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You are here: BAILII >> Databases >> The Law Commission >> REGISTRATION OF SECURITY INTERESTS: COMPANY CHARGES AND PROPERTY OTHER THAN LAND (A Consultation Paper) [2002] EWLC 164(4) (14 June 2002) URL: http://www.bailii.org/ew/other/EWLC/2002/164(4).html Cite as: [2002] EWLC 164(4) |
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notice-filing for company charges
4.1 In Part III of this Consultation Paper we reached the provisional conclusion that the current scheme of registration of company charges under the Companies Act 1985 has serious weaknesses and is in need of reform. In this Part we consider how a basic notice-filing system for company charges might operate and explain our provisional agreement with the Steering Group’s conclusion that a notice-filing scheme should be adopted. It would be the best way to meet the objectives we identified in Part III.[1]
4.2 As we explained in Part I, the Steering Group’s initial approach was not to adopt notice-filing but to amend the current scheme of registration. It put this forward as the favoured option in its consultation document. The Diamond report also made a number of proposals for improving the existing scheme, but in this case intended only as a temporary measure pending implementation of the wider proposed notice-filing system.[2] Some of the proposals found their way into the unimplemented provisions of the Companies Act 1989. Before we turn to notice-filing, we explain briefly why we have rejected the approach of amending the current scheme.
4.6 In what follows we explain the detail of how a notice-filing system might operate and suggest that such a system would fulfil the aims identified in Part III very much better than the current registration scheme does.[3] We have drawn heavily on the work done by the Steering Group and by the Crowther and Diamond reports, as well as on the experience of overseas jurisdictions that are operating a notice-filing system.[4]
4.7 Typically, the notice-filing systems of other jurisdictions that we have considered operate in the following way. A ‘financing statement’ is registered at a central registry, usually electronically. The statement provides brief details of a transaction or series of transactions that secure payment or performance of an obligation. It may be filed before or after the transaction is entered into, and the security agreement itself is not sent to the registry. The legislation sets out a series of rules relating to the priority of filed interests, with priority generally being determined by the date of filing (although there are a number of important exceptions[5]).
4.8 The overseas systems deal with more than notice-filing for company charges, as they apply notice-filing to some quasi-securities and they apply regardless of the legal personality of the debtor. They also include a statement of the rules on the creation, attachment and perfection of securities and of the remedies on default (amounting, in effect, to a partial codification of the law of security). These points are not considered in this Part.[6]
4.9 These notice-filing systems rest on three principles:
(1) filing is not necessarily in relation to a specific transaction, but is a notice that a person has taken or intends to take a non-possessory security over a designated asset or class of assets;
(2) thus the secured party can file a notice to protect the security interest either before or after the security is created,[7] with (once all the other elements of a perfected security agreement are in place) priority normally going back to the time of filing of the financing statement; and
(3) as a consequence of this, and also to reduce the burden of filing and to allow for a purely automated system, transaction documents are not filed and particulars to be filed are kept to a minimum, it being left to a searcher to get the information she wants from the company or chargee.
4.11 The first change would be as to the information to be registered on what we shall call the Company Charges Register.[8] Registration of detailed particulars of the charge would be replaced by the ‘filing’ of a financing statement that would contain only brief particulars.[9] It would not be necessary to send either the original security agreement, or even a copy of it, as part of the process of filing.[10] One advantage of cutting down the amount of information required to be on the Company Charges Register would be that it would assist the operation of a computer-based system, by making registration simpler and quicker. In effect filing could be done on-line by a party (normally the creditor) entering simple details into boxes onto a computer screen and clicking the appropriate buttons.[11] The details will then appear automatically on the register without the need for human input at Companies House; the party filing would take responsibility for the accuracy of the particulars in the financing statement and would bear the risk of any mistakes. Searching could also be carried out on-line.
4.12 Secondly, filing would not be dependent on a charge already having been created. The financing statement could be filed in advance and (subject to what we say about security that qualifies as a ‘purchase-money interest’[12]) would operate to preserve the priority of any charge subsequently created that falls within the scope of the financing statement. This would enable a creditor contemplating taking a charge to ensure that no other charge, already created but not yet registered, will have priority: it would also allow a creditor who has filed to be confident that it will have priority over most other charges[13] even if they are created, and even registered, before its own is completed. Notice-filing also permits the filing of a single financing statement to cover a series of transactions, rather than requiring an individual filing for each transaction.[14]
4.13 Thirdly, subject to any special rules, it would produce a system of priorities based principally on the date of filing of the financing statement, rather than the date of the creation of the security interest. Questions concerning the legal or equitable nature of the interest would cease to matter for this purpose; and questions of notice would be of far less importance than they are under the current law.[15]
4.14 Fourthly, it would bring about a significant change in the interrelationship between the Companies Register and specialist registers, in particular that operated by the Land Registry. At present the validity of a charge as against a subsequent chargee of the same land depends on the first charge being registered at Companies House within the 21-day period. Under the notice-filing system that we propose, priority of charges over land would be determined solely by the rules applying to registered land. For the purpose of information to the public it could be required that the charges be registered on the Company Charges Register (possibly through the Land Registry forwarding on the information) but neither the validity nor the priority of the charges would depend on this.[16] The system would also have this result in relation to the other specialist registries.
4.15 We note at this point that, with one exception, we do not envisage that possessory securities such as the pledge would be brought within the scope of the notice-filing system that we are outlining.[17] This was an exclusion the Steering Group also suggested in its Final Report.[18] Where there is actual possession by the creditor, the existence of the pledge would be evident to third parties, and hence the ‘false wealth’ risk would not apply: perfection is achieved by such possession. Similarly, where the creditor has constructive possession of goods that are in the hands of a third party who has attorned to the creditor, the existence of the pledge would soon be found out.[19] However, the situation is different where the goods are in the hands of the debtor and the debtor attorns to the creditor. It would be difficult for a third party to find out that the debtor’s apparent possession is subject to the creditor’s security in the absence of any requirement to register.[20] Currently, such an attornment (if in writing) would require registration as a bill of sale or under the Companies Act 1985, s 396(1)(c).[21] We think that such attornments should continue to be registrable under a notice-filing system.
4.16 Trust receipts (given when a pledgee allows the pledgor to have the goods or documents of title for a limited purpose, such as for sale as agent) are regarded as a method of securing the continuance of the pledge rather than as an independent security device, and are not registrable under the current company charges registration scheme.[22] They do create a temporary form of non-possessory security. However, they do not seem to pose a great threat to third parties. By definition the debtor has authority to sell the goods or documents so that a purchaser will take free of the pledge and the situation is unlikely to last long enough to mislead other third parties into thinking the debtor owns the assets concerned outright. It would be possible to do as the SPPSA does and hold that the pledge will remain perfected only if the debtor has possession of the goods or documents for less than 15 days. Perhaps because of this the SPPSA applies not only when the goods are handed over for the purpose of selling them but also for such things as processing with a view to sale or trans-shipping. We would welcome consultees’ views on whether there should be a similar provision in respect of a notice-filing system for companies.
4.18 We also note that in our provisional view notice-filing should not apply to any form of security that arises through the operation of law rather than by agreement of the parties.[23] Such interests are generally excluded (at least in part) from the scope of the overseas systems.[24] We propose that notice-filing should not apply to security created by operation of the law.
4.19 Under the Companies Act 1985, the particulars that currently have to be supplied to the registrar are set out in secondary legislation.[25] The present forms used by Companies House[26] for registering a mortgage or charge[27] require the name and number of the company; the date of the creation of the charge; a description of the instrument (if any) creating or evidencing the charge; the amount secured by the charge; the names and addresses of the persons entitled to the charge; short particulars of all the property charged; details of the presentor; particulars as to commission allowance or discount, and a signature of the company or the chargee.[28] In contrast to the sometimes lengthy details that are often supplied in practice under the current scheme, a financing statement may be rather less detailed.
4.20 The Crowther, Halliday and Diamond reports all briefly considered financing statements, and made a number of common suggestions about the contents, which we note below.[29] Whilst the approach taken by the overseas systems obviously varies, there are many similarities as to the information required to be contained in the financing statement.[30] Sometimes the requirements are set out in the primary legislation, but it is more usual to have detailed secondary legislation setting out the full requirements.[31]
4.21 We think that, in general,[32] all that is needed on the financing statement is the following information:
(1) the names, Companies House registration numbers and addresses of the parties;
(2) a general description of the type of property subject to the security (including, where appropriate, an indication that its proceeds are included);
(3) (where filing is by a party other than the chargor) a statement that the chargor has consented to the filing being made;
(4) an indication of the period of validity of the security agreement;
(5) whether the charge is fixed or floating (or both);
(6) where applicable, any unique serial number identifying the secured asset; and
(7) confirmation that the chargor is either the beneficial owner of the property charged or that it holds it in trust.
We consider (1) and (2) at this point; items (3), (4), (5), (6) and (7) we will discuss later as they become relevant. [33]
4.23 The question of whether the creditor’s identity should be given is more controversial. The question has been raised as to whether any aspect of the chargee’s identity should be revealed on the financing statement. This is because of concerns that such disclosure might hinder the availability of credit where banks and other potential lenders were made the subject of campaigns of intimidation or attack by pressure groups or individuals on the basis that they were extending financial assistance to companies that were deemed by some to be carrying on controversial forms of business.[34] The provision of information about the identity and address of the chargee would serve a useful purpose in the context of a public notice of security (for instance, it would provide a point of contact other than the company for other potential secured parties), but we would welcome the views of consultees on whether the problem of possible ‘improper’ use of such information is sufficiently serious to justify not disclosing the chargee’s identity. (We note that the overseas systems all seem to require this information to be included.)
4.24 There should also be an indication of what the secured property comprises. Typically, the overseas notice-filing systems require either a description or a classification of the secured property. The Saskatchewan requirements, for example, provide for describing the collateral by item or kind, or as “goods”, “chattel paper”, “security”, “document of title”, “instrument”, “money” or “intangible”. Alternatively, a statement can be given that the security interest has been taken in all the debtor’s present and after-acquired personal property (allowing for exceptions of certain things).[35] The New Zealand scheme is a wholly electronic one and requires identification of the collateral type being registered from an on-screen choice of 13 types, such as various sorts of goods (such as livestock, crops or “other”); documents of title; chattel papers; investment securities; negotiable instruments; money; intangibles; “all present and after acquired personal property” and “all present and after acquired personal property except …”.[36]
4.25 We provisionally think that a brief description of the property or type of property charged should be included, but given that the purpose of the notice-filing system is to provide only a warning of the possible existence of a charge, the description does not need to be detailed. We would envisage the kinds of description required in Saskatchewan or New Zealand being appropriate: if the system were to operate electronically (as we hope that it would), a list of options could be presented on-screen to the user in a manner similar to that provided under the New Zealand legislation. We also provisionally think that a party should be able to indicate whether it intends the security interest to extend to the proceeds of the secured asset: this is a point we discuss later in this Part.[37] (We also discuss the other suggested requirements later in this Part when they arise in context.[38])
4.26 Although the Steering Group had recommended that the financing statement indicate whether the charge is in respect of a monetary obligation, and, if so, the amount secured,[39] we do not think that this is necessary. It is not required in the overseas systems, and would be of limited use, given that it might well be out of date by the time of searching.[40] The notice-filing system simply warns that a security interest may exist on the specified property, it then being up to the searching party to contact the company for details of the obligation secured and the exact indebtedness. Nor do we think it necessary for the financing statement to state the date of the security agreement.[41]
(1) the names of the debtor and secured party (although we ask consultees for their views on whether the creditor should be identified at all);
(2) the Companies House registration number of the debtor and, where appropriate, the secured party;
(3) a brief description of the secured property, including, where appropriate, an indication that the proceeds of the secured property are included (we ask consultees for their views regarding the level of detail to be given in order to identify the secured property).
(In addition, we will suggest later that the financing statement should indicate where the party registering the charge is not the debtor, confirmation that the debtor has consented to the filing; a statement of the period of validity of the security agreement;[42] whether the charge is fixed or floating (or both); where applicable, any unique serial number identifying the secured asset;[43] and whether the chargor company is acting as a trustee.[44] There might have to be additional requirements of an administrative nature.[45])
4.30 The form of the financing statement will depend in part on the nature of the register itself. A notice-filing system that did not involve sending the charge instrument would enable a wholly electronic system of filing to be introduced.[46] Electronic filing is permitted in some of the systems operating in America and Canada. The New Zealand system provides for a wholly electronic filing system: if financing statements are submitted in a form that does not enable the data to be entered directly by electronic means, they will not be registered.[47]
4.32 The Steering Group discussed in a different consultation document the question of electronic filing at Companies House, and proposed a general power enabling the registrar to prescribe the form and manner of delivery of information.[48] The Steering Group expressed surprise that a majority of consultees were against the mandatory electronic filing of some or all information at Companies House, and suggested that the lack of such a power could eventually become a structural deficiency in company law, so far as the provision of public information is concerned. In spite of the responses, the Steering Group suggested that the case for requiring certain kinds of information to be filed electronically is likely to become overwhelming, although it did not envisage a requirement of this kind being imposed until most companies were already voluntarily making electronic filing, and expected extensive consultation to take place before such a power were used.[49]
4.33 The mandatory filing of electronic information other than that concerning the registration of charges is outside the scope of our Consultation Paper, but we are of the clear provisional view that for a notice-filing system to operate efficiently the ability to file and search electronically is important. Not to have electronic filing and searching would, in our view, negate many of the advantages of modern notice-filing systems over the current registration scheme, in terms of accessibility, simplicity and flexibility.[50] However, we would welcome consultees’ views on whether they think information - in respect of notice-filing, as opposed to other forms of information required under legislation - should be supplied in an electronic format. In responding to this point we ask consultees to note that there would be no need to supply the charging instrument itself (unlike under the present scheme).
4.35 A notice-filing system in respect of securities granted by companies differs from the wider register of security interests in personal property suggested in the Crowther and Diamond reports.[51] It would seem sensible for any new system that applied only to company charges to be administered by the Companies Registrar.[52] We are aware that the Steering Group recommended that the Company Charges Register (or Mortgage Register) should be abolished.[53] However, the Steering Group does not appear to have considered the implications of extending any notice-filing system to non-corporate debtors. It will be seen later that we provisionally propose that the notice-filing scheme should be extended to cover security interests created by non-corporate debtors. It would obviously be inappropriate for such interests to be registrable at Companies House, and it seems unnecessary for there to be two separate registers of security interests.[54] We therefore suggest that while the scheme is limited to company charges, financing statements be registered, not in the general Companies Register, but in the separate register of charges that the registrar is required to keep by section 401 of Companies Act 1985.[55] It is this register we refer to when we speak of the ‘Company Charges Register’. If and when the scheme were extended to security interests created by non-corporate debtors, the Company Charges Register could form the basis of the new, wider register. It would presumably be administered by another body and be re-named, perhaps as the Register of Security Interests.
4.36 There is some concern that not all information about companies would be on the Companies Register. However, we are not sure that this would be a particular problem given that searching any new Register of Security Interests would be a speedy task (and creditors are currently used to searching more than one register[56]). In any event, by the time such a new Register of Security Interests were operational, technology would presumably be sufficiently advanced to allow an electronic link between that register and the Companies Register (and any other specialist register), so that a single filing could be made to produce entries in both registers if that were desired. However, the actual creation and operation of such a Register of Security Interests is something that will obviously require detailed technical work.
4.37 Under the current company charges registration scheme, certain prescribed particulars, together with the charging instrument (if there is one), are sent to the registrar. A certificate is then issued by the registrar, which is conclusive that the requirements as to registration have been satisfied.[57] The checking of the particulars may involve the examination of a lengthy and complicated document, carrying with it the possibility of discovering errors which may result in the particulars form having to be sent back by the registrar, corrected and then returned, all within the original 21-day period. The Steering Group, when considering possible changes to the existing law (as its then-recommended alternative to notice-filing), stated that:
The problem of the conclusive certificate has been the most difficult obstacle to changes in the company charge registration system.[58]
4.38 The result of having a conclusive certificate is twofold. First, it provides a measure of protection to the chargee. In the event of errors in the particulars, an administrator, liquidator or other creditor will not be able to assert that those errors mean that the registered charge is invalid as against it.[59] Indeed if a certificate has been given, even if there are errors in the registration process or the detail recorded in the Companies Register, the secured charge is valid as to its terms. Secondly, in relation to its interaction with the Land Registry, the certificate proves that a charge over land is validly registered under the Companies Act 1985, and will not therefore be invalid for want of registration as against subsequent charges over the same land. (Where the charge is over registered land, the Land Registrar will note on the Land Register that the charge is subject to the provisions of the Companies Act 1985, section 395.[60]) The second point is considered later.[61] In this section we consider the question of errors in registration and the registrar’s certificate.
4.39 In a notice-filing system, as the Steering Group noted, only the particulars of the charge would be required to effect its registration:[62] the security agreement itself would not be filed or even sent to the registrar.[63] Indeed, if the system is to permit filing in advance of any security agreement being created, there might be no security agreement against which the accuracy of the financing statement could (even theoretically) be confirmed.[64] There would be no equivalent registrar’s certificate.[65] All that would be required to protect the security is that the required particulars be filed. The burden of correctly setting out the information shifts from the registrar to the party filing the financing statement. What happens if there are errors in the financing statement?
4.40 The starting point of all the systems based on UCC Article 9 is that errors or omissions do not invalidate the filing unless they make the financing statement “seriously misleading”.[66] The rule for seriously misleading errors seems to be aimed at cases in which it is not reasonably possible to discern from the financing statement who is the debtor or which specific asset is covered (for instance, where the error in the debtor’s name or the description of the asset means that it is not reasonably apparent who or what is meant). In such cases the financing statement will not be validly registered, or will not be valid as against that particular asset.
4.41 The test of whether an error is seriously misleading is generally said to depend on whether a reasonable search using the appropriate search terms (for example, the name or number of the debtor) would have revealed the financing statement.[67] Thus with computerised records what is seriously misleading will depend on the search facilities provided. If, for example, it is easy to search using multiple fields (if there are separate fields for different words from the company’s name and for the company’s registration number), it will be rare that the financing statement will not be discovered, even if the company has changed its name since the financing statement was filed. This approach does mean that as search engines become more sophisticated, fewer errors will be seriously misleading, but that seems an advantage rather than a disadvantage of this approach.
4.43 Nor will a misdescription of the assets covered invalidate the filing as a whole. What protects the other creditors is that, on the one hand, the chargee cannot claim greater rights than it in fact has under the security agreement and, on the other, if the secured collateral does not fall within the description in the financing statement, it will not be covered (although the correctly described collateral will still be validly covered[68]). Thus if the financing statement lists only one particular class of assets as being subject to the security agreement, whereas the agreement in fact covers a second class also, the chargee cannot claim priority over the second class of assets as against a subsequent chargee who, in reliance on the financing statement, has taken security over the second class of assets. The UCC provides that if a financing statement is incorrect, the secured interest is subordinated in priority to a conflicting perfected security interest to the extent that the latter holder gave value in reasonable reliance on the incorrect information. A purchaser of the secured asset takes free to the extent that it gave value in reasonable reliance on the incorrect information (and received delivery, in the case of certain secured assets).[69]
4.44 The UCC provisions just cited may be termed an ‘estoppel’ approach. Such an approach makes it clear that the secured party cannot claim a greater security interest than it has indicated in the financing statement. We wonder whether in addition there should be a provision allowing for damages to be awarded against someone who provides false information to the detriment of another.[70] Loss and damage to the debtor could be caused, for example, through the filing of an inaccurate financing statement. This might deter other lenders before the debtor finds out and has the offending statement corrected. However, this might be best left to the current law relating to misstatements. We would welcome the views of consultees.
4.45 The Steering Group also recommended a criminal sanction to help prevent the provision of false particulars or other information.[71] If this were to apply in the case of deliberate (or possibly reckless) provision of false information, this too would seem to be a useful additional deterrent.
4.48 We therefore provisionally propose following the overseas approach that serious errors or omissions in the financing statement should invalidate the filing. Whether an error or omission was seriously misleading would have to be determined by the courts, although it is possible that guidance could be given in the system itself by deeming that certain errors either were or were not seriously misleading.[72] Minor errors would not invalidate a filing but the secured party would not be able to claim a greater right than was claimed in the financing statement or was in fact given by the security agreement, whichever is the lesser.
4.49 Several of the overseas systems have a provision that an error may be seriously misleading even though no one actually was misled.[73] An advantage of such a provision is that it acts as a discipline to encourage the party filing the financing statement to ensure that the particulars were accurate. The alternative would be to have a provision that an error would not seriously mislead someone searching the register where it was actually known by that person to be an error, or that a seriously misleading error would actually have to prejudice the person claiming to be misled. We welcome the views of consultees on whether a person must actually have been misled in order for an error to be seriously misleading, and whether that person should actually have been prejudiced by such an error.
4.51 There are two aspects to the question of whether any new system should be compulsory. First, should compliance be compelled through the threat of criminal sanctions? Secondly, should there be civil ‘sanctions’ for not complying with the system? In summary, we provisionally think failure to participate in the system should not be a criminal offence, but that non-compliance should give rise to consequences relating to the validity of the charge as against third parties.
4.52 Under the current law, there is a duty on a company to register the charges it creates, default being punishable with a fine.[74] Both the Crowther and Diamond reports suggested that their proposed notice-filing systems should be voluntary.[75] The Steering Group indicated in its Final Report that it thought that it would be unnecessary to have a criminal sanction for failure to register a charge, as did a majority of those who responded to the earlier consultation document.[76]
4.53 These proposals might seem contrary to the aim of ensuring that the register gives the public warning of the existence of security interests over the company’s property. However, if as we propose below the sanction of invalidity is retained, the secured party who does not file will not, in the event of insolvency, be able to enforce the security against other creditors, whether secured or unsecured. Thus it is not clear that third parties will be prejudiced, and therefore a criminal sanction seems not to be justifiable. Therefore we provisionally agree with the suggestions noted above. Providing that there are commercial consequences for not filing along the lines of those we suggest in the paragraphs below, it seems to us to be unnecessary generally to impose criminal sanctions for failing to file a financing statement.[77]
4.55 The Steering Group noted in its Final Report that under its proposals for a notice-filing system the effect of failure to file a financing statement would be that, on the debtor’s insolvency, the charge would be invalid against the liquidator and unsecured creditors.[78] In addition, even before insolvency, a creditor who does not file risks loss of priority as against subsequent holders of security who file first. We think that the rules should make it clear that failure to file would also lead to a loss of validity of the security as against an administrator. As at present, we think that the charge should still be enforceable against the company by the chargee.
4.56 Under the overseas notice-filing systems, failure to perfect the security interest[79] renders it invalid, as against unsecured creditors, in the event of the debtor’s insolvency; and makes it vulnerable to loss of priority as against other secured creditors. The SPPSA, for example, contains an express provision that a security interest in collateral is not effective against a trustee in bankruptcy[80] or a liquidator, if the security interest is unperfected on the day that the bankruptcy or winding up order is made.[81] As against other secured creditors, the effect of failure to perfect a security interest is a priority point.[82]
4.60 The Diamond report referred to the Canadian Uniform Personal Property Security Act and noted that, as the financing statement only provided minimal information and did not show whether a security agreement had actually been entered into, an important part of that registration system was that those with a legal or equitable interest in the collateral should be able to demand from the secured creditor information as to the amount due and the property subject to the security interest.[83] Implicitly approving the Canadian provisions, the Diamond report also suggested that the system it was proposing should expressly state that the secured party should be estopped from denying the accuracy of its statements when responding to a request for information.[84]
4.61 The systems in Saskatchewan and New Zealand are similar in this respect. A debtor, creditor[85] or person with an interest in the personal property of the debtor (or an authorised representative) may make a demand for certain information.[86] The information that can be requested is generally one or more of the following: a copy of the security agreement that provides for the security interest; a written statement of the amount and terms of payment of the indebtedness; a written approval or correction of an itemised list of personal property attached to the demand, indicating which items are collateral; a written approval or correction of the amount and terms of payment of the indebtedness; and sufficient information as to the location of the security agreement (or a copy of it) to enable a person entitled to receive a copy of the security agreement to inspect it.[87] The secured party has 10 working days to comply,[88] and a court order may be obtained to compel performance.[89] Failure without reasonable excuse to comply with the demand, or the provision of incomplete or incorrect information, entitles the person demanding the information to apply to the court to compel compliance.[90] The court may, amongst other things, declare that in the event of non-compliance with the court order to respond to the demand, the security interest is unperfected or extinguished and that any related registration is discharged.[91] Where the person to whom the demand was made no longer has an interest in the obligation or property of the debtor that is subject to the demand, she must disclose the name and address of the immediate successor and the current successor, if known.[92]
4.62 It is our provisional view that similar provisions to those in Canada and New Zealand would be needed. However, we are not sure that the secured creditor should be required to produce a copy of the security agreement itself, rather than merely relevant details. The current company charges registration scheme does not permit the instrument of charge to be viewed by persons searching the register, and, whilst a company has an obligation to keep copies of instruments of charges it creates,[93] the right to inspect such copies is limited only to existing creditors or members of the company.[94] We are concerned that a secured creditor might be obliged to produce a security agreement that contains commercially sensitive matter of no relevance to the party seeking the copy of the agreement (although under the current law presumably someone could find this information out from the company by purchasing shares and thus becoming a member of the company).[95] We ask for views.
4.64 The Diamond report recommended that there should be provision for an estoppel to operate as to the details contained in the financing statement. In Saskatchewan, though not New Zealand, there is express provision that the secured party who replies to a demand is estopped for the purposes of the SPPSA from denying the accuracy of the information or that the copy of the security agreement provided is a true one.[96] Whilst it may already be the case that estoppel might operate in respect of information given by the creditor as a result of a request for information, we think that a new notice-filing system could usefully make express provision for this.[97]
4.66 We noted above that one of the aims of a notice-filing system is to provide a degree of public notice of the possible existence of certain encumbrances to those with no existing interests (such as potential creditors and possibly investors).[98] Would this aim be significantly hampered if there were no means for someone who has no existing interest to discover more details about the security interest than is contained in the financing statement? The financing statement alone may not be sufficient for a commercial decision on whether to invest to be made but it will alert any potential investor to the existence of certain encumbrances on the company’s assets. Does the reduction of the quantity of information that will be on the Company Charges Register mean that we need a provision to allow potential investors, and not just parties with existing interests, to obtain information?
4.68 Under the current law a company is required to keep its own register of all charges over its property, whether or not such charges are registrable at Companies House.[99] A clear majority of those who responded to the Steering Group’s consultation question were in favour of retaining the requirement for companies to maintain registers of their own charges. Nonetheless, in its Final Report, the Steering Group recommended the abolition of the requirement. It noted the statutory right for members and creditors to inspect a company’s instruments of charges,[100] but also that abolition would be apparently to the detriment of potential creditors. However, it went on to say that:
in practical terms, a potential creditor can be expected to note the existence of the charges from the information at Companies House and, if it is then refused access to copies of the instruments creating prior charges, it would be able to withhold its proposed loan.[101]
In the light of this, no further safeguard was felt necessary.[102]
4.70 However, later in this Consultation Paper we provisionally propose widening the list of charges and other security interests that should be registered, so that very few would be omitted save those that a third party is readily able to find out about.[103] If that were done, the case for retaining the company’s own register would be weaker.
4.72 As we have noted, under the current scheme, a potential investor can have sight of the Companies Register (which does not contain a copy of the charging instrument) and also the company’s own register. However, beyond this, requests to the company would have to be made, failing which, the decision not to invest could be taken. We do not think the situation would be that different under a notice-filing system. The overseas systems we have considered do not provide for additional information to be supplied to the wider public: the list of those who can make a request of the secured party is limited.[104] Other parties may approach the debtor for information and, if the information is not forthcoming, may decide not to deal with or invest in the debtor. Provisionally we agree with this approach, and do not think that there should be provision for a potential investor to demand additional information about the security interest detailed in the financing statement. Our concerns about the availability of commercially sensitive (but irrelevant) information being made available on request are heightened when the requesting party does not have an existing relationship with the company, but is instead a general member of the public.
4.74 Under the current company charges registration scheme a charge has to be delivered to, or received by, the registrar within 21 days after the date of the charge’s creation.[105] Late registration requires the court’s permission. Under a notice-filing system, the situation is different. Filing is voluntary and may be done at any time,[106] except that a charge for which no financing statement has been filed will be invalid against other creditors if the debtor goes into administration or insolvency. Thus administration or insolvency acts as a ‘cut-off’.
4.75 The Crowther report suggested that setting a time limit caused inconvenience and expense and did not appear to serve any useful purpose. It was thought that subsequent encumbrances were adequately protected by the rule giving them priority over a previous unregistered interest.[107] We agree with this. We provisionally propose that a creditor should not be required to file within a certain time after creation of the security interest.
4.77 The Crowther report proposed that a security interest filed more than 21 days after its execution should be void against the trustee in bankruptcy or liquidator in the event of the debtor becoming bankrupt or going into winding up within three months of the filing, so as to prevent a secured party gaining an unfair advantage over other creditors by deferring filing until the eve of bankruptcy or winding up.[108] Similarly, the Diamond report recommended that although there should be no mandatory requirement to file within 21 days (or at all), a financing statement should not operate to protect a security interest created more than 21 days before the filing if insolvency occurred within 12 months of the date of filing.[109] Twelve months was chosen, rather than the three recommended in the Crowther report, as it was thought that fewer professional advisers would take the risk of deferring filing for the longer period than for the shorter one.[110]
4.78 In its Final Report the Steering Group rejected the idea that a charge should be invalidated if not registered a certain time before the chargor’s insolvency.[111] Insolvency was considered to be a:
defined point of which the world at large, and in particular the Registrar, has notice so that they can determine whether or not the charge may still be registered.[112]
As far as secured creditors in general are concerned we see no reason to disagree with this conclusion.[113]
4.79 We are hesitant, however, where the secured party is connected to the company, in particular a director.[114] A director is in a particularly good position to know when a company is approaching insolvency, and might be tempted to take a floating charge to secure money owed to her but (to disguise the company’s position) not file until the last minute. This would not prejudice secured creditors who, assuming they have filed, will have priority, but it might well prejudice unsecured creditors who have lent on the assumption that there is no floating charge over the company’s assets.[115] The Insolvency Act 1986, section 245, provides for the avoidance of floating charges created in favour of a connected person within two years of insolvency unless certain conditions are fulfilled (for example, that the charge was for new value received by the company); but this provision relates to the date of creation not the date of filing. In the past, late filing has required the consent of the court, which in the circumstances we envisage would certainly be withheld, but the court’s consent will not be needed under notice-filing. We think that there may be a case for preventing last-minute filing by connected persons.
4.81 Subject to what is discussed later in this Part concerning the filing of provisional financing statements,[116] once a financing statement has been filed, should it remain validly on the register indefinitely, or should it be subject to removal or renewal? Different approaches have been taken to this question by the overseas systems, and by the Crowther, Halliday and Diamond reports.
4.82 There is no common approach taken by all the overseas systems. The UCC Revised Article 9 provides generally for a period of validity of five years after date of filing, renewable by the filing of a continuation statement within six months before the expiration of the five-year period. On the expiration of the period of effectiveness, a security interest becomes unperfected.[117] The Saskatchewan system provides that registration is effective for the period indicated on the financing statement and may be renewed by filing a ‘financing change statement’[118] before the registration expires.[119] The New Zealand system provides that a registration is effective until whichever is the earlier of either the expiration of the term specified in the financing statement or the expiration of five years after registration, and can be renewed for the shorter of either the period specified in a financing change statement or five years.[120]
4.83 The Crowther report had proposed that, as under the version of the UCC Article 9 then in force, filing should be effective for five years and should be renewable for successive five-year periods. Non-renewal would result in the statement being removed on expiration of the five-year period and destroyed. However, in respect of certain types of corporate security, such as debentures and debenture stock, it was recommended that these should be valid indefinitely until vacated.[121] The Halliday report agreed with these proposals, but suggested that there should be provision to renew a statement within six months after its expiration.[122] The Diamond report, however, suggested following the method adopted by Saskatchewan: that of permitting the parties to specify in the financing statement the period of time for which it is to be effective.[123]
4.84 We agree with the Diamond report that having a five-year period, such as that of UCC Article 9, may put some secured creditors at serious risk of loss due to inadvertently failing to renew the notice.[124] It seems better to permit the parties to specify in the financing statement the time for which the filing is to be valid.
4.87 After a financing statement has been filed, changes may occur that render the filed information inaccurate: the type or nature of the secured asset may change, the indebtedness under the security agreement may have become wholly or partially discharged, or the debtor or creditor may transfer its interest to another party. Whilst the register may be rendered out of date by such changes, the effect of any resulting inaccuracies - if the register remains uncorrected - will vary. Many would be unlikely to cause any significant prejudice to a potential creditor who is searching the register, but others might do so. If changes have occurred or the indebtedness has been discharged, should the debtor or creditor be required to amend the filed information, or can this be done on a wholly voluntary basis?Under the current law, there is no obligation to register an alteration of an existing charge,[125] although there is provision for the voluntary delivery to the registrar of memoranda of satisfaction or release.[126]
4.88 We approach this question by recalling that a notice-filing system is intended to provide only a limited amount of information to a person searching.[127] We discussed earlier in this Part the minimum information that we thought ought to be included on a financing statement.[128] The reason for recording changes would be to ensure that the register can still fulfil its ‘warning’ and priority functions.[129] What changes are likely to be important to a person searching the register? On the basis that the list of particulars is as we have provisionally proposed,[130] we think that a person searching would want to know if there were important changes to the property covered by the charge (including whether there was indeed a security interest still in existence) or to the parties involved, such as where the charge had been assigned. Minor changes are probably of less importance to the inquirer, given that in any event she will need to seek further information from either the debtor or the secured party.
4.89 Changes that bring more property within the scope of the charge will not be enforceable by the secured party, in the event of insolvency, unless they are reflected in the financing statement. Nor will they get priority if the property is charged to a subsequent secured creditor. As the Steering Group noted, any addition to the property charged would result in a new charge being created, as would a change to the nature of the charge.[131] It is rather the debtor who may be prejudiced if the range of property covered decreases or the security is terminated altogether but the financing statement remains unaltered. The Steering Group noted that in practice it is common for charges to be satisfied but memoranda not to be filed.[132]
4.90 How should changes to the security or the termination of liability be dealt with?[133] The overseas systems have approached the question of recording changes to the filed particulars (including where there is no outstanding secured obligation) by the use of ‘financing change statements’.[134] The Saskatchewan and New Zealand systems provide that, where there have been changes,[135] the debtor,[136] or any person with an interest in property that falls within the description of the collateral on the financing statement, may give a written demand to the secured party to amend or discharge the registration.[137] The secured party is given 15 days after the demand in which to comply, failing which[138] the person giving the demand may register the financing change statement herself.[139] In the case of certain security interests, different procedures apply.[140]
4.91 In addition to the debtor being able to demand a financing change statement be filed, the Saskatchewan and New Zealand systems provide that an amendment to, or discharge of, a registration may be effected by the secured party registering a financing change statement at any time during the period of effectiveness of the registration.[141]
4.92 The provisions operating in Saskatchewan and New Zealand are sensible, both for removing filings where there is no outstanding secured obligation and for the recording of other changes. They allow for a chargor to remove inaccurate assertions of indebtedness in a way that reduces the possibility of fraudulent cancellation, whilst providing the chargee with notice of the proposed amendments together with an incentive for it to comply with the procedure through the sanction of obtaining a court order (presumably a costs penalty could result, to give this provision ‘bite’).[142] We provisionally propose provisions allowing the debtor to demand that a change in an inaccurate financing statement be made, or an outdated financing statement be removed, by the secured party within a certain period, failing which the debtor may make the change.
4.93 It is possible that the parties to a security agreement may wish to dispose of their interest to another party whilst maintaining the security: the creditor may wish to sell or transfer its secured interest to another, or the debtor may wish to sell or transfer the asset subject to the charge.[143] In each case the creditor will be concerned also that the charge should not lose its priority. In the case of a security that has been registered under a notice-filing system, a change of either creditor or debtor will mean that the original financing statement is no longer accurate. In this section we consider whether the original filing should have to be amended in the light of such changes. The overseas systems have specific rules relating to the transfer of interests by both the debtor and the secured creditor, although in both cases the onus is on the secured party to take some action to ensure continuity of priority.
4.94 The SPPSA provides that where a secured party transfers its security interest in whole or part, a financing change statement may be registered disclosing the transfer,[144] and in the case of partial transfers describing the collateral in which the interest is transferred. After registration of such a financing change statement, the transferee becomes the secured party for the purposes of registration (and, by extension, the priority) provisions of the legislation.[145]
4.95 In the absence of such a financing change statement the register would be inaccurate, as it would record the wrong name as creditor. This would mean that persons searching the register would not be able to contact the creditor for details of the secured interest (assuming they chose not to contact the company itself[146]). Whilst this may not be an overly significant factor (in most cases, information will probably be sought from the company rather than the creditor, and subsequent potential creditors are more likely to be concerned about the nature of the security interest rather than the identity of the holder), it is possible that such an inaccuracy might result in the financing statement being ‘seriously misleading’, or result in an estoppel operating to prevent the unnamed creditor from asserting it was a secured party. Such a result would go towards ensuring the accuracy of the register, and filing such a financing change statement should not be a particularly onerous task for the new creditor to perform. Our provisional view, on balance, is therefore that there should be a similar provision, to enable the ‘new’ creditor to file a financing change statement to amend an existing one.[147] However, filing would not be necessary to preserve either the validity or the priority of the charge.[148]
4.97 Here we are dealing with the transfer by the debtor of its interest so that there is a new debtor in relation to the secured property. This situation is recognised under the current law: the Companies Act 1985 requires that, where a company has acquired property that is already subject to a charge that would require registration had it been created by the company after it acquired the property, it must be registered.[149]
4.98 Under the SPPSA, where a security interest is perfected by registration, and the debtor transfers all or part of its interest in the collateral, that security interest may be subordinated to other interests perfected or registered following the transfer if the secured party does not take steps to perfect its interest against the transferee. The problem is that when the collateral charged by a company (D1) to a creditor (C1) is transferred to a second company (D2), a subsequent creditor (C2) thinking of lending to D2 may assume that the collateral is unencumbered. There is no problem if a fresh financing statement is filed by C1 against D2 before C2 files. However, it would be unreasonable to require C1 to file immediately. C1 is therefore given 15 days’ grace. The rules vary according to whether the creditor (C1) has or has not agreed to the transfer. In essence, if C1 has consented, to preserve its priority it must file against D2 within 15 days of the transfer.[150] If C1 did not consent, it has 15 days from when it has sufficient knowledge of what has taken place to file against D2.[151] (It may be that the property has been transferred more than once; then the 15 days run from when C1 had knowledge of the most recent transferee who still has the collateral and of anything else C1 needs to know to file; C1 need not bother with intermediate transferees.[152])
4.99 The name of the debtor being wrongly recorded on the register as a result of a transfer would be a more serious inaccuracy than the name of the creditor: it would mean that there was a risk that the existence of security interests would not be revealed on a search of a company name. We therefore think that there should be a similar provision, so that where a company acquires property that is subject to a registrable security interest from the existing debtor (so that it has, in effect, become the new debtor),[153] a financing statement would have to be filed (where there was no existing filing[154]) or an existing one amended in order to preserve priority within the rules of any new system.
4.101 Whether the change relates to the nature of the charge or to the parties (through transfer), there is no compulsion on any party to record changes (subject to the procedure for demanding that the creditor file a financing change statement). We do not think that this will mean that changes are not recorded. Generally, it is in the debtor’s own interest to ensure that the record of its indebtedness is accurate. In addition, we have considered whether there should be provision for invalidating the financing statement as against third parties where it contains seriously misleading errors.[155] Even if a new notice-filing system were not to have the specific rules relating to subordination that we have considered in the above section, the possibility that a failure to record changes might result in the originally filed financing statement becoming seriously misleading would act as an additional encouragement to the creditor to ensure that significant changes would be recorded.
4.102 We consider the use of financing change statements further when we discuss the filing of provisional financing statements in advance of the creation of the charge.[156]
4.104 The Crowther report suggested that the financing statement should be signed by the secured party and, where filing takes place before the creation of the security agreement, by the debtor.[157] At the time of the Crowther and Diamond reports, and of the Steering Group’s consultation, UCC Article 9 required that the financing statement be signed by the debtor.[158] Although some of the Canadian systems require a signature,[159] UCC Revised Article 9 no longer requires one.[160] Were it desirable to keep the requirement of signature as part of a computerised filing system, some definition of what would amount to ‘signature’ would have to be developed, but we regard this as a secondary issue.[161] The question of whether or not the financing statement should be signed should be determined on the merits and not on a supposed technological question.
4.105 The Steering Group in its Final Report opposed a requirement for both the chargor and the chargee to sign the financing statement.[162] Instead, it proposed that if the particulars were filed by someone other than the chargor and the charge has not yet been created, then that party should be required to verify that the chargor has consented to the filing. This would be supported by the proposal for the deliberate filing of inaccurate particulars being an offence.[163]
4.106 In our provisional view, there is no need for the financing statement to be signed by either chargor or chargee.[164] We agree that where the financing statement is filed by someone other than the chargor, the person filing should be required to confirm that the filing is being made with the consent of the chargor (for example, by the chargee confirming on the financing statement that the chargor has consented). There should also be a mechanism to ensure that the chargor is aware of the filing after it has been made (for example, by the debtor company being sent either a copy of the filed financing statement or at least notification that such a statement had been filed[165]). We agree with the Steering Group that there should be a sanction on a party who deliberately provides false or inaccurate information.[166]
4.107 We asked earlier in this Part whether there should be a provision for damages to permit the corporate debtor to claim compensation from the person filing false information for damage suffered as a result. Such a provision might be sensible in this context, but we would welcome the views of consultees.[167]
(1) the person filing should be required to confirm that the filing is being made with the consent of the chargor;
(2) there should be a mechanism to ensure that the chargor is aware of the filing after it has been made; and
(3) there should be a criminal sanction on a party who deliberately (or possibly recklessly) provides false or inaccurate information.
We also ask consultees whether damages should be available for a party that has suffered as a result of this (and, if so, whether this should depend on proof of negligence).
4.110 The notice-filing systems in operation in overseas jurisdictions generally permit the filing of a financing statement either before or after a security agreement is made.[168] The advantage of filing such ‘provisional’ financing statements is that, if the security interest is created subsequently, priority is generally backdated to the date of filing. Thus a potential creditor can conduct negotiations with the company in the knowledge that by filing such a provisional financing statement it can preserve its priority against other security interests that might be granted during the conduct of negotiations.[169] Both the Crowther and Diamond reports recommended that filing should be possible even though not linked to an existing security agreement.[170] The Steering Group’s Final Report also proposed that particulars could be filed in advance.[171] We provisionally propose that it should be possible to file a financing statement before or after a security agreement is made.
4.111 As the Steering Group pointed out, where a charge has not in fact been created, it is not in the interest of a chargor company to allow a notice of that non-existent charge to remain filed, as it may affect the company’s credit rating and its ability to raise finance.[172] It would therefore be sensible to have some provision for removing such provisional financing statements from the register. The chargor cannot be permitted simply to file a cancellation statement without more because of the risk of a chargor fraudulently cancelling the financing statement for a valid charge. The putative chargee, on the other hand, would have no incentive to incur the time, cost and inconvenience of filing a notice of cancellation in respect of what were ultimately unsuccessful negotiations.
4.112 The Steering Group thought that such a problem could be solved either by requiring the filing of a confirmation notice in the event that a charge had been created, or by requiring a cancellation notice in the event that it had not.[173] The Steering Group preferred the latter approach, on the ground that it was less likely to have to be used than a confirmatory approach. This problem has been addressed in the overseas systems we have considered through the use of financing change statements. As we noted earlier, the Saskatchewan and New Zealand systems allow a debtor, or any person with an interest in property, to give a written demand to the secured party in certain circumstances, one of which is where a financing statement has been registered and no security agreement exists between the secured party and the debtor.[174] Failure to comply can result in the person giving the demand registering the financing change statement itself.[175]We think that a similar provision to that operating in Saskatchewan and New Zealand should be adopted.[176]
4.115 However, we do not think that indicating whether a charge has actually been created at the time of filing would in reality be of much use. Even if such an indication were made there would not be a way of telling the true position from a search of the register. Only half the picture would be revealed: an indication that a charge had actually been created would reveal this fact to a searcher, it is true, but equally an indication on the financing statement that no such charge had been created would not mean that, at the time of searching, there was no charge in existence. A charge might been created between the date of filing and the date of searching but it would not appear on the register as having come into existence. We are provisionally of the view that there should be no requirement to indicate whether or not at the date of filing a charge has in fact been created. As we have noted, the register cannot hope to give a complete picture of the encumbrances that are on a company’s assets: all such a system will do is to provide a warning that such encumbrances might exist, and that therefore the person searching should make further enquiries of the company.[177] We therefore provisionally propose not to require an indication of whether the charge has actually been created at the time of filing, but we would welcome the views of consultees on this point.
4.116 A system that permits the filing of a financing statement in advance of the creation of a security interest enables a single filing to be made in respect of a number of secured transactions between the same parties.[178] This could greatly ease the administrative burden of dealing with such a succession of security interests, all of which, under the current scheme, would need to be individually registered. The New Zealand and Saskatchewan systems generally permit the financing statement to relate to one or more agreements, in addition to providing for such statements to be filed whether or not the security agreement has been executed.[179] The Diamond report suggested that this flexibility would allow for the turnover of shares in a portfolio,[180] a point which generated some discussion in the Steering Group’s consultation document and to which we return later.[181]
4.117 We ask consultees whether they agree that an important advantage of notice-filing would be that it would permit a single filing to cover a series of security transactions between the same parties.[182]
4.118 In this section we consider how any new system of notice-filing should deal with the question of priorities between competing secured interests. We noted earlier in this Consultation Paper[183] that one aim of any new system of notice-filing should be to set out a clear and secure system of priorities as between registrable charges.[184] The overseas notice-filing systems include specific rules setting out the priority position for a number of situations.
4.119 The UCC approach is that for registrable security interests that have already been created, filing both perfects the security and, in general,[185] ensures its priority over security interests that are only perfected later. (We also saw earlier that filing may take place in advance, in which case the security has priority as from the date of filing.[186]) Neither the distinction between legal and equitable interests nor notice (whether actual or constructive) has any role to play.[187] This approach has been followed in the Saskatchewan and New Zealand systems and was advocated in the Diamond report.[188] In this section we begin by briefly considering any specific consequences of not filing a financing statement. We go on to consider the impact of notice-filing on priority disputes as between registrable company charges (considering both fixed and floating interests), and as between registrable and unregistrable interests. We also consider the position of innocent purchasers of assets that have been charged.
4.120 As we noted earlier, failure to perfect the security interest renders it invalid, as against unsecured creditors, in the event of the debtor’s insolvency; and makes it vulnerable to loss of priority as against other secured creditors.[189] The SPPSA expressly provides that a security interest in collateral is not effective against a trustee in bankruptcy or a liquidator, if the security interest is unperfected on the day that the bankruptcy or winding up order is made.[190] As against other secured creditors, the effect of failure to perfect a security interest is not that it is invalid as against them[191] but that, unless the matter is dealt with by one of the specific rules, a perfected security interest will take priority over an unperfected one.[192] As between two competing unperfected interests, priority is determined by date of attachment.[193]
4.122 Where priority disputes arise between security interests for which a financing statement has been filed, the determination of priorities in theoverseasnotice-filing systems is generally based on the date of filing of a financing statement, rather than the date of the creation of the security interest.[194] This ‘residual’[195] rule will in certain cases be overridden by specific provisions.[196]Save in relation to the purchase-money interest (an important exception which we deal with later in this Part), these specific provisions are not, we think, relevant to the limited notice-filing scheme for only company charges that we are considering in this Part.
4.124 Determining priority by date of registration would be a significant difference to the current scheme under the Companies Act 1985.[197]Another fundamental difference between the existing registration scheme and the notice-filing system would be that a financing statement may be filed and priority secured before the charge is created.[198] We have already explained why we think this would be advantageous.
4.126 The UCC Revised Article 9 does not recognise a floating charge but does incorporate a floating lien concept, that is, a fixed charge with provision for subordination. Thus Section 9-204 permits a security interest to operate over after-acquired property (except for consumer goods). Section 9-205 validates a provision giving the debtor liberty to use, commingle or dispose of all or part of the collateral. These provisions can be said to have conceptual parallels to the floating charge.[199]
4.127 We consider that there is a clear need for a form of security interest that, like the floating charge, permits the company to dispose of its assets in the ordinary course of business without obtaining the consent of the creditor for each disposal.[200] The Crowther report suggested that this be achieved by adopting the American concept of a fixed charge over shifting security. This would suggest that there would be no need to preserve the floating charge as a security device, but the Crowther report thought that it should remain, given that this form of security is so widely used.[201] The Diamond report also suggested that “the floating charge or something like it is here to stay.”[202] Its existence is connected to the question of preferential debtors (which we discuss below). The question then is how to accommodate the concept of a floating charge within a new notice-filing system.[203]
4.128 In terms of priority, the essential difference in principle between the floating charge and the fixed security interest on shifting assets operating under the UCC is that under the UCC the time when the charge crystallises does not determine the priority position of the secured party. Indeed the UCC does not recognise the concept of crystallisation (although presumably under the fixed charge over shifting assets there must come a time when the debtor is no longer free to dispose of the property subject to the security interest[204]). Under UCC Article 9, priority is determined from the date of filing of the financing statement.[205] This obviously gives the floating lien a stronger position than a bare floating charge as it operates in England and Wales, which until the point of crystallisation will always rank behind a later created fixed charge.
4.129 However, in current practice, floating charges often appear with negative pledge clauses,[206] which, if effective as against subsequent secured parties, give priority to the floating charge even before it crystallises. It is true that there is doubt about the effectiveness of negative pledges, in that noting them on the current particulars filed with the registrar may not give constructive notice of them, but a subsequent chargee who in fact discovers the existence of the clause will take subject to it. In Scotland negative pledge clauses must be mentioned in the particulars registered,[207] which position the Diamond report recommended should be introduced for England and Wales.[208]
4.131 The Insolvency Act 1986, section 175 provides that in a winding up preferential debts are to be paid in priority to all other debts, and that they rank equally amongst themselves after the expenses of the winding up (or abate in equal proportions), and that they have priority over the claims of floating charge-holders (and that they shall therefore be paid out of any property comprised in or subject to that charge). The categories of preferential debt are set out in the Insolvency Act 1986, Schedule 6, and fall into six categories: debts due to the Inland Revenue; debts due to Customs and Excise; Social Security contributions; contributions to occupational pension schemes; remuneration of employees; and levies on coal and steel production. The Enterprise Bill proposes to abolish the Crown’s preferential status in relation to debts due to the Inland Revenue or Customs and Excise, and in relation to social security contributions.[209] However, preferential status will be retained for contributions to occupational pension schemes; remuneration of employees for the relevant period; and levies on coal and steel production.
4.132 The Enterprise Bill also proposes to insert a new Insolvency Act 1986, section 176A, providing for a percentage share of the company’s assets to go to unsecured creditors, although the percentage will be set by Statutory Instrument, and the Explanatory Notes indicate this is to be the subject to consultation.[210]
4.134 We consider, however, that one change to the existing notion of a floating charge would have to be made. As we saw in Part II, the reason that a subsequent fixed charge can gain priority over an earlier floating charge is that the creation of subsequent fixed charges having priority is, in the absence of a negative pledge clause, treated as being in the ordinary course of the company’s business.[211] If this were to remain the rule, floating charges would continue to lose any priority they might have through prior filing to subsequent fixed charges. That would defeat the aim of devising a simpler system of priority determined principally by the date of filing.
4.135 There are two ways in which this could be prevented. The first is to require that the financing statement reveal whether or not the agreement contains a negative pledge clause and to provide that all subsequent creditors are deemed to have constructive notice of any clause mentioned. No doubt floating charge-holders would very quickly include negative pledge clauses in all floating charges[212] and file accordingly. We wonder whether the Steering Group had such a solution in mind when it made a recommendation that it should be possible to make a voluntary indication of whether the floating charge was subject to a negative pledge.[213]
4.136 However, to rely on this mechanism is to re-import the doctrine of notice just at the moment that we are trying to move away from that doctrine to a simpler system. It is our provisional but strongly held view that it would be better to provide simply that a floating charge does not give the company authority to create subsequent security interests having priority to the floating charge.[214] This appears to be the effect of the provisions of the UCC quoted earlier:[215] no mention is made of power to create further security interests.[216] If the parties desire to alter the order of priority it can be achieved by a subordination agreement between the floating charge-holder and the second creditor.
4.137 Our proposal to limit the company’s authority to create charges that might rank ahead of the floating charge should apply not only to fixed charges but also to pledges. This too is consistent with the priority rules of the notice-filing systems used elsewhere. As between a security perfected by filing and one perfected by possession, priority will go to the one that is first to file or to perfect by other means.[217]
4.138 It should be noted that even with our provisional proposal to limit the company’s authority to create fixed charges that would automatically get priority over the earlier floating charge, the special priority position given to the purchase-money interest (which we discuss below) would mean that such purchase-money interests granted by the company would have priority over an earlier filed floating charge (as well as earlier fixed non-purchase-money interests). To this extent, the basic ‘first to file’ priority rule would be abated.[218]
4.139 Earlier in this Part we discussed what details should be included on the financing statement.[219] The Steering Group suggested that the nature of the charge - whether it was fixed or floating - should be included on the financing statement. When it consulted on this proposal, some respondents expressed the view that this might be a difficult particular to require (particularly if there were to be some form of sanction in the case of error[220]), given the difficulties that have been experienced in practice in identifying a fixed charge from a floating charge.[221]
4.140 Whilst we agree that it would be harsh if the charge were rendered invalid because of a difficulty in identifying accurately its nature led to the financing statement being incorrect, we do not see that this would occur under a notice-filing system. As we have already noted, we only envisage the sanction of invalidity operating in respect of errors that are “seriously misleading”.[222] It is hard to see that an error in the description of the nature of the charge would be seriously misleading. If it were stated to be fixed when it was in fact floating, a later creditor would not be prejudiced, since it could not be enforced as a fixed charge. Conversely, if what was stated to be a floating charge were in fact a fixed charge, it could only be enforced as a floating charge; the chargee would be estopped from claiming beyond what was registered.[223]
4.141 It is true that if our proposals above are accepted, priority of both sorts of charge would normally date from the time of filing (rather than, in the case of a floating charge, from crystallisation) and the difference between the two sorts of charges will be reduced for the purposes of determining priority as against subsequent security holders. However the information will be of use to a potential buyer if, as we propose later, a purchaser of the property subject to a filed security interest should bound by it.[224] If the charge is stated to be a floating charge the purchaser can be confident that, provided the sale is in the ordinary course of business, she will take free of it.
4.143 The Steering Group also proposed that the financing statement should indicate whether there was an automatic crystallisation clause.[225] As our provisional view is that if priority is determined by date of filing, rather than date of crystallisation, there seems little need to make this a mandatory requirement for the purposes of priority. However, a problem may remain in relation to potential purchasers of assets who wish to know whether the company still has authority to sell the asset in the ordinary course of its business.[226] If there is an automatic crystallisation clause and the crystallising event occurs, the company’s authority ceases. If buyers have no means of knowing that the company’s authority to sell has been withdrawn, they will take free of the charge in any event; but there will often be scope for arguments that the buyer will prefer to avoid. It might therefore be better to require filing of automatic crystallisation and to provide that until notice is filed purchasers will continue to take free of the charge. In other words, we do not think that it is necessary to register the existence of an automatic crystallisation clause, but we do think that it should be necessary to register the fact in the event that such a charge has crystallised if the charge-holder wishes to rely on it.
4.144 We ask consultees whether they agree with our provisional recommendation:
(1) not to require inclusion of the nature of the charge and/or whether there is an automatic crystallisation clause in the financing statement, and
(2) to register the fact that a floating charge has crystallised pursuant to an automatic crystallisation clause.
4.146 The Steering Group’s consultation document noted that the priority rules of a notice-filing system for company charges would not cover all priority questions.[227] It would not deal with priority between unregistrable charges or between registrable and unregistrable charges. (It will be recalled that under the present scheme, not all non-possessory security interests created by companies are registrable.[228]) The Steering Group’s view was that these would be determined by the general law.[229] While this approach might be necessary were there to remain substantial numbers of unregistrable charges, we would regard it as a very unsatisfactory compromise given that it would mean that these priority issues would continue to depend on the questions of actual or constructive notice that the notice-filing system is designed to eliminate. We think that there is a much better approach.
4.147 In Part V of this Consultation Paper we suggest that all charges should be registrable, unless there is a good reason for them not to be (such as the existence of the security interest being obvious). We will suggest that charges over certain types of property - in particular, over shares and other investment securities - should not have to be registered provided that the shares are ‘controlled’ by the secured party (or in the case of certificated shares, if the certificates are in the secured party’s possession). This is because the charge will then be apparent to third parties. In other words, a charge over shares that are within the control of the secured party will be treated as ‘perfected’ without the need for registration, just as a pledge is perfected by the creditor taking possession of the goods. Priority as against subsequent security interests will depend on the date of perfection.[230]
4.148 We ask consultees whether they agree that, if our provisional proposal that charges over assets such as shares and other investment securities that are ‘controlled’ by the secured party (or in the case of certificated shares, if the certificates are in the secured party’s possession) should be treated as perfected without the need for registration, priority between registrable and unregistrable charges should depend on the date of perfection.
4.149 There may also be questions of priority between registrable but unregistered interests. In the overseas systems, priorities in such cases are sometimes dealt with by order of attachment.[231] This seems simpler than to leave it to be determined by the general law (thus depending on the date of creation, notice and such like).[232] We provisionally propose that priority as between competing charges, each of which is registrable but neither of which has been registered, should be determined by the date of attachment.
4.150 We do not propose to erode the principle of freedom to contract as between competing creditors. The overseas systems contain provisions allowing the parties to vary the statutory priority by agreement.[233] In New Zealand the Law Commission recommended that subordination agreements should be effective as between the parties if a financing statement is registered recording the agreed order of priorities and, if relevant, the duration of the agreement.[234] Any agreement should not adversely affect the rights and priority of third parties and the debtor should have to be informed of the variation.[235] We are not convinced of the need to require the registration of subordination agreements. They operate to regulate priorities only as between the contracting parties and do not affect the position of other secured creditors. However, the SPPSA permits a financing change statement to be filed in the event that the secured party subordinates its interest, and we ask whether consultees think that this needs to be done.[236] We provisionally propose not to make the registration of a subordination agreement necessary for the agreement to be effective, and ask whether registration of a subordination agreement should be made possible.
4.151 Earlier in this Part we considered the question of changes to the security agreement as they affected the financing statement.[237] Where changes have occurred that need to be recorded, we provisionally think that this should not affect the priority position of the security interest, subject to the comments about subordination that we made earlier.[238] So where there has been a change of creditor recorded, for example, priority in the security interest should be preserved. This is the approach generally taken by the overseas systems.[239] Where the security agreement has been changed but the changes not yet recorded in the financing statement we provisionally think that the priority position of the security interest should not be altered.
4.152 The Saskatchewan system provides that the priority that a security interest has applies to all advances, including future advances.[240] The UCC and the New Zealand system permit this only where the security agreement provides for future advances at the time when it is made.[241] This is different to the present rules of tacking,[242] under which a prior chargee who has notice of the subsequent charge will retain priority for further advances only if she was under an obligation to make them. The UCC and New Zealand schemes would permit this when the original agreement allowed for further advances without imposing any obligation on the lender.[243] This approach is consistent with the policy of permitting filing in advance to protect a security interest that may or may not be taken.[244]
4.154 However, under a scheme that permitted tacking of further advances it would always be possible for a second potential creditor to reach a subordination agreement with the first creditor. It will often be in the first creditor’s interest for a further advance to be made by another creditor. Meanwhile, to refuse the tacking of further advances unless there were an obligation to make the further advance would be inconsistent with the policy of allowing advance filing for a series of transactions. Further advances of credit - whether of money or of goods on credit - would become impossible without obtaining the consent of subsequent creditors of whom the first creditor had notice.[245] That would be extremely cumbersome and might well prejudice the debtor company more than the reverse rule. We think it better to follow the approach of the overseas systems. We provisionally propose to allow the tacking of further advances where these are contemplated by the security agreement and are covered by the financing statement.
4.155 It is common for a company to create a registrable charge that purports to cover not only its existing property but also its future property. The company may then purchase additional property with a loan provided by another creditor and secured by a charge or other security interest over that property. Such interests are sometimes known as purchase-money interests.[246] As the Crowther report pointed out, it would seem unfair to allow the security for this additional loan to be subordinate in priority to the earlier charge:
In this case, it is [the later creditor’s] money that has led to the increase in the dealer’s inventory, and it would be quite wrong that this increase should become a windfall added to the security of the original party … simply because he had filed a prior financing statement.[247]
4.156 This problem occurs under existing law. It does not happen when the first charge is a floating charge (unless there is a negative pledge clause), as provided the second charge is fixed it will take priority. However, it may happen with a fixed first charge that applies to after-acquired property. If the debtor then acquires further property with finance provided by another creditor and secures the loan by charging the property to the second creditor, which creditor has priority? At one time it seemed that the first creditor might have priority: this was because the debtor was considered to own the property free of the second charge for a moment of time (the ‘scintilla temporis’) before the second charge was granted, and in that moment the first charge attached.[248] However, this approach was rejected by the House of Lords in Abbey National Building Society v Cann,[249] where the approach taken was that the purchase of the new asset and the grant of the second charge are in essence a single transaction.[250]
4.158 The overseas systems deal with this issue by providing that the purchase-money interest will have priority, displacing the ‘first to file’ approach. In keeping with the broader scope of these systems, a functional approach is taken to the question of what is a purchase-money interest (and so the phrase purchase-money security interest is used[251]); in such a context, ‘quasi-securities’ such as hire-purchase agreements fall within that definition, and it is to security interests such as these that the concept of the purchase-money security is perhaps most clearly applicable. We shall return to the concept of purchase-money interests and quasi-securities in Part VII, but the concept of the purchase-money interest is still relevant to a notice-filing system that applies only to traditional security, particularly in its relationship with the floating charge.
4.159 It might be asked why a purchase-money interest should be protected, whereas someone who had simply lent money that has been used to reduce a company’s indebtedness should not be protected. It seems to us that there is a difference. Someone who simply advances further funds to a company, whilst providing new value in exchange for any security she takes, is not contributing to the property available to secured creditors: she is not making their position any better. In contrast, where the fresh finance was to enable the debtor to acquire further property, if the property subject to the purchase-money interest in favour of the second (or later) creditor was available to the earlier creditors, they would be better off as a result of that later creditor, who would probably lose out.[252]
4.161 There is a danger involved in moving to a system that sets out the priority given to purchase-money interests. An existing secured creditor that sees the debtor acquire further assets may assume that they belong to the debtor and perhaps that they will be subject to its security, whereas in fact they are purchase-money interests and will have priority. There are two possible methods of warning the earlier creditor: the second creditor could file a financing statement or alternatively it could give notice to the first creditor. The UCC, SPPSA and NZPPSA require notice to be given in the case of inventory, and filing for other assets (in other words, it is harder to preserve priority in inventory[253] and intangibles).[254] The Crowther report favoured requiring that notice be given to the earlier creditors in all cases.[255] The Diamond report proposed that filing should be the required method in all cases.[256]
4.162 We also consider that the holder of the purchase-money interest should have to make the existence of the interest clear to other security holders if the purchase-money interest is to retain its priority. At the very least it should have to perfect its interest (normally by filing) within a short period (15 days, for example[257]) after the debtor has obtained possession.[258] As to whether notice should be required in some cases (for example, with inventory) we have no firm views. We invite views as to whether in the case of inventory the holder of the purchase-money interest should have to give notice to other secured parties who have filed in order to preserve the priority of the purchase-money interest.[259]
4.163 If the secured asset is disposed of by the debtor in some way, two questions arise. The first is whether the asset should continue to be subject to the security in the hands of the recipient. This depends firstly on whether the disposition was authorised (for example, if the charge was a floating charge and the disposition was in the debtor’s ordinary course of business[260]). If it was authorised, the purchaser will take free of the charge. If the disposition was not authorised (for example, the asset was subject to a fixed charge and the creditor had not consented to the disposition), the relevant rules are those on the rights of purchasers (as explained in the next section, a purchaser may sometimes take free of the security interest even though the disposition was not authorised by the creditor) and on tracing.[261]
4.165 The overseas systems contain specific provisions dealing with the question of proceeds. ‘Proceeds’ are defined by the SPPSA and the NZPPSA as being identifiable or traceable personal property, fixtures or crops derived directly or indirectly from any dealing with collateral or the proceeds of collateral, and in which the debtor acquires an interest. It also includes a right to an insurance payment or any other payment as indemnity or compensation for loss of or damage to the collateral or its proceeds, and also a payment made in total or partial discharge or redemption of an intangible, chattel paper, an instrument or a security.[262]
4.166 The security will attach to the proceeds if that was originally provided for in the security agreement and stated in the financing statement. Thus if the security is over all the company’s assets, or covers property of the same kind as the proceeds, it will automatically catch the proceeds. Similarly if the financing statement specifically states that any proceeds of disposition of the collateral shall be subject to the security. In these cases perfection is treated as ‘continuous’,[263] that is, priority will date with reference to the perfection of the original collateral.[264]
4.167 If the security agreement or the financing statement does not expressly cover proceeds, the SPPSA and NZPPSA both provide that the security will attach to the proceeds but apply rules that vary according to the nature of the proceeds. If the proceeds consist of money, cheques or deposit accounts, the security interest is also regarded as continuously perfected in the proceeds and the creditor need take no further steps.[265] If the proceeds are of other kinds the security interest will apply to them but the creditor must take steps to prevent it becoming ‘unperfected’.
4.168 The reason for this is that, as the Diamond report noted, where proceeds are of property of a different type to that of the original secured asset, and this type of property is not covered by the financing statement, third parties might be misled. One of the purposes of the financing statement - that of putting third parties on notice that the goods described were, or might become, subject to a security interest - might thereby be compromised.[266]
4.169 The SPPSA provides that in the case of proceeds that are not covered by the original financing statement and are not money (and the like), the security interest in the proceeds is a continuously perfected security interest, but becomes unperfected after 15 days unless the security interest in the proceeds is otherwise perfected under the Act.[267] The NZPPSA contains provisions to similar effect (although the period given is 10 working days).[268]
4.170 The UCC Revised Article 9 approach is similar to that of the SPPSA and the NZPPSA, providing for automatic perfection for 20 days, after which the security interest becomes unperfected unless the proceeds are identifiable cash proceeds or the security interest in the proceeds has been perfected by another method.[269] The Diamond report recommended following the Canadian approach.[270]
4.171 It is our provisional view that the question of proceeds should be dealt with in a similar way to that taken by the overseas systems. Where the proceeds are money and the like, or where the proceeds comprise property that is covered by the original financing statement, we think that the security interest in the secured asset should extend to the proceeds automatically, with priority being backdated to the date of filing in respect of the original asset. We also provisionally think that a creditor should be able to secure continuous perfection where there has been an indication in the original financing statement that it covers not only the original asset but also its proceeds (hence our suggestion at the beginning of this Part that there be a requirement to indicate on the financing statement whether proceeds are covered[271]). Such a description of the proceeds should be sufficiently detailed so that an original financing statement could have been entered in relation to it. Where there was no such indication, the creditor should be permitted to file a financing statement within a short time identifying the proceeds as the secured asset (or take other steps to perfect the security), or should otherwise lose the benefit of being able to ‘backdate’ the priority of the proceeds.
4.172 We ask whether consultees agree with our provisional views that:
(1) where an asset subject to a security is dealt with or otherwise gives rise to proceeds, the security should extend to the proceeds;
(2) the proceeds should be treated as continuously perfected (and therefore having the priority of the original financing statement) where there was a financing statement covering the original secured asset and either
(a) the proceeds are money or similar property (and we ask consultees whether they have views as to the extent of this provision); or
(b) the proceeds would either come within the description of the property originally subject to the security, or the financing statement covers proceeds of the original property;
and
(3) where the proceeds are not continuously perfected, they should be temporarily perfected for a short period, allowing a new financing statement to be filed in respect of the proceeds, in which case, priority will be that of the original financing statement.
4.173 In Part II we saw that registration under the Companies Act 1985 affects the validity of a charge only as against the administrator, liquidator or creditors. As concerns purchasers of property that has been charged, there are two points. First, a purchaser of the goods will take subject to the charge even if it has not been registered, unless the doctrine of good faith purchase for value and without notice applies to protect her.[272] Secondly, and conversely, if the charge is registered it is unclear to what extent this affects a purchaser in the ordinary course of business. Registration may give purchasers constructive notice but it is arguable that purchasers of stock-in-trade cannot reasonably be expected to search the Companies Register and therefore should not be treated as having constructive notice of registered charges.[273]
4.174 On the question of purchasers of property subject to an unregistered charge, the UCC provides that a buyer takes free of a security interest provided that she gives value and, at the time of delivery, the security interest had not been perfected (for this purpose, let us assume this means one for which no financing statement has been filed) and the buyer did not know of it.[274] A similar rule, but not referring to delivery, applies to buyers of accounts and intangibles.[275]
4.175 The Saskatchewan system has a similar provision, subordinating an unperfected security interest in a number of assets[276] to the interest of someone who, pursuant to a transaction that is not a security agreement, acquires an interest for value and without knowledge.[277] Where the purchase relates to an instrument, a security, or a negotiable document of title, the purchaser or holder who acquired it in the ordinary course of the transferor’s business is held to have knowledge only if she knew of the existence of a prior security interest and knew that the transaction was in breach of it.[278]
4.176 In some systems the buyer’s knowledge is irrelevant. The New Zealand system provides that a buyer or lessee of collateral who acquires it for value takes free of an unperfected security interest in it, unless the unperfected security interest was created or provided for by a transaction to which the buyer or lessee is a party.[279] The Diamond report recommended a similar rule. In the part of the Diamond report that dealt with changes to the existing system, the recommendation was made that an unregistered (but registrable) charge should be void as against a purchaser who did not have actual knowledge of it.[280] This proposal found its way into the unimplemented part of the Companies Act 1989, which would have made an unregistered charge void against a purchaser, but apparently irrespective of her knowledge.[281]
4.178 On the question of purchasers of property subject to a charge that has been registered, UCC Revised Article 9 provides that a buyer “in the ordinary course of business” of goods subject to a security interest created by her seller takes free of it, even if the security interest has been perfected[282] and the buyer knows of it.[283] However, the buyer will take subject to the security interest if she also knows that the disposition is in breach of the security agreement, as “buyer in ordinary course of business” is defined as a buyer “in good faith and without knowledge that the sale to him is in violation” of the security interest.[284] The same definition also limits the protection given by Section 9-307 to purchases “from a person in the business of selling goods of that kind”. As Official Comment 2 points out, this limits the article primarily to sales of inventory. Thus those buying stock-in-trade will be protected unless they know that the sale is in breach of security agreement; other buyers will be protected only if the security agreement had not been perfected and they did not know of it.
4.179 The Crowther report stated merely that one who buys goods (other than motor vehicles, for which special rules were envisaged[285]) from a person selling in the ordinary course of business should not be obliged to search the register and should take free of the security interest unless she knows that the disposition is in breach of the security agreement.[286]
4.180 In the part dealing with notice-filing, the Diamond report proposed a more-wide-ranging reform of the rules of dispositions by non-owners[287] but also, as a set of ‘minimum proposals’, suggested rules similar to those of UCC Article 9 then in force.[288] Broadly similar rules appear in the Canadian[289] and New Zealand legislation, [290] although there are particular rules dealing with specific situations.[291]
4.181 It would be unreasonably burdensome to expect a person who buys goods supplied by the seller in the ordinary course of its business (in the sense of stock-in-trade as opposed to sales of capital assets such as used equipment) to check the Company Charges Register. The buyer should take free of even a registered security interest unless the buyer knows that the disposition to her is in breach of the agreement. It will in fact be rare for the security interest to be relevant since stock-in-trade will normally be subject only to a floating charge; but if the floating charge has crystallised or if, unusually, the stock-in-trade was subject to a fixed charge, we think the buyer should take free of it unless she knows that the sale would be a breach of the agreement.[292]
4.182 Conversely, we see no need to give the same protection to a buyer who is buying capital equipment; she can be expected to check the register.[293] However the Australian Law Reform Committee pointed out that it may be hard - particularly in cases of fraud by the debtor - for the purchaser to be sure that she has the correct name in which to search.[294] This may be mitigated if, as we propose below, provision is made for charges over equipment that is identifiable by a unique serial number should have to give that number on the financing statement.[295] However not all capital goods are identifiable in this way. Therefore it may be desirable to provide that a good faith buyer even of capital assets should take free of a registered but unknown security interest if she has taken reasonable steps to check. We invite comment from consultees on whether a buyer of capital equipment should be expected to search the register.
4.183 It might also be asked whether a consumer[296] who buys a piece of used equipment (that is, an item that is not the company’s stock-in-trade) from a company should be expected to check the register. This point does not appear to have been considered by the Diamond report, who considered only the case of a consumer buying from another consumer. (We will consider that case in Part IX when we deal with security interests created by non-corporate debtors.) Private purchasers of motor vehicles are protected by Part III of the Hire-Purchase Act 1964.[297] Should this be generalised? We invite views on whether a consumer who buys goods (other than stock-in-trade, which is covered above) that are subject to a registered charge should take free of the charge unless she knows of the charge.
4.184 The Crowther and Diamond report proposals went slightly beyond the rules in the UCC, Saskatchewan and New Zealand. They pointed out that the buyer of goods sold in the ordinary course of business should take free of security interests created not only by her seller but by prior owners also.[298] Subject to the point about uniquely identifiable goods,[299] we agree with this, because it will be practically impossible for the buyer to discover such an interest (against what name should she search?) and because, when the purchase is of stock-in-trade, we consider that the buyer who acts in good faith should normally be protected for the reasons given above.
4.186 A number of the overseas systems contain a provision that security interests over certain types of uniquely identifiable assets such as vehicles, or goods with serial numbers - the types are usually listed by regulation - should be recorded as such in the financing statement, permitting in these cases searching by asset, rather than simply by debtor. We provisionally think that such a requirement would be helpful. It would be particularly useful where purchasers were concerned: under a debtor-based system, a security interest created by a previous owner over the asset will not appear from a search of the register in the name of the company seeking to sell-on the asset, and such a purchaser might not take free of that security interest, even if she had no way of finding out about it.[300]
4.189 The Diamond report recommended that the protection afforded to buyers (whether against an unregistered charge or a registered one under the exception for buyers in the ordinary course of business) should apply also to those who acquire ownership or possession under a hire-purchase agreement, lease, contract for work and materials or contract of barter - in short, all except those also taking a security interest, who may be expected to check the register. We provisionally propose that persons acquiring ownership or possession of goods in the ordinary course of business under a hire-purchase agreement, lease, contract for work and materials or contract of barter should take free from a security interest in the same circumstances as buyers.
4.190 Where the charge should be registered in a specialist register,[301] the validity of the charge against purchasers should be determined by the rules of that register.
4.192 We later provisionally propose that charges over investment securities should not be registrable.[302] If the secured party has the relevant certificates and transfer forms, it will appear to have authority to sell; if it registered as owner it will appear to have full power to sell. In the light of this, we think that it would be right to allow a purchaser to take free of the security interest unless she knows of it and that sale would be in breach of the agreement.[303]
4.195 It seems to us that the same approach should apply to block-discounting.[304] The Saskatchewan and New Zealand systems take a different approach. They provide that a purchaser of ‘chattel paper’ who takes possession of it in the ordinary course of the purchaser’s business and for new value takes priority over a perfected security interest if the purchaser took possession without knowledge of it, or where the perfected security interest has attached to proceeds of inventory, whether possession was taken with or without knowledge of it.[305] It is our understanding that in England and Wales block-discounting does not involve the physical transfer of documents and that therefore the Saskatchewan and New Zealand models cannot be transferred directly to our law. We think, however, that the result is similar to the one that we propose.
4.197 The Crowther report noted that whilst interests over negotiable instruments can be protected by filing, a transferee who takes possession in good faith, even after perfection by filing, should take priority, the essence of such documents being that they are transferable or negotiable by delivery, or indorsement and delivery, and commercial transactions would be hampered if a search were required.[306] Both the Saskatchewan and the New Zealand system give a purchaser of a negotiable instrument or document of title priority over a perfected security interest, where the purchase was for value and without notice,[307] and where the purchaser has taken possession of the negotiable instrument.[308] Our provisional view is that, as with the other systems, priority rules should not disturb the protection currently given to a holder in due course.
4.199 We noted in Part II that there are a number of specialist registers, wherein details of ownership of, or charges over, particular assets have to be recorded.[309] A difficulty arises in considering the relationship between any new notice-filing register and the specialist registers. We have noted that under the current registration scheme, a charge taken over most of the assets registrable in a specialist register would also be registrable under the Companies Act 1985. However, the specialist registers have their own rules on priority, even though invalidity for non-registration in the Companies Register would affect a charge that had otherwise been validly registered in the specialist register. If a notice-filing system sets out a new system of priorities in the way that we envisage, and the specialist registers continue unchanged, conflicts may arise if the ‘specialist’ assets are required to be subject to all the same rules of a new notice-filing system as every other registrable asset.
4.200 We believe that there is a simple solution. We pointed out in Part III that there is no need for a charge to be registrable in the Company Charges Register if it will in any case be readily discoverable. Charges that are registrable in specialist asset registers should be readily discoverable. Therefore under the notice-filing system, charges over ‘specialist’ assets[310] should not be registrable in the Company Charges Register. If they were not, then conflicts over the two systems of priority would not arise.
4.201 This issue seems most apparent in respect of land. As we noted in Part II, where there is no conclusive certificate of valid registration from the Companies Registry, the Land Registry will register the charge over land but note on the Land Register that it is subject to the provisions of the Companies Act 1985, section 395.[311]
4.202 Whilst it would be possible to introduce a system that applied only to property other than land,[312] this would result in the retention of the old scheme for charges over land, and the new system for all other charges or security interests. It would prove expensive and confusing in the case of security being granted over both sorts of asset to the same creditor.
4.203 The Steering Group in its consultation document made a very simple proposal: neither the validity nor the priority of charges over land should depend upon registration in the Companies Register. Thus the Land Registry would no longer have to note that registration of a charge over land was subject to the Companies Act 1985, section 395. It suggested that in order to give a more accurate picture of the company’s financial position, charges over land would have to be registered at Companies House and there would be penalties for default but the charge would still be valid if it were not registered.[313]
4.204 These provisional proposals were welcomed by the Land Registry (in their response to the Steering Group’s consultation document), which suggested that when it received details of charges over land for registration, it would be able to forward the relevant particulars to Companies House for registration.[314]
4.206 However, the Land Registry and the Shipping Registry do not generally permit searching by name of the owner.[315] A party searching would need to know that a company owned a particular piece of land or ship before it could search for encumbrances on it. This would mean that a person seeking information about the encumbrances of a company would not be able to find out if there were any charged assets in these registers simply by knowing the name of the company.[316]
4.210 On the other hand, if the specialist registry were able to forward the information in a form that could appear on the Company Charges Register without significant further input,[317] then perhaps it would do no harm and might do some good to include it. (This form of ‘notice’ on the Company Charges Register would in effect be compulsory. Indeed if the company could somehow opt out of the ‘forwarding’ by the specialist registry the public notice purpose that this option assumes would be defeated.)
4.212 The changes will have little effect for floating charges which, we pointed out earlier, are likely to continue in some form under notice-filing. A floating charge may cover the company’s ‘undertaking’ or ‘all its assets’, which would obviously include land and other items for which there are specialist registers. Normally lenders taking a floating charge will include in the same charge document a fixed charge over land and possibly other capital assets, but there is always the possibility that this will not be done or that the fixed charge will be unenforceable for some reason. At present a floating charge over unregistered land does not need to be registered in the Land Charges Register if it is registered at Companies House.[318] A floating charge over registered land can only be made the subject of a notice or caution on the Land Register.[319] Under a notice-filing system the floating charge will be valid against an administrator or liquidator, and have priority against other secured interests, only if a financing statement is filed. As far as the specialist registers are concerned we see no reason why the present approach should be changed. Registration of such a charge over an asset is unnecessary at the moment because a purchaser and subsequent chargee will always have priority. Under our proposed notice-filing system, that remains true of a purchaser, although a subsequent chargee will be subject to a registered floating charge. It is not practical to register a floating charge over a specialist asset because it can only cover those assets owned at the time.[320] Therefore the chargee would be required to consult both the Company Charges Register and the specialist register. However, we do not think that this is worse than the present situation.
4.213 Although the consequence of not submitting either the original or a copy of the charge instrument is that the registrar can no longer issue a certificate that is conclusive of anything other than that a financing statement was filed on a particular date, a form of verification statement could be issued to confirm the date or time of filing, or the absence of any filed statement.[321] This could be done automatically under an electronic system. An alternative approach is that taken by the SPPSA and the NZPPSA: a printed search result that purports to be issued by the registry is receivable in evidence as prima facie proof of its contents, including the date of registration and the order of registration as indicated by the registration number.[322] We provisionally favour the latter approach. Presumably an electronic system would indicate whether a filing had been accepted.
4.215 We have explained that under the notice-filing scheme we envisage, the financing statement would be completed by the party filing (who would take responsibility for errors in it[323]) and be displayed automatically on the Company Charges Register. The scope for errors on the part of registry staff would thus be minimal but the possibility cannot be discounted altogether (for example, a fault in the software might resulted in an erroneous search result being revealed).
4.216 Under the current scheme it is unclear whether a person injured by an error on the part of the registry (such as a creditor who relies on the absence of a record of the charge) might have a remedy against the registrar. There is no statutory system of liability,[324] but there have been suggestions that liability might exist.[325]
4.217 The Saskatchewan system provides that an action will lie against the Crown corporation to recover loss or damage suffered by that person because of an error or omission in the operation of the registry where the loss or damage resulted from reliance on a printed search result issued by the registry or from the failure of the registrar (except in certain circumstances, such as non-payment of fees) to register a printed financing statement submitted for registration.[326] There is an exception from this liability in the case of oral advice (unless the maker was not acting in good faith), and in the case of a failure to register (correctly or at all) a financing statement in electronic form sent to the registry for the purpose of effecting a registration.[327]
4.218 The NZPPSA does not have a similar express section, but it does provide that if a person fails to discharge any duty or obligation imposed on that person by that Act, the person to whom the duty or obligation is owed and any other person who can reasonably be expected to rely on performance of the duty or obligation has a right to recover damages for any loss or damage that was reasonably foreseeable as likely to result from the failure.[328] Although this provision would probably not include liability on the part of the supplier of information for inaccuracy of the financing statement (although there might be liability for this under other existing laws), it would presumably cover breach by the registrar of its various duties under the NZPPSA (although this is likely to relate to the duties to operate the system rather than the accuracy of the information contained in the financing statements). Unlike Saskatchewan, other forms of action are not barred.[329] Our provisional view would be to adopt the New Zealand approach, although we would welcome the views of consultees on this point.
4.220 We noted above that the NZPPSA contains a provision to the effect that a person failing to discharge any duty or obligation imposed by that Act may be liable in damages for reasonably foreseeable loss to the person to whom the duty or obligation is owed, and we considered this provision in the context of the registrar’s possible liability.[330] However, we have also seen that there are some instances where the NZPPSA imposes a duty on the parties involved, such as in relation to responding to requests for further information being made. We would like the views of consultees as to whether they think a similar provision would be sensible, in the event that the notice-filing system we are provisionally proposing contains equivalent ‘duties’. We make clear that we do not envisage such a provision would found a claim for damages in the event of inaccuracies in the filing of a financing statement (that would be governed by the estoppel provisions we noted earlier,[331] or possibly a claim under existing misrepresentation law), and would apply only where there was some form of obligation imposed (such as in relation to supplying further information following a request).
4.225 New Zealand is the most recent jurisdiction to adopt a comprehensive system of notice-filing (the current SPPSA deals only with transition from an already existing notice-filing system which had been established under a previous PPSA (the ‘original SPPSA’), which the later SPPSA repealed[332]). The NZPPSA sets out a transitional period of six months from commencement (1 May 2002), and provides a series of rules relating to registration and priority conflicts within this period. Effectively, prior security interests must be re-perfected during the transitional period, otherwise they become unperfected. In general, where these had priority under the old law (for example, by being registered elsewhere) priority is backdated to the original date of perfection. Other prior security interests (which we think would include previously unperfected interests as well as floating charges) seem to date their priority from being re-perfected during the transitional period. Certain specific priority rules operate during the transitional period (covering, for example, conflicts between interests that are deemed to be perfected and those that are otherwise perfected under the NZPPSA).[333]
4.227 We initially wondered whether there would have to be two Company Charges Registers - the old and the new - operating independently, each of which having to be searched separately. However, we see no reason why the information currently held on the existing Company Charges Register should not be incorporated onto a new notice-filing register, or the new information be put onto the existing register (and its nature changed to an electronic version). Whether all the existing information held on the Company Charges Register should continue to be available, or whether the registrar should convert the information held into a financing statement format, is a point on which we have no firm view.[334]
4.230 Although no entry under the new register would take priority over an old one in respect of fixed charges, the situation would be slightly different in relation to floating charges. Under the current law, an uncrystallised floating charge is subordinated to subsequently created fixed charges, although not to subsequent floating charges.[335] Under a notice-filing system, a floating charge’s priority would date from filing rather than crystallisation. Consequently, it would be possible for an ‘old’, uncrystallised floating charge[336] to be subordinated in priority not only to a subsequently created fixed charge but also to a ‘new’ floating charge over part of the company’s assets.[337] Although this would be a change from the current position, we do not think that in practice it is likely to lead to prejudice, given that those who take floating charges under the current law do so without an expectation of having priority over any other charge before crystallisation.
4.231 In any event, we would expect that an existing floating charge-holder would want to re-register the floating charge under the new system, so as to get the benefit of fixing priority from the date of re-registration. Thus we think that ‘old’ floating charges might disappear quite quickly. We return to the question of transition in respect of previously unregistrable charges and quasi-securities later in this Consultation Paper.[338]
4.234 In addition to these benefits, 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 purchase-money interests). Filing could be done in advance of the creation of the security, so as to preserve priority during negotiations; and a single financing statement could be filed to cover future transactions between the same parties, thus obviating the need to register successive securities as and when they are created. The amount of information available to the public might therefore be increased, as it would be possible to register charges that are currently excluded from the registration requirements because registration of each charge is impractical.[339] The ‘date of filing’ approach (subject to the special position of the purchase-money interest) would make the determination of priority as between registered charges significantly easier. The position of purchasers of charged property would also be put on a more rational basis.
[1]In this Part we do not discuss what should be a registrable security (either under an amended version of the current scheme or under notice-filing): this question is dealt with in Part V. We also deal in that Part with the possibility of exempting trusts created by corporate members of Lloyds from the application of the notice-filing system: see below, paras 5.78-5.86.
[2]See the Diamond report ch 20.
[3]See above, paras 3.4-3.8.
[4]We have also been assisted by the Australian Law Reform Commission’s 1993 report, Personal Property Securities, ALRC 64.
[5]See especially below, paras 4.155 ff. Some the exceptions of these would not apply were the scheme to be confined to company charges: see further below, paras 7.71 ff.
[6]See above, para 2.5, and below, Parts VII, X, XI and Appendix B.
[7]Eg, by making the security agreement, giving the advance, and then registering the security interest, or by registering the intended security interest first, making the security agreement, and then giving the advance.
[8]We refer to this rather than to the Companies Register for reasons explained below, para 4.35.
[9]See further below, paras 4.19 ff.
[10]This has implications for the certificate currently issued by the registrar, a situation we discuss later in this Part: see below, paras 4.37-4.38.
[11]This is the system that has recently been introduced in New Zealand.
[12]See below, paras 4.155 ff.
[13]Subject again to the proviso about purchase-money interests.
[14]See further below, paras 4.116-4.117.
[15]See further below, paras 4.19 ff.
[16]See further below, paras 4.199 ff.
[17]Both the Crowther and Diamond reports suggested that such interests should come within the general codification of security law they proposed, but also that it should not be necessary to register such interests: see the Crowther report para 5.7.61 and the Diamond report paras 9.5.6-9.5.7 and 11.5.2-11.5.7. We return to the ‘wider’ scheme when we discuss the possible codification of security law: see below, Part XI.
[18]The Steering Group suggested that there should be an exception from the requirement to register charges where the chargee has actual or constructive possession. This was contrasted with an approach, favoured by a few consultees, whereby a charge should be registrable unless the chargor did not have actual or constructive possession of the goods - the difference was said to be important when the charged asset was not in the possession of either chargor or chargee, the example being given of whisky in a bonded warehouse. The Steering Group’s suggestion would seem to mean that a charge over such goods was registrable unless the creditor had constructive possession (ie, where the whisky was held to the order of the chargee); the minority view would result in the charge being registrable if the debtorhad constructive possession, but not otherwise. SeeFinal Report para 12.57.
[19]The Steering Group noted that, so far as apparent possession was concerned, an asset may be out of possession but still included in the company’s accounts by virtue of the Companies Act 1985, Schedule 4 paras 48(2) and 50(1): Final Report para 12.57.
[20]Although presumably some information will be revealed from the company’s accounts.
[21]See, eg, Halsbury’s Laws vol 4(1) para 621.
[22]R Goode, Commercial Law (2nd ed 1995) p 1029. Where the goods relate to imported goods, there is a separate provision exempting such documents from being a bill of sale: see the Bills of Sale Act 1890, s 1, and see below, para 8.13.
[23]As we have seen in Part II, only charges that are ‘created’ fall within the current registration scheme, and then only if they are on the list of registrable charges. Thus a debtor does not ‘create’ a charge where it arises from operation of law, such as in the case of most liens: see, eg, London and Cheshire Insurance Co Ltd v Laplagrene Property Co Ltd [1971] Ch 499, 514, and above, para 2.22 n 53. We would include the concept of the ‘Quistclose’ trust as such an interest: even if such trusts amount to charges, they are not registrable as they are created by operation of law. See further below, para 7.53.
[24]The SPPSA, s 4(a) states that, unless expressly provided for, the Act does not apply to “a lien, charge or other interest given by statute or rule of law”; the NZPPSA, s 23(b) provides that the Act does not apply to a “lien (except as provided in Part 8 [which deals with priority points]), charge, or other interest in personal property created by any other Act or by operation of any rule of law.” The Crowther report had envisaged that the scope of its new system for security and filing should extend to non-consensual security interests arising by way of lien: see the Crowther report paras 5.3.1 and 5.7.75, and Appendix III, para 4. However, the Diamond report considered that the new law on security interests it proposed should only apply to security interests created by agreement: see the Diamond report para 9.3.1.
[25]See the Companies (Forms) Regulations 1985, SI 1985 No 854, which provides for the use of a series of forms.
[26]Form No 395 is used for the particulars of a mortgage or charge. There are other relevant forms, eg, for registration of a charge over property acquired or a series of debentures.
[27]References on the form to a charge also include mortgage.
[28]Not all the particulars that have to be supplied are necessarily ‘particulars of the charge’ for the purposes of the Companies Act 1985, s 395: see Grove v Advantage (T10) Ltd [2000] 1 BCLC 661, where the company’s number was held to be a particular of the ‘mortgagor’, rather than of the ‘charge’ which had to be registered.
[29]The Diamond report did not go into much detail, but instead suggested that the form of the financing statement would be laid down by regulations: see the Diamond report para 10.5.5.
[30]Some of the requirements vary, depending on whether the parties are businesses or individuals: this reflects the fact that the overseas systems all generally apply to all debtors, regardless of legal personality.
[31]See, eg, the Personal Property Security Regulation for Alberta (AR 95/2001) and the Personal Property Security Regulations for Saskatchewan. Some of the minimum requirements are sometimes included in the enabling statute: see, eg, the PPSA for Manitoba, s 48(1) and the NZPPSA, s 142.
[32]More particular requirements are discussed in the relevant contexts, see paras 4.81-4.86, 4.103-4.108 and 4.186-4.187.
[33]See below, paras 4.81-4.86, 4.103-108, 4.139, 4.186-4.187 and 5.56-5.72.
[34]See generally the Steering Group’s discussion in relation to company directors’ residential addresses in its Final Report paras 11.44-11.48.
[35]Personal Property Security Regulations for Saskatchewan, s 14. The UCC Revised Article 9 requires a description of the collateral covered by the financing statement: see Section 9-504 and Section 9-108. Similarly, the other Canadian systems require a description or classification of the secured property, although the details may often be brief: eg, the Ontario system requires an indication that the classification of collateral is “consumer goods, inventory, equipment, accounts or that the classification is other than consumer goods, inventory, equipment or accounts or any combination thereof”: Revised Regulations of Ontario 1990, reg 912, s 3(1)(f). Sometimes an indication has to be given that a particular asset is included in the collateral, eg, a motor vehicle: see the Revised Regulations of Ontario 1990, reg 912, s 3(1)(g). See also the Personal Property Security Regulation for British Columbia (BC Reg 279/90), s 13. The Australian Law Reform Commission recommended that a short description of the property be given: see ALRC 64, Personal Property Security paras 13.10. The Crowther report suggested that there should be a statement of the security given or intended to be given (indicating the types or describing the items): Crowther report para 5.7.53. A similar suggestion was made in the Halliday report para 51. The Diamond report did not go into details on this point. The Steering Group proposed that the property or class of property charged should be identified: Final Report para 12.28.
[36]For further details of this system, see the registry website at http://www.ppsr.govt.nz/search/cad/dbssiten.main.
[37]See below, para 4.171.
[38]See below, paras 4.81-4.86, 4.103-4.108, 4.186-4.187 and 5.56-5.72.
[39]Final Report para 12.28. The Halliday report had suggested that the amount secured should be a voluntary, rather than mandatory, particular: see the Halliday report para 51.
[40]We agree with the Australian Law Reform
Commission’s conclusion that little purpose would be served by requiring the
inclusion of the amount of money to be repaid (as it would vary from time to
time and have to be checked with the lender), and its consequent recommendation
that it should not be required: see ALRC 64, Personal Property Security
para 13.4.
[41]This had been recommended in the Halliday and Diamond reports, and by the Australian Law Reform Commission: see the Halliday report para 51; the Diamond report para 11.2.12; and ALRC 64, Personal Property Security para 13.10. However, it may be that a financing statement is filed which relates to a security agreement yet to be entered into, and consequently a date cannot be entered on the financing statement. In the light of this, requiring a date could confuse, particularly where a charge came into agreement after the filing of the financing statement.
[42]See below, para 4.81-4.86.
[43]See below, para 4.186-4.187.
[44]See below, para 5.72.
[45]See, eg, the Personal Property Security Regulation for Alberta (AR 95/2001) and the Personal Property Security Regulations for Saskatchewan.
[46]The Diamond report suggested that the register that it was proposing should be kept on computer to facilitate searching, and favourable comment was made about two of the Canadian registries in operation at the time: Diamond report para 11.6.1.
[47]See the NZPPSA, ss 139(2)(a) and 143(a). The Personal Property Securities Register came into effect on 1 May 2002: for further information see the web site of the registry at http://www.ppsr.govt.nz/search/cad/dbssiten.main.
[48]Modern Company Law for a Competitive Economy: Completing the Structure URN 06/1335para 6.63.
[49]Modern Company Law for a Competitive Economy: Completing the Structure para 6.64.
[50]We would envisage any notice-filing system to be voluntary, not mandatory.
[51]Crowther report para 7.4.8; Diamond report paras 1.11 and 11.6.1.
[52]The Crowther report suggested that the register should be administered by the Commissioner, who has responsibility for registration under the Bills of Sale Acts 1878 and 1882: see the Crowther report para 7.4.10. The Diamond report suggested that there should be two registers (one for England and Wales and the other for Scotland), and that the registrars of companies would be the best people to run them (although it was also proposed to retain the Companies Act 1985 registration system for security interests in land): see the Diamond report paras 11.6.2-11.6.5 and 12.2.6.
[53]Final Report para 12.69.
[54]As we will see later, an advantage in having a single register would be that for certain types of collateral, searches could be made by asset. Security interests over the asset would be revealed whether the chargor was a company or not.
[55]Which the Steering Group proposed should be abolished:Final Reportpara 12.69.
[56]Such as the ‘specialist’ registers, which we discuss below, in para 4.199 ff.
[57]See above, para 2.25.
[58]Registration of Company Charges para 3.12.
[59]Registration of Company Charges para 3.13.
[60]The unimplemented Companies Act 1989, ss 94 and 95 introduced new Companies Act 1985, ss 397 and 399(1), whereby the registrar’s certificate was to be conclusive only that the specified particulars were delivered no later than the stated date, and that failure to deliver within the required time would result in invalidity against the liquidator, administrator or any person who for value acquired an interest in or right over property subject to the charge. The registrar’s certificate would therefore have become conclusive only as to date of filing, whilst the sanction of invalidity for any breach of the registration requirements would have been retained. The Steering Group put this forward as an important reason for the non-implementation of Part IV of the Companies Act 1989: seeRegistration of Company Charges para 3.14.
[61]See below, paras 4.199 ff.
[62]Final Report para 12.20.
[63]Although this is not always the case: under the system operating under the PPSA for Manitoba, in the case of corporate securities, the trust deed containing the security interest, or a copy of the bonds, debentures or debenture stock containing the security interest must accompany the financing statement: see s 48(3). The Australian Law Reform Commission also recommended that in the case of securities over company property the documents constituting the transaction would have to be lodged: see ALRC 64, Personal Property Security paras 13.13 and 13.23.
[64]See further below, paras 4.110 ff.
[65]Although there could be some form of verification statement that the financing statement had been filed. The Steering Group thought that entry on the Companies House register could be conclusive as to the date, and did not think that the issuing of a separate certificate would be necessary: seeFinal Report para 12.20. We provisionally agree with this view, although there would clearly need to be rules to determine times of filing within the same day, eg, the SPPSA, s 43(2), which provides that registration of a financing statement is effective from the time assigned to it at the registry and, where two or more such statements are assigned the same time, the order of registration is determined by reference to the registration numbers assigned to them at the registry.
[66]See UCC Revised Article 9, Section 9-506(a); the SPPSA, s 43(6); and the NZPPSA, s 149. The PPSA for Manitoba, s 48(5) provides that “An error of a clerical nature or in an immaterial or non-essential part of a financing statement … that does not mislead” does not invalidate the registration. See also ibid, s 4(2).
[67]In Coates v General Motors Acceptance Corporation of Canada Ltd (case no 21546, 3/12/99), Grist J, sitting in the Supreme Court of British Columbia, provided a summary of applicable principles. He was referring to the registration of serial numbered goods (on which, see below, paras 4.186-4.187) but the principles are of more general application. “1. The test of whether a registration is seriously misleading is an objective one, independent of whether anyone was or was not misled by the search, or whether a search was in fact conducted. 2. Total accuracy in registration by name or registration by serial number is not necessary. 3. A seriously misleading description of either the name or the serial number in the registration will defeat the registration. 4. A seriously misleading registration is one that, (a) would prevent a reasonable search from disclosing the registration or, (b) would cause a reasonable person to conclude that the search was not revealing the same chattel (in the case of a serial number search) or the same debtor (in the case of a name search). The obligation is on the searcher to review the similar registrations to make this determination. 5. Whether a registry filing and search program is reasonable in the sense that its design will reveal simple discrepancies without arbitrary distinction, will not be assessed in determining if a reasonable search would disclose a registration. The only question to be answered is whether a registry search will reveal the incorrect registration.” Ibid, para 17. See also Gold Key Pontiac Buick (1984) Ltd v 464750 BC Ltd (Trustee of) [2000] BCCA 435.
[68]Eg, the SPPSA, s 43(9) provides that “Failure to provide a description in a financing statement in relation to any item or kind of collateral does not affect the validity of the registration with respect to other collateral described in the financing statement.” See also the NZPPSA, s 152.
[69]See UCC Revised Article 9, Section 9-338.
[70]See Final Report para 12.32. See also the Diamond report para 22.3.3.
[71]See Registration of Company Charges para 3.27.
[72]The overseas systems do not go this far, although they do provide some guidance. See, eg, Section 9-506(b) of UCC Revised Article 9, which provides that a financing statement that fails sufficiently to provide the name of the debtor (in accordance with Section 9-503(a)) is seriously misleading (but see also Section 9-506(c) and Section 9-507); there may still be dispute over what constitutes “sufficiently”. The PPSA for Manitoba, s 48(6) provides that an error in the spelling of any part of the name of a debtor invalidates the registration unless a judge or court is of the opinion that it did not actually mislead anyone whose interests are affected by the registration. The NZPPSA, s 150 provides that “a registration is invalid if there is a seriously misleading defect, irregularity, omission, or error in (a) the name of any of the debtors required by section 142 to be included in the financing statement other than a debtor who does not own or have rights in the collateral; or (b) the serial number of the collateral if the collateral is consumer goods, or equipment, of a kind that is required by the regulations to be described by serial number in a financing statement.” However, although the title to this section is “When financing statement seriously misleading” (sic), the wording of the section does not really assist on this matter: it does not provide that an error in the name of the debtor, for example, is seriously misleading, but rather than an error in the name will result in invalidity if it is seriously misleading: there is no actual help to the court in determining what “seriously misleading” means. A similar sort of provision exists in the SPPSA, s 43(7).
[73]See, eg, the SPPSA, s 43(8), and the NZPPSA, s
151. However, cf the PPSA for Manitoba, s 48(6): an error in the spelling of
any part of the name of a debtor invalidates the registration unless a judge or
court is of the opinion that it did not actually mislead anyone whose interests
are affected by the registration. See also Section 9-506(b) of UCC Revised
Article 9.
[74]Companies Act 1985, s 399.
[75]The Crowther report noted that it should be for the secured party to take the commercial decision whether to risk subordination of her interest to a subsequent purchaser: see the Crowther report para 5.7.48. See also the Diamond report paras 9.8.1 and 11.3.9.
[76]Final Report para 12.48.
[77]Although we think there should be a criminal sanction for the deliberate or reckless filing of false information: see above, para 4.47.
[78]Final Report para 12.44.
[79]Possessory security interests are perfected by possession. In the UCC security interests over investment securities are perfected by ‘control’. On this, see further below, paras 5.29-5.34.
[80]This reflects the fact that the overseas systems apply to all forms of debtor, and not just companies.
[81]SPPSA, s 20(2).
[82]See below, para 4.120.
[83]It was noted that the court has the power to enforce that obligation, and that failure to comply, or the provision of incorrect information, renders the secured party liable for any foreseeable loss incurred as a result. See the Diamond report paras 18.6.1-18.6.2.
[84]Diamond report para 18.6.3.
[85]In New Zealand, the statute refers only to “judgment creditor”: see the NZPPSA, s 177.
[86]See the NZPPSA, s 177, and the SPPSA, s 18(1) (under which a sheriff is also listed as a person who may make a demand). A person with an interest in personal property of the debtor is only entitled to make a demand with respect to a security agreement that provides for a security interest in the property in which she has an interest: see the SPPSA, s 18(3).
[87] See the SPPSA, s 18(2). See also the NZPPSA, s 177. The Australian Law Reform Commission recommended that lenders who chose to register their securities should be required to provide copies of the security instruments if a reasonable request were made: ALRC 64, Personal Property Security para 13.23. This was subject to the question of privacy, and in the case of a debtor who was an individual, the debtor’s consent would be required before the information was to become available: ibid, para 13.24.
[88]NZPPSA, s 178; SPPSA, s 18(6).
[89]See the SPPSA, s 18(8). Under the New Zealand system, the request must be complied with unless exempted by a court order following an application by the secured party: see the NZPPSA, ss 178-179.
[90]SPPSA, s 18(8); NZPPSA, s 181. If the court is satisfied that it would be unreasonable to comply with the request, it may exempt the secured party from complying with a request in whole or in part, or may extend the time for compliance: see the NZPPSA, s 179.
[91]SPPSA, s 18(12); NZPPSA, s 182.
[92]NZPPSA, s 183; SPPSA, s 18(9).
[93]Companies Act 1985, s 406. We have also already noted that PPSA for Manitoba, s 48(3) requires that in the case of corporate securities, the trust deed or a copy of the bond, debenture or debenture stock that contains the security interest must also be filed.
[94]Companies Act 1985, s 408(1).
[95]The unimplemented Companies Act 1989, s 101 created a new Companies Act 1985, s 412, which would have made it compulsory to allow any person to inspect a copy of any charge (and, on payment of a fee, any entry in the company’s own register).
[96]See the SPPSA, s 18(14); see also ss 18(15) and (16) for provisions dealing with estoppel in relation to successors in interest.
[97]Where supplementary information has been filed correcting the error, we provisionally think that estoppel would still operate in respect of reliance on the previously inaccurate information prior to the change being made.
[98]See above, paras 3.4-3.5.
[99]See above, para 2.30.
[100]Although the right to inspect the instruments (as opposed to the register) does not extend to those who are not members or creditors of the company (contrary to the suggestion in Registration of Company Charges para 3.70).
[101]Final Reportpara 12.68.
[102]Except for a point affecting Scots companies:Final Reportpara 12.68.
[103]See below, Parts V and VII.
[104]See above, paras 4.61-4.62.
[105]Companies Act 1985, s 395: see above, para 2.27. There is, however, provision to extend the time for registration or to rectify errors and omissions in the register: see s 404.
[106]The UCC Revised Article 9 has no time limit for filing the initial financing statement (nor did the previous version). However, there are time limits for filing continuation statements before the expiry of the period of validity of the original financing statement: see Section 9-515(d). On the question of the period of validity of an original financing statement, see below, para 4.81-4.86. Similarly, neither the Saskatchewan nor the New Zealand system has a time limit. An earlier version of the PPSA for Ontario imposed a 30 day deadline for filing financing statements after the execution of the security agreement (see the Diamond report para 7.1.4); however, the current 1990 version no longer has such a requirement.
[107]Crowther report para 5.7.54.
[108]Crowther report para 5.7.55. The Halliday report para 55 recommended that filing should take place within 21 days of execution.
[109]Diamond report para 11.3.9.
[110]Diamond report para 11.3.8.
[111]Provisions of the Companies Act 1989, if implemented, would have provided that late-registered charges would have been invalidated where insolvency proceedings began within one of several periods varying from six months to two years after the particulars were delivered (depending on the nature of the charge): the Companies Act 1989, s 95 introduced a new Companies Act 1985, s 400. The Steering Group described this unimplemented change as “an unnecessary and undesirable complication in insolvency law.”See Registration of Company Charges para 3.9.
[112]Final Reportpara 12.46.
[113]We have sympathy with the Steering Group’s suggestion in its consultation document that it would be inequitable to penalise a creditor if the company were solvent at the time the charge was created, and for some time afterwards: seeRegistration of Company Charges para 3.9.
[114]We are most grateful to Dr Sarah Worthington for bringing this point to our attention.
[115]See, eg, Re Fablehill Ltd [1991] BCLC 830.
[116]See below, paras 4.110 ff.
[117]UCC Revised Article 9, Section 9-515. There are longer periods for certain transactions: see Section 9-515 (b), (f) and (g).
[118]See below, para 4.90.
[119]SPPSA, s 44. The PPSA for Manitoba takes a slightly different approach, providing that in the case of corporate securities, there are no time limits set out, although in other cases the time limit is generally three years (but not in the case of instruments, securities, letters of credit, advices of credit or negotiable documents of title): see s 53.
[120]NZPPSA, ss 153-154.
[121]Crowther report paras 5.7.56 and 5.7.45.
[122]Halliday report para 56.
[123]Diamond report para 11.8.6.
[124]Diamond report para 11.8.6.
[125]See Registration of Company Charges para 3.49. However, there is such an obligation in Scotland: Companies Act 1985, s 466.
[126]Companies Act 1985, s 403. Note that if failure to register a change makes the financing statement seriously misleading then the filing may become invalid: see above, paras 4.39 ff.
[127]The purpose is to provide a warning, rather than a detailed breakdown, of possible encumbrances on a debtor’s assets.
[128]See above, paras 4.19 ff.
[129]See above, para 3.4.
[130]See above, para 4.29.
[131]Eg, a change from a fixed to a floating charge:Final Reportpara 12.39.
[132]Registration of Company Charges para 3.52. The Steering Group suggested that the delivery of memoranda of satisfaction (in whole or part) should remain voluntary, on the basis that the only party to suffer was the company itself, as a satisfied charge that was still on the register gave an impression that its assets were more encumbered than they were. In addition, the Steering Group argued that it would be difficult to see how effective sanctions for non-compliance could be imposed, given that the registrar would have no means of knowing that a charge had been satisfied. Whilst the majority of those who responded to the Steering Group’s consultation document supported such filing as being voluntary, there were some who thought it should be compulsory, expressing concern that otherwise the register would give an inaccurate impression to anyone searching it. The Steering Group also proposed that the chargee’s signature should be required on a memorandum of satisfaction, and that the chargor should have the right to apply to the court for an order if the chargee refused to sign (and in such circumstances to be indemnified in costs): Final Report paras 12.41-12.42.
[133]The Steering Group suggested that the filing of some changes - assignments, changes to negative pledges and the late introduction of a negative pledge - should be voluntary, but it did not consider that any other change needed to be notified: Final Report para 12.40.
[134]See, eg, the NZPPSA, s 135, which defines a financing change statement as the data required or authorised by the Act and regulations to be entered in the register to renew, discharge, or otherwise amend a financing statement.
[135]This includes where all of the obligations pursuant to the security agreement have been performed; where the secured party has agreed to release part or all of the collateral described in the financing statement; and where the description of the collateral contained in the financing statement either includes an item or kind of property that is not secured collateral, or does not distinguish between original collateral and proceeds: SPPSA, s 50(3); NZPPSA, s 162.
[136]Which the Saskatchewan legislation defines, for these purposes, as including “any person named in a registered financing statement as a debtor”. See the SPPSA, s 50(1)(a).
[137]In order to reflect the terms of the agreement or the collateral description, so as to exclude items or kinds of property that are not secured collateral or to identify items and kinds of property as original collateral or proceeds: SPPSA, s 50(4); NZPPSA, s 163. Similar suggestions for the demanding and lodging of notices of full or partial discharge were made by the Australian Law Reform Commission: see ALRC 64, Personal Property Security para 13.18. The Crowther report (based on UCC Article 9 then in force) suggested that the debtor should be able to obtain a termination statement from the secured party, the presentation of which should result in the removal of the financing statement from the file. It was also recommended that where the security is released by the secured party (in whole or in part), the debtor should be entitled to a statement of release, and to have this noted on the file: Crowther report para 5.7.57-5.58. The Diamond report also recommended that there should be similar requirements to those of UCC Article 9: Diamond report paras 18.5.1-18.5.3.
[138]Or where the secured party does not give to the registrar a court order confirming that the registration need not be amended or discharged (the secured party being permitted to seek such an order under the SPPSA, s 50(7) and the NZPPSA, s 167).
[139]In Saskatchewan this is done on providing the registrar with proof that the demand has been given to the secured party: SPPSA, s 50(5). In New Zealand the registrar is required to ensure that the secured party is given a notice (as soon as reasonably practicable after the financing change statement is entered in the register) stating that the financing change statement will be registered unless a court order maintaining the registration is served on the registrar within 15 working days of the notice being given to the secured party: NZPPSA, ss 165 and 166. In the case of termination statements, UCC Revised Article 9, Section 9-513 provides that (in cases not involving consumer goods) within 20 days after receiving an authenticated demand from a debtor, the secured party has to cause the party named as the secured party on the original financing statement (the “secured party of record”) either to send the debtor a termination statement for the financing statement or file the termination statement, provided certain conditions are met.
[140]See, eg, the SPPSA, ss 50(8)-(9) and the NZPPSA, ss 164 and 168.
[141]See the SPPSA, ss 44(3)-(4), and see the NZPPSA, s 160, which also allows for a statement of discharge to be entered.
[142]There would, in addition, be sanctions for the filing of false information: see above, para 4.45.
[143]Here we deal only with the disposition of property expressly subject to the charge; the sale of charged property to a purchaser who does not agree to take subject to the charge is considered later in this Part: see below, paras 4.173 ff.
[144]As with a financing statement, a financing change statement disclosing a transfer of a security interest may be registered before or after the transfer takes place: SPPSA, s 45(4).
[145]See the SPPSA, s 45.
[146]Such a person might choose initially not to contact the company itself either for reasons of anonymity or possibly as a more independent source of information.
[147]There should always be an existing financing statement where the debtor is a company; if the debtor is not a company, our proposed rules will not apply (at least until any scheme is extended to include unincorporated debtors). For these purposes the legal personality of the creditor is irrelevant.
[148]See below, paras 4.118 ff. The Steering Group recommended that there should be provision for voluntary filing where there was assignment to a new chargee: it was not in favour of having either a criminal sanction or a sanction of invalidity in respect of a failure to file: Final Report para 12.38. The SPPSA, s 23(2) provides that a transferee of a security interest has the same priority with respect to perfection of the security interest as the transferor had at the time of the transfer.
[149]Companies Act 1985, s 400.
[150]SPPSA, s 51(1). Although the debtor is the one undertaking the transfer, the relative priority of the security interest is more likely to be of concern to the secured party to the debtor.
[151]Where the secured party knows the information required to register a financing change statement disclosing the transferee as the new debtor (where the debtor has transferred all or part of its interest), or where the secured party knows the new name of the debtor (where there is a change in the debtor’s name), similar rules apply although the 15 days are taken form the date of knowledge: SPPSA, s 51(2).
[152]In such a case, where there are one or more subsequent transfers of the collateral without the consent of the secured party before the secured party acquires knowledge of the name of the most recent transferee, the secured party is deemed to have complied with the requirements of the SPPSA if it registers a financing change statement not later than 15 days after acquiring knowledge of the name of the most recent transferee who has possession of the collateral and the information that is required to register a financing change statement (the secured party need not therefore register a financing change statement with respect to an intermediate transferee): see ibid, s 51(4).
[153]As to the possible range of registrable security interests, see below, Parts V and VII.
[154]Eg, where the purchase was from an unincorporated body that was not subject to the requirement to file a financing statement, being outside the notice-filing system.
[155]See above, paras 4.40 ff.
[156]See below, paras 4.111-4.113.
[157]Crowther report para 5.7.53.
[158]See Section 9-402(1) of UCC Article 9 as in force at the date of those publications. This was presumably for the purpose of preventing fraudulent attempts to remove the registration.
[159]See, eg, the PPSA for Manitoba, s 48(1) (but not where it relates to a corporate security and it is accompanied by the trust deed, bond, debenture or debenture stock containing the security interest: ibid, s 48(2)). See also the Personal Property Security Regulations for Saskatchewan, s 7, and the Personal Property Security Regulation for Alberta (AR 95/2001), s 9(1) (although an electronic statement filed is deemed to be signed by the secured party: see ibid, s 93)), and the Personal Property Security Regulation for British Columbia (BC Reg 279/90), s 15.
[160]See Section 9-502 and Section 9-516 of UCC Revised Article 9. See J J White and R S Summers, Uniform Commercial Code (5th ed 2000) pp 782-783: “The drafters of Revised Article 9 apparently concluded that the debtor’s signature was an unnecessary technicality”. We also understand that there may have been concerns over the validity of electronic signatures in an electronic filing system which the removal of the requirement to sign the financing statement overcame.
[161]It would be possible, for instance, to require that filing be accompanied by a digital signature of the company or its responsible officer. See the Electronic Communications Act 2000 and (2001) Electronic Commerce: Formal Requirements in Commercial Transactions - Advice from the Law Commission. Requiring a signature on paper would mean that the system could not be wholly electronic (as we think it should be).
[162]See Final Report para 12.23. It seems from the context that the Steering Group was concerned that to require the chargor’s signature might delay filing.
[163]See Final Report para 12.23. See also above, para 4.45.
[164]The Australian Law Reform Commission also recommended that a signature should not be required: see ALRC 64, Personal Property Security para 13.6.
[165]The NZPPSA, s 148 provides that, not later than 15 days after receipt of the verification statement (which under s 145 must be given to the person who registered the financing statement as soon as reasonably practicable after such registration), the secured party must give the debtor a copy of it, unless it has given written waiver. See also the SPPSA, s 43(12), which provides for the secured party to send the debtor a copy of either the financing statement or the verification statement within 30 days of the filing or receipt of the verification statement. Failure to comply with this provision results in the debtor being deemed to have suffered damages of not less than the prescribed amount: see ibid, s 65(6).
[166]The Australian Law Reform Commission also recommended that it should be an offence knowingly or recklessly to lodge a false statement, and that the debtor should be entitled to compensation from the person filing for damage suffered as a result of lodging a false statement: see ALRC 64, Personal Property Security para 13.8. However, the overseas systems do not generally make express provision for such sanctions, although we presume attempts at fraud would be covered by the general law.
[167]See above, para 4.44.
[168]See the UCC Revised Article 9, Section 9-502(d); the SPPSA, s 43(4); and the NZPPSA, s 157. At the time of the Diamond report, the PPSA for Ontario did not permit registration in advance of the execution of the security agreement at all (see the Diamond report para 7.1.4), and this is still the case for consumer goods: see s 45(2). However, in the case of collateral other than consumer goods, filing is permitted either before or after the security agreement is signed by the debtor: see s 45(3).
[169]“It is implicit in the statutory requirements of a financial statement that the notice intended should be broad - that it should be a warning, nothing more. The notion of a warning with its underlying purpose of functionality, practicality and versatility is completely compatible with and actually promotes the notion of one financing statement giving notice of either an acquired or a pending security interest as well as of a security interest that was not specifically contemplated at the time of the notice and (it would appear to necessarily follow) of more than one such security interest.” Per Bayda CJS in Agricultural Credit Corporation of Saskatchewan v Royal Bank of Canada SKCA CA94082.
[170]Crowther report para 5.7.53; Diamond report para 11.2.12. However, the Halliday report was not in favour of such a step: see para 54. It was thought that such a concession might open the way to unjustified or speculative filing (but see the comments on this aspect in the Diamond report para 11.2.11).
[171]Final Reportparas 12.22-12.23.
[172]Final Reportpara 12.33.
[173]Final Reportpara 12.34.
[174]SPPSA, s 50(3)(d); NZPPSA, s 162(d).
[175]See above, para 4.90.
[176]See below, paras 4.152-4.154 on the question of priority of future advances.
[177]Whilst it would be possible additionally to require that where a financing statement had been filed in advance of the creation of a charge, subsequent confirmation should be made where the charge was in fact created at a later date, this would seem to negate the whole point of allowing notice-filing in advance of creation, and render the system more akin to a transaction registration scheme, with details of each individual transaction having to be supplied.
[178]See the Diamond report para 11.2.13.
[179]NZPPSA, s 147; SPPSA, s 43(5).
[180]Diamond report para 11.2.13.
[181]See below, paras 5.18 ff. However, we suggest that a charge over shares should not generally be registrable.
[182]If a functional approach were to be taken as to what should be registrable under a notice-filing system (see below, Part VII), this flexibility would also permit a ‘Romalpa seller’ contemplating the supply of goods over a period of time to file a single financing statement in respect of an unlimited and unspecified number of future advances. See M Bridge, “Form, Substance and Innovation in Personal Property Security Law” [1992] JBL 1, 15.
[183]See above, para 3.5.
[184]And, depending on the scope of the system, quasi-security interests: see below, Part VII.
[185]The UCC requires filing for security interests but then for purposes of priority distinguishes between purchase-money and non-purchase-money security interests. See below, paras 4.155 ff.
[186]See above, para 4.110.
[187]The overseas systems make it clear that registration of a financing statement does not amount to constructive notice or knowledge of its existence or contents: see, eg, the SPPSA, s 47.
[188]Diamond report para 11.9.5.
[189]See above, para 4.56.
[190]SPPSA, s 20(2).
[191]Compare the current English law: see above, para 2.28.
[192]See UCC Revised Article 9, Section 9-322(a)(2); the SPPSA, s 35(1)(b), and the NZPPSA, s 66(a).
[193]See the SPPSA, s 35(1)(c) and the NZPPSA, s 66(c) and UCC Revised Article 9, Section 9-322(a)(3).
[194]See UCC Revised Article 9, Section 9-322(a)(1); the SPPSA, s 35(1)(a), and the NZPPSA, s 66(b)(i). These sections also allow for perfection by possession to be determinative of priority. The time of registration of the security interest is also taken to be the time of registration in respect of proceeds: see the SPPSA, s 35(3), and the NZPPSA, s 68. On the question of ‘proceeds’, see below, para 4.163 ff.
[195]See the SPPSA, s 35(1): “Where this Act provides no other method …”, and the NZPPSA, s 66: “If this Act provides no other way …”.
[196]All the overseas systems have specific rules dealing with particular situations: in Saskatchewan, for example, there are specific priority rules for liens, fixtures, crops, accessions, processed or commingled goods, and purchase-money security interests.
[197]Although we have already noted that priority by date of registration already operates under the provisions of some of the specialist registers: see above, paras 2.49 ff, and see further below, paras 4.199 ff.
[198]See above, paras 4.110 ff.
[199]It has been noted that, in America, the development of equitable floating charges was arrested by judicial hostility: I Davies, “Floating charges and reform of personal property legislation” [1988] Company Lawyer 47, 48. As Gilmore points out, if floating charges had become common in America some of the pressure for change which brought about Article 9 would have been absent: G Gilmore, Security Interests in Personal Property (1965) pp 359-361.
[200]As is the case with a floating charge: see above, paras 2.16-2.17.
[201]Crowther report para 5.7.77.
[202]Diamond report para 16.7.
[203]The Halliday report seemed to suggest that the floating charge should exist outside any new comprehensive scheme covering personal property and security: see para 60(3), and see the comments on this in the Diamond report para 16.8.
[204]It is the ability of the chargor company to carry on its business in the ordinary way regarding the particular class of assets that is subject to the floating charge that is regarded as the ‘hallmark’ of the floating charge: see Agnew v Commissioner of Inland Revenue [2001] 2 AC 710, 718. See also Smith (Administrator of Cosslett (Contractors) Ltd) v Bridgend County Borough Council [2001] 3 WLR 1347, 1359. This concept does not seem to be specifically addressed in the overseas legislation. There may also be an issue as to whether an execution creditor may seize goods that are covered by a floating lien. Currently an execution creditor may take goods that are subject to an uncrystallised floating charge, as the secured creditor is not regarded as having rights over any specific item: see R Goode, Commercial Law (2nd ed 1995) p 742. In the UCC Revised Article 9 the implication is that the ‘judgment lien’ takes priority: see J J White and R S Summers, Uniform Commercial Code (5th ed 2000) p 841. The same result has been reached under the Ontario PPSA: see G McCormack, “Personal Property Security Reform in England and Canada” [2002] JBL 113, 121. However these results seem to follow from a definition of attachment that covers all goods currently owned by the debtor, rather than from the adoption of notice-filing in itself. See further below, Appendix B paras B.9-B.11.
[205]The Australian Law Reform Commission also recommended that a registered floating charge should take priority from the date of registration: see ALRC 64, Personal Property Security para 8.37.
[206]So-called ‘lightweight floating charges’ that are solely for the purpose of giving the floating charge-holder the right to appoint an administrative receiver and thus to block an administration order (see, eg, Re Croftbell Ltd [1990] BCLC 844) may not contain a negative pledge clause, but we understand that in cases in which the charge-holder is looking to the charge to provide security in any real sense, a negative pledge clause is almost invariable.
[207]Companies Act 1985, s 417(3)(e).
[208]Diamond report para 16.10 The unimplemented Companies Act 1989, s 103 would have substituted a new Companies Act 1985, s 415(2)(a), allowing a negative pledge to be one of the prescribed particulars.
[209]Clause 242.
[210]Clause 243. The explanatory notes indicate that where a company has gone into liquidation, administration, provisional liquidation or receivership, the office-holder will, after taking account of preferential debts, fixed charges and realisation costs, make part of the company’s property available to unsecured creditors, although it will not be necessary to distribute funds to unsecured creditors if they are less than the prescribed minimum, and the office-holder thinks that the cost of making a distribution would be disproportionate to the benefits.
[211]See above, para 2.40.
[212]As administrative receivers are likely to be abolished under the forthcoming Enterprise Bill, ‘lightweight’ floating charges created solely to give the right to appoint a receiver and thus to block an administration order are also likely to disappear.
[213]Final Reportpara 12.26.
[214]And perhaps that a provision to this effect will be invalid.
[215]See above, para 4.128.
[216]As the Official Comment to Section 9-204 makes clear, the purpose of this Article was to prevent arrangements which give the debtor unfettered control over the collateral from being held void.
[217]UCC Revised Article 9, Section 9-322(a). This is a change from the 1962 version that was criticised by the Crowther report at Appendix III para 17, and achieves the result that the Crowther report recommended.
[218]See below, paras 4.155 ff.
[219]See above, para 4.19 ff.
[220]On this point, see above, paras 4.51 ff.
[221]Eg, the question of whether a charge was fixed or floating was again considered in the recent Privy Council decision in Agnew v Commissioner of Inland Revenue [2001] 2 AC 710. See also Smith (Administrator of Cosslett (Contractors) Ltd) v Bridgend County Borough Council [2002] 3 WLR 1347.
[222]See above, paras 4.39 ff.
[223]See above, para 4.44.
[224]See below, paras 4.173 ff.
[225]SeeFinal Reportparas 12.25 and 12.28 (it was proposed to retain the mandatory requirement for Scotland). The Australian Law Reform Commission recommended that automatic crystallisation should only take place where a notice that the charge has become fixed by virtue of the crystallising event has been lodged with the companies’ office; a receiver of property or the chargee (or its agent) has entered into possession of the property under the terms of the charge or another charge, or a liquidator or administrator of the company has been appointed: see ALRC 64, Personal Property Security paras 10.13-10.14. Cf the unimplemented Companies Act 1989, s 100, which would have introduced a new Companies Act 1985, s 410, which, amongst other things, would have enabled the Secretary of State to require notice to be given of the events which would cause crystallisation.
[226]See below, paras 4.173 ff.
[227]Registration of Company Charges para 2.10.
[228]We consider what changes should be made to the list of registrable interests below, in Part V.
[229]Registration of Company Charges para 2.10.
[230]See below, paras 5.18 ff. In Part V we also ask whether it should be possible to protect a charge over shares and other investment securities by filing a financing statement. If this were made possible, then a rule would be required to deal with questions of priority as between the holder of a secured interest protected by filing and one protected by control.
[231]Attachment being dealt with within the system: see, eg, the SPPSA, s 35(1)(c).
[232]See above, paras 2.36 ff. The date of attachment test would overcome the question of notice. Such priority would, however, be displaced if the second party then filed first (although this could not occur in the event of administration or insolvency).
[233]See, eg, the SPPSA, s 40(1) and the NZPPSA, s 70(1).
[234]NZLC R8, A Personal Property Securities Act for New Zealand cl 39.
[235]Cf, eg, ALRC 64, Personal Property Security para 7.13.
[236]Where a security interest has been subordinated by the secured party to another’s interest, a financing change statement may be registered to disclose the subordination at any time during the period that the registration of the subordinated interest is effective: see the SPPSA, s 45(6).
[237]See above, paras 4.87 ff.
[238]See above, para 4.100.
[239]See the SPPSA, s 23(2) and the NZPPSA, s 69 and UCC Revised Article 9, Section 9-325. See also ALRC 64, Personal Property Security para 13.16.
[240]See the SPPSA, s 35(5).
[241]See the NZPPSA, ss 71-72 and UCC Revised Article 9, Section 9-323.
[242]See above, paras 2.56-2.57.
[243]The Australian Law Reform Commission proposed that a security holder who, whether or not under a contractual obligation to do so, makes a further advance contemplated by the securitytransaction, with or without notice of a registered security filed later in time or a later but unregistered security, should have the same priority for the further advance as for the principal amount secured: see ALRC 64, Personal Property Security para 8.10.
[244]Indeed if ‘tacking’ were not permitted in such a case, lenders would presumably file a financing statement covering a series of separate possible future loans.
[245]It might be thought that under such a scheme the first creditor would even have to file a fresh financing statement.
[246]See the Crowther report para 5.2.12 and the Diamond report para 11.5.9. Some of the overseas statutes give a wide definition, eg, s 16 of the NZPPSA: “‘Purchase money security interest’ (a) Means (i) A security interest taken in collateral by a seller to the extent that it secures the obligation to pay all or part of the collateral’s purchase price; or (ii) A security interest taken in collateral by a person who gives value for the purpose of enabling the debtor to acquire rights in the collateral, to the extent that the value is applied to acquire those rights; or (iii) The interest of a lessor of goods under a lease for a term of more than 1 year; or (iv) The interest of a consignor who delivers goods to a consignee under a commercial consignment; but (b) does not include a transaction of sale and lease back to the seller”.
[247]Crowther report para 5.7.73. The recommendation was therefore that there should be a distinction between a purchase-money security interest and a non-purchase-money security interest (that is, an interest taken in property already owned by the debtor). The Diamond report recommended that purchase-money security interests should be subject to the requirement to file a financing statement under the notice-filing system it proposed and agreed that purchase-money interests should receive some form of favourable treatment: Diamond report paras 11.5.19-11.5.20.
[248]See Church of England Building Society v Piskor [1954] 1 Ch 553.
[250]Although the extent of this decision is questioned by Goode: see R Goode, Commercial Law (2nd ed 1995) pp 724-725.
[251]We have already noted that in this Consultation Paper we use the phrase ‘security’ to refer to traditional forms of security, and ‘security interest’ to encompass all transactions that have a security function, whether or not the law currently classes them as traditional security: see above, para 1.26.
[252]There might be an argument that if the loan were used to pay arrears of employees’ salary that would otherwise constitute a preferential debt, then the floating charge-holder would benefit. We think that such a situation would perhaps be better dealt with by the creditor who is seeking to pay off the preferential debts to seek a subordination deal with the floating charge-holder, rather than create some specific provision giving purchase-money interest status to such debts in respect of floating charge-holders but not others.
[253]As well as in the case, under the UCC, of chattel paper; an instrument constituting proceeds of an instrument or chattel paper; and identifiable cash proceeds of the inventory: Section 9-324(b).
[254]See UCC Revised Article 9, Section 9-324(a) and (b). The requirement to serve a notice is apparently to ensure that previous creditors who have agreed to make future advances are protected from the fraud of debtors: see J J White and R S Summers, Uniform Commercial Code (5th ed 2000) p 850. See also the SPPSA, ss 34(2)(b) 34(3) and the NZPPSA, ss 73-74. In the case of intangibles, the purchase-money security interest will obtain priority if it is perfected within 15 days of attachment (or 10 days in New Zealand): SPPSA, s 34(2)(b); NZPPSA, s 75. In addition, both the Saskatchewan and New Zealand systems also provide that a perfected purchase-money security interest in goods that continues in the product or mass has priority over a non-purchase-money security interest that either continues in the product or mass, or is given in the product or mass itself by the same debtor: SPPSA, s 39(6); NZPPSA, s 86. The Saskatchewan system requires notice to be given in some cases.
[255]Crowther report para 5.7.74.
[256]Diamond report paras 11.7.6-11.7.7.
[257]See, eg, the SPPSA, s 34(2) (15 days) and the NZPPSA, s 73 (10 days).
[258]In the case of shares or other investment securities, the debtor will not normally obtain possession as the shares will be in the control of the creditor; so a purchase-money interest for shares will not have to be filed (and probably will not be registrable, see below, paras 5.18 ff).
[259]There may be additional priority rules applicable in the case of quasi-securities, which we return to in Part VII.
[260]See above, para 2.40.
[261]As to which see below, para 11.32.
[262]SPPSA, s 2(1)(hh); NZPPSA, s 16(1). The definition excludes the offspring of animals used as collateral simply because they are offspring. UCC Revised Article 9, Section 9-102(a)(64) defines proceeds as including “whatever is acquired upon the sale, lease, license, exchange or other disposition of collateral”.
[263]SPPSA, s 28(2).
[264]If the secured party enforces the security interest against both the collateral and the proceeds, the amount secured by a security interest in collateral and the proceeds is limited to the value of the collateral at the date of the dealing that gave rise to the proceeds: SPPSA, s 28(1); NZPPSA, s 45.
[265]NZPPSA, s 46, which also allows for continuous perfection where the financing statement covered the original collateral and the proceeds consist of a payment made in total or partial discharge or redemption of an intangible, a negotiable instrument, an investment security, or chattel paper; or a right to an insurance payment or any other payment as indemnity or compensation for loss or damage to the collateral or proceeds.
[266]Diamond report para 15.1.6.
[267]SPPSA, s 28(3).
[268]NZPPSA, s 47, and see also s 42.
[269]UCC Revised Article 9, Section 9-315(c) and (d).
[270]Diamond report para 15.1.11. The Australian Law Reform Commission recommended that there should be a statutory rule to displace the common law and equitable rules. The security interest in the original property should continue into identifiable proceeds, unless the security agreement provides otherwise, and that an interest in identifiable proceeds should have the same priority as the original security interest without any further steps having to be taken: ALRC 64, Personal Property Security para 8.41- 8.42.
[271]See above, para 4.29.
[272]Estoppel might also act as a protection.
[273]See above, para 2.60.
[274]Section 9-317(b).
[275]Section 9-317(d).
[276]Goods, chattel paper, a security, a document of title, an instrument, an intangible or money.
[277]SPPSA, s 20(3).
[278]SPPSA, s 20(4).
[279]NZPPSA, s 52.
[280]Diamond report para 24.3.5.
[281]The Companies Act 1989, s 95 would have amended the Companies Act 1985, s 399 to make a charge not registered within 21 days void against “any person who for value acquires an interest in or right over property subject to the charge” (whether acquired before or after the 21-day period).
[282]Section 3-320, which replaces Section 3-307, provides an exception when the secured party had perfected her interest by taking possession. This seems correct in principle.
[283]UCC Revised Article 9, Section 9-320, which replaces Article 9, Section 9-307. There are special rules on purchases of securities and negotiable instruments, see UCC Revised Article 9, Section 9-322 (money), Section 9-330 (chattel paper and instruments) and Section 9-321 (licensees and lessees): essentially they take free of the security interest whether or not in ordinary course of business - see Section 9-309. There are also provisions for purchasers of consumer goods but these bite only where the seller is not a trader and therefore do not seem relevant to a system applicable only to companies.
[284]Section 1-201(9).
[285]See below, paras 7.55 ff.
[286]Crowther report para 5.7.72.
[287]Diamond report paras 13.6.1-13.6.10. These reforms are outside our terms of reference, though we think the proposals are worthy of serious consideration.
[288]UCC Article 9, Section 9-307.
[289]See, eg, the SPPSA, s 30. We have not addressed other provisions in the overseas systems that relate to purchasers who are consumers.
[290]See the NZPPSA, s 53(1), which also applies to a lessor of goods.
[291]See, eg, the SPPSA, s 31 (money, instruments, securities, negotiable documents of title and chattel paper), and the NZPPSA, ss 94-99 (money, negotiable instruments, investment securities and chattel papers).
[292]The Australian Law Reform Commission considered whether the purchaser of particularly valuable property (eg, over $40,000) should be expected to check the register and therefore should not be protected against registered charges. It concluded that such a provision was unnecessary: we agree. See ALRC 64, Personal Property Security para 9.11.
[293]Although we have noted that, in the context of a floating charge, the position under the current law seems to be that sales of capital assets seem to be in the ordinary course of business: see above, para 2.61.
[294]ALRC 64, Personal Property Security para 9.9.
[295]See below, para 4.187.
[296]Ie, a person buying for private use or consumption.
[297]See below, para 7.58. We consider the case of vehicles at paras 7.55-7.56 and 10.51-10.54 below.
[298]Crowther report para 5.7.72; Diamond report para 13.5.4.
[299]See below, para 4.186.
[300]Although there is specific provision in the Hire-Purchase Act 1964 concerning vehicles sold whilst held on hire-purchase agreements. However, this aspect is more relevant to our discussion of quasi-securities in Part VII.
[301]We develop our provisional proposals in relation to the application of a notice-filing system to the specialist registers dealing with certain assets in the next section: see below, paras 4.199 ff.
[302]See below, para 5.28.
[303]Cf SPPSA, ss 31(4) and (5); though s 31(6) limits this to a purchaser who buys in the ordinary course of the transferor’s business. We do not find the latter qualification easy to apply to, for example, a bank that takes a charge over shares (that are registered in its own name) and then sells them.
[304]See below, para 6.28.
[305]See SPPSA, s 31(7) and the NZPPSA, s 98. Similarly, UCC Revised Article 9, Section 9-330(a) provides that where the competing interest in the chattel paper is only in respect of the proceeds of inventory, the purchaser will take free if she is acting in the ordinary course of its business, is in good faith, purchases for value and takes possession of the chattel paper, providing that the chattel paper does not indicate that it has been assigned to anyone other than the purchaser. Where the competing interest in the chattel paper is in respect of anything other than proceeds of inventory, the purchaser who takes possession of the chattel paper will take free if in good faith, for value, in the ordinary course of her business and without knowledge that the purchase violates the rights of the secured party: Section 9-330(b).
[306]Crowther report para 5.7.76.
[307]For these purposes, where the sale is in the ordinary course of business, knowledge is defined as meaning knowledge that the transaction is in breach of the security agreement: see the SPPSA, s 31(6) and the NZPPSA, s 96(2).
[308]See the SPPSA, ss 31(4) and 31(5) and the NZPPSA, ss 96(1) and 99(1).
[309]See above, paras 2.49 ff.
[310]Other than ‘floating charges’ that would cover such assets: see below, para 4.212.
[311]See above, para 2.51.
[312]As we noted earlier, neither the Crowther report nor the Diamond report envisaged the systems they proposed applying to security interests over land, and so this issue was not discussed in any detail. Nor do the overseas notice-filing schemes we have considered cover security interests granted over land (other than fixtures or mineral rights).
[313]Registration of Company Charges para 2.8.
[314]Although this was on the basis of an electronic means of passing on such information: the Land Registry’s response to our provisional proposals may of course differ from its response to the Steering Group’s consultation document.
[315]The Land Registration Rules 1925, r 9(2) provides that any person can apply for a search in the index of registered proprietors’ names in respect of the name of a person “in whose property he is able to satisfy the Registrar he is interested generally (for instance as his trustee in bankruptcy or his personal representative)”, although this search facility is necessarily limited.
[316]Of course, a party interested in a company could ask the company to provide details, or could consult the accounts, but for the party wishing to keep its enquiries from the company, or for the party wishing to know more about the assets themselves than are revealed by the accounts, this is not an option.
[317]We do not think that this would be a particularly onerous task, particularly if the Companies Register were in electronic format. The Land Registration Act 2002 already contains a section (as yet unimplemented) giving power to the Lord Chancellor to make rules about the transmission by the Land Registrar to the Companies Registrar of applications under Part XII or Part XXIII, Chapter III of the Companies Act 1985: Land Registration Act 2002, s 121.
[318]See above, para 2.52.
[319]Land Charges Act 1972, s 3(7).
[320]Cf the problem of registration in respect of after-acquired land.
[321]The Australian Law Reform Commission recommended that, whilst administration of searching any new register should generally be left to the registering authority in the light of available technology, the registering authority should issue a record of search which would be conclusive on the question of whether a security was registered, but only if the search revealed the existence of that security. If it disclosed no registered security it would not be conclusive, although it would be admissible as evidence that there was no such registered security, ALRC 64, Personal Property Security para 13.20
[322]See the SPPSA, s 48(2) and the NZPPSA, s 175.
[323]See above, para 4.39.
[324]Cf the system of indemnity in respect of the Land Registry under the Land Registration Act 1925, s 83, and see Prestige Properties Ltd v Scottish Provident Institution, The Times 23 May 2002.
[325]See the Diamond report paras 22.1.3 and 22.1.7 (referring to the Report of the Company Law Committee 1962, Cmnd 1749 (the ‘Jenkins report’)). See also W J Gough, Company Charges (2nd ed 1996) pp 720-721 and the New Zealand Court of Appeal decision in First City Corp Ltd v Downsview Nominees Ltd [1990] 3 NZLR 265, 272. However, cf G McCormack, Registration of Company Charges (1994) p 117.
[326]SPPSA, s 52(1).
[327]SPPSA, s 52(2). Alternative forms of action in respect of the discharge or purported discharge of any duty or function pursuant to the SPPSA are prohibited: ibid, s 52(4). This would presumably preclude tortious actions for misrepresentation.
[328]NZPPSA, s 176(1).
[329]NZPPSA, s 176(2).
[330]NZPPSA, s 176(1).
[331]See above, paras 4.43-4.46.
[332]The transitional provisions of the original SPPSA are therefore probably of more assistance to us for these purposes. The original SPPSA contained a general provision that it applied to every security agreement made after it came into force, and to every existing prior security interest. It also applied to security interests created under certain transactions made after the original SPPSA came into force, and which dealt with renewal, extension, refinancing or consolidation, and to the continuation of revolving credit transactions: ibid, ss 71(1) and (4). A “prior security interest” was defined as “an interest created, reserved or provided for by a security agreement or other transaction validly created or entered into, before this section comes into force, that is a security interest within the meaning of this Act and to which this Act would have applied if it had been in force at the time the security agreement or other transaction was created or entered into”: ibid, s 72(1)(a).
[333]See the NZPPSA, ss 193-201.
[334]Although, if the latter course were taken, we would envisage the date of the creation of the charge being added to the listed particulars on the financing statement. Although conversion by the registrar would be an initial administrative burden, it would probably be cheaper and more effective to have the registrar conduct this task than to require the company or creditor to re-submit particulars in the form of a financing statement.
[335]Although it may be if the first charge so permits: see above, para 2.40 n 95 and Re Benjamin Cope and Sons Ltd [1914] 1 Ch 800 and Re Automatic Bottle Makers Ltd [1926] Ch 412 (which suggests that a floating charge over part of the assets may be authorised impliedly).
[336]Which would be subject to the ‘old’ law.
[337]Having granted one floating charge the company would have no authority to grant a second over the same class of (eg, all) its assets.
[338]See below, paras 5.126 and 7.77-7.80.
[339]Which types of charge should be exempt from filing requirements is considered in Part V.
