Company Security Interests (Consultation Paper) [2004] EWLC 176(6) (13 August 2004)

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You are here: BAILII >> Databases >> The Law Commission >> Company Security Interests (Consultation Paper) [2004] EWLC 176(6) (13 August 2004)
URL: http://www.bailii.org/ew/other/EWLC/2004/176(6).html
Cite as: [2004] EWLC 176(6)

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PART 6

LIST OF PROVISIONAL RECOMMENDATIONS AND CONSULTATION QUESTIONS

We set out below a summary of our provisional recommendations and questions on which we invite the views of consultees. We would be grateful for comments not only on the matters specifically listed below, but also on any other points raised by this consultative report. It would be very helpful if, when responding, consultees could indicate either the paragraph of the summary that follows to which their remarks relate, or the paragraph of this consultative report in which the issue was originally raised.

Part 2 – Critical issues

Replacing the scheme of registration and priority for company charges

We provisionally conclude that there are significant weaknesses in the way the current company charge registration system operates. (Paragraph 2.6.)

We provisionally recommend that a wholly electronic notice-filing scheme for company charges, and an associated scheme of priorities, should be introduced. (Paragraph 2.68.)

We would welcome consultees' estimates of the costs and benefits of introducing the scheme as set out in the draft regulations, but limited to 'traditional' securities. (Paragraph 2.69.)

Unincorporated businesses

We provisionally recommend that the notice-filing scheme for companies should be extended to SIs created by other business debtors as soon as possible. (Paragraph 2.79.)

We would welcome consultees' estimates of any additional costs and benefits of extending the companies scheme as set out in the draft regulations to all business debtors. (Paragraph 2.80.)

Quasi-security devices

We provisionally recommend that even at the companies-only stage:

(1) sales of receivables should be brought within the notice-filing scheme for the purposes of perfection and priority (but not the statement of remedies); and

(2) title-retention devices that have a security purpose should be brought within the scheme (including the statement of remedies).

If consultees do not agree with these recommendations we ask whether they think that the relevant SIs should be brought into the scheme:

(a) only at an 'all business debtors' stage, or

(b) not at all. (Paragraph 2.135.)

We ask consultees whether they agree that operating leases of over one year and commercial consignments that do not have a security purpose should be brought within the scheme for the purposes of perfection and priority:

(a) at the 'companies-only' stage (our provisional recommendation), or

(b) only at an 'all business debtors' stage, or

(c) not at all. (Paragraph 2.136.)

We would welcome consultees' estimates of any additional costs and benefits of including (a) sales of receivables, and (b) title retention devices in the scheme as set out in the draft regulations. If it is possible, it would be helpful if consultees were to give separate estimates for both a companies-only scheme and one for all business debtors. (Paragraphs 2.137.)

Financial collateral

We provisionally recommend that SIs over investment property should be brought within the scheme, and that it should be possible to perfect such SIs by 'control'. (paragraph 2.148.)

We provisionally recommend that SIs over bank accounts should be brought within the scheme; and that it should be possible to perfect such SIs by control. (Paragraph 2.157.)

We would welcome consultees' estimates of the costs and benefits of our provisional recommendations for financial collateral. (Paragraph 2.159.)

A statement of the parties' rights and obligations

We provisionally recommend that any scheme of rights and remedies should not contain a general reference to 'good faith', nor a general requirement that either party exercise its rights or perform its obligations in a commercially reasonable manner. Instead there should be specific requirements when these are necessary. (Paragraph 2.182.)

We provisionally recommend the inclusion of a statement of rights and remedies in the 'companies-only' scheme. (Paragraph 2.190.)

We would welcome consultees' estimates of the costs and benefits of our provisional recommendations for including a statement of rights and remedies. (Paragraph 2.191.)

Part 3 – The scheme in full

Scope of the scheme

We would welcome views on whether the scheme we provisionally propose should be limited to registered companies and LLPs, or should apply also to other corporate bodies; and, if so, as to which corporate bodies should be included. (Paragraph 3.8.)

We would welcome advice on whether we should continue to use a definition of 'debtor' that may refer to either the party creating the SI or the party whose obligation is secured, where they are not the same person, or both.

Security interests

'In-substance' SIs

On the assumption that the scheme should apply to quasi-securities, we provisionally recommend that the definition of 'security interest' should encompass all those transactions that have a security purpose, irrespective of the form of the transaction or who has title to the collateral. (Paragraph 3.33.)

'Deemed' SIs

We provisionally recommend that leases for over one year that do not have a security purpose should be brought within the definition of 'security interest' for the purposes of perfection and priority. (Paragraph 3.38.)

We ask whether consultees agree with the way 'lease for a term of more than one year' has been defined in the draft regulations.

We provisionally recommend that commercial consignments that do not secure payment or performance of an obligation should nonetheless be 'deemed' to be SIs. (Paragraph 3.43.)

We provisionally recommend that sales of accounts should be treated as SIs for the purposes of perfection and priority. (Paragraph 3.48.)

We ask consultees whether, for the purposes of priority, sales of promissory notes should also be treated as SIs that are automatically perfected. We also ask consultees whether sales of bills of exchange should be treated as SIs in the same way as sales of promissory notes. (Paragraph 3.49.)

Supporting obligations

We provisionally recommend that:

(1) where an SI attaches to a monetary obligation, an SI attaches automatically to any supporting obligation for the collateral;

(2) perfection of an SI in the collateral also perfects an SI in the supporting obligation. (Paragraph 3.57.)

Partial and total exclusions from the overall scheme

We ask consultees whether there are there other interests that should be wholly or partially excluded from the application of the draft regulations. (Paragraph 3.66.)

We provisionally recommend that the interests listed in DR 12 should be excluded from the scheme. We provisionally recommend that SIs over insurance policies and tort claims should be within the scheme. (Paragraph 3.67.)

Attachment of SIs

We provisionally recommend that for a non-possessory SI to attach there should be no requirement that a security agreement should be, or be evidenced, in writing (whether signed or not), and that the Law of Property Act 1925, section 53(1)(c) should, so far as it would otherwise apply, cease to apply to SIs under our scheme. (Paragraph 3.81.)

We ask whether the scheme should contain a provision dealing with the reattachment of an SI to goods which have been returned or repossessed. (Paragraph 3.85.)

Methods of perfection in detail

Perfection by filing

We provisionally recommend that the filing of a financing statement should be capable of perfecting an SI that has attached (whether before or after filing) over any type of collateral. (Paragraph 3.94.)

Automatic perfection

Should the scheme provide that an assignment which does not by itself or in conjunction with other assignments to the same assignee transfer a significant part of the assignor's outstanding accounts will be automatically perfected on attachment? (Paragraph 3.98.)

Perfection by possession and goods in the possession of bailees

Possession by secured party

We provisionally recommend that actual possession of collateral by the secured party (or its agent) should perfect an SI in goods, an instrument, a negotiable document of title or money. (Paragraph 3.100.)

We provisionally recommend that where the goods are in the possession of the debtor or its agent, attornment to the secured party will not amount to possession by the secured party. (Paragraph 3.102.)

Possession by bailee

We provisionally recommend that, where the goods are in the possession of a bailee other than the debtor, the SI may be perfected in three ways:

(1) by the bailee attorning to the secured party;

(2) by the bailee issuing a document of title in the name of the secured party;

(3) or by the secured party perfecting an SI in a negotiable document of title to the goods, where the bailee has issued one. (Paragraph 3.104.)

Seized or repossessed goods

We provisionally recommend that a secured party who has not perfected its SI by filing but who has seized or repossessed the goods should not be excluded from having possession of them for the purposes of perfection. (Paragraph 3.107.)

Trust receipts and temporary perfection

We provisionally recommend that where an SI over instruments or certificated securities has been perfected by possession, or one over goods in the possession of a bailee has been perfected by the bailee issuing a negotiable document of title or otherwise, if the collateral or document of title is returned for specified purposes, the SI should remain perfected for a limited time thereafter. We ask whether 15 business days is an appropriate period. (Paragraph 3.112.)

Filing: Financing statement

We would welcome views on whether the financing statement should record that the debtor is a trustee and, if so, whether the beneficiary of a bare trust should also be identified. (Paragraph 3.121.)

We provisionally recommend that the financing statement should contain

(1) the name of the debtor and its registered number (if any);

(2) the name and address of the secured party or its agent;

(3) a description of the collateral;

(4) whether the filing is to continue indefinitely or for a specified period; and

(5) such other matters as may be prescribed by the Rules.

We ask consultees to identify any additional information that they consider should be provided or any information that should not be required. (Paragraph 3.134.)

Who files?

We provisionally recommend that any person should be able to file a financing statement. (Paragraph 3.137.)

Filing for future SIs

We provisionally recommend that it should be possible to file before or after a security agreement has been made. (Paragraph 3.139.)

Consent of the debtor to filing

We provisionally recommend that a financing statement that is filed before a security agreement is made should be ineffective if it is made without the debtor's consent (whether before or after the filing). (Paragraph 3.140.)

We ask consultees whether they think a power should be taken to impose a criminal sanction on those who file without the debtor's consent when there is no security agreement in existence. (Paragraph 3.141.)

'Last-minute' filing

We provisionally recommend that, when our scheme is introduced, section 245 of the Insolvency Act 1986 be amended to apply to any SI in favour of the persons mentioned in that section that is filed within the times stated before the onset of insolvency, save when new value is given or the company is not insolvent at the time, as provided in section 245(3) and (4). (Paragraph 3.146)

Verification statement

We provisionally recommend that, when a financing statement has been filed, the Registrar must send the secured party a verification statement. The secured party must then send a copy of the statement to the debtor within 10 business days, unless the debtor has waived the right to receive a copy. (Paragraph 3.150.)

Effect of failure to file or perfect by other means

We provisionally recommend that it should not be compulsory to perfect an SI by filing or any other means; but that an unperfected SI should be:

(1) at risk of losing priority to one that has been perfected;

(2) ineffective against a liquidator or administrator on insolvency and other secured parties;

(3) ineffective against an execution creditor who completes execution before the SI is perfected;

(4) ineffective against some purchasers (whether a buyer or subsequent secured party) in certain circumstances. (Paragraph 3.153.)

Financing change statements

We provisionally recommend that the creditor should be able to make amendments to the financing statement by means of a financing change statement. The debtor should be able to demand that an incorrect or out of date financing statement is, as appropriate, corrected or removed. (Paragraph 3.162.)

Errors in the financing statement

We provisionally recommend that the effectiveness of a filing should not be affected by a defect, irregularity, omission or error in the financing statement unless it would have the result that a reasonable search, conducted in accordance with the requirements of the draft regulations and the Rules relating to searches, would not reveal the financing statement. An error in the collateral description will result in the SI remaining unperfected in relation to collateral that was omitted but will not affect it as regards other collateral that is described in the financing statement. (Paragraph 3.168.)

Effect of unauthorised or accidental discharge

We provisionally recommend that where there has been mistaken or unauthorised lapse or discharge of a financing statement, the secured party should be able to re-activate the financing statement within 30 days of the lapse or discharge. Where this is done, the lapse or discharge should not affect the priority ranking of the SI as against those SIs which, prior to the lapse or discharge, were subordinate in priority to it. However, this should not be the case as against SIs that are perfected by filing after the lapse or discharge but before the financing statement was re-activated, nor to the extent that the competing SI secures advances made or contracted for in that period. The Rules should deal with the procedure for re-activation of the financing statement. (Paragraph 3.170.)

Searching

We provisionally recommend that it should be possible to search the register on-line by the company name; the company registered number (where it has one – overseas companies may not be registered at Companies House); the financing statement number (the number allocated by the registry on filing); and (for collateral prescribed in the Rules) the unique identifying number. (Paragraph 3.174.)

System failure

We ask consultees whether there should be a statutory, no-fault compensation fund for system failures; and fault-based liability for loss caused by errors in the system. (Paragraph 3.175.)

SIs over vehicles

We provisionally recommend that where goods are of a type that is designated by the Rules as having a unique serial number, the financing statement may include that serial number. If it does not, a buyer of the goods who does not know of the SI will normally take free of it, and, where the goods are equipment, the SI will not be treated as perfected for the purposes of priority as against other SIs over the same goods. (Paragraph 3.180.)

Proceeds

Right to proceeds of disposition

We provisionally recommend that where collateral is disposed of by the debtor, unless the secured party has authorised the dealing free of the SI or the case is one in which the buyer will take free of the SI, the SI should continue in the collateral and attach to the proceeds. (Paragraph 3.183.)

We ask consultees whether the scheme should include a provision to limit the secured party's recovery from original collateral and proceeds to the market value of the collateral. (Paragraph 3.184.)

We provisionally recommend that whether proceeds are identifiable and traceable should not depend on the presence of a fiduciary relationship. (Paragraph 3.185.)

Perfection of right over proceeds

We provisionally recommend that an SI in proceeds should be continuously perfected if the SI in the original collateral is perfected by filing, and

(1) the financing statement contains a description of the proceeds that would be sufficient to perfect an SI in original collateral of the same kind; or

(2) the financing statement covers the original collateral, if the proceeds are of a kind within the description of the original collateral; or

(3) the proceeds consist of money, cheques, deposits in or money credited to a bank account or insurance payments.

In other cases, the secured party should have a short period in which to perfect against the proceeds. (Paragraph 3.187.)

Obtaining additional information about the SI

We conclude from the point of view of obtaining information about security that there is little point in maintaining the company's own register of charges. We ask whether the scheme should contain a provision enabling the debtor to require the secured party to supply information relating to the amount owing and the collateral subject to the SI. In particular, we seek views on whether:

(1) only the debtor should be entitled to make an 'information request',

(2) the secured party should be obliged, at the debtor's request, to supply the information to a named third party,

(3) the court should be able to order the sanctions set out in DR 18, including extinguishing the SI. (Paragraph 3.197.)

Priority between competing SIs

'Residual' priority rules

We provisionally recommend the following residual rules:

(1) Perfected SIs take priority over unperfected ones.

(2) As between secured parties with perfected SIs, priority is determined by whoever was first to file or perfect.

(3) As between unperfected SIs, priority is determined by date of attachment.

(4) The priority that an SI has under the rules above applies to all advances, including future ones, whether or not made under an obligation. (Paragraph 3.201.)

Specific priority rules

Purchase-money SIs

We provisionally recommend that an SI in collateral, to the extent that it secures all or part of the collateral's purchase price, and an SI taken 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, should have priority over any other SI given by the debtor in the same collateral. Interests of lessors and consignors of goods should have the same priority. (Paragraph 3.208.)

We ask consultees whether our scheme should limit PMSIs to SIs over goods or whether it should include an SI over any type of collateral other than investment property. (Paragraph 3.209.)

We provisionally recommend that for an SI over inventory to have PMSI status, it must be perfected, and a notice must have been given to any other secured party who has filed a financing statement covering the same type of collateral, before the debtor (or another person on its behalf, if earlier) obtains possession of the collateral. The notice must state that the person giving the notice expects to acquire an SI in inventory, and describe the inventory by item or kind. (Paragraph 3.214.)

We provisionally recommend that a PMSI over goods that are not inventory should have priority over any other conflicting SI provided that it is perfected not later than 10 days after the debtor obtains possession of the collateral. In the case of a PMSI over intangibles, the 10 day period should date from attachment. (Paragraph 3.219.)

We provisionally recommend that PMSI status in one piece of inventory should extend to other inventory supplied by the same supplier, even if the particular item claimed has been paid for. (Paragraph 3.220.)

We provisionally recommend that where two PMSIs in goods or proceeds conflict, a PMSI taken by a seller, lessor or consignor has priority over any other PMSI, providing that it is perfected, in the case of non-inventory, within 10 days of the debtor obtaining possession of the collateral or, in the case of inventory, at the time the debtor obtains possession of the collateral. (Paragraph 3.221.)

We provisionally recommend that a secured party claiming an accounts as original collateral should have priority over a secured party claiming the account as the proceeds of a PMSI, provided that the receivables financier perfected its SI by filing before the PMSI secured party supplied the goods in question or filed in respect of its SI. (Paragraph 3.223.)

For the purposes of the priority rules, should the scheme provide that a PMSI in livestock be treated in the same way as a PMSI in inventory? (Paragraph 3.226.)

We ask whether the scheme should provide that an SI taken by a secured party who effectively enables a crop to be produced should have priority over competing SIs in the resulting crop or its proceeds. If so, should there be time limits or notice requirements in relation to this? (Paragraph 3.228.)

Protection of transferees of 'negotiable' collateral

We provisionally recommend that a purchaser of an instrument for value, without knowledge of the SI, and who takes possession of the instrument should have priority over any SI in the instrument, whether or not the SI was perfected, unless the purchaser not only knew of the SI but knew that the transaction would violate the terms of the security agreement. (Paragraph 3.231.)

We provisionally recommend that:

(1) holders of money (that is, notes and coins in any currency) which is subject to an SI, whether perfected or not, should have priority over that SI if the holder acquired the money without knowledge that it was subject to an SI, or is a holder for value, whether or not the holder acquires the money without knowledge of the SI;

(2) a creditor who has received payment of a debt owing to it by the debtor other than by payment in cash, should have priority over an SI in the funds, intangible or instrument used to effect the payment, whether or not it knew of the SI at the time of payment. (Paragraph 3.235.)

We provisionally recommend that a holder to whom a negotiable document of title is negotiated, and who gave value, should have priority over an SI in the document of title, whether or not the SI was perfected, unless the holder not only knew of the SI but knew that the transaction would violate its terms. (Paragraph 3.236.)

Priority in transferred collateral

We provisionally recommend that if collateral is transferred by the debtor to a party who takes subject to the SI, then provided the secured party's interest was perfected at the time of transfer and has remained so, it should have priority over any SI created by the transferee. This is so whether the SI created by the transferee was created or filed before or after the SI created by the transferor. (Paragraph 3.246.)

Liens

We provisionally recommend that where a person in the ordinary course of business supplies materials or services with respect to goods which are subject to an SI, a lien that that person has with respect to those services and materials has priority over the SI (unless the lien is a statutory lien which expressly provides otherwise). (Paragraph 3.249.)

Priority as against execution creditors

We provisionally recommend that execution creditors should have priority over unperfected SIs

Priority as against buyers or lessees

Unperfected SIs

We provisionally recommend that a buyer or lessee of collateral should take free of an unperfected SI unless it had knowledge of the existence of the SI. (Paragraph 3.256.)

Sales in the ordinary course of business

We provisionally recommend that a buyer of goods from a seller who normally sells goods of that kind, or a lessee from a lessor who normally leases goods of that kind, should take free of any perfected SI created by the seller or lessor unless the buyer or lessee knows that the sale or lease is in violation of the security agreement. (Paragraph 3.260.)

Low price goods bought for private purposes

We ask consultees whether a person who

(1) buys goods for a purchase price of, say, £1000 or less (or leases them where they have that market value),

(2) does so primarily for personal, family or household purposes,

(3) and does not know that the goods are subject to an SI,

should take free of any perfected or unperfected SI in the goods. If so, is the figure of £1000 appropriate? (Paragraph 3.262.)

Other priority situations

Fixtures

We ask whether consultees agree that specific rules dealing with fixtures are not needed. (Paragraph 3.268.)

Crops

We provisionally recommend that a perfected SI in growing crops (whether planted or natural) should have priority over a conflicting interest in the land, if the debtor has an interest in or is in occupation of the land. (Paragraph 3.272.)

We ask consultees whether growing trees should be treated like other crops or should be left outside the scheme. (Paragraph 3.273.)

Accessions, commingled goods and processed goods

We provisionally recommend that specific rules on accessions are not needed. (Paragraph 3.277.)

We provisionally recommend that there is no need for our scheme to include special rules to deal with commingled goods. (Paragraph 3.278.)

We provisionally recommend that there is no need for our scheme to include specific provisions on processed goods. (Paragraph 3.282.)

Liability in damages

Do consultees agree with the approach we have set out in DR 71 of permitting damages for reasonably foreseeable loss? If not, what sanctions should exist for failing to carry out any obligation imposed by the draft regulations? Should the availability of damages be limited to those to whom the duty or obligation is owed? If damages are an appropriate sanction, should there be provision for fixed-sum awards for breach of particular provisions? (Paragraph 3.286.)

Should there be a provision effectively limiting any duty of a secured party towards debtors and other secured parties unless the secured party knows that the person is a debtor or secured party as appropriate, and their identities? (Paragraph 3.288.)

SIs and the 'specialist' registries

Land

We provisionally recommend that the creation and transfer of interests in land should be excluded from the scope of the draft regulations. Arrangements should be made to make available on or via the Companies House register information about charges over a company's land that are registered at the Land Registry. (Paragraph 3.309.)

We provisionally recommend that interests over rights to payment arising from an interest in land should not be excluded from the scheme. (Paragraph 3.312.)

Aircraft

We provisionally recommend that SIs over aircraft registered in the UK or anywhere else in the world should be excluded from our scheme. (Paragraph 3.322.)

Ships

We provisionally recommend that any SI over a ship that is registered in the UK and to which the 'private law provisions' apply, or over a ship registered anywhere else in the world, should be outside our scheme. (Paragraph 3.333.)

For those SIs in ships that fall within the scope of the draft regulations, we provisionally recommend that the statement of rights and remedies contained in Part 5 of the draft regulations should be made without prejudice to current Admiralty practice relating to the enforcement of charges and mortgages in ships. (Paragraph 3.336.)

Intellectual property

We provisionally recommend that SIs over registered designs, patents and trade marks should be excluded from our scheme. (Paragraph 3.342.)

SIs over assets abroad or created by 'foreign' companies

Companies registered in England and Wales

We provisionally recommend that the scheme should apply to SIs created by companies registered in England and Wales over assets outside the UK. (Paragraph 3.363.)

Companies incorporated outside the UK

We provisionally recommend that SIs created by foreign companies over their assets in England and Wales, or to which the law of England and Wales would apply for the purposes of determining questions of perfection and priority , should be subject to the scheme. (Paragraph 3.372.)

Scotland

We provisionally recommend that an SI created by an English company over assets in Scotland should be subject to the scheme, including the normal rules of perfection. An SI created by a company registered in Scotland over assets in England and Wales, or to which the law of England and Wales would apply for the purposes of determining questions of perfection and priority, should also be subject to the scheme. (Paragraph 3.383.)

Transitional provisions

We provisionally recommend that pre-commencement registrable charges that were registered before commencement should be treated as perfected under the scheme. They should retain their existing priority as against other pre-commencement SIs. As against post-commencement SIs their priority should depend on the normal rules of priority of the new scheme. (Paragraph 3.393.)

We ask consultees whether there should be a transitional period during which pre-commencement charges that are not registrable under current law should have to be registered. (Paragraph 3.397.)

We provisionally recommend that:

(1) Pre-commencement sales of receivables should retain their existing effectiveness and priority for a transitional period of [five] years. If they are perfected by filing within that period they will retain their priority (as from the date of creation). If by the end of that period they have not been perfected by filing they will cease to be effective in insolvency and will lose their priority as against other post-commencement SIs.

(2) We ask consultees whether they agree with our conclusion that a similar scheme should apply to post-commencement title-retention transactions and, if so, how long the transitional period should be. (Paragraph 3.409.)

Part 4 – Financial collateral and proceeds of letters of credit

Basic principles

We provisionally recommend that our scheme for financial collateral should adopt as basic principles that:

(1) a secured party, or with investment property an outright buyer, should be treated as having sufficient 'control' to perfect its SI if it has taken all the steps that it reasonably can to give itself the right to realise the collateral, or to appropriate it in order to satisfy the secured obligation, without any further act on the part of the debtor or any court order;

(2) a secured party who perfects by control should take priority over an SI perfected by any other method (or that is unperfected);

(3) a bona fide purchaser for value who takes control of investment property in such a way that no one else can also have control of it should take free of other SIs; and

(4) otherwise, as between SIs perfected by control, priority should (unless agreed otherwise) be in the order that the secured parties obtained control. (Paragraph 4.29.)

Investment property

We provisionally recommend the definitions explained in the paragraphs shown of:

(1) investment property (paragraph 4.31);

(2) security (paragraph 4.32);

(3) securities accounts (paragraph 4.34); and

(4) financial assets (paragraph 4.35). (Paragraph 4.37.)

Investment securities

Control

Do consultees agree that it is unnecessary for the draft regulation dealing with control to refer to someone 'holding on behalf of' the purchaser? (Paragraph 4.48.)

Do consultees agree that an agreement between the intermediary and the secured party, rather than simply a notice of assignment, should be a condition of 'control' and its consequences? (Paragraph 4.54.)

We provisionally recommend that with investment securities, a secured party or other purchaser will have control:

(1) With a certificated security in bearer form, if it takes possession of the certificate;

(2) With a certificated security which is in registered form if it:

(a) takes delivery of the certificate with a signed transfer form made out to him or in blank, or

(b) is registered with the issuer as the holder;

(3) With an uncertificated security if:

(a) in systems in which it is entry in the register of the operator of the settlement system that determines legal title, either-

(i) the purchaser is entered in the register of the operator as the holder, or

(ii) the operator, on the instructions of the registered holder, has placed the security into a sub-account in the holder's own name but has given the purchaser a power of attorney over the security, or

(b) in systems in which it is entry in the register of the issuer that determines legal title, either –

(i) the purchaser is entered in the register of the issuer as the holder, or

(ii) the issuer has entered into a control agreement with the purchaser;

(4) With a security entitlement, if it-

(a) becomes the entitlement holder; or

(b) has entered into a control agreement with the intermediary; or

(c) is the entitlement holder's own securities intermediary, to whom the entitlement holder has granted an SI.

Control over a securities account amounts to control over the security entitlements carried in the securities account. (Paragraph 4.57.)

We ask whether the issuer or intermediary should be obliged to disclose what control agreements exist if required to do so by the registered holder or entitlement holder. (Paragraph 4.58.)

We provisionally recommend that an SI in investment property created by a securities intermediary is treated as perfected when it attaches, without further steps being required. (Paragraph 4.61.)

We provisionally recommend that a secured party may have control of indirectly-held securities whether or not the entitlement holder retains the right to deal with the entitlement. (Paragraph 4.64.)

We provisionally recommend that control over uncertificated securities or indirectly held securities (that is, those covered by the FCAR) should not be effective to perfect an SI unless the security agreement is evidenced in writing. (Paragraph 4.67.)

We provisionally recommend that a secured party that has control of investment property should have the right to create a further SI in it and, if agreed, to sell it. (Paragraph 4.68.)

We provisionally recommend that an SI that is perfected by control should remain perfected even though the secured party itself relinquishes control, until such time as the debtor recovers the equivalent of control. (Paragraph 4.69.)

Priority as between competing SIs over investment securities

We provisionally recommend that a secured party who takes control of a certificated or uncertificated security or, in the case of a security entitlement, has the entitlement transferred into its own name, for value and without knowledge that the sale or acquisition constitutes a breach of the security agreement creating or providing for a competing SI, should take free of that SI. (Paragraph 4.73.)

Do consultees agree that an SI held by an intermediary in an entitlement or account maintained by the intermediary should have priority over any other SI over the same assets? (Paragraph 4.75.)

We provisionally recommend that where competing SIs granted by securities intermediaries are perfected otherwise than by control they should rank equally. (Paragraph 4.76.)

Buyers of investment securities

We provisionally recommend that a buyer who takes control of a certificated or uncertificated security or, in the case of a security entitlement, has the entitlement transferred into its own name, for value and without knowledge that the sale or acquisition constitutes a breach of a security agreement creating or providing for a competing SI, should take free of that SI. (Paragraph 4.81.)

We ask whether the draft regulations should include a provision to the effect that where a security is certificated, an SI is treated as temporarily perfected, without filing or taking possession, for 20 days, provided that new value was given. (Paragraph 4.83.)

The 'broker's lien'

Do consultees think that it is necessary or desirable for the scheme we propose to include an automatic SI in favour of a securities intermediary who has credited the entitlement holder's account before receiving payment? (Paragraph 4.87.)

Commodities

We provisionally recommend that the scheme for SIs over investment property should cover commodity contracts and commodity accounts. We ask whether these should be treated separately, as in the draft regulations, or should simply be brought within the definition of a financial asset and thus within the rules governing SIs over what is currently termed a 'security entitlement'. (Paragraph 4.92.)

Bank accounts

We provisionally recommend that SIs created over a bank account should in principle be within the proposed scheme of notice-filing (though filing would not necessarily be required in all cases) and priority of SIs. (Paragraph 4.105.)

We provisionally recommend that SIs created over bank accounts should be brought within the provision for perfection by control and the associated priority rules. (Paragraph 4.110.)

What amounts to control of a bank account

We provisionally recommend that a secured party should be able to perfect an SI over a bank account by 'control', by:

(1) becoming the account holder; or

(2) entering an agreement with the debtor and the bank that the bank will accept directions from the secured party without further reference to the debtor; or

(3) where the secured party is the bank at which the account is held, without any further steps being required.

There may be perfection by control even though the debtor retains the right to dispose of funds in the account. (Paragraph 4.119.)

We ask whether a bank that has entered a control agreement with a secured party should have to disclose it to a third party if required to do so by the customer/debtor. (Paragraph 4.121.)

Priority

We provisionally recommend that as between competing SIs over a bank account:

(1) an SI perfected by control should take priority over one perfected by other means;

(2) as between SIs perfected by control, priority should depend on the date of control, except that where one of the secured parties is the bank itself, the bank should have priority unless the other secured party has become the account holder. (Paragraph 4.126.)

Transferability of funds

Should a transferee be protected:

(1) unless it did not give value or it knew that the transfer was in breach of the security agreement, or, alternatively,

(2) whether or not it gave value or had knowledge, unless it colluded with the debtor? (Paragraph 4.129.)

Bank's right of set-off

We provisionally recommend that the existence of a control agreement with a third party secured party should not prevent the bank exercising defences and set-offs that it has against the debtor, but it should not be able to raise or exercise a right of set-off that it has against the debtor against a secured party who has taken control by becoming the customer of the bank. (Paragraph 4.130.)

Bank's obligations to debtor

We ask whether consultees consider it necessary or desirable to include a provision in the draft regulations providing that, unless agreed otherwise, the bank will continue to have its normal obligations to the debtor despite an SI in the bank account perfected by control. (Paragraph 4.132.)

Proceeds of letters of credit

Do consultees agree that:

(1) an SI over the proceeds of a letter of credit should be regarded as perfected by control if the SP has obtained the bank's agreement to the assignment, and

(2) an SI over the proceeds of a letter of credit that is perfected by control should take priority over one that is not, and that SIs perfected by control should rank according to priority in time of obtaining control? (Paragraph 4.150.)

Part 5 - A statement of the rights and remedies under a security agreement

Scope of the statement of rights and remedies

We provisionally recommend that the statement of rights and remedies should not, in general, apply to 'deemed' SIs. (Paragraph 5.11.)

Limitations on the scope of the statement

SIs over both personal property and land

We ask whether the scheme should provide that, if the same obligation is secured by an interest in land and an SI to which the draft regulations apply, the secured party may either proceed under Part 5 as to the collateral, as to both the land and the personal property. (Paragraph 5.16.)

Essential provisions: surplus and deficit

We provisionally recommend that the draft regulations contain a provision setting out expressly how, unless otherwise provided by law or the agreement of all interested parties, the secured party must apply the proceeds of any disposition of the collateral. (Paragraph 5.21.)

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

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

(2) to the debtor or any other person known by the secured party to be an owner of the collateral. (Paragraph 5.26.)

We ask consultees whether the secured party should have to pay any surplus proceeds only to those subordinate secured parties who have given it a written notice of their interests, or also to any subordinate creditor who has filed against the collateral before the date of distribution. (Paragraph 5.27.)

We provisionally recommend that, as an alternative to paying over any surplus in the order specified in the draft regulations, the secured party should have an unqualified right to pay it into court. (Paragraph 5.28.)

We provisionally recommend that our scheme should provide that, unless otherwise agreed or provided for by statute, the debtor is liable to pay the amount of any deficiency to the secured party. (Paragraph 5.29.)

Desirable provisions

Effect of prohibition on assignment

We provisionally recommend that in a contract between a company and a third party creating an account payable to the company, a term that purports to prohibit or restrict assignment of the account should be of no effect against a third-party assignee. (Paragraph 5.39.)

Duties of parties under the security agreement but before default

Care in custody and preservation of collateral

We provisionally recommend that the secured party who has possession of the collateral should be under a duty to take reasonable care of it and should be able to insure it at the debtor's expense. (Paragraph 5.41.)

We provisionally recommend that an outright buyer of accounts or of a promissory note should be under a duty to take necessary steps to preserve rights against other parties unless the sale was on a non-recourse basis. (Paragraph 5.42.)

Income, etc. from collateral

We provisionally recommend that the secured party who has possession or control of collateral should apply any money received from the collateral to reduction of the obligation secured or remit it to the debtor; and in the case of other proceeds should be entitled to hold them as additional collateral. (Paragraph 5.43.)

Right of use

We provisionally recommend that, unless otherwise agreed, the secured party who has possession of collateral should be permitted to use it for the purpose of preserving the collateral or to the extent authorised by the security agreement or the court; may create an SI in it, and, where the secured party has possession or control of collateral that is investment property, and the parties so agree, sell it. (Paragraph 5.46.)

Rights and remedies on default

Collection rights

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

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

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

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

There should be similar provisions for bank accounts. (Paragraph 5.51.)

We provisionally recommend that a secured party who buys receivables on a recourse basis should be required, if it collects on the receivables, to proceed in a commercially reasonable manner. (Paragraph 5.52.)

We provisionally recommend that the secured party should be able to defer applying or paying over non-cash proceeds, provided that it is not commercially unreasonable; and that where a secured party does apply or pay over non-cash proceeds, it must do so in a commercially reasonable manner. (Paragraph 5.53.)

Taking possession on default

We provisionally recommend that the secured party should have an implied right to enter the debtor's premises in order to repossess collateral on the debtor's default, but should have to obtain a court order to enter the premises of a third party. (Paragraph 5.57.)

We provisionally recommend that on default the secured party should have the right to disable equipment collateral that is on the debtor's premises and to sell it from there, provided that the secured party does not cause the person in possession of the premises any greater inconvenience and cost than is necessary. (Paragraph 5.60.)

We ask whether the secured party should be able to require the debtor to assemble the collateral and make it available to the secured party at a place to be designated by the secured party which is reasonably convenient to both parties. (Paragraph 5.61.)

Power of sale

We provisionally recommend that the secured party should have the power to dispose of collateral on default by the debtor. (Paragraph 5.63.)

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

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

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

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

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

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

(6) If the agreement so provides, payment for the collateral may be deferred or the collateral may be disposed of by lease. (Paragraph 5.67.)

We provisionally recommend that a secured party need not apply or pay over non-cash proceeds of disposition unless the failure to do so would be commercially unreasonable, but where a secured party does apply or pay over such non-cash proceeds, it must do so in a commercially reasonable manner. (Paragraph 5.70.)

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

(1) at a public sale, or

(2) at a private sale if the collateral is of a kind that is customarily sold on a recognised market or the subject of widely distributed standard price quotations, subject to special rules about calculating the surplus or deficiency after such sales. (Paragraph 5.72.)

We ask consultees whether, where there is no organised market (or where the collateral is neither perishable nor likely to decline rapidly in value if not disposed of immediately), the secured party should have to give notice a reasonable time before the sale or disposition. If so, do they agree that 10 business days' notice should be sufficient? (Paragraph 5.83.)

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

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

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

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

(4) the intended method of disposition;

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

We would welcome views on whether it would be useful to provide a standard form of notice in the draft regulations. (Paragraph 5.84.)

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

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

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

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

(4) any other person with an interest in the collateral who has given a written notice to the secured party of that person's interest in the collateral prior to the day on which the notice of disposition is given to the debtor. (Paragraph 5.86.)

We provisionally recommend including a provision on the effect of disposition. (Paragraph 5.87.)

Retention of collateral by secured party ('foreclosure')

We provisionally recommend that the statement of remedies should include provisions for the secured party, on the initiative of either party, to take the collateral in full or partial satisfaction of the obligation secured, provided that the debtor has agreed in writing and other interested parties have been notified and have not objected within 20 business days. (Paragraph 5.93.)

Redemption

We provisionally recommend that a person entitled to notice of disposition under DR 63 may, unless otherwise agreed in writing after default, redeem the collateral by tendering fulfilment of the obligations secured by the collateral and paying a sum equal to the reasonable expenses incurred by the secured party in preparing etc. the collateral for disposition and enforcing the security agreement. (Paragraph 5.95.)

Cumulative remedies

We provisionally recommend that it be provided that the rights and remedies of each party against the other are cumulative, and may be exercised simultaneously so long as they are not mutually incompatible and simultaneous exercise is not commercially unreasonable. (Paragraph 5.97.)

We also provisionally recommend that it be provided that the secured party may enforce its personal rights under the obligation secured by the SI, and may seek to execute any judgment against the debtor's property, including the collateral, without extinguishing the SI. (Paragraph 5.98.)

Appointment of receiver and secured party acting through receiver

We provisionally recommend that it be stated specifically that a security agreement may provide for the appointment of a receiver and for the rights and duties of a receiver (save as provided for by the draft regulations or another enactment). We also provisionally recommend that the rights, powers and duties of a secured party under Part 5 and DR 17 of the draft regulations should apply equally when the secured party acts through a receiver. (Paragraph 5.101.)

Provisions not recommended

We provisionally recommend that the scheme should not contain a provision relating to the interpretation of an acceleration clause. (Paragraph 5.104.)

We provisionally recommend that the scheme should not contain a provision dealing with the measure of damages relating to leases or consigned goods seized when the lessor's or consignor's interest is ineffective because it is unperfected. (Paragraph 5.109.)

We provisionally recommend that the secured party should not be under an obligation to give other secured parties a written account of the nature of the disposition, the amount raised and how it was distributed. (Paragraph 5.110.)

We provisionally recommend that the scheme should not contain a provision dealing with reinstatement of the security agreement. (Paragraph 5.113.)

We provisionally recommend that the statement of rights and remedies should not contain provisions relating to the powers of receivers. (Paragraph 5.118.)

Applications to court

We provisionally recommend that there be a provision relating to court orders to ensure compliance, enforcement, stay etc. (Paragraph 5.119.)

Financial Collateral

Security financial collateral arrangements

We provisionally recommend that the statement of rights and remedies set out in the draft regulations should be without prejudice to any agreement in a financial collateral arrangement within the meaning of the FCAR. (Paragraph 5.125.)

Title transfer financial collateral arrangements

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

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

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

(3) whether title transfer financial collateral arrangements should be exempted from the scheme as a whole. (Paragraph 5.133.)

Good faith and commercial reasonableness

We provisionally recommend that there be no general requirement of good faith included in the draft regulations, but that a specific requirement of commercial reasonableness be included in relation to DRs 59(1)-(2), 60(5)-(6), 62(6) and 65(5). (Paragraph 5.135.)

We provisionally recommend that the parties to a security agreement should be able to determine the standards which fulfil the rights of a debtor or obligations of a secured party under any provision mentioned in DR 59(3), provided that the standards are not manifestly unreasonable. (Paragraph 5.137.)

We provisionally recommend that the scheme should include guidance on steps that are sufficient to ensure that particular methods of collection, enforcement, disposition or acceptance are 'commercially reasonable' within the meaning of the draft regulations. (Paragraph 5.141.)

Mandatory or default rules?

We provisionally recommend that the requirements to act in a commercially reasonable manner should be mandatory. (Paragraph 5.156.)

We provisionally recommend that the parties should be free to set standards as to the notice to be given before disposal of collateral, provided that the standards set are not wholly unreasonable; but, subject to that, even as between debtor and secured party any notice requirements should be mandatory. (Paragraph 5.159.)

We provisionally recommend that the provisions on surplus should be mandatory. (Paragraph 5.163.)

We provisionally recommend that the provisions on acceptance of collateral in full or partial satisfaction of the obligation secured should be mandatory. (Paragraph 5.164.)

We provisionally recommend that the provisions on redemption should be mandatory. (Paragraph 5.165.)

We seek consultees' views as to whether the draft regulations should deny effect to any provision in a security agreement or other agreement purporting to exclude or limit the secured party's liability for failure to comply with any provision of the scheme of rights and remedies. Should any other provision in the draft regulations that gives rise to a duty be capable of being excluded or limited? (Paragraph 5.169.)

We ask whether it is necessary or desirable for the draft regulations to contain provisions setting out when a debtor may waive its mandatory rights or agree to an exclusion or restriction of liability as part of a settlement agreement. (Paragraph 5.171.)

Appendix B - Changes needed to the draft regulations to omit title-retention devices

If the draft regulations were amended to apply only to traditional securities and sales of accounts, and not to title-retention devices, we ask whether consultees think that the draft regulations should continue to contain:

(1) provisions relating to PMSIs,

(2) the statement of the rights and remedies set out in Part 5 of the draft regulations. (Appendix B.9.)

Note 1    As set out in DR 5.    [Back]

Note 2    DR 8.    [Back]

Note 3    DR 20(3).     [Back]

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