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Registration of Company Charges Revisited: New and Familiar Problems

Document Cited authorities 6 Cited in Related
Vincent
Pages153-176
Author
Published date01 May 2019
DOI10.3366/elr.2019.0547
Date01 May 2019
INTRODUCTION

The law of registration of company charges is of considerable importance throughout the jurisdictions of the UK. Corporate finance transactions often depend upon the creditor obtaining valid security over the debtor's property. For such a security right to be fully effective, the registration of charges rules must be complied with. Yet despite its significance, there is a general absence of detailed analysis of the current law of registration of company charges in Scotland.1 The previous law received a degree of scholarly attention2 and the present regime also requires to be appropriately scrutinised.

This article therefore focuses on: what is meant by a “charge”; when charges are deemed to be created; the effect of an unregistered charge; and the applicability of the provisions on registration of charges where a company acquires property already subject to a charge. It will be shown that some of the criticisms levelled against the predecessor registration of charges regimes remain valid3 and that, despite its overall positive impact, the current law contains significant points of uncertainty and difficulty. The article deals with conceptual and practical matters. It addresses issues that have not been discussed in the relevant literature. Legal practitioners involved in secured finance transactions and associated litigation in Scotland require to have in-depth knowledge of much of the registration of charges law that is considered in this article. In addition, the discussion of the potential uniformity of English law and Scots law on certain points, despite the existence of different systems of property law and security rights, may be a source of interest for those based outside Scotland, within both practice and academia.

 REGISTRATION OF CHARGES: BACKGROUND

A regime for the registration of “charges” granted by a company was introduced to Scots law by the Companies (Floating Charges) (Scotland) Act 1961 (“1961 Act”).4 English law had required company charges to be registered with the Registrar of Companies since 1901 in order to overcome problems arising from the lack of publicity in relation to charges.5 But the traditional Scots law adherence to the publicity principle in the creation of security rights meant that, until 1961, there was no perceived need for (additional) registration in that system.6 The position changed, however, with the arrival of the floating charge.

There was a recognition that the Scots law floating charge ought to be accompanied by a mechanism for registration against the person of the chargor. This would publicise the encumbrance of all or any part of the chargor's property. Given that the floating charge was being transplanted from English law, the English system of registering floating charges was also copied. However, like English law, the adopted scheme for the registration of charges extended beyond floating charges to other forms of security.7 The justification provided in the 1961 Act, section 6, was that floating charges and other charges “ought to be published for the information of persons considering taking security… by way of floating charge”.8 In other words, the registration of charges system was (at least in part) to be an information nexus for prospective floating charge holders, as regards certain security rights already created by the company. Due to the desire to encourage investment in Scottish companies by offering floating charges, it is understandable that an attempt was made to minimise the resource implications of gathering information regarding prior security rights. The information provided would also be of benefit to others dealing with the company. Yet, on the other hand, additional costs and inconvenience were imposed upon the company and secured creditors by the requirement for double registration of some security rights.9

Over the following decades, the various iterations of the registration of company charges regime were the subject of criticism by commentators.10 Professor Gretton described the applicable statutory provisions as “a rich source of difficulty” and recommended the abolition of the registration of charges system, due to it being unnecessary (from a publicity perspective) for security rights other than the floating charge.11 The Scottish Law Commission also recommended such an approach.12 The registration of charges has persisted but the most significant changes to that system came into force on 6 April 2013 when chapter A1 was inserted into Part 25 of the Companies Act 2006.13 There is now a UK-wide scheme of registration of charges in place of the previously separate (but substantively similar) schemes for Scotland and the rest of the UK.14 It is possible to view this as a natural convergence led by commercial considerations. In introducing floating charges and registration of charges in 1961, Scots law was replicating aspects of English law to promote the business of Scottish companies and a combined system of registration seems like a logical further development which increases cross-border uniformity of laws and facilitates ease of lending across the UK.15

Given the dissimilarities between the Scots and English laws of security rights, such as terminological differences, the types of security available and the absence of equity in Scots law, the creation of a system which caters for both sets of laws is a notable achievement.16 It may also mean that the courts will give particular regard to consistency of interpretation across the jurisdictions.17 However, since registration of charges must operate against the background of the wider legal system, there would be no end of technical difficulties if the Scottish law of security rights was overridden or disregarded. There are still elements of registration of charges that are distinct to each jurisdiction and this article will analyse aspects of the current regime from the perspective of Scots law, but with reference to the English position where that is useful for interpretive purposes.

 WHAT IS A “CHARGE”? General

Section 859A of the Companies Act 2006 provides details regarding registering charges. The section applies “where a company creates a charge”,18 and only these “charges” fall within the registration of charges regime. A charge by its nature is a form of security over property and thus cautionary obligations are outside the registration of charges system. The requirement that the company “creates” the charge also excludes security rights that the company does not voluntarily grant. This exclusion extends to securities arising by operation of law, such as liens and the landlord's hypothec, and judicial securities (diligences).19 In addition, there are some express exclusions within s 859A.20

Nevertheless, the general rule in the current provision is that all charges created by a company over its property are registrable. Formerly, only floating charges and charges over specific types of property (e.g. land, ships and aircraft, and certain types of incorporeal moveable property, such as intellectual property and book debts) fell within the regime.21 A system which provides that voluntarily created charges are registrable unless excluded should provide greater certainty as to whether something is a registrable charge or not.22 However, it still leaves the question of what does the term “charge” cover?

It is stated in s 859A(7) that a charge includes “a standard security, assignation in security, and any other right in security constituted under the law of Scotland, including any heritable security, but not including a pledge”.23 In Scots law, the principal types of real rights in security are the pledge, for corporeal moveable property, and the standard security, for heritable property (mainly land). The former is expressly excluded, while the latter is expressly included. Since 1970, the standard security has been the only form of voluntary heritable security available in Scots law.24

 Assignation in Security

Assignation in security is also mentioned in the definition in s 859A(7). The consensus view is that this is a functional form of security in Scots law whereby incorporeal property is transferred to the assignee for security purposes.25 It is not a true (subordinate real) right in security.26 The transfer is completed by intimation to the claim debtor (or an equivalent step)27 and requires retransfer (retrocession) to the cedent (assignor) when the secured debt is satisfied. There are two general forms of assignation in security: assignation expressly in security; and assignation ex facie absolute qualified by back letter or agreement. No distinction is drawn in the definition between the different types of assignation in security. Both of them presumably constitute “charges”. It is, however, sometimes difficult to discern whether what appears to be a non-security absolute assignation is, in fact, an assignation in security and thus ought to be registered. This is especially true if the cedent has a conditional right to have the property transferred back to them or can obtain such a right. Where there is a statement that the assignation is for security purposes then this will indicate that a charge has been created.28 But even if there is no such statement, if property is assigned to minimise or neutralise the risk of non-performance of a separate obligation owed to the assignee, and the assignee is obliged to re-transfer the property upon satisfaction of that separate obligation,29 then the assignation should be deemed a security and thus a registrable charge.30

 Floating Charge

Whether a floating charge is included under the legislation simply due to its nature and nomenclature or because it is a “right in security constituted under the law of Scotland”, it is undoubtedly a registrable charge.31 A floating charge is a voluntary security created over potentially all of a company's property from time to time, whether moveable or...

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