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You are here: BAILII >> Databases >> The Law Commission >> REGISTRATION OF SECURITY INTERESTS: COMPANY CHARGES AND PROPERTY OTHER THAN LAND (A Consultation Paper) [2002] EWLC 164(10) (14 June 2002) URL: http://www.bailii.org/ew/other/EWLC/2002/164(10).html Cite as: [2002] EWLC 164(10) |
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Extending the notice-filing system
10.3 In this Part we consider whether the notice-filing system we provisionally proposed in respect of companies should be extended[1] to cover non-corporate debtors. However, in doing this, we think it is necessary to give separate consideration to the case of non-corporate business debtors - comprising sole traders, partnerships and other unincorporated businesses or associations - on the one hand, and consumers, on the other. Our provisional views on how the notice-filing scheme should apply differ in respect of the two groups.
10.6 It would follow naturally from the abolition of the restrictions contained in the Bills of Sale Acts that (unless the replacement legislation were also to contain restrictions on non-corporate business debtors from charging their after-acquired property[2]) sole traders and partnerships would be able to create floating charges. We think that there is a good case for permitting non-corporate business debtors to create floating charges. As we pointed out in Part IX, this was recommended by the Cork Committee (subject to certain safeguards relating to the debtor’s personal possessions[3]). In Part IV we explained that under the notice-filing system floating charges as they are currently known would probably disappear over time, to be replaced by what we have provisionally called the ‘floating lien’. The floating lien would operate in very much the same way as the old floating charge, save that priority would be determined by the date of filing.[4] Equally we see no reason why non-corporate business debtors should not be allowed to use this kind of security interest. We think, however, that there should be a limit to the extent of such a charge, as was suggested by the Cork Committee.
10.8 We have pointed out that under the current law certain charges created by non-corporate debtors are not registrable anywhere. This applies to assignments of receivables that do not amount to a general assignment of book debts. We do not know whether in practice this causes difficulty to third parties, but we see it as a possible advantage of applying the notice-filing system to non-corporate business debtors that it would be easy to require the filing of a financing statement for such charges, which would then become a matter of public record.[5] We provisionally propose that the same types of charge should be registrable when created by unincorporated businesses as when created by companies.
10.14 We noted in Part VIII that the restrictive nature of the Bills of Sale Acts has been overcome in the case of charges granted to banks by farmers, and that floating charges are permitted in certain cases under separate legislation.[6]
10.15 In his report Professor Diamond stated that:
My impression is that the fundamental reason for having separate registers under the Agricultural Credits Acts is that the legislation permitted farmers to grant charges that other individuals could not grant and … to avoid the stigma of the Bills of Sale Acts.[7]
It was suggested that with the creation of the registers proposed in the Diamond report that there would be no need for separate registers against farmers, and that contact with what was then the Ministry of Agriculture, Fisheries and Food should be initiated to see if the policy of closing the separate agricultural credits register would be acceptable.
10.16 It seems to us that, as the Diamond report suggested, a notice-filing system that covered all forms of debtor would enable the separate legislation relating to agricultural charges to be repealed. However, we have not been able to investigate this area in as much depth as we would have liked in the time available for the preparation of this Consultation Paper, and we would therefore welcome the views of consultees on this point. Certainly the provisions of the 1928 Act are not identical to those that we are proposing,[8] and there is a greater degree of overlap between personal and real property where this area is concerned (such as the priority given to growing crops over a mortgage over land); however, subject to receiving the views of interested consultees we provisionally think that it may be possible to repeal this legislation.
10.19 As with priorities, we would envisage the rules we outlined in Part IV relating to purchasers from companies applying to purchasers from non-corporate debtors.[9] However, at this point we need to return to the question of the purchaser of a vehicle subject to a hire-purchase or conditional sale agreement, which raises an additional problem. The law relating to purchasers of such vehicles, and the operation of the HPI register, was described in Part VII.[10] The Hire-Purchase Act 1964 applies whether the vehicle was sold by a company or by a non-corporate debtor.
10.20 When we discussed the position of purchasers of vehicles subject to hire-purchase or conditional sale agreements in respect of security interests granted by companies, we provisionally considered that such purchasers should be outside the system we proposed, given the difficulties we anticipated regarding the legal personality of the ‘rogue’ vendor of the vehicle.[11] However, there would still be a problem if the system were extended to cover security interests granted by all business debtors, but not to consumers, as the person selling the vehicle which was subject to the hire-purchase agreement or conditional sale might be an individual who was a consumer. If the system were to cover all forms of debtor, this difficulty would not apply. We therefore defer this issue again until we have considered whether consumers should be able to file financing statements. We then deal with the case of purchasers of vehicles as a separate issue.[12]
10.21 We ask consultees whether they agree with our provisional view:
(1) that the notice-filing system that we proposed for companies should be extended to apply to security interests created by non-corporate business debtors such as sole traders, partnerships and other unincorporated businesses;
(2) that, as is proposed for companies, the system should take a functional approach to what is registrable, so that quasi-securities are brought within it; and
(3) the same rules on priority apply, with preference being given to purchase-money interests.
10.23 In Part VIII we pointed out that the restrictions on individuals creating bills of sale over after-acquired personal property under the 1882 Act were a consumer protection measure, and we note that many of the systems adopted or proposed overseas prevent consumers charging after-acquired personal property. We suggested that any new system for security interests over personal property should maintain this prohibition.[13] We think that a power to create security interests over after-acquired property would be open to serious abuse as between lenders, not all of whom are scrupulous, and consumers, many of whom would not understand the significance of creating such a charge.[14]
10.24 We have discussed above the concept of the purchase-money interest. Security interests falling into this class involve security over property acquired by the debtor with the funds provided by the secured party (as opposed to security granted over an existing item of the debtor’s property). The whole purpose of the loan is to enable the secured property to be acquired.[15] Consumer transactions involving quasi-security over the goods supplied (such as hire-purchase or conditional sale agreements) are very common. They constitute a valuable means of consumers being able to use their anticipated future income to cover present needs. We think it is important that there should be no undue hindrance to such transactions and no unwonted degree of risk to the creditor who employs this form of transaction.
10.25 Normally a consumer will obtain the goods at the same moment that the purchase-money-interest is created. However, on occasion the goods will be acquired shortly after the money is advanced and the advance would be for that purpose. We think that where consumers seek to create purchase-money interests in such after-acquired goods, such security interests should be permissible.[16]
10.27 It seems that the Crowther report would have gone further than simply preventing security interests over after-acquired consumer property. After discussing after-acquired consumer goods, it stated - without distinguishing between present and future goods - that it should not be permissible to take a security interest in consumer goods unless the loan secured was for the purpose of acquiring the goods (in other words, a purchase-money secured loan).[17] The Diamond report was explicit on the point. It was noted that the Director-General of Fair Trading had expressed concern that consumers were already frequently over-committed in their borrowing, and it suggested that if it were possible simply to take security over even existing consumer goods, some less responsible lenders might do this as an alternative to making a careful evaluation of the consumer’s prospects.[18]
10.31 To permit consumers to pawn items of personal property may be seen as less ‘risky’ than to permit non-possessory charges over it. The need to hand the property over to the pawnbroker is likely to bring home to the consumer the significance of what she is doing and the risk that, if she defaults in payment, the property may be lost. We think this ‘cautionary’ function is important but we also think that it would be possible to build sufficient safeguards into any notice-filing system for non-possessory consumer security interests over existing property. In particular, we consider that it would be possible for consumers to be permitted to create security interests over their existing personal property if the items concerned are individually listed in the security agreement (and, in this context, a description along the lines of ‘all existing property’ should not be sufficient).[19] It might be desirable also to require the secured party to use documents containing prescribed warning notices, rather as is done at present for some consumer credit agreements.[20] We certainly think that there should be some form of safeguard, for we expect that a credit lender operating against a simpler system than the Bills of Sale Acts will seek to take security from a consumer wherever possible.
10.33 Whilst we think that consumers should be able to create purchase-money interests over personal property, and perhaps should be permitted to create security interests over individually-specified items of existing personal property,[21] it does not necessarily follow that such interests would have to be registrable under a notice-filing system. The Crowther report recommended that security interests over consumer goods[22] should not be registrable except for those over vehicles and the like.[23]
10.34 The Crowther report stated that:
With the exception of motor and other vehicles, boats, light aircraft and fixtures to land[24] … purchase of most types of consumer goods involves relatively small sums of money and the repossession value of such goods is small. Mandatory filing of security interests in consumer goods would thus involve expense and inconvenience disproportionate to the sums involved. Further, many consumer goods do not lend themselves to precise identification, so it would be difficult, if not impossible, to determine whether a particular article was the self-same article as that described in the security agreement. Moreover, most consumer goods [other than vehicles and the like] are of a household nature which are unlikely to be resold, and the necessity of giving notice of a security interest to third parties will therefore rarely arise. Finally, we doubt whether it is reasonable to expect the consumer to search a register before making a purchase, even where he is buying from another consumer rather than from a retail supplier.[25]
In the Crowther Committee’s view, the interest of the secured party should nonetheless be effective against the debtor’s general creditors in a bankruptcy.[26]
10.35 The Crowther report considered that in addition to not being mandatory,[27] filing of security interests over consumer goods should not be permissible. As purchasers could not be expected to search the register if filing were not obligatory, to permit it would risk clogging up the register to no good purpose. The Diamond report noted that the UCC does not require filing in the case of purchase-money security interests but does permit it, and that “this has some advantages for the secured creditor”.[28] However it was also thought that to permit filing might lead to a vast number of entries in the register with no useful purpose being served, and concluded that, on balance, security interests over consumer goods should not be registrable.[29]
10.37 In our view the principal issue is actually not about whether the unfiled (and unfileable) consumer security interest should be valid in the event of the consumer’s bankruptcy. The principal reason for making an unregistered company security invalid in the event of the company’s insolvency is to protect unsecured creditors, who might otherwise be misled by seeing the company with apparently unencumbered assets. We doubt whether creditors of consumers are likely to be misled by the consumer’s appearance of having personal property that is unencumbered.[30] From that point of view we think it would not be necessary to require filing in order to protect the security interest (as the UCC puts it, a consumer security interest could be treated as perfected without filing). It is the position of innocent purchasers (including subsequent encumbrancers) of the goods subject to the security interest that seems more important.
10.38 Under the current law an innocent purchaser of consumer goods that are subject to a hire-purchase agreement, conditional sale or finance lease will not obtain title to the goods unless she falls within the protection provided by Part III of the Hire-Purchase Act 1964. The Diamond report considered that the rules about transfer of title by a non-owner were in need of radical reform, and proposed as part of a minimum set of proposals[31] that a consumer buyer of goods from another consumer should take free of any security interest over the goods. The Diamond report does not state a view on trade buyers, but as the recommendation was made that consumer security interests should not be filed it may have been intended that a trade buyer would also take free unless it had actual knowledge of the security interest. This seems to have been the view of the Crowther Committee, which recommended that the secured party’s interest would be subordinated to the rights of a bona fide buyer for value, as a buyer would take free of the security interest unless she knew of it. For this purpose, the Crowther report stated that “buyer” includes “subsequent encumbrancer”.[32]
10.41 Associated with this is a second change that is again only a matter of impression: namely, that there is a developing second-hand market in such equipment. It seems that consumers frequently ‘upgrade’ their equipment well before it has reached the end of its working life. That may occur also before any hire-purchase or conditional sale agreement has been paid off. This creates risks for buyers who, under the present law, would obtain no title to the goods even if they acted in complete good faith.[33]
10.43 Fourthly, the Crowther report considered that filing would be of little value if it were optional, because purchasers could not be treated as having constructive notice of filed interests. Whilst the point on constructive notice may be true, in our view it does not necessarily follow from it that filing would be of little value. Even if buyers of consumer goods subject to a security interest will obtain a good title, knowledgeable buyers would prefer not to take any chances, particularly if they in turn may wish to resell.[34] If the relevant information is easy to look up, potential buyers may well check it. We suspect that even consumer buyers are becoming more sophisticated and thus more likely to wish to check. At the same time they are better able to do so now that registers can be searched on-line and access to the Internet is so widespread.
10.44 Fifthly, one of the changes in the way that expensive electronic items, at least, are produced is that each manufacturer seems to use unique serial numbers for items of any size or value.[35] This makes it far easier to identify consumer goods and it can make any register more useful. When goods are readily exchanged second-hand, the question is not just whether the immediate seller has created a security interest over the goods but whether that has been done by a previous owner. Previous owners’ names may not be known to the potential buyer, so a search by name of debtor may not produce the relevant information. If the unique serial number is entered on the register, a quick and simple search will quickly reveal if there is a registered security interest. We suggested in Part IV that such a detail be one of the required particulars for a financing statement. We suspect that most buyers would prefer to check (particularly if this can be done cheaply and easily)., They may discover that what looks like a good deal is not necessarily a safe deal.
10.45 Lastly, we suggested earlier that perhaps consumers should be enabled to create security over individual items of their existing property.[36] Whereas hire-purchase agreements and the like are usually confined to fairly new items, we envisage security being created over valuable artefacts that may be far from new (such as antiques). That might make it all the more desirable to have such interests filed. First, filing would enable third parties to discover that the debtor does not have full rights over all that is in her possession (the original purpose of the Bills of Sale Acts). Secondly, it would give the secured party more protection against subsequent buyers or other parties taking security interests in the same item. Such items are unlikely to be identifiable by serial number, but filing should offer the hope that at least the first potential purchaser will discover the security interest.
(1) consumers may not create security interests over their after-acquired property except where the security interest is a purchase-money interest or the goods are replacements for goods under an earlier, valid security interest;[37]
(2) a security agreement that specifies merely that the security interest is over ‘consumer goods’ will not be effective as against third parties;[38]
(3) a buyer or lessor of consumer goods takes free of even a registered security interest if the goods are worth less than $2000 and the buyer or lessee (a) gave value and (b) bought or leased the goods without knowledge of the security interest; [39] and
(4) if the obligations under a security interest relating to consumer goods are performed, the registration must be discharged by the secured party within 15 days.[40]
(1) the interest must be over specified, existing goods or goods bought with the loan secured; and
(2) buyers of such goods take free of the security interest if they give new value, the goods are worth less than $2000 and the buyer does not know of the security interest.
10.50 We ask consultees whether they think it better that:
(1) security interests over consumer goods should be treated as valid in the event of the consumer’s insolvency without filing, which would not be possible, with a concomitant rule that a purchaser would be bound by the security interest only if she had actual knowledge of it
or
(2) security interests over consumer goods should be fileable, so that
(a) an unfiled interest should not be valid in the event of the consumer’s insolvency;
(b) an unfiled interest should not be binding on a subsequent purchaser unless she knew of it; and
(c) a filed interest should bind any purchaser.
We also ask whether, under (2) above, private purchasers (as opposed to purchasers who are in the relevant trade) who do not know of the security interest should take free of it even if it has been filed.
We have a preference for permitting filing and treating a filed interest as good against trade purchasers but not private purchasers (that is, a similar rule to that used for motor vehicles).
10.51 The reason for our preference for permitting filing and treating a filed interest as good against trade purchasers but not private purchasers is that, as against purchasers, this in effect replicates the system already used as far as motor vehicles are concerned.[41] In other words, security interests in vehicles, whoever the debtor, could also be fileable on the register of security interests; and, following our earlier proposal, the security interest would be fileable (and searchable) against the vehicle by its unique serial number as well as against the debtor. The filed interest would then be binding on a trade purchaser but a private buyer would take free of the interest unless she knew of it.
10.52 This system has, so far as we are aware, worked reasonably well. The Crowther report did note that private purchasers who bought without knowing of the hire-purchase or conditional sale agreement over the vehicle, and who thus in law take free of it, may nonetheless find that their ‘statutory title’ is not fully marketable.[42] However, there would be nothing to prevent a private purchaser from searching the register and, we suggested earlier that, even if private buyers are not to be affected by filed interests of which they do not know, we think that more sophisticated buyers will do a search in order to avoid trouble.
10.53 In Part IV we asked whether all consumers who buy goods that are not the seller’s stock-in-trade should take free of the security interest unless they know of it. If that rule were adopted, then private purchasers of motor vehicles would be treated no differently to private purchasers of other goods. If, however, it is thought that private purchasers of other capital goods should be expected to check the register, and should be bound by registered security interests, private purchasers of vehicles would be treated more favourably. We think this could be justified on the basis that vehicles are traded so regularly by both companies and consumers that special rules are needed. The special rules could if necessary be expanded to cater for other goods that are regularly purchased and sold by consumers and that have unique serial numbers, such as caravans and small boats.[43]
10.54 We provisionally propose that:
(1) security interests over motor vehicles be registrable in the same way as other security interests, whether the debtor is a company, unincorporated business or a consumer;
(2) an unfiled interest should not be valid in the event of the debtor’s insolvency;
(3) an unfiled interest should not be binding on any purchaser, whether or not she knew of it;
(4) a filed interest should be binding on a trade purchaser (or subsequent secured creditor, who will take subject to it); but
(5) a filed interest should not be binding on a person who buys the vehicle for private use unless she knows of the security interest.[44]
10.55 It will be apparent that one feature of the New Zealand legislation is that goods worth less than $2000 are treated differently from those over that value. The Crowther report suggested that filing should not be available for any security interest unless the sum secured exceeds or may exceed £300, or no secured sum is stated.[45] The reason given was again to avoid burdening the register with small items. In contrast, the Diamond report rejected a complete exemption for small transactions, on the ground that there was no justification for exempting security interests created by businesses, and thus rendering them enforceable even if the business becomes insolvent, just because the amounts were small. Further, there might be several transactions between the same parties, each one small but of a significant amount in aggregate.[46] In the context of a notice-filing system that would apply only to companies we provisionally proposed that there should be no exclusions for small transactions, because we are of the view that a company’s secured debt is unlikely to be of the amount that would qualify as small.[47] However, even for individuals and unincorporated businesses, we agree that it is not necessary or desirable to exempt all small transactions. As the Diamond report pointed out, the creditor may choose not to file but in such a case the consequences in the event of the debtor’s bankruptcy are the result of the creditor’s own decision.[48]
10.59 When we discussed notice-filing in the context of corporate debtors, we suggested that Companies House could still administer such a system using the Company Charges Register. The relevant registers in the ‘unified’ systems in Saskatchewan and New Zealand are, for obvious reasons, referred to as the Personal Property Register (or a similar title), but essentially they operate in the same way as we envisage that the Company Charges Register would operate under a notice-filing system: a financing statement is filed against the name of the debtor for existing or future security interests. If the system were to be expanded to cover all forms of debtor, the implication would be that the Company Charges Register would be replaced by a register of security interests in property other than land (such a register might also refer to security interests over land, though neither the validity nor the priority of such interests would be governed by registration.[49]) Presumably there would still have to be a separate Companies Register for purposes other than the recording of security interests.
[1]We have already noted our understanding that it is probable that the DTI will want to introduce specific legislation for companies rather than go straight to a single, unified system: see above, para 1.17.
[2]We have explained already that we do not think that consumers should be able to charge their after-acquired property: see above, para 9.11. We later ask consultees whether consumers should be able to charge their existing goods: see below, paras 10.27 ff.
[3]See above, para 9.12.
[4]As we explain above, para 4.130, this is not very different to the effect that is at least intended when a floating charge includes a negative pledge clause (although whether the clause is effective to preserve the floating charge’s priority over subsequent fixed charges depends on whether it comes to the notice of any subsequent secured creditor).
[5]Registration would not be compulsory but an unregistered charge would be invalid against creditors in the event of bankruptcy: see above, paras 4.55 ff.
[6]See above, paras 8.40 ff.
[7]Diamond report para 12.4.3 (emphasis omitted).
[8]We have not proposed, for example, that a subsequent fixed charge should be void against property covered by an earlier floating charge, as is the case with agricultural charges (see above, para 8.43). However, under notice-filing a subsequent fixed charge would be subordinate to an earlier floating charge (unless a purchase-money interest), and so the practical difference for the creditor may not be that great.
[9]See above, paras 4.173 ff.
[10]See above, para 7.58 n 89.
[11]See above, para 7.64.
[12]See below, paras 10.51-10.54.
[13]See above, para 9.11.
[14]Both the Crowther and Diamond reports opposed consumers granting security interests over after-acquired property (save, in the case of the Crowther report, where it amounted to a purchase-money interest: see para 5.6.6).
[15]Although the taking of the security and the purchase of the asset may sometimes take place at the same time.
[16]This was recommended by the Diamond report, para 18.1.9. The NZPPSA, s 45 allows a purchase-money security interest in a consumer’s after-acquired goods.
[17]Thus it would be possible to create a security interest in consumer goods only if the debtor acquires rights in the goods within 10 days after the secured party gives value (the delay is to cover the time between a purchase-money advance and the time when the asset actually becomes the property of the debtor): see the Crowther report para 5.6.6. Consumer goods cannot be defined solely by the nature of the goods (because in a manufacturer’s or wholesaler’s hands they will constitute inventory), therefore consumer goods would be defined in terms of goods “used or bought primarily for personal, family or household purposes”: see ibid, para 5.7.24-25. Motor vehicles, other vehicles and the like would be subject to different rules: see below, paras 10.47-10.50.
[18]Diamond report paras 18.1.1-18.1.12. It was proposed to exempt cases in which the consumer had acquired the goods within 30 days before the advance, which the consumer sought in order to pay for them: ibid, para 18.1.12.
[19]This is the position under the NZPPSA,: s 37.
[20]The security agreements would be “consumer credit agreements” within the Consumer Credit Act 1974. Under s 60 the Secretary of State has power to make regulations on the form and content of consumer credit agreements.
[21]See above, para 10.31.
[22]In the sense of goods bought for private use or consumption: see above, para 10.27 n 17.
[23]Both the Crowther and Diamond reports considered that security interests over consumer goods should be within the new schemes they envisaged: see in particular the Diamond report para 9.6.1-9.6.5, rejecting the contrary recommendation of the Halliday report. However what this seems to mean is that such security interests would be governed by the same general scheme of rules governing creation, remedies, and other matters. On these see below, Part XI.
[24]On these see below, paras 10.51-10.54. Footnote not in the original.
[25]Crowther report para 5.7.21.
[26]Crowther report para 5.7.27. This dealt also with purchasers of the goods: see below, paras 10.37 ff.
[27]We have already noted that we believe any system should be voluntary, with the sanction being loss of validity or priority against third parties.
[28]Filing is required to perfect non-purchase money security interests in consumer goods: UCC Revised Article 9, Section 9-309(1) and the Official Comment thereto.
[29]Diamond report paras 11.5.8-11.5.14.
[30]Perhaps this is not true when the consumer has extensive intangible assets, but security interests over these will be easily discoverable from other sources, just as with investment securities owned by companies: see above, paras 5.18-5.28.
[31]The Diamond report would have preferred a broader principle, to the effect that wherever the owner of goods has entrusted goods to, or acquiesced in their possession by, another person (‘the possessor’), and the possessor then disposes of the goods in the ordinary course of business to an innocent purchaser, the latter should obtain a good title: see the Diamond report para 13.6.3.
[32]Crowther report para 5.7.27; Diamond report para 11.5.12.
[33]And whether the quasi-security was a hire-purchase agreement or a conditional sale: see above, para 6.13 n 25.
[34]Compare the point made in the Crowther report in relation to the Hire-Purchase Act 1964, Part III: private buyers who take a valid, statutory title may find that a dealer to whom they try to resell will check the HPI register, discover the previous hire-purchase agreement and refuse to deal with them. See the Crowther report para 5.7.32. A valid title is not the same as a marketable title.
[35]This may originally have been a device to discourage theft.
[36]See above, para 10.32.
[37]NZPPSA, s 44.
[38]NZPPSA, s 37. This rule is perhaps not accurately categorised as one of consumer protection as the same applies to an agreement that specifies merely ‘equipment’. On the other hand, it is possible to exclude consumer goods from a security interests merely by using that phrase.
[39]NZPPSA, s 54. Where the goods are sold in the ordinary course of business the buyer takes free unless the buyer or lessee also knows that the sale or lease constitutes a breach of the security agreement under which the security interest was created: NZPPSA, s 53(1).
[40]NZPPSA, s 161.
[41]See above, paras 7.55 - 7.66.
[42]See above, para 10.43 n 34.
[43]Larger vessels and aircraft would remain subject to the specialist registers that apply to them.
[44]In addition, a purchaser of stock-in-trade will take free of the security interest unless she knows that the sale is in breach of the security agreement: see above, para 4.181.
[45]Crowther report para 5.7.26.
[46]Diamond report paras 11.5.15-11.5.17.
[47]See above, para 7.85.
[48]Diamond report para 11.5.17.
[49]See above, para 4.211.
