PASSING OF PROPERTY IN THE GOODS

THE FUTURE FOR COMPANY CHARGES Hans Tijo. Copyright (c) 2002 Sweet and Maxwell Limited and Contributors Subject: COMPANY LAW Keywords: Charges; Companies; Registration

Abstract: Criticism of registration regime for company charges and DTI Company Law Review Steering Group's proposals on notice filing system, amendments to current system, constructive notice and registrable charges. *457

The creation and registration of company charges has been the subjectof much examination in the United Kingdom over the past 30 years, notably inthe Crowther Report (1971) [FN1] and the Diamond Report (1989). [FN2] Mostrecently, in October 2000, the DTI's Company Law Review Steering Group("Steering Group") published a consultation paper ("Initial Report", whoseconsultation period ended on January 5, 2001) in respect of the registration ofcompany charges, which was one of the single issue papers under the rubric ofthe wideranging review being undertaken by the DTI to modernise core companylaw in the U.K. entitled Modern Company Law for a Competitive Economy. [FN3]

The Final Report of the Steering Group that was published on July 26, 2001 putforth even more radical proposals and sought further consultation on them. Thisarticle discusses some of these proposals.Criticisms of the present system One of the criticisms of the present registration regime for company chargesis its link by virtue of the Companies Act 1985, s.396(1)(c) to the Bills ofSale Acts of 1878, 1882 and 1890 (as amended in 1891). Although it is clearthat the Bills of Sale Acts are for individuals and not incorporated bodies,[FN4] section 396(1)(c) makes registrable under the Companies Act those chargeswhich, if executed by an individual, would require registration as a bill asale. Although amendments were *458 proposed in the Companies Act 1989 tosimply refer to a charge on goods, the relevant provision was never broughtinto force. [FN5] A more fundamental concern with the present system is that registration ofthe particulars of a charge (along with the instrument creating it) within the21- day allowable period is conclusive evidence that there was no defect in itsregistration, even if there in fact had been such. No judicial review of theRegistrar of Companies' actions is permitted. [FN6] This allowable period alsomeans that there are 21 days in which other creditors would not know of theexistence of the charge, which is the "21-day invisibility problem" describedby the DTI. [FN7] These subsequent creditors may be prejudiced as priority isnot determined by the time of registration, but is still generally determinedby the time of creation and extant property law concepts which depend on thecollateral in question. This is quite different from the specialist systems forships and aircraft, which operate alongside the company charge registrationsystem, where registration is required for the creation of security. Putdifferently, under the company charge registration system, the concern is withperfection of the charge vis-a-vis third parties, which is a necessarycondition for enforceability but is not sufficient for priority. Using theterminology adopted by Professor Goode, attachment still really determinespriority and this is most evident in the case of unregistrable charges such ascharges over company shares [FN8] or insurance policies. [FN9] Indeed, thecomprehensiveness of the list of registrable charges in section 396 is itself asource of concern. And pledges, where perfection is through possession, clearlydo not need registration. [FN10] Both the Crowther Report and Diamond Report had proposed the adoption of a"first-to-file" regime based on Article 9 of the U.S. Uniform Commercial Code,which has been adopted in every U.S. State, and most Canadian provinces and byNew Zealand's Personal Property Security Act 1999 (which came into force on May1, 2002). Under the U.S. notice filing system, there is no time limit forregistration, and registration could be made any time before or after creationof the charge. Where charges are concerned, only a financing statement isrequired to be registered and priority is generally determined by the time offiling or registration. However, there was then little public support for theseproposals. Although comprehensive changes were introduced in Part IV of theU.K. Companies Act 1989, which amongst other things, reduced the effect of theconclusive certificate upon registration [FN11] and updated the list ofregistrable *459 charges, these changes still operated within a system whereregistration perfected the security interest but did not, of itself, conferpriority. In any case, due to its problems in interfacing with the landregistration system and the other specialist registration systems, Part IV wasnever brought into force. [FN12] The responses to a November 1994 DTI consultation paper [FN13] also showed aclear preference for retaining the present system under Part XII of theCompanies Act 1985, but to incorporate some of the changes introduced by theunimplemented Part IV of the U.K. Companies Act 1989. Consequently, the October2000 Initial Report also advocated adopting this option. However, afterreceiving "convincing arguments in favour of radical change" [FN14] inresponses to its consultation paper, the Steering Group in its Final Report putforth further proposals to adopt a notice-filing system.Notice-filing The purpose of the proposed notice-filing system would be to determine therelative priority of charges which are registered as well as to give publicnotice of any security interest in the specified categories of a company'sassets. Under this system registration of a charge is effected by filing afinancing statement giving notice of such a charge. The financing statement iseffectively an abridged statement of the details or particulars of the charge.But, as the Registrar will have no access to more information about the charge,entry on the Companies House register (no certificate will be issued) wouldonly be conclusive evidence of the date on which those particulars were filed,and not other particulars of the charge itself. By contrast, under the presentsystem, the charge instrument itself has to be registered, and the issue of acertificate of registration is conclusive even as to the amount secured by thecharge [FN15] or the relevant collateral, [FN16] even if inaccurate. Priority of charges would be determined by the registration date, instead ofthe time of its creation. Unregistered charges would be void against aliquidator or administrator, and against a creditor. [FN17] However, theSteering Group believed that there should be a right to apply to the court forrelief, as there were possible ramifications from the "deprivation" provisionsof Article 1 of Protocol 1 of the *460 European Convention on Human Rights.[FN18] But the caveat is that, in providing relief from the effect of thesanction, the court would not be able to change the relative priority ofregistered charges. Consequently, the Steering Group was also of the view thatthere is no need to provide for a statutory civil sanction or criminal sanctionfor failure to register a charge, as there are sufficient disincentives fornon-registration. The notice-filing system will not alter the present practice where eitherthe chargor or chargee may register the charge. [FN19] If a notice is filed inadvance of the creation of the charge and the charge is then not created, orcreated over part of the property, the notice would remain valid unless anduntil it is cancelled (or partially cancelled if eventually the charge iscreated over only part of the property). This approach was preferred to afiling of a confirmation once the charge is created, where the date of filingwould then only be a priority point if there has been a confirmation that acharge has been created over the assets specified in the particulars. [FN20]The disadvantage of this approach is that it brings back part of theinvisibility problem highlighted above, by creating uncertainty over the statusof the charge pending confirmation. [FN21] Paragraph 12.22 of the Final Reportthus clearly provides that a prior registered charge would have priority evenif executed after a later registered charge. This appears to also suggest thatan agreement to give a charge may be registered, and this would have priorityover a later registered charge even though it has been cogently argued that anagreement to give a charge upon a contingency lies only in contract, and failsto create any present security interest or even one on the occurrence of thecontingency. [FN22]Amending the present system As an alternative to the notice-filing system, the Steering Group hasproposed certain changes to the present registration system. However, itappears that except *461 for one recommendation, the others are not distinctlydifferent from those suggested in the context of notice-filing. An example ofthis is the introduction of a provision that chargees be allowed to apply tocourt for relief from the effects of a failure to register their charge within21 days of creation, as currently required, in order to comply with thedeprivation provisions in the European Convention on Human Rights. Similarly, the Steering Group also proposes to remove the requirement thatthe instrument of charge (or copy) [FN23] be submitted together with theparticulars of the charge. As with notice-filing, evidence of registration onthe Companies House register under this proposal will only be conclusive as tothe date on which the charge was registered. However, the Final Report does notdeal sufficiently with the problem that was highlighted in the Initial Reportabout the need for finality accompanying company charge registration in a casewhere registration under a separate specialist register is required, asinvalidity under the former prevails. [FN24] One possible solution is alludedto. This is that where there is a parallel registration in a specialistregister, defective particulars in the charge registration would not invalidatethe company charge, and searchers will remain at risk and are expected to makefurther inquiries. [FN25] In the longer term, however, the Steering Groupthought that "technological improvements may provide scope for administrativechanges so that a single filing achieves registration with both Companies Houseand the appropriate specialist register and would recommend that thepossibility of establishing such arrangements should be urgently pursued by therelevant registrars". [FN26] It is likely that this issue will remain thebiggest stumbling block to both notice-filing or any amendment to the presentsystem to reduce the effect of conclusive certification. The one recommendation that is distinct concerns the issue of registrationout of time. Presently an application can be made to court for an extension oftime to register the charge even after the 21-day period if there is sufficientcause for the extension. The courts invariably grant the extension, withoutprejudice to the rights of any intervening secured creditor, if the company isnot in liquidation and winding-up is not imminent. The Steering Group hastherefore proposed that late registration should be permitted withoutapplication to court if no winding-up petition has been presented at the timeof registration and no meeting has been convened to pass a resolution for acreditors' voluntary winding-up petition. The *462 charge would be treated asif it were registered on time, but it would rank behind any prior registeredcharges. However, if a liquidator has been appointed or a creditor hascommenced an action against the relevant assets before registration, the chargewould not be retrospectively validated. [FN27] Given this proposal on lateregistration, there would no longer be a need for the statutory civil sanctionthat the sum secured be payable on demand if the charge is not duly registered,[FN28] as that provision was largely for chargees to ensure that chargors wouldagree to the reconstitution of a charge that is not registered in time. TheSteering Group also recommends the abolition of the criminal sanction againstthe company and every officer who is in default of registering the charge.Constructive notice For both notice-filing, and even the present system, the Steering Grouprecommends that only creditors taking registrable charges should be deemed tohave notice of a prior registered charge. Purchasers of charged property wouldnot, however, have constructive notice of the charge and the purchaser's titleto the asset should not be determined by whether the charge is registered butby general law. This probably accords with the law as it presently stands,[FN29] and is consistent with previous DTI recommendations as well as Part IVof the Companies Act 1989, which was not brought into force. [FN30] Under the new proposals, a subsequent creditor would have constructivenotice of all the information filed (whether on a voluntary basis or amandatory one). The Steering Group has made a number of recommendations on theparticulars that should be filed in order to register a charge under thenotice-filing system, as well as under the present system. Significantly, theSteering Group proposes that filings could, in England, include particulars onwhether the charge is subject to a negative pledge. [FN31] The common lawposition is that independent negative pledges do not bind third parties, [FN32]and the advantage they bring is where they protect a floating charge againstsubsequent fixed chargees taking with actual *463 notice of the prior floatingcharge and negative pledge. The problem at the moment is that cases like Wilsonv. Kelland [FN33] support the proposition that one only has constructive noticeof the registered prescribed particulars and not optional extras, such as anegative pledge. [FN34] The new proposals will promote what is probably adesired outcome.List of registrable charges Under either one of the new regimes, floating charges will continue to beregistrable, although the Final Report suggests that any automaticcrystallisation clause should be made a particular of the charge in order toincrease transparency. The Companies Act, s.396(1)(c), will be modified toremove the reference to bills of sale to include all charges on goods,including goods (as well as other property) situated overseas. [FN35] Chargesover most insurance policies would also be registrable, which is unlike thepresent position. [FN36] This had been proposed in the 1994 DTI document,[FN37] even though charges over other contingent obligations are notregistrable as such. In addition, those charges where registration is alsorequired in a specialist register, e.g. in respect of land, would continue tobe subject to the company registration regime. This would enable a singlesearch for all relevant charges created by a specific company. However, it haspreviously been argued that more consideration should be given to theinterfacing of the systems, which was a problem identified in previousconsultations. [FN38] One of the recommendations is for there to be an exception from registrationwhere the chargee has possession of the underlying collateral even under thenotice-filing system. Since the main purpose of registration is to notify thepublic that a chargor's assets are secured, there would not be a need forregistration where the chargee has possession of those assets. Put differently,possession continues to provide a different mechanism for perfection. TheSteering Group believes that a charge over property held by a third party wouldbe registrable unless it was being held to the order of the chargee and thus inits constructive *464 possession. It would appear therefore that an attornmentby the third party would suffice in this regard. But this would mean that thesystem would still not be totally transparent. Where retention of title clauses are concerned, the Steering Group thoughtthat difficult legal issues would be created by any attempt to devise astatutory definition of those clauses which are registrable, and they preferrednot to do so. Simple retention of title clauses will not be registrable, andthis would mean that there would still not be a registration system thatcompletely looks to the functional nature of security. [FN39] However, complexretention of title clauses which purport to give the seller rights to goodswhich have been altered or to the proceeds from the sale of those goods wouldbe treated as registrable charges, as they currently are by the courts. [FN40] For the sake of certainty (in particular to remove doubts caused by theuncertain concept of "book debts" [FN41]), the Steering Group proposes thatspecific provision should be made of the types of financial assets over whichcharges are not registrable and making registrable charges over all other formsof financial assets. This differs from the initial consultation document whichconsidered whether the reference to charges over book debts should be amendedto refer to "receivables" [FN42] or even "debts" generally. Though these arewider concepts than "book debts", there would still be money obligations thatwould not fall into these categories, and the problems that exist in thepresent system would remain. In the Final Report, it was therefore recommendedthat only the following should not be registrable: * a charge for the purpose of securing an issue of debentures [FN43]; * depositing, by way of security, a negotiable instrument given to secure payment of a debt [FN44]; * a charge over shares. [FN45] This was partly because of the difficulties this would cause to the practice of substituting shares which form part of a charged portfolio. * a charge over marine insurance policies which insure goods to be exported and insurance policies in respect of goods, charges over which are not themselves registrable; *465 * contractual liens over sub-freights [FN46]; and * charges on cash or securities (including shares, bonds, money market instruments and units in collective investment schemes in such securities). [FN47]In respect of changes to a registered charge, it was recommended that thefiling of any changes to particulars of the registered charge should be on avoluntary basis and should not be made mandatory. [FN48] Such changes wouldinclude assignments to new chargees, changes to the ranking statements and thelate introduction of a negative pledge.Conclusion The Steering Group recommends that companies should no longer need tomaintain their own registers of charges although members and creditors of thecompany should still have the right to inspect the company's copies of theinstruments of charge. [FN49] The Companies House would also not be required tomaintain separate registers of charges for each company. In addition, trusteescharging trust property not beneficially owned must register such charges, anddisclose to the Registrar that they do so as trustee. [FN50] One other major change suggested by the Final Report is that the companycharge registration system should be governed by secondary, rather than primarylegislation. [FN51] The flexibility this will bring is to be welcomed, butthere should be realistic expectations about when these changes will takeeffect given the impact of the recommendations on personal property securityinterests generally. The Final Report noted that there was a need to consultwith the Lord Chancellor's Department and Scottish Executive, and it may bethat further review and implementation will be taken up by a separate body.[FN52]Hans Tjio [FNa1] FN1. The Report of the Committee on Consumer Credit, HMSO, Cmnd. 4596 (1971) which was endorsed by the Cork Committee, Insolvency Law and Practice, Report of the Review Committee, HMSO, Cmnd. 8558, (1982). FN2. A Review of Security Interests in Property, HMSO, ISBN 011 514664 4 (1989). FN3. Registration of Company Charges, October 2000, URN 00/1213 ("Initial Report"). For some proposals on how the system should be modified, see R. Calnan [2001] B.J.I.B.F.L. 53. FN4. NV Slavenburg's Bank v. Intercontinental Natural Resources Ltd [1980] 1 All E.R. 955 at 975. There is thus no need for duplicate registration under the two Acts. See also Bills of Sale Act (1878) Amendment Act 1882, s.17 (debenture exemption), and Re Standard Manufacturing Co. [1891] 1 Ch. 627. FN5. Companies Act 1985, s.396(1)(b), as inserted by the unimplemented Companies Act 1989, s.93. Compare Australia's Corporations Act 2001, s.262(1)(d) which refers to a charge on a personal chattel. FN6. R. v. Registrar of Companies, ex p. Central Bank of India [1986] 2 W.L.R. 177. FN7. Initial Report, para.1.2. FN8. R.M. Goode Legal Problems of Credit and Security (2nd ed., London, Sweet & Maxwell, 1988), p.37. FN9. Paul and Frank v. Discount Bank (Overseas) [1967] Ch. 348. FN10. Ex p. Hubbard, re Hardwick (1886) 17 Q.B.D. 690. FN11. Part IV of the Companies Act 1989 would have restricted the conclusive effect of the certificate to the date on which the charge particulars were delivered, and not all registration requirements, see the text accompanying nn.24-26, below. FN12. Initial Report, paras 1.12 and 3.14. Under these specialist systems, registration creates the charge, but it also has to be registered as a company charge for validity, so that conclusiveness under the latter registration system is crucial. FN13. Company Law Review: Proposals for Reform of Part XII of the Companies Act 1985, November 1994. FN14. Final Report, para.12.7. FN15. Re Mechanisations (Eaglescliffe) Ltd [1966] Ch. 20. FN16. National Provincial and Union Bank of England v. Charnley [1924] 1 K.B. 431. FN17. Under present Companies Act 1985, s.395, an unregistered charge is void as against a liquidator and creditors. The latter is believed to mean the secured creditors: Re Ehrmann Brothers Ltd [1906] 2 Ch. 697. FN18. This approach was preferred to the alternative of imposing on the chargee a statutory duty that is owed to those who deal with the company to register the charge, breach of which would give rise to compensatory damages or subordination of the chargee's interest to that of a subsequent chargee: see the Final Report, para.12.17. FN19. By contrast, Art.9-402 of the U.S. Uniform Commercial Code requires the chargor's signature. The Final Report, at para.12.23, however, states that where the chargee files a notice in advance of the creation of the charge, that chargee would be required to verify that the chargor had consented to the filing. FN20. Goode, above, n.8 at p.39 points out that under the present system, where a charge is created over collateral that is not in existence, there is still only 21 days from creation to register the charge whether or not there is any property to which the charge can attach. The Final Report, para.12.34, suggests that a confirmation approach will also be based on similar time-limits. No such limits are required under the cancellation approach; the debtor company will have sufficient incentive to improve its credit rating. FN21. Final Report, para.12.35. FN22. R.M. Goode, above, n.8 at p.36; cf. P. Gabriel, Legal Aspects of Syndicated Loans (London, Butterworths, 1986), pp.85-9; J. Stone "The Affirmative Negative Pledge" [1991] 9 J.I.B.L. 364. See also Asiatic Enterpises (Pte) Ltd v. United Overseas Bank Ltd [2000] 1 S.L.R. (Singapore Court of Appeal) discussing Australian cases such as Murphy v. Wright [1992] 5 B.P.R. 11, 734 (N.S.W.C.A.), Troncone v. Aliperti [1994] 6 B.P.R. 13,291 (N.S.W.C.A.): see Tan C.H. (2002) 2 J.C.L.C. (forthcoming). FN23. cf. Calnan, above, n.3. FN24. Initial Report, para.3.13. However, the Steering Group were then also mindful of the fact that the Registrar, as a general rule, does not verify the content of information registered. Conclusive certification that the registration requirements are complied with may thus expose the Registrar to liability for loss associated with an error in a particular registration, which it may not be equipped to prevent, although the Steering Group noted that primary responsibility must lie with the registrant, see Initial Report, para.3.20. FN25. Final Report, para.12.31. The Steering Group considers that, as a general, rule, if the particulars are defective, the charge would not be invalidated completely but would only be valid in respect of the property or classes of property included in the particulars. FN26. Final Report, para.12.56. FN27. Final Report, para.12.76. FN28. Under the Companies Act 1985, ss.395(2) and 415(3). By contrast, the recommendation in the Initial Report suggested introducing a provision similar to the Companies Act, s.407, inserted by the unimplemented Companies Act 1989, s.99, which stated that underlying indebtedness becomes immediately payable "notwithstanding that the sum secured is also the subject of other security". FN29. Goode, above, n.8 at pp.44-5. FN30. Companies Act 1985, s.416, inserted by the unimplemented Companies Act 1989, s.103, provides that notice of a prior registered charge is only imputed to a person who takes a charge over the company's property. Conversely, in the case of an unregistered charge, the Initial Report suggested adopting a provision similar to the Companies Act 1985, s.399(1)(b), inserted by the unimplemented Companies Act 1989, s.95, which invalidates the charge against "any person who for value acquires and interest in and right over property subject to the charge". FN31. Final Report, para.12.26. This is similar to the Companies Act 1985, s.415(2)(a), inserted by the unimplemented Companies Act 1989, s.103. In Scotland, it would be mandatory to file information concerning a negative pledge. FN32. Goode, above, n.8 at p.19. FN33. [1910] 2 Ch. 306. FN34. English & Scottish Mercantile Investment Company, Ltd v. Brunton [1892] 2 Q.B. 700. In Singapore, by contrast, Kay Hian v. Jon Phua [1989] 1 M.L.J. 284 following the Supreme Court of Canada in Union Bank of Halifax v. Indian and General Investment Trust (1908) 40 S.C.R. 510, held that it is for a third party creditor to assert that it had no notice of the prior floating charge and negative pledge clause, see H. Tjio (1995) 16 Company Lawyer 28. This is akin to the inferred knowledge favoured by J. Farrah, "Floating Charges and Priorities" (1974) 38 Conv. (NS) 315 at 319 et seq. but to which Goode disagrees, above, n.8 at p.19. FN35. Similar to the proposed changes under the unimplemented Part IV of the 1989 Act, see above, n.5. FN36. See above, n.9. Goode, above, n.8 at p.13 points out that while insurance policies are often deposited as security, they are not documentary intangibles and cannot be pledged. Consequently, any security over them has to take effect as a charge, which are presently largely unregistrable. FN37. above, n.13. FN38. See text accompanying nn.24-26, above. FN39. See, e.g. Welsh Development Agency v. Export Finance Co. Ltd [1992] B.C.C. 270, contrast art. 9-102 of the US Uniform Commercial Code. FN40. Re Bond Worth Ltd [1980] Ch. 228, Pfeiffer GmbH & Co. v. Arbuthnot Factors Ltd [1988] 1 W.L.R. 150. FN41. See, e.g. Re Brightlife Ltd [1986] 3 All E.R. 673, where Hoffmann J. thought that it did not include money deposited in a bank, but compare F. Oditah Legal Aspects of Receivables Financing (1991, Sweet & Maxwell), p.24. FN42. This was the term recommended by the 1994 DTI report, above, n.13. FN43. Contrast the present Companies Act 1985, s.396(1)(a). But compare Companies Act 1985, s.396(2)(e), inserted by the unimplemented Companies Act 1989, s.93. FN44. Similar to Companies Act 1985, s.396(2)(f), inserted by the unimplemented Companies Act 1989, s.93. FN45. Like insurance policies, shares generally cannot be pledged, see Harrold v. Plenty [1901] 2 Ch. 314, and any security over them takes effect as a charge. FN46. Similar to Companies Act 1985, s.396(2)(g), inserted by the unimplemented Companies Act 1989, s.93. FN47. Even if a bank were able to take a charge over its customers' bank accounts (see Morris v. Agrichemicals [1997] 3 W.L.R. 909, compare Re Charge Card Services Ltd [1987] Ch. 150) such a charge would not be registrable. FN48. The Steering Group also believes that memoranda of satisfaction (of the charge) could be filed on a voluntary basis. The chargee would have to sign the memoranda but if the chargee refuses to do so, the chargor would have the right to apply to court for an order and to be indemnified for costs by the chargee, Final Report, para.12.42. Compare the Companies Act 1985, s.403, inserted by the unimplemented Companies Act 1989, s.98, which provides that a memorandum of satisfaction, if lodged with the Registrar upon the satisfaction of the debt underlying the charge, must be signed by both the chargee and the chargor company. FN49. Final Report, para.12.69. FN50. Final Report, para.12.24. FN51. Final Report, para.12.10 FN52. Final Report, para.12.8. FNa1. Associate Professor, Faculty of Law, National University of Singapore.END OF DOCUMENT © 2007 Thomson/West. No Claim to Orig. US Gov. Works.