England and Wales

Michael Bridge

I.Introduction

1.The statutory schemes

The most striking feature of the English1 approach to security over tangibles2 is the way that it divides the treatment of registration and formal requirements according to whether the security grantor (hereinafter referred to as the chargor, to cover both chargors in the strict sense and mortgagors) is a company or an individual (a category that includes sole traders). The registration of company charges (we shall see that few formal requirements are exacted) is a matter for the Companies Act 2006, which supersedes the Companies Act 1985. Individuals, on the other hand, are dealt with in bills of sale legislation. This division created difficulties for the work of the Law Commission when in recent years it reviewed company charges. Its terms of reference prevented it from looking at bills of sale and hence thwarted a full overview of the system of per-

1The constitutional structure of the United Kingdom is a matter of wonderment. England has no separate legislature, though Scotland has a Parliament and Wales has a Legislative Assembly. Legislative powers (more in the case of the Scottish Parliament) have been devolved by the United Kingdom Parliament in Westminster to the Scottish Parliament and the Welsh Assembly. English law is not in force in Scotland but it is in force in England and Wales. The existence of the Welsh Assembly may in future require some differentiation between law applicable only in England, law applicable only in Wales and law applicable in England and Wales.

For present purposes, English law means the last of these three categories.

2The expression “tangibles”, or “tangible movables”, is not used in English domestic law, with the exception of conflict of laws. The appropriate equivalent is “choses in possession”, though even this expression suffers from the defect that it could also include so-called “choses real” (leasehold interests in land). The bills of sale legislation (see infra) used the expression “personal chattels”, but that had a particular meaning under the relevant statutes. The expression “chattels” is in common use. In modern practice, the expression probably most often used is “goods”, an abbreviation of the earlier form of “goods, wares and merchandise”. I shall nevertheless use the expression “tangibles” in this paper.

sonal property security. This binary division of the law of security over personal property (tangible and intangible) is complicated by separate statutory provision for farmers (the Agricultural Credits Act 1928). Furthermore, partnerships are treated as individuals for the purpose of security, except that the recently introduced limited liability partnership (LLP) is assimilated to companies, with registration of charges being dealt with at Companies House in Cardiff using forms that are an adaptation of those used by companies.3

The Companies Act 2006 is a new statute which permits certain major changes to be made at a future date by way of secondary legislation. Until such secondary legislation is made, the full impact of the new legislation in the field of secured transactions cannot be known. It will take some time for the law on the subject to migrate completely from the Companies Act 1985 to the Companies Act 2006. The requirement of registration is laid out in Sec. 395 et seq. of the 1985 Act and in Sec. 860 et seq. of the 2006 Act. The particulars of registration are entered on a so-called 395 form (an LLP 395 form for limited liability partnerships). It will be some time before new forms are devised to reflect the change in numbering (so far there is no change in substance).

In the case of individuals (to which ordinary partnerships are assimilated), the applicable legislation is the Bills of Sale Act 1878 supplemented by the Bills of Sale Act (1878) Amendment Act 1882. The former statute applies to all bills of sale, including those that do not serve a security purpose. The latter statute deals only with security bills of sale and it operates by laying down its own substantive provisions and by modifying pro tanto (to the extent needed for security bills of sale) the provisions of the 1878 Act. Apart from the difficulties of complying with this dreadful Victorian statutory relic, there are considerable difficulties in just reading the two statutes side by side as they apply to security bills of sale.

2.The general features of the law of security

In the case of companies and farmers, security over tangibles may be granted in the form of a charge or a mortgage. The charge may take the shape of either a fixed or a floating charge. There can equally be a floating as well as a fixed mortgage, but few references are made in practice to this possibility. Whereas a mortgage of movables is the outright conveyance of ownership with a cesser (that is, a reversion to the mortgagor) on redemption of the mortgage, a charge is technically not a conveyance

3See the Limited Liability Partnership Regulations 2001 (as amended), SI 2001 No. 1090, regulation 4 and Schedule 2.

but an encumbrance.4 In practice, the difference between a charge and a mortgage is of little consequence. The statutory provisions on the registration of company charges define a charge as including a mortgage5 and Sec. 205 (1) (xvi) of the Law of Property Act 1925 defines a mortgage as including a charge. The differences between mortgages and charges have largely been eliminated by commercial drafting practice.6 The mortgagee’s remedy of foreclosure, not exercised in practice,7 and the remedy of taking possession, which for various reasons mortgagees would be advised not to exercise,8 were never available by law (as opposed to contract) to chargees.

Floating charges are not granted by individuals (though provision is made for farmers to do so under the Agricultural Credits Act 1928).9 This practice appears to be due to difficulties concerning the interpretation and application of bills of sale legislation. Sec. 5 of the Bills of Sale Act (1878) Amendment Act 1882 states that a bill of sale is void, except as against the grantor, “in respect of any personal chattels specifically described in the schedule thereto of which the grantor was not the true owner at the time of the execution of the bill of sale”. This has been understood as amounting to a prohibition on security bills of sale (that is,

4Carreras Rothmans Ltd v Freeman Mathews Treasure Ltd [1985] Ch 207.

5Sec. 860 Companies Act 2006.

6In London County and Westminster Bank v Tompkins [1918] 1 KB 515, Pickford LJ states that “the elaborate and drastic documents by which bankers seek to protect themselves may pass the line between mortgages and charges unintentionally”. Note the way that the elimination of the line between mortgages and charges is condoned by the case law. For example, see Swiss Bank Corp v Lloyds Bank Ltd

[1982] AC 584, per Buckley LJ in the Court of Appeal: “[A]n equitable charge may, it is said, take the form either of an equitable mortgage or of an equitable charge not by way of mortgage.” In Re Bank of Credit and Commerce International SA (No.

8)[1998] AC 214, Lord Hoffmann refers repeatedly to the equity of redemption in charged assets. There cannot be a true equity of redemption in charged assets because the idea connotes the right to call for a reconveyance of property after a mortgage has been paid off. A charge does not involve the conveyance of property in the first place. Rather it is an encumbrance that can be lifted from the charged

assets by paying the secured debt.

7It has never been a feature of the law of mortgages over tangible personalty and

has in practical terms been eliminated from mortgages over land.

8Mainly because of the high standard of management of the charged assets expected of a mortgagee taking possession, see Gaskell v Gosling [1896] 1 QB 669, at 691 et

seq. (Rigby LJ).

9Sec. 5 (2).

charges) on after-acquired property.10 The meaning of the legislation and the extent to which it purports to deal with after-acquired property have been a constant source of misunderstanding and disagreement among the judiciary.11 The legislation, however, applies only to documents and not to transactions,12 and mortgages and charges of tangible movables are not required by law to be in writing. It will, however, not suit creditors to enter into oral charges in respect of after-acquired property.

Apart from the difficulties posed by bills of sale legislation, perhaps the most significant feature of the English law of security is the ease with which it permits a single security to cover both present and future assets.13 English law may have on the face of it a numerus clausus of consensual security interests (mortgages, charges and possessory pledges),14 but the elasticity and universality of the charge15 renders it unnecessary to look for new forms of security and English law has never had to develop a notion of security transfer of title16 to make up for deficiencies in its law of security. Future assets are automatically attached by a charge

10See, for example, R. M. Goode, Commercial Law (3rd edn. 2004), p. 587 footnote 63.

11See Thomas v Kelly (1888) 13 App Cas 506, at 514 et seq. (Lord Macnaghten), advancing the proposition that, apart from a stated exception, a security bill of sale over after-acquired property was not a bill of sale for the purpose of the Act, and Brown-Wilkinson VC in Welsh Development Agency v Export Finance Co Ltd [1991] BCLC 936, at 956 (reversed on other grounds at [1992] BCLC 148, CA), who thought this view was wrong.

12See Lord Herschell in Charlesworth v Mills [1892] AC 231, as explained by Lord Esher MR in Ramsay v Margrett [1894] 2 QB 18, at 23 et seq. The significance of this observation has never been fully clarified. So far as a document merely records a previous transaction (“not intended to be part of the bargain to pass the property in the goods” in that case), then it is not a bill of sale. So far as no writing requirement is laid down by law to constitute that earlier bargain, then it should follow that the legislation will not “bite” on documents that merely record the bargain. It is in the nature of a security bill of sale, however, that as a practical matter of proof a creditor will find it difficult to persuade a sceptical court that an informal security has in fact been granted.

13Cf. Italian law (subject to the broader rights given only to banks in recent times) and German law (with its asset by asset approach).

14Re Cosslett (Contractors) Ltd [1998] Ch 495 (Millett LJ).

15Cf. Belgian law and French law (before the recent reforms) in their requirement that a nantissement du fonds de commerce cover the whole of a going concern and not particular parts of it.

16Cf. German and Spanish law. Italian law, Belgian law and Dutch law (since 1992) have not been accommodating to the notion of security transfer.

granted in these terms as soon as they come into existence.17 In modern times, at least, the issue of secret liens and apparent ownership has not played a major role in the English law of security,18 largely because of the introduction of compulsory registration. In the case of a floating charge, English law also permits the chargee to deal beneficially with the charged assets without having to account for their proceeds to the chargee.19 In one respect, however, English law has imposed obstacles with regard to a single security stretching into the future. It has resisted the automatic “tacking” of later discretionary advances by a creditor so that they benefit from that creditor’s priority position, as against a later creditor taking security over the same assets before the discretionary advance by the first secured creditor is made.20

Security over tangible movables is also available by law to certain categories of creditor. These include unpaid sellers of goods, granted the right by statute,21 as well as certain creditors long recognised as having the right at common law, such as repairers and carriers. The rights of these lienors may be supplemented by contract (invariably the case with carriers) so as to include rights that the creditor is not granted by law, namely, the right to retain tangibles for debts incurred by the owner on a previous occasion and the right of sale in the event of non-payment.22

In the mid-1980s, the number of types of preferential creditors ranking ahead of ordinary secured creditors was severely reduced to comprise only six categories, and the number was further reduced to three with the Enterprise Act 2002, as the Crown in its various capacities was removed

17Tailby v Official Receiver (1888) 13 App Cas 523.

18Contrast the pre-Article 9 American position in Benedict v Ratner 268 US 353 (1925).

19See Cookson v Swire (1884) 9 App Cas 653 (Lord Blackburn, noting that retaining possession after a conveyance, in earlier times conclusively deemed to be fraudulent, later came to be seen as merely evidence of fraud).

20See Sec. 94 Law of Property Act 1925 (setting out the limits of tacking); Hopkinson v Rolt (1861) 9 HLC 514; H. Beale/M. Bridge/L. Gullifer/E. Lomnicka, The Law of Personal Property Security (2007), p. 480 et seq. The difficulty that this position posed for bankers taking security for an overdraft facility is shown by Deeley v Lloyds Bank Ltd [1912] AC 756, since each payment into a current account retires old debt and each withdrawal creates new debt.

21Sec. 41 Sale of Goods Act 1979. But the lien is lost when possession is lost and there is no equivalent of the rights found in other legal systems, such as French law, Italian law and Belgian law, allowing an unpaid seller who has not reserved title to recover goods from the buyer within a stated period.

22See Barker (George) Transport Ltd v Eynon [1974] 1 WLR 462.

from the ranks of preferential creditors.23 It is a striking feature of the law governing the rights of preferential creditors that they are entitled to be paid ahead of floating chargees and to that extent therefore they expropriate floating chargees.24 A listing of preferential creditors does not quite do justice to the complexity of the law, because account has to be taken of the rights to recover expenses of those who administer the estates of insolvent persons, namely, administrators, administrative receivers, trus- tees-in-bankruptcy and company liquidators.25 Furthermore, with the retrenchment in the ranks of preferential creditors there has emerged a limited statutory right to ordinary unsecured creditors to participate in the estate of an insolvent person at the expense of floating chargees. This again arises under the Enterprise Act 2002.26

The vulnerability of the floating charge encourages creditors to seek a fixed charge over assets to the maximum extent permitted by law. To that end, they have sought to take fixed rather than floating charges even over book debts (accounts receivable), though there were few signs of similar developments in the case of tangibles. So far as fixed charges were taken over tangibles, they concerned equipment rather than stock- in-trade (inventory) and related items, since in the case of equipment it was a practical matter for the creditor to exercise the relatively tight controls, imposing for example the requirement of consent by the chargee to individual disposals of the equipment, necessary for a charge to be characterised as fixed. In recent times, the controls required for a fixed charge have been reemphasised,27 so that in practical terms it is impossible to take a fixed charge over a debtor’s circulating capital.28 This shift in the attitude of the law has come at the expense of the long-standing preference of English law to give full effect to the contract between secured creditor and debtor. English courts have long been reluctant to recharacterise transactions, whether this was to treat a supposed fixed

23See Schedule 6 to the Insolvency Act 1986, as amended by Sec. 251 Enterprise Act 2002.

24Sec. 175 Insolvency Act 1986 and para. 65 (2) of Schedule B1 (as added by the Enterprise Act 2002).

25For example, Sec. 175 (2) (a) Insolvency Act 1986 states that preferential creditors rank equally and rateably inter se after the expenses of the winding-up (the list of which in rule 4.218 of the Insolvency Rules includes expenses incurred by and remuneration accruing to the liquidator).

26Adding Sec. 176A to the Insolvency Act 1986. Taking account both of this provision and the rights of preferential creditors at the expense of a floating chargee, English law seems to be more generous to secured creditors asserting their rights than the other legal systems in this study.

27National Westminster Bank v Spectrum Plus Ltd [2005] 2 AC 680.

28See Agnew v Commissioner of Inland Revenue [2001] 2 AC 710.

charge as a floating charge29 or to treat a complex funding scheme as giving rise to a charge.30 English law, while condemning sham transactions that are designed to dissimulate the parties’ true intentions, have accepted artificial transactions and treated them at face value, so long as the parties actually do what they say they are doing.31 It has to be recognised, nevertheless, that English law was less leniently disposed to reservation of title creditors who by various means, such as deemed ownership, agency and trust clauses, sought to claim an original interest in new goods manufactured with the goods supplied and in the money proceeds of the goods supplied. Despite language that was sometimes encouraging to draftsmen of reservation of title clauses,32 their effectiveness as such clauses, as opposed to charges, was confined to the very goods supplied.33

Amongst secured creditors, the basic principle is that the first in time prevails.34 Nevertheless, floating charges give way to subsequent fixed charges, so far as these are created within the ordinary course of business of the chargor and within the limits of an authority, implied or express, to do so, granted by the floating chargee to the chargor. It is probably because English law does not recognise title retention as a form of security that it has never developed the idea of a purchase money security interest, though interesting examples with little practical importance have arisen in the case of land but not tangibles.35 Those creditors exercising effective reservation of title clauses, whether in a contract of sale or in a financing contract taking the form of hire purchase, conditional sale or finance lease, nevertheless rank ahead of those creditors taking security over the debtor’s assets. This is because the debtor’s assets do not extend to assets owned by third parties. This ranking might plausibly be

29See Re New Bullas Trading Ltd [1994] 1 BCLC 485, overruled by the House of Lords in National Westminster Bank v Spectrum Holdings Ltd [2005] 2 AC 680.

30See Welsh Development Agency v Export Finance Co Ltd [1992] BCLC 148.

31See Re Inglefield (George) Ltd [1933] Ch 1. A case where the parties’ choice of language was unfortunate so that a sale and resale of stock-in-trade was recharacterised as a charge over the assets in question was Re Curtain Dream plc

[1990] BCC 341. English law therefore accepts a sale and leaseback for what it purports to be and is not restrictive in the way that Italian law is.

32For example, Clough Mill Ltd v Martin [1985] 1 WLR 111 (Robert Goff LJ).

33See for example Tatung (UK) Ltd v Galex Telesure Ltd (1989) 5 BCC 325. So far, however, as a reservation of title clause apples to the original goods supplied, English law (unlike Italian law) makes it easy for a seller to reserve title.

34See Case 1 infra.

35See Abbey National Building Society v Cann [1991] 1 AC 56; Re Connolly Bros Ltd (No. 2) [1912] 2 Ch 25.

seen as an unexpressed recognition of the purchase money security interest.

English law accepts the principle that charges should be registered and thus made available to public inspection.36 Both the bills of sale legislation and the Companies Act 2006 provide for this.37 Nevertheless, the effectiveness of such a system of public notice is impaired, not only by the exclusion of title-based financing devices,38 but also by the requirement that only particular types of charge are required to be registered. For example, a fixed charge over shares is not on the list of charges that have to be registered under the Companies Act. Registration under bills of sale legislation and the Companies Act 2006 is by entry against the name of the debtor and is a negative priority point, in that it prevents the charge (or bill of sale) from being defeated by third parties (including here insolvency officers, such as a company liquidator). In the case of companies, it has been established that registration constitutes public notice, at least against those who might be expected to search the register.39 Constructive notice is less important than might be supposed for various reasons: first, equitable interests arising by way of charge are effective against insolvency officers since they stand in the shoes of the insolvent person and bear the burdens that afflict his conscience;40 secondly, a legal mortgage is rarely taken, so the prospects of such a security outranking an earlier equitable charge are sensibly diminished; and thirdly, to the extent that a floating charge can upset the normal order of priority by outranking a later fixed charge, because of restrictions on the debtor’s authority to create a later fixed charge over the same assets, it will be because the later fixed chargee has actual notice, that is, knowledge, rather than constructive notice, of any limitations on the chargor’s usual authority to deal with its floating charge assets.

Apart from the debtor entry registration systems provided for under bills of sale legislation and the Companies Act, there are also asset registers dealing with land, ships, aircraft and certain types of intellectual property. Registration here is against the assets in question and the registers, besides being registers of charges, also function as registers of title. Their relations with the debtor entry registers are not necessarily easy to discern.

36This is to be contrasted with Germany (no registration) and the Netherlands (confidential registration with the tax authorities).

37In the case of companies, apart from the specialist registers where a second registration is required, English law subsumes all charges under a single register (cf. Italy).

38Unlike Spain, where there is an option to register finance leases.

39Wilson v Kelland [1910] 2 Ch 306.

40For example, Madell v Thomas [1891] 1 QB 230.

II.Case Studies

1.Non-possessory security right in specific equipment

a) If the security (it will be a fixed charge in practice) is granted by a company (the position is the same, mutatis mutandis, for a limited liability partnership), then nothing more is required than a simple writing sufficiently evidencing the grant of the charge. There are no technical requirements regarding the way that the charged assets are described. The English law of security is largely an offshoot of contract law and contract law will accept any description that passes the test of contractual certainty. Just as English contract law is with relatively few exceptions informal in tone, so the law does not in fact require writing for a charge to be valid41 and there is no relevant notarial system to consider. There is no stamp required for security over tangibles. Stamp duty and stamp reserve tax in recent years have been confined to land and share transfers. The documentation will in practice consist of a facility letter and an instrument of charge (or debenture) and the transaction will have to be registered if it is to be opposable against third parties and insolvency officers. This is because the transaction falls under the head of one of the registrable charges, namely, a charge that if granted by an individual would be a registrable charge.42 English law thereby succeeds in anchoring the company charges system to the disreputable bills of sale legislation.

If the charge is granted by an individual, then, if the charge is going to be reduced to writing, it has to be in a prescribed form or otherwise it is void.43 A schedule of the property charged has to be attached to this form and the bill of sale is effective only as to the property “specifically described” in the schedule. The bill of sale is void if it is not duly attested by “one or more credible witness or witnesses” not party to the bill.44

In the case of an agricultural charge, it may be made “in such form and…upon such conditions as the parties thereto may agree”.45

41But the Registrar will not accept details of an unwritten charge for the registration that is needed to give the chargee third party protection. Mortgage Guidance Form 395, available at http://www.companieshouse.gov.uk/forms/generalForms/395Guidance. pdf (1 August 2007), states: “This form must be accompanied by an original instrument creating or evidencing the form (original emphasis).”

42Sec. 860 Companies Act 2006.

43Sec. 9 Bills of Sale Act (1878) Amendment Act 1882. The form is set out in a schedule to the Act and takes the form of an indenture.

44Sec. 8 and 10 Bills of Sale Act (1878) Amendment Act 1882.

45Sec. 5 (2) Agricultural Credits Act 1928.

In order to register a company charge (the same applies mutatis mutandis to limited liability companies) so as to make it effective against third parties and insolvency officers, the instrument that creates or evidences the charge,46 together with the particulars of charge, have to be sent within 21 days of the creation of the charge to the Registrar of Companies in Cardiff, where the particulars of charge are entered on the company charges register.47 The particulars of charge are entered on a simple form (a 395 form)48 which contains a box (“Short particulars of the property mortgaged or charged”): the box does not require any technical description or classification of the property charged. Curiously, the registration is effective as to the contents of the instrument of charge,49 whereas it is the particulars of charge that are available to public inspection.50 The staff in the office of the Registrar of Companies check the particulars of charge against the instrument of charge to ensure that the former document is accurate, but they occasionally make mistakes. Registration of the charge within 21 days protects the priority position of the chargee from the creation of the charge. There is a discretion in the court to permit registration out of time,51 but it will not be exercised in the

46Often referred to as the instrument of charge. In view of the general absence of writing requirements for the creation of charges over personal property (that is, not land), it is technically correct to differentiate between documents that create a charge and documents that evidence a charge that has already been created. See footnotes 12 and 41 supra.

47There is a statutory duty laid on the company chargor, with a criminal penalty attached for non-compliance, to register the charge. The task of registration is in fact carried out of the chargee to protect itself against the adverse consequences of non-registration. The chargee will employ solicitors to register the charge, but there is at least one legal publisher (Jordans) that offers a registration service over the internet. See http://www.jordans.co.uk/jordans3.nsf/Main/Registration+of+charges (1 August 2007). The fee for filling in the 395 form and lodging it at Companies House starts at £ 279.72 (including VAT). For a fee starting at £ 126.97 (including VAT), Jordans will check a 395 form already prepared against the instrument of charge and “handle” the registration of the 395 form at Companies House.

48The registration fee is £ 13. See Mortgage Guidance Form 395, available at http://www.companieshouse.gov.uk/forms/generalForms/395Guidance.pdf (1 August 2007).

49National Provincial and Union Bank of England v Charnley [1924] 1 KB 431.

50Cf. Spanish law which requires the registration of particular clauses for mortgages of movables.

51Sec. 873 Companies Act 2006.

chargee’s favour if insolvency proceedings involving the chargor are imminent or in progress.52

The position regarding individuals is completely different. The technical requirements for registering a security bill of sale are daunting and it is easy to make mistakes. The number of such bills of sale registered annually is believed to be very small. The security bill of sale is void unless registered together with an affidavit of due execution within “seven clear days” of execution.53 The affidavit will set out the residence of the grantor of the bill. Registration is carried out by the “registrar”, defined as the “masters of the Senior Courts attached to the Queen’s Bench Division of the High Court of Justice”.54 Where the affidavit of due execution shows the grantor of the bill to reside outside the London insolvency district, or the personal chattels to be located outside the London insolvency district, then the registrar is required within “three clear days” after registration in the principal registry to deliver an abstract of the contents of the bill of sale in the prescribed form to the district judge where the grantor resides or the personal chattels are located, as the case may be.55

Provision in made in the Agricultural Charges Act 1928 for the registration of charges granted by farmers.56 Registration must take place within seven clear days of execution, though there is a discretion to allow registration out of time. A register of agricultural charges is kept by the Land Registrar, even though the charge may extend to “assets” as well as agricultural land. A memorandum of the charge has to be sent to the Registrar, together with prescribed particulars of the charge, and the register may be searched for a prescribed fee. Curiously, perhaps, the Act contains a prohibition on listing the names of chargor farmers.57

b) A lender for example may search the relevant register on line to see if there has occurred an earlier charge.58 The search will reveal the par-

52For example, Re Ashpurton Estates Ltd [1983] 1 Ch 110. The wording of permission to register out of time is expressed in the form of a Charles Order, taking its name from Re LH Charles & Co Ltd [1935] WN 15, by which the company (in effect, the liquidator acting in the company’s name) is given liberty to move for the order to be discharged if in fact the company goes into liquidation within the ensuing time limit specified in the order.

53Sec. 8 Bills of Sale Act (1878) Amendment Act 1882.

54Sec. 13 Bills of Sale Act 1878.

55Sec. 11 Bills of Sale Act (1878) Amendment Act 1882.

56Sec. 9.

57Sec. 10 (1).

58A monthly subscription to Companies House (as from 1 February 2005), dealing with a range of company matters, costs £ 5. It then costs nothing to look at an in-

ticulars of charge and not the instrument of charge itself, which is returned after the registration has been completed. Further, since the reservation of title by an unpaid seller is not a registrable charge,59 details of the reservation of title are not eligible to appear, even voluntarily, on the company charges register. Moreover, there is a blind spot on the register in that a chargee has 21 days to present particulars to the registrar and it will take a further several days (up to about a week) before the particulars of charge are available for inspection. There exist private, voluntary registration systems dealing with hire purchase and related agreements.60 In practice, they cover a high percentage of hire purchase agreements and financiers; their lack of completeness prevents them from providing full assurance to those who are eligible to consult their records and who do so. There is no requirement in English law that a reservation of title financier or hire purchase financier attach a plate or notice to the equipment so as to give notice of its interest to the world.

c) If the manufacturer sells an encumbered machine, the first difference is whether the machine was subject to a floating charge or, more likely, a fixed charge. If the charge was a floating charge, then a sale by the manufacturer in the ordinary course of business would fall within the implied licence or authority given to the manufacturer to deal with floating charge assets. The purchaser would thus obtain full title to the machine with the lender’s permission. If the machine is subject to a fixed charge, and if the manufacturer conducts the sale without permission, then the manufacturer has the power to transmit a good title to the machine to a bona fide purchaser in the ordinary course of business of the machine by virtue of the familiar principle that equitable interests are overridden in cases where legal title is transmitted to a bona fide purchaser. The same applies if the goods are subject to a floating charge and the manufacturer exceeds certain restrictions imposed by the instrument of charge on its authority to dispose.

If the machine is subject to a legal mortgage, then the assistance is required of a statutory exception in favour of the bona fide purchaser in

dex of a company’s charges and £ 1 to view one or more charges of a selected company as well as £ 1 to download a document. Documents can also be sent for £ 3 by post or fax. See http://www.companies.house.gov.uk/toolsToHelp/Directprice List.shtml (1 August 2007).

59Even if it is in respect of all moneys owed and not just for the price of the particular goods supplied: Armour v Thyssen Ehdelstahlwerke AG [1991] AC 339. In this

respect, English law appears to be in line with Germany and the Netherlands (to an

extent at least in this case) and in opposition to Spain.

60For example, Experian Ltd. (http://www.experian.co.uk, 1 August 2007). This is not a practical matter for the short-term reservation of title of ordinary sellers.

the ordinary course of business who takes possession.61 The position is the same if the machine is the subject of title-based financing, such as hire purchase or, more likely, a finance lease. The scope of the rule that registration of a company charge constitutes constructive notice of the registrable particulars of charge62 has never been fully tested. It certainly applies to competing chargees and it therefore ought to apply, as a matter of principle, to those who finance by other means, such as by sale and leaseback. It is unlikely to apply to outright purchasers of the machine, whose title will be tested according to whether they acted in good faith and in the ordinary course of business. If a chargor were selling many machines, then it might tell against the good faith of a buyer that it did not fully engage in exploring the possibility that the machines were subject to a registered charge. The status of the buyer as a wholesale or retail buyer might therefore make a considerable difference to the outcome of a title dispute with the chargee. If the machines were subject to a title-based scheme of financing, then, in the absence of any scheme of registration, private or otherwise, any inquiries the buyer might make would be dependent upon the cooperation of the seller.

The creditor’s right to the proceeds, whether the sale is authorised or not, would first depend upon whether it had a charge that originally covered proceeds of the type herein described. Where the machine is encumbered by a floating charge, then, although a floating charge can be expressed to capture a narrow range of assets, the likelihood will be that it extends to the proceeds of the disposition, in our case, the substitute machinery. It is quite possible too that a fixed charge over machinery might be expressed so as to capture substitute machinery. The same is not likely to be the case if the machinery is subject to a finance lease.63

If the charge did not extend on its terms to the proceeds, the next question would be whether the chargee had by operation of law a proprietary right to the proceeds that it could assert by means of the process of tracing. First of all, there would have to be a wrong committed when the machine was disposed of, which would not the case where the disposal was authorised, as it would be in the case of a floating charge. So far as the security is an equitable mortgage or charge, the right of a claimant to trace into proceeds was, according to the traditional view, based on a requirement that there had to be a fiduciary relationship between the claimant and the person disposing of property. This assumed the existence of a property right of the claimant in the first place, easily enough satisfied in the case of a trustee and beneficiary since equity

61Sec. 9 Factors Act 1889; Sec. 25 Sale of Goods Act 1979.

62Wilson v Kelland [1910] 2 Ch 306.

63See the finance lease precedent in R. M. Goode, Commercial Law (3rd edn. 2004), p. 727 et seq.

conferred upon the beneficiary a proprietary claim to the proceeds of an unauthorised disposition by the trustee. The leading cases on tracing in equity involve trustees and beneficiaries. In parallel with equity, the common law had its own tracing rules, but these, though not requiring a fiduciary relationship, were inflexible and of no assistance if the tracing process had to go through a mixed fund, like a bank account. This would be a problem if the proceeds of sale of machinery were mixed in an account before the substitute machinery was purchased.

The modern law of tracing has been redefined64 in a way that emphasises that tracing is an evidentiary process and that, in order to be able to trace, the claimant must have in the first place a proprietary right to the proceeds, arising by operation of law, which can be vindicated with the aid of tracing. This has nothing to do with unjust enrichment and is not a matter of discretionary entitlement, even if the property rights claimed are equitable in character. Hence, resulting trusts and constructive trusts do not come into play.65 As long as the existence of a fiduciary relationship is necessary for a tracing claim, however, the existence of such a property right will be limited. There have nevertheless been calls for the abandonment of any requirement of a fiduciary relationship between claimant and person disposing of assets.66 Until that happens, it is unlikely that a secured creditor would be treated in equity as having by operation of law a proprietary right in the proceeds of an unlawful disposition: there is no fiduciary relationship between secured creditor and debtor. This explains why the rights of a secured creditor in a case of this kind have received almost no judicial attention. The days of the fiduciary relationship requirement do however seem to be numbered; its abandonment would also open the door to eliminating any distinction between common law and equitable tracing. In Westdeutsche Landesbank Girocentrale v Islington LBC,67 Lord Browne-Wilkinson refers to a tracing claim against a thief, albeit one who perhaps improbably is bound by a fiduciary relationship to the owner,68 and in Foskett v McKeown,69 Lord

64See Foskett v McKeown [2001] 1 AC 102.

65Ibid.

66See the brief summary of the tracing process from the commercial lawyer’s point of view in R. M. Goode, Commercial Law (3rd edn. 2004), p. 52 et seq., stressing that the claimant has to elect either to follow the original assets or the proceeds (on which see also Lord Millett in Foskett v McKeown), and the further discussion at p. 458 et seq. If it were not for the election, the tracing claimant might in time benefit from a “geometrical multiplication of [his] property”.

67[1996] AC 669.

68This opens up the possibility that any unconscionable behaviour might give rise to a proprietary claim. It is one of the oddities of equitable intervention that a person’s

Millett makes a passing, one-line reference to a secured creditor having rights in proceeds. This is insufficient for a current restatement of the law that a secured creditor has the right to trace into the proceeds of unlawful dispositions of the secured assets. Furthermore, even assuming a change in the law, the conceptualisation of a charge as an encumbrance, as opposed to a transfer of property to the chargee,70 might inhibit a court in deciding that the chargee should have a proprietary right in the proceeds of sale of the machine in this case. A mortgage might be a different matter, in that a mortgage of personal property still involves the defeasible transfer of the ownership in the mortgaged asset to the mortgagee.71 Perhaps one should not make too much of these technical distinctions.

If it seems odd that the position on tracing is so difficult to state in the context of secured credit in English law, the real point is that the structure of the law of security, as well as of proprietary rights akin to security, deprive the issue of tracing of any real significance. The ease with which security over all of the assets of a debtor can be granted in English law, together with the improbability of the machines being financed with the aid of a narrowly based charge confined to machinery, as opposed to a finance lease or other title-based device, render unlikely any clarification of the law of tracing within the field of secured credit. A prudent secured creditor would be ill-advised not to take a charge over proceeds in the first place.

d)If the lender has any rights in replacement machines, then, subject to any tracing claim arising from a wrongful disposition of the earlier machines, it will only be because the instrument of charge so provides. Any such right will not arise by operation of law since English law does not as such recognise a doctrine of, or akin to, real subrogation in circumstances like these.

e)The security right will take the form either of a charge or of a mortgage. The remedies available at law for a chargee are, first, to apply to the court to have the charged assets sold (since a mere chargee, to whom no property interest has been conveyed, will not have the right to take possession), or secondly, to apply to the court for the appointment of a receiver to take possession of the charged assets, thereafter to receive

proprietary rights against third parties are peculiarly dependent upon the stricken

conscience of a wrongdoer.

69[2001] 1 AC 102.

70Carreras Rothmans Ltd v Freeman Mathews Treasure Ltd [1985] Ch 207.

71Keith v Burrows (1876) 1 CPD 722.

income generated by the assets and dispose of them if necessary.72 The appointment by the court of a receiver is a remedy that, like other equitable remedies, is discretionary. There is a statutory right to have a receiver appointed where the charge is expressed in a deed.73 A mortgagee has these remedies, together with the additional remedies of foreclosure, almost a dead letter (because it involves forfeiting the mortgagor’s equity of redemption), and taking possession on default.74 As stated earlier, the fine distinctions separating the remedies of chargee and mortgagee are eliminated by drafting practice, which amplifies remedies to the greatest extent possible. Moreover, the most powerful remedy at all is available by contract to a chargee or mortgagee whose security includes a floating charge, where the security as a whole covers all or substantially all of the chargor/mortgagor’s assets. Under an irrevocable power of attorney, the secured creditor is entitled to appoint in the name of the debtor an administrator who, acting as the agent of the debtor, is entitled without interference from the debtor to pay down the secured debt. The administrator can be sent in at very short notice indeed75 and the right of the secured creditor to take this action, pre-empting intervention by other interested parties, is safeguarded by legislation.76 It is very often the case that a bank will be requested by a company’s directors to intervene by appointing an administrator in this way: the directors are fearful of incurring personal liability for wrongful or fraudulent trading77 while the company is in an insolvent state.

The issue of cost and time is a difficult one to address in general terms. It depends upon the complexity of the case and the value of the items. Courts in England aim to be self-financing, so that for each application and for each order a fee is generated, on a sliding scale as to the value of the matter. So far as professionals, such as lawyers and insolvency accountants become involved, the high fees involved will add substantially to the cost and have at times attracted critical comment.78 Applications

72Sec. 37 (1) Supreme Court Act 1981.

73Sec. 101 and 205 (1) (xvi) Law of Property Act 1925.

74The controls on the exercise of this right in the Bills of Sale (Amendment) Act 1882 imply the existence of such a right by operation of law: Re Morritt (1886) 18 QBD 222.

75See Bank of Baroda v Panessar [1987] Ch 335.

76Insolvency Act 1986, Schedule B1, as added by the Enterprise Act 2002, discussed further in Case 1 f) infra.

77Sec. 212 Insolvency Act 1986 et seq.

78See the remarks of Mr Justice Lightman, speaking in a non-judicial capacity, “The Challenges Ahead: Address to the Insolvency Lawyers’ Association” JBL (1996) p. 113.

are made to the County Court if the amount at stake is up to £ 30,000, otherwise to the High Court.

f) The starting point is that the commencement of insolvency proceedings does not impair the exercise by a secured creditor of any available remedies for the debtor’s default. Hence, the liquidator has no power to prevent chargees and mortgagees from exercising any of the remedies stated above. The position changes somewhat, however, in the case of an insolvency procedure that involves management, as opposed to a quick break-up, of an insolvent party’s estate. When the office of administrator was introduced in the mid-1980s, it brought with it a moratorium on the exercise of certain property rights, whether these arose by way of security in the proper sense or by way of reservation of title. This moratorium arose with the commencement of steps to secure the appointment of an administrator and continued during the conduct of the administration,79 subject to the moratorium being lifted in an individual case either by the administrator or by the court.80 The length of the moratorium is a discretionary matter for the court81 and was discussed at length in the leading case, which involved finance leases of bespoke computer systems.82 The discretionary guidelines laid down at length in that case83 centre upon a balancing of the legitimate interests of the lessor against the legitimate interests of other creditors of the company (“scales and weights”). The exercise is not a mechanical one and no two cases are alike. Proprietary rights will be the subject of interference in this way only where this is “unavoidable” and even then “only to a strictly limited extent”. The moratorium will probably, therefore, be lifted if “significant loss” is likely to be caused to the interests of those whose property rights are frozen by the moratorium. The moratorium was continued in the Enterprise Act 200284 but was extended to meet the additional case of those administrators appointed out of court by chargees. The out of court administrator replaced the former administrative receiver in most cases but, whereas

79Sec. 10 Insolvency Act 1986 et seq. (now repealed).

80Re Atlantic Computers Ltd [1992] Ch 505.

81Unlike the case of Dutch law, there is no general court power to order a moratorium on the enforcement of security.

82Ibid.

83This was a case where the conflict was between unsecured creditors and titleretaining financiers. Where the moratorium is being exercised in the interests of a chargee (now possible because chargees have been able to appoint administrators out of court since the Enterprise Act 2002), this is bound to affect the way that the discretion is exercised.

84Schedule 16, adding a new Schedule B1 to the Insolvency Act 1986.

the administrative receiver had and has no true moratorium power,85 the out-of-court administrator has. This power is exercised in the same way as the former power contained in insolvency legislation.

g)In English law, motor vehicles are treated for the purpose of security like other tangible movables. There is no difference.

2.Non-possessory security right in present and future equipment (floating security right)

a)The position under the Companies Act (and under regulations dealing with limited liability partnerships) is the same as in Case 1. Instead, however, of the charge being registrable on the ground that, had it been granted by an individual it would have been a registrable bill of sale, the charge is now registrable on the separate ground that it is a floating charge. For reasons stated earlier, individuals, if they are not farmers, are considered not to have the ability to grant a floating charge. Nevertheless, by way of exception to this, Sec. 6 (2) of the Bills of Sale Act (1878) Amendment Act 1882 states that nothing in that Act shall render a bill of sale void in respect of “trade machinery” brought on to stated types of premises “in substitution for … trade machinery specifically described in the schedule to [a registered] bill of sale”. A charge granted over agricultural assets under the Agricultural Credits Act 1928 extends, in the case

of “agricultural plant”, to “plant substituted for the plant specified in the charge”.86

b)See Case 1. Although restrictive clauses in a floating charge, curtailing the freedom of the chargor to grant a fixed and therefore superior security in the ordinary course of business, are not registrable, the practice has grown up of inserting such restrictive clauses in the particulars of charge so that, when the register is searched, the restrictive clause is actually seen and noticed by the searcher. Constructive notice of the presence of such a clause would not arise because such clauses are not registrable particulars under the Companies Act 2006.

c)The answer lies largely in Case 1 supra. The idea of the floating security is that the chargor is authorised to dispose of assets in the ordinary course. There would also be no question of a proprietary remedy available through the tracing process, since the wrongdoing needed to

85But see the ingenious fabrication by Mr Justice Hoffmann of a de facto moratorium power for administrative receivership in Lipe Ltd v Leyland Daf plc [1993] BCC 385.

86Sec. 5 (3) (b) Agricultural Credits Act 1928.

give rise to such a remedy would be absent. A separate right to the proceeds granted in the instrument of charge would of course be a different matter.

d)So far as such substitute machines fall within the category of assets embraced by the floating charge, the lender does have a right by way of floating charge to these replacement machines. Similarly, any well-drawn instrument of charge will give the lender a right to the proceeds of insurance of the machines if they are lost or destroyed. It should nevertheless be stressed that any sensible lender will seek to avoid taking a floating charge over plant and machinery and that the instrument of charge will give the lender a fixed charge in the machinery and its substitutes. As a result of a recent decision of the House of Lords,87 it has become in practical terms impossible for a creditor to take a fixed charge in receivables, because of the need for effective controls in fact to be exercised over any dealings with and collection of those receivables that would interfere unreasonably with the day-to-day conduct of the debtor’s business. It is technically possible for a critical judicial eye to look at the need for similar interventions by the creditor in the case of a fixed charge over equipment, over and above the requirement that permission be sought of the chargee before the equipment is disposed of, but such a development is unlikely. At the heart of the House of Lords decision, and of a previous Privy Council decision,88 is the belief that a fixed charge should not be taken over the circulating capital of a company. A company’s circulating capital includes cash, receivables, stock-in-trade, raw materials and work in progress, but does not include its equipment.

e)See supra. So far as any floating security extends, whether alone or with the aid of other charges, to the whole or substantially the whole of a company chargor’s property, then any administrator appointed out of court, pursuant to a right given by the chargor to the chargee to make such an appointment in the name of the chargor, will be an administrator for the purpose of insolvency legislation with the powers, including the moratorium power, granted under the legislation.89 Court and related fees will be avoided unless an application has to be made to the court unless the administrator is faced with the need to obtain directions from the court.90

87National Westminster Bank v Spectrum Plus Ltd [2005] 2 AC 680.

88Agnew v Commissioner for Inland Revenue [2001] 2 AC 710.

89See Schedule B1 to the Insolvency Act as added by the Enterprise Act 2002.

90There is a general power to apply in connection with the exercise of the functions of administrator: ibid., para. 63.

f)As stated above, the commencement of insolvency does not prevent the chargee from exercising any remedies to which it is entitled. There is however a statutory duty laid on the administrator to pay preferential creditors and, so far as the legislation orders, unsecured creditors,91 ahead of a floating chargee. In Buchler v Talbot,92 the House of Lords reversed the rule that the expenses of the liquidation should be paid ahead of the floating chargee, but this reversal has in its turn been reversed again by legislation, namely, Sec. 1282 of the Companies Act 2006.

g)As stated above, there is no difference for motor vehicles.

3.Non-possessory security right in present and future inventory (floating security right)

a)The answer to Case 3 is the same as the answer to Case 2 because there are no differences between equipment and inventory under this heading.

b)As in a).

c)As in a).

d)As in a). Note also the received wisdom, even before the decision of the House of Lords in National Westminster Bank plc v Spectrum Plus Ltd,93 that a fixed charge could not be taken over inventory.

e)As in a).

f)As in a).

g)As in a).

4.Purchase-money financing – alternative sources

a) The manufacturer has all of these options but it is unlikely that the third party financier will take a mortgage or charge. Rather, the financier would use a title-based device, such as a finance lease, hire purchase or conditional sale.

91Sec. 176A Insolvency Act 1986, as added by the Enterprise Act 2002.

92[2004] 2 AC 298.

93[2005] 2 AC 680.

b) (1) If a mortgage or charge were adopted, then the rules stated above for the registration of company charges or security bills of sale would apply. A seller might reserve title and then assign its rights to a third party financier, but this practice normally arises in different, low-value sorts of assets (for example, furniture) where the system of block discounting94 is employed. It is much more likely, in the case of a highvalue robotic machine, that a supplier would sell the machine to a financier, which would then have it delivered by the supplier to the manufacturer on finance lease or other title retention terms. No registration of title-based agreements is required, though, as stated above, there are voluntary schemes in operation. In particular, it has long been settled that hire purchase and conditional sale, and thus also finance leasing, do not give rise to registrable bills of sale,95 with the further consequence that they are not registrable as company charges. In addition, there are no writing requirements (Statute of Frauds) operating between the parties to a finance lease etc transaction.

(2) For reasons stated above, the following text considers only titlebased financing devices. Because the debtor lacks title to the relevant assets, title-based devices defeat earlier security because such earlier security “attaches” (to use an Article 9 word) only to assets belonging to the debtor. They also, a fortiori, defeat later security granted by the debtor, subject to any special legislation (see immediately infra). Depending upon the particular device employed, title creditors are nevertheless vulnerable to third party purchasers acquiring the equipment in the ordinary course of business. The ordinary course of business here is not sensitive to whether the seller is disposing of equipment or inventory; rather, the test supplements the buyer’s bona fides and examines whether the sale took place objectively in a business-like way.96 If the supply to the manufacturer takes place on conditional sale terms, then the manufac-

94Block discounting is similar to facultative factoring. A trader and a discounter enter into a master agreement further to which the trader, at intervals, offers blocks of individual hire purchase or similar agreements for discounting. The trader receives the discounted value of these agreements, minus a security retention, and the trader then collects the instalments for the discounter. The discounter is a purchaser of the trader’s rights against its customers (which can, but need not, include its proprietary rights to the subject matter of those agreements) and does not become contractually bound to those customers. See RM Goode, Commercial Law (3rd edn. 2004), p. 702 et seq.

95McEntire v Crossley Bros [1895] AC 457.

96See Oppenheimer v Attenborough & Son [1908] 1 KB 221, a decision concerning mercantile agents and the Factors Act 1889 but applicable to cases where it is a buyer in possession who is disposing of goods. See also Case 1 c) supra.

turer is a buyer in possession with the power to transmit title to a disponee under sale of goods and factors legislation.97 The disposing transaction must be a “sale, pledge or other disposition” of the goods, hence a purchaser under the relevant statutory provision includes not just outright buyers but also other persons giving value, such as a pledgee, legal mortgagee or a person obtaining the asset under an exchange or barter arrangement.

How far the understanding of a purchaser might go, and in particular, whether it might include equitable security, depends critically upon the meaning of the undefined word “disposition”. If interpreted literally,98 it is perfectly capable of catching a subsequent transaction by which equitable rights are acquired. Nevertheless, there would certainly be some judicial disquiet if the argument were squarely raised that equitable rights could override legal rights in the financier. Moreover, the relevant legislation calls for the goods to be delivered to the disponee,99 which would not ordinarily be the case where the manufacturer later charged or mortgaged the machine. If the manufacturer has obtained the machine on hire purchase terms, then it has not “agreed to buy” the machine under sale of goods and factors legislation and so lacks the power to pass title under that legislation.100 The manufacturer may nevertheless pass a good title to hire purchase “motor vehicles” to a private purchaser, though not to a “trade or finance” purchaser,101 under hire purchase legislation.102 There is no similar statutory power available in the case of finance leasing. In the absence of such statutory provision, a good faith purchaser will have to fall back on basic common law principles of apparent ownership or authority, grounded in notions of estoppel. It is in practical terms almost impossible for a successful claim to be made that, by its words or conduct, a financier represented to the outside world that

97Sec. 9 Factors Act 1889; Sec. 25 Sale of Goods Act 1979.

98See the interpretation placed on the word in Worcester Works Finance Ltd v Cooden Engineering Co Ltd [1972] 1 QB 210.

99Delivery has in recent years been interpreted so as to be satisfied in the case of a buyer who sells and attorns to the sub-buyer: see Forsyth International (UK) Ltd v Silver Shipping Co Ltd [1994] 1 WLR 1334, applying Gamer’s Motor Centre (Newcastle) Pty Ltd v Natwest Wholesale Australia Pty Ltd (1987) 163 CLR 236.

100Helby v Matthews [1895] AC 471.

101For this reason, the disposing power of a hirer on hire purchase terms is less than that of a buyer on conditional sale terms: Forthright Finance Ltd v Carlyle Finance Ltd [1997] 4 All ER 90. But a trade or finance purchaser as defined in the legislation would not include a business that used the motor vehicles as equipment.

102Part III of the Hire Purchase Act 1964 (as amended). For the definition of “disposition” see Sec. 29 (1) (drafted in terms that should exclude a mortgage and a charge).

the lessee had the right or authority to pass a good title to a purchaser.103 It is not enough that a representation of authority or ownership originated with the lessee in possession or that, by transferring possession to

the lessee, the financier in some way facilitated such a claim by the lessee.104

(3) The remedies of those with security in the technical sense of that word have been discussed above. A financier with title to the machine has the right to repossess the machine, its own property, in the event of default without going to court;105 the right will invariably be spelt out also in the lease, conditional sale or hire purchase agreement. The question now arises whether the hirer or conditional purchaser has any accumulated rights under an agreement as against a financier seeking repossession of the equipment and termination of the agreement. It is well settled that a conditional purchaser and a hire purchaser do not incrementally acquire property rights, whether equitable or legal in character, as instalments are paid under the transaction.106 A fortiori, this is the case for a finance lease where, as is not uncommon, an agreement to sell the

103Moorgate Mercantile Co Ltd v Twitchings [1977] AC 890; Jerome v Bentley [1952] 2 All ER 114.

104Ibid. In English law, good faith purchasers are heavily dependent upon specific statutory exceptions to the rule that a transferor can only such property interest as is vested in him (nemo dat quod non habet). English law is therefore significantly less generous to good faith purchasers than any of the other legal systems in this study.

105This is known as recaption and is an example of the right to exercise self-help that any owner out of possession is entitled to exercise. Reasonable means must be exercised, including reasonable force, proportionality being the key: Blades v Higgs

(1861) 10 CB (NS) 713 (Erle CJ); Law Reform Committee, Conversion and Detinue

(1971) (18 th Report, Cmnd 4774). The entitlement of an owner to enter another’s land to recover goods, especially where that other is a third party, is a difficult question and dependent upon the circumstances, particularly the giving of prior notice to recover the goods: Anthony v Haney (1832) 8 Bing 186. It is profoundly difficult to give firm advice on this subject. Self-help generally, if it is to be exercised, had better be exercised quickly and surgically with a minimum of disturbance, so that difficult questions of entitlement to act are deliberated after the event.

106See, e.g., Helby v Matthews [1895] AC 471. In a conventional reservation of title case, there is a dictum that a buyer who has paid part of the price may have a restitutionary or implied contractual right, personal and not proprietary in character, to receive any surplus after the seller has realised the goods; Clough Mill Ltd v Martin

[1985] 1 WLR 111 (Robert Goff LJ). This may logically be extended to conditional sales and hire purchase. For consumer credit agreements, see also Sec. 132 Consumer Credit Act 1974.

equipment to the former lessee may but not must be made after the lease has run its course. Nevertheless, it is becoming increasingly recognised that, as long as the lessee, hirer or conditional purchaser is ready and willing to resume the payment of instalments and continue those payments to term, relief may in some cases107 as a matter of equity be granted against forfeiture of the possessory interest in the equipment.108 Common law systems thus treat possession as more than a creature of contract but rather a matter of property in its own right.

(4) The position of the secured creditor in the strict sense in the event of the manufacturer’s insolvency has been dealt with above. As for those creditors with title-based rights, the moratorium that can be enforced against assets from the commencement of administration applies to them too, whether they are embodied in a reservation of title clause in a con-

tract of sale or in a hire purchase or conditional sale or in a finance lease.109

5.Bona fide acquisition

The subject of a sale of equipment in the ordinary course of business has already been discussed. There is little to add in the case of a sale of inventory. The sale of inventory will be permitted by an authority conferred upon the manufacturer to sell in the ordinary course of business. Hence, perfection of the floating security by registration is beside the point. And even if registration were in some way relevant to the buyer’s

107Relief against forfeiture, which has a more established presence in the case of land, is discretionary and available “in appropriate and limited cases”: Shiloh Spinners Ltd v Harding [1974] AC 691 (Lord Wilberforce).

108Stockloser v Johnson [1954] 1 QB 476; Barton Thompson & Co Ltd v Stapling Machines Co [1966] Ch 499; On Demand Information plc v Michael Gerson (Finance) plc [2003] 1 AC 368; Goker v NWS Bank plc (Unreported 1 August 1990);

Transag Haulage Ltd v Leyland DAF Finance plc [1994] 2 BCLC 88. In the case of consumer transactions, a similar measure of relief is available as a matter of right: Sec. 129 Consumer Credit Act 1974 et seq. Apart from this case, there are occasional hints that English law will go behind the form of a title reservation transaction and recognise it as a type of sub modo security interest. For example, a third party wrongdoer sued for converting goods the subject of a hire purchase agreement is bound to pay as damages to the financier the amount of unpaid instalments and not the value of the goods at the date of the act of conversion: Wickham Holdings Ltd v Brooke House Motors Ltd [1967] 1 All ER 117. Otherwise, English law (like Italian law) recognises that a genuine reservation of ownership has occurred under a finance lease.

109Schedule B1 to the Insolvency Act 1986 (as added by the Enterprise Act 2002).

position, English commercial law is generally resistant to notions of constructive notice110 and, even in the limited cases where it does arise, as where one lender has constructive notice of a previously registered company charge,111 this constructive notice will not apply to outright purchasers, since they belong to a class that is not expected to search the register of company charges.112 As for the sale of machinery, discussed also above, the same points apply. The buyer would not be expected to search the register and it is also a very nice question whether, even if knowing of the existence of a charge or mortgage over the machines, the buyer should infer from that knowledge that the machines should not be sold or that they should not be sold without permission. The requirement that the buyer be a bona fide purchaser is not usually couched in terms of a requirement to make inquiries, but the higher the value of the item, and (as stated above) the greater the number of items being sold, the more likely a court is to find that the buyer who has not made inquiries is guilty of a wilful blindness that is fatal to a claim of bona fides. A buyer in the same line of business as the manufacturer selling its machines, and therefore cognisant of the realities of financing, should certainly be faulted for a failure to ask questions or to demand to see the relevant paperwork. If the sale price were significantly below market value, not the case here, this would constitute a separate ground for impeaching the buyer’s bona fides.

6.Possessory pledge – constructive or fictive possession

With one exception, the possible elastic properties of pledge have not been tested in English law. English law does not have a concept of nonpossessory pledge because there was no need to overcome any legal objection to the taking of non-possessory security. The creation of the

110Manchester Trust v Furness [1895] 2 QB 39.

111Wilson v Kelland [1910] 2 Ch 306. Registration of an agricultural charge is deemed to constitute actual notice of the charge and its registration to “all persons and for all purposes connected with the property comprised in the charge” as from the date of registration: Sec. 9 (8) Agricultural Credits Act 1928. Nevertheless, this rule does not apply as regards a bank that has an agricultural charge over a current account or for future advances, in respect of competing agricultural charges created after the bank’s security: ibid. The scope of this exception is unclear because it does not as such create a right to tack (see text accompanying footnote 20 supra) in cases where it would not otherwise exist (principally, in the case of discretionary advances and current account financing).

112See also Case 1 c), where an exception is submitted for sale and leaseback cases, which are financing schemes taking the form of outright purchase.

equitable charge obviated any need to stretch the legal pledge to accommodate non-possessory financing. The exceptional case occurs with short-term advances in the export trade, where the release of a bill of lading under the terms of a trust receipt is deemed to be a continuing pledge. This arrangement accommodates the needs of all parties. It permits the buyer of a cargo to take delivery of it from a carrier, the carrier to release the cargo to the holder of the bill of lading and the bank to retain its pledge interest in the bill of lading, as well as in the cargo represented by the bill of lading. The bank is considered to be in constructive possession of the cargo.113 In treating the bank’s interest as that of a pledgee, any requirement that it should register its interest as a company charge or as a security bill of sale is avoided,114 since the relevant legislation does not apply to possessory pledge. The trust receipt arrangement resembles a similar principle that applies in the case of liens exercised by those who provide services in respect of goods. It is considered possible for a lienee to retain its possessory interest in tangibles despite a temporary release of them to the lienor,115 but it is unlikely that a mere acknowledgment by the manufacturer that possession of machine or inventory is held under the terms of a pledge for a financier would be taken at face value. The likely interpretation of the parties’ conduct is that a (registrable) charge over the assets in question was thereby created.

7.Over-security

This is a concept neither understood nor recognised in English law.116 A creditor is entitled to bargain for as much security as it can obtain. So far as a creditor’s rights are limited, this lies in the rules of insolvency distribution, where the holders of a floating charge are expropriated in favour of preferential creditors and, to a limited financial extent, unsecured creditors of the chargor.117

113See Re David Allester Ltd [1922] 2 Ch 211.

114Ibid.; Re Hamilton Young & Co [1905] 2 KB 772.

115Albemarle Supply Co v Hind [1928] 1 KB 307.

116As with the other legal systems in this study with the exception of Germany.

117Sec. 175 Insolvency Act 1986 and para. 65 (2) of Schedule B1 (as added by the Enterprise Act 2002); Sec. 176A Insolvency Act (as added by the Enterprise Act 2002).

8.Legal (non-consensual) rights of unpaid seller

An unpaid seller has no special privilege in English law apart from the possessory lien of the unpaid seller118 and the right of stoppage in transit.119 The lien is a lien only for the unpaid price,120 and not for the cost of storage, and it is associated with a right to resell the goods that in modern times has been rationalised as stemming from a termination of the contract for the buyer’s breach, coupled with a revesting of the property in the goods in the seller pursuant to an implied condition subsequent.121 The problem with the implied term approach is that it applies only where the seller remains in possession and not where the goods have been delivered to the buyer. The implied term, therefore, can hardly be rationalised as based upon a true agreement between buyer and seller. The right of stoppage in transit applies only where the buyer becomes “insolvent”, an expression not defined by the Act. The case law does not differentiate between cash flow and balance sheet insolvency. The effect of the seller exercising the right of stoppage is that the seller resumes possession of the goods. Stoppage in transit therefore has the consequence of resurrecting the lien that the seller had earlier surrendered when the goods were delivered to the carrier, who is generally treated in English law as the agent of the buyer.122 The Sale of Goods Act 1979 states that the right of stoppage ceases when “the buyer or his agent in that behalf takes delivery of [the goods] from the carrier”.123 In English law, there is nothing that corresponds to the right given by some laws to a seller to recover possession from a buyer within a stated period of the buyer taking delivery of the goods and in the event of non-payment. In consequence, it has become common practice in the last 30 years for sellers granting credit to have inserted in the contract of sale an express reservation of title clause.

118Sec. 41 Sale of Goods Act 1979. If the property in the goods has not yet passed to the buyer, the Act refers instead to a right of retention.

119Sec. 44 Sale of Goods Act 1979 et seq. In modern conditions, this right is very rarely invoked.

120The seller is permitted to retain the goods “until payment or tender of the price”, Sec. 41 Sale of Goods Act 1979.

121RV Ward Ltd v Bignall [1967] 1 QB 532.

122Wait v Baker (1848) 2 Ex 1, 154 ER 380. See also Sec. 32 (1) Sale of Goods Act 1979 (delivery to the carrier is presumptively delivery to the buyer).

123Sec. 45 (1) Sale of Goods Act 1979. The same applies where the carrier at the end of the journey acknowledges to the buyer that the goods are being held on his account: Sec. 45 (3) Sale of Goods Act 1979.

9.Special property registers

For present purposes, the relevant asset registers deal with ships and aircraft. There are also asset registers dealing with land and certain intellectual property rights.

In the case of aircraft, the UK Register of Civil Aircraft is operated by the Civil Aviation Authority pursuant to the Air Navigation Order 2000.124 It contains detailed provisions concerning the identity and operations of aircraft that have to be registered in the UK and the requirements of registration. The registration and priority of aircraft mortgages, however, are governed by a separate instrument, the Mortgaging of Aircraft Order 1972.125 The 1972 Order contains a permissive provision that a UKregistered aircraft, together with “any store of spare parts”, may be made security for a loan. Such a mortgage, in a form set out in the Schedule to the Order and accompanied by a certified true copy of the mortgage, may be entered in a Register of Aircraft Mortgages kept by the Civil Aviation Authority. Provision is also made for advance filing by means of a socalled “priority notice” recording an application to enter a “contemplated mortgage” on the Register. Applications for registration are entered on the Register in the order of their receipt by the Civil Aviation Authority. The rights of a mortgagee under a registered mortgage are not affected by the removal of the aircraft from the UK nationality register.

The 1972 Order expressly states that “[a]ll persons shall at all times have express notice of all facts appearing in the Register”, though the registration of a mortgage does not necessarily mean that it is a valid mortgage. It should be noted that a charge over an aircraft is also compulsorily registrable under the Companies Act if it is given by a company. Registered mortgages have priority over any other mortgage or charge on an aircraft and, as between two registered mortgages, priority is determined by the order of registration. A mortgagee’s priority under the 1972 Order is effective “notwithstanding any express, implied or constructive notice affecting the mortgagee”. This means that a secured creditor with constructive notice of a charge registered under the Companies Act 2006 will have priority over that earlier charge if it is not registered also pursuant to the 1972 Order. The priority of a mortgagee under the 1972 Order, however, does not come at the expense of a possessory lien for work done on the aircraft on the authority of persons in possession of the aircraft. In the case of aircraft, bills of sale legislation is disapplied but, as seen above, the Companies Act 2006 is not disapplied.

124SI 2000 No. 1562. The powers to make the order are found in the European Communities Act 1972, the Civil Aviation Act 1982 and the Airports Act 1986.

125SI 1972 No. 1268 (as amended), made under the Civil Aviation Act 1968.

In the case of ships, there is similar but less clear provision for the registration of the ownership of ships and of ship’s mortgages. Provision is made for the optional registration of ships further to the Merchant Shipping Act 1995 and the Merchant shipping (Registration of Ships) Regulations 1993.126 The 1995 Act contains in Schedule 1 certain “private law provisions” dealing with the transfer and mortgaging of ships, but these provisions do not apply to all ships, even if they have been registered under the Act.127 Consequently, if a ship is excluded from the scope of these private law provisions, a mortgage may not be registered as a ship mortgage. As with aircraft, a mortgage or charge granted by a company registered in England Wales is registrable under the Companies Act 2006 with the usual consequences.

A ship’s mortgage, either of the whole ship or of one or more of its 64 parts, must be properly attested and on a form approved by the Registrar. As with aircraft, priority between registered ship’s mortgages is based on the order of registration, and provision is also made for priority notices (particularly useful if the ship has not yet been built). Provision is also made for the transfer of registered mortgages.

10.Non-possessory security rights in raw materials – effects of processing (commingling, attachment)

To understand the position of the credit providers, it must first be determined what happens to the raw materials when they are supplied to the buyer. If raw materials are supplied to a manufacturer who transforms them into something new, then any right to those raw materials is lost because they have ceased to exist.128 The same would apply if the goods supplied were irrevocably attached to a greater whole so as to lose their separate existence.129 If goods are commingled, however, so as to be a calculable share of a mixed larger quantity, even if the different parts produce a different quality or standard than their individual parts, then any right to the relevant commingled part survives as a common law right by becoming an aliquot share of the larger whole.130

126SI 1993 No. 3138.

127Small vessels and ships on bareboat charter.

128See Chaigley Farms Ltd v Crawford Kaye & Grayshire Ltd [1996] BCC 957; Pongakawa Sawmill Ltd v NZ Forest Products Ltd [1992] 3 NZLR 305.

129Hendy Lennox Ltd v Grahame Puttick Ltd [1984] 2 All ER 152.

130Indian Oil Ltd v Greenstone Shipping SA (The Ypatianna) [1987] 3 All ER 393.

Assuming that a fiduciary duty exists as between a seller reserving title to the raw materials supplied and a buyer,131 it has been held that a right to trace may not be exercised if the tracing has to take place into a composite manufactured product, for example, the wood chip product that is manufactured out of lumber and resin.132 So far as a calculation can be made of the seller’s contribution to the new product, which ought not to be unduly difficult, this position is impossible to justify. It would be preferable to conclude that the necessary fiduciary duty does not exist as between seller and buyer in the first place, thus eliminating any platform for a tracing claim.133 In any case, it can hardly be claimed that a buyer using raw materials for the purpose for which they were supplied has committed a wrongful act (see supra). The limitations of the unpaid seller’s rights when goods lose their identity has prompted attempts to insert in the contract of sale a reservation of title clause that purports to lay an original claim to the new goods manufactured with the aid of the seller’s goods, which has always been recharacterised as amounting to a charge over the new goods.134

There is no point of course in discussing the rights of hire purchase financiers and finance lessor to the fruits of raw materials since, obviously, such instruments are not used for the supply of raw materials. Similarly, if it is a case of the supply of raw materials taking place pursuant to a charge or other conventional security, the secured creditor will stand to lose as much from the fact that raw materials cease to exist, unless the secured creditor takes the obvious step of having the charge extend to the new product which is derived from the raw materials supplied. A clash between secured creditors supplying different raw materials towards the new product will be resolved by the application of ordinary priority principles and will be resolved according to the date of creation of the competing charges. A settlement of any contest between competing reservation of title sellers cannot take place in the same way. A dead heat occurs as and when the goods supplied lose their separate identities.

So far as a supplier retains a share of a commingled greater whole, then, in the absence of any agreement between the relevant parties, the appropriate course of action would be to apply to the court to sever the tenancy in common that arises upon the commingling of substances.

131But note the uncertainty surrounding the continuing need for a fiduciary relationship to launch a tracing claim, discussed under Case 1 c) supra.

132Borden (UK) Ltd v Scottish Timber Products Ltd [1981] Ch 25.

133Re Peachdart Ltd [1984] Ch 131.

134Ibid.

11. Cross-border issues

In the case of title-based financing, English law recognises proprietary consequences that follow according to the lex situs in respect of transactions that take place subject to that law. Since English law lays down no compulsory registration requirements in the case of title-based financing techniques, the requirement of reregistration in State B (England) does not arise. This explains the complete lack of any case law that corresponds to American and Canadian case law on the same subject. If State B were another foreign jurisdiction and State C were England, there is no relevant case law, but English law should recognise State B, so far as its law requires reregistration, only in so far as State B gives effect to a transaction in State B that serves to divest the interest of the relevant party who had perfected an interest in State A but who did not reperfect in State B.135 If State B, unlike English law, does not recognise the role of the law of State A as the lex situs, that is no reason for English law to give up its commitment to the lex situs.

Although the problem is more likely to arise in the case of a supplier of goods under a short-term, reservation of title, there is a potential problem in determining which is the relevant situs for the purpose of identifying State A.136 Suppose that equipment is supplied under the terms of a conditional sale by a seller located in State A and a buyer located in State B. State A requires the conditional sale to be registered but State B does not. The terms of delivery may be relevant in identifying the original lex situs, since that law is identified by time as well as by place. For example, a seller’s delivery obligations require the equipment to be delivered in State B under a contract of conditional sale governed by the law of State A. The delivery term may be on CPD (carriage paid to destination) or similar terms. Even though the reservation of title clause is present in the contract, as a matter of characterisation it would seem that the effect of that clause is a proprietary matter and therefore subject to the law of State B. But if the seller’s delivery obligations were performed in State A, as they might be for a contract on ex works or FOB (free on board) terms, then the effect of the law of State A should be recognised in State B.

The position regarding non-possessory security is more complex, largely because the English law of security stems largely from a combination of the law of contract and the law of corporate capacity. So far as the transaction in State A involves an English company and amounts to

135See J. Fawcett/J. Harris/M. Bridge, International Sale of Goods in the Conflict of Laws (2005), chapter 18.

136This problem does not arise under Dutch law in so far as reservation of title for export goods is to be determined according to the law of the country of destination.

a charge for the purpose of the Companies Act 2006, then the charge would be ineffectual so far as it complied only with the law of State A and not with the law of State B (England). It is not then a matter of reregistration or grace periods in which to reregister, but rather an original registration requirement. English law accommodates the law of State A in the case of property outside the country. According to Sec. 866 of the Companies Act 2006, a copy of the instrument of charge, as opposed to the original, may in such cases be sent to the Registrar of Companies in compliance with English registration requirements.

A particular difficulty is presented by oversea companies with an established place of business in England.137 The relevant provisions under the Companies Act 1985, though repealed, need still to be discussed since they form the basis of a current consultation. Beginning with Sec. 409 of the 1985 Act, charges on English property granted by a company incorporated outside Great Britain138 with an established place of business in England have to comply with the registration requirements of the Act. This gives rise to the so-called Slavenburg problem,139 which occurs if the oversea company with an established place of business in England has not registered in England as an oversea company, as it is required by law to do. This omission may be due to various reasons, not the least of which is that of determining when a place of business is created and when that place of business becomes an established place of business. The failure of an oversea company to register itself in England means that it will not have a corporate number that can be use when the register of company charges is searched. In consequence, the Registrar of Companies will not actually enter details of any charges granted by such companies on the register but will enter the details instead on a searchable index of doubtful utility called the Slavenburg index. Now, the Companies Act does not actually require a charge to be entered on the register if it to be saved from defeasance. Rather, it requires particulars of the charge together with the instrument of charge to be delivered to the Registrar. Consequently, the rights of the chargee are preserved from defeasance by the above procedure.

A further problem presented in the Slavenburg case concerned property brought into England after the charge was created. In the view of the court, the requirement of registration extended to future property in England as well as to property in England at the time the charge was created. This conclusion is somewhat doubtful and would lead to applica-

137The legislation refers to England and Wales.

138An expression that includes England and Scotland, but not Northern Ireland and not the Channel Islands and Isle of Man.

139The leading case is NV Slavenburg’s Bank v Intercontinental Natural Resources Ltd

[1980] 1 WLR 1076.

tions having to be made, perhaps long after the charge had been created, to comply with the registration requirements outside the 21-day rule.140

So far as an English court is adjudicating on a matter of priority as between a charge created in State A and a later charge created in State B (England), it will apply its ordinary time-based rules of priority and come down in favour of the earlier charge. The same applies in the case of execution creditors, whose rights in English law are weak since they are defeated by creditors with fixed charges and by creditors whose floating charges have crystallised before the execution is completed. Priority in English law is not determined by the date of registration, but a failure to register under Sec. 860 of the Companies Act 2006 would lead to the defeasance of the charge as against other secured creditors and execution creditors. Subject to the Slavenburg point in the previous paragraph, English law does not recognise as such the principle that a security already perfected under a foreign law needs to be perfected again under English law just because the charged assets have later been brought into England.141

140See the text accompanying footnotes 51-52.

141The commitment of the other legal systems in this study to the lex situs (or lex rei sitae) rule results in the same approach being adopted, except that certain legal systems (e.g., France and Germany) require a correspondence between the right created under a foreign law and an equivalent in their own legal system. Germany’s approach in this respect is based on the numerus clausus rule.