Faculty of law blogs / UNIVERSITY OF OXFORD

Working Towards a Modern English Law of Secured Transactions: the STR Project (Part 2 of 2)


Louise Gullifer QC (Hon)
Rouse Ball Professor of English Law, University of Cambridge


Time to read

8 Minutes

The previous part of this blog set out the arguments for reform and the background to the STR project.  This part sets out the details of the recent papers written by members of the project.

The core aspects and the identification of the next stage of the debate are set out in a general policy paper.  This paper is expressed to be in draft, as it is envisaged that it will be a ‘living document’.  As the debate moves forward, conclusions will be incorporated into new versions of it, so that it becomes a set of considered proposals.  At present, however, it raises many questions, on which the STR would like comment and input.

The core features of law reform for secured transactions

The core aspects of a modern secured transactions law, which are explained further in the general policy paper, have been determined in light of these principles and as a result of consideration of the common features of reform of secured transactions law in other jurisdictions around the world.  These aspects are:

  1. A simplified and codified law of secured transactions.
  2. Adoption of a single concept of a (consensual) security interest. 
  3. A regime of secured transactions which enables security to be taken over any asset, present or future.
  4. A regime of secured transactions, including registration, which covers security interests granted by all debtors (whether corporate or non-corporate), although there could be different rules for consumers.
  5. A fully electronic system of registration, where registration takes effect without human intervention.
  6. A set of clear priority rules based on rational distinctions, and, at its core, a rule that priority between registered interests is by date of registration.

It will be seen that many of these aspects focus on simplifying the current law, by removing unnecessary distinctions and complexities, increasing clarity while taking advantage of the flexibility of English law whereby security can be taken over any asset, present or future.  

Recent work on the core features of law reform: the features of a registration scheme

Recently, work has been undertaken on the details of two of these aspects: registration and priorities.  Professor Louise Gullifer has written a paper considering what a registration scheme could look like.  The discussion is based on several parameters (which are themselves critically examined in the paper):

  1. That the registration system would be wholly electronic.
  2. Registration and searching should be instantaneous and take place without human intervention.
  3. It should be possible to register in advance of the creation of a security interest.
  4. Registration should be a priority point.
  5. The registration regime covers interests created by all debtors, whether corporate or non-corporate (with the possible exception of consumers).

The paper goes on to consider what information should be included in the register, and how to tackle specific problems arising from some of the parameters, namely, the identification of parties and ‘empty’ filing, that is, registration of an interest when one has not been and is not going to be created.  The merits of document filing and notice filing are compared, and then the paper sets out two possible schemes.  One is a notice filing scheme, based on the work of the Law Commission in its report no 296 ‘Company Security Interests’) (2005) but taking advantage of technological advances since that report was written.  The other sets out a scheme of advance registration based on priority notices, as a comparator, including some features included in the Cape Town Convention on International Interests in Mobile Equipment.  There are extensive comparative references in the appendices to the paper.

Recent work on the core features of law reform: priorities

The paper on priorities is written by Professor Duncan Sheehan of the University of Leeds.  This examines the basic priority rules which are proposed, including ‘first to register’, but also looks at more detailed questions, such as what should be the position where possession is taken of the collateral, whether there should be superpriority for purchase money security interests, and what, if any, the restrictions on this should be, and what should be the priority rules vis a vis interests which are not security interests, such as ‘Quistclose’ trusts.  The paper also considers when a purchaser will take free of a registered security interest.  The final part of the paper examines the possible priority rules on three different models concerning whether retention of title devices are recharacterised as security interests: these are discussed in another paper considered below.

Recent work on other aspects of law reform

Security interests created by consumers

Work has also been done on some of the non-core aspects identified in the policy paper.  Professor Sarah Nield of Southampton University has written a paper considering whether security interests created by consumers should be included within a reformed scheme.  Taking as read that consumer protection legislation governs (or should govern) whatever financing transactions are entered into by consumers, the paper identifies two main areas of discussion: first, the reform of security instruments available to consumers, most notably Bills of Sale, and secondly what the functional approach inherent within notice filing might have to offer to in terms of the priority of security interests over personal property both bought by and sold to consumers.  The Law Commission’s work on bills of sale is considered in detail, but their recommendations still involve a fragmented registration system.  The main discussion in the paper is, therefore, of whether there is benefit in consumer security interests being subject to the same rules as interests created by all other borrowers, and whether registration in a single register is viable and desirable.  As Professor Nield says: ‘The key issue then becomes one of evaluating whether the clarity and certainty filing would provide is of sufficient importance to justify the time and expense involved.’

The application of the scheme to a wider category of transactions

While the core aspects of the scheme could apply just to ‘true’ consensual security interests, that is, mortgages, charges, pledges and contractual liens, the PPSA schemes in other jurisdictions apply more widely.  Most include outright assignment of receivables, for the purposes of registration and priority, and devices based on the retention of title, such as asset finance devices (finance leases and hire purchase) and trade finance of inventory (retention of title clauses in sale contracts).  Two of these types of transactions have been the subject of two more papers produced by the STR.  

Professor Hugh Beale’s paper deals with outright assignments of receivables and discusses three questions:

(a) Should the sale be governed by the priority rules of the scheme?

(b) Should the sale have to be perfected by registration in order to be effective in the assignor's insolvency?  

(c) If the scheme is to apply, precisely which receivables should it apply to?  

In relation to the last question, the paper largely concentrates on trade receivables, but considers some more specific exceptions in addition even to this category of receivables.  With regard to the first question, the benefits of a system of priorities which depends on registration as opposed to the rule in Dearle v Hall are pointed out, including the advantage to a receivables financier who is able to protect its position by registration in a way that is not possible at the moment without giving notice to all account debtors.  In relation to the second question, the paper considers the possible disadvantages of requiring registration for effectiveness in assignor’s insolvency, but concludes that on balance requiring registration is desirable, particularly as it is already required for unincorporated assignors (s.344 Insolvency Act 1986).

The application of a scheme of registration and priorities to asset finance devices

The same questions may be asked in relation to asset finance devices, where another issue also arises.  Many of the PPSA schemes ‘recharacterise’ asset finance devices, that is, such structures are treated as security interests for the purposes of the personal property security regime (though not necessarily for other purposes).  While there are many arguments in favour of recharacterisation, which are discussed in a paper produced a little while ago by one of the STR working groups, the more recent paper written by Dr Magda Raczynska, of University College, London focuses on whether a scheme of registration and priorities for asset finance devices could be made to work without recharacterising the transactions.  This is the approach of the Cape Town Convention on International Interests in Mobile Equipment (which includes both security interests and title retention devices without recharacterisation) and the unitary approach under the UNCITRAL secured transactions guide

The paper focuses on two main aspects: the treatment of the surplus on enforcement, and the result if an uncharacterised asset finance device is not registered.  The second discussion includes two parts which correspond to the discussion of assignments of receivables: (a) should the transaction be governed by the priority rules of the scheme (including priority by date of registration)? (b) Should the transaction have to be perfected by registration in order to be effective in the assignor's insolvency?  While the benefits of including such devices in the registration scheme make the arguments for inclusion for priority purposes strong, there are good arguments either way as to whether an unregistered interest should be void in insolvency.  In New Zealand, unregistered interests are not void in insolvency, and Professor Mike Gedye has suggested that this may have taken the sting out of making asset finance devices registrable, although it has led to an increased role for the equitable doctrine of marshalling.

The distinction between fixed and floating charges

The final paper in this series deals with a very important issue indeed.  The distinction between fixed and floating charges has to be drawn, in English law, mainly in order to determine over which security interests the expenses of the insolvency process, the claims of preferential creditors and the amount of the prescribed part have priority.  This has led many financiers attempting to create fixed rather than floating charges.  

In a series of cases culminating in the Re Spectrum Plus decision of the House of Lords, the courts have laid down the criteria by which a charge will be characterised as fixed or floating, of which the label used by the parties in the charge document is only one part.  Many doubts as to how the test is applied in practice still remain, and the resulting uncertainty has led to increased costs in structuring transactions, particularly cross-border financing transactions. 

The STR’s view is that there should be a single concept of a consensual security interest, and this view is also shared by the CLLS working group.  However, this view necessitates the abolition of the distinction between fixed and floating charges.  The paper by Sarah Paterson, of the London School of Economics, considers whether the insolvency priority consequences flowing from the distinction could be abolished (and concludes that they should not).  It therefore discusses what could replace the distinction as a trigger for those priority consequences, and comes to the provisional conclusion that it should be replaced by references to security over inventory, book debts and money, perhaps with some extension to include other types of what are sometimes called "circulating assets", such as raw materials and crops.  The paper also considers some difficult issues stemming from this conclusion, including whether parties should be permitted to ‘contract out’ of the priority consequences by obtaining ‘control’ over the charged assets or by taking an absolute assignment of receivables.  These are very difficult questions and the STR particularly hopes that market participants will join in the debate engendered by the discussion in this paper.

Call for comments

As mentioned, these papers, which form the bulk of the work of the STR over the last year, are intended to engender public discussion.  It is very hoped that market participants and commentators will read them and will join in the debate by emailing comments and views to securedtransactionslawreformproject@gmail.com or filling in the form at https://securedtransactionslawreformproject.org/be-involved/comments/


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