This page intentionally left blank Secured Credit under English and American Law Secured credit drives economic activity. Under English law it is possible to create security over almost any asset, but the law is widely considered to be unsatisfactory for several reasons, including a cumbersome regis- tration system, a preoccupation with formalistic distinctions and the lack of clear and rationally determined priority rules. Gerard McCormack examines the current state of English law, highlighting its weaknesses. He uses Article 9 of the American Uniform Commercial Code as a ref- erence point: this article has successfully serviced the world’s largest economy for over forty years and is increasingly used as the basis for legislation by Commonwealth jurisdictions including Canada and New Zealand. The Law Commission has suggested the enactment of simi- lar legislation in England. In addition, McCormack considers whether there really is a case for the priority of secured credit, as well as whether there are other international models to draw upon. The appendix con- tains the text of Article 9. GERARD McCORMACK is Baker and McKenzie Professor of Cor- porate Law at the University of Manchester. His recent publications include Registration of Company Charges (1994), Reservation of Title (2nd edn 1995) and Proprietary Claims and Insolvency (1997). Cambridge Studies in Corporate Law Series Editor Professor Barry Rider, University of London Corporate or Company Law encompasses the law relating to the creation, op- eration and management of corporations and their relationships with other legal persons. Cambridge Studies in Corporate Law offers an academic platform for discussion of these issues. The series is international in its choice of both authors and subjects, and aims to publish the best original scholarship on topics ranging from labour law to capital regulation. Jane Dine The Governance of Corporate Groups 0 521 66070 X A. J. Boyle Minority Shareholders’ Remedies 0 521 79106 5 Gerard McCormack Secured Credit under English and American Law 0 521 82670 5 Secured Credit under English and American Law Gerard McCormack cambridge university press Cambridge, New York, Melbourne, Madrid, Cape Town, Singapore, São Paulo Cambridge University Press The Edinburgh Building, Cambridge cb2 2ru, UK Published in the United States of America by Cambridge University Press, New York www.cambridge.org Information on this title: www.cambridge.org/9780521826709 © Gerard McCormack 2004 This publication is in copyright. Subject to statutory exception and to the provision of relevant collective licensing agreements, no reproduction of any part may take place without the written permission of Cambridge University Press. First published in print format 2004 isbn-13 978-0-511-21064-8 eBook (EBL) isbn-10 0-511-21241-0 eBook (EBL) isbn-13 978-0-521-82670-9 hardback isbn-10 0-521-82670-5 hardback Cambridge University Press has no responsibility for the persistence or accuracy of urls for external or third-party internet websites referred to in this publication, and does not guarantee that any content on such websites is, or will remain, accurate or appropriate. Contents Preface page ix List of abbreviations xi 1 The essence and importance of security1 2 Security rights under English law 39 3Anoverview of Article 9 of the Uniform Commercial Code 70 4 Implications of Article 9-type reforms for the English law of security interests 99 5 Notice filing versus transaction filing 129 6 Retention-of-title clauses under English law and Article 9 163 7 Receivables financing 209 8 Security interests in deposit accounts, investment property and insurance policies 249 Appendix: Article 9 of the Uniform Commercial Code 277 Index 404 vii Preface One of the characters created by a famous Irish playwright said that the world is in a state of ‘chassis’, by which was meant ‘chaos’. This may or may not be true but, whatever the broader geopolitical developments, the English law of security interests is in a state of some upheaval. We are possibly at the threshold of major reform heralded by the Company Law Steering Group in their final report on Modern Company Law for a Competitive Economy and by the Law Commission in their consultation paper on Registration of Security Interests. Given that corporate rescue law has recently been streamlined is there not a case now for streamlining the law of secured credit? Why is the present law on secured credit considered to be unsatisfactory? Is reform really needed? Would the cure be worse than the disease? Is Article 9 of the American Uniform Commercial Code really a suitable legislative guide? Are there other international models to draw upon? Is there really a case for the priority of secured credit? This book attempts to address these questions. The focus is on the law of secured credit rather than on corporate and insolvency law more gen- erally. Corporate rescue law only gets a look-in as an adjunct to secured credit law. English law and the alleged deficiencies of the same are anal- ysed against the backdrop of Article 9 of the Uniform Commercial Code. Article 9 moves away from the formalistic preoccupations of current English law and combines a more comprehensive filing system with clearer and more rationally determined rules for determining priorities between competing security interests in the same property. For good pragmatic reasons, however, reform in England may be slow and piece- meal. Practitioners might say, ‘half a loaf is better than no bread at all’ and even, ‘if it is not broke why fix it?’ On the other hand, the fact that a system works very successfully in the largest economy in the world is not a reason for saying that it could not work very well here. Why use Article 9 as a direct comparator rather than New Zealand and the Canadian province of Saskatchewan as the Law Commission has done? Two reasons spring to mind. Firstly, Article 9 is the catalyst that ix x Preface inspired the others; and secondly, the English business community might find the American comparison more appropriate. The jurisdictions relied upon by the Law Commission do not have developed financial markets on the English scale. The focus is on English law as compared with Article 9. I recognise that Scots law is different in some significant respects though Scottish lawyers may find the more general analysis to be of some use. This is not a comprehensive treatise. Some topics receive more attention than others. Certain topics warrant much more extended treatment, as they have received elsewhere from other writers on the subject. I would single out in this regard the issue of security over intellectual property and the whole area of financial collateral, which is the subject of a recent EU directive. The relevant provisions of the Enterprise Act came into force on 15 September 2003. The Insolvency Act 1986 (Prescribed Part) Order 2003 sets aside a proportion of floating-charge recoveries for the benefit of unsecured creditors of a company. The proportion is based on a sliding scale and calculated as 50% of the first £10,000, then 20% of a remainder but subject to a ceiling so that the fund for unsecured creditors shall not exceed £600,000. The draft Financial Collateral Regulations 2003 came too late for dis- cussion in this text. In the writing of the book I have incurred many debts. Special thanks are due to the British Academy and the Leverhulme Trust for facilitating some of the research on which the book is based as well as to the University of Manchester and the National University of Singapore. Hugh Beale, John De Lacy, Janet Dine, David Milman, Agasha Mugasha, Tan Cheng Han, Alan Ward and many others have also helped me in various ways. Finally, I would like to thank Presy y Amelia por todo. Gerard McCormack Manchester September 2003 Abbreviations AJIL American Journal of International Law Ark LR Arkansas Law Review Can Bus LJ Canadian Business Law Journal CFILR Company, Financial and Insolvency Law Review Chicago-Kent Law Rev Chicago-Kent Law Review CLJ Cambridge Law Journal CLP Current Legal Problems Co Law Company Lawyer Colum Bus L Rev Columbia Business Law Review Colum L Rev Columbia Law Review Conn L Rev Connecticut Law Review Conv Conveyancer Cornell L Rev Cornell Law Review Duke LJ Duke Law Journal DULJ Dublin University Law Journal EBLR European Business Law Review Ga L Rev Georgia Law Review Harv L Rev Harvard Law Review ICLQ International and Comparative Law Quarterly Idaho LR Idaho Law Review Int Bus Lawyer International Business Lawyer Int’l RevL&Econ International Review of Law and Economics JBL Journal of Business Law JIBL Journal of International Banking Law J Legal Stud Journal of Legal Studies Kan LR Kansas Law Review LMCLQ Lloyds Maritime and Commercial Law Quarterly LQR Law Quarterly Review McGill LJ McGill Law Journal Minn LR Minnesota Law Review xi xii List of abbreviations MLR Modern Law Review Nebraska LR Nebraska Law Review NILQ Northern Ireland Legal Quarterly NLJ New Law Journal NYULR New York University Law Review NZBLQ New Zealand Business Law Quarterly NZLJ New Zealand Law Journal NZULR New Zealand Universities Law Review OJLS Oxford Journal of Legal Studies Rutgers L Rev Rutgers Law Review Tenn L Rev Tennessee Law Review Te x Int’l LJ Texas International Law Journal Texas L Rev Texas Law Review UCC LJ Uniform Commercial Code Law Journal UChLRev University of Chicago Law Review UPaJInt’l Econ L University of Pennsylvania Journal of International Economic Law UPaLRev University of Pennsylvania Law Review UWALR University of Western Australia Law Review VaLRev Virginia Law Review Vand L Rev Vanderbilt Law Review Yale LJ Yale Law Journal 1 The essence and importance of security This book compares and contrasts American and English approaches to- wards the recognition and enforcement of security interests in personal property.