The Law Commission

The Law Commission

Consultation Paper No 176

COMPANY SECURITY INTERESTS

A consultative report

London: TSO

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

The Law Commissioners are:

The Honourable Mr Justice Toulson, Chairman
Professor Hugh Beale QC, FBA
Mr Stuart Bridge
Professor Martin Partington CBE
Judge Alan Wilkie QC

The Chief Executive of the Law Commission is Steve Humphreys and its offices are at Conquest House, 37-38 John Street, Theobalds Road, London WC1N 2BQ.

This consultative report, completed on 13 August 2004, is circulated for comment and criticism only. It does not represent the final views of the Law Commission.

The Law Commission would be grateful for comments on this consultative report before 23 November 2004. Comments may be sent either –

By post to:

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

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

By e-mail to:

james.robinson@lawcommission.gsi.gov.uk

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

All responses to this consultative report will be treated as public documents, and may be made available to third parties, unless the respondent specifically asks that the response, or a particular part of it, should be treated as confidential.

The text of this consultative report is available on the Internet at:

http://www.lawcom.gov.uk

254-161-07

THE LAW COMMISSION

COMPANY SECURITY INTERESTS

CONTENTS

	Paragraph
Executive Summary	Summary
PART 1: INTRODUCTION	1.1
The importance of credit and of security	1.6
Terms of reference	1.9
The 2002 consultation paper	1.10
Further consultation	1.13
Structure of this consultative report	1.18
The draft regulations	1.19
Summary of the scheme	1.23
Scotland	1.31
Consultation questions	1.33
Acknowledgements	1.35
PART 2: CRITICAL ISSUES	Part 2
Introduction	2.1
Replacing the scheme of registration and priority for company charges	2.3
Weaknesses of the current scheme	2.3
Amendment of the current scheme or adoption of notice-filing?	2.7
The notice-filing scheme for company charges in outline	2.12
A note on terminology	2.12
Attachment and perfection	2.13
The scheme	2.17
Scope	2.18
Attachment and perfection	2.21
Filing	2.24
Searching	2.27
Financing change statements	2.28
The effect of errors	2.29
Effect of failure to perfect	2.31
Obtaining additional information about the SI	2.33
Priority as between competing SIs	2.35
Priority as against buyers or lessees	2.38
Support for the notice-filing scheme for company charges	2.41
Advantages of the notice-filing scheme	2.43
Major reservations of consultees	2.44
Registration of the charge document	2.45
Reduction of information that is publicly available	2.46
Financing statements compared to particulars of charge	2.47
Specialist registers	2.48
Registration will be voluntary	2.52
Filing before an SI is created	2.53
Conclusion on 'loss of information' overall	2.55
The floating charge	2.56
Would the cost outweigh the benefits?	2.61
Unincorporated businesses	2.70
Quasi-security devices	2.81
Sales of receivables	2.87
Title-retention devices	2.89
The advantages of title-retention devices	2.92
Vehicles	2.92
Finance leases	2.92
Operating leases of over one year	2.96
Other equipment	2.99
Inventory supplied under a retention of title clause	2.102
Re-characterisation	2.107
Re-characterisation (1): the supplier may lose its title	2.108
Re-characterisation (2): the right to any surplus	2.110
Re-characterisation (3): tax consequences	2.111
Companies only	2.120
Costs and benefits	2.123
Conclusions on quasi-securities	2.128
Financial collateral	2.138
Shares and other forms of investment property	2.140
An outline of the notice-filing/control scheme for investment property	2.149
SIs over bank accounts	2.154
Outline of scheme for bank accounts	2.158
A statement of the parties' rights and obligations	2.160
An outline of the statement of rights and remedies	2.168
Good faith	2.172
Mandatory rules	2.183
Conclusion on the legislative statement of rights and remedies	2.188
Conclusions on principal issues	2.192
PART 3: THE SCHEME IN FULL	Part 3
Structure of this Part	3.4
Scope of the scheme	3.6
Companies	3.7
Unregistered companies	3.8
The person creating the SI and the 'debtor'	3.9
Agents and trustees	3.15
Personal property	3.17
Goods	3.18
Instruments and documents of title	3.20
Accounts	3.21
Intangibles and money	3.22
'Chattel paper'	3.25
Security interests	3.26
'In-substance' SIs	3.30
'Deemed' SIs	3.34
Leases that do not have a security purpose	3.37
Commercial consignments that do not have a security purpose	3.41
Sales of accounts and promissory notes	3.44
'Deemed' SIs and the definition of 'debtor'	3.50
SIs in 'supporting obligations'	3.51
Partial and total exclusions from the overall scheme	3.58
Effectiveness of a security agreement, attachment and perfection	3.68
Effectiveness of security agreement	3.70
Attachment of SIs	3.71
Should the security agreement have to be in writing?	3.75
Returned and repossessed goods: reattachment	3.83
Perfection of SIs	3.86
Methods of perfection in detail	3.92
Perfection by filing	3.94
Temporary perfection	3.95
Automatic perfection	3.96
Perfection by possession and perfection by bailees	3.99
Possession by a debtor who has attorned to secured party	3.102
Possession of goods by bailees	3.103
Seized or repossessed goods	3.106
Trust receipts and temporary perfection	3.108
Filing	3.113
Financing Statement	3.118
Debtor's name and registration number	3.119
Name and address of the secured party	3.122
A description of the collateral	3.124
'Sufficient' collateral descriptions	3.126
Collateral type as a searchable field	3.128
Duration of the filing	3.130
Other matters	3.133
Who files?	3.137
Filing for future SIs	3.138
Consent of the debtor to filing	3.140
'Last-minute' filing	3.142
Verification statement	3.147
Effect of failure to file or perfect by other means	3.151
Financing change statements	3.154
Correction of errors and removal of unwanted filings	3.158
Transfer of secured party's interest	3.161
Errors in the financing statement	3.163
Effect of unauthorised or accidental discharge	3.169
Searching	3.171
System failure	3.175
SIs over vehicles	3.176
Proceeds	3.182
Definition of proceeds	3.182
Right to proceeds of disposition	3.183
Perfection of right over proceeds	3.186
Obtaining additional information about the SI	3.188
Priority between competing SIs	3.198
'Residual' priority rules	3.201
Specific priority rules	3.204
Purchase-money SIs	3.204
Definition of PMSI	3.206
Conditions for PMSI status	3.211
Inventory	3.213
Non-inventory collateral	3.215
Cross-collateralisation	3.220
Conflicting PMSIs	3.221
PMSIs over proceeds and conflicting SIs	3.222
Priority rules for farming?	3.224
Protection of transferees of 'negotiable' collateral	3.229
Transferees of money	3.232
Transferees of negotiable documents of title	3.236
Priority in transferred collateral	3.237
Transfers by the secured party	3.237
Transfer by the debtor	3.239
Changes in the debtor's name	3.247
Liens	3.249
Priority as against execution creditors	3.250
Priority as against buyers or lessees	3.253
Unperfected SIs	3.255
Sales of goods in the ordinary course of business	3.257
Low price goods bought for private purposes	3.261
Motor vehicles and other serial-numbered goods	3.263
Other priority situations	3.264
Fixtures	3.265
Crops	3.269
Accessions and commingled/processed goods	3.274
Accessions	3.275
Commingled goods	3.278
'Processed' goods	3.279
Liability in damages	3.283
SIs and the 'specialist' registries	3.289
Land	3.295
Rights to payment arising in connection with land	3.310
Aircraft	3.313
Ships	3.323
Enforcement of ship mortgages	3.334
Intellectual Property	3.337
SIs over assets abroad or created by 'foreign' companies	3.343
Companies registered in England and Wales	3.347
Possessory SIs	3.349
Non-possessory SIs over goods	3.350
Companies incorporated outside the UK	3.364
Scotland	3.373
Transitional provisions	3.384
Commencement	3.385
A transitional period?	3.387
Pre-commencement registered charges	3.388
Pre-commencement unregistrable charges	3.394
Pre-commencement quasi-securities	3.398
A transitional period	3.399
No transitional period	3.402
Conclusion on quasi-securities	3.405
Insolvency issues	3.410
PART 4: FINANCIAL COLLATERAL AND PROCEEDS OF LETTERS OF CREDIT	Part 4
Introduction	4.1
Types of investment securities	4.6
Basic principles	4.14
'Control' means a right to realise or appropriate the collateral	4.15
Control trumps other forms of perfection	4.19
A bona fide purchaser for value who takes control of investment property in such a way that no one else can also have control of it takes free of other interests	4.21
As between SIs perfected by control, priority is in the order in which control is obtained	4.25
Provisional recommendation on basic principles	4.27
Investment property	4.30
Definition of investment property	4.31
Investment securities	4.38
'Control'	4.38
Certificated securities	4.40
Certificated securities in bearer form	4.40
Certificated securities in registered form	4.42
Uncertificated securities	4.49
Uncertificated securities held through CREST	4.49
Uncertificated securities where title depends on the issuer's register	4.50
Securities held through an intermediary	4.51
Security taken by intermediaries	4.55
Securities accounts	4.56
Control of investment securities: a summary	4.57
Disclosure of the control agreement	4.58
Security given by intermediaries	4.59
Debtor may retain right to deal with security entitlement	4.62
Security agreement in writing	4.66
Right of use/on-pledging	4.68
Priority as between competing SIs over investment securities	4.70
Control trumps other forms of perfection	4.70
Rules of priority for competing SIs over investment securities where both the SIs are perfected by control	4.71
Protected purchasers	4.72
SIs created in favour of intermediaries	4.74
SIs created by intermediaries	4.76
Buyers of investment securities	4.77
Temporary perfection of SIs over certificated securities	4.82
The 'broker's lien'	4.84
Commodities	4.88
Bank accounts	4.93
Why include bank accounts within the scheme?	4.97
SIs created without the agreement of the bank	4.102
SIs where there is a 'control' agreement	4.106
Basic principles	4.111
The scheme for bank accounts in detail	4.113
Definitions	4.113
What amounts to control	4.115
Bank's agreement required for control	4.120
Disclosure of the control agreement	4.121
Priority	4.122
Transferability of funds	4.127
Bank's right of set-off	4.130
Bank's obligations to debtor	4.131
Proceeds of letters of credit	4.133
Background	4.133
The Revised Article 9 approach to letter-of-credit rights	4.140
Control	4.141
Perfection as proceeds	4.144
Should we adopt the Article 9 notion of control over letter-of-credit rights?	4.145
PART 5: A STATEMENT OF THE RIGHTS AND REMEDIES UNDER A SECURITY AGREEMENT	Part 5
Introduction	5.1
Summary of provisional recommendations	5.6
Scope of the statement of rights and remedies	5.10
Application to 'in-substance' SIs	5.10
Other limitations on the scope of the statement of rights and remedies	5.13
Financial collateral	5.13
Ships	5.14
SIs over both personal property and land	5.15
Secured party acting through a receiver	5.17
Essential provisions: surplus and deficit	5.18
Distribution of any surplus	5.18
Payment to subordinate secured parties	5.22
Payment into court	5.28
Deficiency	5.29
Desirable provisions	5.30
Effect of prohibition on assignment	5.31
Duties of parties under the security agreement but before default	5.40
Care in custody and preservation of collateral	5.41
Income, etc. from collateral	5.43
Right of use	5.44
Rights and remedies on default	5.47
No effect on judicial remedies	5.48
Collection rights	5.49
Where the SI secures payment or performance of an obligation	5.49
Outright sales of receivables	5.52
'Non-cash' proceeds	5.53
Taking possession on default	5.54
Taking possession: general	5.55
Collateral that cannot readily be moved or stored	5.58
Assembly of the collateral	5.61
Power of sale	5.62
Method of sale or disposition	5.64
Disposition to be made in a commercially reasonable manner	5.65
Non-cash proceeds	5.69
Purchase by the secured party at a private sale	5.71
Notice requirements	5.73
The period of notice	5.81
Form and content	5.82
Parties to be notified	5.85
Effect of disposition	5.87
Retention of collateral by secured party ('foreclosure')	5.88
Redemption	5.94
Remedies are cumulative	5.96
Appointment of receiver and secured party acting through receiver	5.99
Provisions not recommended	5.102
Interpretation of acceleration clause	5.103
Taking possession on anticipated default	5.105
Measure of damages when lease is ineffective because unperfected	5.108
An account of the distribution	5.110
Reinstatement of security agreement	5.111
Receivers	5.114
Applications to court	5.119
Financial collateral	5.120
Security financial collateral arrangements	5.121
Title transfer financial collateral arrangements	5.126
Good faith and commercial reasonableness	5.134
Determining whether conduct was commercially reasonable	5.136
Mandatory or default rules?	5.142
Protection of the debtor	5.145
The Ontario and Saskatchewan PPSAs	5.147
The New Zealand PPSA	5.148
The UCC Revised Article 9	5.152
The provisions that should be mandatory	5.156
The right to be notified before the collateral is sold	5.157
The right to receive the surplus	5.160
Notice before acceptance of collateral in full or partial satisfaction of obligation	5.164
The right to redeem collateral	5.165
Exclusion and restriction of liability	5.166
Waiver	5.170
PART 6: LIST OF PROVISIONAL RECOMMENDATIONS AND CONSULTATION QUESTIONS	Part 6
APPENDIX A: DRAFT REGULATIONS	Appendix A
APPENDIX B: CHANGES NEEDED TO THE DRAFT REGULATIONS TO OMIT TITLE-RETENTION DEVICES	Appendix B
Necessary changes	B.4
Provisions that might be omitted	B.7
PMSIs	B.7
The statement of rights and remedies	B.8
Consultation question	B.9

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