Part I

introduction

                    1.1               This Consultation Paper considers reform to the scheme of registration of company charges and to security over property other than land created by individuals and unincorporated businesses.[1]

                    1.2               Credit is of great importance to business, whether carried out by a company, a partnership or a sole trader. A business will incur operating costs in relation to its staff, its premises, and in the various stages of dealing with the products or services it wishes to market or deal in. It will be rare that all these costs can be covered by the business without some form of credit:

Enterprises live (and sometimes die) by credit. In any developed economy an essential feature of commerce is the provision of suitable media for the extension of credit.[2]

Businesses may need credit to purchase capital equipment and also to finance day-to-day operations. Thus they may want to obtain stock-in-trade or raw materials on credit; and they may also want to borrow to finance the gap between the time at which they supply goods or services to their customers and the time when the customers pay.

                    1.3               Credit is also of importance for consumers, whether this be for the purchase of a house or car, or through the use of the credit card or other forms of credit agreement. The Committee on Consumer Credit, chaired by Lord Crowther, said that, on balance, it thought consumer credit to be beneficial:

since it makes a useful contribution to the living standards and the economic and social well-being of the majority of the British people. Individual consumers derive a variety of advantages from its use … . Loans … to buy durable goods … make it possible for consumers to substitute cheaper inside services for more expensive outside services. … [T]hey enable them to accumulate a stock of consumer capital which might otherwise be impossible and to enjoy a more satisfactory ‘mix’ of goods and services over time. Shorter-term forms of credit … confer real benefits, particularly on low income consumers, by making it easier for them to make room in their budgets for the purchase of household necessities … .[3]

                    1.4               Those who supply finance to businesses or individuals will often seek a means of protecting themselves against the risk of the business becoming insolvent or the individual becoming bankrupt. This protection is usually sought through the taking of security, which can be either possessory (as where goods are pledged, or pawned, to the creditor) or non-possessory (as where the creditor takes a mortgage or ‘charge’ over the asset; the asset usually remains in the possession of the borrower). The assets may be pledged, mortgaged or charged, or may be the subject of various other legal transactions that are not currently recognised by the law as creating a security but that serve the same purpose. For example, goods may be bought on credit by using forms of ‘title finance’, such as hire-purchase, conditional sale or a finance lease, that effectively enable the purchase of goods on credit using the goods as security for the loan. These are often termed ‘quasi-securities’.

                    1.5               A business may offer as ‘security’ not only land or other capital assets but also stock-in-trade and, increasingly, its expected income (‘receivables’). Private borrowers most commonly provide security by mortgaging their houses (security created by non-corporate borrowers over land is outside the scope of this project), but they can also use goods as ‘security’. Mortgages of goods are uncommon but the other transactions that can serve a similar purpose, such as hire-purchase, are very common indeed.

                    1.6               In the case of possessory security, because by definition the creditor takes possession of the debtor’s asset or assets, it will be clear to third parties (such as other potential lenders) that the debtor does not own the asset outright.[4] However, where the loan is secured on a non-possessory basis - a method that is generally more useful for either commercial or private purposes, because the debtor can continue to use the asset - there are two problems.

                    1.7               First, the impression may be given that the asset is still owned outright by the debtor concerned. This carries the risk of misleading someone contemplating supplying credit (whether on a secured or unsecured basis) to that debtor. How is a third party who might be contemplating making a further loan to the debtor against security over the debtor’s assets to know that a particular asset or class of assets is already subject to a non-possessory security? Similarly, how is someone thinking of buying the property from the debtor to know that it is mortgaged or charged to the creditor? As we will see, this problem arises whether the transaction is in the form of a traditional mortgage or charge, or is done by a transaction such as a finance lease or hire-purchase agreement that the law does not currently recognise as a security but that serves the same purpose.

                    1.8               Secondly, how can the creditor who has taken a non-possessory security over the asset be confident that, if the debtor does charge the same asset again to another creditor, that other creditor will not be able to claim the asset before the first security has been paid off? This is the question of which creditor will have ‘priority’.

                    1.9               The risk of the impression of ‘false wealth’ and the lack of a means whereby the existence of non-possessory secured lending could be discovered resulted in the introduction of the requirement to register the existence of many non-possessory securities, whether created by companies or by individuals. Registration of certain charges[5] created by companies is required under the Companies Act 1985.[6] Mortgages and charges over goods created by individuals (whether for business or for private purposes) require registration under the Bills of Sale Acts 1878 and 1882.[7]

                1.10               These enactments are designed to provide information to other potential creditors. We will see that they do not cover the ground fully. Not all forms of security are required to be registered, and the rules differ significantly depending on the statutory scheme applicable, which in turn depends on the legal personality of the debtor. The legislation does not address fully either the interests of potential purchasers or questions of priority. In addition, there are, as we have mentioned, many transactions that are in fact used for the purpose of securing indebtedness but which are not treated as coming within the law of security - including forms of ‘title finance’ - and which are consequently not registrable either as a company charge or a bill of sale. We discuss in this Consultation Paper whether such methods should become subject to registration requirements.

                1.11               In this Consultation Paper we discuss reform to the registration requirements. We start with those for companies and then consider those applying to individuals and  non-corporate debtors.

Background to the consultation paper

                1.12               In July 2001 the Company Law Review Steering Group (the ‘Steering Group’) published its Final Report on Modern Company Law for a Competitive Economy.[8] This wide-ranging and fundamental review had been launched by the Secretary of State for Trade and Industry in 1998. Its Final Report contained many recommendations for a major re-working of the whole framework of company law. In Chapter 12 of the Final Report the Steering Group proposed to replace the current scheme of registration under Part XII of the Companies Act 1985 by a system of ‘notice-filing’.[9] In essence, the proposal was that the current system under which particulars of each registrable charge, and the charge document itself, are lodged with the Companies Registry should be replaced by the filing of a notice called a ‘financing statement’. This would indicate that the creditor has taken or intends to take security over a given item or class of property. The financing statement could be ‘filed’ electronically and would appear on the register without further human intervention. The relative priority of registrable charges would be determined not, as at present, by a complex series of rules referring principally to the date of creation of the charge but instead by the date of filing.

                1.13               The concept of a notice-filing system is not new. In the United States Article 9 of the Uniform Commercial Code (‘UCC’) adopted notice-filing in 1952,[10] and in 1971 the Crowther report recommended the adoption of such a system in the United Kingdom.[11] Notice-filing was also considered in the 1986 report of a working party on security over moveable property set up by the Scottish Law Commission, chaired by Professor Halliday,[12] and by Professor Diamond’s Review of Security Interests in Property, carried out for the DTI and published in 1989.[13] Outside the United Kingdom, many common-law jurisdictions now operate notice-filing systems.[14]

                1.14               However, all the systems mentioned (both proposed and operational) apply not only to charges created by companies but also to security over personal property created by individuals and unincorporated businesses. They also apply more widely than to charges. They adopt what is often termed a ‘functional approach’[15] and require registration of transactions that do not take the form of a charge but which function to create a secured transaction (the ‘quasi-securities’ referred to earlier[16]). Moreover, nearly all the existing or proposed schemes not only cover the registration of security interests but also provide a revision and partial codification of the law governing the creation and enforcement of security interests.

                1.15               The Steering Group reported that it had not had sufficient time to consult fully on its proposals for notice-filing, nor on the question of quasi-securities, while securities not created by companies raised issues outside its terms of reference. It therefore concluded:

Given the lack of opportunity to discuss our new and more radical proposals and given that their implications for the law of security and ‘quasi-security’ over property other than land are outside our remit, we have recommended that DTI consult with the Lord Chancellor’s Department and the Scottish Executive with a view to the Law Commissions being requested to examine the system for registering company charges and security and ‘quasi-security’ generally over property other than land. We hope that the Law Commissions will make recommendations for reform to both company law and security over property other than land in both England and Wales and in Scotland, and in doing so will take account of our provisional conclusions on the company law aspects of this issue, as set out in this Chapter.[17]

That recommendation led to a Ministerial reference from the DTI to the Law Commission.

terms of reference

                1.16               The terms of reference to the Law Commission[18] request that we:

                                            (1)          examine the law on the registration, perfection and priority of company charges;

                                            (2)          consider the case for a new scheme of registration and priority of company charges, including charges created by

                                                                   (a)          companies having their registered office in England or Wales, wherever the assets charged are located; and

                                                                   (b)          oversea companies and companies having their registered office in Scotland, where the charge is subject to English law;

                                            (3)          consider whether such a scheme should apply both to security in the strict sense and to ‘quasi-security’ interests such as conditional sales, retention of title clauses, hire-purchase agreements and finance leases, including the extent to and means by which such interests should be made subject to the law governing securities;

                                            (4)          examine the law relating to the granting of security and ‘quasi-security’ interests by unincorporated businesses and individuals over property other than land, including the feasibility of extending any new scheme for company charges to such interests, and the extent to and means by which such ‘quasi-security’ interests should be made subject to the law governing securities; and

                                            (5)          make recommendations for reform.

                1.17               We have noted that this reference arose as part of the Steering Group’s wider proposals for reform to company law, but it goes wider than this. In its Final Report, the Steering Group recognised that if reform of company charges is to take place as part of a wider reform of the registration of security interests, it might more appropriately be addressed through separate provision outside any new Companies Act.[19] However, we understand that it is more likely that any proposals we might ultimately make for the reform of the company charges registration scheme would be introduced by way of secondary legislation under any forthcoming Companies Bill. Such a method could not realistically be used to introduce the wider reform of the law of security over personal property of the sort that we also propose in this Consultation Paper. These would have to await implementation in separate primary legislation.

                1.18               In the light of this, we decided that we would have to split the treatment we gave to this project. First, we formulate proposals that could be introduced initially in respect of companies. Secondly, we consider reform applying to non-corporate debtors which would have to be implemented through primary legislation at a later stage. This would entail amending reforms already introduced under any Companies Bill. We provisionally recommend that in this second phase the law relating to the creation and use of security interests for both corporate and non-corporate debtors be restated in statutory form. It is this reasoning that compels the divided structure of this Consultation Paper, rather than it being our preferred approach.[20]

Structure of the consultation paper

                1.19               In the following sections of Part I we outline the recommendations made by previous reports and their fate; note other jurisdictions in which notice-filing systems have been adopted or proposed, and summarise our provisional conclusions.

                1.20               In Part II we outline the types of security that can be granted over property other than land and the current system for registration of company charges under the Companies Act 1985. In Part III we explain why we have reached the provisional conclusion that there is a need for reform of the system of registration of charges created by companies.

                1.21               In Part IV we first set out briefly a series of minor amendments to the existing company charges registration scheme which were proposed by the Steering Group as an alternative to notice-filing, but which the Steering Group rejected in favour of the more radical approach.[21] We go on to consider in detail a notice-filing system for charges created by companies, and we explain our provisional view of how such a scheme would operate. In Part V we consider whether certain types of charge should be exempt from registration or filing.

                1.22               In Part VI we give a brief description of types of quasi-security interest, and in Part VII we ask whether quasi-security interests should be brought within the scheme of notice-filing, and, if so, which ones.

                1.23               We then turn to security interests created by non-corporate debtors. The current law applying to security and quasi-security interests created by such debtors is outlined in Part VIII, and the alleged defects in the law are examined in Part IX. In Part X we consider whether notice-filing and the other proposals for reform of the law applying to security interests created by companies should apply also to security interests created by non-corporate debtors.

                1.24               In Part XI we consider the implications that the extension of the law to cover quasi-security interests might have for the law of security generally. We ask whether, for reasons of clarity and certainty, it would be necessary or desirable to set out the relevant rules in the form of a statutory code and briefly indicate how this question has been addressed in other jurisdictions.[22]

                1.25               Part XII contains a list of all our provisional proposals and questions for consultation. Appendix A develops the proposals outlined in the first section of Part IV on amending the company charges registration scheme in a less radical way than through the introduction of a notice-filing system. Appendix B sets out in more detail various questions that would need to be decided were the law applying to the creation and enforcement of security interests to be set out in the form of a statutory code.

                1.26               In this Consultation Paper we use the term ‘security’ to mean something recognised as being subject to the existing law of security. We use the term ‘security interest’ to include both traditional forms of security (which we discuss in Part II) and the wider functional-equivalent of ‘quasi-security’ interests (which we discuss in Parts VI and VII).

Previous recommendations and attempts at reform

                1.27               We indicated earlier that reform of the scheme for registration of company charges has been considered directly or indirectly by several previous reports. After one of these, the Diamond report, amendments to the scheme were included in the Companies Act 1989; but for reasons that we will note later[23] the relevant Part of that Act has never been brought into force. In addition, the DTI issued a consultation document in 1994; and, before it issued its Final Report, the Steering Group had issued a consultation document exploring possible amendments to the current scheme of registration of company charges.[24]

                1.28               In this section we outline briefly the reports and consultation documents concerned, and the unimplemented provisions of the Companies Act 1989. We have relied heavily on the reports and the consultation that preceded them in preparing this Consultation Paper.

The Crowther report

                1.29               The Committee on Consumer Credit, chaired by Lord Crowther, presented its report to Parliament in 1971. This Committee had been charged with looking into the law and practice relating to consumer credit for the purposes of financing goods and services for personal consumption.[25] In addition to suggesting legislation to increase consumer protection, the Crowther report recommended a sweeping change to the law: a new legal framework of security over moveable property should be introduced, which would include a notice-filing system that would take a functional approach to commercial transactions, including within its scope quasi-securities. The system would be based on Article 9 of the UCC. Instead of a copy of the instrument itself being sent to the registrar, a financing statement would be filed, giving certain details of the security interest. Filing would be voluntary, not mandatory. Securities created by companies[26] and by other debtors would be included within the scheme, as would some quasi-security transactions. It was recommended that the new system should apply both to England and Wales and (through separate legislation) to Scotland. These recommendations were partly outside the terms of reference of the Committee[27] and although the Crowther report resulted in the enactment of the Consumer Credit Act 1974, the proposed new system of security and notice-filing was not implemented.

The Halliday report

                1.30               Following the publication of the Crowther report, concerns were raised that the reforms it suggested might be applied to Scotland without regard to the significant differences between Scots law on security and that of England and Wales.[28] The Scottish Law Commission set up a working party on security over moveable property, chaired by Professor Halliday, to consider the problems that would be likely to arise in creating a system of security over moveable property in Scotland. The Halliday report, published in 1986,[29] recommended the introduction of a system for creating security over moveable property based upon the establishment of a register of security interests with notice-filing. However, it was suggested that reform should be restricted to the area where reform of the existing law of Scotland was most required, and the Halliday report drew selectively on the Crowther report proposals and differed from it on some points. It also avoided recommendations that would introduce into Scots law concepts which were alien to its tradition and which might result in confusion.[30] As this Consultation Paper covers only the law of England and Wales, we do not consider the Halliday report’s individual proposals in depth.

The Diamond report

                1.31               In 1989, following a consultation process, a report was produced and published for the DTI by Professor Diamond, reviewing the law on security interests over property. Drawing on the Crowther and Halliday reports, the Diamond report also recommended that the law should be reformed by the introduction of a new law of security and the creation of a notice-filing system. Again, the recommendation was that the system should apply to all debtors (including companies) and to all transactions that are functionally equivalent to security; and that such filing should be voluntary, not mandatory. It was recommended that the system should apply both to England and Wales and to Scotland, as far as the objectives to be achieved were concerned, although separate legislation would be needed. The Diamond report also proposed a number of specific changes to the company charges registration system, as an interim measure pending the introduction of any new notice-filing system.[31] As with the Crowther report, the new law of security and the comprehensive notice-filing system were not introduced, but some of the Diamond report’s interim proposals were enacted in the Companies Act 1989.

The Companies Act 1989

                1.32               An attempt was made to change the scheme of registration of company charges by Part IV of the Companies Act 1989: new sections were introduced into the Companies Act 1985, but the relevant provisions have never been brought into force.[32] Under these reforms, changes were made to the list of charges that would be registrable[33] and to the requirement to file the instrument of charge itself. Some of the problems that had arisen with respect to charges created by oversea companies as a result of the decision in NV Slavenburg’s Bank v Intercontinental Natural Resources Ltd[34]were to be overcome by requiring registration of charges only in the case of registered oversea companies.[35] However, it emerged that there were difficulties with some of the new provisions, in part because the certificate of registration issued by the Companies Registrar would no longer be conclusive.[36] As a result it is unlikely that these provisions will ever be brought into force in their current form.

DTI consultations

                1.33               In November 1994 the DTI published a consultation document, Company Law Review: Proposals for Reform of Part XII of the Companies Act 1985,[37] in which it advanced several options for future legislation, including one of retaining the main provisions of the current law but incorporating into it some of the reforms that would have been achieved by the unimplemented provisions of the Companies Act 1989. A notice-filing system was also advanced as a possible option. However, consultees to that document were strongly in favour of retaining the main provisions of the current law.

                1.34               In October 2000 the Steering Group published its consultation document Modern Company Law for a Competitive Economy: Registration of Company Charges.[38] In this document it raised the possibility of adopting the “radical option” of changing the current system to one of notice-filing; but it noted the lack of support for such a system in previous consultation and instead made provisional proposals for a number of amendments to the present scheme.[39] However on this occasion the response to consultation was different. In its Final Report the Steering Group stated that:

About half of the respondents favoured developing a system of notice-filing, and opposition to it was much weaker than in previous consultations.[40]

The Steering Group therefore changed its position to recommend the introduction of a notice-filing system.[41]

                1.35               In addition to the above consultation processes, the Enterprise Bill currently before Parliament contains proposals relating to insolvency that are relevant to our project, which we note at various points in later Parts of this Consultation Paper.[42]

European proposals

                1.36               Proposals relating to the validity of financial collateral arrangements are contained in a draft European Union Collateral Directive, which we return to later in this Consultation Paper.[43]

Reforms overseas

The United States of America

                1.37               In making their recommendations for the introduction of a new law on security and a new system of notice-filing applicable to all debtors and based on a functional approach, the Crowther and Diamond reports drew heavily on the UCC.

                1.38               A notice-filing system was introduced by UCC Article 9 in 1952.[44] The 1962 UCC introduced a “unitary” security device, incorporating all of the security interests that previously had been dealt with separately.[45] This had the effect of simplifying the law by treating as alike all transactions that had the same effect even though they were different in their form.[46] Article 9 applied whoever held the title to the collateral.[47]

                1.39               In July 2001 a Revised Article 9 effected a number of changes.[48] The scope of Revised Article 9 is set out in Section 9-109(a), which provides that (in general) it applies to a transaction (regardless of its form) that by contract creates a security interest[49] in personal property or fixtures.[50] The UCC Revised Article 9 has been adopted by all States (and the District of Columbia).

                1.40               It has been said that the UCC has adopted a “simple and uncomplicated procedure” for notice-filing (contained now in Revised Article 9, Part 5).[51] The notice-filing procedure acts as one method of perfecting the security interest,[52] and Revised Article 9, Part 3 sets out how priorities between competing interests are to be settled. The priority of the interests is dependent upon which security interests are in issue. Article 9 has generally been viewed as a successful piece of legislation.

Canada

                1.41               Nine of the ten Canadian Provinces[53] as well as the three territories[54] have also moved to a notice-filing system for security over property other than land.[55] Although each province and territory has its own Personal Property Security Act (‘PPSA’),[56] these are based to some degree on the Model PPSA which was adopted by the Canadian Conference on Personal Property Security Law.[57] The Model PPSA was in turn based upon UCC Article 9.[58] We understand that the Model PPSA has not been published, although the Saskatchewan Personal Property Security Act 1993 (‘SPPSA’) is said to be virtually identical.[59] It seems that the Canadian systems have been well received by users and are enthusiastically supported by the various provincial governments.[60]

                1.42               Although the Canadian versions of the PPSA vary from one another (sometimes by little, sometimes in more significant ways), to avoid a multiplicity of references when we discuss the Canadian approach in this Consultation Paper, we have concentrated on the Saskatchewan version because it is the closest to the Model PPSA. We sometimes make reference to other versions to show consistency of approach or to illustrate diverging views.[61]

New Zealand

                1.43               The New Zealand Personal Property Securities Act 1999[62] (‘NZPPSA’) has also adopted a notice-filing system which came into force on 1 May 2002 and replaced several other registers, including those relating to company charges and to chattels. Like UCC Revised Article 9 and the SPPSA, the New Zealand system takes a functional approach to security, and applies both to companies and to non-corporate debtors. The Personal Property Securities Register created under the legislation is a centralised, wholly electronic register available for searching at all times.[63]

Australia

                1.44               The Australian Law Reform Commission published a report on personal property securities in 1993, attaching a draft bill.[64] Again, a functional approach was recommended, as was a system of registration based on the submission of a financing statement.[65] Although at the time it apparently received little support from relevant industry and legal sectors, in 1995 the Federal Attorney-General’s Department sought to revive the report by publishing a discussion paper. Subsequent workshops resulted in substantial support for reform and the need for a new draft bill: the Australian Personal Property Security Law Reform Committee[66] is currently considering reforms to the law of security, including notice-filing, and a new draft bill has been produced by the committee and circulated to a number of interested parties for discussion. This bill is very similar to the SPPSA.[67]

Other systems

                1.45               In November 2001, a Diplomatic Conference in Cape Town held under the joint auspices of the International Institute for the Unification of Private Law (‘UNIDROIT’) and the International Civil Aviation Organization (‘ICAO’) concluded a Convention on International Interests in Mobile Equipment and a Protocol to the Convention on International Interests in Mobile Equipment on Matters specific to Aircraft Equipment. The Convention establishes an international legal order for the creation, registration and enforcement of security and title retention interests (including leasing agreements) in high value, uniquely identifiable mobile equipment. The Convention applies to interests in airframes, aircraft engines, helicopters, railway rolling stock and space assets, as designated in the relevant Protocol.[68] These interests will be protected by registration in an international public registry.[69] The registration system, which will be operational 24 hours a day and will be wholly electronic, will allow for the registration of international interests,[70] and assignments and subordinations of such interests, as well as certain other types of interest.[71] Registration will be against the asset, not the debtor. The holder of a registered international interest will have priority over the holder of a subsequently registered interest and over unregistered interests, whether or not registrable.[72] The United Kingdom signed both the Convention and the Aircraft Equipment Protocol (with reservations to the signatures). Work continues in this area in relation to the Supervisory Authority, the appointment of the Registrar and the establishment of the International Registry, and additional Protocols relating to railway rolling stock and space assets have been drafted and are currently under examination with a view, we understand, to the adoption of final texts at a second (and possibly third) Diplomatic Conference.

                1.46               There are several other international bodies that have considered the law on secured transactions in some form or another. Following the production of a preparatory note,[73] the United Nations Commission on International Trade Law (‘UNCITRAL’) decided to establish a working group to develop a regime for security rights.[74] At the time of producing this Consultation Paper, this working group has yet to report back; it was scheduled to hold its first session in May 2002. In addition, UNCITRAL also published a draft Convention on the Assignment of Receivables in International Trade, part of which relates to the creation of a register of assignments, which would affect priority. In December 2001 the General Assembly of the United Nations adopted the draft Convention and opened it for signature or accession.[75]

                1.47               The European Bank of Reconstruction and Development (‘EBRD’) published a Model Law on Secured Transactions in 1994. Principles were drawn from Common Law and Civil Law systems in order to produce a text compatible with the civil law concepts which underlie many of the legal systems of Central and Eastern Europe.[76] The EBRD’s Model Law is noted to be less comprehensive than UCC Article 9,[77] but it provides for a filing system that is intended as a basis upon which legislators can build their own domestic laws on secured transactions.[78]

Acknowledgements

                1.48               We have relied heavily on the work done by those involved in the reports and recommendations mentioned above, and would like to acknowledge our great debt to them. We would also like to thank the members of a small Advisory Group - Professor Sir Roy Goode QC, Mr Guy Morton of Freshfields Bruckhaus Deringer, Mr Richard Sykes QC and Mr Philip Wood of Allen & Overy - for their invaluable guidance. Ms Catherine Beahan of Allen & Overy also gave us a great deal of valuable information about systems overseas. Further valuable advice was received from Professor David Allan, Professor Michael Bridge, Mr Julian Burling of Lloyds, Mr Graham Crane of Ince & Co, Dr John de Lacy, Mrs Louise Gullifer, Professor Gerard McCormack, Mr Richard Nolan, Professor Dan Prentice, and Dr Sarah Worthington. In addition, we also received assistance from Shearman & Sterling and the staff at Companies House and HM Land Registry. We are most grateful to them all. The contents of this Consultation Paper are, of course, our responsibility and ours alone.

Summary of provisional conclusions[79]

                1.49               In Part III we reach the provisional conclusion that the current system for registration of company charges has a number of serious weaknesses and that reform is needed. After exploring how a system of notice-filing might operate in Part IV, we conclude that a notice-filing system would have very significant advantages over any amended version of the current system.

                1.50               It may be helpful to summarise our reasons for this conclusion. A system of notice-filing would make it substantially easier for companies (or, more realistically, their creditors) to register security interests. Filing could be done electronically by the completion of a simple on-screen form and the information filed would appear on the public register without imposing on registry staff the burden of checking the information submitted. The register could be searched easily and accurately on-line. Although less information would have to be submitted, there would be little reduction in the practical value of the register as a source of information about the company’s financial affairs. The inter-relationship between the register of company charges and the various ‘specialist registers’ applying to land, aircraft, ships and other assets would be simplified.

                1.51               Further, a potential creditor could have confidence that any charge it filed would have priority over any earlier charge that does not appear on the register and any subsequent charge (other than a purchase-money interest[80]). The system would permit filing in advance of the creation of the security, in order to preserve priority during negotiations; and a single financing statement could be filed to cover future transactions, thus obviating the need to register successive security interests as and when they are created. This might lead to an increase in the amount of information available to the public, as it would be possible to register charges that, under the present system, have to be excluded from registration requirements because registration of each charge is impractical.[81] Determining priority as between registered charges would become significantly easier as it would generally be determined by the date of filing, although this would be subject to the special priority position enjoyed by the ‘purchase-money security’. The position of purchasers of charged property would also be rationalised.

                1.52               Some of these advantages could be achieved by amending the present system but others could not. Moreover, to retain even a modified version of the present system would be out of step with developments not only in the United States of America and many Commonwealth jurisdictions but also in modern international instruments. It is our provisional view that there would be significant advantages in adopting a system that is broadly similar to that which seems to be becoming a standard in many common-law jurisdictions of the world and will thus be familiar to and easily useable by foreign lawyers and business people wishing to do business in England and Wales.

                1.53               In Part IV we also consider a change that would make the law fairer to creditors who have provided the company with the finance to purchase new assets (‘vendor credit’) and secure their loan by a charge over the new asset. Sometimes under the present law they may find that their charge is subordinated to those of more general secured creditors, so that the general creditor benefits at the expense of the provider of ‘vendor credit’. We propose that such ‘purchase-money-interests’ should be given priority.

                1.54               We think that the notice-filing system described in Part IV could be applied just to the charges that are currently registrable under the Companies Act 1985. However, in Part VII we provisionally conclude that there would also be advantages in following the functional approach to what amounts to a security thereby bringing into the scheme at least those quasi-securities that, without a system of registration, may be misleading to potential creditors or purchasers.

                1.55               Under the present law holders of quasi-security interests have priority over earlier ‘securities’, and to remove this might hinder businesses in obtaining vendor credit in future. In Part VII we argue that this priority should in most cases be preserved by giving priority to purchase-money interests over other security interests, as proposed in Part IV.

                1.56               In Part IX we provisionally conclude that the rules governing security interests created by non-corporate debtors over property other than land, and in particular the Bills of Sale Acts 1878 and 1882, are seriously defective. Although in theory non-corporate debtors can create fixed charges over most types of property, the present legislation makes this a practical impossibility, while no business other than a company can create a floating charge.[82] These rules prevent business people from using forms of security that in some circumstances would be very useful. In Part X we reach the provisional conclusion that the scheme provisionally proposed for company securities should be extended to security interests created by non-corporate debtors. It would be simple to do this and the only reason for not recommending that it be done at the same time as the scheme for companies is that there is a more immediate prospect of legislation dealing with companies.

                1.57               In Part XI we consider whether bringing quasi-securities created by companies within the scheme would mean having to subject them to many of the same rules as apply to securities of the traditional type, and we consider how the overseas systems have dealt with this. We conclude that in principle they should be subjected to much of the security regime, and that the only practical way to make it quite clear which rules apply would be to state the rules in the form of a statutory code. Whilst in the longer-term we think this is very desirable, we provisionally conclude that it is not necessary for a new scheme applying only to security and quasi-security interests created by companies. Any ‘codification’ may be done if and when the scheme is extended to security interests created by non-corporate debtors. We develop these points in Appendix B.

The consultation process

                1.58               In order to meet the legislative time-scale imposed on the project by the DTI’s reference, we have had to prepare this Consultation Paper in a much shorter time than would be normal. Consequently we have not been able to do as much research into some issues, particularly the operation of other notice-filing systems, as we would have wished. We believe that we have covered the principal issues but we would be particularly grateful to consultees for information on any point we appear to have missed or not to have taken fully into account.

                1.59               We recognise that the changes we are provisionally proposing would represent a major change to the current law. Whilst the Law Commission has a clear interest in improving the law, and indeed a statutory duty to review all the law with which it is concerned with a view to its systematic development and reform,[83] we have no wish to recommend reform for its own sake. In the field of security and security interests we think that any law reform should be justifiable in terms of costs and benefits. The benefits long accepted in the United States of America and Canada as flowing from the new regimes they have introduced are several: there is an integrated treatment of the various forms of transaction intended as security but which are (under English law) currently subject to differences in legal treatment that have little policy sense; there is a gathering together in one place of the main principles and rules, making them more accessible; and there is a legal regime which reflects modern financing practice and produces results which in the typical case commend themselves to the commercial world as fair and sensible.

The impact of our provisional proposals

                1.60               As we indicate in Parts III and IX, we believe that there is a real need for reform. It appears to us that in the long term the changes we propose would therefore be of considerable benefit, in particular to business, but we have no detailed information on the costs (including either the costs of moving from the current system to the new one or the likely operating costs of the new system compared to the old once any transitional period is over). The time allowed for the preparation of this Consultation Paper has not been sufficient for us to make detailed investigations. In order to assist us in evaluating our provisional proposals, we would welcome consultees’ comments and evidence - in as much detail as reasonably possible - about their benefits and costs. We invite comments about the main practical and economic impact upon the parties involved, including small businesses in particular. Our final consultation question given in Part XII will ask specifically about the practical and economic impact of our provisional proposals. Any factual information may also assist the DTI in due course in evaluating our proposals and will therefore be passed to the DTI, unless consultees ask us not to pass it on.

                1.61               At least as far as company securities are concerned there is a real prospect that any changes we finally recommend could be implemented as part of the more general reforms of company law that are expected to give effect to the recommendations of the Final Report of the Steering Group.[84] This means that the consultation period must be limited. We ask for responses to reach us by 2 October 2002. We regret that we may be unable to accept or consider responses that are made after this deadline.