The Law Commission

 


PART 2

CRITICAL ISSUES

Introduction

2.1     In this Part we explore the issues that we think are critical in deciding whether a scheme of notice-filing should be adopted and the scope that such a scheme should have. Issues that go to the detail of the scheme will be dealt with in Parts 3-5, where the scheme is explained in full.
2.2     In the light of responses to the CP, and of our further work, we think that the critical issues may be grouped under five headings. These are:

(1) Do the disadvantages of the current scheme of registration and priority of company charges justify replacing it with a notice-filing scheme?

(2) Should the scheme ultimately apply also to security interests created by unincorporated businesses? (The question of security interests created by consumers is not dealt with in this consultative report.)

(3) Should the scheme be extended to cover 'quasi-security' devices, including title-retention transactions (such as finance leases) and outright sales of receivables; and, if so, should the extension be made while the scheme applies only to companies or be left until it is extended to other business debtors?

(4) Should the scheme (though, for the most part, not the registration requirements) apply to security over financial collateral such as investment securities and bank accounts?

(5) Should the scheme include a statement of the rights and obligations of the parties, and in particular the remedies available upon default by the debtor?

Replacing the scheme of registration and priority for company charges

Weaknesses of the current scheme

2.3     In the CP we argued that the current scheme has serious weaknesses when judged by the basic functions that a registration and priority scheme should perform. A scheme should (1) provide information to persons who are thinking of extending secured lending, credit rating agencies and potential investors^[1] about the extent to which assets that may appear to be owned by the company are in fact subject to security in favour of other parties; and (2) determine questions of priority.^[2] We suggested that the current scheme does neither effectively.
2.4     The vast majority of consultees agreed with our conclusions. We conclude that the 'public notice' function is not performed effectively because:

(1) The requirement to register charges by sending to Companies House particulars of the charge and a copy of the charge document is unnecessarily cumbersome and expensive for what it achieves.^[3]

(2) The scheme imposes a considerable burden on Companies House that in practice it is not fully able to discharge because it is not feasible for its staff to check every particular against the charge document.^[4] (We understand that the current scheme requires Companies House to have a dedicated registration team of around 28 people. Moreover, we are told that the quality of the information relating to charges is of 'considerable concern'. The complex nature of some charges has meant that problems have sometimes arisen between the registry staff and the mortgagor/chargor or its advisers over whether the précis of the information contained on form 395 that is produced by the registry staff has captured the essence of the charge properly.)

(3) As a result, the registered particulars may not be completely accurate but the charge will be properly registered and will be effective according to its terms.^[5]

(4) The list of charges is out of date and incomplete, and it is not certain whether charges over certain types of assets must be registered.^[6]

(5) The system requires dual registration of charges over property such as land for which there is also a specialist register of mortgages.^[7]

(6) There is no mechanism for registering a charge before it has been created, for example during negotiations to take a security.^[8]

(7) The charge must be registered within 21 days and a court order is required for later registration.^[9] (The staff at Companies House have told us that the 21-day period has caused them difficulties, with many documents being filed close to the end of the period. Moreover, they tell us that they reject about 3000 applications each year for being 'out of time'.)

(8) Charges over assets of oversea companies that have an established place of business in England and Wales are invalid if the assets are here and the charge is not registered. This applies even though the company has not registered with Companies House. This also applies even though the goods were only brought into the country more than 21 days from the creation of the charge, so that it is too late to register.^[10]

(9) The company's own register of charges that each company is required to keep at its registered office is not in practice a useful source of information; these registers are often not up-to-date, they do not provide complete information to enquirers and they are seldom relied on.^[11]

2.5     As to priority:

(1) The rules are complex, varying from one type of asset to another and depending on a complicated interplay of factors - the date of creation, whether the competing interests were legal or equitable, whether the charge was registrable, whether it was registered within the 21 days allowed and, in some cases, whether a subsequent secured party had notice of a negative pledge clause in an earlier charge.^[12]

(2) The rules that apply to competing assignments, where priority depends primarily on the date of notice to the debtor, are not appropriate to modern business practice.^[13]

(3) The 21-day period for registration means that a valid charge may be 'invisible' to other creditors who search the register within 21 days of the creation of the charge. Consequently, subsequent creditors may be postponed to earlier interests even though they had registered first.^[14]

(4) The rules applying to persons who buy property that unknown to them is subject to a security are unclear and not satisfactory.^[15]

2.6     We provisionally conclude that there are significant weaknesses in the way the current company charge registration system operates.

Amendment of the current scheme or adoption of notice-filing?

2.7     How can these weaknesses best be addressed? One approach would be to retain the current scheme but to amend it in a number of ways. This had been proposed by the Company Law Review Steering Group in its consultation document Modern Company Law for a Competitive Economy: Registration of Company Charges.^[16] The proposal did not find favour with consultees and it was this that led the Steering Group to recommend the introduction of a notice-filing system.^[17] In our CP we also suggested a series of amendments to the current law that might be made instead of the notice-filing system,^[18] but expressed our strong preference for the more radical approach. There was very little support for the alternative of amending the current scheme.^[19] Only four consultees even thought it worth commenting on the amendments in any detail.^[20]
2.8     The notice-filing scheme for the registration of company charges that was proposed in the CP, and the associated rules of priority, received the broad support of all but a handful of consultees.^[21] Many emphasised the various advantages of the scheme. We will deal with what, in the light of the responses, we see as the principal positive reasons for adopting the scheme below, after we have given an outline of what is proposed.^[22]
2.9     Some consultees did have reservations or questions about the effects of the scheme and whether the changes proposed were justified. The issues raised are of serious concern to us but we feel able to answer them. As it is easier to evaluate these issues after we have outlined the scheme that we provisionally recommend, we deal with them below.^[23]
2.10     Some respondents would wish to see a notice-filing system only as part of a larger scheme that would include quasi-security.^[24] We return to this issue later in this Part,^[25] but note at this stage that the detailed explanation of the scheme in Part 3 is made on the basis that the scheme would include quasi-security.
2.11     In the light of consultation, for company charges we provisionally recommend the adoption of a scheme of notice-filing and priority along the lines outlined in paragraphs 2.12-2.40 below, and developed in more detail in Part 3. The outline follows closely the scheme proposed in the CP. It is not identical because consultees made numerous helpful suggestions which have influenced our proposals. (To avoid repetition, the bulk of our provisional recommendations and consultation questions are left for Parts 3-5, where we deal with the relevant points in more detail. Before consultees comment on or respond to the provisional recommendations and consultation questions set out in this Part, we recommend that they consider the remaining Parts of this consultative report.)

The notice-filing scheme for company charges in outline

A note on terminology

2.12     It may be helpful to begin with a note on terminology. (We will deal with other definitions as we come to them.)

(1) 'Debtor'. In the CP, following the UCC and PPSA models, we referred to the company or other person creating the security as 'the debtor'. Consultees pointed out that a security-giver is not always a debtor; a charge may be by way of guarantee of a third party's debt or obligation.^[26] There is also the danger of confusion with 'account debtors', those who owe debts which are made the subject of security interests. For the purposes of a companies-only scheme we could refer to 'the company' but that would mean a change of terminology were the scheme later to be extended. We have not found a better alternative and we continue to use 'debtor'.^[27]

(2) 'Security interest' (SI). For the purposes of this outline we include only the traditional securities – mortgages, charges or pledges. (We will discuss later whether the scheme should be extended to apply to title-retention devices and outright sales of receivables.^[28])

(3) 'Secured party'. Similarly, for present purposes this refers to the mortgagee, chargee or pledgee. It includes parties who hold an SI on behalf of another.^[29]

(4) 'Collateral'. This is the general term used in the UCC and PPSAs for the personal property that is subject to an SI. We have followed this usage for convenience.

Attachment and perfection

2.13     In the CP we suggested that it would not be necessary to define or explain these terms, which some commentators already use in describing English law. In the light of consultation we realise that it is necessary to define attachment (the point at which a secured party acquires a proprietary right in the relevant collateral) and to set out the ways in which an SI may be 'perfected' (in the sense of the steps that need to be taken to secure, so far as legally permissible, the effectiveness and priority of an SI as against third parties^[30]).
2.14     Attachment will occur when:

(1) there is a security agreement for an SI and the collateral is sufficiently identified either in the agreement or by subsequent appropriation;

(2) value is given; and

(3) the debtor has rights in the collateral. ^[31]

An SI may attach even though under the security agreement the debtor has the right to dispose of the collateral free of the SI.^[32]

2.15     Perfection^[33] means the taking of any necessary steps to secure, so far as legally permissible, the effectiveness and priority of an SI as against third persons. To be 'perfected' an SI must also have attached (although attachment and the taking of the necessary steps to perfect can occur in any order). Thus an SI that has attached may be perfected:

(1) by filing a financing statement;

(2) by the secured party taking possession of the collateral;

(3) where the goods are in the possession of a bailee, by the bailee attorning to the secured party or issuing a document of title in the secured party's name;^[34] or

(4) for SIs over limited types of property such as investment securities and bank accounts,^[35] by the secured party taking 'delivery' or obtaining 'control'.^[36]

In a few cases (particularly in relation to investment property and bank accounts) no filing, possession or control is needed: these cases would be treated as ones of 'automatic perfection'.^[37]

2.16     Further, in some circumstances an SI that has been perfected by one method that has ceased to apply may remain 'temporarily' perfected for a limited period, for example, where an SI over negotiable documents was perfected by possession and the documents are released to the debtor for sale or presentation.^[38] This is not an independent perfection 'method'.

The scheme

2.17     What follows is a summary of the overall scheme, as applicable to 'traditional' securities. A more detailed account of the scheme in given in Part 3.

Scope

2.18     The scheme will apply to mortgages, charges and pledges created or provided for by debtors who are:

(1) companies registered under the Companies Act 1985 (or its successor) in England and Wales,^[39]

(2) limited liability partnerships (LLPs),^[40] or

(3) companies registered in Scotland or incorporated outside Great Britain, so far as the relevant assets are in England and Wales or are ones to which the law of England and Wales would apply for the purposes of determining questions of perfection and priority.^[41]

2.19     A non-possessory mortgage or charge over any type of asset comprising personal property will need to be perfected by filing unless the scheme provides that it may be perfected by a different method^[42] or it is specifically exempted from the scheme as a whole.^[43]
2.20     Charges over land, registered aircraft, many registered ships and registered intellectual property rights will be outside the scheme. Therefore such charges will not have to perfected by filing at Companies House and priority as between competing charges will be governed solely by the rules of the specialist scheme.^[44] Some other interests, such as any charges arising from Lloyd's trust deeds, will also fall outside the scheme altogether.

Attachment and perfection

2.21     We noted the meaning of attachment and perfection above.^[45] The parties will remain free to agree that the SI is to attach at a later time than that discussed above, but a reference in a security agreement to the charge as a 'floating' charge will not of itself be an agreement that the SI is to attach at a later time.^[46] SIs in after-acquired property will attach without specific appropriation by the debtor when the debtor acquires rights in the property.
2.22     The elements of attachment and perfection may occur in any order. Thus filing may be made in advance, though the secured party will acquire no rights in the collateral until the SI attaches, for example, when the security agreement is made or, if the debtor does not yet own the collateral, when it acquires it.
2.23     Where the method of perfection changes, and where there is no period when the SI is unperfected, perfection will be 'continuous'. This will have the practical effect of backdating priority to the time of perfection by the first method.^[47]

Filing

2.24     The filing system should operate on a wholly electronic basis (with a register run by or on behalf of Companies House). The Registrar will have power to make Rules relating to the detailed operation of the system.^[48]
2.25     A filing will be made through the submission of an on-screen 'financing statement',^[49] which will contain:

(1) the name and, where there is one, the registered number of the debtor;

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

(3) brief details of the collateral;

(4) the duration of the filing (which may be for a fixed or an unlimited period), and

(5) any other matter prescribed by Registrar's Rules.

2.26     The financing statement will be treated as filed at the time when a date, time and number are assigned to it by the registry; this will be done automatically as the on-line form is submitted, unless the system rejects it, for example, because the company name and number do not match. Once a filing has been made, a verification statement will be issued to the secured party by the registry; a copy of this must be sent by the secured party to the debtor unless the debtor has waived the right to receive it.^[50]

Searching

2.27     The register will be a 'real-time' system in the sense that the financing statement will appear on the register and be available to searchers as soon as the on-screen registration process is completed. The register will be searchable electronically by company name and number, and (where applicable) the unique identifying number of the collateral. Searching will also be possible by the financing statement number assigned on registration.^[51]

Financing change statements

2.28     Changes to the filed details or a discharge of the financing statement will be made through the use of a financing change statement; the financing statement and financing change statement will be linked by a common identifying number. A search by this number will reveal all amendments.

The effect of errors

2.29     Errors contained in the filed details will render a filing ineffective only where the error is such that a reasonable person using the search criteria set by the Registrar would not locate the financing statement. In practice this should not occur unless the filing has been made against the wrong company or, with collateral that has a unique serial number (such as a vehicle),^[52] that number is entered incorrectly. Other errors in describing the collateral will not invalidate the filing or affect security over collateral that is described correctly, though a filing will perfect an SI only to the extent that the collateral is covered by both the financing statement and the security agreement.
2.30     The debtor may require the secured party to correct an inaccurate financing statement (including one that is no longer correct because collateral has been released), or to discharge a financing statement that does not relate to a subsisting security agreement (including an agreement that has now been discharged), by means of a financing change statement.^[53]

Effect of failure to perfect

2.31     Filing will not be compulsory but failure to perfect an SI by filing or another permitted method will have the following consequences for an SI:

(1) it will be ineffective against the liquidator or administrator in the event of the debtor's insolvency;^[54]

(2) it will be ineffective against an execution creditor who seizes the collateral before the SI is perfected;^[55]

(3) it will lose priority to any other SI that is perfected, or for which a financing statement is filed, first;^[56] and

(4) it may also be ineffective against most buyers.^[57]

2.32     'Last minute' filing by 'connected persons' before the onset of insolvency will be of no effect.^[58]

Obtaining additional information about the SI

2.33     The debtor can demand that the secured party supply it or a third party (such as an intending lender) with:

(1) a written statement of the outstanding amount of indebtedness, or a written approval/correction of the debtor's estimate of the amount, or

(2) a written approval/correction of an itemised list of personal property (provided by the debtor) indicating which items are collateral.

Failure without reasonable excuse to provide this information can ultimately result in the court invalidating the SI and the discharge of any filed financing statement.^[59]

2.34     If the debtor, or anyone who can reasonably be expected to rely on the information supplied by the secured party, relies on the information to their detriment, the secured party will be estopped from denying that the information supplied is correct. The secured party may also be liable in damages to anyone who can reasonably be expected to rely on the information if, without reasonable excuse, it supplies information that is incorrect.^[60]

Priority as between competing SIs

2.35     The general rules^[61] governing priority will be:

(1) Perfected SIs take priority over unperfected ones.^[62]

(2) As between perfected SIs, priority goes to the first to file or perfect by another means. This means that where all the competing SIs are perfected by filing, the first to file will have priority. Where the competition is between an SI perfected by filing and one perfected by a different method,^[63] if the filing pre-dates the other SI being perfected, priority will go to the SI perfected by filing, even if that SI was not created or did not attach until after the competing SI was perfected.^[64]

2.36     However, specific priority rules mean that a 'purchase-money security interest' (for example, one that secures only the purchase price of the collateral) will, subject to certain safeguards, have priority over SIs that were perfected earlier.^[65] There are also specific rules to protect transferees of negotiable collateral.^[66]
2.37     An SI will continue into the proceeds of collateral that has been sold by the debtor. There will be rules as to when further steps will be required to perfect this continuing SI and as to priority of competing claims over proceeds.^[67]

Priority as against buyers or lessees

2.38     A buyer or lessee of an unperfected SI without knowledge of the SI will take free of it.^[68]
2.39     A buyer or lessee of goods of a kind that the seller sells on a regular basis will take free of any SI created over the goods by the seller, unless the buyer had actual knowledge that the sale was in breach of the security agreement.^[69]
2.40     A buyer for 'private purposes' of collateral for a purchase price of £1000 or less (or a lessee of goods of that market value) will take free of any SI over the collateral, whether created by the seller or a previous owner.^[70]

Support for the notice-filing scheme for company charges

2.41     As we have noted,^[71] in response to our CP there was widespread support for the introduction of a notice-filing scheme along the lines outlined above. Consultees had suggestions on particular points that we have gratefully adopted.
2.42     A number of consultees did raise possible difficulties or have reservations about the proposed scheme of notice-filing for company charges. In the sections that follow we discuss the advantages of the scheme and the principal reservations and difficulties.

Advantages of the notice-filing scheme

2.43     Although English law does not suffer from many of the weaknesses that prompted the development of Article 9 of the UCC or the subsequent adoption of the PPSA schemes in Canada,^[72] many consultees saw significant advantages in the notice-filing and priority scheme for company charges outlined above. In the light of the responses and our own further work, we think the principal advantages of the scheme would be the following:

(1) Electronic, on-line filing would be simple, fast and (in the long term) cheap.^[73] The same is true of searching.

(2) At least in a companies-only scheme, the risk of an error that might invalidate a filing would be very small. This is because under the notice-filing scheme the chief risk of such an error lies in making a mistake in the debtor's name. With companies registered in the United Kingdom (UK) the system will be able to cross-check the name and company registration number. It could then warn the party filing of the mismatch and ask for confirmation of the company against which the filing is to be made.^[74]

(3) The risk of inaccuracies in the description of the collateral is reduced because a simple description will suffice, and the danger to third parties is greatly reduced as an SI will not be effective as regards collateral that is not within the description in the financing statement.

(4) It will be possible to file while a security agreement is being negotiated to protect the lender's priority position.^[75]

(5) 'Dual registration' of charges over land, many registered ships, registered aircraft and patents, trade marks and registered designs will generally no longer be necessary.

(6) The rules of priority will be more rational and better suited to modern conditions, for example in relation to assignments of receivables. They will still be complicated but they will be significantly clearer than under current law.

(7) The distinction between fixed and floating charges, with all the associated uncertainty over the borderline between them, will in practice disappear. The floating charge will be supplanted by a single type of SI that shares all the advantages of a floating charge and has fewer disadvantages to the lender.

There would be major additional advantages, in our view, were the scheme to be extended to cover (1) unincorporated debtors; (2) quasi-security devices and (3) financial collateral. We deal with these separately later in this Part.

Major reservations of consultees

2.44     There were some reservations expressed in relation to the scheme as provisionally proposed in the CP, and some suggestions that we have not adopted. A few went to the nature of the scheme. We deal with them here.

Registration of the charge document

2.45     It was suggested by a couple of consultees that the charge document itself should be registered in an electronic format, and possibly that registration should be an essential element of the validity of a charge. This, it was said, would provide more information than the financing statement, while priority could then depend simply on the date of creation. We do not favour this approach for three reasons.^[76] First, many expressed concern that the proposals made in the CP to require the secured party to provide certain third parties with information about the terms of the charge, or perhaps a copy of the charge document itself,^[77] might mean that confidential information would have to be made public. Partly because of these objections, we no longer propose that the secured party should have to provide information about the terms of the charge or a copy of the document (nor indeed do we propose to allow anyone other than the debtor to demand information from the secured party). In particular, to require the secured party to give a copy of the charge document might mean that the documents had to be drafted so that the 'charge' was in a separate document from matters that were properly confidential. The suggestion that the charge document itself should be registered would risk the same problem. Secondly, the requirement would inevitably lead to problems over incomplete documents being filed and arguments over what constitutes 'the charge'. Thirdly, as one of the consultees admitted, this approach would not be compatible with bringing quasi-securities into the scheme, because with these the relevant document is the whole of the sale agreement or lease and because it would prevent the possibility of advance filing, which is particularly important for quasi-securities.

Reduction of information that is publicly available

2.46     Company charge registration was intended to prevent the implication of false wealth, whereas its role in governing priorities has grown almost by accident.^[78] Several consultees have correctly pointed out that the proposals involve a shift of emphasis: registration would be made easier, and there would be clear and rational rules of priority, but at the expense of some loss of information. The question is, how much useful information would no longer appear on the Companies House register?

Financing statements compared to particulars of charge

2.47     It may appear that relatively little information would be required on a financing statement: the details of the debtor, those of the secured party, the duration of the filing and a brief description of the collateral. In fact the current scheme requires only two additional items: the amount secured by the charge and the date it was created or on which the company acquired the property subject to the charge.^[79] The statement of the amount secured is not a useful piece of information since, unless the charge is for a fixed amount, it is most unlikely to be accurate by the time anyone searches the register.^[80] To provide the date on which the charge was created is not possible in a system that has the advantage of allowing filing before the charge has been agreed or has attached.^[81] Thus we do not think the reduction of information on the financing statement as compared to what is currently required is significant.

Specialist registers

2.48     SIs over assets for which there is a specialised register – aircraft, ships, certain types of intellectual property rights and above all land – would no longer be registrable at Companies House.^[82] This would avoid the need for dual registration and allow priority issues to be governed by the rules of the relevant register alone. It would however mean that an enquirer would no longer be able to discover such charges merely by searching the Companies Register.
2.49     In relation to charges over land, the first point is that any subsequent secured party intending to take security over the land, and any buyer, will normally want to check, and register in, the relevant land register; if they do so they will inevitably discover an existing SI. It is true that at present an equitable mortgage over registered land may bind a subsequent purchaser even though it is not on the land register, and that some equitable mortgages over company land appear to be registered only on the Companies Register.^[83] This is likely to change when electronic conveyancing is introduced under the Land Registration Act 2002: then all mortgages and charges will have to be registered.^[84]
2.50     Thus we are concerned principally with other enquirers, for example unsecured creditors. We certainly accept that unsecured creditors, or at least credit rating agencies, rely on the Companies Register.^[85] It may be questioned whether it would be a significant burden on a credit rating agency to have to check the relevant land register in addition to the Companies Register. But in any event we may be able to use information technology to make this unnecessary. The Land Registration Act 2002, section 121 allows for the Land Registrar to transmit applications to register charges over land onward to the Registrar of Companies. The purpose was to avoid the need to register twice. That would not be necessary under our scheme, but implementing the forwarding provision would ensure that the necessary information would normally be shown on the Companies Register. Alternatively it would be possible to establish links between the two registers so that a search against a company at Companies House would also reveal mortgages that are registered in the Land Registry against the company's land.^[86]
2.51     Mortgages and charges over registered aircraft and ships that have been registered on the relevant specialist mortgage register will no longer have to be perfected by filing at Companies House. We are told by experts that the taking of security over such assets is very specialised, and that no lender that is seriously looking to the ship or aircraft as security will rely on registering or searching merely at Companies House. We also very much doubt that a credit rating agency assessing the worth of a company known to have registered aircraft or ships would not check the aircraft or ship register and it would be very little additional burden then to check the relevant mortgage register.^[87] We conclude that loss of information from the Companies Register about registered mortgages over registered aircraft and ships will be of little practical consequence. (We take a similar approach in relation to interests affecting intellectual property rights, where they are capable of being registered at the Patents Office, where the registers are held.)

Registration will be voluntary

2.52     Registration (notice-filing) will no longer be compulsory and there will be no time limit, save that registration at the 'last minute' before insolvency will not be effective.^[88] Consultees have suggested that this will make the register less reliable. Again, only unsecured creditors would be affected: if an SI has not been perfected, it will not bind buyers unless they know of it and it will lose priority to a subsequent secured party who files (or perfects its interest in some other way, for example by taking possession) first. In any event, it seems unlikely that many secured parties will not file promptly, given the severe risks that not perfecting will entail – loss of priority and ineffectiveness of the SI in the debtor's insolvency.

Filing before an SI is created

2.53     The scheme allows filing in advance of the security agreement. This allows a potential secured party to file while negotiations are proceeding (providing the debtor consents to the filing being made).^[89] It is pointed out, quite correctly, that there would be a risk of the register becoming cluttered with items that do not represent actual SIs. This has exercised us too; but enquiries in other jurisdictions suggest that this has never proved a problem there and that the risk is small.
2.54     First, filing will only be effective if done with the debtor's consent and it can be expected that debtors will be circumspect in giving their consent to a filing.^[90] Secondly, if further finance is sought from another secured party, it will insist before anything else that any filings that are not concerned with existing security agreements are removed. (The debtor has the right to require the removal of 'empty' filings.^[91]) If the new secured party does not insist on this, it takes a risk that the party who has already filed might subsequently advance funds to the debtor and, because of the earlier date of its filing, have priority. The effect of this practice is that the register is to a degree 'self-cleansing'. The small risk of 'clutter' seems clearly outweighed by the advantages of permitting advance filing, particularly as it enables a secured party to file just once for a series of future transactions with the same debtor. As we shall see, this is particularly useful for title-retention devices, but we think that it would be of value even for a scheme applying only to company charges.^[92]

Conclusion on 'loss of information' overall

2.55     We accept that were notice-filing to be introduced there would be some overall reduction in the amount of reliable information that could be obtained by a search of the Companies Register. However our conclusion is that the reduction will not be significant. In practice potential chargors already have to obtain further information from specialist registers or from the parties to existing charges. The advantages of the notice-filing scheme seem to outweigh the likely 'loss of information'.

The floating charge

2.56     The other issue that concerned consultees, including many of those who said that they were in favour of the notice-filing scheme, was that the effect of the scheme on the floating charge was not clear from the CP. There was concern that the scheme should not prevent lenders from using a floating charge or its equivalent.
2.57     We agree and we accept the criticism that in the CP we did not make the effect of the scheme on the floating charge as clear as we should have done. We used old labels to describe new concepts, continuing to speak of 'floating charges' when under the notice-filing scheme the distinction between fixed and floating charges will in practice disappear. In place of the floating charge^[93] there will be a new form of SI that seems, at least from the point of view of the secured party, to have all the advantages of the floating charge without most of the disadvantages.
2.58     Under the scheme, any security agreement may permit the debtor to dispose of the collateral free of the SI without obtaining the secured party's consent at the time.^[94] Even if the security agreement does not give such authority, a buyer of goods from a debtor who normally sells goods of that kind will take free of any SI created by the seller/debtor unless the buyer knows the sale to be in breach of the security agreement.^[95] Thus the company will remain entirely free to continue to trade its inventory in the normal way. Conversely, a person buying goods from a dealer in the kind of goods in question need not search the register.^[96] Sales of other goods - one-off sales of capital equipment, for example - will require the secured party's consent if the buyer is to take free of the SI. This in effect gives the lender what currently will be achieved by taking a combination of a fixed charge over capital equipment and a floating charge over inventory. As the scheme permits the parties to agree that the debtor may have the right to dispose of any item free of the charge, it gives the charge the same flexibility as the current law.
2.59     In addition it gives the chargee a more secure priority position. Provided the SI is perfected, it will retain its priority over subsequent SIs other than purchase-money security interests (PMSIs).^[97] (PMSIs will of course be over 'fresh' property.^[98]) Thus in future there will be no question of a 'floating' charge being overtaken by a subsequent 'fixed' charge, nor any need for a negative pledge clause. Even with inventory, the SI will be treated as attaching as soon as the debtor acquires the property. The secured party will therefore also have priority as against judgment creditors who might seize the collateral. Crystallisation will no longer be relevant unless the parties deliberately agree to postpone attachment until some event occurs. To make the position absolutely clear, especially with charges that were created before the scheme came into operation,^[99] the scheme provides that attachment will not be postponed merely because the SI is described as 'floating'.
2.60     Some uncertainty remains over the exact effect of the scheme, because the distinction between fixed and floating charges is of importance in the legislation relating to insolvency.^[100] Policy issues relating to insolvency are issues for the Government rather than the Law Commission: our brief does not include insolvency. However, it is clear that if the scheme we provisionally propose were to be implemented, a good deal of consequential amendment would be needed to the current insolvency legislation. We have discussed our scheme with the Insolvency Service, and although we have identified some areas that will need amendment, we are continuing to work on this area. It is our intention that our reforms should effectively be insolvency-neutral).^[101] One particular area of concern relates to preferential creditors and the unsecured creditors' fund. We do not know how the Government will choose to deal with this, but it seems appropriate for the Law Commission to suggest a possible solution. So far, the most promising candidate is that adopted in New Zealand. In broad terms the NZPPSA identifies the kind of collateral that, in practice, is not likely to be subject to any security or 'quasi-security' interest other than the floating charge, and gives preferential creditors priority over any SI over that kind of collateral. The provision is explained in detail in Part 3, but in broad terms the preferential creditors have first call on inventory that is not subject to a PMSI and on receivables which are subject to an SI that was not for new value at the time.

Would the cost outweigh the benefits?

2.61     The other major reservation expressed by several consultees was simply whether the cost of implementing the scheme will outweigh the benefits. Many of these respondents accepted that the old scheme has deficiencies, but said that it is not completely unworkable; we have lived with it for years and could no doubt continue to do so.
2.62     Whether the benefits justify the costs of change is a critical question that affects every aspect of the scheme. One reason for issuing this consultative report is to provide an opportunity for those affected to make an accurate assessment. An assessment needs to be made of the costs and benefits of notice-filing for company charges, and then separate assessments for the extensions to SIs created by unincorporated debtors, to quasi-security and to investment property, and in respect of the statement of rights and obligations. We deal here just with notice-filing for company charges.
2.63     In the long term, the cost of registering charges should be reduced considerably. Electronic filing will be much easier and cheaper than registration under the current scheme, and will require less skilled staff.^[102] Court proceedings for filing out of time will be unnecessary (as will the administrative inconvenience of alternatively executing a new charge). There should also be considerable savings for Companies House. No précis of detailed charge documents will need to be undertaken by Companies House staff, indeed no details will be entered onto the register by staff at all: this will all be done by the user. We are told that in New Zealand the Personal Property Securities Register has been operating without any permanent full-time staff – essentially someone simply has to check the computer from time to time. New Zealand has a much smaller population and a less commercialised economy than our own but there is no reason to think that a larger operation would involve disproportionately higher costs.
2.64     There would undoubtedly be short-term and transitional costs. The cost of setting up the register would probably not be great – we have been told that in New Zealand it cost just over US $1m and paid for itself in seven months. There would be some cost for regular users to set up the direct links to enable them to transmit their data directly to the registry without further input.
2.65     The most significant short-term cost will be that to secured parties and their lawyers or agents, in changing their procedures and re-training their staff. It is not possible for us to make an accurate assessment of these costs but, in relation to a scheme for company charges only, we would not expect these costs to be very great. The rules on what needs to be filed and the methods of filing and searching will be significantly simpler and may well mean that financiers no longer need to employ lawyers for the purpose. The rules of priority would not be simple – though we suggest that they would be simpler, and a great deal easier to discover, than the current law – but only a relatively small number of specialists need to know them, and many lawyers involved in aspects of secured finance are broadly familiar with them already through working with SIs taken under one of the laws of North America. It is not much of an exaggeration to say that most staff concerned need learn only two rules – before you lend against a security, (1) search; and (2), file – even if you are not sure whether you need to.^[103]
2.66     There would be transitional costs, but fortunately these may be lower than we at one stage feared. We thought initially that in order to avoid having two schemes for company charges – one old, one new – running in perpetuity, it might be necessary to require re-registration of existing charges. That would be costly and time-consuming; we are told that chargees often have poor records of what charges they have taken. It now seems that this will not be necessary. We understand from Companies House that the electronic registers can be set up so that a single search against a company will reveal both SIs under the new scheme and charges registered before the commencement of the scheme. (It may be necessary for secured parties to file financing statements for previously unregistrable charges within a transitional period. This should depend on whether the benefit of making the electronically-searchable record complete would be outweighed by the cost of finding these charges and filing – a question on which we ask for views.^[104])
2.67     Thus while we are not in a position to make an accurate assessment of the costs and benefits of the scheme, our provisional view is that the costs of changing from the current scheme of registration and priority of company charges to the notice-filing scheme outlined earlier would not be great and would be relatively slight compared to the benefits to be obtained. This conclusion and the nearly unanimous support for this change from those who responded to our CP lead us to recommend that, unless the response to this consultative report reveals convincing reasons to the contrary, a notice-filing scheme for company charges should be adopted. The details of the scheme will be considered in Part 3.^[105]
2.68     We provisionally recommend that a wholly electronic notice-filing scheme for company charges, and an associated scheme of priorities, should be introduced.
2.69     We would welcome consultees' estimates of the costs and benefits of introducing the scheme as set out in the draft regulations, but limited to 'traditional' securities.

Unincorporated businesses

2.70     In the CP we provisionally proposed that the notice-filing scheme should apply not only to company charges but also to those created by other debtors.^[106] The Bills of Sale Acts 1878-1891 impose highly complex and draconian registration requirements on mortgages and charges created by unincorporated debtors. They make it very difficult for unincorporated businesses to create fixed charges over their equipment and effectively prevent them from granting floating charges. We suggested that the Bills of Sale Acts should be repealed and replaced by the same scheme as is proposed for companies.
2.71     This consultative report is primarily concerned with SIs created by companies, but the question of how best to deal with them is connected with what should be done about SIs in general. At several points we will refer to this question, particularly when we discuss extension of the notice-filing scheme to quasi-security.^[107] We therefore take this opportunity to report that among those who commented on the issue in response to our CP and subsequently there was very wide support for replacing the Bills of Sale legislation by the proposed scheme for notice-filing for mortgages and charges.
2.72     What did concern many consultees was the proposal to introduce legislation on SIs created by companies before that for unincorporated debtors. It was said that this would lead to an unacceptable fragmentation of the law in principle and to difficulty in practice. We have sympathy with this view; we too would prefer a single piece of legislation dealing with SIs created by all forms of debtor. However we do not think that this would be a crucial issue were the scheme to be limited to include only mortgages and charges (that is, 'traditional' securities). The law governing the registration of company charges is already completely different from that applying to charges governed by the Bills of Sale Acts and as a result the rules of priority also differ to some extent. Where the issue becomes important is in relation to the extension of the scheme to quasi-security issues. We return to it below.^[108]
2.73     In terms of the costs and benefits of extending the scheme for registration of charges to cover unincorporated businesses, the benefits should be significant. It is evident from the replies of consultees, even from the few who doubted the need to change the current law in this area, that the present system does create barriers to small business raising finance in flexible ways; it works only because a business that needs to borrow on a secured basis can incorporate.
2.74     The additional cost could be quite small. The overall scheme would apply just as it would apply to companies. We see three possible additional elements of cost.
2.75     There might be a significant cost if it were thought that extending the scheme to charges created by unincorporated businesses made it necessary to set up a new registry, whether to deal with all charges over personal property or just those not registrable at Companies House. In our view there would be no need to set up a new register in any more than name if only charges created by unincorporated businesses were to be brought within the notice-filing scheme. The system that (we assume) Companies House will already be operating will be dealing with companies that are not registered in this country,^[109] and we think Companies House could properly be asked to take charges created by unincorporated businesses onto its computer system even if, nominally, they were to be registered under a separate 'unincorporated businesses' scheme. It would really require little more than a separate website linking into the same electronic database as for companies. We would add that, although we expect the number of such charges to increase from the very small numbers of security bills of sale currently registered, the overall numbers would probably remain relatively low. (We return to the issue of a separate register when we consider quasi-securities.^[110])
2.76     The second additional cost might be in developing a system to identify unincorporated businesses. A person seeking to register a charge or to search against a company will be able to work via both the company name and its registration number. If the name and number being used do not match, the system will give a warning.^[111] It would be an advantage if something similar applied to unincorporated businesses, but as they do not have to be registered at Companies House or elsewhere, there cannot be an exactly parallel system. However, we think that for the majority of businesses against which charges are likely to be registered an equivalent check could be devised, perhaps using the VAT registration number. Even without that, we think that it will usually be obvious from the address shown on the financing statement whether or not the correct debtor has been identified. Thus we do not think that the second possible cost will be a significant one.
2.77     The third cost is simply the transitional cost of changing to a new system. Given the very small numbers of security bills of sale registered against unincorporated businesses, we do not think either that the cost of requiring these to be re-registered, or the cost of re-training any staff who have been involved in making such registrations in the past, will be significant.
2.78     The CP also contained our provisional proposal that some SIs created by consumers should be within the scheme. We suggested that the present rule preventing consumers from charging their after-acquired property should be maintained and asked whether consumers should also be prevented from creating non-PMSIs over their property, as had been proposed by the Crowther and Diamond reports. We asked whether 'consumer SIs', particularly those over property other than motor vehicles, should have to be perfected by registration. Few of the responses tackled these issues in any detail. Fortunately they have little impact on the remainder of the scheme, and we do not cover them in this consultative report. We are continuing to work on them and plan to include recommendations in our final report.
2.79     We provisionally recommend that the notice-filing scheme for companies should be extended to SIs created by other business debtors as soon as possible.
2.80     We would welcome consultees' estimates of any additional costs and benefits of extending the companies scheme as set out in the draft regulations to all business debtors.

Quasi-security devices

2.81     In our CP we provisionally proposed that the notice-filing scheme should apply not only to traditional securities (mortgages, charges and pledges) but also to any device that is 'functionally equivalent' to a security. This would include title-retention devices such as hire-purchase agreements, finance leases and conditional sales.
2.82     We also provisionally proposed that other transactions that do not or may not have a security purpose, but that are hard to distinguish from those that do should be brought within the scheme for certain purposes. Thus all outright transfers (sales) of receivables would be registrable, as would commercial consignments that do not have a security purpose and operating leases of over one year.^[112] The schemes adopted in North America and New Zealand all require registration to perfect all sales of receivables and all consignments; most PPSAs require it for operating leases over one year, but the Ontario PPSA and the UCC do not.
2.83     There are a number of reasons for including 'quasi-security devices' within the scheme.

(1) These devices serve the same purpose as traditional security devices. For example, under a conditional sale or hire-purchase agreement the seller or owner retains title only in order to ensure that, in the event of default, it may repossess the goods and use the proceeds of their disposition to satisfy the outstanding debt. However, current law looks to the form, not the substance, and treats quasi-security in a very different way from, for example, a charge.

(2) Quasi-securities do not have to be registered. This means that a company may be in possession of assets that are, in functional terms, subject to an SI; but potential secured lenders (and other purchasers of a company's assets), creditors and investors will not know, in the absence of information from one of the voluntary registration schemes^[113] or the company itself, that assets which are apparently free from registered charges are in fact not the absolute property of the company. The Cork report called for retention of title clauses in particular to be registrable.^[114]

(3) Title-retention devices are treated differently from securities in that the former are not subject to the same rules on default. Under a mortgage any surplus achievable on resale would have to be returned to the debtor; under a quasi-security such as a sale and lease-back it would be retained by the lender. In the case of retention of title clauses the courts have tried to reduce the differences in effect by means of implied terms and the law of restitution.^[115]

2.84     The Crowther and Diamond reports recommended that all transactions that have the effect of securing repayment of a loan or performance of an obligation should be treated in the same way as traditional security devices. All the North American schemes and the NZPPSA are to this effect.^[116]
2.85     On the question of including quasi-security the responses to our CP were divided. Some were strongly in favour, others against and a large number wished to know more about the details of the scheme so as to be able to evaluate the costs and benefits.^[117] Interpreting the responses of consultees is complicated further by two factors. The first is that some expressed different views depending on the nature of the scheme to be introduced (that is, 'companies-only' or 'all debtors').^[118] We think the way to approach this is to consider first whether a 'full' scheme (that is, one applying to SIs created by both companies and other incorporated businesses) should cover quasi-securities. If our conclusion on this point is that it should, we will then return to the question of whether a companies-only scheme should include them.^[119]
2.86     The second factor is that some supported the inclusion of some types of quasi-security more strongly than they did others. We take them in turn.

Sales of receivables

2.87     There was quite wide support for including the sales of receivables within the scheme, even among consultees who opposed the inclusion of title-retention devices.^[120] This is because it is at present hard to find out whether a company has sold, rather than charged, its receivables; and because the new priority rule, depending on the date of filing, appears to be much more suitable to modern conditions than the existing rule, under which priority depends primarily on the date of notice of the assignment to the account debtor. It is not practicable to check with each account debtor to find out whether a notice of assignment of the debt has been given, nor will the assignee always wish to give notice simply in order to preserve its priority as against a competing assignment.^[121] There was some disagreement as to whether the scheme should apply only to receivables sold on a recourse basis (that is, if the debt is not paid the seller must repurchase the debt or make good the loss), as these resemble a secured transaction more closely than those sold without recourse. However many supported the argument in the CP that it is so hard to distinguish between those that resemble a secured transaction and those that do not (for example, a sale may be made without recourse but with a warranty of payment from the assignor) that it would be better to bring all outright sales within the scheme.^[122]
2.88     We have therefore provisionally concluded that if the scheme is to include any quasi-securities, all sales of receivables should be within the scheme for the purposes of perfection and priority. The scheme of remedies discussed in the CP and provisionally recommended in Part 5 of this consultative report, and in particular the rule that any surplus must be paid to the debtor, would not apply to sales of receivables.^[123] In this sense, sales of receivables are 'deemed' rather than 'in-substance' SIs.^[124]

Title-retention devices

2.89     Consultees were divided or undecided over the proposals to include title-retention devices within the scheme. Many simply accepted that because the devices have the same functional purpose as security, they should be treated in the same way as security, and did not give detailed reasons for their support. It was pointed out that accounting standards sometimes require a 'substance over form' approach to accounting.^[125] Other arguments in support will appear below.
2.90     Consultees opposed to including title-retention devices made several arguments. Requiring registration will provide more information but it will impose a burden on finance companies. Bringing in title-retention devices will have little impact on priorities, since as PMSIs they will still rank ahead of other SIs. Further, title-retention devices will in effect be re-characterised as SIs despite the parties' deliberate choice of a different structure. If the SI is not registered, and sometimes even when it is, the debtor will have power to transfer ownership to a buyer without notice even though the debtor is not an owner. Other consequences would follow if the scheme set out in the statement of rights and remedies that we propose in Part 5 were to be adopted. If after default and repossession the goods realise more than is due to the secured party (including interest and costs) the surplus must be returned to the debtor. There may be consequences for the tax treatment of finance leases. Finally, it was argued that it was not appropriate to include title-retention in a companies-only scheme.
2.91     These are strong arguments. There are also counter-arguments. It is helpful to consider separately the advantages of a registration scheme for title-retention devices over (1) motor vehicles and similar items that have unique serial numbers; (2) other equipment supplied to the company for use; and (3) inventory in the form of either materials for manufacture or finished products for resale. We will then consider re-characterisation.

The advantages of title-retention devices

Vehicles

Finance leases

2.92     With vehicles and other (designated) forms of goods that have unique serial numbers it will be possible to provide for registration of the vehicle identification number (VIN) in the financing statement and for searching by VIN alone. A serial-number search would reveal any SI that has been perfected by a full filing, whether created by the person who is offering the vehicle for sale or a previous owner. Most finance agreements over vehicles are now registered voluntarily with commercial organisations such as HPI and Experian (who share information).
2.93     Our scheme would go further than providing information. Under current law, a finance company that fails to register an agreement with a voluntary register such as HPI is not thereby prevented from enforcing its agreement.^[126] Several representatives of members of the Finance and Leasing Association volunteered that they would like to see this rule changed. Our scheme would have that effect. Under our proposals, if the VIN were not included, any buyer without actual knowledge of the existing SI would take free of it. Conversely, if the financing statement did contain the correct VIN, any buyer should be bound by the SI.^[127]
2.94     Many of those to whom we have spoken in the motor finance trade have welcomed our proposals warmly.^[128] Some of the organisations concerned have suggested that there might be difficulties in dealing with company vehicles alone; this is a real difficulty that we discuss below.^[129]
2.95     One of the companies that operates a voluntary registration scheme also suggested that our proposals might interfere unjustifiably with its business if it permitted searches by assets. Our scheme would affect the role of organisations such as HPI and Experian but we do not believe it would diminish it in practice. We anticipate that many finance companies would wish to file through them as agents because they can offer data 'cleansing' or checking services – for example, checking that all the information about a vehicle tallies with that held by DVLA – that Companies House would not be able to provide. Equally we think it unlikely that either dealers or members of the public will search the Companies House register directly for vehicle data. HPI and Experian can provide a great range of other information (for example, whether a vehicle has been reported stolen or is an insurance write-off) in addition to that about SIs. We anticipate that there will be a continuing demand for all this information, including that on SIs derived from the Companies House register.

Operating leases of over one year

2.96     In the CP we proposed that any lease of goods for more than one year should be brought within the scheme of perfection and priority, whether or not it had a 'security purpose' in the sense of securing a debt or the performance of an obligation. Thus an operating lease for more than one year would be treated in the same way as a finance lease in that, if it were not perfected by filing, the lessor would risk loss of priority to a buyer or subsequent secured party and, if the lessee became insolvent, the lease would not be effective against the administrator or liquidator.
2.97     Article 9 of the UCC does not treat operating leases as SIs. We understand that in the early years after the introduction of Article 9 there was a great deal of litigation between finance companies and trustees in bankruptcy over whether leases of goods were finance leases and were thus ineffective because no filing had been made; but that this kind of dispute is now very uncommon. The explanation is simply that if there is any possibility that the lease might be viewed as a finance lease, the lessor will file as a precaution. The later Canadian schemes^[130] and the NZPPSA have taken the practical step of requiring filing for operating leases of more than a year if they are to be fully effective. This makes it much easier for would-be buyers, subsequent secured parties and liquidators to determine whether the goods belong outright to the company or are subject to a lease, while reducing disputes over which kind of lease is involved to a minimum. It is only in the relatively small number of cases in which the lessee defaults and the goods have a value of more than the outstanding debt that there will be any point in seeking to determine which type of lease was involved. If the lease was a finance lease, the scheme of remedies and, in particular, the rule that any surplus must be paid to the debtor, applies. If it was an operating lease, these provisions do not apply. Like a sale of receivables, an operating lease is a 'deemed' SI.^[131]
2.98     In the CP we asked whether all leases of over one year should be registrable, or only those that have a security function. Opinion among consultees was divided, but subsequent discussion with those in the industry and others suggests that many do see an advantage in bringing operating leases of over a year within the scheme of perfection and priority, particularly where vehicles are concerned, as the register would then give a more complete picture of whether a vehicle is subject to a lease or other title-retention agreement. Therefore in Part 3 we make the provisional recommendation that leases of over one year that do not have a security purposes, as well as all leases that do have a security purpose, should be within the scheme. We think that to include these would increase the register's value to those involved in vehicle finance and leasing.

Other equipment

2.99     With equipment that does not have a unique serial number, the advantage is not so obvious because there is no possibility of searching against the piece of equipment itself. An intending buyer or subsequent secured party can only search against the name of the seller and, though it will take free of any unperfected SI created by the seller, it will take subject to any perfected SI created by a prior owner. Nonetheless a number of experts from the finance leasing industry have told us that having a registration scheme, with the associated sanction for non-registration, would still be worthwhile from their point of view. This seems to be confirmed to some extent by the fact that HPI and the other organisations receive a significant number of registrations of finance agreements over equipment that does not have a unique serial number.
2.100     There would also be advantages to other financiers or potential buyers, who would have a clearer idea of what equipment is owned by the company outright and what is subject to an SI. This information would also be of value to liquidators.
2.101     Again there is the question whether to include operating leases within the scheme. We think that this would give added value to the scheme, just as with vehicles.^[132]

Inventory supplied under a retention of title clause

2.102     The last case is inventory supplied under a retention of title clause that, expressly or by implication, gives the buyer the right to consume the inventory or to resell it free of the SI. Registration would again provide useful information to other secured parties (particularly 'stock' financiers who specialise in lending against that part of a company's inventory that they consider is not likely to be subject to a retention of title clause) and equally to liquidators.
2.103     Is there any advantage under our scheme for the retention of title supplier itself? There is no obvious advantage. The supplier will be unable to enforce its right to claim the goods in the buyer's insolvency unless it has filed. However, the scheme as a whole does provide such a supplier with some benefits that are not readily available under current law. Many retention of title clauses purport to give the supplier a right to goods made from what it has supplied or to the proceeds of sale. These clauses are almost invariably held to be ineffective as unregistered floating charges and we understand that few are registered because of the trouble and cost of registration – particularly as, unless the transactions are very carefully structured under a master agreement, each separate contract to sell will require separate registration.
2.104     Under our scheme that will change. One filing per debtor (the buyer) will suffice and, as we have already said,^[133] filing on-line will be cheap and easy. For high-volume users such as suppliers who normally use retention of title clauses in their conditions of sale we anticipate special arrangements under which information entered into a secured party's own system (for example, when the contract to sell is recorded) can be forwarded to the registry without further data input.
2.105     We expect that many suppliers would take advantage of easy filing to file for SIs over 'new goods' and 'proceeds'. Thus there is 'something in it' even for the retention of title supplier.^[134]
2.106     To avoid doubt, the draft regulations contain a provision that where a transferor retains an SI in goods the regulations only govern the security aspect of the transaction. For other purposes, and to the extent that they are not inconsistent, the law relating to contracts of sale or supply of goods governs the transfer.^[135]

Re-characterisation

2.107     The argument that the scheme would mean some re-characterisation of the transaction is quite correct. The question is whether the degree of re-characterisation involved is justified by the advantages that it would bring. In fact re-characterisation may refer to a number of changes that need to be considered separately.

Re-characterisation (1): the supplier may lose its title

2.108     One form of re-characterisation is that legal title may be lost if the SI is not perfected. Thus if a finance lease or an operating lease for over a year has not been perfected by registration, a sale or further lease to a buyer or lessee who does not have actual knowledge of the SI will give the buyer or lessee a title free of the SI. The degree of change on this point may easily be overstated. We are used to the idea that a buyer in possession can pass title that it does not have;^[136] we are less used to it in relation to hire-purchase (save where the Hire Purchase Act 1964, Part III, applies) and quite unfamiliar with it in relation to finance leases. Our scheme involves widening the exceptions to the basic principle that a person cannot pass a title he or she does not have.^[137] But the basic principle is already riddled with exceptions; and it should be noted that what the motor vehicle financiers – who usually are the legal owners of the vehicles – seem to be seeking is just this form of re-characterisation, at least with finance leases and possibly with operating leases of over one year.^[138] The hirer or lessee is not an owner, but if the financier has not filed, a sale or other disposition by the hirer or lessee should give the innocent purchaser rights in priority to those of the financier. What to lawyers may be a painful change to familiar conceptual structures may be precisely the practical relief that industry needs.
2.109     The scheme also has the effect that if the financier has not perfected its SI the collateral may be seized by an execution creditor;^[139] and the debtor may create a second SI in the collateral – an SI that, if the first SI had not been perfected by filing, will take priority but that otherwise will be junior to the earlier SI.^[140] Similarly, if the debtor becomes insolvent, the collateral may be taken by the liquidator.^[141] These are further aspects of the same form of re-characterisation. Those in the industry who have welcomed the scheme seem to view these rules as necessary sanctions to encourage filing.

Re-characterisation (2): the right to any surplus

2.110     A different form of re-characterisation of title-retention devices would occur if the scheme for the statement of rights and remedies that we propose in Part 5 were to be adopted. This is in relation to the surplus rule. This too may seem a major wrench to current concepts. But we have been told repeatedly, though not universally, that all title-retention financiers are concerned about is to recover the sum owing under the agreement, including interest and charges, plus any costs they have incurred. In the unlikely event that there is any surplus after these have been recouped, it is a windfall in which they have no particular interest.^[142] They would be content for this to be returned to the debtor. Indeed, we are told that well-drawn agreements (which we take to mean, those involving large enough sums to make negotiation over the terms worthwhile) frequently provide for the return of any surplus to the debtor. We have also been told that if the lessee is insolvent, a finance company that has received from the proceeds of disposition all that is due to it will often, if asked, voluntarily hand any surplus to the liquidator for the benefit of other creditors. Here again legal concepts and practical needs may be different. Once more there appears to be an argument in favour of re-characterisation.

Re-characterisation (3): tax consequences

2.111     A form of re-characterisation that has given us cause for concern relates to the tax treatment of finance leases. This is whether treating finance leases as security devices, and subjecting them to the scheme of remedies that we propose in the statement of rights and remedies in Part 5, would mean that the lessor (the finance company) was no longer treated as the owner of the leased goods for tax purposes, so that it would no longer be able to claim the current tax advantages.
2.112     The issue appears to be this. Finance leases take a variety of forms. They frequently envisage that the lessee will in effect pay the full capital value of the goods, plus the costs of financing the transaction, and will obtain the economic benefit (and risks) of ownership. Thus many finance leases provide that for 'the primary period' the payments will be at a high rate, to pay most of the value of the goods; once that is complete, there is a secondary period during which the lessee has the right to use the equipment at a low rental. This might continue until the equipment has reached the end of its useful life. It is then returned to the lessor or disposed of for it by the lessee and scrapped. Alternatively (or in addition) the lessee may be empowered to dispose of the equipment as agent for the lessor and to retain, typically, 95% of any difference between the net sum obtained and the balance due under the lease. Thus neither type of lease has any provision for the lessee to become owner of the goods.^[143]
2.113     We are told that in the past this has been a critical question for the purposes of the accounting and tax treatments of finance leases. As far as accounting is concerned, finance leases were a form of 'off balance sheet' arrangement. We understand that this has now changed and that assets held on finance leases must be shown on the balance sheet,^[144] as must property that is subject to a charge. The tax treatment of finance leases, however, still differs from that accorded to either hire-purchase or property that is bought with funds from a lender to whom it is subsequently charged. The fact that the company leasing the goods never becomes legal owner of them means that the finance company can use capital depreciation allowances on the goods. This allows it to defer payment of tax and the savings resulting from this deferral will be (in part at least) passed on to the lessee. The question is whether our scheme would have the effect that a finance lease would be re-characterised so that this tax advantage would be lost.
2.114     It is certainly not the purpose of our scheme to alter the tax treatment of any form of security device, but at first sight it does seem that if the tax treatment depends on the ownership of the asset, the tax position might be altered. The effect of the scheme is, for example, to treat a sale on retention of title terms in a similar way to a true sale coupled with an SI in favour of the seller; and the same might be said of its treatment of a finance lease. For example, the UCC and PPSA schemes include a set of remedies that in the event of default apply to any transaction that, like a finance lease, has a 'security purpose'. As we have seen, one of the central provisions is that if the secured party repossesses and disposes of the collateral, any surplus must be returned to the debtor.^[145] In all the schemes except the NZPPSA this is a mandatory provision.
2.115     Further analysis suggests that it does not necessarily follow that the tax treatment of finance leases will change, because (in our view) neither ownership in a formal legal sense nor ownership in an economic sense will change.
2.116     Formal legal ownership will not change. The lessor will remain the owner. The change will be that, if the lessor fails to perfect its interest, that interest is liable to be lost to a buyer of the goods. That is something that can happen in a number of different cases - for example, if the owner is estopped from denying the authority of someone who purports to sell the goods on its behalf^[146] - but it has not been suggested that the power of the third party to transfer title means that, before any transfer takes place, the 'owner' is not the owner after all. Equally, the lessor who fails to perfect may lose to an execution creditor or the liquidator, but the lessor remains, formally speaking, the owner.
2.117     Will the lessor remain owner in an economic sense? Provided the lessor perfects the interest, it is not liable to be lost to an execution creditor or to the liquidator, nor do we think that the other rules of the scheme mean a change. It appears that the provision that the lessor will ultimately get back either the equipment or 5% of its value is sufficient for the lessor to be treated as an owner in the economic sense. This will not change. If, as will happen in the vast majority of cases, the agreement runs its course without a default, the contractual provisions will be followed and the equipment, or 5% of any residual value realised when the equipment is sold, will be returned to the lessor. The lessor's right to the machine or the 5% is therefore one of the obligations of the lessee under the agreement. The scheme of remedies that we would introduce requires the surplus to be paid to the debtor,^[147] but it is the surplus left after application of the proceeds to various items including 'the satisfaction of obligations secured by the security interest'.^[148] The obligation to return the machine or pay 5% to the lessor, will normally be one of the obligations secured. Thus the lessor will still be entitled to the residual value of the machine, or the agreed percentage. There is therefore no reason why ownership in the economic sense should be changed by our scheme.
2.118     We have recently submitted our view to the Inland Revenue for their opinion; they have not yet had time to consider the issue fully. Pending their response, it is our view that our scheme will not necessarily lead to the re-characterisation of finance leases for tax purposes.
2.119     Even if we are wrong, it may not be a matter of great moment. We have been told by contacts in the finance leasing industry that the tax advantage of finance leases is now a relatively minor concern. Whether this is universally true we do not know; it may not apply to leases of very 'big ticket' items.^[149] We would welcome information from consultees. It is worth noting also that the Government is currently considering reform of corporation tax, including changing the way in which leasing transactions are taxed.^[150]

Companies only

2.120     The remaining argument was that it is inappropriate to include title-retention devices in a companies-only scheme. We are concerned about the awkwardness of having to apply these rules to title-retention devices where the lessee, hirer or buyer is a company when, at least for a while, our scheme is unlikely to be extended to unincorporated debtors. It would certainly make the law on 'title-retention devices' more complex. For example, until extended to all debtors, the rules on when the purchaser of a vehicle will take free of an unperfected SI over the vehicle would vary according to whether the debtor who created the SI was a company or not.
2.121     One consultee suggested that differences in treatment would often lead to practical difficulties or 'turbulence in the [vehicle] market'. We are not convinced. It will normally be clear whether the SI in question was created by a company or some other debtor and thus which set of rules should apply. For example, if the dispute is as to the priority of competing interests over a debtor's property, which set of rules governs will depend simply on whether the debtor is or is not a company. If the question is whether a buyer has taken free of an SI, the question will depend on whether the debtor that created the SI was a company.^[151] It is of course true that an item of property may at different times have been dealt with by a company and by an unincorporated debtor, so that different rules about transfer of title will apply at different stages, but similar issues arise under the current law when property has passed through a number of hands. For example, the rules affecting motor vehicles under the Hire Purchase Act 1964, Part III, vary according to whether the person who bought a vehicle was a 'trade buyer' or a 'private buyer'. However, we accept that it would be unfortunate for the law to be unnecessarily fragmented between companies and other debtors.
2.122     We are faced with a stark choice. The anticipated Companies Bill gives us an opportunity to establish the notice-filing scheme for companies. If we do not seize that opportunity, we reduce the chance that any of the scheme will ever reach the statute book. A Bill introducing this scheme from scratch would require much more Parliamentary time and Departmental effort than to take powers, and have regulations made, under a Companies Bill. It is true that primary legislation would then be needed in order to extend the scheme to unincorporated debtors; but it would in substance be merely a re-enactment of the companies scheme with a wider scope of application. That should require much less Parliamentary time and Departmental effort. It would be ideal to insist on enactment of the entire scheme all at once but those with close knowledge of the legislative process have advised us not to recommend an all-or-nothing approach. The best might be the enemy of the good. We have concluded that, on balance, if (as we provisionally recommend) the scheme should ultimately cover quasi-securities for all business debtors, these should be included at the 'companies-only' stage.

Costs and benefits

2.123     We have described the benefits that we think would flow from bringing the various types of quasi-security within the scheme. We have also mentioned that the cost of filing would be low, both in terms of any fee and in terms of the time and level of expertise involved. This would particularly be so for secured parties using the system regularly. What of the costs? Again they fall into several groups.
2.124     There would be some additional cost in terms of setting up the register. Compared to a charges-only scheme there would be a much higher volume of registrations, particularly if title-retention devices were to be included. Thus the computer equipment used would have to have a higher capacity for data entry, storing and searching. We are not able to put a figure on this cost but it seems unlikely to be enormous.
2.125     If at a later stage the scheme were to be extended to cover security and quasi-security created by unincorporated businesses, it might be thought necessary to set up a separate registry, whether to deal with all SIs over personal property or just those not registrable at Companies House. However, as we suggested when we discussed the extension of notice-filing to charges created by unincorporated businesses, this may be no more than creating a new or separate 'public face' or gateway to the same database that will hold records of SIs created by companies. Once the system is up and running, the human input required is limited. While it may be too much to hope that a system as large as would be required would need proportionately only the same number of staff as the New Zealand Personal Property Securities Registry (which employs no full-time staff), we think the numbers would be small.
2.126     There would be some cost involved in registering existing quasi-securities. We aim to minimise this by having a relatively long transitional period. New quasi-securities would have to be perfected (by filing or otherwise) from the commencement date, but existing ones would be treated as perfected, and would retain their existing priority position against purchasers, until the end of the period.^[152] Only if they had not been perfected by the end of the period would they be subject to the usual consequences of non-perfection. If the period were set at, say, seven years the vast bulk of existing title-retention devices would have run their course before it ended, so that it would never become necessary to file them.^[153] It is true that this would mean that the scheme would not become fully operational for seven years, but that seems preferable to imposing the cost of registering all quasi-securities within a shorter time.
2.127     As with the notice-filing scheme generally, the principal cost will be the human one of adapting business systems and training staff to deal with the new system. However we repeat that for most staff 'learning the new system' will be simple. They need learn only two rules – before you lend against a title-retention device, or purchase a receivable, (1) search; and (2) file – even if you are not sure whether or not you need to.

Conclusions on quasi-securities

2.128     For the reasons given earlier,^[154] we consider that sales of receivables should be brought within the notice-filing scheme for the purposes of perfection and priority (but not the statement of remedies explained in Part 5).
2.129     The question of title-retention devices is much more nuanced. The UCC and all the PPSAs enacted in Canada and New Zealand do include quasi-securities. We have not been able to conduct our own research into the success or otherwise of those schemes but there is evidence that the schemes as a whole are regarded as very successful.^[155] A survey of practitioners in Ontario - probably the province whose economy comes closest to our own in complexity and sophistication – found a high level of satisfaction with the scheme.^[156] Criticisms were made of the scheme but the inclusion of quasi-securities was not one of them – indeed 70% of those who expressed a view on the question thought that the scheme should be extended to cover operating leases.^[157] The authors of the survey concluded that commercial lawyers in Ontario were very pleased with the PPSA and 'fully supported the radical changes' that it had made.^[158]
2.130     It is true that unlike Ontario and many of the jurisdictions that have introduced PPSAs, English law does not currently impose any registration requirements on title-retention devices; and that we have well-established voluntary schemes that deal efficiently with some of the worst problems. However, for the reasons we have given, we think that there would be overall advantages to most of those who are affected by the law of title-retention – suppliers, finance houses, buyers, unsecured creditors and liquidators – were the scheme to cover title-retention devices.
2.131     We also think that there would be definite advantages in subjecting leases of over one year that do not have a security purpose as SIs for the purposes of perfection and priority.^[159]
2.132     We recognise that the questions whether or not the ultimate scheme of registration and priority should include quasi-securities, and whether any extension should be made at the companies-only stage, are difficult and controversial. We agree with the many consultees who argued that it is difficult for them to give an answer without seeing the detail of the proposed scheme.
2.133     We therefore decided to work up a scheme that would include quasi-securities. We also provisionally decided that the disadvantages of a 'split system' would be less than those of having no reform at all, and thus we provisionally recommend a companies-only scheme as the first stage, to be followed as soon as possible by an extension to SIs created by other debtors. Therefore the scheme that has been worked up includes quasi-securities at this first, companies-only stage; quasi-securities are included in this consultative report and in the draft regulations in Appendix A. However, we also decided that, so far as possible, the scheme should be drawn up and the legislation drafted in such a way that the provisions dealing with the extension to quasi-security should be severable from the remainder. If after analysing the responses to this consultative report we decide not to recommend the extension to quasi-securities, the relevant provisions can be omitted without bringing down the rest of the scheme. Equally it would be possible to defer the implementation of those provisions.
2.134     We have already said that a cost-benefit analysis must be central to the decision whether or not to adopt a notice-filing scheme. The Law Commission does not have the expertise or the capacity to conduct a detailed analysis of either the costs that particular businesses would face were the scheme to be introduced, nor of the benefits they would derive from it. One of the purposes of this paper is to enable businesses to make that evaluation in the light of a fully worked up scheme. We hope that as many as possible will do so and will let us know their conclusions.
2.135     We provisionally recommend that even at the companies-only stage:

(1) sales of receivables should be brought within the notice-filing scheme for the purposes of perfection and priority (but not the statement of remedies); and

(2) title-retention devices that have a security purpose should be brought within the scheme (including the statement of remedies).

If consultees do not agree with these recommendations we ask whether they think that the relevant SIs should be brought into the scheme:

(a) only at an 'all business debtors' stage, or

(b) not at all.

2.136     We ask consultees whether they agree that operating leases of over one year and commercial consignments that do not have a security purpose should be brought within the scheme for the purposes of perfection and priority:

(a) at the 'companies-only' stage (our provisional recommendation), or

(b) only at an 'all business debtors' stage, or

(c) not at all.

2.137     We would welcome consultees' estimates of any additional costs and benefits of including (a) sales of receivables, and (b) title retention devices in the scheme as set out in the draft regulations. If it is possible, it would be helpful if consultees were to give separate estimates for both a companies-only scheme and one for all business debtors.

Financial collateral

2.138     In the CP we raised the issue of charges over securities and bank accounts. We explained that Revised Article 9 of the UCC provides a special method of perfecting an SI over these types of asset, particularly to deal with SIs over shares and other investment property held in dematerialised form, by the secured party taking 'control' of the registered holding, securities entitlement or bank account. With investment property, an SI perfected by control will have priority over one perfected by any other means; with bank accounts, the SI can only be perfected by control. We provisionally proposed that we should apply the same rules to charges over bank accounts and shares, but asked whether control should be the only method of perfection in both cases.
2.139     The responses we received are not easy to interpret.^[160] Many of them, for example, called for registration of all charges over shares and bank accounts, but this has now become impossible under European law.^[161] Subsequent discussion suggests that there is wide, though not unanimous, support for bringing charges over these types of property within the scheme but permitting perfection by control. In the circumstances, and because it is our provisional view that investment property and bank accounts should be within the scheme, we thought it best to develop this aspect in this consultative report, and to cover it in the draft regulations, so that consultees can see in detail how it would work. In this Part we explain why we think it is important for the scheme to cover security over investment property and bank accounts, and give a brief description of our proposals. The proposals will be explained in detail in Part 4.

Shares and other forms of investment property

2.140     Shares and other forms of investment property are of enormous importance as collateral. Convenient and legally robust financial collateral arrangements are crucial to the effective functioning of the wholesale financial system. Companies have very large holdings of various kinds of investment property and need to be able to use them as security, and to do so with confidence that the legal position will reflect accurately proper commercial practices and reasonable commercial expectations. In particular the law must accommodate the fact that much investment property is now held in dematerialised form. The law should make it clear how lenders may take security and, where there is a contest between different SIs or other interests over the same assets, what the rules of priority are. At the same time the law must not hinder trading in investment securities. Thus there must be ready mechanisms that suit the needs of the various parties:

(1) secured parties should be able to take effective security without the need to file;

(2) both potential secured parties and potential buyers should be able to take security over/buy the collateral without the need to search, confident that they will not be subject to SIs of which they are not aware; and

(3) debtors (so far as compatible with the relevant settlement systems) should be able to continue to deal with the investment securities.

2.141     However the law that applies is neither clear nor satisfactory. First, there seems to be some doubt as to when a security (for the moment we will deal only with traditional security devices) has to be registered. Leaving aside for the moment the effect of the Financial Collateral Directive,^[162] the position is as follows. Floating charges require registration and this will apply to a charge over just shares if the charge agreement allows the debtor to continue to dispose of the shares in the portfolio without the creditor's consent to each disposition. A fixed charge over shares is not on the list of registrable charges but some lawyers take the view that if the charge entitles the chargee to the dividends it may have to be registered as a charge over book debts. An arrangement under which the creditor is given physical share certificates by way of security is probably not a pledge of the shares but a fixed equitable mortgage over them; it is likewise not registrable unless the creditor is also entitled to the dividends and these constitute book debts.
2.142     The Financial Collateral Directive (FCD) prevents Member States from imposing 'the performance of any formal act' where shares, bonds or other securities are 'delivered, transferred, held, registered or otherwise designated so as to be in the possession or control of the collateral taker' under a 'security financial collateral arrangement' that is 'evidenced in writing'.^[163] The FCD has been implemented by the Financial Collateral Arrangement (No 2) Regulations 2003 (FCAR), which apply to security financial collateral arrangement between non-natural persons,^[164] and provide that section 395 of the Companies Act 1985 does not apply to such arrangements (if it would otherwise do so).^[165]
2.143     It has been suggested to us that in the light of those provisions we should simply leave security over investment securities out of the scheme altogether. We disagree, for three reasons.
2.144     The first reason is the need to clarify the law. Neither the FCD nor the FCAR define what is meant by 'possession or control'.^[166] There is some doubt as to what will constitute sufficient control for the FCAR to apply. It is almost certain that merely having a floating charge over the shares does not amount to control.^[167] It is certainly sufficient if the shares or entitlements are transferred into the name of the secured party.^[168] Something less than this may suffice, but it is not certain what. For example, with indirectly-held investments it is unclear whether it is enough that the intermediary has been given notice of the assignment by way of charge, or whether the secured party must get the intermediary to agree to hold to its order (an attornment). With investments held directly on the books of an issuer, since under English law an issuer may not take notice any such arrangement, it seems that the secured party must have the shares transferred into its name; with those to which title is determined by entry on the CREST operator's register, it is presumably enough that the shares have been placed in an escrow account controlled by the secured party.
2.145     The second reason is a technical one. The exemption from section 395 granted by the FCAR applies only to 'financial collateral arrangements' that involve the 'collateral provider' transferring legal and beneficial ownership to the secured party, or the secured party taking 'possession or control' of the collateral. A fixed charge over indirectly held investment securities requires the taking of control and thus would be exempt, but it is also possible to take floating charges over investment securities where the chargee has no 'control' over the investment securities.^[169] These require registration, and cause no problem under current law since any subsequent fixed charge or disposition of the investment securities (for example, under a 'repo') will, because of the general rules of priority of the floating charge, have priority over it. Under our new scheme, however, there will be some fundamental changes. Floating charges as such are likely to disappear. Any security agreement may allow the debtor to dispose of the collateral free of the SI.^[170] Further, the old rules of priority of subsequent fixed charges will also disappear: the SI's priority as against other SIs will depend on the date of filing or perfection. Thus, unless special provision were made under the scheme, a filed non-possessory SI over investment securities would take priority over a later one under which the secured party took (in the words of the FCD) 'possession or control'. That would defeat the aim of the FCD to ensure the ready transferability of investment securities. It is necessary to create an exception for investment securities, and the clearest way in which to do that is to provide that a secured party who perfects an SI over investment securities by taking 'control' will have priority over one who merely perfects by filing (or some other method). At the same time our scheme will define what, in English law, amounts to 'possession or control' for this purpose.^[171]
2.146     The third reason is probably the most important. Experts have told us that it is vital that those who take security over investment securities should know what rules of priority apply in the event that a second secured party claims an SI over the same collateral. We also think it is vital that the priority of a secured party who takes control should not be open to challenge by one who has not done so. This might happen under current law. Although the basic rule of priority for intangibles like shares is that it depends on the order in which notice was given to the intermediary,^[172] a party who takes an assignment with knowledge of a prior assignment cannot gain priority by giving notice first.^[173] Which rules apply seem to vary according to whether the shares are indirectly held (when the rule in Dearle v Hall applies) or are held on the books of the issuer (when the rules of priority depending on the date of creation and whether the second interest is legal or equitable, and was taken with or without notice, seem to apply).^[174] Our scheme aims to establish clear rules of priority under which a secured party who takes control will always have priority over one who has not done so, whether or not the party who takes control knows of the other SI.^[175]
2.147     In our view the introduction of the notice-filing scheme presents an invaluable opportunity to provide a clear set of rules to underpin the FCAR and to deal with priority issues. Revised Article 9 of the UCC has developed a scheme that seems to be clear and sensible. It is being considered for adoption as part of the 'Model' PPSA in Canada.^[176] From the discussions we have had with experts in the area, it seems to fit with good practice in this country and to be readily adaptable to the slightly different arrangements that pertain here.
2.148     We provisionally recommend that SIs over investment property should be brought within the scheme, and that it should be possible to perfect such SIs by 'control'.

An outline of the notice-filing/control scheme for investment property

2.149     For investment securities such as shares and bonds, the outline of the scheme would be as follows:

(1) It will be possible for the secured party to perfect by taking 'control' of the collateral, as an alternative to perfection by filing.

(2) What amounts to control will vary in accordance with the nature of the investment property (because of its nature or the rules of the scheme under which it is held). An SI over investment securities may be perfected by 'control' in the following ways:

(a) with bearer securities, by taking possession;

(b) with certificated securities in registered form,

(i) by taking possession of the certificate and, we suggest, a signed transfer form (in which case the secured party is described as having taken 'delivery'), or

(ii) by being registered as the holder;

(c) with uncertificated securities to which the holder's rights are evidenced by an entry on the register of the operator of a settlement system such as CREST,

(i) by the secured party being entered in the operator of the settlement system's register as the holder; or

(ii) by the operator, on the instructions of the registered holder, placing the investment securities into a sub-account in the holder's own name where they are subject to the instructions of the secured party and not those of the registered holder;

(d) with uncertificated securities to which the holder's rights are evidenced by an entry on the issuer's books, by being entered as the holder;

(e) if the debtor's interest is a security entitlement in the books of an intermediary, and if the security agreement is evidenced in writing:

(i) by the secured party being entered in the accounts as the entitlement holder; or

(ii) by the intermediary agreeing that it will comply with instructions of the secured party without further consent from the entitlement holder (has entered into a 'control agreement'), whether or not the entitlement holder retains the right to deal with the entitlement; or

(iii) by the secured party being itself the entitlement holder's intermediary.

(3) An issuer or intermediary is not obliged to enter a control agreement even if the debtor directs it to do so.

(4) The control agreement may be expressed to relate either to the individual securities entitlement or to the account of which that entitlement forms part; and when an SI attaches to the account it also attaches to the entitlements held in the account.

(5) Where an intermediary creates an SI over investment securities held by it in its own books, the SI is treated as perfected as soon as it attaches ('automatic perfection').

(6) A secured party who perfects by control will take priority over an SI perfected by any other method (or which is unperfected), whether or not it has given value and whether or not it knew of the prior interest.

(7) As between SIs perfected by control, priority will (unless agreed otherwise) be in the order that the secured parties obtained control. There will, however, be exceptions to this rule:

(a) an SI created by an investment intermediary over an entitlement or account with itself will have priority over SIs in favour of other parties; and

(b) a party who takes control, gives value (including existing indebtedness) and takes without notice of an earlier SI or other adverse claim may take free of it. (Such a person is known as a 'protected purchaser'.) We say 'may' because the rules differ according to the nature of the investment property. With certificated or uncertificated securities, the rule is just as stated. For security entitlements, the purchaser will take free only if the financial asset is credited to its account (rather than a control agreement being made that the intermediary will accept its instructions without further reference to the debtor).

(8) An intermediary is not required to confirm the existence of a control agreement unless required to do so by the entitlement holder.

2.150     It will be seen that the scheme has the effect that when an SI is perfected by control, the secured party need not file, and that a secured party who perfects by control, or a buyer who obtains control, has no need to search any register beforehand. The rules fit for the most part with the general policy we adopted in the CP^[177] that registration should not be necessary in order to perfect an SI if its existence should be sufficiently evident to third parties. In the cases so far described, except one, we think that any potential secured party or buyer of the investment securities will inevitably discover the existence of the SI, and that therefore it is unnecessary to require filing. The one exception relates to escrow agreements under CREST. CREST will not reveal these agreements to third parties even on the holder's instructions. This seems very minor, since if SP2 were concerned to obtain priority it should seek to obtain control, and when it attempts to do so it will inevitably discover SP1's interest. In any event we have now realised that the policy stated in the CP cannot always be achieved in a pure way without unjustifiably impairing the operation of the relevant market. Under the 'intermediaries' scheme, SP2 should be able to discover the existence of the existing SI by enquiring of the intermediary, and if the entitlement holder so requests the intermediary must disclose the SI. In any event, if it becomes the entitlement holder without knowledge of any adverse interest it will take free of it.
2.151     We have spoken so far of SIs over investment securities. Exactly the same scheme may be applied to any asset that is held by way of book entry in an account maintained by an intermediary, for example, commodities or cash. Under the UCC and the proposed Canadian schemes there are exactly parallel provisions for commodities and commodity contracts. We are told that investment securities and commodities were treated separately purely because in the US they are subject to separate regulatory regimes. This does not apply here, but the FCAR apply only to financial instruments (and cash held in an account^[178]). To make comparison easier, the draft regulations have followed the UCC pattern but we would welcome advice whether we might have a single set of provisions dealing with indirectly-held investment property of any kind.^[179]
2.152     So far we have referred exclusively to charges over investment property. In the CP we pointed out that there are also forms of quasi-security – in other words, devices that have a security purpose – that are used over investment property. The principal one is the 'repo'.^[180] A company that wishes to raise money on the 'security' of its shares will sell them to a lender on terms that it will repurchase identical shares, at a future date or possibly on demand, at a price equal to the purchase price plus a financing charge (calculated in the same way as interest on a secured loan). One advantage of the scheme is that it permits the buyer/lender to deal with the assets as its own, perhaps by using the securities as collateral in further transactions with third parties. The party granting the security can also be given the right to deal with them and have a right of substitution.
2.153     In the CP we provisionally proposed that transfers under a 'repo' should not be registrable.^[181] All but two of those who commented on this proposal agreed.^[182] The FCD and the FCAR apply to repos, which are described as 'title-transfer' financial collateral arrangements.^[183] There is some doubt as to whether the provisions of Revised Article 9 of the UCC apply to repos. However it will be seen that the effect of the rules is that where the secured party has become the registered holder or the entitlement holder it will always have control,^[184] so there will be no question of having to register; and it will always have priority, normally taking free of any other interest or adverse claim.

SIs over bank accounts

2.154     Cash held in accounts is an important form of security. As we explained in the CP, it has long been recognised that a debtor may create a charge over a bank account in favour of a secured party other than the bank. There was doubt as to whether the bank itself could take a charge over an account held with itself, and instead a form of set-off agreement was often used; but it now appears that a bank can take a charge over an account of its own customer.^[185] A charge over a bank account is probably not currently registrable unless it is a floating charge. Further, the FCD and the FCAR apply as much to cash held in an account as they do to investment securities.^[186]
2.155     If we were not to make some special provision, the result would be a breach of the 'publicity principle' proposed in the CP,^[187] in that there might be a charge that would not be evident either from the Companies Register or by enquiry from the bank. Under current law a fixed charge requires that the chargee take 'control' (in a different and much more restrictive sense than that word means in our scheme), in which case the SI will be evident to the bank; and a floating charge must be registered. As we have explained, under our scheme the distinction between fixed and floating charges will in practice disappear. Thus unless filing is required of charges that are not perfected by control, there might be a charge in existence that would be effective as against unsecured creditors but which has not been notified to the bank.^[188]
2.156     Many consultees argued that there should be 'public notice' of any SI over a bank account. The FCD means that we cannot follow the suggestion that all such charges should be registered. However, since the FCAR apply only when the collateral taker has 'possession or control' of the account, and that phrase is left undefined, we have the opportunity to define it within our scheme so that the exemption will apply only when the SI has been agreed to by the bank, or at least is known to it;^[189] and to require that any other SI be perfected by filing. It also presents an opportunity to establish rules of priority that, like those proposed for investment property, will enable bank accounts to be used as collateral with the minimum of investigation and the maximum of confidence.
2.157     Again the UCC provides a model.^[190] It requires some adaptation, principally because at the insistence of the banking authorities Article 9 does not permit an SI to be perfected over a bank account otherwise than by control. This limitation seems illogical^[191] and was not supported by any of our consultees. In most other respects, however, Article 9 again seems to be a useful model that fits with good practice here. We provisionally recommend that SIs over bank accounts should be brought within the scheme; and that it should be possible to perfect such SIs by control.

Outline of scheme for bank accounts

2.158     In outline the scheme would be as follows:

(1) An SI over a bank account may be perfected by control as an alternative to filing:

(a) where the secured party is the bank itself, without more; or

(b) where the secured party is a third party,

(i) if the bank has agreed in writing with the debtor/account holder and the secured party that it will comply with instructions of the secured party without further consent from the account holder, or

(ii) if the secured party becomes the account holder (sole or joint). This will also require a written, tri-partite agreement.

(2) The secured party (whether it is the bank or a third party) is not prevented from having control by the fact that the debtor retains the right to dispose of funds in the account.

(3) A bank is not required to enter a control agreement with a secured party even if its customer so directs.

(4) A bank need not confirm to a third person the existence of a control agreement unless so required by the debtor (its customer).

(5) An SI over a bank account that has been perfected by control has priority over those perfected in any other way (or are unperfected). This includes SIs over cash proceeds that are paid into the account.

(6) Priority between SIs perfected by control will be in the order that control was acquired, except that:

(a) where the secured party is the bank itself, the bank will have priority, unless

(b) the other secured party has taken control by becoming the account holder, when that secured party will take priority over any SI of the bank itself.

(7) Where a third party secured party has an SI over a bank account, the bank may still rely on defences available against the debtor and set off against the secured party sums due to the bank from the debtor. However, set-off of sums due from the debtor is not available against a secured party who has taken control by becoming the account holder.

(8) The existence of a control agreement does not affect the bank's normal rights and duties in relation to the account.

These points are discussed in more detail in Part 4.

2.159     We would welcome consultees' estimates of the costs and benefits of our provisional recommendations for financial collateral.

A statement of the parties' rights and obligations

2.160     The UCC and the PPSAs all contain provisions setting out the law on the creation of SIs, the rights and duties of the parties to the security agreement, and the enforcement of SIs following default. These rules apply to most SIs, whether they are 'traditional' securities, such as charges or mortgages, or quasi-securities such as title-retention devices. However, the provisions relating to default and enforcement do not apply to 'deemed' SIs (that is, sales of accounts, and leases for more than one year or commercial consignments which do not secure payment or performance of an obligation).
2.161     When we have discussed whether our proposed scheme for companies should have a similar set of rules, we have in the past tended to speak of a 'restatement'. This was a shorthand term, as some - but not all - of the rules would change existing law rather than simply put it on a legislative footing.
2.162     In the CP we suggested that a restatement of the law of security would make it easier to see which rules should apply to the SI in question,^[192] and we provisionally proposed that our scheme should contain a restatement.^[193] However, because we envisaged (as is still the most likely outcome) that our proposals for companies would be implemented before any of those for non-corporate debtors, we also asked in the CP whether any restatement should form part of the companies stage, or whether it should wait until a scheme for 'all' debtors was implemented.^[194] We in fact offered three choices:

(1) that the Regulations for 'company charges' should include a restatement;

(2) that they should include (for title-retention devices only) a clause stating that such transactions should be treated 'as if' they were true securities; or

(3) there should be no provisions in the Regulations, so that for the time being quasi-securities would be subject to filing requirements (or rather, the need to perfect) but would not be subjected to the restatement rules governing traditional securities.

2.163     We said that we did not favour (2) because it might cause uncertainty over which rules should apply to which interests. Partly because we did not think we would have time to prepare a full restatement, and partly because we felt that to include one would exacerbate the differences between companies and other debtors,^[195] we provisionally proposed the third approach.
2.164     The responses to these consultation questions showed a wide range of opinions, and the complications over the 'staging' questions make it hard to get a clear picture. Some thought that if quasi-securities were to be included, a restatement would be essential. Several doubted the necessity of a full restatement, although most seem to have thought that it would be desirable, provided that there could be a second consultation on the detailed proposals. On the question of staging, more respondents agreed with our provisional proposal than on any other solution, but the picture is confused because there was (as we have noted) disagreement over whether quasi-securities should be included at the companies-only stage.
2.165     Our work on the provisions of rights and remedies of the other schemes has revealed that they are more radical than we had appreciated. The UCC and the PPSAs apply a single scheme of remedies to all types of SI, with exceptions only when necessary. (This is what seems to be meant when it is said that the UCC/PPSAs recognise a 'single security interest'.) This simplifies the law a great deal, and indeed makes it unnecessary for the parties to mould their security agreement into any of the existing forms. It will be perfectly adequate for them to agree that the secured party is to have 'a security interest' in the particular collateral. Thus a legislative statement of rights and remedies presents a major opportunity for simplification. That seems to us to strengthen the case for it. However, by the same token it suggests that it is not really appropriate to refer to the scheme as a 'restatement.' That term may be misleading. In this consultative report we use the term 'statement of rights and remedies', to avoid any confusion as to whether some changes would be brought about to the existing law: in some cases there would be such change.
2.166     Given the view of the majority that ultimately a full scheme should contain a statement of rights and remedies, and since the revised timetable for drawing up secondary legislation for the companies scheme is now such that we can have a further consultation on the detailed proposals, we include a statement of rights and remedies within this consultative report and have been able to produce draft regulations accordingly.^[196] Part 5 of this consultative report deals with this statement in more detail.
2.167     In the light of the responses to the CP and after the discussions held at the discussion seminars, our provisional view is that it would be sensible to include the statement of rights and remedies in the companies-only scheme. As several consultees pointed out, to apply the scheme only to SIs created by companies would create a further gulf between these and those created by other debtors; but we take the provisional view that the differences are already so great that the scheme would make little difference. We see an advantage in making the companies-only scheme as complete and clear as possible.

An outline of the statement of rights and remedies

2.168     To give an idea of what is involved, we list here the provisions that we have provisionally included in the draft regulations that relate to the statement of rights and remedies:

(1) Application (DR 56),

(2) Overlap with security over land (DR 57),

(3) Receivers (DR 58),

(4) Rights and remedies (DR 59),

(5) Collection rights of secured party (DR 60),

(6) Rights of secured party (DR 61),

(7) Disposal of collateral (DR 62),

(8) Disposal of collateral: requirement to give notice (DR 63),

(9) Calculation of surplus or deficiency in disposition to secured party etc (DR 64,)

(10) Distribution of surplus (DR 65),

(11) Deficiency (DR 66),

(12) Acceptance of collateral in full or partial satisfaction of obligation (DR 67),

(13) Redemption (DR 68),

(14) Determination as to whether conduct was commercially reasonable (DR 69),

(15) Applications to court (DR 70).

2.169     There should be a savings provision for principles of common law, equity and the law merchant, save as far as such principles are inconsistent with our legislation.
2.170     Although many of the other schemes include provisions on fixtures, accessions to goods and processed or commingled goods, these seem to reflect different common law rules in the relevant jurisdictions. In the light of discussions at the seminars held after publication of the CP we do not think such provisions should be included in our scheme.^[197]
2.171     Two possible provisions suggested in the paper prepared for the seminar on this topic proved to be sufficiently controversial to merit mention at this point. One was a provision to the effect that all rights and duties that arise under the security agreement or the legislation must be exercised or discharged in good faith and in a commercially reasonable manner. The other was a provision that the rights and obligations on default set out in the scheme should be mandatory in the sense that the secured party is not permitted to reduce the debtor's rights.

Good faith

2.172     A provision to the effect that all rights and duties that arise either under the security agreement or the legislation must be exercised or discharged in good faith and in a commercially reasonable manner features, in one form or another, in the UCC and all the PPSA schemes.
2.173     UCC Section 1-203 provides that:

Every contract or duty within this Act imposes an obligation of good faith in its performance or enforcement.

Good faith is defined for general purposes as 'honesty in fact in the conduct or transaction involved'. For the purposes of Article 9 a broader definition applies: '"good faith" means honesty in fact and the observance of reasonable commercial standards of fair dealing.'^[198] However it seems that this applies only where Article 9 itself refers specifically to good faith, which in the Part on remedies is only in one provision.^[199]

2.174     Some of the PPSAs include a provision imposing a general obligation to act in good faith or in a manner that is commercially reasonable.^[200] SPPSA section 65(2) is typical:^[201]

All rights, duties or obligations that arise pursuant to a security agreement, this Act or any other applicable law are to be exercised or discharged in good faith and in a commercially reasonable manner.

It seems that a breach of this duty will render the party liable in damages.^[202]

2.175     Requirements of good faith in this sense^[203] are rare in English law. English law does not recognise any general duty to act in good faith, let alone in a commercially reasonable manner. At first sight the provisions of the other schemes appear to be a recipe for uncertainty. As one respondent put it:

One of the great advantages of English law is the ability of the parties to write their own contract in the knowledge that a court will enforce it without replacing the parties' bargain with the courts' own judgment of what ought to have been agreed.^[204]

We agree.

2.176     However it is widely recognised that though English law does not have a general doctrine of good faith, it frequently achieves similar results by particular rules.^[205] Indeed, in the field of SIs some of the duties owed to a mortgagor are already couched in the language of good faith. In addition, the courts have recognised that one party may be under a duty to act reasonably, or to use reasonable care, in a number of situations. Under current law a secured creditor (or receiver appointed by it) is under a duty to exercise its power in good faith for the purpose of obtaining repayment.^[206]
2.177     A clear distinction is drawn between the general duty of good faith, which is broken only if there is 'some dishonesty or improper motive, some element of bad faith',^[207] and the duties of care owed in more specific circumstances. The secured party does not owe a general duty to use reasonable care when exercising its powers and in dealing with the assets of the mortgagor.^[208]
2.178     This has not prevented the courts recognising duties to act with reasonable care in an increasing number of specific instances. Equity^[209] imposes certain duties including a duty on the secured creditor to take reasonable care to obtain a proper price.^[210] This duty is owed to the mortgagor and to a subsequent encumbrancer. In Medforth v Blake^[211] the Court of Appeal held that a receiver who chose to manage a business owed the mortgagor a duty to do so with due diligence. This did not require him to continue the business but, if he chose to do so, it required him to take reasonable steps to manage it profitably.
2.179     Moreover, it is likely that a court would interpret the new scheme, so far as it could, in such a way as to avoid one party being able to exercise its rights in a way that is commercially unreasonable. For example, in the analogous field of the power of the mortgagee to set interest rates, the Court of Appeal has held that the power was fettered by an implied term. This was to the effect that not only would the lender's discretion not be exercised dishonestly, for an improper purpose, capriciously or arbitrarily but also that it was subject to a Wednesbury-type unreasonableness test: it could not be exercised in a way that no reasonable lender acting reasonably would do. This, as the court emphasised, is very different from requiring the lender to set a reasonable rate.^[212]
2.180     Thus we think that even a general provision along the lines of those in the UCC or SPPSA would be consistent with both existing English law and current trends within it. We do not think that a provision requiring all rights and duties that arise under the security agreement or the legislation to be exercised or discharged in good faith and in a commercially reasonable manner would empower a court to substitute its own judgment for that of the parties, or to override the express rights given by the agreement. It would merely give the court an overt power to prevent a party from exercising its rights in a manner that was commercially unreasonable rather than having to achieve the same result by means of more covert techniques such as interpretation or the implication of terms.
2.181     However, we understand that in fact the impact of the general provision on good faith in the UCC on Article 9 has been very slight indeed. It appears that it is often cited but has had no appreciable effect on the outcomes of the cases. Rather, it seems that the more important provisions of Article 9 are those specific ones that require the parties (and particularly the secured party) to act in specified circumstances in a way that is commercially reasonable. The principal situation is in relation to disposing of collateral after the debtor's default, when the 'method, manner, time, place and other terms' of the disposition must be commercially reasonable.'^[213] There are only half a dozen other references in Article 9 to a requirement to act in a commercially reasonable manner, each one being even more specific.^[214] There is only one reference to good faith.^[215]
2.182     Thus it seems that a scheme of rights and remedies can be made to work without any general requirements of good faith or commercial reasonableness, provided that specific requirements are imposed where necessary. Given the importance that we attach to certainty, we have decided to follow this model and not to include any general provisions. We provisionally recommend that any scheme of rights and remedies should not contain a general reference to 'good faith', nor a general requirement that either party exercise its rights or perform its obligations in a commercially reasonable manner. Instead there should be specific requirements when these are necessary. So that consultees can see for themselves whether or not they agree with our assessment of how these provisions would work, we have included them within our scheme.^[216] There are also two ancillary provisions. One states that the parties may, by agreement, determine the standards which fulfil the rights of a debtor or obligations of a secured party under a provision that requires commercial reasonableness, provided that the standards are not manifestly unreasonable.^[217] The other gives specific guidance in various situations.^[218]

Mandatory rules

2.183     A provision that the rights and obligations on default set out in the scheme should be mandatory, in the sense that the secured party is not permitted to reduce the debtor's rights, is found in the Ontario and Saskatchewan PPSAs. The UCC has a closed list of specific provisions that cannot be waived by the debtor.
2.184     In contrast the NZPPSA opted to allow the parties freedom to vary the rules, but not in such a way that might affect third parties. This seems a good idea in principle; but in practice, as we will explain in detail in Part 5, it allows the parties little additional freedom and seems to cause uncertainty. For example, the NZPPSA provides that the debtor may give up its right to the surplus. However this will not affect a second creditor who has a right over that surplus. Thus SP1 may be entitled to the surplus as against the debtor but have to pay it to SP2.
2.185     Although we are attracted to avoiding an element of compulsion over the terms of agreements where it is not strictly necessary, our provisional view is that it would be simpler and more effective to make the surplus rule mandatory. However, as we explain in more detail in Part 5, we favour the UCC's approach of a closed list of mandatory rules to the general provision of the Canadian schemes.
2.186     Again we have included the provisions within the draft regulations so that consultees can make their own evaluation, but in Part 5 of this consultative report we also set out the New Zealand alternative so that consultees can examine both and advise us.
2.187     In any event we think that it will be seldom that parties will find it useful to vary the scheme and very rare that any varied provisions - for example, waiving the debtor's right to receive the surplus - will actually come into play. Thus although a decision must be made one way or the other, we do not think it affects the viability of the scheme of rights and remedies set out in the statement.

Conclusion on the legislative statement of rights and remedies

2.188     Overall, we think that to include a statement of rights and remedies in the notice-filing scheme would have significant benefits in terms of clarity and simplicity. The law would be clearer than if the statement were omitted because it would set out clearly which remedies were applicable to which type of SI. As consultees pointed out, this would be particularly important if, as we also provisionally recommend, quasi-securities were to be brought within the scheme. In such a case we think that it would be essential to have at least provisions dealing with the right to any surplus following disposition; but we think that it would be highly desirable to include the other provisions we have suggested. The law would be simpler because the same set of rights and remedies would apply to every type of transaction that has a security purpose, whatever its form. Indeed it would no longer be necessary for the parties to adopt any particular form of SI. It would suffice that they had agreed that the secured party should take 'a security interest' in identifiable collateral and that the SI had been perfected by filing or any other means that is applicable under the scheme.
2.189     This would not prevent the parties from devising new forms of security device or agreeing to different remedies, provided that (subject to the decision on whether certain default rules should be mandatory) the 'floor' of rights of the debtor set out in the scheme was not touched. Given the rather basic nature of those rights we think that, even if the rules were made mandatory, there would be very little loss of flexibility in practice.
2.190     It is our provisional conclusion that to include a statement in the notice-filing scheme would have significant benefits in terms of clarity and simplicity. We provisionally recommend the inclusion of a statement of rights and remedies in the 'companies-only' scheme.
2.191     We would welcome consultees' estimates of the costs and benefits of our provisional recommendations for including a statement of rights and remedies.

Conclusions on principal issues

2.192     Reviewing the issues that have been explored in this Part, it is our provisional recommendation that a scheme of notice-filing with its associated rules of priority should definitely be adopted for company charges and, as soon as Parliamentary time permits, for charges created by unincorporated businesses. The current law is not completely unworkable, nor does it have such serious flaws as did American law before the UCC, with no equivalent of the floating charge and a multiplicity of filing requirements. Nonetheless, electronic notice-filing would be much less costly and much more efficient than registration under the current law; the reduction in the 'public notice' function would be slight; and the rules of priority would be clearer and more appropriate to modern conditions.
2.193     The question of extending the scheme to cover quasi-security devices, and particularly to title-retention devices, is more difficult. Our provisional view is that the overall benefits would outweigh the costs, both in the short and long terms. However we hope that with the explanation of the details of the proposed scheme in this consultative report, consultees will be in a position to make a proper evaluation.
2.194     It is our provisional recommendation that the scheme should also include provisions on SIs over investment property and bank accounts, in particular developing the notion of perfection by 'control' and providing appropriate rules of priority. We think that this will provide an important legal underpinning of the FCAR. We believe that this will increase the confidence of those who wish to lend against the security of these kinds of property. This is particularly important for investment property: having an effective and predictable law on SIs over investment property may increase the attraction of keeping such property in accounts that are governed by English law. At present the governing law depends on the place of the relevant register but, with indirectly held investments, if the Hague Convention is brought into force, the parties will have a large measure of freedom to choose the law to govern their holding. We think that our scheme would make a choice of English law even more attractive than at present.
2.195     As to the statement of rights and remedies, we believe that it is worth incorporating even at the companies-only stage in order to clarify and simplify the law. We would not, however, include general provisions regarding good faith or commercial reasonableness.
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Note 1    Potential buyers of the property that is subject to a security interest should be added to this list.    [Back]

Note 2    See CP para 3.4. In relation to priority, we argued that a scheme should enable potential secured parties to be confident (a) that they can take a security without any risk that it will be subject to other existing interests of which they had no reasonable means of knowing; (b) that, having checked the register, they will be able by taking simple steps to ensure the priority of any security they subsequently take over one that is taken in the meantime by another party; and (c) that registration will ensure the priority of their security against any subsequent security interest (unless there are good reasons of policy for the later interest to have priority). See CP para 3.5.    [Back]

Note 3    CP paras 3.21 and 3.45.    [Back]

Note 4    CP para 3.16.    [Back]

Note 5    CP para 3.16.    [Back]

Note 6    CP paras 3.12-3.15.    [Back]

Note 7    CP para 3.46.    [Back]

Note 8    CP paras 3.29-3.30 and 3.45.    [Back]

Note 9    CP para 2.29.    [Back]

Note 10    CP paras 3.33-3.40.    [Back]

Note 11    CP paras 3.18-3.20.    [Back]

Note 12    CP paras 3.25-3.28.    [Back]

Note 13    CP para 7.43.    [Back]

Note 14    CP paras 2.37 and 3.26.    [Back]

Note 15    CP paras 2.58-2.61.    [Back]

Note 16    Modern Company Law for a Competitive Economy: Registration of Company Charges URN 00/1213.     [Back]

Note 17    See CP para 1.34.    [Back]

Note 18    See CP Appendix A.    [Back]

Note 19    But see para 2.8 n 21 below.    [Back]

Note 20    There was, on the other hand, wide agreement with our conclusion that the relevant provisions of the Companies Act 1985 are not incompatible with the Human Rights Act 1998. This was a concern that had been raised by the Steering Group: see CP paras 3.41-3.42. The risk of incompatibility has been reduced even further by the decision of the House of Lords in Wilson v First County Trust Ltd (No 2) [2003] UKHL 40; [2003] 3 WLR 568. See also J de Lacy, “Company Charge Avoidance and Human Rights” [2004] JBL 448.    [Back]

Note 21    Only one response from this country and one from Australia were completely opposed to notice-filing for company charges. A number of other responses made suggestions that we do not think are compatible with a notice-filing scheme as we envisage it (or as adopted in the other jurisdictions). Some of these will be discussed in this Part or in Part 3. However, we cannot discount the possibility that some respondents may have changed their views since submitting their response to the CP. We understand that at least one respondent representing legal practitioners may now have moved to a position where it considers only minor reform of the law relating to registration of company charges is desirable.    [Back]

Note 22    See below, para 2.43.    [Back]

Note 23    See below, paras 2.44-2.69.    [Back]

Note 24    Eg, the Law Society’s Company Law Committee and the Bar Council Law Reform Committee (joint response).    [Back]

Note 25    See below, paras 2.81-2.137.    [Back]

Note 26    The UCC designates the third party as an ‘obligor’; the PPSAs deal with this by stating that the meaning of debtor varies according to the context.     [Back]

Note 27    See below, paras 3.9-3.14.    [Back]

Note 28    See below, paras 2.81-2137. The scheme described in Part 3 and the draft regulations contained in Appendix A are drawn up on the assumption that title-retention devices and outright sales of receivables will be included. Appendix B lists the provisions that would not be required were title-retention quasi-securities to be omitted from the scheme.    [Back]

Note 29    See below, para 3.16.    [Back]

Note 30    See below, para 3.86.    [Back]

Note 31    See below, para 3.72.    [Back]

Note 32    See below, para 3.73.    [Back]

Note 33    See below, paras 3.86-3.91.    [Back]

Note 34    Or, if the bailee issues a negotiable document of title, by taking possession of that: see below, paras 3.99-3.101.    [Back]

Note 35    See further below, paras 2.138-2.159.    [Back]

Note 36    See below, paras 4.38 and 4.42-4.47.    [Back]

Note 37    See below, paras 3.96-3.97; 4.59 and 4.84.    [Back]

Note 38    See below, paras 3.108-3.112.    [Back]

Note 39    We seek views in Part 3 as to whether unregistered companies should be included, and if so, to what extent: see below, para 3.8.    [Back]

Note 40    The provisions of Part XII of the Companies Act 1985 currently apply also to LLPs by virtue of the Limited Liability Partnerships Regulations 2001, SI 2001 No 1090; the latter would be amended to apply the new scheme to LLPs.    [Back]

Note 41    ‘Conflicts’ issues are dealt with in Part 3, paras 3.343-3.383.    [Back]

Note 42    Principally in relation to financial collateral, see below, paras 2.148 and 2.157.    [Back]

Note 43    See below, paras 3.58-3.67.    [Back]

Note 44    See below, paras 3.289-3.342.    [Back]

Note 45    Paras 2.13-2.16.    [Back]

Note 46    On ‘floating charges’ under the new scheme, see below, paras 2.56-2.60.    [Back]

Note 47    See below, para 3.91.    [Back]

Note 48    See below, para 3.115.    [Back]

Note 49    See below, paras 3.118-3.136.    [Back]

Note 50    See below, paras 3.147-3.150.    [Back]

Note 51    See below, para 3.171.    [Back]

Note 52    And is designated as such by the Rules.     [Back]

Note 53    See below, paras 3.154-3.160.    [Back]

Note 54    See below, para 3.152.    [Back]

Note 55    See below, para 3.250.    [Back]

Note 56    See below, para 3.201(1).    [Back]

Note 57    See below, para 3.255.    [Back]

Note 58    This will be done by consequential amendment to the Insolvency Act 1986, s 245. See below, paras 3.142-3.146.     [Back]

Note 59    See below, para 3.196.    [Back]

Note 60    See below, para 3.193.    [Back]

Note 61    These will be overridden where there is a different specific rule: eg, a secured party who takes control of investment property will have priority over one who has perfected by other means: see below, para 2.149(6).    [Back]

Note 62    Where none of the competing SIs has been perfected, priority is determined by the date of attachment. See below, para 3.201(3).    [Back]

Note 63    Which in nearly all cases except those involving financial collateral, will mean by possession.    [Back]

Note 64    See below, paras 3.201(2) and 3.202.    [Back]

Note 65    See below, paras 3.204-3.205.    [Back]

Note 66    See below, paras 3.229-3.236.    [Back]

Note 67    See below, paras 3.183-3.187.    [Back]

Note 68    See below, para 3.255.    [Back]

Note 69    See below, paras 3.257-3.260.    [Back]

Note 70    See below, paras 3.261-3.262.    [Back]

Note 71    See above, para 2.7.    [Back]

Note 72    For example, in the US it was not possible to create a floating charge; there were very serious concerns over lack of uniformity between the States; and there were problems over registration requirements. The last was also a major concern in Canada. See G McCormack, “Personal Property Security Law Reform in England and Canada” [2002] JBL 113, 118-120.     [Back]

Note 73    See the discussion of costs below, paras 2.61-2.69.    [Back]

Note 74    The issues of foreign companies, and of other debtors if the scheme is to be extended, are considered below, paras 3.343-3.383 and 2.70-2.80 respectively.    [Back]

Note 75    It will also be possible to file just once for a series of transactions; but that is more important in relation to title-retention devices, see below, paras 2.53-2.54.    [Back]

Note 76    However, we note that the SLC provisionally proposed in its discussion paper that registration should effect the creation of a floating charge: DP No 121 para 2.11.     [Back]

Note 77    See CP para 4.63. The secured party would have been obliged to provide the information to anyone with an interest in the company’s property: our provisional proposals have now changed to the extent that only the debtor can demand such information.     [Back]

Note 78    See J de Lacy, “Reflections on the ambit and reform of Part 12 of the Companies Act 1985 and the doctrine of constructive notice”, in J de Lacy (ed), The Reform of United Kingdom Company Law (2002) p 76.    [Back]

Note 79    See CP para 2.24 n 58. There are separate provisions for charges securing issues of debentures (see CP para 2.22 n 54) but we understand that these are seldom created nowadays: CP para 5.14. If necessary the Registrar could make rules requiring additional information about such charges (such as the total amount secured by the series) to be filed.    [Back]

Note 80    See CP para 3.17.    [Back]

Note 81    See further below. Some consultees called for a provision to require the date of creation to be recorded once the charge had come into being. Others were firmly opposed to any requirement to file a second time. We agree that this should not be required. It appears that a principal reason for the suggestion was a fear that the register will be ‘cluttered’ with filings that do not represent actual charges. We deal with this point below, para 2.54. It is worth noting that under the proposed system it is generally date of filing rather than date of creation that determines the priority of non-possessory SIs.    [Back]

Note 82    See below, paras 3.289-3.342.    [Back]

Note 83    See below, paras 3.301-3.302.    [Back]

Note 84    See the Land Registration Act 2002, s 93.     [Back]

Note 85    The New Zealand Government accepted an argument that unsecured creditors do not rely on the register, and the NZPPSA does not contain the usual section making an unperfected SI ineffective as against a liquidator. We have not suggested following that model.     [Back]

Note 86    See below, paras 3.304-3.306.    [Back]

Note 87    Floating charges over aircraft and ships are not registrable in those registers but in practice such general SIs will cover other assets and thus will be perfected by registration at Companies House.    [Back]

Note 88    See below, para 3.146.    [Back]

Note 89    It will also permit a single filing for a series of transactions between the same parties but that is more relevant in relation to quasi-security transactions and is considered below, paras 3.138-3.139.    [Back]

Note 90    See below, para 3.140.    [Back]

Note 91    See above, para 2.30.    [Back]

Note 92    Several of those concerned about advance filing suggested that there should be a scheme of provisional registration, ‘priority notices’ or ‘priority searches’ allowing a party who is negotiating to take security priority in respect of any charge actually taken within a fixed period after the registration, notice or search: compare the Land Charges Act 1972, s 11; the Land Registration Act 2002, s 72 and see CP paras A.43-A.45. In the light of consultation we maintain our conclusion that advance filing offers greater advantages.    [Back]

Note 93    As noted earlier (see above, para 2.21), it will be possible for the parties to agree that attachment should be postponed until the occurrence of some event such as the appointment of a receiver, so in effect replicating the floating charge; but it is hard to see any advantage in doing so.     [Back]

Note 94    See below, para 3.253.    [Back]

Note 95    See above, para 2.39 and below, paras 3.257-3.260. Similar rules will apply to those who lease goods from a party whose normal business is to lease such goods.    [Back]

Note 96    This assumes that the goods are new. With used goods there is the possibility that a previous owner has created an SI over the goods and that this will bind the buyer – though the buyer may be able to trust the dealer to have discovered any outstanding SI. See further below, paras 2.92-2.95.     [Back]

Note 97    See above, para 2.39 and below, paras 3.246-3.249.    [Back]

Note 98    See below, para 3.198.    [Back]

Note 99    These will continue to be effective but from the date of commencement will be treated for priority purposes like SIs created under the new scheme: see below, para 3.379-3.404.    [Back]

Note 100    See, eg, Buchler and another v Talbot v another [2004] UKHL 9; [2004] 1 BCLC 281, where the House of Lords recently held that the costs and expenses of winding up a company were not payable out of the assets subject to a floating charge, until the whole of the principal and interest had been paid.    [Back]

Note 101    See below, para 3.411.    [Back]

Note 102    In New Zealand the fee is NZ$5; here, Companies House have indicated informally that they have no intention of making a profit on registration, so a low fee can be expected here too. On-line filing is simple (the New Zealand Registry provides very helpful tutorial exercises), and for regular users the New Zealand scheme allows for special arrangements under which information entered into a secured party’s own system (eg, when the contract to sell or the lease is recorded) can be forwarded to the registry without further data input.    [Back]

Note 103    For this reason the draft regulations allow for filing on a ‘precautionary’ basis, even if, in fact, there is no security agreement or SI under the scheme: see DR 46(3).    [Back]

Note 104    See below, paras 3.94-3.97.    [Back]

Note 105    Although there we consider the scheme as constructed to include quasi-securities.    [Back]

Note 106    CP paras 10.21(1) and 10.61.    [Back]

Note 107    On quasi-securities, see below, paras 2.81-2.137.    [Back]

Note 108    See below, paras 2.120-2.122.    [Back]

Note 109    See below, paras 3.364-3.372.    [Back]

Note 110    See below, para 2.124.    [Back]

Note 111    Or, depending on the system ultimately set up, refuse to accept the filing until a correct match has been entered.    [Back]

Note 112    If the statement of rights and remedies is included in the scheme, it would not apply to outright sales of receivables or transactions that do not have a security purpose. See further below, para 2.160.     [Back]

Note 113    Schemes are operated by HPI and Experian Ltd.    [Back]

Note 114    Insolvency Law and Practice (1982) Cmnd 8558, para 1639.    [Back]

Note 115    See CP para 6.21.    [Back]

Note 116    See CP para 7.1.    [Back]

Note 117    Eg, the Commercial Bar Association (who were not opposed, but sceptical whether a case for reform had been made); and the Finance and Leasing Association (who were unable to give a definitive view without further analysis).    [Back]

Note 118    Eg, the Law Society’s Company Law Committee and the Bar Council Law Reform Committee (joint response), were in favour of including quasi-securities but not of taking a ‘two stage’ approach (ie, companies first and then all debtors later), and so it is unclear whether they would support a ‘company only’ scheme which included quasi-securities. Conversely, the Consumer Credit Trade Association also favoured including quasi-securities, but thought implementation should be staged: initially notice-filing for those company charges that are already registrable; then an extension to all other SIs for companies later, and a third stage of extending to all debtors.    [Back]

Note 119    A third difficulty was the question of whether there should be any statement of rights and remedies (ie, security law). In the CP we provisionally proposed that if quasi-securities were to be introduced there should ultimately be a statement of the law on the creation and enforcement of SIs as part of the ‘all debtors’ scheme: CP para 11.47. There was an issue as to whether the scheme should be extended to quasi-security before such a scheme could be developed. We have since had sufficient time to be able to prepare a statement of rights and remedies for the ‘companies-only’ stage if one is thought desirable. See further below, paras 2.160-2.191.    [Back]

Note 120    For example, the City of London Law Society. The British Bankers’ Association also supported this inclusion, although they were also in favour of including quasi-securities more generally.    [Back]

Note 121    The assignee may of course wish to give notice in order to ensure that the debtor does not pay the assignee; but we understand that much receivables financing is on a non-notification basis.    [Back]

Note 122    See CP para 7.45.     [Back]

Note 123    See CP para 7.41 and below, para 5.10.    [Back]

Note 124    See below, paras 3.44-3.45.    [Back]

Note 125    Eg, the UK accounting standard Statement of Standard Accounting Practice (SSAP) 21 and the international accounting standard IAS 17 both take a substance over form approach to accounting for finance leases (although there are differences between them).    [Back]

Note 126    Moorgate Mercantile Co Ltd v Twitchings [1977] AC 890. (The position between members of HPI may now be different because of contractual obligations to register.)    [Back]

Note 127    Exceptions could be made for private purchasers who buy from a dealer (ie, its inventory), when it would be unreasonable to expect them to search for SIs created by prior owners; and possibly for any non-trade buyer, as under the Hire Purchase Act 1964, Part III. However we doubt the need for the latter kind of protection now that organisations such as HPI make information about vehicles – including outstanding finance agreements – readily available to members of the public. This is discussed below, paras 3.170-3.175.    [Back]

Note 128    This would apply only to SIs over vehicles created by companies until the legislation is extended to other debtors. The CP suggested leaving provisions for motor vehicles until the scheme was extended to all debtors; discussion with the industry suggests that it may be worth including provisions dealing with motor vehicles even at the ‘companies-only’ stage, but views on this are not unanimous.     [Back]

Note 129    Para 2.121. It was also suggested that improvements in the arrangements for vehicles could be achieved by more modest changes. That may well be true but the scheme has many advantages overall and could deal with vehicles very simply at the same time.    [Back]

Note 130    The OPPSA does not cover operating leases.    [Back]

Note 131    See above, para 2.88 and below, para 3.37.    [Back]

Note 132    See above, paras 2.92-2.95.    [Back]

Note 133    See above, para 2.43(1).    [Back]

Note 134    The question how far the retention of title supplier’s PMSI priority over proceeds should extend, particularly as against a receivables financier, is discussed below at paras 3.222-3.223.    [Back]

Note 135    DR 72(2).    [Back]

Note 136    Factors Act 1889, s 9; Sale of Goods Act 1979, s 25.    [Back]

Note 137    Often still expressed in the Latin tag,nemo dat quod non habet.    [Back]

Note 138    See above, para 2.93.    [Back]

Note 139    See DR 20(3).    [Back]

Note 140    See DR 33(1) rule 2. These rules apply even though the agreement contains a contractual restriction: see DR 41.    [Back]

Note 141    See DR 20(1).    [Back]

Note 142    This argument does not apply to an operating lease. Then the lessor has a very clear interest in recovering the equipment or its value. Operating leases would not be subject to this form of re-characterisation because the surplus rule would not apply to them. See above, para 2.97.    [Back]

Note 143    A finance lease is thus different from a hire-purchase agreement, under which either the hirer has an option to buy the goods for a nominal sum once the full credit price has been paid, or which provide that the hirer will become the owner at the end of the hire-period but give the hirer the option to terminate the hiring at any time.    [Back]

Note 144    Since 1984 finance leases have had to be shown on the balance sheet under SSAP 21.     [Back]

Note 145    See below, paras 5.18-5.27.    [Back]

Note 146    This may occur at common law, see R Goode, Commercial Law (2nd ed 1995) pp 451ff, or as a result of the Factors Act 1889, s 2.    [Back]

Note 147    See below, paras 5.12-5.18 and Appendix B, SPPSA, s 60(2); also UCC Section 9-615(d).    [Back]

Note 148    Section 9-615(a)(2).     [Back]

Note 149    Leases of registered aircraft would be outside our scheme: see above, para 2.20 and below, para 3.309.    [Back]

Note 150    See Corporation tax reform: a consultation document (2003), published by the Inland Revenue and HM Treasury in August 2003, following on from their Reform of corporation tax: a consultation document of August 2002.    [Back]

Note 151    The status of the buyer is irrelevant.    [Back]

Note 152    See below, paras 3.98-3.409.    [Back]

Note 153    We understand that in the motor vehicle financing world, for example, the standard financing period is about 3 years. (Most ships and aircraft, where long leases are common, will fall outside the scope of our scheme in any event: see below, paras 3.13-3.333.)    [Back]

Note 154    See above, para 2.87.    [Back]

Note 155    Professor Elizabeth Warren of Harvard Law School, who is a leading specialist in insolvency law in the US, told us that the notice-filing system has substantial benefits in effectively requiring powerful creditors to file. This both provides a ‘gold standard on information’ and has ‘an important monitoring effect on the relationship between powerful creditors and the troubled debtor.’ We think that the more complete the range of SIs that need to be registered, the greater these effects will be.    [Back]

Note 156    J Ziegel and D Denomme, ‘How Ontario Lawyers view the PPSA: an Empirical Survey’ (1992) 20 CBLJ 90, 97. The survey related to the version of the PPSA introduced in 1967; it was revised in 1989. Many of the criticisms made by respondents have been addressed in the revised PPSA.    [Back]

Note 157    Ibid, p 103. It will be recalled that operating leases are included in most PPSAs but not OPPSA nor Article 9: see above, para 2.97.    [Back]

Note 158    Ibid, p 122.    [Back]

Note 159    See above, paras 2.96-2.98. We would do the same for commercial consignments: see below, paras 3.41-3.43.    [Back]

Note 160    Our proposal about charges over shares was supported by fewer consultees than were opposed to it, but the latter were divided between those who thought that security over shares should be left right outside the scheme and those who thought that charges over shares should always have to be registered. As we will explain (below, para 2.142), European law now prevents us requiring registration in all circumstances. Subsequent discussion with some of those originally opposed suggests that they would prefer a scheme that allows for perfection based on control to leaving investment property outside the scheme altogether. On bank accounts, those opposed to our proposal again outnumbered our supporters but many of them opposed it on the ground that registration should be an alternative to control, or that registration should be required in all cases. We are persuaded by the former; the latter is no longer possible under European law.    [Back]

Note 161    This is the result of the Financial Collateral Directive, which had not been adopted at the time the CP was written. See further below, para 2.142.    [Back]

Note 162    Directive 2002-47-EC.    [Back]

Note 163    FCD, arts 2 and 3.     [Back]

Note 164    FCAR, reg 3.    [Back]

Note 165    FCAR, reg 4(4). Although under the FCD, art 2(1)(c) this is defined as applying only where the ‘full ownership of the financial collateral remains with the collateral provider’, it is clearly intended to cover the English mortgage and is so defined in the FCAR, reg 3. (Compare ‘title-transfer’ financial collateral arrangements, below, para 2.153.)    [Back]

Note 166    At least in respect of ‘book entry’ securities collateral (ie, that where the holder’s entitlement is represented by an entry in the books of an intermediary, as opposed to shares held directly from the issuer) this is left to the law of the place where the relevant account is maintained: FCD, art 9.    [Back]

Note 167    There may be ‘control’ under the FCD even though the collateral provider retains a right to substitute or to withdraw excess collateral, but this would probably not mean in English law that the charge could only be a floating charge. A right of use cannot mean that the secured party does not have control within the meaning of the FCD, since the FCD requires that Member States ensure that any right of use conferred by the agreement can be exercised: FCD, art 5(1).    [Back]

Note 168    With indirectly-held securities, this would amount to a novation.    [Back]

Note 169    We will see below that the FCAR, reg 3 contemplates that some floating charges will also be exempt from s 395.     [Back]

Note 170    Disposition may be sale, in which case the buyer would take free, or by creating another SI that will have priority. (Note that the word ‘purchaser’ denotes either a buyer or a subsequent secured party.) The debtor may have the power to dispose of the collateral free of the SI even if it has not been given the right to do so. See below, paras 3.257-3.260.    [Back]

Note 171    These issues are left to the law of the country in which the relevant account is maintained: FCD, art 9.    [Back]

Note 172    Dearle v Hall (1828) 3 Russ 1.    [Back]

Note 173    See R Goode, Commercial Law (2nd ed 1995) pp 704-705.    [Back]

Note 174    The position under CREST seems particularly uncertain: a secured party who has the shares transferred into an escrow account may be subject to prior equitable interests.    [Back]

Note 175    Under current law, a secured party who has directly-held shares transferred into its name may nonetheless take subject to an earlier equitable interest of which it had notice. A secured party who takes an SI over indirectly held shares may not obtain priority by being first to give notice to the intermediary if it has notice of a prior interest.    [Back]

Note 176    This is the model law produced by the Uniform Law Conference of Canada: see below, para 4.2.    [Back]

Note 177    See CP para 4.15.     [Back]

Note 178    See below, para 2.154.    [Back]

Note 179    See further below, paras 4.88-4.92.    [Back]

Note 180    In the CP we suggested that repos frequently have a security purpose, though this is not always the case (eg, a non-security purpose might be tax arbitrage). Traditionally, stock lending arrangements do not normally have such a purpose, though the ‘borrower’ is, in market standard documentation, required to provide security (through the outright transfer of cash or securities) for the performance of its redelivery obligations.     [Back]

Note 181    CP para 7.50.    [Back]

Note 182    One of those who disagreed wanted the arrangement to registrable in order to make the registration scheme as comprehensive as possible, but with the FCD this is not possible.    [Back]

Note 183    The rights of ‘use’ and of ‘appropriation’ given by the FCD (see further below, paras 5.44-5.56) apply only to security financial collateral arrangements since the rights were thought to exist already when title has been transferred to the secured party.    [Back]

Note 184    In agency repo arrangements, where a third party financial institution receives the collateral on behalf of the secured party, it is important that the terms of the agency arrangement are effective to confer control on the secured party.    [Back]

Note 185    Re Bank of Credit and Commerce International SA (No 8) [1998] AC 214, 225-228. It is not clear that under English law a charge will give the bank any advantage over having mere rights of set-off; we have been told that charges in favour of the bank itself are mainly important under other laws which give more limited rights to use set-off in insolvency. Nonetheless these charges over bank accounts are found under English law and must be provided for, along with charges in favour of third-party secured parties.     [Back]

Note 186    FCD, art 2(1)(d) and FCAR, reg 3.    [Back]

Note 187    See CP para 4.15.     [Back]

Note 188    It is true that a second party taking security over the account could protect itself under the rule in Dearle v Hall (1828) 3 Russ 1, by giving notice, but that will not help an unsecured creditor or credit rating agency.    [Back]

Note 189    On this point see below, para 4.1.    [Back]

Note 190    We are not aware of Canadian proposals on this point as yet.    [Back]

Note 191    We are told that it was based on a ‘misunderstanding’ by the relevant authorities.    [Back]

Note 192    CP para 11.37.    [Back]

Note 193    CP para 11.47.    [Back]

Note 194    CP para 12.103.    [Back]

Note 195    CP para 11.42.    [Back]

Note 196    See Part 5 of the draft regulations.    [Back]

Note 197    We deal with these issues below, paras 3.274-3.282.    [Back]

Note 198    UCC Section 9-102(a)(43), and see Section 9-102(c).    [Back]

Note 199    Section 9-617(b). See below, para 5.87.    [Back]

Note 200    The Ontario PPSA has ‘commercially reasonable’ requirements in respect of particular powers only, eg, s 63(2) (disposal).    [Back]

Note 201    See also NZPPSA, s 25(1); New Brunswick PPSA, s 65(2); British Columbia PPSA, s 68(2).    [Back]

Note 202    Under SPPSA, s 65(5); NZPPSA, s 176.    [Back]

Note 203    The nearest analogy may be the reference in Unfair Terms in Consumer Contracts Regulations 1999, SI 1999 No 2083, reg 5(1) to a term being regarded as unfair ‘if, contrary to the requirement of good faith, it causes a significant imbalance in the parties’ rights and obligations arising under the contract, to the detriment of the consumer.’ However we will explain that, in our view, the provision in the schemes are of much more limited effect.    [Back]

Note 204    R Calnan, “The reform of the law of security” 2004 BJIBFL 19(3) p 88.    [Back]

Note 205    See the oft-quoted remarks of Bingham LJ in Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd [1989] QB 433, 439.    [Back]

Note 206   Downsview Nominees Ltd v First City Corporation Ltd [1993] AC 295.    [Back]

Note 207    Scott V-C in Medforth v Blake [2000] Ch 86, 103.    [Back]

Note 208    See Cuckmere Brick Co Ltd v Mutual Finance Ltd [1971] Ch 949 and Downsview Nominees Ltd v First City Corporation Ltd [1993] AC 295. See also R Goode, Commercial Law (2nd ed 1995) p 691, and Medforth v Blake [2000] Ch 86.    [Back]

Note 209    In Downsview Nominees Ltd v First City Corporation Ltd [1993] AC 295 Lord Templeman ‘insisted that [the duties owed by a receiver] were duties arising in equity and were not common law duties of care’: Scott V-C in Medforth v Blake [2000] Ch 86, 97, referring to [1993] AC 295, 315. Scott V-C said that in his view there is no difference between the duties owed by a receiver at common law and in equity: [2000] Ch 86, 102.    [Back]

Note 210   Cuckmere Brick Co Ltd v Mutual Finance Ltd [1971] Ch 949.    [Back]

Note 211    [2000] Ch 86.    [Back]

Note 212    Paragon Finance plc v Nash [2001] EWCA Civ 1466; [2002] 1 WLR 685.    [Back]

Note 213    UCC Section 9-610(b): see below, para 5.65.    [Back]

Note 214    See Sections 9-607(c); 9-608(a)(3); 9-610(a)-(b); 9-611(e)(i); 9-615(c); and 9-627.    [Back]

Note 215    See above, para 2.173.    [Back]

Note 216    See DRs 59(1)-(2), 60(5)-(6), 62(6) and 65(5).    [Back]

Note 217    DR 59(4).    [Back]

Note 218    DR 69.    [Back]