Registration of Company Charges - consultation paper issued.

United Kingdom

Modern Company Law for a Competitive Economy, A consultation document from the Company Law Review Steering Group. (October 2000)

A consultation paper has been issued by the DTI seeking views on proposals in respect of the registration of company charges.

The first part of the document describes the present system for the registration of company charges and its history. The law has not been reformed for over 100 years. The second part sets out two alternative ways forward: developing a new system or improving the present system. The third part of the document describes proposals to improve the present system by providing more information, simplifying procedures and reducing costs.

The way forward: Improvements to the system (Part 2)

The system is said to perform a useful commercial function and provides information on the financial position of companies which the business community and its professional advisers find important and helpful. No abolition of the system is proposed.

Consideration is given to the US and Canadian system of "notice-filing" which has been successful for decades. A financing statement is filed before the making of the security agreement and the advance, but once these have been made priority goes back to the time of filing. The system of priorities would not be complete though. It would not cover priority between unregistrable charges or between unregistrable and registrable charges which would be determined by the general law. Notice-filing is simple in practice and in concept but given the opposition when it was first suggested by the DTI in November 1994, it is proposed only to do further work on how the detail of such a scheme could be made to work under English law if there were a strong call for it.

The proposals put forward are to retain the core procedural provisions of the present legislation but to incorporate some of the improvements introduced in the unimplemented Part IV of the Companies Act 1989, including updating the list of registrable charges and the new provisions for oversea companies.

Proposals for Improvement (Part 3)

Invalidity

Registration ensures the validity of the security as against a liquidator or creditors (as against the company it remains fully enforceable). At present, if a charge's particulars are not properly delivered to the Registrar within a period of 21 days after creation, the charge is void against a liquidator, administrator or creditor. Registration of charges must take place within 21 days of creation for the charge to take priority over subsequent charges. The law regarding priority between secured creditors is unclear because the system was originally designed to assist unsecured creditors through public disclosure of prior charges.

It is proposed to carry though the unimplemented section 99 of the 1989 Act (s407 CA85) so that if the charge is not duly registered, the sum secured is payable forthwith on demand even if the sum secured is also the subject of another security. Further, an unregistered charge would be invalidated against "any person who for value acquires an interest in or right over property subject to the charge." Thus want of registration invalidates the charge in the event that the Company sells or disposes of an interest in the charged property. The charge would not be void against a person acquiring an interest where the acquisition is expressly subject to the charge. If there was delay in registering the charge and the 21 day deadline was missed, the invalidity sanction would not apply after the particulars were delivered but there would be no protection between the due date and the actual date for delivery of the particulars. This would save costs of re-execution or of application to the court.

Conclusive Certificate

This has been the greatest obstacle to reform. The Registrar is required to give a certificate which is conclusive evidence that the requirements as to registration have been satisfied. The certificate protects the holder of the security as it is evidence of the validity and priority of the charge. Where the charge is also registrable in a specialist registry, (e.g., shipping), then the double registration requirement produces conflicting priority rules. The Registrar at present is unable to verify the content of what is presented for registration. The Registrar may be exposed to legal liability for loss arising through an error on the public record.

The burden of ensuring compliance should fall on the presenter of the documentation.

The system in England and Wales could be further simplified by not requiring the delivery of the actual charge documents, but of either the document or a certified copy. This would remove the timing problem that arises when the documents have also to be delivered to a specialist registry. The present requirement in Scotland for a certified copy to be delivered has not created any problems.

The system could be simplified even further by dispensing entirely with the delivery of either the document creating the charge or a certified copy of it. Instead, the requirement might be for the company only to submit the particulars of the charge, which would include the date of its creation but it is to be presumed that the company would still have to make a copy available for inspection at the Registered Office.

Any change to the scope of the conclusive certificate would involve a reduction in the degree of assurance that, it is generally believed, is given by the certificate of registration under the current arrangements. There would be no assurance that the information contained in the particulars would be accurate. The registrar would be dependent on the honesty and accuracy of the presenters of the information.

Categories of Charge to be registered

The following changes are proposed:

  • registration is required of a charge created or evidenced by an instrument which if executed by an individual would require registration as a bill of sale;

  • to remove the outmoded reference to a bill of sale by making a charge on goods or any interest in goods registrable other than a charge under which the chargee was entitled to possession either of the goods or of the document of title to them.

Debts

Charges over book debts need to be registered. A charge over a negotiable instrument given to secure the payment of book debts is not registrable. If charges over a wider category of money obligation became registrable, substituting "receivables" for "book debts" might substantially expand the category of registrable transactions whilst restricting registration to that small class of money obligations which underpins a company's cashflow. An alternative is to retain the concept of "debt" as the operative concept while dropping the reference to "book". Should the scope of registration be extended to securities over contractual rights? It is proposed that all charges on insurance policies should be expressly made registrable whether or not other contingent debts are registrable. Should "all moneys" obligations be registrable? Would any of these options improve the current position as to the identification of what should be registered?

Retention of Title

Simple retention of title (ROT) clauses do not constitute a charge. Complex ROT clauses do and are registrable. It is proposed to leave this position as it is.

Shares

Fixed charges over shares are not registrable. This is at odds with economic reality. The difficulty of creating a workable charging system allowing the free movement of the shares is suggested as being an obstacle. Views are sought on the necessity for change.

Negative Pledges

Negative pledges are not registrable provisions in themselves. The position in Scotland is that if there is a negative pledge contained within a floating charge (or within any instrument relating to it) then a "statement" of that negative pledge has to be registered. (There is no requirement for registration of a negative pledge contained in some document which is not a floating charge, e.g. a loan agreement.) It is proposed to have a system of voluntary registration, which will have advantages for the lending community and will protect floating charges against subsequently registered fixed charges. Constructive notice might arise under such a system either from the date of creation or registration of the charge. The beneficiary of the pledge ought not to be allowed to register at any time during the life of the pledge, but should deliver particulars at the same time as registering the relative charge.

Alterations of Floating Charges

There is no obligation to register an alteration of an existing charge in England and if the alterations were to result in a new charge, it would be registered in the usual way. (This section is concerned with the Scottish position.)

Memoranda of Satisfaction

It is proposed that delivery of a memoranda of satisfaction ought to remain voluntary and that the 1989 Act should be followed so that both the chargee and the chargor sign it to reduce the risk of fraud.

Crystallisation of Charges

The increasing use of "automatic crystallisation clauses" under which the floating charge holders provide for crystallisation to happen on certain events causes concern. Crystallisation previously was understood to have occurred only on the appointment of a receiver or the commencement of a winding up. In the case of automatic crystallisation there is no public notice of the legal change. The 1989 Act would have enabled regulations to be made requiring notice to be given of the crystallisation and requiring automatic crystallisation clauses to be entered on the public register at Companies House; crystallisation would be ineffective if the notice was not given. The argument against such a system is that it could prove counter-productive and the courts favour contractual freedom to agree such clauses.

Company Trustees

It is debatable whether a company acting as trustee creating a charge over property it holds as trustee needs to register such a charge. It is generally thought not to be registrable, because the sanction of invalidity would be irrelevant; the liquidator of the trustee would obtain no benefit if the unregistered charge were void against him, because the trustee would not be the beneficial owner of the charged property. Alternatively, one could argue the sanction of invalidity is not the only rationale for the requirement to register and you could make the money secured immediately payable and impose a fine. The current practice is to note the fact of trusteeship on the register, so that the creation of the charge does not reflect upon the creditworthiness of the chargor (particularly important for banks).

It is proposed that company trustees charging trust property should register such charges and disclose in the particulars that they do so as trustee or alternatively that the law be clarified so that company trustees should not register such charges.

Oversea Companies

The present difficulty is that a chargee might not know if an oversea company has a place of business in England. It will not know whether a charge should be registered here.

Also, the law applies only to property located here and not to property which is charged but brought into England at a later date. Property such as motor vehicles which can be constantly moved present a further problem. It is not proposed to abolish registration of charges on oversea companies, but a simplified system is proposed.

A worrying point (3.68.e) made by the paper is that a company which is an oversea company, but has not been registered as such, and which has property located in Great Britain subject to a charge which would have been registrable if the company had been a British registered company, should on registering as an oversea company be required to register the charge within 21 days of registering. If the proposal is adopted, it would be necessary to make explicit the law so that if the company fails to register the charge, the charge should be void.

Unregistered Companies

It is proposed that unregistered companies as defined by s.718 of the 1985 Act should be governed by the same requirements to register company charges as registered companies.

Companies' Own Registers

The duplication of work in requiring each company to keep a register of basic information for all charges over their property, as well as maintaining a comprehensive register at Companies House is noted. The good discipline in record keeping and the possibility of keeping the records in electronic form is suggested as forming a good basis for the future development of a wider de-centralised system.

Separate Register of charges maintained for each Company by Companies House

The maintenance of summary information for each company in a separate register is an existing statutory obligation placed on the Registrar. It places an additional administrative burden on the Registrar but adds nothing to the information already held. Even without the separate registers, Companies House can produce a package of charge information for any company. The benefit of continued practice of maintaining separate registers is questioned.

Constructive Notice

The main function of the system is to give public notice of the possible existence of a security interest of the possible existence of a security interest. The current position is that it is the responsibility of the person dealing with the company to avail himself of any information held on the public register. The 1989 Act would have provided that the only person deemed to have notice of the charge is a new chargee who takes a registrable charge.

21 day Invisibility Problem

A charge may not be visible on the register until 21 days after its creation (the sanction of invalidity only takes effect if the particulars of charge are not delivered to the Registrar within 21 days after creation). The problem caused by this "invisibility" are thought to be greater in theory than in practice. A reduction of the problem, not a solution, is proposed. The period for delivery would be shortened to 10 days. It is pointed out that lenders can make it a term of lending that no money is drawn down until any pending charge would have appeared on the register.

For further information please contact Ruth Pedley at ruth.pedley@cms-cmck.com or on +44 (0)20 7367 2098.