The Law Commission

PART 4

COMMERCIAL LAW AND COMMON LAW

PROFESSOR HUGH BEALECOMMISSIONER
TEAM MEMBERS^[1]
Government Legal Service
Tamara Goriely (Team Manager)
Geoffrey Davies
Peter Tyldesley
Research Assistants
Inewari Diete-Spiff
Laura Giachardi
Christopher Kelly
Natalie Moore
Saira Paruk
Adam Sher


Company security interests

4.1      The current system for registering company charges is cumbersome, slow and expensive. In August 2005 we published a final report and draft legislation recommending major reforms.^[2] These would replace the present paper-based system with a new on-line process to register charges cheaply and instantaneously. They would also provide simpler and clearer rules to determine "priority" disputes between competing interests over the same property.
4.2      Under the recommended scheme:

(1) When registering a charge, lenders need only send brief particulars in a simple, electronic format. They will no longer need to submit lengthy charge documents; and Companies House staff will no longer need to check them or issue certificates of registration.

(2) The present 21-day time limit will be removed and it will be possible to register in advance of the transaction. The time limit causes considerable inconvenience, as each year Companies House rejects around 3,000 late applications. Instead, priority between charges will be by date of filing, giving lenders an incentive to register quickly.

(3) The criminal sanction requiring companies to send information will be abolished.

(4) The list of registrable charges will be updated to reflect contemporary practice. We start from the basis that a charge should be registered unless it is specifically exempt.

(5) The rights of buyers will be clarified. For example, buyers will not be bound by unregistered charges unless they know about them.

4.3      The report also recommends extending the scheme to sales of receivables, such as factoring. At present, a factor can only be sure of its priority if it writes to each account debtor. Under our scheme, it can secure its position more cheaply and easily by registering with Companies House.
4.4      Finally, the report clarifies the rules on charges over investment securities and other forms of financial collateral.
4.5      The final report followed a consultative report in August 2004,^[3] and a consultation paper in July 2002.^[4] These earlier documents had considered extending the scheme beyond "traditional security" (such as mortgages and charges) to "quasi-security", such as leases, hire purchase and the sales of receivables. This proved controversial. We have been persuaded that such a major reform should only be considered in a context of a broader review, looking at what happens when someone buys property in good faith to discover that the seller did not own it, or that it was subject to a security interest. If the government accepts our recommendations on companies, we intend to return to the problems posed by "quasi-securities" in the context of this wider review. We will also consider whether the scheme should be extended to apply to security interests given by unincorporated businesses.

The forfeiture rule and the law of succession

4.6      In July 2005 we published a final report and draft Bill to solve a problem that arose in the case of Re DWS (deceased) [2001] Ch 568. The claimant's two grandparents had been murdered by their only son (the claimant's father). The grandparents died intestate, and the question was who should inherit their estate. The son was disqualified from inheriting under the "forfeiture rule", by which a murderer cannot inherit from his victims. The court found that the grandchild could not inherit either, because under intestacy law, grandchildren can only inherit once their parents are dead. So the property went to more distant relatives.
4.7      Our Bill applies to both intestacy and wills. It provides that where a person forfeits property it should be distributed as if that person had died. The effect is that property will normally pass to the next in line, such as the grandchildren. Our recommendations would also apply where the heir voluntarily disclaims the property. We were expecting an interim report from the Government in early 2006, but have not heard anything as yet.

Insurance contract law

4.8      This year we initiated a joint project with the Scottish Law Commission to review insurance contract law. The law relating to insurance contracts has long been criticised for its obscurity and potential to cause unfairness to policyholders. In several areas it no longer accords with good business practice. Some of these problems have been addressed by codes of practice, regulation and the Financial Ombudsman Service. However, these measures are not a complete response to inadequacies in the underlying law, while the need to consider such a wide range of sources makes the law even more inaccessible.
4.9      In 1980, the Law Commission called for reform of the law on non-disclosure and breach of warranty. The recommendations were not implemented and, following a report from the British Insurance Law Association, we decided that these issues should be looked at again.
4.10      In January 2006 the two Law Commissions published a scoping study asking whether there are any other areas of law we need to consider. We have been encouraged to receive over 100 responses, many of which contained detailed discussions of the problems with the current law. There seems to be considerable support for a major review of this area.

Property interests in investment securities

4.11      In December 2005 we formally launched a review of the law on indirectly held securities, that is, securities such as stocks and bonds that are held by the investor through an intermediary such as a bank rather than directly from the issuer. This is now a very common way of holding securities, but English law has lagged behind market developments. While the basic law is sound, some gaps and uncertainties have arisen. This project aims to modernise and clarify the law to keep pace with changes in market practice and to ensure that it provides predictable solutions to the possible risks that market participants bear.
4.12      The EU Commission is currently considering a legal framework to deal with intermediated securities that can apply to the differing legal structures in all the Member States. The Law Commission's initial focus will be to develop a clear set of principles that address shared legal concerns in a way that is compatible with different legal frameworks within the EU. This work will assist the Treasury in ensuring that any European legislation meets Britain's needs.
4.13      In March, we held a successful seminar to consider the principal objectives that a common framework should seek to achieve. We will be holding further seminars during the remainder of 2006 to discuss other issues that affect the holding, transfer and pledging of intermediated securities. We intend to publish a consultation paper in early 2007.

Illegal transactions

4.14      We deferred work on illegal transactions until the Company Security Interest report was published. Now that project is completed, we are continuing to review the law of illegal transactions, looking at the effect of illegality on claims in contract and trusts. The law on illegality has been criticised for being complex, uncertain, arbitrary and, on occasion, unjust. The legal landscape in which it operates has also been transformed by the Proceeds of Crime Act 2002 and subsequent developments, which have extended the state's powers to recover property associated with illegality. We intend to publish a report in 2006.

Note 1    Including those who were at the Commission for part of the period.    [Back]

Note 2    Company Security Interests (2005), Law Com No 296.     [Back]

Note 3    Company Security Interests: A Consultative Report (2004), Consultation Paper No 176.    [Back]

Note 4    Registration of Security Interests: Company Charges and Property other than Land (2002), Consultation Paper No 164.     [Back]