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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(5) (14 June 2002) URL: http://www.bailii.org/ew/other/EWLC/2002/164(5).html Cite as: [2002] EWLC 164(5) |
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5.1 In this Part we consider what charges should be registrable under a notice-filing system of the kind that we provisionally proposed in Part IV. We noted in Part III that the Steering Group’s consultation document provoked a strong response to the effect that the list of registrable charges set out in the Companies Act 1985[1] does not reflect current commercial practice.[2] We reach the provisional but clear view that there should be significant amendment to the current list of registrable charges.[3]
5.3 A preliminary question is whether the approach should be to list those charges which are registrable (as under the current scheme) or whether there should instead be a requirement to register any charge that is not specifically excluded. This question was raised in the Diamond report in the context of interim amendments to the list pending the introduction of more fundamental reforms the report recommended. The Diamond report stated that it would not be sensible to require all charges to be registered, nor even to require registration of all charges except those on a list of exceptions, as not all the charges that might possibly be used in the future could be identified.[4] The unimplemented reforms enacted by the Companies Act 1989 retained the ‘list of registrable charges’ format, although the list was amended.[5]
5.4 The Steering Group adopted the alternative approach.[6] In its Final Report, after recommending that floating charges and all charges on goods[7] should be registrable,[8] concluded that charges over all forms of ‘obligations’[9] should be registrable unless they were on a list of charges that it proposed should be exempt from registration (most but not all of which related to charges over intangibles).[10]
5.5 As between making all charges registrable except those listed as exempt and simply having a list of those that should be registrable, not much might turn on the method used if the list were carefully drawn. However, arguably the Steering Group’s approach is preferable: a system working on the basis that the parties to a transaction would expect most charges to be registrable unless on a finite list would perhaps be easier to operate and would reflect the commercial reality[11] that in practice most companies or creditors seek to register all charges ‘just in case’. In addition, such an approach would go towards making the section ‘future-proof’ in respect of security over new types of assets. This would avoid repetition of the difficulty apparently now felt over whether charges over, for example, computer software and film negative rights in film financing are registrable.[12] While we accept the Diamond report’s concern that we cannot identify future types of charge or asset that might be charged, we think it better that new types of charge or charges over new types of asset should be registrable unless exempted. We provisionally propose that there should be power to create new exemptions by Ministerial order.
5.7 Such an approach would deal with a point on which the Steering Group thought the list was in clear need of updating.[13] Section 396(1)(c) of the Companies Act 1985 makes registrable a charge created or evidenced by an instrument which, if executed by an individual, would require registration as a bill of sale (a requirement first appearing in the Companies Act 1900, section 14). We agree that this cross-reference to the complex and outdated registration provisions relating to bills of sale[14] is unfortunate. The Steering Group’s suggestion that in principle all charges on goods should be registrable[15] would remove the cross-reference. Even if it were decided to retain a list of registrable charges on the existing model we would propose to replace the reference in section 396(1)(c) with a stand-alone provision making all charges on goods registrable.
in essence … charges on goods abroad or at sea, or imported goods before they are delivered to a buyer or deposited in a warehouse factory or store.[16]
5.9 Using the approach suggested above as a working basis we now turn to consider the appropriateness of the Steering Group’s proposed list of excluded items, noting that some of the exceptions listed are already excluded in section 396 of the Companies Act 1985, and others are suggested to clarify the existing position.[17] The exemptions proposed by the Steering Group were:
(a) simple retention of title clauses,
(b) a charge, as such, for the purpose of securing any issue of debentures,
(c) the deposit by way of security of a negotiable instrument given to secure the payment of a debt,
(d) charges over shares,
(e) charges over insurance policies,
(f) contractual liens over sub-freights, and
(g) charges on cash or securities, including shares, bonds, money market instruments and units in collective investmentschemes in such securities.
We will deal with each of these points but not in the same order. In particular, we will not deal separately with the items mentioned in (g).[18] We understand that in practice a charge over cash will be safeguarded either by requiring that the cash be deposited, either in the chargee’s possession or in a bank account over which the chargee has control. This is discussed below.[19] Charges over the other assets mentioned raise the same issues as will be discussed in relation to shares.[20]
5.10 The Steering group also proposed a special rule to deal with the rather unusual problem affecting corporate members of Lloyds. This is considered separately.[21]
5.11 As the Steering Group noted in its consultation document, the broad thrust of the case law is to the effect that complex retention of title charges are registrable charges.[22] Simple ones, even ‘all-monies’ clauses, are not.[23] To exclude ‘simple’ retention of title clauses might clarify the question of when a retention of title clause amounts to a registrable charge. The Steering Group was inclined to leave such questions to the courts. Respondents suggested that the current position is sufficiently clear and legislation should not be too prescriptive. Many respondents also noted the difficulty in attempting a precise definition which may risk raising a new set of uncertainties in this area. We provisionally suggest that a statutory definition of a registrable retention of title clause, or indeed a specific exemption for the ‘simple’ clause, is unnecessary.
5.12 We provisionally propose that the question of whether a retention of title clause creates a registrable charge should be left to the courts.
5.13 Later in this Consultation Paper we return to the question of retention of title clauses when we consider whether ‘quasi-securities’ should be registrable, and in that context we think all retention of title clauses should become registrable.[24]
5.14 The Steering Group noted that it had been told that charges are no longer in practice given to secure issues of debentures, and that this made the requirement for their registration “arguably otiose”.[25] However, if it is the case that certain charges are not in common usage we see no necessity to specifically exclude them as a result of this. We are not provisionally inclined to have such an exception, but would welcome the views of consultees.
5.16 The Steering Group was advised to retain the current exception relating to negotiable instruments[26] and we agree that these should be excepted. We have already expressed the provisional view that possessory securities should be outside the scope of the notice-filing system we envisage.[27] A pledge is not a charge, and the current law makes clear that the deposit of a negotiable instrument to secure payment of book debts is not to be treated as a charge over those book debts.[28] We provisionally propose to continue that exception.
5.18 In its consultation document the Steering Group noted that fixed charges over shares are not registrable under the current law,[29] but we have been told that in practice a charge over shares may be registered, since part of the charged property is the right to receive dividends, which are book debts and thus registrable under the Companies Act 1985, section 396(1)(e).
5.19 Whether charges over shares[30] ought to be registrable has been the subject of debate for many years. Clearly shares can constitute valuable assets of a company and in principle therefore it should be possible for third parties to discover whether the company has created charges over its holdings of shares. The Jenkins report recommended that charges over shares in a subsidiary ought to be registrable and the Cork report recommended that all charges on shares be made registrable.[31] However, the Diamond report (in the context of interim reform) rejected the idea of registering all charges on shares,[32] as did the legislature, as it was thought that that registration would be impractical and the operation of the market could be severely undermined in cases where companies owned a changing portfolio of shares.[33]
5.20 We pointed out in Part II that with certificated shares parties may attempt to create a charge by depositing the share certificate and a blank stock transfer with the creditor.[34] This is intended to work rather like the possessory security that may be created be depositing bearer shares. Not even possessory security is possible where the investment security is not represented by a physical document. As we also saw in Part II,[35] the traditional pattern of direct holdings of these securities (that is by either possession of bearer securities or transfer of legal title by register in the company share register) has been replaced by the evolution of indirect holdings through custodians. With the development of uncertificated securities, many transfers are effected by book entry.[36]
5.21 The Steering Group considered whether the blanket exclusion ought to continue or whether all shares should be made registrable other than those where compelling commercial reasons dictated their exclusion. In its Final Report the Steering Group concluded that all shares ought to be exempt from the requirement to register.[37] It reached this conclusion for practical reasons and because of the Draft EU Collateral Directive.[38] We will consider each of these reasons in turn.
5.22 We are not convinced that the exemption of charges over shares or other investment securities would necessarily have to be continued under a scheme of notice-filing. In Part IV we pointed out that one of the advantages of the scheme would be that a single financing statement could be filed to cover a series of future transactions rather than, as at present, each new charge having to be registered separately as and when it is created. This would, we think, give sufficient flexibility to allow the chargor to continue trading the portfolio of shares, and in effect substituting new shares for old, without having to file a fresh financing statement each time (or reducing the charge to a floating charge).[39] We understand that under the schemes in New Zealand and Saskatchewan, security interests in investments securities are perfected by filing.[40]
5.23 However, we think that there are good reasons of principle for making registration of charges over shares and investment securities unnecessary under a notice-filing system.[41] (We will discuss below whether notice-filing should be a permissible alternative.[42]) In Part III we set out the criteria that we think a modern system of registration should meet. One of these is to provide information about security over a company’s property, particularly ones that third parties are unlikely to be able to discover easily from other sources. On the other hand, the register need not duplicate information from other sources or warn about securities that will be obvious to third parties. For example, it would serve no good purpose to require registration of pledges. These require that the creditor have possession of the goods or documents (including, for example, bearer shares). Any potential creditor will find this out easily. Equally, the goods or documents will not appear to potential investors to be among the debtor’s assets.[43]
5.24 A similar argument applies to shares. A mortgage or charge over shares may be created by a simple agreement,[44] but in practice the mortgagee or chargee will wish to protect the security interest against third parties. There are two ways of what amounts to perfecting a charge over shares. One is to take custody of any share certificates, usually together with a transfer form signed in blank by the share-owner. The other is to have the shares registered in the name of the mortgagee or chargee. (We pointed out in Part II that systems like CREST for trading of dematerialised shares do not allow for registration of interests less than ownership.[45]) In either case, the position will be clear to third party enquirers, or at least readily ascertainable by them. As the UCC Article 9 puts it, the shares are under the control of the chargor; and Article 9 treats securities that are under the control of the secured party as perfected, just as it does possessory securities once the collateral is in the possession of the creditor. For reasons that we explain below,[46] it would not be appropriate simply to provide that a charge over shares should be treated as effective against third parties without any steps being taken to perfect it, but we think it is unnecessary to require the registration of charges over shares when the chargee has either taken possession of the physical certificates or has control by virtue of having been registered as the owner. In those circumstances the charge should be treated as perfected without filing. Thus it would be valid in the event of insolvency and would have priority over any subsequent security interest. (We would also exempt a charge over rights to dividends when this forms part of a charge over the shares concerned.[47])
5.25 The policy behind the EU Collateral Directive is that publicity requirements for perfection in differing jurisdictions are perceived as impractical, difficult and inconvenient when applied to financial markets.[48] The Draft Directive seeks to protect the validity of financial collateral arrangements that are based on the full ownership of the financial collateral.[49] The Draft Directive proposes a simplified framework in order to create legal certainty. This should lead to increased liquidity in these markets and in turn to more efficient price determination. The two specific measures designed to achieve this aim are, first, to permit agreements allowing the collateral-taker to reuse the collateral by on-pledging[50] and, secondly, to allow specifically for collateral substitution. The proposed regime would apply to both financial collateral arrangements that operate by title transfer (as to which, we discuss below, in Parts VI and VII) and those that employ security in the traditional sense.
5.26 In order to limit the administrative burdens, the only perfection requirement which national law may impose is that the financial collateral (which can consist of cash or financial instruments as defined in the paper) is delivered, transferred, held, registered or otherwise designated so as to be in the possession or under the control of the collateral taker (or a person acting on their behalf). Further the validity and perfection, enforceability or admissibility may not be made dependent on the performance of any formal act such as the execution of any document in a specific form or in a particular manner, the making of any filing with an official or public body or registration in a public register.[51]The EU Collateral Directive aims to provide a balance between market efficiency and the safety of the parties to the arrangement and third parties, thereby avoiding the risk of fraud: this is achieved through the scope of the Directive covering only those financial collateral arrangements which provide for some form of dispossession where the provision of financial collateral is evidenced in writing or a durable medium and the collateral can be effectively traced.
5.29 It has been suggested to us that there might be advantages in allowing a chargee the option of perfecting a security interest over shares by filing a financing statement. This would mean that neither of the methods described above would be necessary as a way of taking a valid charge over shares or other investment securities. This point requires careful explanation.
5.31 Under a notice-filing system, one possibility would be to continue to exclude charges over shares from filing altogether. This would mean, however, that unsecured creditors and others might be affected by a charge that was not protected by possession of the certificates or control, and which they would therefore have no means of discovering. That would go against the policy of trying to ensure that third parties are alerted to the possibility of charges that are not evident. A second possibility would be to say that no charge over shares will be perfected unless the creditor takes possession of the certificates or control. This solution has the advantage of simplicity but it may seem to be restrictive. The third possibility is to provide that a charge over shares may be perfected by filing as an alternative to the other methods of perfection.[52]
5.33 This issue is parallel to one that arises in relation to goods. Under present law goods may be subject to a floating or fixed charge to one creditor and then be pledged by the company to a second creditor. Who has priority under current law depends on the nature of the first charge; if it is floating, the pledgee has priority. Under a notice-filing system, this would change. If the charge were perfected first it would have priority over the pledge.[53] We think that this priority rule is appropriate for questions as between a charge over goods and a pledge of them, but we do not think that it is appropriate for shares or investment securities. Although shares are not negotiable instruments, it is very important that their ready transferability be maintained. As the Official Comment to the UCC puts it, with such collateral:
a lender should be able to rely on the collateral without question if the lender has taken the necessary steps to assure itself that it is in a position where it can foreclose on the collateral without further action by the debtor.[54]
Revised Article 9, which permits perfection of security interests over ‘investment property’ by either filing or control, provides that the party who has control will always have priority, even if the financing statement was filed first.[55]
5.34 We think that, if the alternative of perfection by filing were to be permitted, such a rule would be desirable.[56] The result would be that a secured party could protect a charge over shares, without taking possession or control, by filing, and this would mean that the charge would be valid against unsecured creditors in the event of the debtor’s insolvency. However, the charge would be ‘vulnerable’ to loss of priority to a subsequent creditor who perfected by taking possession or control - an outcome not very different to the present situation when shares are subject to a registered floating charge.
5.36 Charges over insurance policies currently do not require registration; case law has decided that they are not registrable as charges over book debts.[57] The existence of an insurance policy would not be entered onto a company’s book as a debt before liability under the policy and the amount have been ascertained; moreover it is properly construed as a contingent debt.[58]
5.37 The Steering Group’s proposal would make charges over most insurance policies registrable. It noted that the 1994 DTI consultation document had proposed that all charges over insurance policies should be registrable and that this proposal had found strong support.[59] Whilst the Steering Group noted that a requirement to register such charges might deter parties from charging policies that include a confidentiality clause, it was of the view that the argument was one which did not justify excluding all insurance policies: it noted that publicity is an essential part of the registration of charges and an insurance policy containing a confidentiality clause is unlikely to be subjected to a charge.[60]
5.38 The Diamond report had also recommended that charges over insurance contracts should be made registrable. However, the recommendation in the Diamond report was not followed in the unimplemented amendments of the Companies Act 1989, and the overseas systems also seem to have excluded security interests over insurance policies from being registrable. The UCC excludes such security interests from the scope of Article 9 (except to the extent they constitute proceeds under Section 9-109(d)(8))[61] and the SPPSA seems to have also favoured such an exemption.[62] The NZPPSA also excludes such security interests, except in relation to its rules relating to proceeds.[63] However, it has been noted that the decision to exclude insurance policies seems to be based on political rather than reasoned legal or practical reasons.[64]
5.40 However, the Diamond report’s recommendation was subject to exceptions with regard to marine insurance on goods to be exported and for charges on policies relating to other goods of a sort over which a charge would not be registrable.[65] The Steering Group also proposed that there should be exceptions in these cases.[66] We agree. We provisionally propose that neither charges on goods nor on insurance policies on goods should be registrable where the goods are abroad or at sea, or are imported goods before they are delivered to a buyer or deposited in a warehouse, factory or store.
5.41 Contractual liens over sub-freights to secure performance of the master time charter payments over ships were never considered to be registrable charges until the decision in Re Welsh Irish Ferries Ltd[67] which held contractual liens over sub-freights constitute a charge. At the time Nourse J recognised that there may be “great practical difficulties” in requiring these to be registered.[68] The Diamond report recommended that charges on freight should not be registrable, as it was thought unlikely that persons extending credit to a charterer rely on that income, or would be unaware of the presence of a lien which is a standard clause in many charterparties, and hence little useful purpose would be served by added publicity.[69] Had the provisions been implemented, the Companies Act 1989 would have excluded ship-owner’s liens from registration.[70] The Steering Group proposed this exception also on the basis of the Privy Council decision in Agnew v Commissioner of Inland Revenue[71] which doubted the correctness of the decision in Re Welsh Irish Ferries Ltd.[72] Whilst it may be that some of the practical difficulties of registering a lot of such charges might be reduced by a notice-filing system permitting the filing of a single financing statement in respect of multiple transactions between the same parties, in the light of the questionable status of such liens, it may be sensible to make clear that such liens ought not to be registrable charges.[73] However, we would welcome the views of consultees on this point.
5.44 Charges over certain types of monetary obligation, including uncalled share capital of the company or calls made but not paid and, more importantly, book debts are registrable charges.[74] It is also uncertain whether credit balances at a bank account are book debts and consequently whether a charge over a bank balance in favour of a party other than the bank[75] is registrable. Contingent debts, for example rights under insurance policies,[76] are currently not registrable as they are not regarded as book debts.[77]
5.45 The Steering Group noted in its consultation document that the actual meaning of book debts has been the source of constant debate.[78] The 1994 DTI consultation document raised the question of whether the concept of book debts should be replaced by a wider concept of ‘receivables’ and proffered a suggested definition which would in effect have caught many of the transactions which have been held not to be book debts.[79] The Steering Group did however note that even under an expanded definition uncertainties as to exactly what did constitute a ‘receivable’ would remain.[80] An alternative would be simply to require registration of charges over ‘debts’, which might still exclude some categories of money obligation.[81] The final question posed to consultees was whether charges over all money obligations should be made registrable, and whether this should include contingent contract rights.[82]
5.46 Responses to the Steering Group’s consultation document were generally in favour of making charges over contingent debts registrable.[83] Responses on the other questions were more variable. A small number suggested that only book debts should be registrable while larger numbers suggested ‘receivables’ or ‘all debts’ should be registrable. The Steering Group’s Final Report dealt with the issue by suggesting that all charges over obligations would be registrable save for specified exceptions. The exception specified in relation to ‘debts’ was the deposit by way of security of a negotiable instrument given to secure the payment of a debt, essentially a possessory security.[84]
5.47 It is our provisional view that the present requirement to register charges over book debts should be replaced by a provision in effect requiring[85] registration of charges over any kind of money obligation[86] with specified exceptions. (This would be achieved simply by acceptance of our provisional proposal that all charges save those expressly excepted should be registered.[87]) Thus not only traditional book debts but income from, for example, PFI schemes, would be within the registration scheme; so would contingent obligations.
5.48 We would create a number of exceptions, in accordance with our general approach that registration should be required only of charges that would not be immediately apparent to third parties.[88] These relate to charges over bank balances. (We have already proposed that charges over bonds and other debt securities, and equity share dividend rights when part of a charge over the shares concerned, should be exempt.[89])
5.49 We begin with the charge over a bank account in favour of the bank itself. The Re Charge Card decision,[90] in which it was held to be conceptually impossible for a bank to take a charge over a customer’s account with the bank, was effectively reversed by the House of Lords in Re Bank of Credit and Commerce International SA (No 8).[91]
5.50 Assuming that such charges are indeed possible,[92] the question is whether the charge should be registrable. In our view this is probably unnecessary because it seems inevitable that any potential creditor considering taking security over the same account will discover the charge-back. It will not advance credit against the ‘security’ of the bank balance without obtaining the confirmation of the bank that the account exists and is in funds, and the bank’s agreement that the money will be paid out only to the creditor. The bank will reveal its own charge-back.
5.51 In this context we note the provisions of the UCC. Former Article 9 did not provide for a security interest in a deposit account. Revised Article 9 specifically brings within its ambit a security interest in a deposit account.[93] However, it is expressly stated that security interests over deposit accounts are not to be perfected by filing. Instead they may be perfected only by control.[94] In effect the fund is in the bank’s ‘control’, just as shares that are charged will normally be within the control of the chargee, and registration is unnecessary to warn potential secured creditors.[95] We provisionally propose that a charge over a bank account in favour of the bank itself should be possible only if the bank takes ‘control’ of the account; and that it should be exempt from registration.
5.53 We ask consultees whether they agree that:
(1) charges over money obligations, including contingent obligations, ought to be made registrable; but that
(2) ‘charge-backs’ and charges over bank accounts should be possible only if the account is under the control of the secured party. The charge should then be treated as perfected without filing.
5.54 The Diamond report indicated that in relation to Scotland, doubts had been raised whether a charge to secure a non-monetary obligation is registrable, as the Companies Act 1985, section 417(3)(b) refers to “the amount secured by the charge.” It pointed out that, although the issue had not been raised in relation to England and Wales, section 401(1)(b)(ii) also refers to “the amount secured by the charge”. It suggested that, if necessary,[96] it should be made clear that securities to secure a non-monetary obligation should be treated in the same way as those securing a monetary one.[97] This would be achieved by our proposal that charges generally should be registrable unless specifically excepted.[98]
5.55 We have noted earlier in this Consultation Paper our provisional view that charges registrable in specialist registries (such as those for aircraft, land or ships) should not be registrable in the Company Charges Register. Alternatively, we suggested that they might be required to be shown on the Company Charges Register (being forwarded on from the registry concerned), but that this should be for notification purposes only, and would not be affected by any other rules of a notice-filing system.[99]
5.57 The registration of charges by trustee companies over trust property has given rise to difficulties. There seems to be doubt as to whether such a charge is registrable under the Companies Act 1985, section 395, since that section applies only to ‘a security on the company’s property’ and property held beneficially for another may not be ‘the company’s property’.[100] The current practice of Companies House is to register a charge submitted by a trustee and to record on the register that the chargor is acting as a trustee.[101] The responses to the Steering Group’s consultation document pointed out that the position of commercial trustee companies under Part XII Chapter I of the Companies Act 1985 is unsatisfactory and should be clarified, but there was little agreement on the solution.
5.58 The Steering Group reported that it is “the general, but not universal, view” that a charge created by a trustee company is not registrable because in such a case the sanction of invalidity would be irrelevant. The liquidator would obtain no benefit if the unregistered charge were invalid against him. The trustee is not the beneficial owner of the property, so that it would not be available to the trustee company’s creditors in any event.[102] This means that a requirement to register against the beneficiaries may be impractical. Certainly this argument was used by several respondents as a reason why the charge should not be registrable. In our view this is a valid point but not decisive.
5.59 First, if the trustee company deals with the trust property in a way that is authorised by the trust deed, the beneficiary’s interests are subject to those dealings.[103] Take the case of a unit trust scheme. If the trustee company has power to charge the assets of the trust, to that extent the assets are available to satisfy secured creditors, and to that extent the trustee company is in a similar position to the owner of the property.[104]
5.63 Therefore we see no need to require registration of a charge created by a trustee company unless the charge would be registrable were it created by a company over assets that it owned beneficially. In other words, the list of charges that would be exempt from registration[105] should apply to charges created by trustee companies. For example, it would not be appropriate, and if the draft EU Collateral Directive is adopted would in many cases not be permissible, to require registration of a charge created over investment securities.[106] This would reduce the impact of requiring registration by trustee companies and would mean that charges created by the ‘group custodian’ referred to by the Steering Group would not have to be registered if the shares were in the ‘custodian’s’ control.[107] Charges created by trustee companies over land would similarly be exempt from registration.[108]
5.66 A different question is whether a charge created by a trustee company over assets that it holds for a beneficiary should be registrable by the secured creditor against the beneficiary[109] if the latter is a company. It may be necessary to draw a distinction between, on the one hand, investment schemes that operate via a trust, like unit trusts, and other trusts under which the trustees have exclusive management powers, and, on the other hand, those ‘bare trusts’ and other trusts under which the trustees act at the direction of the beneficiary.
5.67 In the case of a unit trust, for example, it seems to us to be quite unnecessary for a charge created by the trustee company over the trust property to be registrable against the beneficiary, even where the beneficiary is a company.[110] Under the proposals just made, the charge (if it is not on the exempted list) will already be registrable against the trustee company. Not only would it be burdensome to require double registration, but we cannot see that registration against the beneficiary company would serve any useful purpose. The chargee will already secure priority, and be secure against purchasers, as the result of filing against the trustee company. Registering against the beneficiary might at first sight seem to warn potential lenders to or investors in the beneficiary that the pool of assets in which the beneficiary has an interest has been charged, but we do not think this is useful information to such parties. Potential lenders or investors will of course be interested in the units held by the beneficiary and their value, and liabilities of the trust, including any secured debts created by the trustee company, should be reflected in the value of the units. Whether the value of the units reflects charges created or simply the performance of the investments is irrelevant to the investor in or lender to the beneficiary.
5.68 In the case of a bare trust, the position may be different. Assets that are held under a bare trust are in a very real sense under the beneficiary’s control. It is accepted that if a company charges its assets, and the charge is not one that from its nature will be evident to third parties,[111] then in principle there should be some public record of it. We are not convinced that it should make a difference whether the company charges its assets directly or transfers them to a trustee company with directions that the trustee should charge them and, presumably, use the funds obtained for the beneficiary’s purposes. In both cases the charge should be on record.
5.71 We explained earlier that we do not think that registration against a beneficiary is necessary where the assets are held in a collective investment scheme like a unit trust. Equally we do not think that in such a case the financing statement needs to indicate whose assets are involved - indeed to do so would normally be impossible because the assets will be held in a pool for all the investors. The same would apply, we think, to a trustee company holding securitised assets for bondholders.[112] The critical distinction seems to us to be whether the beneficiary has power to direct the trustee as to the disposition of particular assets or a particular number of fungible assets.
5.72 We envisage that the electronic form for filing a financing statement would have boxes in which it would have to be stated that the chargor has confirmed:[113]
(1) either that it is the beneficial owner of the property charged or that it holds it in trust; and
(2) if it holds the property on trust, either that it has power to charge the trust assets without reference to the beneficiaries, or that it is charging property that holds it for another person on that person’s direction and naming the person.[114]
5.76 The Steering Group also suggested that there should be provision for voluntary inclusion on the financing statement of whether the charge is a “market charge” within the meaning of section 173 of the Companies Act 1989.[115] A “market charge” means a charge, whether fixed or floating, in favour of a recognised investment exchange, for the purpose of securing debts or liabilities arising in connection with the settlement of market contracts.[116] It is given special treatment in insolvency and, even if it is a floating charge, as against execution by unsecured creditors.[117] Given that the floating charge is unlikely to continue in use, or at least will have very different priority rules, under a notice-filing system, we doubt whether there will be any need to indicate in the financing statement that a charge is a market charge.
5.77 It is our provisional view that it is not necessary to state in the financing statement whether a charge is a “market charge” but we would welcome the views of consultees.[118]
5.78 The Steering Group considered a particular problem that is faced by corporate members of Lloyds.[119] Lloyds’ corporate members are required to enter into a number of trust deeds in support of their underwriting business. We understand that the trusts fall into three categories. First, when a member commences business at Lloyds it must place funds in trust (for example, Lloyd’s Deposit Trust Deeds). Secondly, each member must create a number of premium trust funds,[120] including some for overseas business.[121] These ‘working trust funds’ govern the day to day arrangements for collecting premiums and other receipts, and the payment of claims, reinsurance premiums and other expenses. The third category involves trusts that are on a different basis. Some overseas insurance regulators, particularly in the United States of America, require each syndicate to place funds in a separate trust fund. The majority of syndicates underwrite business in America. A member of Lloyds will participate in many syndicates and may therefore have to execute a large number of these trust deeds.
5.80 A switch to notice-filing would not alleviate the problem significantly, even though it would be possible to file a single financing statement to cover a series of future transactions. The premiums trust deeds executed by corporate members of Lloyds create trusts of the corporate member’s receivables, that is, the member’s anticipated income. As we understand it, when payments are received these are held by trustees appointed by the Managing Agents in separate sub-funds. The money held in each type of trust may be applied to permitted trust outgoings, of which the most important is the satisfaction of claims by insureds against the relevant syndicate.[122] In the case of the certain trusts for overseas business, the funds may be held by a nominated trustee for the fund (for example, the Royal Trust of Canada). Thus the funds are held in trust for purposes rather than named individuals, but in effect the beneficiaries are the insureds and other creditors of the syndicate. It is difficult to identify the chargees other than as the creditors (actual or future) of the syndicate. It would therefore not be possible to say that a single filing could be made to cover a series of transactions between the same parties.
5.82 Corporate members of Lloyds are not permitted to undertake any other business.[123] This does not mean that they do not sometimes need to raise finance. For example, there may be a gap in time between a syndicate paying out to insured parties who have suffered a loss and being reimbursed by a re-insurer. To maintain liquidity, managing agents may borrow from a bank and create a further charge to secure the loan - either a fixed charge over the receivables or a floating charge over the premium trust fund. We think that this charge to the bank should be registrable just like any other charge created by a corporate trustee.[124] This will preserve the bank’s priority against any subsequent secured creditor who might take a charge over the same assets, and against any purchaser of the receivables; and will equally provide a warning to potential lenders or purchasers.
5.84 If (contrary to our provisional view) it is thought that the trust deeds should be filed as charges, we consider that it would be satisfactory were there to be much less detail on the Company Charges Register than even a standard financing statement would require. In their response to the Steering Group’s consultation document, Lloyds suggested two alternatives. One was a single ‘bulk’ filing for the trusts in the first two categories, with, for trusts in the third category (those entered by syndicates), filing each year a single set of particulars of the standard form trust deed in respect of each category of business written by the company, together with a list of the syndicates on which the company writes business. The other was to allow just this special provision for trusts in the third category. They pointed to a precedent in section 397 of the Companies Act 1985, which permits a simplified form of registration for a series of debentures.[125] Under section 397 the particulars required are the total amount secured by the whole series; the dates of the resolutions authorising the issue of the series and the date of the covering deed (if any) by which the security is created or defined; a general description of the property charged, and the names of any trustees for the debenture holders. The Steering Group inclined to agree that the second solution suggested by Lloyds would provide “an acceptable balance of adequate notice to creditors and reduced compliance costs.”[126]
5.86 Thus we provisionally propose that if (contrary to our main provisional recommendation) Lloyds’ trust deeds are to be brought within the notice-filing system, each corporate member should be obliged only to file a financing statement listing the members’ and premium trusts that it has created; and, for the third class of trust, describing (in the general terms required for any financing statement[127]) the assets that the standard form trust deeds require to be held in trust for each class of business, and the names of the trustees. It should state that the trust is for the purposes of insurance at Lloyds. We invite consultees’ views.
5.87 We were asked in our terms of reference to include in our review the question of charges created by
(a) companies having their registered office in England or Wales, wherever the assets charged are located; and
(b) oversea companies and companies having their registered office in Scotland, where the charge is subject to English law.
5.88 We consider first the question of charges created by oversea companies having their registered office in England, where the charge is subject to English law. The problems raised by the Slavenburg decision, as well as the situation of the current scheme applying to oversea companies, have been noted earlier in this Consultation Paper.[128]The Steering Group recommended in its Final Report that oversea companies whose place of business is registered[129] in England and Wales (including companies incorporated in Northern Ireland and Gibraltar) should be subject to the same requirements as companies registered in England and Wales. Charges created by a company that had not registered its place of business should not be registrable, even if the company should have registered its place of business.[130]
5.89 However, when this recommendation was made in the earlier consultation document[131] it drew some criticism from consultees. It was suggested that such a requirement would allow a company which had an established place of business, but which had not registered its place of business, to benefit from its own default in not complying with the registration requirements:[132] default in such compliance would effectively exempt it from the requirement to comply with the charges regime.[133]Although this criticism was made in the context of a compulsory registration scheme, we believe that there would be a similar issue under a notice-filing system. Although the filing of a financing statement would not be compulsory, non-registration of the place of business would enable the company to avoid the normal sanctions of loss of priority and invalidity of the charge in the event of the debtor’s insolvency.
5.92 We think that creditors would probably prefer to be able to file in order to take advantage of the relative certainty provided by the system of notice-filing[134] compared to the rather precarious position under the rules of common law and equity that would apply if the charge is not registrable. Thus if a notice-filing system were to apply only to oversea companies that had registered in England and Wales, creditors in England and Wales seeking to take security over a company’s property in England would put pressure on a company to register if it had a place of business in England but had not registered.
5.94 We think that such a notice-filing system would also cover the current problem that arises where a charge has been created by an oversea company on property that was then outside the United Kingdom, but which is subsequently brought into the United Kingdom. Under the current scheme, we noted that this could cause problems where the 21-day period for registering the charge following its creation had passed before the property was brought into the United Kingdom: the registration requirements effectively could not be complied with.[135] A notice-filing system would not have a time limit for filing in the same way as the current registration scheme has: there would therefore be no similar problem.[136] In a notice-filing system that applied to charges over property that is subsequently brought into the United Kingdom, it would not be the case that such a charge or security interest could not be registered (as under the current scheme). Instead, a financing statement could be filed at any time.[137] We provisionally propose that a charge that has been created by an oversea company on property that was then outside the United Kingdom, but which is subsequently brought into the United Kingdom, should be registrable.
5.96 The first point is that the validity of a fixed charge over an asset will normally be governed by the law of the place where the assets are at the time (the lex situs). Thus it is possible to create a charge only if it will be recognised by that law. For example, it is not possible for an English company to create a valid charge over goods (as opposed to a pledge of goods) that are in Scotland because Scots law does not recognise non-possessory security over goods.[138] Similarly a floating charge may be created by an English company even when the assets and the creditor to whom the charge is granted are in a jurisdiction that does not recognise the floating charge;[139] but it does not follow that the charge will be enforceable against the assets in that other jurisdiction. Thus before the floating charge was introduced in Scotland it seems to have been accepted that a floating charge created by an English company would not be effective against assets in Scotland.[140]
5.97 The point that the validity of a charge over assets in another jurisdiction will be subject to the law of that jurisdiction is recognised by the Companies Act 1985, which refers (in the context of property in Scotland or Northern Ireland) to registration in the country where the property is situated being necessary to make the charge valid or effectual according to the law of that country.[141]
5.99 What, however, if the charge over assets in the other jurisdiction has not been validly registered in England? Under current English law, if the 21-day period for registration of the earlier charge has expired by the time the second charge is created, and the second charge is validly registered within 21 days of its own creation, the first charge will be void as against the second.[142] Under the proposed notice-filing system, the first charge would lose its priority to the second.[143] Under either the current law or the proposed new system, a charge that has not been registered by the date of insolvency will in effect be void as against the unsecured creditors.[144] These rules on what we term ‘the effects of non-registration’ cut across the basic rules of priority. Suppose that the jurisdiction in which the assets are situated does not have any equivalent to these rules; will the courts of that jurisdiction simply allow the first creditor priority over the second or, where the debtor has become insolvent, to enforce an unregistered charge against the liquidator?
5.101 As between England and Scotland it is possible that the position is that the courts will apply each other’s rules on the effects of non-registration. First, in Scots law there are indications that the courts might enforce the English rules against the creditor who has failed to register, on the basis that a similar rule would apply to a purely Scots case. However it has to be admitted that the cases involve a different question, namely whether the Scottish courts should recognise the power of an English receiver to enforce a floating charge.[145]
5.102 Secondly, the Insolvency Act 1986, section 426 provides:
(4) The courts having jurisdiction in relation to insolvency law in any part of the United Kingdom shall assist the courts having the corresponding jurisdiction in any other part of the United Kingdom or any relevant country or territory.
(5) For the purposes of subsection (4) a request made to a court in any part of the United Kingdom by a court in any other part of the United Kingdom or in a relevant country or territory is authority for the court to which the request is made to apply, in relation to any matters specified in the request, the insolvency law which is applicable by either court in relation to comparable matters falling within its jurisdiction.
This appears to mean that the English liquidator can apply to the English court for an order for possession or sale, the English court can then request the Scottish courts to assist and the Scottish courts may apply English law. This might enable the liquidator to claim an asset subject to an unregistered charge. However, this is not wholly clear. ‘Insolvency law’ is defined as provisions under the Insolvency Act 1986,[146] which includes the liquidator’s power to get and sell the company’s assets,[147] but it assumes that the asset is the ‘company’s’ even though the company will take free of the charge only by virtue of the Companies Act 1985, to which there is no reference. Secondly, the duty on the court is only ‘to assist’; whether to do so and whether to apply the other country’s law is thus a matter of discretion.
5.104 What alternative is there? The SPPSA section 5(1) provides simply that the validity, the perfection and the effect of perfection or non-perfection of security interests is governed by the law of the jurisdiction where the collateral is situated when the security interest attaches.[148] That seems to leave open the question whether that law will simply apply its rules that would apply to a purely domestic case, or should apply its conflicts rules - which might then refer to the SPPSA. The UCC Revised Article 9, in contrast, is explicit. While for non-possessory securities it is the law of the jurisdiction in which the debtor is located that governs questions of perfection,[149] it is the law of the place where goods or documents are located that governs the effect of perfection or non-perfection.[150] In each case it is the ‘local law’ that is to govern the relevant questions.[151] We suspect, however, that these provisions are drafted primarily with a view to neighbouring jurisdictions that have very similar rules and a similar register, so that potential lenders can quite easily discover what security interests exist over assets in the local jurisdiction and the differences between the jurisdictions over the effects of perfection or non-perfection will be slight. With the exception of Scotland,[152] we cannot be sure that this will be true for ‘foreign’ assets owned by companies registered in England.
5.105 Thus we cannot be sure that a failure to file a financing statement against a company registered in England and Wales that is charging assets outside the United Kingdom will result in the charge being invalid or the secured party losing priority. In our view, to enable filing and to apply, in principle, the usual sanctions (loss of priority and invalidity in the event of insolvency) would still form a useful function for charges over such assets. In cases in which there is no other way in which a potential lender can readily discover that an asset is charged,[153] it will be useful to have the information on the register; and we can expect the register to be reasonably complete, because few creditors will wish to take the risk that the courts of the country where the assets are located may decide to invalidate the charge by applying English law under their rules of private international law.
5.108 We do not think that it would be appropriate to provide for registration in both jurisdictions. ‘Dual’ registration seems to us to cause additional cost with little extra gain. It is true that it might be marginally easier to discover information about charges over assets in Scotland were the charge to be registered there also, but the burden of searching the English register rather than either the Scottish or the English one cannot be great, especially if the register can be searched on-line. It is true that it would be simpler for the Scottish court to reach the conclusion that a charge that had not been filed in Edinburgh was invalid in the event of insolvency, as this would be a rule of Scots law, but given the ease with which potential creditors and investors would be able to search the English register under our proposed scheme, it does not seem justifiable to impose the ‘sanction of invalidity’ on a charge which has not been filed in both jurisdictions. Meanwhile, it is likely that the systems of priority in the two jurisdictions will remain different. It would certainly not be desirable to subject the charge to ‘both’ systems of priority. As the Americans have found to their cost, rules which result in claims to a single assets being subjected to rival rules produce chaos and it becomes necessary to introduce a rule as to which scheme of priority is to have priority.[154]
5.112 In fact the range of charges involved may be rather limited. Under our proposals, charges over land and other assets for which there is a specialist register will not be registrable in the Company Charges Register. Nor, for different reasons, will charges over shares and similar securities (unless the option is adopted of allowing filing instead of taking control[155]). As we have seen, an English company cannot create a valid charge over goods in Scotland. Floating charges will in practice be registered anyway since they will presumably cover assets on each side of the border. Thus effectively the only classes of charge in issue will be fixed charges over receivables and over some forms of intellectual property for which there is no specialist register.
5.114 The provisions in the Companies Act 1985 relating to ‘oversea’ companies do not apply to companies registered in either England and Wales or in Scotland as against the other jurisdiction: a Scots company is not required to register a place of business in England and Wales under the Companies Act 1985 Part XXIII.[156] Equally, the provisional proposals for a notice-filing system in respect of charges created by oversea companies that we have outlined above would not apply to a charge created by a Scots company. A charge created by a Scots company over property in England and Wales is registrable in Scotland but not in England and Wales.
5.116 We provisionally reject ‘dual registration’ for the reasons given earlier.[157] Also, for the reasons given in the previous section and with the same hesitation, we suggest that the current system, under which a charge created by a Scots company over property in England and Wales is registrable in Scotland but not in England and Wales, is preferable to registration in the ‘other’ jurisdiction. As we indicated earlier, we think that if the liquidator of a Scots company approached the English courts for assistance, the latter might apply the Scottish rules on the effects of non-registration.[158]
5.117 There may be a difficulty if a narrower range of charges is registrable in Scotland than in England and Wales. A charge created by a Scots company over property in England and Wales is registrable in Scotland only if the charge is of the types listed in section 410 of the Companies Act 1985. There is, for example, no requirement to list a charge over goods as Scots law does not recognise a non-possessory security over moveable property. If, as we proposed earlier, further types of charge are made registrable south of the border,[159] and if (as we propose in Part VII) ‘quasi-securities’ should become registrable, these differences will increase.
5.118 Thus our earlier proposal for charges created by companies registered in Scotland may - like the present law - make it difficult to discover whether certain types of property (in particular, goods) that a Scots company claims to own in England and Wales have been charged, since the charge will not be registrable in either jurisdiction. The Steering Group noted the same difficulty, and proposed that Scots companies should register any registrable charges over property in England and Wales with Companies House in Edinburgh, even if the same charge were not registrable were it over property in Scotland.[160]
5.119 The registration of charges created by companies registered in Scotland is a question that affects parties in Scotland as much if not more than in England and Wales. In any case, reform of the scheme of registration of company charges created by Scots companies is a matter for the Scottish Law Commission, which has a separate reference to examine the current scheme as it affects Scots companies. We understand that, under the Scottish Law Commission’s current project at least, any reform is not likely to involve the sort of notice-filing system that we have been examining. However, the Scottish Law Commission will no doubt be considering the questions (1) whether to require registration of types of security interests over assets outside Scotland where the security interest is recognised by Scots law but does not require registration if the assets are in Scotland; and (2) whether to require registration in Edinburgh of charges over assets in other jurisdictions that are valid under the law of that jurisdiction, even though the charge is of a kind that cannot be created in Scotland.[161]
5.121 The Steering Group proposed that:
registration of company charges should be included amongst the provisions of the Act that apply to unregistered companies.[162]
5.122 There was widespread - although not universal - support for such a move amongst consultees and in its Final report the Steering Group recommended that registration of company charges should be included amongst the provisions of the Act that apply to unregistered companies.[163] We see no reason to differ.[164] We provisionally propose that charges created by unregistered companies should be within the notice-filing scheme we have proposed.
5.123 It may be useful to summarise the effect of our provisional proposals as to the charges that would be registrable under the notice-filing system.[165] Charges created by either a registered or an unregistered company[166] would be registrable, wherever the assets charges are located,[167] unless the charge falls on a list of exemptions.[168] The list of exemptions would be as follows:
(1) charges over property for which there is a specialist asset register, (that is, land, aircraft and ships, and over patents, trademarks and registered designs);[169]
(2) charges over shares and investment securities where the secured party has possession of the certificate or has control by being registered as owner;[170]
(3) charges over bank accounts which are under the control of the chargee;[171] and
(4) charges on goods, and on insurance policies on goods, where the goods are abroad or at sea, or are imported goods before they are delivered to a buyer or deposited in a warehouse factory or store.[172]
Deposits by way of security of a negotiable instrument to secure a debt would not be treated as a charge over the debt.[173]
5.124 Thus the most important types of charge that would be registrable would in effect be:
(1) floating charges;
(2) charges over goods (save as mentioned in (4) above);
(3) charges over monetary obligations of all types, including contingent obligations such as the proceeds of insurance policies (save as mentioned in (4) above);[174]
(4) charges on goodwill.
5.125 Thus the principal types of charge that would have to be registered and that are not registrable under the current law would be all charges over monetary obligations that are not book debts, including contingent obligations. It would be made clear that, if this is not the case already, charges to secure a non-monetary obligation are registrable. The principal new exemption from registration would be of charges that are registrable in a specialist register.
5.126 In Part IV we discussed the transitional provisions that would probably be necessary if the move to a notice-filing system were made. Whether or not any notice-filing is extended to cover ‘quasi-securities’ (a point which we discuss in the following two Parts), the list of charges that are registrable is likely to be wider than it is under the current scheme. Even if the system operated within the current framework of security there would have to be transitional provisions where a previously unregistrable security were made registrable under a notice-filing system. However, for convenience we deal with the question of transitional provisions for previously unregistrable charges when we deal with that for quasi-securities, as some of the points are the same.[175]
[1]We described the list (set out in the Companies Act 1985, s 396) in Part II: see above, para 2.26.
[2]See above, paras 3.12-3.15. The Steering Group noted that the proposals to update and extend the list of registrable charges embodied in the Companies Act 1989 “were welcomed, and the 1994 consultation confirmed … this”:Registration of Company Charges para 3.30. Although notice-filing could apply to the existing and unchanged list of registrable charges, it seems clear that this would be an unrealistic option, given the criticisms.
[3]We consider whether the system should take a functional approach to what should be registrable, and thus be extended to include ‘quasi-security’ interests as recommended by the Crowther and Diamond reports and as introduced in the overseas systems, in Part VII.
[4]Diamond report para 23.1.6.
[5]The Companies Act 1989 would have substituted (insofar as relevant to England and Wales) a requirement to register:
“(a) a charge on land or any interest in land, other than –
(i) in England and Wales, a charge for rent or any other periodical sum issuing out of the land,
…
(b) a charge on goods, or any interests in goods, other than a charge under which the chargee is entitled to possession either of the goods or of a document of title to them;
(c) a charge on intangible moveable property … of any of the following descriptions –
(i) goodwill,
(ii) intellectual property,
(iii) book debts (whether book debts of the company or assigned to the company),
(iv) uncalled share capital of the company or calls made but not paid;
(d) a charge for securing an issue of debentures; or
(e) a floating charge on the whole or part of the company’s property.”
See the unimplemented Companies Act 1985, s 396 as inserted by the Companies Act 1989, s 92 for additional constructions of the list.
[6]The Steering Group did not consider the question of a notice-filing system that made registrable more than just charges; however, we consider this aspect (the ‘functional approach’) below, in Part VII.
[7]Including those on goods and other property situated overseas: Final Reportpara 12.55, and see below, paras 5.87 ff.
[8]Final Reportpara 12.54.
[9]This is the word used, but the list of proposed exemptions that follows includes items of property, so it seems that the Steering Group meant to include charges over all assets unless exempted.
[10]Final Reportpara 12.60. See below, paras 7.35 ff.
[11]Or so we have been led to believe.
[12]These examples were given during the Steering Group’s consultation process.
[13]Final Reportpara 12.55.
[14]See below, paras 8.7 ff.
[15]Final Reportpara 12.55. This included those on goods (as well as other property) situated overseas: see paras 5.87 ff.
[16]Diamond report para 23.9.18. Below we suggest that charges over insurance policies over such goods should also be exempt from registration: see below, para 5.40.
[17]Our provisional views also relate to registrable charges under the alternative method discussed in Appendix A, unless indicated differently.
[18]This exemption was apparently prompted by concerns of participants in the financial markets that a requirement to register charges over collateral typically used in such transactions would hamper the inherent liquidity and attraction of these markets - which is the same issue as for shares.
[19]See below, paras 5.49-5.53.
[20]See above, paras 5.18 ff.
[21]See below, paras 5.78 ff.
[22]Registration of Company Charges para 3.41.
[23]See below, para 6.18.
[24]See below, paras 7.24-7.26.
[25]Final Reportpara 12.59.
[26]Final Reportpara 12.59.
[27]See above, para 4.17.
[28]Companies Act 1985, s 396(2).
[29]Registration of Company Charges para 3.43, and see Re Sugar Properties (Derisley Wood) Ltd [1988] BCLC 146.
[30]The discussion in this part is confined to charges in the traditional sense. Whether ‘quasi-securities’ over shares (such as the ‘repo’, see below, paras 6.38-6.45) should be made registrable is discussed in Part VII: see below, para 7.50.
[31]See Insolvency Law and Practice (1982) Cmnd 8558 para 1520 and the Jenkins report para 301.
[32]Diamond report paras 23.8.13-23.8.14.
[33] As per the Under Secretary of State for Industry and Consumer Affairs, Official Reports Standing Committee D (Companies Bill) 10th Sitting June 1989.
[34]See above, para 2.65.
[35]See above, paras 2.66-2.71.
[36]As one commentator has pointed out, the use of assets used in these markets through intermediaries and held with custodians has challenged traditional legal analysis, as computerised securities cannot be negotiable instruments and the lack of a tangible subject matter takes custody beyond the scope of bailment:J Benjamin, The Law of Global Custody (1996) pp 15-34. Rights in such securities are held through often multi-tiered, fungible and intangible arrangements. Consequently, academic legal analysis of such arrangements has alternated between recognising the owner as having proprietary and personal rights. The international, cross-border element means that conflict of laws issues are rife and indeed doubt surrounds the legal aspects of portfolios held in international contexts.
[37]Final Reportpara 12.60. Cf the position in Australia, where s 262(1)(g) of the Australian Corporations Act 2001 requires all charges on shares to be registered except where the charge arose by deposit of a document of title (defined by s 261(1)(g) to include share certificates) to the shares or where shares were registered in the chargee’s name upon the company’s own share register. However, it must be noted that most security over shares is achieved by these two methods. Similarly in England and Wales a legal mortgage is effected by transferring shares into the creditor’s name and issuing a new share certificate. An equitable mortgage is achieved where a creditor takes custody of the share certificate along with a blank stock transfer. The creditor can then enforce the share security by filling in its name or selling on the shares. Security over bearer shares is given by delivery of the share certificate along with a memorandum of deposit, ie, a pledge.
[38]See above, para 2.72.
[39]For the disadvantages of a floating charge over shares see above, paras 2.40-2.44 and 2.63.
[40]However, we understand that in Canada a Uniform Law Conference Working Group is preparing a Uniform Securities Transfer Act, which may provide a new regulatory scheme for security interests in investment property: see R Cuming and C Walsh, “Possible Implications of Revised UCC Article 9 for Canadian Personal Property Security Acts” (2001), para 42 (available at http://www.law.ualberta.ca/alri/ulc/99por/eppsaucc.htm).
[41]Or under any amended version of the current scheme.
[42]See below, paras 5.29-5.35.
[43]See above, para 4.15.
[44]Once the creditor has advanced the loan the agreement will be specifically enforceable and thus an equitable mortgage or charge will come into existence: see above, para 2.12.
[45]See above, paras 2.69-2.71. The creditor may also take a power of attorney and have the shares placed in an escrow account, so that any funds raised by their sale will be held for the creditor, but this will not protect the creditor in the event of insolvency of the debtor: see above, para 2.71.
[46]See below, para 5.31.
[47]Whereas the Steering Group also excluded charges over shares it did not offer any clarification as to whether dividends constituted book debts.
[48]See “Proposed Directive on Financial Collateral Arrangements, frequently asked questions”.
[49]Amongst other things, it aims to eliminate the recharacterisation risk.
[50]Or ‘rehypothecation’.
[51]Recording a transfer on the issuer’s register is not considered a formal act.
[52]The draft EU Collateral Directive does not seem to preclude registration as an alternative method of perfecting a charge: see art 4. It applies only where the collateral has been transferred to the collateral taker, or its existence has been noted on the account or register where the collateral taker’s interest is recorded. See the notes to art 4.
[53]See above, para 4.145.
[54]Section 9-328, Official Comment 3.
[55]Section 9-328 (1).
[56]It would probably be necessary were the draft EU Collateral Directive to be adopted in its present form. This applies as soon as the collateral is transferred into the name of the collateral taker, see above, para 5.31 n 52. It then prevents the imposition of further requirements that would impede enforceability by the collateral taker, art 4.
[57]See Paul and Frank Ltd v Discount Bank (Overseas) Ltd and Board of Trade [1967] Ch 348.
[58]See below, para 5.54.
[59]Registration of Company Charges para 3.38.
[60]Final Reportpara 12.61.
[61]However Revised Article 9 now covers health-care insurance receivables as originators of insurance receivables arising from the provision of health care services frequently sell them in financing transactions.
[62]SPPSA, s 4(b) excludes from the scope of the Act “the creation or transfer of an interest or claim in or pursuant to a contract of annuity or policy of insurance except the transfer of a right to money or other value that is payable pursuant to a policy of insurance as indemnity or compensation for loss of or damage to collateral”.
[63]NZPPSA, s 23(e)(vi) provides that the Act does not apply to an interest created or provided for by a “transfer of an interest or claim in or under a contract of annuity or policy of insurance, except as provided by this Act with respect to proceeds and priorities in proceeds”.
[64]G Gilmore, Security Interests in Personal Property (1965). In some cases different legislation may cover insurance policies.
[65]Diamond report para 23.5.4. For the charges on goods that would be exempt see above, para 7.00.
[66]Final Reportpara 12.61.
[67] See Re Welsh Irish Ferries Ltd (The Ugland Trailer) [1986] Ch 471and Annangel Glory Compania Naviera SA v M Gobdetz Ltd (The Annangel Glory) [1988] 1 Lloyd’s Rep 45.
[68]See Re Welsh Irish Ferries Ltd (The Ugland Trailer) [1986] Ch 471, 481.
[69]Diamond report para 23.4.15.
[70]The unimplemented Companies Act 1989, s 93 inserted a new Companies Act 1985, s 396(2)(g).
[71][2001] 2 AC 710, 727E-728D.
[72]Final Reportpara 12.59.
[73]We would propose to exclude such liens from being registrable under the alternative reform outlined in Appendix A. Equally, because they do not purport to create proprietary interests, they should not be treated as quasi-security interests. See below para 7.51 n 78.
[74] Companies Act 1985, s 396(1)(e). However a charge over a negotiable instrument given to secure the payment of book debts is expressly stated not to be registrable: Companies Act 1985, s 396(2).
[75]Charges in favour of the bank itself (‘charge-backs’) are dealt with below, paras 5.49-5.51.
[76]See above, para 5.36.
[77]The relevant accounting standard, FRS12, states that contingent assets are not recognised in financial statements, which derives from the concept of prudence in SSAP2, ie, nothing is brought in until it has happened. This contrasts with the position on contingent liabilities that are known which are mentioned.
[78]Registration of Company Charges para 3.34.
[79]Registration of Company Charges para 3.35.
[80]Registration of Company Charges para 3.35.
[81]Registration of Company Charges para 3.36.
[82]Registration of Company Charges para 3.37.
[83]Although it was also suggested that there was no pressing need to introduce this as an additional category of registrable charge, at least where the chose in action is not recorded in financial statements as an asset under accounting standards.
[84]Final Report para 12.60.
[85]We would remind readers that, if notice-filing were adopted, this would be a ‘requirement’ in the sense that if the charge were not registered it would be at risk of loss of priority and invalidity in the event of insolvency. There would be no criminal sanction. See above, paras 4.51-4.58.
[86]Thus including charges over uncalled share capital of the company or calls made but not paid.
[87]See above, para 5.6.
[88]See above, para 4.5.
[89]See above, para 5.28.
[90] Re Charge Card Services Ltd [1987] Ch 150.
[91][1998] AC 214, 225-228. See above, para 2.74.
[92]To ensure effective security over their own bank accounts (commonly referred to as ‘charge-backs’), practitioners commonly adopted a structure whereby the creditor purported to take a charge over the account but also relied on rights of set-off and restricted the depositor’s right to repayment until all obligations owed by the depositor or any associated company have been discharged (so that the account became a ‘flawed asset’). Practitioners noted that this was ‘convoluted’ (see, eg, M Hughes, “Assignments of choses in action” [2001] JIBFL 103) and used only in the absence of express statutory provision removing any doubts as to the effectiveness of such charges. (In Hong Kong, for example, the Re Charge Card decision was followed by an ordinance removing doubts which arose from that decision. We understand that this method is no longer favoured and now parties almost invariably rely on insolvency set-off; charge-backs are used only in rare situations where insolvency set-off does not operate.
[93]However Article 9 does not provide for a security interest in a deposit account in a consumer transaction, security over which can be obtained under the law outside Article 9: Section 9-102(a)(29).
[94]Control is obtained over a deposit account if the deposit account is maintained by the secured party, ie, automatically or the secured party becomes the bank’s customer with respect to the deposit account, or an agreement is entered into between the debtor, secured party and the bank providing that the bank will comply with instructions originated by the secured party directing disposition of the funds in the deposit account without further consent of the debtor.
[95]Nor do we think that registration is essential to warn potential investors. As pointed out in the Diamond report, the amounts that a company has to its credit are not normally known and therefore it is unlikely that anyone will be misled by the existence of an unknown charge: Diamond report para 23.4.10. In relation to charges over shares we ask whether it should be possible to perfect the charge by filing as an alternative to taking possession or control. We do not think that an equivalent question arises in relation to charge-backs. UCC Revised Article 9 permits security interests over deposit accounts be perfected only by control: Section 9-312(b)(1). Where the secured party is the bank at which the deposit account is maintained, there is ‘control’ without more: see above, para 5.51 n 94 and Section 9-104(a)(1). We are not convinced that in English law the mere fact that the account was maintained with the chargee would suffice to create a fixed charge over the account: compare the requirement for a fixed charge over book debts that the proceeds be paid into an account that is ‘blocked’ by the chargee: Agnew v Commissioner of Inland Revenue [2001] 2 AC 710, 729. A ‘blocked account’ would clearly be ‘controlled’ by the bank. It is possible that, in the absence of express provision, a charge-back over an account that was not blocked might operate as a floating charge, which (if perfected by filing) should be good against unsecured creditors. If so, we would have a ‘perfection by filing’ alternative, as for shares (see above, paras 5.29 ff). It would be much simpler to follow the UCC and say that a charge-back can be perfected only by control.
[96]It seems that this point was one of concern under the Scots law system, rather than for England and Wales.
[97]Diamond report para 23.2. It was suggested that there should be amendment to the requirement to enter “the amount secured by the charge” in the Companies Act 1985, s 401(1)(b)(ii), but we have already indicated that we do not think that this should be a required particular: see above, para 4.26.
[98]See above, para 5.6.
[99]See above, paras 4.209-4.210.
[100]These doubts are reflected in the responses that the Steering Group received to its consultation document, Registration of Company Charges.
[101]See, eg, Registration of Company Charges para 3.61. It was pointed out that even if a trustee company chooses not to register, by virtue of section 399(1) of the Companies Act 1985 another interested party may exercise its option to register. As such registration does not require notice, the trustee company may be unaware of the registration by the interested party.
[102]Registration of Company Charges para 3.59.
[103]In contrast, the trustee is not entitled to charge trust property for non-trust purposes.
[104]Presumably the trust deed might also empower the trust company to incur unsecured debts that could be enforced against the trust property.
[105]See above, paras 5.9 ff.
[106]See above, paras 5.25-5.28.
[107]See above, para 5.24.
[108]See above, para 5.55.
[109]The equivalent under the current law would be that the beneficiary company would be under a duty to register the charge. See above, para 2.22.
[110]Or if the notice-filing scheme is extended to other debtors, as proposed in Part X, any other beneficiary.
[111]See above, para 3.5.
[112]See above, paras 5.18 ff.
[113]Were the information deliberately or recklessly incorrect, the party filing might be subjected to a criminal sanction; cf the confirmation that the chargor has consented to the filing, above, para 4.106.
[114]Whether an omission of this would render the registration ‘seriously misleading’ (see above, paras 4.39 ff) would seem to depend on the circumstances.
[115]Final Report para 12.28.
[116]In summary, the Companies Act 1989, s 173 provides that a market charge is one (whether fixed or floating) granted in favour of a recognised investment exchange; The Stock Exchange; a recognised clearing house, or a person making payments resulting from the transfer or allotment of certain securities through a computer based system established by the Bank of England and The Stock Exchange. The charge must generally be for purposes specified in the section, such as securing debts or liabilities arising in connection with the settlement of market contracts or short-term certificates.
[117]Companies Act 1989, s 180. Under s 178, which has not been brought into force, regulations could have been made to give a floating market charge priority over a subsequent fixed charge.
[118]The suggestion that a market charge should be a required particular was made by one respondent, the Law Society. The unimplemented Companies Act 1989, s 103 would have substituted a new Companies Act, s 415(2)(b), allowing a market charge to be one of the prescribed particulars.
[119]Final Report para 12.65.
[120]For domestic business, there must be separate funds for life and non-life business.
[121]For example, the Canadian Trust deed.
[122]At a later stage surplus funds may be transferred to yet a further account, this time held by the Regulating Trustee (Lloyds itself) and may be used to pay losses on other syndicates in which the corporate member participated, or may be distributed as profit to the member.
[123]Except business that is ancillary to their underwriting. We understand that in practice this is of little significance.
[124]This will involve the bank, or the Managing Agents, filing against each corporate member of the syndicate. This is itself a burden and we understand that in practice this (and the requirements of the Consumer Credit Act 1974 where the syndicate involves individual Names) may mean that no charge is taken. However we understand that no complaint is made about this. In this case registration in the usual way seems necessary.
[125]See above, para 2.22.
[126]Final Report, para 12.66.
[127]See above, para 4.25.
[128]See above, paras 3.37-3.40.
[129]Under the current law, there is a dual registration scheme under Part XXIII, applicable either to foreign companies that have a branch in Great Britain, or to foreign companies that establish a place of business in Great Britain. It has been recommended in the Steering Group’s Final Report that the law relating to Part XXIII should be reformed so as to replace the dual registration scheme (for either branches or places of business) with a single regime based on the existing concept of place of business and the Eleventh Directive: see Modern Company Law for a Competitive Economy: Reforming the Law Concerning Oversea Companies URN 99/1146para 11.26.
[130]Final Reportpara 12.67. The Steering Group’s consultation document, Registration of Company Charges, was not the only document to suggest that the requirements of registration of charges should apply only to companies actually registered as oversea ones. The Steering Group also raised the question in a separate consultation document on oversea companies: see Modern Company Law for a Competitive Economy: Reforming the Law Concerning Oversea Companies paras 64-67. A majority of consultees to this document were also in favour of limiting the need to register company charges to those companies that were registered under Part XXIII of the Companies Act 1985. The unimplemented provisions of the Companies Act 1989 would also have restricted the charge registration provisions to those companies that had registered, rather than to those having an established place of business in England and Wales: Companies Act 1989, s 105 and Schedule 15, inserting Companies Act 1985, section 703A.
[131]See Registration of Company Charges para 3.68.
[132]The Companies Act 1985, s 697 sets out the penalties for non-compliance with ss 691-693 and 696.
[133]In reality, the question of benefiting from default is not so much addressed at the company (which is unlikely to be concerned over the outcome of priority or validity arguments between creditors), but is more aimed at permitting a secured creditor from taking advantage of the company’s default in order to claim that it is not subject to the validity and priority rules of a notice-filing system. A company that has been incorporated outside Great Britain which carried on business, but has now ceased so to do, may be subject to the winding up provisions applicable to an unregistered company, even though it may have been dissolved under the laws of another country: see the Insolvency Act 1986, s 225. This would presumably apply to such a company that had defaulted on its obligation to register.
[134]See above, paras 4.118 ff.
[135]See above, para 3.39.
[136]The legislation in both Saskatchewan and New Zealand provides for the situation where the security interest in goods has been perfected in another jurisdiction and subsequently brought into the country. These systems allow for continued perfection if the security interest is perfected in Saskatchewan or New Zealand either within 60 days after the day on which the goods are brought into the country; 15 days after the day on which the secured party has knowledge that the goods have been brought into the country or before perfection ceases pursuant to the law of the jurisdiction in which the goods were situated when the security interest attached, whichever is the earliest: see the SPPSA, s 5(3) and the NZPPSA, s 27(1). The Saskatchewan legislation notes that the security interest is subordinate to the interest of a purchaser or lessee of the goods without notice and before it is perfected in Saskatchewan by possession or registration: SPPSA, s 5(3). Where such a security interest has not been perfected pursuant to the law of the jurisdiction in which the collateral was situated when the security interest attached and before the collateral was brought into the country, it may be perfected pursuant to the relevant Act: see the SPPSA, s 5(5) and the NZPPSA, s 28(2). There is also provision in New Zealand for temporary perfection in some cases: see ibid, s 28(1).
[137]Although validity against third parties would only occur on such filing.
[138]Inglis v Robertson and Baxter [1898] AC 616.
[139]Re Anchor Line (Henderson Brothers) Ltd [1937] Ch 483, a case before the floating charge had been introduced in Scotland.
[140]See L Collins, “Floating Charges, Receivers and Managers and the Conflict of Laws” (1978) 27 ICLQ 691, 701, who suggests that the position would be different now that Scotland recognises the floating charge, citing Gordon Anderson (Plant) Ltd v Campsie Construction Ltd 1977 SLT 7. See also Norfolk House plc (in receivership) v Repsol Petroleum Ltd 1992 SLT 235.
[141] Companies Act 1985, s 398(4), which goes on to provide that delivery to the registrar in England of a copy of the certificate of registration in one of those countries will have the same effect as delivery of the instrument itself.
[142]See above, para 2.27.
[143]See above, para 4.123.
[144]See above, paras 4.74 and 4.78.
[145]See cases cited above, para 5.96 n 140.
[146]Insolvency Act 1986, s 426(10)(a).
[147]Insolvency Act 1986, s 143(1).
[148]The NZPPSA applies New Zealand law if the asset is outside New Zealand but the secured party has knowledge that it is intended to move the collateral to New Zealand. The security agreement can also provide that New Zealand law will govern: see the NZPPSA, s 26(1).
[149]UCC Revised Article 9, Section 9-301(1).
[150]UCC Revised Article 9, Section 9-301 (3)(C).
[151]UCC Revised Article 9, Section 9-103(1) and (3); and see Official Comment 3.
[152]See below, para 5.108.
[153]Cf above, para 3.5: thus we would only enable filing of charges that would be subject to filing were the assets in England.
[154]See Official Comment 7 to Section 9-301.
[155]See above, paras 5.29-5.35.
[156]Nor vice versa for an English or Welsh company operating in Scotland.
[157]See above, para 5.108.
[158]See above, para 5.102.
[159]For instance, charges over contingent debts and other money obligations that do not at present fall to be registered as charges over book debts.
[160]Final Report para 12.64.
[161]We have been very much helped by discussions with our colleagues at the Scottish Law Commission and will continue to liase with them on this issue.
[162]Registration of Company Charges para 3.69.
[163]Final Reportpara 12.67.
[164]The response from Companies House had noted that whilst some unregistered companies appear on the public register kept at Companies House, they are in fact administered by other bodies (eg, companies incorporated by Royal Charter, whilst having an entry on the public record, are administered by the Privy Council). Companies House does not update the public record for a company of this type, and their response questioned how Companies House would deal with the filing of a charge for such companies, given that they are not incorporated under the Companies Act 1985. If, as we have proposed (see above, para 4.35-4.36), company charges would be registered in the separate Register of Company Charges, we think this problem would fall away.
[165]See above, paras 5.6 ff.
[166]See above, para 5.122.
[167]See above, paras 5.95 ff.
[168]See above, para 5.6.
[169]See above, para 5.55.
[170]See above, para 5.28.
[171]See above, para 5.51.
[172]See above, para 5.40.
[173]See above, para 5.17.
[174]And uncalled share capital of the company or calls made but not paid.
[175]See below, paras 7.77-7.80.
