The Law Commission Consultation Paper No 164 REGISTRATION OF SECURITY INTERESTS: COMPANY CHARGES AND PROPERTY OTHER THAN LAND A Consultation Paper London: The Stationery Office The Law Commission was set up by section 1 of the Law Commissions Act 1965 for the purpose of promoting the reform of the law. The Law Commissioners are: The Right Honourable Lord Justice Carnwath CVO, Chairman Professor Hugh Beale, QC Mr Stuart Bridge Professor Martin Partington Judge Alan Wilkie, QC The Secretary of the Law Commission is Mr Michael Sayers and its offices are at Conquest House, 37-38 John Street, Theobalds Road, London WC1N 2BQ. This consultation paper, completed on 14 June 2002, is circulated for comment and criticism only. It does not represent the final views of the Law Commission. The Law Commission would be grateful for comments on this consultation paper before 2 October. Comments may be sent either – By post to: James Robinson Law Commission Conquest House 37-38 John Street Theobalds Road London WC1N 2BQ Tel: 020-7453-1201 Fax: 020-7453-1297 By e-mail to: [email protected] It would be helpful if, where possible, comments sent by post could also be sent on disk, or by e-mail to the above address, in any commonly used format. It may be helpful, either in discussion with others concerned or in any subsequent recommendations, for the Law Commission to be able to refer to and attribute comments submitted in response to this consultation paper. Any request to treat all, or part, of a response in confidence will, of course, be respected, but if no such request is made the Law Commission will assume that the response is not intended to be confidential. The text of this consultation paper is available on the Internet at: http://www.lawcom.gov.uk 254-161-02 THE LAW COMMISSION REGISTRATION OF SECURITY INTERESTS: COMPANY CHARGES AND PROPERTY OTHER THAN LAND CONTENTS Paragraph Page PART I: INTRODUCTION 1 Background to the Consultation Paper 1.12 3 Terms of Reference 1.16 5 Structure of the Consultation Paper 1.19 6 Terminology: security and security interests 1.26 7 Previous recommendations and attempts at reform 1.27 7 The Crowther report 1.29 7 The Halliday report 1.30 8 The Diamond report 1.31 9 The Companies Act 1989 1.32 9 DTI consultations 1.33 10 European proposals 1.36 10 Reform overseas 1.37 11 The United States of America 1.37 11 Canada 1.41 12 New Zealand 1.43 12 Australia 1.44 13 Other systems 1.45 13 Acknowledgements 1.48 14 Summary of provisional conclusions 1.49 15 The consultation process 1.58 17 The impact of our provisional proposals 1.60 17 PART II: SECURITY AND THE REGISTRATION OF COMPANY CHARGES 19 Introduction 2.1 19 Security 2.3 19 The purpose of security 2.4 20 Creation, attachment and perfection 2.5 20 iii Paragraph Page Traditional forms of security 2.6 21 Pledge 2.6 21 Lien 2.8 22 Mortgage 2.11 22 Equitable charge 2.14 23 Registration of company charges 2.20 25 The duty to register charges 2.22 26 The register of charges and the certificate of registration 2.24 27 Registrable charges and the consequence of non-registration 2.26 28 Late registration and rectification of the register 2.29 30 The company’s own register of charges and copies of instruments creating charges 2.30 30 Memoranda of satisfaction 2.32 31 Registration of enforcement of security 2.33 31 Charges on property in England and Wales created by an ‘oversea’ company 2.34 32 Charges created by an English company over property situated outside the United Kingdom or in Scotland 2.35 32 Priority and the registration scheme 2.36 32 An outline of priority of company charges 2.38 33 Floating charges 2.40 33 Fixed charges 2.45 35 Exceptions to the general rules regarding priorities 2.48 36 Charges that are registered in specialist registers 2.49 36 Security for further advances 2.56 39 Charges and purchasers of company property 2.58 39 Particular issues on what is registrable 2.62 40 Shares and ‘registered securities’ 2.63 40 Charges over credit balances 2.73 43 Contractual liens over sub-freights 2.76 44 PART III: THE NEED FOR REFORM OF THE COMPANY CHARGES REGISTRATION SCHEME 46 The need for a system of registration 3.2 46 Ineffectiveness of the current registration scheme 3.9 48 The public notice function 3.11 48 The list of registrable charges is seriously incomplete 3.12 48 The registered particulars are not necessarily accurate 3.16 50 The register does not reveal important information about charges that are registrable 3.17 50 The company’s own register 3.18 51 iv Paragraph Page Notification of the existence of charges 3.21 51 The priority function 3.25 53 No ‘advance’ registration 3.29 54 Registrable charges and purchasers 3.31 54 Additional criticisms of the registration scheme 3.32 54 Oversea companies 3.33 55 The European Convention on Human Rights 3.41 57 Conclusion 3.44 58 PART IV: NOTICE-FILING FOR COMPANY CHARGES 60 An alternative approach: amending the current registration scheme 4.2 60 The policy aims of any new system 4.5 61 An outline of notice-filing 4.7 61 Principal changes involved in adopting notice-filing 4.10 62 Possessory securities 4.15 63 Security arising by operation of law 4.18 64 The financing statement 4.19 65 The particulars that should be required 4.19 65 The form of the financing statement 4.30 69 Responsibility for the register 4.35 70 The registrar’s certificate 4.37 71 The effect of errors in registration 4.39 72 Should any new notice-filing system be compulsory? 4.51 76 Criminal sanctions 4.52 76 Filing and the sanction of invalidity 4.55 77 Supply of information to other parties 4.59 77 Other parties with interests in the property affected 4.60 78 Notice to the wider public 4.66 80 The company’s own register of charges and copies of instruments 4.68 80 The availability of information to the wider public 4.72 81 Other aspects of filing a financing statement 4.74 82 Time allowed for filing 4.74 82 Duration of filing 4.81 84 The recording of changes to the information filed 4.87 85 Changes to the security and termination of liability 4.89 86 Transfers of interest 4.93 88 Transfers by the secured party 4.94 88 Transfers by the debtor 4.97 89 Should the financing statement be signed? 4.103 91 v Paragraph Page Flexibility of notice-filing 4.109 93 Provisional notice-filing 4.110 93 Multiple transactions 4.116 95 Priorities 4.118 96 Consequences of non-registration under a notice-filing system 4.120 96 Priority as between registrable interests under a notice-filing system 4.121 97 Priority as between fixed registered interests 4.122 97 Priority as between fixed and floating registered interests 4.125 98 The concept of a ‘floating’ interest under the UCC 4.126 98 The position of the floating charge under a notice-filing system 4.128 99 Floating charges and the financing statement 4.139 102 Priority as between pledges and interests protected by filing 4.145 103 Priority between registered and unregistrable charges 4.146 104 Contractual variation of priority - subordination 4.150 105 The effect of changes 4.151 105 Tacking of further advances 4.152 106 Purchase-money interests 4.155 107 The right to proceeds 4.163 110 Purchasers of charged property 4.173 112 Purchasers and unregistered charges 4.174 113 Purchasers and registered charges 4.178 114 Uniquely identifiable goods 4.186 116 Purchasers and property subject to registration in a specialist register 4.190 117 Purchasers of investment securities 4.192 117 Purchasers of receivables 4.194 117 Purchasers of negotiable instruments/documents of title 4.197 118 Other registers 4.199 119 Other issues raised by a new system 4.213 122 Record of search 4.213 122 Liability of registrar for loss caused by registry errors 4.215 122 Liability for breach of duty 4.220 124 Transitional provisions 4.222 124 Existing fixed charges 4.229 126 Existing floating charges 4.230 126 Conclusion 4.233 127 PART V: REGISTRABLE CHARGES 128 A list of registrable charges or exclusions? 5.3 128 vi Paragraph Page The Steering Group’s proposed exceptions 5.9 130 Simple retention of title clauses 5.11 131 A charge, as such, for the purpose of securing any issue of debentures 5.14 132 The deposit by way of security of a negotiable instrument given to secure the payment of a book debt 5.16 132 Shares and investment securities 5.18 132 Practical reasons 5.22 134 Impact of the Draft EU Collateral Directive 5.25 135 Charges over insurance policies 5.36 138 Contractual liens over sub-freights 5.41 139 Other exceptions 5.43 140 Book debts and other monetary obligations 5.44 140 Charges over bank balances 5.49 142 ‘Charge-backs’ 5.49 142 Charges over bank accounts (in favour of parties other than the bank) 5.52 143 Charges to secure a non-monetary obligation 5.54 143 Charges registrable in specialist registries 5.55 144 Charges created by trustee companies 5.56 144 Market charges 5.76 149 Lloyds’ trust deeds 5.78 149 Charges over assets in other jurisdictions and charges created by companies in other jurisdictions 5.87 152 Charges by oversea companies 5.88 152 Charges created by companies registered in England and Wales over assets in other jurisdictions 5.95 155 Charges created by Scots companies over property in England and Wales 5.114 160 Unregistered companies 5.121 161 Summary of charges that would be registrable 5.123 162 Transaitional provisions for previously unregistrable charges 5.126 163 PART VI: FUNCTIONAL EQUIVALENTS TO SECURITY 164 Functionally equivalent interests 6.1 164 Advantages of quasi-security 6.3 164 The risk of recharacterisation 6.8 166 Transactions relating to goods