Company Security Interests (Consultation Paper) [2004] EWLC 176(5) (13 August 2004)

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You are here: BAILII >> Databases >> The Law Commission >> Company Security Interests (Consultation Paper) [2004] EWLC 176(5) (13 August 2004)
URL: http://www.bailii.org/ew/other/EWLC/2004/176(5).html
Cite as: [2004] EWLC 176(5)

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PART 5

A STATEMENT OF THE RIGHTS AND REMEDIES UNDER A SECURITY AGREEMENT

Introduction

As we explained in Part 2, the UCC and the PPSAs all contain provisions setting out the law on the creation of SIs, the rights and duties of the parties to the security agreement, and the enforcement of SIs following default. These rules apply to most SIs, whether they are 'traditional' securities, such as charges or mortgages, or quasi-securities such as title-retention devices. However, the provisions relating to default and enforcement apply only to 'in-substance' SIs (that is, they do not apply to sales of accounts nor to leases for more than one year or commercial consignments that do not secure payment or performance of an obligation, even though these are defined as SIs for the purposes of perfection and priority).

^[1]

In the CP we described these provisions as a 'restatement' of the law of security. We suggested that including a 'restatement' would make it easier to see which rules should apply to the SI in question,

^[2]

^[3]

Since the publication of the CP, we have been able to examine the issues in more detail, to consult informally on them

^[4]

(1) although the rules that we now provisionally recommend in this Part to a large extent reflect current law, there are a number of significant changes, particularly in that the same rights and remedies will, in general terms, apply to all interests that have a security purpose. It is therefore more appropriate to speak of a legislative 'statement of rights and remedies' rather than a 'restatement';

(2) if quasi-securities are to be included, it is necessary for our companies scheme to contain a number of provisions relating to the rights and duties of the parties in respect of any surplus realised when the collateral is disposed of after default;

(3) it is very desirable that the scheme should include a number of other provisions. These deal principally with the remedies available in the event of the debtor's default, and the rights of the debtor. These rules would replace the current rules of common law and equity that apply specifically to the relevant security or transaction, and such statutory provisions as affect them. They would aim to simplify the law by setting out a system that, so far as is feasible, applies to all types of interests created by companies that have a security purpose; and

(4) the statement of rights and remedies should be introduced at the companies-only stage, rather than only if and when the scheme is extended to SIs created by unincorporated debtors.^[5]

Under the terms of the Financial Collateral Directive, collateral takers must be given a right to appropriate the financial collateral.

^[6]

^[7]

This Part does not deal with questions of SIs over crops, fixtures, accessions and processed or commingled goods. Although in the CP and our informal discussion paper these were covered under the heading of the 'restatement', the issues are more accurately described as ones of priority. They were discussed in Part 3.

^[8]

Summary of provisional recommendations

In this Part we provisionally recommend that rules relating to the distribution of any surplus and the payment of any deficiency should be included in our scheme; they are essential for the proper functioning of the full scheme we have outlined in the preceding Parts of this consultative report. We also provisionally recommend that it would be desirable for the scheme to include rules relating to what might broadly be said to be prohibitions on assignment, the duties of the parties and their rights and remedies on default. Although the statement will supersede the current law governing the law of security and the quasi-security transactions brought within the scheme, it is not intended that it should affect general principles of law – for example, on the formation or validity of contracts. There is therefore a savings provision for principles of common law, law merchant and equity save as far as such principles are inconsistent with our legislation. The draft regulations contain provisions relating to these matters for consultees to consider and assess.

5.7

We explain briefly why we are not recommending the inclusion of a number of provisions found in the PPSAs and UCC. Some of these seem to be aimed at consumer protection and may need to be reconsidered if and when the scheme is extended to SIs created by consumers.

5.8

In the CP and the later informal discussion paper we suggested that the legislation might usefully include a general provision to the effect that the rights and remedies under the scheme must be exercised in good faith and in a commercially reasonable manner. As we explained in Part 2, in the light of consultation and further examination of the way in which such provisions operate in other schemes, we have concluded that a general provision is not needed and may be undesirable. Instead we provisionally recommend merely that certain remedies (principally, the secured party's sale or disposal of the collateral) must be exercised in a commercially reasonable manner.

5.9

We would welcome views on whether specified rules in the restatement should be mandatory or whether the parties should be able to vary the rules to the detriment of the debtor. Provisions making the specified rules mandatory have been included for consultees to evaluate but, in our view, they could be altered without affecting the structure as a whole.

Scope of the statement of rights and remedies

Application to 'in-substance' SIs

5.10

It is important to note that, subject to one exception, the provisions comprising the statement of rights and remedies in Part 5 of the draft regulations will only apply to 'in-substance' SIs. Thus the provisions of Part 5 that we discuss here will not apply to those interests that are 'deemed' SIs for the purposes of the application of the rules of perfection and priority (that is, outright sales of accounts or promissory notes, or leases for more than one year or commercial consignments that do not secure payment or performance of an obligation). This is made clear by DR 56(1). The exception referred to above is that a secured party who has taken an outright transfer of an account on a recourse basis must exercise its collection rights in a commercially reasonable manner.

^[9]

We provisionally recommend that the statement of rights and remedies should not, in general, apply to 'deemed' SIs.

5.12

In addition, in this Part of the consultative report we discuss two provisions that are not in Part 5 and which apply to both 'in-substance' and 'deemed' SIs. They concern the preservation and use of collateral

^[10]

^[11]

^[12]

Other limitations on the scope of the statement of rights and remedies

Financial collateral

We have noted above that specific treatment is accorded to financial collateral.

Ships

5.14

As we noted when we were dealing with the specialist registers, the provisions of the statement of rights and remedies is without prejudice to Admiralty practice relating to the enforcement of mortgages and charges over ships (those that fall within the scope of the scheme).

^[13]

SIs over both personal property and land

Although the creation or transfer of interests in land are generally excluded from the scope of the scheme as a whole,

^[14]

^[15]

^[16]

We think that such a provision might be helpful clarification, but we would welcome the views of consultees as to whether it should be included. We ask whether the scheme should provide that, if the same obligation is secured by an interest in land and an SI to which the draft regulations apply, the secured party may either proceed under Part 5 as to the personal property, or proceed as to both the land and the personal property, in which case its rights, remedies and duties will be as if all the property were land.

Secured party acting through a receiver

5.17

The draft regulations provide that the rights, powers and duties of a secured party under Part 5 (that is, the statement of rights and remedies), as well as DR 17 (dealing with preservation and use of collateral) apply equally when the secured party acts through a receiver.

^[17]

^[18]

Essential provisions: surplus and deficit

Distribution of any surplus

The CP proposed that any 'restatement' forming part of a system that included quasi-securities should clearly set out the rights and duties in respect of surplus.

^[19]

The need for such a provision follows from the decision to treat quasi-securities, and in particular title-retention devices, in the same way as the traditional securities to which they are functionally equivalent. We explained in the CP that under current law, where a secured asset is subject to a 'traditional' form of security and is sold by the creditor, it must account to the debtor for any surplus above the amount of the secured sum including the properly incurred costs, charges and expenses of the sale.

^[20]

^[21]

We noted in Part 2 that the UCC and PPSAs re-characterise SIs that have a security purpose in the sense that any surplus

^[22]

^[23]

We provisionally recommend that the draft regulations contain a provision setting out expressly how, unless otherwise provided by law or the agreement of all interested parties, the secured party must apply the proceeds of any disposition of the collateral.

^[24]

Payment to subordinate secured parties

A further question is to whom, and in what order, the SP should account for any surplus in priority to the debtor. The SPPSA requires the secured party who is left with a surplus to account for it to any subordinate creditor who has filed against the collateral before the distribution of the surplus.

^[25]

^[26]

In many cases the secured party will already have searched because it may be under a duty to notify subordinate secured parties before it disposes of the collateral.

^[27]

^[28]

^[29]

Consequently, the draft regulations provide that any surplus

^[30]

^[31]

^[32]

The order of distribution stated is without prejudice to the priority of any claimant.

^[33]

^[34]

We provisionally recommend that any surplus be accounted for and paid over in the following order:

(1) to a person who has a subordinate SI in the collateral and who has given written notice of the interest to the secured party prior to the distribution, and

(2) to the debtor or any other person known by the secured party to be an owner of the collateral.^[35]

We ask consultees whether the secured party should have to pay any surplus proceeds only to those subordinate secured parties who have given it a written notice of their interests or also to any subordinate creditor who has filed against the collateral before the date of distribution.

^[36]

Payment into court

Under Revised Article 9 the secured party has the option of paying any surplus into court rather than paying it to subordinate secured parties or the debtor. The SPPSA also permits payment into court but limits this right to cases in which there is a question as to who is entitled to the surplus.

^[37]

^[38]

We provisionally recommend that, as an alternative to paying over any surplus in the order specified in the draft regulations, the secured party should have an unqualified right to pay it into court.

Deficiency

The draft regulations contain a similar provision to that found in the SPPSA: unless otherwise agreed or provided for by the draft regulations or by statute, the debtor is liable to pay any deficiency to the secured party.

^[39]

We provisionally recommend that our scheme should provide that, unless otherwise agreed or provided for by statute, the debtor is liable to pay the amount of any deficiency to the secured party.

Desirable provisions

The provisions we explained in the previous section are those that we think are essential for the full scheme explained in Part 3 to function effectively. The other schemes contain a number of other provisions that we think are desirable even for our companies-only scheme, and which we have accordingly included in the draft regulations for consultees to consider. Most of these were outlined in the CP. The provisions may be treated under three broad headings: prohibitions on assignment, a statement of the duties of the parties and a statement of their rights and remedies on default. The first two heads would apply to all SIs, whether the SI secures payment or the performance of an obligation or is a 'deemed' SI; the statement of rights and remedies on default would (with one exception) apply only to 'in-substance' SIs.

Effect of prohibition on assignment

5.31

An issue that we mentioned in the CP without raising it for discussion, but that has been the subject of considerable debate subsequently, is whether the scheme should render ineffective prohibitions on assignment. The current law is that if a contract - for example, a contract of sale on credit, giving rise to a book debt - provides that the debt may not be assigned without the debtor's consent, the account debtor is entitled to ignore any notice of assignment and may insist on paying the assignor.

Opinion is divided. The principal concern is that a debtor may want a prohibition to avoid having to deal with an assignee who is not known to it and whose demands may be much more insistent than those of the assignor.

^[46]

On the first point, discussion with a number of those who raised the point has revealed that their main concern is that this might affect loans. In the context of high value loans, prohibitions on assignment are seen as important for the borrower, not only to protect the borrower from an assignee who might be more demanding than the original creditor, but also to prevent the debt being sold to one of the borrower's competitors. These consultees said that they would not be concerned were the prohibition confined to accounts receivable. It was not our intention that the prohibition would affect loan agreements. The provision we have included for consultation in the draft regulations is limited to non-assignment clauses in contracts between assignors and 'account debtors'. This by definition excludes money due under a loan.

^[47]

It was also suggested to us that any prohibition of anti-assignment clauses should be limited to receivables financing, that is, where receivables are sold in large numbers. We agree that this is where the principal problem with anti-assignment clauses arises, but we do not think that limiting the rule to receivables sold in 'bulk' would be workable, since any receivable may be sold either in bulk or on its own.

^[48]

The second argument, that prohibitions on assignment cannot appropriately be invalidated as part of a companies-only scheme, involves two issues.

5.36

The first is that any prohibition will be contained not in the security agreement but in the contract that gives rise to the debt or other right purportedly assigned. Changing the rule would effectively mean that anyone dealing with a company could no longer employ a prohibition on assignment in its contracts with the company. It strikes some consultees as inappropriate that regulations on companies should remove the rights of those who are not companies. With respect, we think this objection is misconceived. It has always been the case that the legislation governing company charges - for example, the provisions invalidating a charge that is not registered within the 21-day period - affects the rights of creditors who may not themselves be companies. The proposed rule overriding any contractual prohibition on assignment would be no different in this respect.

5.37

The second issue does cause us concern. This is that under a companies-only scheme the proposed rule could not affect receivables that are payable to a business that is not a company. Thus the proposed rule would increase the differences between the rules applying to companies and the rules applying to other businesses. However, as we stated in Part 2,

^[49]

^[50]

The third argument, that a prohibition of anti-assignment clauses is an interference with freedom of contract, is obviously correct. The question is, however, whether the interference is justified. The arguments are finely balanced. We have provisionally concluded that, given the clear inconvenience of the current rule in the context of receivables financing and the international trend towards overriding such prohibitions, the interference is justifiable.

5.39

We provisionally recommend that in a contract between a company and a third party creating an account payable to the company, a term that purports to prohibit or restrict assignment of the account should be of no effect against a third-party assignee.

^[51]

Duties of parties under the security agreement but before default

We think that it would be useful to include provisions that set out the rights and duties of the secured party in respect of the care and use of collateral, and in relation to 'proceeds' such as dividends received from it. We discuss these in the following paragraphs. As we indicated earlier, the provisions would (save as otherwise stated) apply to both 'in-substance' and 'deemed' SIs.

Care in custody and preservation of collateral

5.41

The SPPSA and UCC each provide that if the collateral is in the possession of the secured party, it must take reasonable care of it and preserve it, including (in the case of an instrument) taking steps to protect it from third parties.

^[52]

We provisionally recommend that the secured party who has possession of the collateral should be under a duty to take reasonable care of it and should be able to insure it at the debtor's expense.

^[53]

The UCC provides that a duty to preserve rights against the prior parties will apply also to an outright buyer of accounts (for example, a factor) if the sale was on a recourse basis.

^[54]

^[55]

We provisionally recommend that an outright buyer of accounts or of a promissory note should be under a duty to take necessary steps to preserve rights against other parties unless the sale was on a non-recourse basis.

^[56]

Income, etc. from collateral

Where collateral is in the secured party's possession or control, the draft regulation provides that the secured party may hold as additional collateral any increase or profits (except money) received from the collateral. In the case of money received, the secured party must either remit it to the debtor or apply it to reduce the amount of the secured obligation.

^[57]

We provisionally recommend that the secured party who has possession or control of collateral should apply any money received from the collateral to reduction of the obligation secured or remit it to the debtor; and in the case of other proceeds should be entitled to hold them as additional collateral.

^[58]

Right of use

We have included in our draft regulations that in the case of financial collateral

^[59]

^[60]

As to a right to use other collateral, the SPPSA and UCC provide that the secured party may use the goods only for the purpose of preserving the collateral or to the extent authorised by the agreement or the court.

^[61]

^[62]

We provisionally recommend that, unless otherwise agreed, the secured party who has possession of collateral should be permitted to use it for the purpose of preserving the collateral or to the extent authorised by the security agreement or the court; to create an SI in it, and, where the secured party has possession or control of collateral that is investment property, and the parties so agree, to sell it.

^[63]

Rights and remedies on default

We provisionally recommend the inclusion of a number of provisions that set out the rights and remedies of the parties, and in particular the remedies available to the secured party,

No effect on judicial remedies

What follows, and Part 5 of the draft regulations, provides a set of essentially self-help remedies to which a secured party may resort in the event of default by the debtor. The secured party has only the remedies provided by the scheme and the rights and remedies provided in the security agreement. However this is without prejudice to judicial remedies otherwise available to enforce the rights of the parties.

^[68]

Collection rights

Where the SI secures payment or performance of an obligation

The SPPSA provision reflected those of UCC former Article 9.

Consultees' views were divided on whether a provision equivalent to that in the SPPSA should be included in a restatement, some taking the view that it should be left to the parties to agree expressly. We think that, although these rules reflect, broadly, the current law, and cover matters that frequently will be agreed expressly, it would nonetheless be useful to include a set of 'default' rules along the lines of the SPPSA provision. The provisions should deal expressly with bank accounts. We do not, however, think that it is necessary to include in a companies-only scheme a requirement on the collecting secured party to notify the debtor that it has enforced its interest. The additional issues covered by the UCC can also be left to the parties to deal with expressly.

^[78]

We provisionally recommend that the statement of rights and remedies provide that where the collateral is an account and the debtor defaults, the secured party may:

(1) notify the account debtor to make payment to the secured party, whether or not the secured party was making collections on the collateral before the notification by the secured party;

(2) take any proceeds of collateral to which it is entitled; and

(3) apply the money received, or any account, instrument or security in the form of a debt obligation taken as collateral to the satisfaction of the secured obligation.^[79]

There should be similar provisions for bank accounts.^[80]

Outright sales of receivables

There is another difference between the SPPSA and the UCC. The SPPSA provisions on collection by the secured party do not apply to outright sales of receivables. The UCC also imposes a duty on the outright buyer of this type of collateral, unless the sale was on a non-recourse basis (in which case the debtor has no interest in the amount that the secured party recovers from the account debtor).

We provisionally recommend that a secured party who buys receivables on a recourse basis should be required, if it collects on the receivables, to proceed in a commercially reasonable manner.

^[85]

'Non-cash' proceeds

It may be that the account debtor is unable to pay cash but discharges its obligation by some other form of performance that is accepted by the secured party in lieu, for example by giving a promissory note. The secured party may wish to wait until the note is due rather than have to raise cash immediately by selling the note at an unfavourable discount. The UCC permits this (termed as 'applying or paying over the non-cash proceeds') unless to wait would be commercially unreasonable. If the secured party does apply the non-cash proceeds, it must do so in a commercially reasonable manner.

^[86]

We provisionally recommend that the secured party should be able to defer applying or paying over non-cash proceeds, provided that is it not commercially unreasonable; and that where a secured party does apply or pay over non-cash proceeds, it must do so in a commercially reasonable manner.

^[87]

Taking possession on default

As we said in the CP, rules on the secured party's right to take possession of the collateral and to enforce the SI seem to state an obvious principle, but it would be very odd to have a statement of rights and remedies without including provisions on this issue. The question is rather, what provisions should be included? We deal with the questions by reference to the model of the SPPSA or, in some cases, the NZPPSA. In some cases we contrast these provisions (which frequently derive from earlier versions of Article 9 of the UCC) with the provisions of Revised Article 9. (For the moment we will assume there is only one secured party.)

Taking possession: general

5.55

The SPPSA provides that the secured party has, unless otherwise agreed, the right to take possession of the collateral or otherwise enforce the security agreement by any method permitted by law.

^[88]

^[89]

As we explained in the CP, these provisions broadly follow existing law, though in some cases the right to take possession may need to be stated in the agreement. We think that they should be replicated in the statement of rights and remedies, and accordingly they are included in the draft regulations.

^[90]

The phrase 'by any method permitted by law' seems to refer to the common law principle that the secured party must not commit a breach of the peace. It seems unnecessary to state this, and we have omitted it. A more pertinent issue is whether the secured party may enter land in order to take possession unless this is authorised by the agreement or by a court.

^[91]

We provisionally recommend that the secured party should have an implied right to enter the debtor's premises in order to repossess collateral on the debtor's default, but should have to obtain a court order to enter the premises of a third party.

^[92]

Collateral that cannot readily be moved or stored

If the collateral cannot readily be moved, the secured party may need to be able to 'take possession' in some other way. Both the SPPSA and the NZPPSA in effect provide that where the collateral is of a kind that cannot readily be moved from the debtor's premises, or is of a kind for which adequate storage facilities are not readily available, the secured party may repossess the collateral without removing it from the debtor's premises.

^[93]

The UCC does not limit the right to render equipment unusable and dispose of it from the debtor's premises to cases in which the collateral cannot readily be moved; it applies in any case.

^[94]

We provisionally recommend that on default the secured party should have the right to disable equipment collateral that is on the debtor's premises and to sell it from there, provided that the secured party does not cause the person in possession of the premises any greater inconvenience and cost than is necessary.

^[95]

Assembly of the collateral

We have included a provision from the UCC to the effect that a secured party may require the debtor to assemble the collateral and make it available to the secured party at a reasonably convenient place.

^[96]

We ask whether the secured party should be able to require the debtor to assemble the collateral and make it available to the secured party at a place to be designated by the secured party which is reasonably convenient to both parties?

Power of sale

The secured party's power of sale is a central topic that cannot sensibly be omitted from a statement of rights and remedies. As we stated in the CP, under the current law, all secured creditors are permitted to sell the collateral if it has been agreed in the security agreement, though there are various statutory restrictions.

^[97]

The SPPSA provides that the secured party may dispose of collateral 'after seizing or repossessing' it.

^[98]

We provisionally recommend that the secured party should have the power to dispose of collateral on default by the debtor

^[99]

Method of sale or disposition

The SPPSA sets out specific rules on exercise of the power of sale. These include:

(1) The sale may be by public sale (including auction or closed tender ^[100]) or private sale.^[101]

(2) The secured party may buy the collateral, but only at a public sale, and only for a price that bears a reasonable relationship to its market value. ^[102]

(3) The collateral may be sold in its existing condition or after 'repair, processing or preparation for distribution'.^[103]

(4) The collateral may be sold as a whole or in commercial units.^[104]

(5) The secured party may delay disposition of all or some of the collateral.^[105]

(6) If the agreement so provides, payment for the collateral may be deferred^[106] or the collateral may be disposed of by lease.^[107]

Disposition to be made in a commercially reasonable manner

These rules as a whole are subject to the general provision contained in the SPPSA that all rights under the Act or the agreement are to be exercised in good faith and in a commercially reasonable manner.

^[108]

^[109]

^[110]

It seems appropriate to require the disposition to be made in a commercially reasonable manner. As we explained in the CP:

Under current law a secured creditor (or receiver appointed by it) does not owe a general duty to use reasonable care when exercising its powers and in dealing with the assets of the mortgagor.^[111] However equity imposes certain duties including a duty on the secured creditor to take reasonable care to obtain a proper price^[112] and a duty to exercise its power in good faith for the purpose of obtaining repayment.^[113] This duty is owed to the mortgagor and to a subsequent encumbrancer.^[114]

The formulation used by the UCC and the PPSAs is slightly different to that used in current English law in that, rather than imposing a duty to take reasonable care, they impose one to act in a commercially reasonable manner; but it is hard to see any difference in substance between the two formulations.

We provisionally recommend that the scheme should incorporate a provision to the effect that:

(1) The sale may be by public sale (including auction or competitive tender) or private sale.

(2) The secured party may buy the collateral, but only at a public sale, and only for a price that bears a reasonable relationship to its market value.

(3) Collateral may be sold in its existing condition or after 'repair, processing or preparation for distribution'.

(4) Collateral may be sold as a whole or in commercial units.

(5) The secured party may delay disposition of all or some of the collateral.

(6) If the agreement so provides, payment for the collateral may be deferred or the collateral may be disposed of by lease.

5.68

The regulations should require that in exercising its rights under this provision the secured party act in a commercially reasonable manner.

^[115]

Non-cash proceeds

On occasions a secured party may dispose of collateral not for cash but for some other form of proceeds, for example a bill of exchange or promissory note. We have already considered this issue in relation to the proceeds of collection, and suggested that a secured party should not have to apply the proceeds of sale where they are non-cash proceeds unless the failure to do so would be commercially unreasonable; and that if the secured party does apply or pay over such non-cash proceeds, it must do so in a commercially reasonable manner.

^[116]

^[117]

We provisionally recommend that a secured party need not apply or pay over non-cash proceeds

^[118]

of disposition unless the failure to do so would be commercially unreasonable, but where a secured party does apply or pay over such non-cash proceeds it must do so in a commercially reasonable manner.

Purchase by the secured party at a private sale

The UCC permits the secured party to buy the collateral at a public sale (as does the SPPSA),

^[119]

^[120]

We provisionally recommend that the secured party should be permitted to buy the collateral:

(1) at a public sale, or

(2) at a private sale if the collateral is of a kind that is customarily sold on a recognised market or the subject of widely distributed standard price quotations, subject to special rules about calculating the surplus or deficiency after such sales.^[121]

Notice requirements

The SPPSA sets out detailed requirements on notices to be given before the sale.

^[122]

^[123]

The notice has to contain a number of detailed requirements:

(1) a description of the collateral;

(2) the amount required to satisfy the obligations secured by the SI;

(3) the sums actually in arrears, and a brief description of any default other than non-payment (and the provision of the security agreement breached);

(4) the amount or reasonable estimate of 'applicable expenses';

(5) a statement that, on payment of the amount due, a person who is entitled to receive the notice may redeem the collateral;

(6) a statement that, on payment of the sums in arrears or on the curing of any other default, as the case may be, together with payment of the amounts due, the debtor may reinstate the security agreement;

(7) a statement that, unless the collateral is redeemed or the security agreement is reinstated, the collateral will be disposed of and the debtor may be liable for any deficiency; and

(8) details of location, date etc. of any sale or closed tenders.^[124]

There are also provisions as to notices to be given by receivers.^[125]

However, in quite a wide range of circumstances notice is not required. In particular, collateral may be sold without notice if it is sold on an organised market.

^[126]

^[127]

Even with the exceptions, this scheme

^[128]

^[129]

Secondly, the Law of Property Act scheme applies only if there is no express provision in the mortgage. An expressly agreed scheme may provide for sale when no money is due under the mortgage and without notice to the mortgagor.

^[130]

^[131]

We can see the value in requiring notice to the debtor in cases where it is feasible, and understand that in practice most well-drafted charges will contain such provisions. Presumably the same is true of most other forms of SI where there is currently a power of sale. However, even with the exceptions provided by the SPPSA,

^[132]

^[133]

The question is whether there should be a compulsory notice requirement of a less detailed kind. We think that when the collateral will be disposed of on an organised market, there should be no notice requirement, both because it would prevent prompt realisation of the security and because it seems unnecessary. Notice requirements seem to serve two functions: (1) to enable the debtor who is able to pay to redeem the property and (2) to enable the debtor or anyone else interested to check that the sale is made for the best possible price. When the sale is on an established market for essentially fungible items, there is no need for such a check, while the debtor who would have responded to the notice by redeeming the property can purchase equivalent property and it can readily be established whether the sale was at market price.

5.80

Where the goods are not of a kind for which there is an organised market in which identical goods can be bought or sold, we can see a case for requiring notice unless it is impractical for other reasons, for example because the goods are perishable or liable to decline in value in a short space of time. On balance, we think this issue is sufficiently important to be worth including in the scheme, and we have therefore included in the draft regulations a notice requirement unless the collateral is sold on an organised market or is perishable, or likely to decline rapidly in value if not disposed of immediately. However, we would welcome the views of consultees. In any event, we believe that the notice requirements should be less rigid than those of the SPPSA in terms of time and content.

The period of notice

5.81

We think that the notice requirement might safely be made more flexible than the minimum of 20 days required under the SPPSA. We suggest following the approach of the UCC, which is to require that the notice is sent a reasonable time before the sale and to provide that 10 business days' notice is sufficient.

^[134]

^[135]

Form and content

We think that the notice should have to be in writing (which can include an electronic communication). As to its contents, rather than have a list of fixed requirements, we suggest following again the UCC 'safe-harbor' approach. We think a notice should be treated as sufficient if it indicates:

(1) the debtor (or party who owns the collateral);

(2) the secured party, and gives an address at which it may be contacted in sufficient time;

(3) the collateral to be sold or disposed of;

(4) the intended method of disposition;

(5) the time and date of any sale or after which any other disposition will be made.

It would be possible to provide a 'standard form' of notice that would be taken to be sufficient.^[136]

We ask consultees whether, where there is no organised market (or where the collateral is neither perishable nor likely to decline rapidly in value if not disposed of immediately), the secured party should have to give notice a reasonable time before the sale or disposition. If so, do they agree that 10 business days' notice should be sufficient?

^[137]

If there is to be a notice requirement, we provisionally recommend that the notice should have to be 'sufficient', and that it will be sufficient if it indicates:

(1) the debtor (or party who owns the collateral);

(2) the secured party, and gives an address at which it may be contacted in sufficient time;

(3) the collateral to be sold or disposed of;

(4) the intended method of disposition;

(5) the time and date of any sale or after which any other disposition will be made.^[138]

It would be possible to provide a 'standard form' of notice that would be taken to be sufficient.^[139] We would welcome views on whether it would be useful to provide a standard form of notice in the draft regulations.

Parties to be notified

We think that the notice should be sent to the parties listed in the SPPSA.

We provisionally recommend that, when a notice is required before collateral is disposed of, it should be sent to:

(1) the debtor or any other person who is known by the secured party to be an owner of the collateral;

(2) a person with an SI in the collateral if, before the day on which the notice of disposition is given to the debtor, that person has filed a financing statement;

(3) any person who has given an indemnity or guarantee for the debt, if the secured party knows that one exists and knows the name and address of the person, and

(4) any other person with an interest in the collateral who has given a written notice to the secured party of that person's interest in the collateral prior to the day on which the notice of disposition is given to the debtor.^[144]

Effect of disposition

The SPPSA provides that a purchaser who acquires the interest for value and in good faith and who takes possession of it, acquires the collateral free from the debtor's interest, an interest subordinate to that of the debtor, and an interest subordinate to that of the secured party, whether or not the other requirements of the SPPSA relating to disposition have been complied with by the secured party.

^[145]

We provisionally recommend including a provision on the effect of disposition.

^[146]

Retention of collateral by secured party ('foreclosure')

Foreclosure involves the termination by order of the court of the right to redeem, the effect of which is to vest the mortgaged property in the mortgagee. The mortgagee is then completely free from the equity of redemption.

^[147]

Foreclosure is available under current law only to a mortgagee; it requires a court order. We understand that it is rarely used.

This scheme strikes us as a sensible one that we should also adopt. It seems sensible to provide explicitly in what circumstances a secured party may simply take and keep the collateral rather than having to sell it in a commercially reasonable manner. However, we think that we should adopt a number of refinements that have been introduced by Revised Article 9 of the UCC. The principal ones are that either party should be able to initiate the process; and that it should be possible for the secured party to accept the collateral in partial satisfaction of the obligation secured, rather than only in full satisfaction. Given that the debtor or any person interested may, if they are not happy with the proposal, simply block the process and insist on the secured party disposing of the collateral, there seems no danger in this extension and we can see that it may often be advantageous to all concerned that the secured party should take the collateral in partial satisfaction rather than incur the expense and possible uncertainty of a sale. Of course all the parties could agree to that, but the Revised sections of the UCC provide a convenient mechanism by which it is not necessary to get each party's positive consent; instead, interested parties must be notified and have a chance to object.

5.92

The debtor or other party should be given a notice that conforms to the requirements proposed earlier for notices before disposition of collateral, but with the addition that the notice should not be treated as automatically sufficient unless it indicates:

(1) where the proposal is to take the collateral in full satisfaction, the amount (including the secured party's costs, etc.) secured by the collateral; or

(2) where the proposal is to taken in partial satisfaction, the amount of the obligation secured that will be discharged.

Without that information the debtor or other party is not usually in a position to judge whether or not to object to the secured party's proposal.^[156]

We provisionally recommend that the statement of remedies should include provisions for the secured party, on the initiative of either party, to take the collateral in full or partial satisfaction of the obligation secured, provided that the debtor has agreed in writing, and other interested parties have been notified and have not objected within 20 business days.

Redemption

5.94

The debtor's right to redeem the property before it has been sold or taken by the secured party in satisfaction ('foreclosure') forms an important counterbalance to the secured party's rights

We provisionally recommend that a person entitled to notice of disposition under DR 63 may, unless otherwise agreed in writing after default, redeem the collateral by tendering fulfilment of the obligations secured by the collateral and paying a sum equal to the reasonable expenses incurred by the secured party in preparing etc. the collateral for disposition and enforcing the security agreement.

Remedies are cumulative

5.96

The remedies set out above are intended to be cumulative. This is provided explicitly in the SPPSA and the UCC,

^[164]

^[165]

^[166]

We provisionally recommend that it be provided that the rights and remedies of each party against the other are cumulative, and may be exercised simultaneously so long as they are not mutually incompatible and simultaneous exercise is not commercially unreasonable.

^[167]

We also provisionally recommend that it be provided that the secured party may enforce its personal rights under the obligation secured by the SI, and may seek to execute any judgment against the debtor's property, including the collateral, without extinguishing the SI.

Appointment of receiver and secured party acting through receiver

5.99

We noted above that the draft regulations contain a provision that the rights, powers and duties of a secured party under Part 5 (that is, the statement of rights and remedies), as well as draft regulation 17 (dealing with preservation and use of collateral) apply equally when the secured party acts through a receiver.

^[168]

^[169]

However, as we explain below, we do not think it necessary for the draft regulations to set out the powers of administrative receivers.

^[170]

We provisionally recommend that it be stated specifically that a security agreement may provide for the appointment of a receiver and for the rights and duties of a receiver (save as provided for by the draft regulations or another enactment). We also provisionally recommend that the rights, powers and duties of a secured party under Part 5 and DR 17 of the draft regulations should apply equally when the secured party acts through a receiver.

Provisions not recommended

5.102

There are a number of provisions contained in the PPSAs (both in the Parts dealing with rights and remedies and in other Parts dealing with obligations) which we do not think it necessary to include within any statement of rights and remedies, and accordingly equivalent provisions do not appear in the draft regulations.

^[171]

Interpretation of acceleration clause

The SPPSA provides that a clause in an agreement that the secured party may accelerate payment or performance by the debtor when the secured party thinks that the collateral is in jeopardy or the secured party believes itself to be insecure should be interpreted to apply only when the secured party's view is reasonable.

^[172]

^[173]

We provisionally recommend that the scheme should not contain a provision relating to the interpretation of an acceleration clause.

Taking possession on anticipated default

5.105

Under the NZPPSA, a secured party with priority over all other secured parties may take possession of and sell collateral when the collateral is 'at risk'.

^[174]

destroyed, damaged, endangered, disassembled, removed, concealed, sold, or otherwise disposed of contrary to the provisions of the security agreement.^[175]

In the CP we suggested that it would be useful to include such a provision in the restatement.

^[176]

It might be thought that this could be left to the secured party to provide for in the security agreement. In most of the schemes we have considered that might not be possible because it would reduce the rights of the debtor, which they prohibit. Now that we are not provisionally recommending a general mandatory requirement

^[177]

Measure of damages when lease is ineffective because unperfected

In the CP we asked whether the 'restatement' should deal with the measure of damages that might be recovered by a lessor from the lessee if the leased goods are seized by a judgment creditor.

^[178]

^[179]

^[180]

We provisionally recommend that the scheme should not contain a provision dealing with the measure of damages relating to leases or consignment goods seized when the lessor's or consignor's interest is ineffective because it is unperfected.

An account of the distribution

5.110

Some of the PPSAs require that the secured party must, within a set time, give all those persons to whom it has to account and pay over the surplus a written account relating to the method and outcome of the disposition, including the costs and distribution of the amount received, and of any surplus.

^[181]

^[182]

We provisionally recommend that the secured party should not be under an obligation to give other secured parties a written account of the nature of the disposition, the amount raised and how it was distributed.

Reinstatement of security agreement

We noted above that we provisionally recommended including a provision permitting certain people to redeem the collateral before the secured party disposed of the collateral or irrevocably agreed to accept it in full or partial satisfaction.

A legislative right to reinstate may be appropriate to consumer transactions,

^[188]

^[189]

We provisionally recommend that the scheme should not contain a provision dealing with reinstatement of the security agreement.

Receivers

5.114

We provisionally recommended above that the statement of rights and duties contain a limited provision in relation to receivers.

The Enterprise Act 2002 prohibits the appointment of an administrative receiver by floating charge holders save in particular situations. The aim is to prevent the floating charge holder being able to block an administration order by appointing an administrative receiver. The exceptions relate to capital market arrangements; public-private partnership projects; utility projects; where the company is a 'financed project' company, and certain financial market transactions.

^[198]

A receiver may also be appointed to receive income from the secured property or to manage just part of a company's property. The powers of such a receiver are set out in the Law of Property Act 1925, section 109.

5.117

In the CP we asked whether the powers of receivers should be set out more fully in any restatement, as they are in the SPPSA.

^[199]

^[200]

We provisionally recommend that the statement of rights and remedies should not contain provisions relating to the powers of receivers.

Applications to court

5.119

We have included in the draft regulations a provision that a debtor, creditor, secured party or other person with an interest in the collateral may apply to the court, in relation to Part 5 of the draft regulations (the statement of rights and remedies on default) or DR 17 (preservation and use of collateral) for orders:

(1) necessary to ensure compliance, relieving a person from compliance or staying enforcement of rights,

(2) directing persons regarding the exercise of rights or discharge of obligations, and

(3) necessary to ensure protection of the interest of any person in the collateral.

Although seeking relief from the courts would probably be an available option even if the draft regulations were silent, we think it would be sensible for such provision to be included. We provisionally recommend that there be a provision relating to court orders to ensure compliance, enforcement, stay etc.

Financial Collateral

5.120

We noted above that slightly different treatment was needed in case of financial collateral, and that we would accordingly deal with this issue separately. The other provisions of the statement of rights and remedies we have discussed above will have application, where appropriate, to financial collateral, but additional provisions will be necessary.

Security financial collateral arrangements

5.121

Recital (17) of the Financial Collateral Directive states that the FCD 'provides for rapid and non-formalistic enforcement procedures.' Article 4 provides for the realisation of financial collateral held under a security financial collateral arrangement by sale, appropriation or the setting off of its value against the obligations secured, though without prejudice to requirements of national law that the realisation or valuation and the calculation of the relevant financial obligations be conducted in a commercially reasonable manner.

^[201]

Article 4 of the FCD has been implemented by regulations 17 and 18 of the FCAR in the following terms:

17. Where a legal or equitable mortgage is the security interest created or arising under a security financial collateral arrangement on terms that include a power for the collateral-taker to appropriate the collateral, the collateral-taker may exercise that power in accordance with the terms of the security financial collateral arrangement, without any order for foreclosure from the courts.

18. (1) Where a collateral-taker exercises a power contained in a security financial collateral arrangement to appropriate the financial collateral the collateral-taker must value the financial collateral in accordance with the terms of the arrangement and in any event in a commercially reasonable manner.

(2) Where a collateral-taker exercises such a power and the value of the financial collateral appropriated differs from the amount of the relevant financial obligations, then as the case may be, either –

(a) the collateral-taker must account to the collateral-provider for the amount by which the value of the financial collateral exceeds the relevant financial obligations; or

(b) the collateral-provider will remain liable to the collateral-taker for any amount whereby the value of the financial collateral is less than the relevant financial obligations.

5.123

It will be seen that although regulation 17 of the FCAR refers to foreclosure, the power exercisable by the collateral taker is actually akin to the power of sale described earlier. This is because regulation 18 requires that the financial collateral be valued and any surplus paid to the collateral-giver.

5.124

We think that it would be perfectly possible to incorporate these requirements within our scheme. We have seen that where there is a ready market for the collateral, it may be disposed of by the secured party without notice. There is no explicit provision for the secured party to retain the collateral at a commercially reasonable valuation and pay the difference to the secured party, but such a remedy would not be incompatible with the scheme. However, subject to what is said below, it seems simpler to provide that the scheme of remedies in the legislative statement of rights and remedies is without prejudice to any right of appropriation under a security financial collateral arrangement within the meaning of the FCAR,

^[202]

^[203]

We provisionally recommend that the statement of rights and remedies set out in the draft regulations should be without prejudice to any agreement in a financial collateral arrangement within the meaning of the FCAR.

Title transfer financial collateral arrangements

5.126

It should be noted that the FCD does not require any particular remedies to be given in the event of a default under a title transfer financial collateral arrangement such as a repo. This was presumably because it was assumed that these devices already provide adequate 'rapid and non-formalistic enforcement procedures'. The traditional interpretation is that the debtor merely has contractual rights to repurchase the collateral that have been transferred to the collateral-taker and that, if the collateral-giver defaults, these rights will be lost or modified, as the parties choose to agree.

5.127

This creates a potential difficulty. It is arguable that a repo has a security purpose within the meaning of our scheme – that is, it may be designed to secure payment or performance of an obligation. As we explained in the CP, under a repo a party that wishes to raise capital on an asset sells the asset to a buyer, with an undertaking to re-purchase the asset or equivalent assets, at a future date or on demand.

^[204]

The Prefatory Note to Article 8 states that a repo 'might be characterised as an outright sale or as the creation of a security interest. Article 8 does not attempt to specify any categorical rules on that issue'.

^[205]

^[206]

If a repo does have a security function, it will fall within our scheme (unless repos are to be specifically exempted).

^[207]

One would be simply to exempt title transfer financial collateral arrangements within the meaning of FCAR

^[208]

The other solution would be to build into our scheme a right of appropriation for financial collateral arrangements of all types, as we have already provisionally recommended for security financial collateral arrangements. Thus the statement of remedies should be without prejudice to any contractual right to retain, appropriate or dispose of financial collateral under a title transfer financial collateral arrangement within the meaning of the FCAR.

5.132

We think the last approach seems the most appropriate. Accordingly, the application of Part 5 of the draft regulations is stated to be without prejudice to any contractual right to retain, appropriate or dispose of financial collateral under a title transfer financial collateral arrangement, within the meaning of the FCAR.

^[209]

We ask whether in respect of a title transfer financial collateral arrangement:

(1) the statement of remedies should be without prejudice to any contractual right to retain, appropriate or dispose of financial collateral under a title transfer financial collateral arrangement, within the meaning of the FCAR; or

(2) whether title transfer financial collateral arrangements should be exempted from the statement of remedies in Part 5 of the draft regulations; or

(3) whether title transfer financial collateral arrangements should be exempted from the scheme as a whole.

Good faith and commercial reasonableness

5.134

On consultation – particularly in the informal seminars – two provisions that are found in the comparable schemes proved highly controversial even though, in our view, neither their inclusion nor exclusion would have an enormous effect on the scheme of remedies as a whole. One of these was a provision imposing a general obligation to act in good faith or in a manner that is commercially reasonable. We have already discussed this in Part 2, and so we do not go into detail here again, save to say that we no longer propose that the scheme should incorporate any general requirement that the parties act in good faith or a commercially reasonable manner in exercising or discharging their rights or duties. Instead, we provisionally recommend that the question of commercial reasonableness be dealt with in the context of individual provisions.

^[210]

(1) simultaneous exercise of either the secured party's or the debtor's rights under DR 59 (in that the simultaneous exercise of the different rights should not be commercially unreasonable),^[211]

(2) collection or enforcement of an account with recourse,^[212]

(3) withholding, or application or paying over, of non-cash proceeds of collection and enforcement under DR 60,^[213]

(4) the methods of disposal of collateral on default,^[214] and

(5) withholding, or application or paying over, of non-cash proceeds of disposition under DR 65.^[215]

We provisionally recommend that there be no general requirement of good faith included in the draft regulations, but that a specific requirement of commercial reasonableness be included in relation to DRs 59(1)-(2), 60(5)-(6), 62(6) and 65(5).

Determining whether conduct was commercially reasonable

5.136

The draft regulations contain two provisions. The first, and perhaps most important, is in relation to the provisions which we provisionally recommend should not be capable of being amended or waived.

^[216]

We provisionally recommend that the parties to a security agreement should be able to determine the standards which fulfil the rights of a debtor or obligations of a secured party under any provision mentioned in DR 59(3), provided that the standards are not manifestly unreasonable.

5.138

The second provision that the draft regulations contain is one giving guidance as to when certain conduct will be deemed to be commercially reasonable. The UCC provides that a disposition is made in a commercially reasonable manner if it is made:

(1) in the usual manner on any recognised market,

(2) at the price current in any recognised market, or

(3) otherwise in conformity with reasonable commercial practices among dealers in the type of property that was the subject of the disposition.^[217]

In addition, a 'collection, enforcement, disposition or acceptance' is made in a commercially reasonable manner if it has been approved:

(1) in judicial proceedings,

(2) by the equivalent of a creditors' committee (under the Insolvency Act 1986),

(3) by a representative of creditors, or

(4) by an assignee for the benefit of creditors.^[218]

The UCC makes clear that the fact that a higher amount could have been obtained at a different time or by a different method than that used by the secured party does not prevent the secured party from establishing that it acted in a commercially reasonable way. We think that some legislative guidance on what would amount to a commercially reasonable disposition would be helpful. This provision is itself not mandatory, so it would be open to the parties to exclude its operation if they are seeking to set their own standards of commercial reasonableness.

5.141

We provisionally recommend that the scheme should include guidance on steps that are sufficient to ensure that particular methods of collection, enforcement, disposition or acceptance are 'commercially reasonable' within the meaning of the draft regulations.

^[219]

Mandatory or default rules?

The other provision that proved highly controversial during the formal and informal consultation process was a provision that the rules in the 'restatement' should be mandatory, in the sense that the parties should not be able to vary the rules to the detriment of the debtor. The extent to which the parties should be able to agree on rights and remedies that differ from those set out in any 'statement', or should be able to modify the legislative rules, is a difficult issue and one that the UCC and the PPSAs do not answer uniformly. The extent to which the rules on SIs should be mandatory is particularly important in relation to the rights and remedies on default but it affects the entire legislative scheme.

5.143

Much of the scheme that we have provisionally recommended elsewhere in this consultative report is designed essentially to protect third parties – subsequent secured parties, buyers and other disponees and, less directly, unsecured creditors. The parties should not be able to alter these rules in any way that might prejudice third parties. Thus the rules requiring perfection, whether by filing, possession or control, and the rules on priority should be mandatory, just as the equivalent rules are under current law.

^[220]

This does not prevent the secured party making an agreement with a third party that will alter their rights as between themselves, for example a subordination agreement. Equally, a party does not have to exercise its rights, but it will not be able to avoid the consequences unless it obtains the agreement of other parties who are affected. Thus a secured party is under no obligation to file a financing statement to cover a non-possessory SI but, if it does not, it will normally suffer the consequences in terms of loss of priority and ineffectiveness of the SI if the debtor becomes insolvent. If, however, a prior secured party has agreed that a subsequent secured party shall have priority, that agreement might be effective as between the two of them even if the subsequent secured party does not perfect its SI in the normal way.

^[221]

Protection of the debtor

As between the debtor and the secured party, there is greater scope for freedom of contract, but even here current law imposes some controls on securities given by companies.

The purpose of these rules is to protect the debtor, which is normally in a weaker position than the lender. It seems to be a generally accepted policy in the jurisdictions which have adopted notice-filing schemes that the parties should be free to agree terms that give the debtor greater rights, or exclude some remedy that would normally be available to the secured party. However, the other schemes then diverge.

The Ontario and Saskatchewan PPSAs

5.147

These schemes are quite restrictive. Lip service seems to be paid to the principle of freedom of contract in provisions such as:

Where the debtor is in default under a security agreement, the secured party has the rights and remedies provided in the security agreement and the rights and remedies provided in this Part… .^[226]

But in fact the Ontario and Saskatchewan PPSAs not only make rules that may affect third parties mandatory but also, with very limited exceptions,^[227] commonly prevent the parties from excluding or restricting the rules that are intended to protect the debtor.^[228]

The New Zealand PPSA

The NZPPSA takes a different approach, which is to permit the debtor to waive its rights but to prevent that affecting third parties. In its original version section 107(2) provided that the parties were free to 'make their own terms in respect of provisions in this [Remedies] Part to the extent that those provisions do not relate to the rights of third parties'. To counter criticism that this left too much uncertainty, section 107 was amended

^[229]

^[230]

(1) the right to be notified before the collateral is sold;^[231]

(2) the right to be paid the surplus,^[232] and

(3) the right to reinstate the security agreement.^[233]

It is further provided

^[234]

(1) recover surplus under section 119,^[235]

(2) receive notice of a secured party's proposal to retain collateral under section 120(2),

(3) object to a secured party's proposal to retain collateral under section 121; and

(4) redeem collateral under section 132.^[236]

These provisions have been strongly criticised by a team of Canadian and New Zealand authors.

^[237]

^[238]

The economy of New Zealand is different from that of the UK, and it may be that greater freedom of contract than that advocated by the authors cited for New Zealand would be justified in legislation to affect SIs created by companies registered in England and Wales. However, the parties' freedom in business-to-business transactions is also severely restricted in Ontario. Moreover, the provisions of the NZPPSA produce results that are quite hard to understand or, we think, to justify.

^[239]

The UCC Revised Article 9

The approach of Revised Article 9 is different again. Rather than rely on a general provision to prevent waiver or variation, like the SPPSA,

^[240]

(1) DR 60(5) (duty to act in commercially reasonable manner as to collection of outright sales of receivables etc. on a recourse basis),

(2) DR 60(6) (duty to apply non-cash proceeds in commercially reasonable manner),

(3) DR 62 (disposal of collateral),

(4) DR 63 (disposal of collateral: requirement to give notice),

(5) DR 64 (calculation of surplus or deficiency in disposition to secured party etc.),

(6) DR 65(1) and (2) (distribution of surplus),

(7) DR 67 (acceptance of collateral in full or partial satisfaction of obligation),

(8) DR 68 (redemption),

(9) DR 59(5) (provision void if purports to exclude duty or limit liability).

As we have noted, Section 9-603 permits the parties in their agreement to determine the standards by which it is to be determined whether the parties have fulfilled their rights and duties – in other words, to set for themselves what is required by phrases such as 'commercially reasonable' – provided that the standards agreed are not manifestly unreasonable.

5.154

Rights may be waived by the debtor by an agreement made after default but only if the agreement is authenticated.

^[241]

Of the three approaches, we consider the most attractive one to be that of the UCC, because it produces a relatively short and clear list of the provisions on rights and remedies that may not be varied against the interests of the debtor. With this in mind, we turn to the question of which rights it should not be possible to vary.

The provisions that should be mandatory

5.156

Because of the importance of this question, it seems necessary to consider the various rights individually. We think that it is clear that where there is a requirement to act in a commercial reasonable manner, that should be a mandatory provision, even though the parties are free to determine what will be commercially reasonable. We have already provisionally recommended that there be a requirement to act in a commercially reasonable manner with respect to:

(1) collection by a secured party who buys accounts outright on a recourse basis;^[242]

(2) a secured party who receives non-cash proceeds of collection and enforcement under DR 60 and who chooses to apply or pay over for application the proceeds;^[243]

(3) every aspect of a disposition of collateral after the debtor's default.^[244]

We provisionally recommend that the requirements to act in a commercially reasonable manner should be mandatory.

The right to be notified before the collateral is sold

5.158

It would be possible to give even greater certainty by providing, as does the UCC, that where the legislation calls for one party's rights or conduct to be measured by a standard – reasonableness or sufficiency – the parties may determine those standards by agreement provided that the standards determined are not manifestly unreasonable.

^[245]

We provisionally recommend that the parties should be free to set standards as to the notice to be given before disposal of collateral, provided that the standards set are not wholly unreasonable; but, subject to that, even as between debtor and secured party the notice requirements should be mandatory.

The right to receive the surplus

5.160

Under traditional security devices – the mortgage, charge or pledge – the debtor has an inalienable right to any surplus. The position is otherwise under title-retention devices.

^[246]

^[247]

We have also pointed out that under the terms of the security agreement the debtor may be obliged to pay a certain amount to the secured party even if it does not default.

^[248]

In the light of this we cannot see what real interest would be served by permitting the debtor to give up its right to the surplus. The argument is reinforced by the problem of third parties with an interest in the surplus, such as another party with an SI over the same collateral. They may not know that the prior secured party's security agreement entitles it to retain a surplus. The NZPPSA, true to its principle of prohibiting contracting out to the detriment of third parties, provides that it is only the debtor who can give up the right to the surplus. Thus SP1 may be entitled to the surplus as against the debtor but have to pay it to SP2.

^[249]

^[250]

^[251]

We provisionally recommend that the provisions on surplus should be mandatory.

Notice before acceptance of collateral in full or partial satisfaction of obligation

5.164

To allow the parties to agree that the secured party may 'foreclose' without informing the debtor, or allowing the debtor to object, seems so risky for the debtor that we cannot see any merit in allowing the parties to agree this. We provisionally recommend that the provisions on acceptance of collateral in full or partial satisfaction of the obligation secured should be mandatory.

The right to redeem collateral

5.165

The right to redeem is fundamental to the notion of a mortgage or other traditional security. There is no such general right under title-retention devices but the thrust of our proposed reforms is to bring these closer into line with traditional securities rather than the other way about. We thus hesitate to permit the parties to exclude the right to redeem, even though the NZPPSA allows the debtor to give up this right.

^[252]

We provisionally recommend that the provisions on redemption should be mandatory.

Exclusion and restriction of liability

A linked question is whether a party may exclude or restrict its liability for breach of any duty imposed by this Part, or any other Part, of the draft regulations. The SPPSA states that any clause purporting to have this effect shall be void.

^[253]

By definition, the rules that are mandatory under Part 5 cannot be excluded or limited. However, there is also the question of liability for breach of duties or obligations imposed by other Parts of the draft regulations.

5.168

Our provisional view is that any clause that purports to exclude or limit the secured party's liability for failure to comply with duties and obligations imposed by the draft regulations should be of no effect. However, we are unsure as to whether this is appropriate, and would welcome views.

5.169

We seek consultees' views as to whether the draft regulations should deny effect to any provision in a security agreement or other agreement that purports to exclude or limit the secured party's liability for failure to comply with duties and obligations imposed by the draft regulations.

Waiver

5.170

The UCC contains a limited provision to the effect that a debtor may 'waive' its mandatory rights after there has been a default (for example, as part of a settlement).

^[254]

^[255]

We ask whether it is necessary or desirable for the draft regulations to contain provisions setting out when a debtor may waive its mandatory rights or agree to an exclusion or restriction of liability as part of a settlement agreement.

Ý
Ü Þ

Note 1    SPPSA, ss 3(2) and 55(2); NZPPSA, ss 17(1)(b) and 105. The UCC seems to address the application of the rules of its Part 6 (‘Default’) on a rule-by-rule basis, see, eg, Section 9-608(a). In the case of the New Zealand scheme, all transfers of accounts are excluded from the application of the default rules, whether or not they have a security purpose. This may have been a drafting error: M Gedye, R Cuming and R Wood, Personal Property Securities in New Zealand (2002) para 105.4 (pp 384-385). We do not suggest following a similar approach to New Zealand.    [Back]

Note 2    CP para 11.37.    [Back]

Note 3    CP para 11.47.    [Back]

Note 4    A supplementary paper was produced for a discussion seminar held at Berwin Leighton Paisner on 5 November, 2003.    [Back]

Note 5    See above, para 2.188.    [Back]

Note 6    See FCAR, Part 4.    [Back]

Note 7    See below, paras 5.120-5.133.    [Back]

Note 8    See above, paras 3.264-3.282. Attachment has also been dealt with earlier: see above, paras 3.71-3.85.    [Back]

Note 9    See below, para 5.50.    [Back]

Note 10    DR 17.    [Back]

Note 11    DR 45.    [Back]

Note 12    See below, paras 5.31-5.46.    [Back]

Note 13    See above, paras 3.34-3.336.    [Back]

Note 14    DR 12(1)(g), and see above, para 3.63(1).    [Back]

Note 15    DR 57.    [Back]

Note 16    SPPSA, s 55(4)-(6); OPPSA, s 59(6); UCC Section 9-604(a).    [Back]

Note 17    DR 58(2).    [Back]

Note 18    See below, paras 5.99-5.101.    [Back]

Note 19    CP para 12.129.    [Back]

Note 20    CP para B.47.    [Back]

Note 21    See CP para 6.21, discussing Clough Mill Ltd v Martin [1985] 1 WLR 111. See also On Demand Information plc (in Administrative Receivership) v Michael Gerson (Finance) plc [2003] 1 AC 368.    [Back]

Note 22    After deduction of all that is due to the secured party, including sums to which it would have been entitled had the agreement run its course, and reasonable expenses.    [Back]

Note 23    See above, para 2.110.    [Back]

Note 24    We have already noted that the provisions of Part 5 of the draft regulations will not apply to ‘deemed’ SIs. Thus although, under our provisional recommendations, any lease of goods for more than one year and any consignment of goods would need to be perfected, the ‘surplus’ rules would not apply if the particular lease or consignment were shown not to have a security function, eg, if it were shown that the lease was a long-term operating lease or the consignment was merely because the goods were on sale-or-return, the consignee having already paid a deposit equal to the purchase price. Similarly, when accounts are sold outright, eg, under a factoring agreement, the SI will be perfected (by filing), so as to warn other parties that the accounts are no longer the debtor’s to dispose of. However, the factor who has bought the debt is entitled to keep all the proceeds; the difference between the discounted price paid and the amount the factor collects represents its profit. Therefore there is no obligation to account for the surplus. It is otherwise if the accounts are not sold outright but are transferred by way of security (as happens at present with a charge over book debts). Then the transfer does secure payment or performance of an obligation and the rules on surplus do apply. UCC Section 9-608(b) likewise excludes the rules on surplus and deficiency if the underlying transaction is a sale of accounts.     [Back]

Note 25    SPPSA, s 60(2), which also requires payment to a subordinate secured party who was in possession of the collateral when it was seized, and to anyone else who has given a written notice to the secured party of an interest in the collateral. See further para 5.25 n 33.    [Back]

Note 26    UCC Section 9-607 and Section 9-615.    [Back]

Note 27    See below, paras 5.73-5.86.    [Back]

Note 28    See below, paras 5.49-5.51.    [Back]

Note 29    See below, para 5.71.    [Back]

Note 30    Any surplus distributed in accordance with DR 65 must be dealt with after deduction of various reasonable expenses and the satisfaction of the obligations secured by the SI: DR 62(9).    [Back]

Note 31    ‘Owner’ in this context is not intended to include the secured party who is a lessor or other retainer of title, but rather to cover the situation where the debtor may be co-owner of the collateral. We think this is sufficiently clear from the context, but if consultees think there is ambiguity in the draft regulation, this point can be clarified.    [Back]

Note 32    DR 65(2).    [Back]

Note 33    This follows the SPPSA, s 60(2), closing words. This seems to envisage that the first secured party may pay in the order stated and, if that is not the order of priority, the other interested party who had priority but was not paid can claim in restitution against the one without priority who was paid. The NZPPSA, s 117 requires the first secured party to pay other secured parties who have filed in order of priority, which appears to put the risk of making an error onto the secured party. We do not consider that to be appropriate.    [Back]

Note 34    We explained in Part 2 that we are now no longer provisionally recommending a ‘general’ duty of good faith and commercial reasonableness, but how instead the draft regulations include specific instances of the need to act in a commercially reasonable manner. See above, para 2.182. This provision is an example.    [Back]

Note 35    Below, at para 5.163, we provisionally recommend that this provision on surplus should be mandatory in the sense that it cannot be varied against the interests of the debtor.    [Back]

Note 36    We see no need to require the secured party to notify a secured party who had possession of the collateral before it was seized, as is required by SPPSA, s 60(2)(a)(ii); such a secured party will inevitably know of the senior secured party’s intentions and can make a demand if it wishes any surplus to be paid to it.    [Back]

Note 37    SPPSA, s 60(4).    [Back]

Note 38    DR 65(2).    [Back]

Note 39    See DR 66. Equivalent provisions can be found in the SPPSA, s 60(5) and the UCC Sections 9-608(a)(4) and (b) and 9-615(d)(2). The NZPPSA, s 116(c) implicitly suggests the debtor remains liable for the outstanding balance. This of course assumes that the secured party has acted properly in the way it disposed of the goods. Again, this provision does not apply to the ‘deemed’ SIs, although an account may of course be sold on a recourse basis, so that in effect the debtor does become liable for a deficiency.    [Back]

Note 40    See Helstan Securities Ltd v Hertfordshire County Council [1978] 3 All ER 262, QBD; Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd [1994] 1 AC 85, HL. It also enables the account debtor to continue to rely on set-offs against the assignor that arise after the debtor has received notice of the assignment.    [Back]

Note 41    See R Goode, Legal Problems of Credit and Security (3rd ed 2003) paras 3.41-3.43 (pp 107-110).    [Back]

Note 42    Ibid, at n 11.    [Back]

Note 43    SPPSA, s 41(9); UCC Section 9-406(d). The OPPSA does not have a similar provision, although this has been criticised: J Ziegel and D Denomme, The Ontario Personal Property Security Act Commentary and Analysis (2nd ed 2000) para 40.5 (pp 334-335).    [Back]

Note 44    Art 6(1).    [Back]

Note 45    Art 9.    [Back]

Note 46    Other reasons are to avoid the risk of overlooking a notice of assignment and paying the wrong person, and to preserve rights of set-off, see above, para 5.31 n 40.    [Back]

Note 47    See the discussion of ‘account debtor’ and ‘account’, above, paras 3.12 and 3.21.    [Back]

Note 48    There is no such restriction in the 2001 UN Convention on the Assignment of Receivables in International Trade.    [Back]

Note 49    See above, para 2.167.    [Back]

Note 50    The law on assignment of receivables is already fragmented, as outright sales of receivables by a company do not have to be registered but a general assignment of book debts by an unincorporated business requires registration as a bill of sale: Insolvency Act 1986, s 344; see CP para 8.36.    [Back]

Note 51    DR 45.    [Back]

Note 52    SPPSA, s 17; UCC Section 9-207. Fungible property may be commingled.    [Back]

Note 53    See DR 17(2).     [Back]

Note 54    UCC Section 9-207(d).    [Back]

Note 55    Compare the parallel issue that arises in respect of collection of receivables sold on a recourse basis: below, para 5.52. We are not aware on any authority on whether a recourse buyer is subject to any implied duty.    [Back]

Note 56    See DR 17(6).    [Back]

Note 57    Compare SPPSA, s 17(3) and UCC Section 9-207(c).    [Back]

Note 58    See DR 17(5)(a).     [Back]

Note 59    See above, paras 4.68-4.69.    [Back]

Note 60    Compare UCC Section 9-207(c).    [Back]

Note 61    See SPPSA, s 17(4); UCC Section 9-208 (a)-(b) (similar save that a consumer may not consent to the secured party using the goods). The OPPSA, s 17 contains similar rules.    [Back]

Note 62    See Chitty on Contracts (29th ed 2004) paras 33-130 - 33-131 (duty of care); N Palmer and A Hudson, ‘Pledge’ in Interests in Goods (eds N Palmer and E McKendrick 2nd ed 1998) p 640 (pledgee cannot use goods unless necessary to look after them, eg, milking a cow).    [Back]

Note 63    See DR 17(4)-(5).    [Back]

Note 64    Under most of the PPSAs, the remedies provided (for example, taking of possession and sale or retention of the collateral) may be exercised by any secured party, even if another secured party has priority over the same collateral. The junior secured party will hold the collateral subject to the prior SI; and if the junior secured party were to sell it, it would have to do so subject to the prior SI, which would be binding on the purchaser. It is only the interest of the debtor and any SIs subordinate to the secured party’s interest that would be extinguished by the sale: see eg, SPPSA, s 59(14). This is the case also under current English law. It is of course possible for the junior creditor to persuade the senior creditor to join in the sale, presumably at the cost of paying the senior creditor off; and under the Law of Property Act 1925, s 50 the court may order that the sale be free of any incumbrance if enough to cover the payments due is paid into court. In contrast, under the NZPPSA the remedies are normally stated to be exercisable only by ‘a secured party with priority over all other secured parties’: See, eg, ss 109, 111 and 120. It appears that this was done deliberately, but possibly under the misapprehension that otherwise the senior secured party would be left unsecured: M Gedye, R Cuming and R Wood, Personal Property Securities in New Zealand (2002) para 109.2, especially n 32 (pp 392-396). We do not think this approach should be adopted.    [Back]

Note 65    See above, paras 2.160-2.167.     [Back]

Note 66    The exception relates to receivables sold outright but on a recourse basis; see below, para 5.52.    [Back]

Note 67    See above, para 5.10.    [Back]

Note 68    DR 56(4)(a).    [Back]

Note 69    In the CP para B.13, we erroneously said the NZPPSA has a similar provision. In fact, the right to notify the debtor, etc. has to be implied: see M Gedye, R Cuming and R Wood, Personal Property Securities in New Zealand ( 2002) para 108.1 n 25 (p 391).    [Back]

Note 70    Ie, the party whose obligation is secured, whether or not it is the person who has provided the receivables as collateral: see above, para 2.12(1).    [Back]

Note 71    ‘Control’ here should not be confused with the concept of perfection by control (a concept not used in the PPSAs). Our draft regulations do not use ‘control’ in this context.    [Back]

Note 72    SPPSA, s 57.    [Back]

Note 73    SPPSA, s 57(3)-(5).    [Back]

Note 74    Former Article 9, Section 9-502.    [Back]

Note 75    Revised Article 9, Section 9-607.    [Back]

Note 76    Section 9-607 allows a junior secured party to enforce the relevant obligations. See above, para 5.47 n 64.    [Back]

Note 77    UCC Section 9-607(a) (4)-(5).    [Back]

Note 78    Nor do we feel it is necessary to provide expressly, as does UCC Section 9-607(e), that the provisions only affect the rights of the secured party as against the debtor.    [Back]

Note 79    See DR 60(1), (2) and (4).    [Back]

Note 80    See DR 60(3).    [Back]

Note 81    It applies to case of default and to any other cases in which it has been agreed by the parties that the secured party may collect on the collateral.    [Back]

Note 82    Section 9-607(c). Compare the parallel provision on care of the collateral, discussed above, paras 5.41-5.42.    [Back]

Note 83    We are not aware of any relevant authority.    [Back]

Note 84    This is one of the few specific instances in which we propose that there should be an obligation to proceed in a commercially reasonable manner. We are no longer proposing that there should be a general provision requiring commercial reasonableness, see above, para 2.182.    [Back]

Note 85    See DR 60(5). This is the one provision contained in Part 5 of the draft regulations which applies to a ‘deemed’ SI. See above, para 5.10.    [Back]

Note 86    UCC Section 9-608(a)(3).    [Back]

Note 87    See DR 60(6).    [Back]

Note 88    SPPSA, s 58(2). Compare NZPPSA, ss 109(1), 112; UCC Section 9-609(a)(1).    [Back]

Note 89    Ibid.    [Back]

Note 90    DR 61.    [Back]

Note 91    A court order is required for regulated agreements under the Consumer Credit Act 1974, section 92.    [Back]

Note 92    See DR 61(2) and (6).     [Back]

Note 93    SPPSA, s 58(2)(b), which provides that possession may be taken ‘in any manner by which a sheriff acting pursuant to a writ of execution may seize without removal’ (the type of collateral is also limited to goods); NZPPSA, s 111, which uses the concept of ‘apparent possession’, although the meaning of this is not explained.    [Back]

Note 94    UCC Section 9-609(a)(2).    [Back]

Note 95    See DR 61(3)-(4). It will be noted that this avoids the formula used in the SPPSA referring to the disabling of the equipment as a form of repossession. Although under our scheme repossessing goods is treated as a form of perfection (see above, paras 3.106-3.107), we do not consider that merely to disable equipment should be seen as a method of taking apparent possession that might perfect an otherwise unperfected SI, since the fact that the equipment has been disabled may not make it evident to third parties that an SI exists over it.    [Back]

Note 96    DR 61(5), and see UCC Section 9-609(c).    [Back]

Note 97    CP paras B.34-35.    [Back]

Note 98    SPPSA, s 59.    [Back]

Note 99    DR 62(1). Compare UCC Section 9-610(a).    [Back]

Note 100    We assume that ‘closed tender’ means a competitive tendering procedure under which sealed bids are submitted. We think the phrase ‘competitive tender’ used in the draft regulations would be more readily understood in this country.    [Back]

Note 101    SPPSA, s 59(3)(a), (b). NZPPSA, s 113 refers also to ‘other method’: M Gedye, R Cuming and R Wood, Personal Property Securities in New Zealand (2002) para 113.1 (p 403).     [Back]

Note 102    SPPSA, s 59(13). Notwithstanding any other provision, where the collateral is a licence, the collateral may be disposed of only in accordance with the terms and conditions under which the licence was granted or which otherwise pertain to it:ibid, s 59(18).    [Back]

Note 103    SPPSA, s 59(2). The secured party may apply the proceeds to the reasonable costs of doing this and other expenses in seizing, repossessing, holding and disposing of the goods, and any other expenses reasonably incurred, before applying them to the obligations secured:ibid.     [Back]

Note 104    SPPSA, s 59(3)(c).    [Back]

Note 105    SPPSA, s 59(5).    [Back]

Note 106    SPPSA, s 59(4).    [Back]

Note 107    SPPSA, s 59(3)(d). There is no equivalent in the NZPPSA.    [Back]

Note 108    SPPSA, s 65(2). See above, para 2.174.    [Back]

Note 109    See above, para 2.173.    [Back]

Note 110    Above, para 2.182.    [Back]

Note 111    See Cuckmere Brick Co Ltd v Mutual Finance Ltd [1971] Ch 949 and Downsview Nominees Ltd v First City Corporation Ltd [1993] AC 295. See also R Goode, Commercial Law (2nd ed 1995) p 691, and Medforth v Blake [2000] Ch 86. In the case of mortgages of goods falling within the Bills of Sale Acts and the Consumer Credit Act 1974 there are additional requirements for the giving of notice. (Footnote in original.)    [Back]

Note 112    Cuckmere Brick Co Ltd v Mutual Finance Ltd [1971] Ch 949. (Footnote in original.)    [Back]

Note 113    Downsview Nominees Ltd v First City Corporation Ltd [1993] AC 295. (Footnote in original.)    [Back]

Note 114    CP para B.41.    [Back]

Note 115    See DR 62. We do not think it necessary to follow UCC Section 9-610(d) and (e) in providing for implied warranties in the contract of disposition as to the right to sell, etc. These issues are adequately covered by other legislation.    [Back]

Note 116    See above, para 5.53.     [Back]

Note 117    Compare UCC Section 9-615(c).    [Back]

Note 118    Non-cash proceeds are defined as proceeds other than money, cheques, deposits in or money credited to a bank account or insurance payments: DR 2(1).    [Back]

Note 119    UCC Section 9-610(c); SPPSA, s 59(13). This is provided that the price bears a reasonable relationship to the market value of the collateral. A sale at a marked difference would seldom be commercially reasonable.    [Back]

Note 120    Section 9-615(f).    [Back]

Note 121    See DRs 62(7) and 64.    [Back]

Note 122    SPPSA, s 59.    [Back]

Note 123    UCC Section 9-611(c) contains a similar list.    [Back]

Note 124    Where notice has to be given to persons other than the debtor, not all the information listed need be supplied: SPPSA s 59(8).    [Back]

Note 125    The required contents of a notice given by a receiver are slightly less than for a secured party. The notice is to contain a description of the collateral; a statement that, unless the collateral is redeemed, it will be disposed of; and details of any sale by public auction, closed tender or private disposition: SPPSA, s 59(11).    [Back]

Note 126    Thus there is no need for notice if the collateral ‘is of a type that is to be disposed of by sale on an organised market that handles large volumes of transactions between many different sellers and many different buyers’: s 59(16)(d).    [Back]

Note 127    SPPSA, s 59(16).    [Back]

Note 128    NZPPSA has a broadly similar scheme in s 114 and the Personal Property Securities Regulations 2001 (reg 23 and Form 1, Sched 2); but these provisions have been severely criticised: M Gedye, R Cuming and R Wood, Personal Property Securities in New Zealand (2002) para 114.1 (pp 405-406).    [Back]

Note 129    Sections 87 and 88, and the regulations made thereunder.    [Back]

Note 130    The Maule [1997] 1 WLR 528 (PC).    [Back]

Note 131    Section 56(3).    [Back]

Note 132    See above, para 5.75.    [Back]

Note 133    Conversely, the exceptions seem too broad to protect consumers: a consumer will not be entitled to notice, and thus to be given a chance to reinstate the agreement, if the goods are sold in a market.    [Back]

Note 134    UCC Section 9-612.    [Back]

Note 135    UCC Section 9-612, Official Comment 3.    [Back]

Note 136    Compare UCC Section 9-613(5).    [Back]

Note 137    See DR 63(1) and (3)-(4).    [Back]

Note 138    See DR 63(1)-(2).    [Back]

Note 139    Compare UCC Section 9-613(5).    [Back]

Note 140    SPPSA, s 59(6), and see above, para 5.73. This is in effect the same persons that may be entitled to any surplus: see above, paras 5.22-5.27.    [Back]

Note 141    Compare UCC Section 9-611(c). It may be a junior creditor who has taken possession of the collateral and intends to dispose of it. Senior secured parties might fall within s 59(6)(c) but only if they have given written notice.    [Back]

Note 142    We would include also a party who has given an indemnity. UCC Section 9-611 refers to ‘any secondary obligor’, which includes both.    [Back]

Note 143    Compare UCC Section 9-611(c)(2), which must be read with Section 9-605.    [Back]

Note 144    See DR 63(1).    [Back]

Note 145    SPPSA, s 59(14). UCC Section 9-617 is to similar effect. The NZPPSA has been criticised for omitting a similar provision: M Gedye, R Cuming and R Wood, Personal Property Securities in New Zealand (2002) para 115.2 (pp 408-409). A person who is liable to a secured party pursuant to a guarantee, endorsement, covenant, repurchase agreement or the like and who receives a transfer of collateral from the secured party or who is subrogated to the rights of the secured party has thereafter the rights and duties of the secured party; the transfer of collateral is not a disposition of the collateral: SPPSA, s 59(15) (replicated in our DR 62(10)).    [Back]

Note 146    See DR 62(8).    [Back]

Note 147    R Goode, Commercial Law (2nd ed 1995) p 692.    [Back]

Note 148    R Bradgate, Commercial Law (3rd ed 2000) para 22.2.1.3.    [Back]

Note 149    In the CP we noted the attempts by the courts to avoid equivalent results when a supplier repossesses under a retention of title clause: para 6.21.    [Back]

Note 150    Section 61. NZPPSA, ss 120-124 are broadly similar. UCC Section 9-620 introduces an alternative system that in some cases dispenses with the need for the secured party to make a proposal. This seems an unnecessary complication.    [Back]

Note 151    It should be made clear that this refers to default by the debtor, not eg, the case where the secured party is in breach because the goods are defective and the secured party agrees to take them back and release the debtor. See M Gedye, R Cuming and R Wood, Personal Property Securities in New Zealand (2002) para 120.3 (pp 418-420). It also seems sensible to ensure that the parties are free to agree that the collateral is returned in exchange for cancellation of the debt if the debtor is not in default but is in difficulties:ibid. However, such an agreement should not be effective if there are junior creditors or other parties with an interest in the collateral (the debtor may have no interest in the fate of the collateral if the total of security over it exceeds the value, but junior creditors may be concerned if the senior creditor’s interest may be less than the value of the collateral).    [Back]

Note 152    It seems that this refers to the whole sum secured on the collateral, even if the sum is evidently greater than the collateral. This has led to a proposal in New Zealand that the debtor’s obligation be reduced only by the reasonable value of the collateral. The proposal is criticised by M Gedye, R Cuming and R Wood, Personal Property Securities in New Zealand (2002) para 123.4 (pp 425-426).    [Back]

Note 153    See above, para 5.85; SPPSA, s 61(1).     [Back]

Note 154    SPPSA, s 61(2); compare NZPPSA, s 121. This is subject to proof of the objector’s SI being forthcoming if demanded by the secured party; and an objection may be overridden by a court order if the objection is made not in order to protect the objector’s interest but for another purpose, or if the value of the property is less than the secured party’s interest: seeibid, ss 61(5)-(6). (Compare NZPPSA, s 122.)    [Back]

Note 155    SPPSA, s 61(3). A party who should have been notified but was not will retain rights against the secured party; it can presumably redeem the property, and in Canada it has been held that such a person can force the secured party to sell the collateral (M Gedye, R Cuming and R Wood, Personal Property Securities in New Zealand (2002) para 123.3 (p 425)), but a good faith purchaser from the secured party will take free of those rights whether or not the requirements of the section have been followed: s 61(7). The position of a party with rights in the collateral but who was not entitled to notice (eg, one with an SI but who had failed either to file or to notify the secured party) are not wholly clear but probably they are cut off when the secured party takes the collateral in satisfaction. It should be made clear that these rules are for the benefit of the debtor and others with an interest in the collateral, not for the secured party’s benefit. Thus a secured party who simply takes the collateral without complying with the proper procedures should not subsequently be able to claim that its election was ineffective, so that when the property falls in value it can insist on a sale and recovering the shortfall from the debtor: see J Ziegel and D Denomme, The Ontario Personal Property Security Act Commentary and Analysis (2nd ed 2000) para 65.3 (pp 538-539).    [Back]

Note 156    M Gedye, R Cuming and R Wood, Personal Property Securities in New Zealand (2002) para 120.2 (p 418).    [Back]

Note 157    M Gedye, R Cuming and R Wood, Personal Property Securities in New Zealand (2002) para 132.1 (p 441).    [Back]

Note 158    As was recommended by both the Crowther and Diamond reports: CP para B.60.    [Back]

Note 159    UCC Section 9-623 is in very similar terms.    [Back]

Note 160    Under the SPPSA, s 59(6) or (10); see above, para 5.73.    [Back]

Note 161    SPPSA, s 62(1)(a). This encompasses the expenses of ‘seizing, repossessing, holding, repairing, processing and preparing the collateral for disposition’ actually incurred and any other reasonable expenses actually incurred.    [Back]

Note 162    NZPPSA, s 132(1). The New Zealand legislation goes further by stating that the debtor’s right to redeem the collateral has priority over any other person’s right to redeem the collateral: s 132(2). It has been remarked that this it is unlikely that both the debtor and another party with an interest in the collateral will want to redeem: M Gedye, R Cuming and R Wood, Personal Property Securities in New Zealand (2002) para 132.2 (p 441).    [Back]

Note 163    The equitable doctrine of consolidation should not apply to require a debtor who wishes to redeem one piece of collateral to redeem all the SIs it has granted to the same secured party (see Fisher & Lightwood’s Law of Mortgages (11th ed 2002) ch 27). The doctrine has not applied to mortgages since 1882: see the Law of Property Act 1925, s 93. However, as under that provision, contractual provisions to the like effect might be permitted.    [Back]

Note 164    SPPSA, s 55(3); UCC Section 9-601.    [Back]

Note 165    DR 59(1)-(2).    [Back]

Note 166    DR 56(2).    [Back]

Note 167    DR 59(1)-(2).    [Back]

Note 168    DR 58(2).    [Back]

Note 169    DR 58(1).    [Back]

Note 170    See below, paras 5.114-5.118.    [Back]

Note 171    We have dealt earlier with the question whether a security agreement that is not perfected by possession must be evidenced in a signed writing: paras 3.75-3.82.     [Back]

Note 172    SPPSA, s 16.    [Back]

Note 173    Compare the cases on whether one party’s ‘satisfaction’ has to be bona fide: G Treitel, The Law of Contract (10th ed 1999) p 61.    [Back]

Note 174    NZPPSA, s 109(1)(b). There is no equivalent in the SPPSA.    [Back]

Note 175    NZPPSA, s 109(2).    [Back]

Note 176    Para B.18.     [Back]

Note 177    See below, paras 5.142-5.171.    [Back]

Note 178    CP para 12.135.    [Back]

Note 179    SPPSA, s 21.    [Back]

Note 180    There does not seem to be an equivalent in the NZPPSA or UCC.    [Back]

Note 181    Eg, SPPSA, s 60(3).    [Back]

Note 182    See UCC section 9-616.    [Back]

Note 183    See above, para 5.95.    [Back]

Note 184    Para B.61.    [Back]

Note 185    SPPSA, s 62(1)(b); NZPPSA, s 133.    [Back]

Note 186    Ibid.    [Back]

Note 187    SPPSA, s 62(2); NZPPSA, s 134.    [Back]

Note 188    CP para B.62 noted that there are no direct equivalents in English law but the closest analogy seems to be the power of the court to make a ‘time order’ under the Consumer Credit Act 1974, ss 129-130.    [Back]

Note 189    Section 66(2): see J Ziegel and D Denomme, The Ontario Personal Property Security Act Commentary and Analysis (2nd ed 2000) para 66.2 (pp 543-544).    [Back]

Note 190    See above, para 5.92.    [Back]

Note 191    Para B.25.    [Back]

Note 192    Insolvency Act 1986, s 29(2).    [Back]

Note 193    The general powers and duties of a receiver are contained in the Insolvency Act 1986, ss 42-43. There are 23 separate powers set out in the Schedule.    [Back]

Note 194    This includes powers to hold and dispose of the assets, as well as collecting them.    [Back]

Note 195    R Goode, Commercial Law (2nd ed 1995) p 865.    [Back]

Note 196    Insolvency Act 1986, Sched 1, para 11.    [Back]

Note 197    Insolvency Act 1986, ss 44(1)(a)-(c).    [Back]

Note 198    Enterprise Act 2002, s 250.    [Back]

Note 199    SPPSA, s 64.    [Back]

Note 200    There will need to be consequential amendments to the Insolvency Act 1986, s 29(2), which currently defines administrative receiver by reference to floating charges. This should be changed to refer to a power to appoint a receiver given by an SI that covers the whole, or substantially the whole, of the company’s property.    [Back]

Note 201    Art 4(6).    [Back]

Note 202    See above, Part 4.    [Back]

Note 203    DR 56(3)(a).    [Back]

Note 204    CP para 6.38. A fuller description of repos will be found in the Prefatory Note to Article 8, para III.C.10. In the CP we proposed that repos should be exempt from registration: para 7.50. Even if a repo is within our scheme as creating an SI, filing would not normally be required because the SP/original buyer will have control. However, as noted in the Prefatory note just cited, there are ‘hold-in-custody’ repos under which the buyer leaves securities in the hands of the seller, relying on the representation that the buyer will hold them for the seller. If the repo were to amount to an SI, under such an arrangement it would not be perfected under our scheme (or that of the UCC).     [Back]

Note 205   Para III.C.10.    [Back]

Note 206    In re Bevill, Bresler & Schulman Asset Mgt Corp, 67 BR 557 (DNJ 1986).    [Back]

Note 207    On perfection of repos, see para 5.127 n 205 above.    [Back]

Note 208    We would not recommend exempting all repos from our scheme, because we do not think it appropriate that a repo that is being used as a way of borrowing against securities but that takes the ‘hold-in-custody’ form (see above, para 5.127 n 205) should be exempt. We think it should be treated as unperfected so that a creditor who subsequently takes an SI over the same securities will have priority irrespective of any question of knowledge; and so that a subsequent buyer who does not know of the ‘hold-in-custody’ arrangement will take free. It may also be appropriate that the SI should be ineffective in the event of the ‘borrower’s’ insolvency, since it is not attended by any publicity.    [Back]

Note 209    DR 56(3)(b).    [Back]

Note 210    See above, para 2.182.    [Back]

Note 211    DR 59(1).    [Back]

Note 212    DR 60(5).    [Back]

Note 213    DR 60(6).    [Back]

Note 214    DR 62(6).    [Back]

Note 215    DR 65(5).    [Back]

Note 216    See below, para 5.170.    [Back]

Note 217    UCC Section 9-627(b).    [Back]

Note 218    UCC Section 9-627(c).    [Back]

Note 219    DR 69.    [Back]

Note 220    Although there will be no criminal sanctions for failing to comply with the rules.    [Back]

Note 221    See Euroclean Canada Inc v Forest Glade Investments (Trustee) (1985), 16 DLR (4th) 289, 49 OR (2nd) 769 (CA Ont) (a debenture permitted the creation of subsequent PMSIs having priority to the debenture; this was held to be effective to give priority although a subsequent PMSI was not perfected).     [Back]

Note 222    For individuals, the Bills of Sale Acts 1878-1882 and the Consumer Credit Act 1974 impose quite extensive controls.    [Back]

Note 223    See Fisher & Lightwood’s Law of Mortgages (11th ed 2001) para 28.8.    [Back]

Note 224    Ibid, para 28.11.    [Back]

Note 225    Ibid.    [Back]

Note 226    Ontario PPSA, s 59(1).     [Back]

Note 227    Eg, under the SPPSA, the debtor may waive the secured party’s obligations to take steps to preserve the debtor’s rights against third persons under an instrument or an investment security taken as collateral or to keep the collateral identifiable (s 17(1)-(2)). See also s 59(3)(d) (secured party may dispose of property by lease), and s 59(4) (secured party may dispose of collateral on deferred payment terms). A number of provisions allow for a post-default agreement, eg, s 60(2) (order of payment of surplus may be altered ‘by the agreement of all interested parties’, and s 62(1) (rights of redemption).    [Back]

Note 228    Thus the SPPSA, s 56(3) provides that, with listed exceptions, the rights, remedies and obligations provided by the Act to the extent that the provisions give rights to the debtor or impose obligations on the secured party, cannot ‘be waived or varied by agreement or otherwise’. See also the OPPSA, s 59(2), and J Ziegel and D Denomme, The Ontario Personal Property Security Act Commentary and Analysis (2nd ed 2000) para 59.2 (pp 481-482).    [Back]

Note 229    Personal Property Securities Amendment Act 2001, s 9.    [Back]

Note 230    Section 107(1), as amended.    [Back]

Note 231    NZPPSA, s 114(1)(a).    [Back]

Note 232    NZPPSA, s 117(1)(c).    [Back]

Note 233    NZPPSA, s 133.    [Back]

Note 234    We omit references to a number of provisions that are not applicable to our scheme, for example, concerning the removal of accessions.    [Back]

Note 235    There is a somewhat awkward division between the right to be paid the surplus under s 117 and the right to recover it under s 119.    [Back]

Note 236    Section 107(2). There are additional protections for consumers under the Credit (Repossession) Act 1997.    [Back]

Note 237    M Gedye, R Cuming and R Wood, Personal Property Securities in New Zealand (2002) para 107.1 (pp 388-389).    [Back]

Note 238    L Widdup and L Mayne, Personal Property Securities Act: A Conceptual Approach (2002) para 33.11 (p 308).    [Back]

Note 239    See above, para 5.149 n 236.    [Back]

Note 240    SPPSA, s 56(3), see above, para 5.147 n 229.    [Back]

Note 241    See UCC Section 9-620 and Section 9-624.    [Back]

Note 242    See above, para 5.52 and DR 60(5).    [Back]

Note 243    See above, para 5.53 and DR 60(6).    [Back]

Note 244    See above, para 5.68 and DR 62(4)-(6).    [Back]

Note 245    UCC Section 9-603(1). There is a delightful provision in Section 9-602 to the effect that the parties may not determine the standard applicable to the duty to avoid breaches of the peace while repossessing collateral.    [Back]

Note 246    See CP para 6.4 and above, para 5.19.    [Back]

Note 247    See above, para 2.110.    [Back]

Note 248    See above, para 2.112.    [Back]

Note 249    See M Gedye, R Cuming and R Wood, Personal Property Securities in New Zealand (2002) para 107.2 (p 389). As the authors point out, the debtor could evade the surrender of its rights by arranging an SI in favour of a ‘friendly’ third party.     [Back]

Note 250    SPPSA, s 59(3) and OPPSA, s 59(2).    [Back]

Note 251    Section 9-602(5). The rule does not of course apply to outright sales of receivables, see above para 5.21 n 24.    [Back]

Note 252    They are mandatory under the PPSAs and UCC Section 9-602(11).    [Back]

Note 253    SPPSA, s 65(10).    [Back]

Note 254    UCC Section 9-624.    [Back]

Note 255    Tudor Grange Holdings Ltd v Citibank NA [1992] Ch 53.    [Back]

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You are here: BAILII >> Databases >> The Law Commission >> Company Security Interests (Consultation Paper) [2004] EWLC 176(5) (13 August 2004) URL: http://www.bailii.org/ew/other/EWLC/2004/176(5).html Cite as: [2004] EWLC 176(5)