The Law Commission Consultative Report on Company Security Interests: An Irreverent Riposte
| DOI | http://doi.org/10.1111/j.1468-2230.2005.00538.x |
| Date | 01 March 2005 |
| Published date | 01 March 2005 |
REPORT
TheLawCommissionConsultativeReportonCompany
Security Interests: An Irreverent Riposte
Gerard McCormack
n
I was once at a sermon bya well-known Northern Ireland politician and minister of religion in
which, talking about the fall from grace of a British minister following a sex scandal, he com-
mented that while the will of God worked slowly it also worked surely. Be that as it may, one
might comment that the process of law reform, whatever about working surely, can certainly
work slowly. Back in July 2002 the Law Commission produced with some haste a consultation
paper on Registration of SecurityInterests.
1
There was a bit of a fanfare, a short consultation period
and talk of imminent legislativechange.Things went quiet for a while.More than 2 years later the
Law Commissioncame back in September 2004 with afurther consultation paper only this time
called a‘‘consultativereport’’
2
with the promise of a Final Reportin July 2005. Inth is article I will
look at the consultativereport and ask whether it is going to be the harbinger of legislativetrans-
formation.
BACKGROUND
In the Consultation Paper, Registration of Security Interests the Law Commission
suggested replacing the present transaction based system of company charge
registration under Part 12 Companies Act 1985 with a notice-¢ling system. Part
12 provides information as tothe state of a company’s secured borrowings; infor-
mation that is of assistance to later secured parties, prospective investors, credit
reference and ratingagencies, ¢nancial analysts and the like. Part 12 also assists in
determining priorities between competing security interests in that a registrable
but unregistered security interest is void in the event of the creator’s liquidation.
3
The Law Commission pointed out that company charge registration was
intended to prevent the implication of false wealth whereas its role in governing
priorities had developed almost by accident. The Law Commission proposals
involved a shift in emphasis. Registration would be made easier and there
n
Universityof Manchester.
1 Consultation Paper No164 (CP 164). See L. Gullifer,‘Will the Law Commission sink the £oating
charge?’ [2003] LMCLQ125; G. McCormack,‘Quasi-securities and the Law Commission Con-
sultation Paper on security interests ^ a brave new world’ [2003] LMCLQ 80; I. Davies,‘The
Reformof English personal property security law:fu nctionalism and Article 9 of the Uniform
Commercial Code’(2004) 24 LS 295.
2CompanySecurityInterests (September 2004) (CR).
3 Section 395 Companies Act1985. It is also voidin a company’sadministration. According to Lord
tion of the legislature was that property subjectto a registrable but unregistered charge should be
available to the general body of creditors (or a secured creditor ranking after the unregistered
charge) as if no such charge existed.’
rThe Modern LawReview Limited 2005
Published by BlackwellPublishing, 9600 Garsington Road,Oxford OX4 2DQ,UK and 350 Main Street, Malden, MA 02148, USA
(2005) 68(2)MLR 286^30 9
would be clearer and more rational priority rules but at the expense of some loss
of information.
4
The new notice-¢ling system envisaged by the Law Commission would be
modelled along the lines of Article 9 of the American Uniform Commercial
Code and the Personal Property SecurityActs (PPSAs) in the common law pro-
vinces of Canadaand in New Zealand.
5
The decision touse overseas legislation as
a guide was taken partly because of constraints of time but also because the Law
Commission saw ‘no need to re-invent the wheel.’
6
According to th e Law Com-
mission there was not necessarily an assumption that what has worked well in
North America will work well in England. Nevertheless,‘the fact that Article 9
and the PPSAs have been so successful means that they deserve very carefulcon-
sideration.’
7
The notice ¢ling/transaction ¢ling distinction is central to the Law
Commission proposals and has been explained in the following terms:
8
The most characteristic di¡erence between notice ¢ling and traditional systems of
registration is that notice ¢ling is parties-speci¢c rather than transaction-speci¢c.
What is ¢led are not the details of a particularsecurity but noticethat certain parties
have entered into, or may in future enter into, a secured transaction in relation to
speci¢ed property. This approach has certain implications. A notice may be ¢led in
advance of the transaction and the proposed transaction may never take place. The
same notice mayser vea ser ies of connected transactions. And the informationgiven
on the register is necessarily rather general in character, being an invitation to
further inquiry rather than a full account of the right in security.
Currently, the list of registrable security interests is setout in section 396(1) Com-
panies Act 1985. The practical importance of the registration mechanism is
demonstrated by the fact that in 2003^2004 some197,000 security interests were
registered.
9
To be registrable a security interest must constitute a‘charge’; be cre-
ated by a company and also come within the list set out in the section.
10
If the
security interest falls down on any of these criteria then it is outside the scope of
the registration obligation.
11
The Law Commission suggested that the notice ¢l-
ing system could be applied to a broader range of security interests and also
include functionally equivalent legal devices,’ quasi-security’, such as the assign-
ment of receivables (factoring) and retention of title clauses in sale of goods con-
4 CR para 2.46. See also J. DeLacy,‘Re£ectionso nthe ambit and reform of Part 12of the Compa-
nies Act1985and the doctrine of constructive notice’in De Lacy,(ed) The Reform of United Kingdom
CompanyLaw (London: Cavendish, 2002) 76.
5 See generally on Article 9 Secured Creditunder Englishand American Law (Cambridge: CUP, 2004).
6 CR para 1.20.
7 CR para 1.5.
8 Scottish Law Commission discussion paper Registration ofRights in Securityby Companies(October
2002) 8.
9SeeDTI,Companies in 2003^04 (TSO, London, July 2004) 52.
10 See H.Be nnett,‘Registration of Company Charges’ in J.Armour and H. Bennett (eds.)Vulnerable
Transactionsin CorporateInsolvency(Oxford: Hart 2003) 217,243.
11 ‘Charge’is said by s. 396(4)to include a mortgagebut there is no other ampli¢cation of the term in
the statute. A chargeequals a rightof recourse againstproperty to ensure the payment of money
due or the performanceof some other obligation.It is a conse nsual security right createdby agree-
ment between the parties under which the debtor retains possession of the asset used as security;
see generally Swiss Ba nk Corp vLloydsBank [19 82] AC 58 4, 595.
Gerard McCormack
287rThe Modern LawReview Limited 2005
To continue reading
Request your trial