered securities'	2.63
Charges over credit balances	2.73
Contractual liens over sub-freights	2.76
PART III: THE NEED FOR REFORM OF THE COMPANY CHARGEREGISTRATION SCHEME	Part III
The need for a system of registration	3.2
Ineffectiveness of the current registration scheme	3.9
The public notice function	3.11
The list of registrable charges is seriously incomplete	3.12
The registered particulars are not necessarily accurate	3.16
The register does not reveal important information about charges that are registrable	3.17
The company's own register	3.18
Notification of the existence of charges	3.21
The priority function	3.25
No 'advance' registration	3.29
Registrable charges and purchasers	3.31
Additional criticisms of the registration scheme	3.32
Oversea companies	3.33
The European Convention on Human Rights	3.41
Conclusion	3.44
PART IV: NOTICE-FILING FOR COMPANY CHARGES	Part IV
An alternative approach: amending the current registration scheme	4.2
The policy aims of any new system	4.5
An outline of notice-filing	4.7
Principal changes involved in adopting notice-filing	4.10
Possessory securities	4.15
Security arising by operation of law	4.18
The financing statement	4.19
The particulars that should be required	4.19
The form of the financing statement	4.30
Responsibility for the register	4.35
The registrar's certificate	4.37
The effect of errors in registration	4.39
Should any new notice-filing system be compulsory?	4.51
Criminal sanctions	4.52
Filing and the sanction of invalidity	4.55
Supply of information to other parties	4.59
Other parties with interests in the property affected	4.60
Notice to the wider public	4.66
The company's own register of charges and copies of instruments	4.68
The availability of information to the wider public	4.72
Other aspects of filing a financing statement	4.74
Time allowed for filing	4.74
Duration of filing	4.81
The recording of changes to the information filed	4.87
Changes to the security and termination of liability	4.89
Transfers of interest	4.93
Transfers by the secured party	4.94
Transfers by the debtor	4.97
Should the financing statement be signed?	4.103
Flexibility of notice-filing	4.109
Provisional notice-filing	4.110
Multiple transactions	4.116
Priorities	4.118
Consequences of non-registration under a notice-filing system	4.120
Priority as between registrable interests under a notice-filing system	4.121
Priority as between fixed registered interests	4.122
Priority as between fixed and floating registered interests	4.125
The concept of a 'floating' interest under the UCC	4.126
The position of the floating charge under a notice-filing system	4.128
Floating charges and the financing statement	4.139
Priority as between pledges and interests protected by filing	4.145
Priority between registered and unregistrable charges	4.146
Contractual variation of priority - subordination	4.150
The effect of changes	4.151
Tacking of further advances	4.152
Purchase-money interests	4.155
The right to proceeds	4.163
Purchasers of charged property	4.173
Purchasers and unregistered charges	4.174
Purchasers and registered charges	4.178
Uniquely identifiable goods	4.186
Purchasers and property subject to registration in a specialist register	4.190
Purchasers of investment securities	4.192
Purchasers of receivables	4.194
Purchasers of negotiable instruments/documents of title	4.197
Other registers	4.199
Other issues raised by a new system	4.213
Record of search	4.213
Liability of registrar for loss caused by registry errors	4.215
Liability for breach of duty	4.220
Transitional provisions	4.222
Existing fixed charges	4.229
Existing floating charges	4.230
Conclusion	4.233
PART V: REGISTRABLE CHARGES	Part V
A list of registrable charges or exclusions?	5.3
The Steering Group's proposed exceptions	5.9
Simple retention of title clauses	5.11
A charge, as such, for the purpose of securing any issue of debentures	5.14
The deposit by way of security of a negotiable instrument given to secure the payment of a book debt	5.16
Shares and investment securities	5.18
Practical reasons	5.22
Impact of the Draft EU Collateral Directive	5.25
Charges over insurance policies	5.36
Contractual liens over sub-freights	5.41
Other exceptions	5.43
Book debts and other monetary obligations	5.44
Charges over bank balances	5.49
'Charge-backs'	5.49
Charges over bank accounts (in favour of parties other than the bank)	5.52
Charges to secure a non-monetary obligation	5.54
Charges registrable in specialist registries	5.55
Charges created by trustee companies	5.56
Market charges	5.76
Lloyds' trust deeds	5.78
Charges over assets in other jurisdictions and charges created by companies in other jurisdictions	5.87
Charges by oversea companies	5.88
Charges created by companies registered in England and Wales over assets in other jurisdictions	5.95
Charges created by Scots companies over property in England and Wales	5.114
Unregistered companies	5.121
Summary of charges that would be registrable	5.123
Transaitional provisions for previously unregistrable charges	5.126
PART VI: FUNCTIONAL EQUIVALENTS TO SECURITY	Part VI
Functionally equivalent interests	6.1
Advantages of quasi-security	6.3
The risk of recharacterisation	6.8
Transactions relating to goods	6.11
Conditional sales	6.11
Hire-purchase agreements	6.14
Finance leases	6.15
Retention of title clauses	6.16
Consignment of goods	6.22
Receivables financing	6.24
Factoring	6.26
Discounting of receivables	6.28
Securitisation	6.30
Legal issues in securitisation	6.33
True sale	6.34
Priority	6.36
'Repos'	6.38
Why use a repo rather than traditional security?	6.39
Stock-lending	6.46
Transactions which do not create a proprietary interest	6.47
Contractual set-off arrangements	6.48
Restrictions on right to withdraw deposit	6.49
Subordination	6.50
PART VII: A FUNCTIONAL APPROACH TO SECURITY	Part VII
Introduction	7.1
Criticisms of the present law	7.8
A radical re-think: quasi-securities	7.11
Other notice-filing systems and registrable security interests	7.13
Common forms of quasi-security	7.21
Hire-purchase agreements and conditional sales	7.22
Retention of title (Romalpa clauses)	7.24
Consignment of goods	7.27
Finance leases	7.30
Receivables Financing	7.35
Factored debts	7.36
Block discounting or chattel paper	7.39
Securitisations	7.40
Conclusion	7.43
Declaration of trust by way of security	7.46
Are there any quasi-securities that should not be registrable?	7.48
'Repos' of shares and investment securities	7.50
Contractual set-off arrangments	7.51
Special purpose trusts	7.53
Motor vehicles	7.55
Functional priority rules	7.67
Purchase-money security interests	7.68
Other forms of super-priority	7.71
Purchasers of investment securities and of receivables	7.75
Summary	7.76
Other issues	7.77
Transitional issues for previously unregistrable charges and quasi-securities	7.77
Quasi-securities and the company's own register of charges	7.81
Small transactions	7.83
PART VIII: SECURITY INTERESTS CREATED BY NON-CORPORA DEBTORS AND REGISTRATION	Part VIII
Introduction	8.1
Security granted by non-corporate debtors	8.6
Possessory security	8.6
Goods: bills of sale	8.7
Introduction	8.7
Application of the Bills of Sale Acts	8.9
Meaning of bill of sale	8.11
Meaning of "personal chattel"	8.14
Seizure of personal chattels under a security bill	8.15
Formal requirements	8.17
Absolute bills	8.18
Security bills	8.19
Registration requirements	8.21
The register	8.22
Registration of absolute bills	8.24
Registration of security bills	8.26
Rectification of the register	8.30
Entries of satisfaction	8.31
Failure to register	8.32
Absolute bills	8.32
Security bills	8.33
Priority of security bills	8.34
Aircraft and ships	8.35
Receivables	8.36
Security over intellectual property rights	8.39
Agricultural charges	8.40
Quasi-security granted by non-corporate debtors	8.45
The impact of the Consumer Credit Act 1974 on good faith purchasers	8.47
Factoring and block discounting	8.48
Extended retention of title clauses	8.49
PART IX: SECURITY INTERESTS CREATED BY NON-CORPORATDEBTORS: THE NEED FOR REFORM	Part IX
Complexity of the existing law	9.2
Compatibility with the ECHR	9.5
Difficulty in obtaining finance for unincorporated businesses	9.6
Consumers	9.10
Sole traders and partners	9.12
Invisibility of charges and quasi-security	9.14
Conclusion	9.18
PART X: EXTENDING THE NOTICE-FILING SYSTEM	Part X
Introduction	10.1
Non-corporate business debtors	10.4
Replacement of the Bills of Sale Acts	10.4
Fixed charges	10.5
Floating charges	10.6
What should be registrable	10.8
Non-registrable charges	10.8
Quasi-securities	10.9
Exceptions	10.10
Consequences of bringing quasi-securities into the notice-filing system	10.11
Agricultural charges	10.14
Priorities	10.18
Purchasers	10.19
Conclusion	10.21
Consumers	10.22
Security interests over after-acquired property	10.23
In general	10.23
Purchase-money interests	10.24
Security interests over existing property	10.27
Consumer security interests and notice-filing	10.33
Motor vehicles	10.51
Small transactions	10.55
The security register	10.59
Conclusion	10.60
PART XI: RESTATING THE LAW OF SECURITY	Part XI
Introduction	11.1
A restatement of the law of security	11.13
Scope of application	11.13
Effectiveness of the security agreement	11.16
Creation	11.16
Attachment	11.18
Rights and remedies on default	11.19
Secured party may require payment of money	11.19
Taking possession	11.20
Powers and duties of receivers	11.21
Sale of collateral	11.23
Surplus or deficiency	11.24
Retention of collateral (foreclosure) by the secured party	11.25
Right to redeem collateral	11.26
Reinstatement of security agreement	11.27
Applications to court	11.28
Remedies of secured party when collateral is seized by a third party	11.29
Fixtures, crops, accession and processed or commingled goods	11.30
General provisions	11.31
Tracing	11.32
Is a restatement needed?	11.33
Scheme applying to all types of debtor	11.34
The initial scheme for companies only	11.41
PART XII: LIST OF PROVISIONAL PROPOSALS AND CONSULTATION QUESTIONS	Part XII
APPENDIX A: AMENDING THE CURRENT REGISTRATION SCHE FOR COMPANY CHARGES	Appendix A
Introduction	A.1
The particulars to be delivered to the registrar	A.6
Defects in particulars, the registrar's certificate and submission of the charge instrument	A.16
Defects in the particulars	A.18
The role of Companies House and the registrar's certificate	A.19
Submitting the charge instrument	A.20
Conclusions	A.22
The period for registration and late registration	A.28
The period for registration	A.28
Late registration	A.29
The effect of non-registration and the sanctions for failure to register	A.35
Alterations, satisfaction or release and assignment of charge	A.38
Alterations, satisfaction or release	A.38
Assignment of charge	A.39
Priorities and provisional registration	A.40
Priorities	A.40
Provisional registration	A.43
The position of purchasers of property subject to a charge	A.46
The company's own register	A.50
The register of company charges	A.51
Conclusions	A.53
APPENDIX B: A RESTATEMENT OF THE LAW OF SECURITY	Appendix B
Introduction	B.1
Effectiveness of the security agreement	B.3
Creation	B.3
Attachment	B.9
Rights and remedies on default	B.12
Secured party requiring payment	B.13
Taking possession	B.16
Collateral at risk	B.17
On default	B.19
Powers and duties of receivers	B.25
Sale of the collateral	B.34
Power of sale	B.34
Good faith and a commercially reasonable manner	B.40
Effect of disposition on subordinate security interests	B.42
Effect of non-compliance on purchaser/disponee	B.43
Guarantors and others who take transfer of collateral	B.44
Expenses and applications of proceeds	B.45
Surplus or deficiency	B.47
Statement of account	B.51
Payment of surplus into court	B.52
Foreclosure	B.53
Right of redemption	B.58
Reinstatement of security agreement	B.61
Powers of court	B.64
Remedies of secured party when collateral is seized by a third party	B.68
Fixtures, crops, accessions, processed and commingled goods	B.70
Fixtures and growing crops	B.70
Accessions	B.73
Processed and commingled goods	B.75
General and miscellaneous provisions	B.78
Transfer by debtor of ownership of collateral	B.79
No exclusion or limitation of liability	B.82
Rules on service of documents	B.84