Cases 7 and 8

from A, some paid for, some not. The Model does not seek to provide a solution for this case as it is part of the broader issue of identification of property which does not properly fall for special treatment under the law on secured transactions. If A is unable or unwilling to set up a system of date stamps, batch marks or other similar method of identification, he could take a ‘class’ charge under the Model covering all toasters and other electrical goods sold by him to B. Pursuant to article 5.5, charged property may be identified specifically (in which case the charge is a specific charge) or generally (in which case the charge is a class charge). The objective of the class charge, as stated in the commentary, is to allow a permanently changing pool of present and future assets to be charged, such as inventory. Thus, in this case, the class charge would cover the whole inventory of goods (coffee-makers and toasters) supplied by A at any time and held by B. Upon each new supply by A the new goods will automatically be added to the pool of charged assets and upon sales being made by B to his customers goods sold will automatically leave the pool.

Case 11 also deals with security over stock-in-trade as A, a financial institution, wishes to guarantee a loan to B, with a security right over the stock-in-trade, present and future. As seen above, this can be covered under the Model Law by a class charge. Pursuant to articles 5.8 and 5.9, a charge can cover property which is not yet owned by the chargor; once the property is owned, the charge is deemed to have been created at the time of registration. It is also useful to note at this stage that article 5.6 allows a class charge to cover all the things and rights used in an enterprise which is capable of operating as a going concern or such part of the things and rights of an enterprise which would need to be transferred to enable an acquirer to continue the enterprise as a going concern. This class charge can be registered as an enterprise charge, which results in specific provisions becoming applicable in the case of enforcement (article 25), enabling a sale of the business as a going concern. This is an option that A and B could consider adopting, although the circumstances of the case do not require it. It should be noted that the enterprise charge is not the same as the device known in English law as the floating charge. The particular feature of an enterprise charge is that it entitles the chargeholder to the remedy of selling the enterprise as a going concern, but in other respects it is the same as any other charge, having immediate effect and not involving any concept of ‘crystallisation’. Although it is recognised that an enterprise charge is an instrument that can be of practical use in

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countries in transition, it raises complex and delicate issues such as the rights of the chargeholder to manage the enterprise pending sale. It is thus considered preferable for countries in transition to introduce the enterprise charge concept once the basic secured transactions law is operative.

The Model Law does not cover the issue of security being granted for earlier debts within a certain period prior to bankruptcy as this belongs in the insolvency law.

Cases 10 and 14

Both these cases involve situations which are often covered by financial leasing arrangements. In case 10, B wants to use his fleet of vehicles as security; in case 14, B wants to obtain financing for the purchase of a computer. Financial leasing is outside the scope of the Model Law. It is a commonly used device which has a similar effect to a grant of security but it is structured differently and consequently gives rise to a different legal relationship. The Model Law does not adopt the approach of Article 9 UCC which looks at the intent of the transaction, and therefore treats a lease as a security interest if ‘the consideration the lessee is to pay the lessor for the right to possession and use of the goods is an obligation for the term of the lease not subject to termination by the lessee’ (Article 1-201(37) UCC). The only case in which the Model provides for the recharacterisation of the transaction is the unpaid vendor’s charge referred to above.

Both situations could be covered under the Model Law by a registered charge over the car fleet or the computer. Such a charge would allow the owner, B, to remain in possession of the cars or computer and to use them for his business. It gives the lender a proprietary right in the cars or computer which is effective against third parties as long it has been registered. Registration ensures the creditor’s ranking: first registered is first paid, and it should be easy for any prospective chargeholder, including the lender in these cases, to check with the central registry whether any previous charge has been granted over the cars or the computer. An unsecured creditor would not be able to take priority over the lender’s right in the assets. A sale by B of any cars from the fleet or the computer would only be free from the charge if it was made (a) with the lender’s consent (article 20), or (b) as a sale of B’s trading stock in the ordinary course of B’s business (article 19.2), or (c) where B habitually transfers cars or computers in the ordinary course of his business, as a sale in the

ordinary course of B’s business (article 19.3). These exceptions are not likely to be relevant to these cases.

If the lender becomes bankrupt the position would depend on the relevant bankruptcy law but it is likely that (a) the lender’s administrator would continue to have rights under the charge, and (b) the charge given by B could not be enforced unless he failed to pay under the terms of the loan.

In these cases the parties have a choice whether to provide for security by way of a registered charge or to use a financial lease. The preferred solution would inevitably depend on the particular circumstances of the relevant jurisdiction (not least upon the fiscal treatment of the transaction). The intention of the Model Law is to provide for a simple and effective means of giving security which can easily be adapted to the commercial context of the transaction. If it achieves that purpose it is likely that a registered charge would most often be the better choice.

Cases 12 and 13

Cases 12 and 13 deal with the very important question of security over claims or receivables. In case 12, the claims are already known and identified in terms of amount and debtor: B has a contract with a firm, Happyplay Ltd, which provides him with monthly earnings. He wants to obtain a loan from A, a bank, secured on these earnings. Pursuant to the Model Law, A and B can agree to create a charge over the claims (or rights) as identified. There is no need to notify the claim’s debtor in advance in order for the charge to be valid, but registration of the charge is required in the charges registry. The Model Law provides that the person owing the charged debt may satisfy it in a manner agreed with the chargor, unless the chargeholder notifies that person. The Model Law leaves it to the chargeholder to give the notice and it would be possible for chargor and chargeholder to agree when this could, or could not, take place. The manner in which the notice is given is a matter for each jurisdiction to define but the basic requirements are that it must be in writing, identify the chargor, describe the claim and give clear instructions as to the person to whom the claim is to be paid (article 12.3). Once notified, the debtor must pay the chargeholder or as the chargeholder directs and can be pursued directly by the chargeholder if he fails to do so. There is flexibility for the parties to agree that the claims are paid into an escrow account or a joint account or an account of the chargor which is charged to the chargeholder. Thus, in this case, there