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The Law Commission

(LAW COM No 296)

COMPANY SECURITY INTERESTS

Presented to the Parliament of the United Kingdom by the Secretary of State for Constitutional Affairs and Lord Chancellor by Command of Her Majesty

August 2005

Cm 6654 £25.50

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

The Law Commissioners are:

The Honourable Mr Justice Toulson, Chairman

Professor Hugh Beale QC, FBA

Mr Stuart Bridge

Dr Jeremy Horder

Professor Martin Partington CBE

The Chief Executive of the Law Commission is Mr Steve Humphreys.

The Law Commission is located at Conquest House, 37-38 John Street, Theobalds

Road, London WC1N 2BQ.

The terms of this report were agreed on 7 July 2005.

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

http://www.lawcom.gov.uk

CONTENTS

	Para
Summary	Summary
Terms and abbreviations used in this report	Abbrev.
PART 1: INTRODUCTION	Part 1
Introduction	1.1
Terms of Reference	1.15
The 2002 and 2004 consultation papers	1.16
Responses to the Consultative Report	1.19
Registration	1.21
Priority	1.22
Financial collateral	1.24
Sales of receivables	1.25
Recommendations that were not widely supported	1.26
Summary of our recommendations	1.27
Principal features of the scheme we recommend	1.32
Advantages of the scheme	1.38
Scotland	1.42
Further work	1.45
Consumers, unincorporated businesses, and unregistered companies	1.46
Consumers	1.50
Unincorporated businesses	1.54
Unregistered companies	1.58
Title-retention devices	1.60
A statement of the law of security over personal property	1.67
Plan of this report	1.71
Acknowledgements	1.74
PART 2: THE BUSINESS CASE	Part 2
Introduction	2.1
The scheme for company charges	2.3
Direct savings and costs	2.5
The current cost of registration	2.5
Submission of documents on-line	2.7
Submission of particulars only	2.8
Facilitating the development of electronic conveyancing	2.14
Removing the time-limit for registration	2.15
Improved searching	2.17
Increased information	2.18
Indirect benefits and costs	2.20
Simplicity	2.20
Increasing confidence	2.21
Removing clauses with uncertain effect	2.22
Increasing certainty	2.23
Supporting financial markets	2.26
Deregulation	2.28
EU developments	2.30
Conclusion on the scheme for company charges	2.32
Enabling further developments	2.33
Sales of receivables	2.34
PART 3: THE CORE SCHEME FOR COMPANY SECURITY	Part 3
Introduction	3.1
Terminology and concepts	3.3
Scope	3.8
Companies and LLPs	3.8
Types of security subject to the scheme	3.13
Mortgages and charges	3.14
Pledges	3.17
Liens that arise by operation of law	3.26
Contractual liens	3.28
The property subject to the scheme	3.30
Personal property and land	3.30
Personal property for which there is a specialist mortgage register	3.39
Charges over property outside England and Wales	3.42
Charges excluded from the scheme: Lloyd's trust deeds	3.43
Charges that will not require registration	3.46
Supporting obligations	3.46
Rights to the proceeds of collateral	3.49
Property acquired subject to a charge	3.59
Other situations in which no filing will be required	3.64
The requirement to register	3.69
Electronic on-line filing	3.69
Responsibility for registering	3.72
The charge document and the certificate of registration	3.74
The sanction for failing to register	3.77
Removal of the time-limit for registration and last-minute filing	3.79
Removal of the time-limit	3.80
'Last-minute filing'	3.83
Advance filing or priority filing	3.86
Searching	3.92
The details of filing and searching	3.94
The financing statement	3.97
The name of the debtor and its registered number	3.100
The name and address of the chargee or its agent	3.104
A description of the collateral	3.107
Duration of the filing	3.110
Trustees	3.112
Other matters	3.118
Verification statement	3.121
Errors in the financing statement	3.124
Additional statements	3.132
Amendments by the chargee	3.132
Amendments by the debtor	3.133
Effect of unauthorised or accidental discharge	3.138
Search criteria	3.140
System failure	3.142
Priority	3.145
Introduction	3.145
Priority between competing security interests	3.149
Fixed charges	3.149
Priority of pledges	3.156
The distinction between fixed and floating charges	3.158
Priority of floating charges	3.176
Liens	3.188
Supporting obligations	3.190
Priority in transferred collateral	3.195
Priority as against unsecured creditors	3.201
Execution creditors	3.201
Distress for rent	3.205
Distress for rates	3.208
Priority as against buyers	3.210
Buyers and unregistered charges	3.213
Buyers and registered fixed charges	3.217
Buyers and registered floating charges	3.219
Transferees of negotiable collateral and money	3.222
Fixtures	3.225
Crops	3.227
Priority and assets for which there is a specialist register	3.231
Registered aircraft and ships and intellectual property rights	3.231
Land	3.236
Territorial application	3.246
Companies registered in England and Wales	3.251
Companies incorporated outside Great Britain	3.259
Collateral in Scotland	3.273
Charges created by Scottish companies over assets in England and Wales	3.281
Transitional provisions	3.285
Existing charges that have been duly registered	3.285
Existing charges that are not currently registrable	3.288
Provisions of Companies Act Part XII	3.291
Registration of enforcement of security	3.292
Companies to keep copies of instruments creating charges	3.295
Companies' registers of charges	3.298
Should charges be evidenced in writing signed by the debtor?	3.301
Why require writing signed by the debtor?	3.301
PART 4 SALES OF RECEIVABLES	Part 4
Introduction	4.1
Registration and priority of sales of receivables	4.7
Our proposals on consultation	4.7
Reactions to the CR recommendations	4.12
Priority	4.12
Perfection	4.19
The definition of 'receivable'	4.26
Exceptions	4.30
Isolated assignments of receivables	4.32
Prohibitions against assignments of receivables	4.35
Territorial application	4.41
Transitional arrangements	4.46
PART 5: FINANCIAL COLLATERAL	Part 5
Introduction	5.1
Investment securities	5.5
'Cash'	5.8
Other forms of investment property	5.9
General objectives	5.10
Our proposals on consultation	5.12
The proposals	5.12
Responses to the CR scheme	5.14
Further analysis	5.17
Summary of our recommendations on security over financial collateral	5.19
Scope of the provisions on financial collateral	5.21
'Financial instruments'	5.22
Indirectly-held securities and other forms of investment property	5.28
'Cash'	5.33
Terminology and definitions	5.36
'Control' of financial collateral and exemption from registration	5.42
Forms of 'control'	5.46
Positive control versus negative control	5.46
Positive control without negative control	5.50
'Possession or control' under the Financial Collateral Directive	5.51
The requirements of the Directive	5.51
Control for purposes of perfection distinguished from control for other purposes	5.58
Should 'possession and control' be defined at all?	5.59
A general test of control	5.69
The listed methods of taking control	5.71
'Writing'	5.76
Priority and control	5.78
Positive or negative?	5.81
Purchasers	5.95
An automatic charge in favour of an intermediary	5.103
Provisions that have been removed	5.106
The obligation to disclose a 'control agreement'	5.107
Rights of use	5.108
'Super-priority' of intermediaries and banks	5.109
Intermediaries	5.111
Bank accounts	5.114
PART 6: LIST OF RECOMMENDATIONS	Part 6
The core scheme	6.2
Scope	6.2
The requirement to register	6.16
Details of filing and searching	6.23
Priority	6.36
Territorial application	6.57
Transitional provisions	6.63
Provisions of Companies Act 1985 Part XII	6.65
Should charges be evidenced in writing signed by the debtor?	6.67
Sales of receivables	6.68
Registration and priority of sales of receivables	6.68
Prohibitions against assignments of receivables	6.73
Territorial application	6.74
Transitional arrangements	6.75
Financial collateral	6.76
Scope of the provisions on financial collateral	6.76
Purchasers	6.84
An automatic charge in favour of an intermediary	6.85
APPENDIX A: Draft Company Security Regulations	A
and Explanatory Notes	Notes
APPENDIX B: List of consultees	B

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