учебный год 2023 / Bridge, The English Law of Real Security

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l’air. Le conseil a récemment imposé des contrôles sur la prise de sûretés fixes, et les recours d’auto-assistance subissent la menace d’un projet de modification législative.

Zusammenfassung: Sicherheiten an beweglichem Eigentum werden zu Recht als eine der wichtigsten Aktivitäten im Rahmen der Harmonisierung und Vereinheitlichung des europäischen Privatrechts angesehen. Die Unterschiede, die zur Zeit zwischen den einzelnen Mitgliedsstaaten der Europäischen Union bestehen, beschränken die Grundfreiheit des freien Kapitalverkehrs und verzögern die Vollendung des Binnenmarktes. Englisches Recht wird gemeinhin gegenüber gesichertem Kredit als positiv eingestellt gesehen und hat so das Gewähren von Krediten an Industrie und Handel erleichtert. In seinem Artikel betont der Autor unter Verweis auf den gefeierten ‘floating charge’ die Leichtigkeit, mit der ein Gläubiger Sicherheiten bekommen kann. Er verweist auf die gescheiterten Versuche des englischen Rechts, sich den funktionalen Beweggründen des Artikel 9 Uniform Commercial Codes anzuschließen (der sich als so einflußreich im Erstellen eines ‘model laws’ der Europäischen Bank für Wiederaufbau und Entwicklung erwiesen hat). Abschließend behandelt er noch die Betonung der Vertragsfreiheit zwischen gesichertem Gläubiger und Schuldner im englischen Recht, wobei distributionale Überlegungen (oder Rechte Dritter) nicht in Erwägung gezogen werden. Allerdings kündigt sich ein Wechsel an: das Privy Council hat jüngst dem Schaffen von bestimmten Sicherheiten Einschränkungen auferlegt, die Selbsthilferechte des Gläubigers sind durch einen Gesetzesvorschlag bedroht.

* * *

It is perhaps surprising that the subject of secured lending has received so little attention in European Community law. That may be about to change. In its Communication on European Contract Law,1 the European Commission, in defining the scope of its inquiry, states briefly but significantly that ‘because of its economic context, rules on credit securities regarding movable goods… may also be relevant’.2 In addition, the European Bank for Reconstruction and Development (EBRD) has sponsored a model law dealing with secured lending as part of its programme to restructure the emergent economies of eastern Europe. The United Nations Commission on International Trade Law has also resumed work in the area.3 These latter initiatives are certain to have an impact on the European Union. A likely outcome of all three initiatives is, at the least, progress towards a system of security that is transparent, unconfined by restrictive rules and responsive to the extension of credit, therefore lending itself to the mobility of capital. These features are possessed in abundance by Article 9 of the US Uniform Commercial Code,

1COM (2001) 398.

2Ibid, para 13.

3UNCITRAL is currently preparing a draft Legislative Guide on Secured Transactions to be discussed by a Working Group in New York 20-24 May 2002.

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which is the inspiration for the EBRD model law. Apart from a certain lack of transparency, which likely reforms will do much to redress, they are possessed also by English law, the subject of this paper.

The English law of real security4 is an uncodified and dynamic body of law. It is uncodified in the sense that there is no statute or group of statutes containing systematic coverage of the types of security available, the priorities of the various secured creditors and the remedies available upon default. Statute, however, does have an important role to play. It deals with the registration of security interests5 as well as those rights of preference creditors that are exercised at the expense of certain secured creditors.6 It also deals in an incomplete way with the remedies available to a secured creditor and in part with the rules governing future advances against an existing security. But as is true of so many areas of English law, the starting point for anyone seeking understanding is the common law itself.

English law is also dynamic in the way that it contains few restrictions on the rights of secured creditors. This openness gave Victorian judges the opportunity to invent the floating charge in the cause of providing capital to burgeoning industry, and permitted them to recognise the crypto-security of hire purchase as a means of circumventing restrictive legislation. With a few exceptions, commercial draftsman have been given creative licence when drafting agreements with the aim of securing an advantage over other creditors, secured and unsecured. It is a bipartisan principle of the English law of secured credit that public policy has no part to play,7 which should be contrasted with the opposite stance taken in insolvency law.8 Sham transactions are not permitted but legal artfulness is allowed if parties actually take the steps that their contractual document says they are taking.

It is undoubtedly true to say that banks and other commercial lenders have benefited from the open attitude of English courts to the grant of security. A prevailing theme for many years has been the shortage and volatility of bank finance for SMEs (small to medium enterprises). Whether a judicial sympathy to secured credit has been actuated by a desire to facilitate loan capital is hard to assess, given judicial silence on the subject. It can nonetheless be said that the power given to banks in withdrawing overdraft finance and calling in security has been responsible, in the eyes of some, for the needless collapse of ailing industries and businesses in times of economic trauma, notably when the government of the day was engaged in restructuring the British economy in the early 1980s. About this time emerged the

4Except to the extent that it deals with the all-embracing floating charge, this paper is confined to the taking of security over movable property, tangible and intangible. The concept of movable property is in English law strictly confined to private international law but corresponds very closely though not exactly to personal property.

5Companies Act 1985, ss 395ff.

6Insolvency Act 1986, ss 40, 175 and 386, Schedule 6; Companies Act 1985, s 196.

7Welsh Development Agency v Export Finance Co [1992] BCLC 148; Re Brightlife Ltd [1987] Ch 200.

8National Westminster Bank Ltd v Halesowen Presswork and Assemblies Ltd [197] AC 785.

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first stirrings of the so-called ‘rescue culture’9 which continues to exercise a powerful influence on government policy-making and to serve as a shining star for insolvency accountants hungry for the social status of true professionals. It is more satisfying to be known as a company ‘doctor’ than as a company ‘undertaker’ (which is not to be translated as entrepreneur).

1. Companies, partnerships and individuals

The internal divisions of English law sometimes place obstacles in the way of rational law reform. The English law of security reveals in certain respects a polar division between secured advances to companies, on the one hand, and secured advances to individual partnerships, on the other. This arises from the fact the registration of company securities is governed by the Companies Act 1985, whereas the equivalent legislation for individuals and partnerships consists of the Bills of Sale Acts 1878-91. The statutory differentiation is concerned with registration and formalities, but affects also the type of security that is available.10 Whereas companies legislation is updated from time to time, the Bills of Sale Acts, which attracted stern criticism from Victorian judges, have survived preserved in amber despite their archaic and repulsive character. The terms of reference of any body charged with the reform of company law inevitably stop short of an invitation to consider the need for a wide-ranging reform of the whole law of security. Nevertheless, at times in the relatively recent past, a major reform of the law of security has been called for in the reports of committees reviewing the law.11 There has been a marked lack of enthusiasm in the past for such a project from banks and major law firms, but there are signs that the issue is coming back on the table. In particular, the subject of security for companies and individuals alike has recently been referred to the Law Commission.

2. The list of security interests

Given the absence of a code or statute defining the range of permissible security interests, it should come as some surprise to discover that English law is committed to the idea of a closed list or numerus clausus of true security interests.12 The interests in question are the mortgage, the charge and the pledge. A fourth, non-consensual

9See the Report of the Review Committee on Insolvency Law and Practice, 1982 (Chairman: Sir Kenneth Cork) (Cmnd 8558).

10For various reasons, individual traders cannot grant a floating charge.

11The Cork Committee (supra, note 5); Report of the Committee on Consumer Credit, 1971 (the Crowther Committee Report) (Cmnd 4596); A Review of Security Interests in Property 1989 (a report by Professor Diamond to the Department of Trade and Industry).

12Re Cosslett (Contractors) Ltd [1997] Ch 23.

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security interest is the lien,13 which itself is to be found in a closed common law list.14 It may be special, which means that the assets covered by it may be retained until payment is made for work carried out on those assets under the present transaction, or it may be general, which means that the assets may be retained until payment is made of all moneys owed. Special liens are associated with artisans, such as repairers, and general liens with professionals, such as solicitors, in respect of assets such as the client’s papers that often have no intrinsic value but whose denial is a hardship to the client. Special liens may be inflated by contract to become general liens.15 Liens are not accompanied by a power of sale but this is often provided for by contract and there is also general legislation dealing with the sale of uncollected goods.16

Of these four items, only the first three serve a real purpose in connection with securing loan advances.17 Mortgages and charges, though not confined to non-pos- sessory security, are almost always associated with it. Pledge, which in English law always is a possessory security, apart from cases where possession is released for a temporary purpose,18 is obviously of no real use over working machinery, intangible items and stock-in-trade.19 It has some role to play in trade finance where, in the export-import market, a pledge can temporarily be taken over documents of title such as a bill of lading. Pledge is also of no use in the case of share certificates since a change of legal ownership has to be registered by the company and cannot take place through the unaided efforts of the secured creditor exercising the usual rights of sale of a pledgee. In any case, the modern proliferation of abstract derivative rights into immobilised and decertificated shares, at various intervals in the holding chain, means the absence of a tangible document that can be possessed for the purpose of a pledge. Finally, unlike certain American jurisdictions, England never saw the development of field warehouses, by which the lender was able through its own employees to control and release items of inventory, within the precinct of the borrower’s factory or other establishment, as and when needed for the purpose of the borrower’s trade.

This leaves mortgages and charges. Technically they are distinct. First, a mortgage is capable of conveying a legal interest; a charge can only ever give rise to an equitable interest.20 Secondly, a mortgage is at common law a conveyance with

13This list of four items does not include certain rights of seizure, for example the landlord’s right to distrain for unpaid rent.

14Right akin to a lien are sometimes created by statute, e.g., the Civil Aviation Act 1982, s 88. There also exist a very limited number of equitable, non-possessory liens arising by operation of law.

15This is done with domestic road hauliers: see, e.g., Geo Barker Transport Ltd v. Eynon [1974]

1WLR 462.

16Torts (Interference with Goods) Act 1977.

17With the exception of the banker’s general lien over the customer’s papers.

18As under the so-called trust receipt: see North Western Bank Ltd v. Poynter [1895] AC 56;

Re David Allester Ltd [1922] 2 Ch 211; Lloyds Bank v. Bank of America National Trust [1938] 2 KB 146.

19Including its concomitants, raw materials and work-in-progress.

20The strange statutory animal called a charge by way of legal mortgage (Law of Property Act 1925, s 87) is really a mortgage.

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a cesser on redemption (that is to say, an automatic reconveyance when the loan advance is repaid). A charge is technically an encumbance which permits the unpaid creditor on default to have recourse to the charged asset; it does not involve the conveyance of any interest.21 Charges exist only in equity, but the difference between a mortgage and a charge can be eliminated by drafting that gives the chargee the same remedies as a mortgagee. The technical difference between a charge and a mortgage is rarely a matter of importance and both terms are employed indifferently even in the higher courts.22 A striking feature of the English law of security is that in the event of conflict commercial expediency almost always prevails over legal dogma. A more important distinction than the one between mortgages and charges is that between legal and equitable interests in general, which is important for priority purposes. For the moment, it is enough to note that an equitable security interest is usually the only available vehicle for future asset financing for two main reasons. First, the common law developed no machinery for property interests in intangible property such as accounts receivable (or book debts), a vitally important collateral base for loan advances. Secondly, in equity a purported present conveyance or encumbrance of future assets, which obviously cannot take effect before those assets become present assets, takes effect automatically as and when each asset falls into the present ownership of the debtor. The common law, on the other hand, has always required an individual conveyance for each future asset as and when it falls into the debtor’s present ownership.23 Even if the informality and ease of an equitable charge is put on one side, the common law is therefore unsuitable for general security interests over classes of small assets, such as goods manufactured by the debtor.

English law takes a technical as opposed to a functional view of security. Security is granted by the borrower to the lender. It is not something reserved by a lender, such as the property (ownership) in goods supplied to a buyer by a seller who has not yet been paid and who is retaining that property beyond the point when it would conventionally pass to the buyer until payment has been made. It makes no difference that the reservation of title in fact functions as an effective security for payment, at least if the goods have some permanent value. The refusal of English law to treat title reservation as security means, most importantly for present purposes, that the unpaid seller never becomes involved in a priority battle with a lender who has taken an earlier security over the buyer’s assets. That security attaches only to the buyer’s assets which by definition never include the goods until the property in them is transferred to the buyer when payment is made.

Title reservation is capable of going beyond simple cases where the seller makes use of ‘all moneys’ clauses in its conditions of supply by which the property in goods supplied never passes to the buyer until all outstanding accounts between

21Re Bond Worth Ltd [1980] Ch 228; Carreras Rothman v. Freeman Mathews Treasure Ltd [1985] Ch 207.

22For example, Lord Hoffmann in Re Bank of Credit and Commerce International (No 8) [1998] AC 214; Buckley LJ in Swiss Bank v. Lloyds Bank [1982] AC 584.

23Lunn v. Thornton (1845) 1 CB 379.

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buyer and seller are settled. The main practical value of such clauses is that they permit the repeat seller to assert title to fungible goods supplied without having to trace these goods back to a particular contractual consignment. Although at first glance it may seem that an unpaid seller of certain goods is taking a security for their payment over other goods supplied on different occasions, the House of Lords has firmly concluded that this is an orthodox case of reservation of title.24 The Sale of Goods Act 1979, with one exception, confers autonomy on the contracting parties to designate when the property passes from seller to buyer.25 It further states that the passing of property may be made subject to a condition without stating that that condition must relate to payment for the very goods supplied or in any other way restricting the range of possible conditions.26 All moneys clauses, of course, work effectively only if they are incorporated into each and every contract of sale between the same seller and buyer. A clause in one contract cannot attach to goods supplied under another contract which lacks a reservation of title clause unless it functions as a charge. And if the seller uses in some contracts all moneys clauses and in other contracts conventional reservation of title clauses, the temporary absence of a debit in the account between seller and buyer will cut off an earlier all moneys clause from future supplies on conventional reservation terms, while those later supplies cannot be made retrospectively the subject of a later all moneys clause.

In other cases, where the seller has purportedly ‘retained’ an interest in new goods manufactured by the buyer from materials by the seller, the seller’s reservation of title has not been recognised. Instead, the extended reservation clause has been characterised as a charge and so void as against the liquidator of the buyer company for want of registration.27 One well-known judgment gave considerable comfort to a seller of raw materials in stating that a properly drafted clause could give the seller original title to new goods manufactured by the buyer.28 This is hard to reconcile with basic property rules applicable to newly manufactured goods,29 which give the property in those goods to the operator (here, the buyer) who produces the new goods. In so far as that operator consents to the property in those goods being in the seller, this has the appearance of a grant by the operator and not reservation of title by the seller. It should therefore be characterised as a charge. The judge, however, declined to interpret the reservation of title clause as a true reservation clause. It gave the buyer no credit for value added in the form of labour or new materials and so had to be read as giving rise to a charge in favour of the seller. It is an irritating feature of certain judicial utterances that they pay a form of lip service to contractual freedom: they say that something is possible if the contract sufficiently clearly expresses it but then set

24Armour v. Thyssen Edelstahlwerke AG [1991] 2 AC 339.

25Ss 16-19.

26s 19(1).

27Under s 395 of the Companies Act 1985.

28Robert Goff LJ in Clough Mill Ltd v. Martin [1975] 1 WLR 111.

29It is also inconsistent with the view of another Court of Appeal judge: Buckley LJ in Borden (UK) Ltd v. Scottish Timber Products Ltd [1981] Ch 25.

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the bar so high that no draftsman can possibly clear it. For practical purposes, it is impossible to reserve title to new goods. There is however no doubt that a seller and buyer are at liberty to agree that the seller shall have a property right in new goods: the real issue is what type of property right thereby is created.

Although it is a relatively straightforward matter to register a charge against a company, various matters taken in combination make it impracticable for this to be done by sellers. First, the involvement of the buyer in the registration process gives rise to complications such as the involvement of legal advisers, which is quite unlike the informal, even unilateral, matter of including a reservation of title clause in the seller’s standard conditions of sale. Secondly, a seller cannot register just once for all future occasions when goods might be supplied on credit terms to the buyer. This would be a form of tacking whereby, for priority purposes, future credit advances could be attached to the earlier charge so as to rank ahead of intervening securities. For practical purposes, and with the exception of a priority agreement between the seller and a creditor with a charge registered before the later advance, this could only be done if the seller was under a preexisting commitment to supply goods on future occasions to the buyer,30 which is unlikely though not impossible.31

A similar approach is evident in the case of efforts designed to show that the buyer is reselling goods supplied by the seller as the seller’s agent or fiduciary. In the case that highlighted the importance in modern times of reservation of title clauses, the unpaid seller claimed the proceeds of sale of goods supplied, contending that buyer was acting as a fiduciary in handling goods the subject of the reservation. The buyer’s liquidator conceded that the buyer held the goods as bailee, which had the consequence in the eyes of the court that the buyer was a fiduciary. The result was that the seller could claim an equitable interest in the money proceeds traced from the goods themselves.32 Subsequent case law has distinguished this case so effectively that a similar line of argument could not succeed today. In one case it was held that, even if the buyer in possession held the goods as a bailee,33 it did not follow that the buyer was a fiduciary so that the unpaid seller acquired a proprietary interest in the money proceeds.34 In reselling the goods, the buyer was acting as principal and not as agent, was not required to retain the proceeds of sale in a separate account and did not have to pay until the end of the 45-day credit period, which did not accord with its own reselling arrangements. In a similar vein, attempts to demonstrate that they buyer is reselling as agent have foundered in the face of

30Law of Property Act 1925, s 94.

31A requirements contract would be such a case.

32Aluminium Industrie Vaassen BV v. Romalpa Aluminium Ltd [1976]1 WLR 676.

33Which Robert Goff LJ considered quite possible in Clough Mill Ltd v. Martin [1975] 1 WLR 111.

34Re Andrabell Ltd [1984] 3 All ER 407. See also Hendy Lennox (Industrial Engines) Ltd v. Grahame Puttick Ltd [1984] 2 All ER 152.

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commercial reality when the buyer was plainly acting as a principal on its own account and was able to deal with the proceeds of sale beneficially on its own account.35

The above cases have dealt with the seller’s claim in the liquidation of an insolvent buyer. It is significantly less likely that a buyer will advance credit to the seller by paying in advance. Where the buyer does pay, and the property in goods has not passed, the buyer as an unsecured creditor will rank behind secured and preference creditors of the seller. It is possible for the buyer to make payment in such a way as to reserve the equitable (or beneficial) interest in the money paid until the stipulated condition, supply of the goods, has been met.36 Trust relationships of this kind are not regarded as giving rise to a charge.37 There is little evidence, however, of buyers adopting such a course of action.

3. Floating charges, fixed charges and general security

The creation of the floating charge was a remarkable invention of Victorian draftsmen and judges. It gave the corporate grantor of the charge freedom to deal with its assets in the ordinary course of business. The chargee obtained a relatively low priority but was given extensive powers of enforcement which could be exercised without recourse to the courts. In the heyday of the floating charge, the chargee was given a choice between an extensive security and a high-ranking security. The landscape of corporate secured lending has changed remarkably in the last 30 years or so, to the point where it must seriously be asked whether we are witnessing the slow demise of the floating charge.38 The answer to this question will depend to a degree upon the outcome of impending reform.39

English law has never satisfactorily explained the nature of a floating charge, which given the absence of any analysis of charges themselves in terms of iures in rem and iures ad rem is hardly surprising. In this area of law, metaphors abound. One jurisprudential writer has defined a charge as a shadow cast on property.40 Its floating offshoot has been judicially defined as something that is ‘ambulatory and shifting’, remaining ‘dormant’until the occurrence of an event that causes it to crystallise, whereupon the floating charge becomes a fixed charge. A number of theories abound,41 but

36Re Kayford Ltd [1975] 1 WLR 279.

37Carreras Rothman v. Freeman Mathews Treasure Ltd [1985] Ch 207.

38This question presents itself in the form of a paper by Sir R. GOODE, ‘The Exodus of the Floating Charge’, in B Harvey and F Meisel (eds), Corporate and Commercial Law: Modern Developments,

Lloyd’s of London 1996.

39See infra.

40Salmond on Jurisprudence (P Fitzgerald (ed), Sweet & Maxwell, 14th ed 1966), pp 428-33.

41See PENNINGTON, ‘The Genesis of the Floating Charge’, 23 Modern L Rev (1960) 630; FERRAN, ‘Floating Charges – The Nature of the Security’, Cambridge L J (1988) 213; WJ. GOUGH, Company Charges 2nd ed Butterworths 1991); S. WORTHINGTON, Proprietary Interests in Commercial Transactions, Clarendon 1996, pp 79-86.

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the one that is most plausible, given that a floating charge is a present security for priority and registration purposes, is that the company encumbers its assets but is accorded by the chargee an authority to deal with those assets in the ordinary course of its business and to dispose of them free of the encumbrance. The company, under this approach, is treated rather as an agent at the point of disposal, where the chargee’s interest is overreached.

The chargor’s authority to deal continues as a matter of contract between chargor and chargee. The authority may be revoked on any one of a number of stipulated events. When the authority to deal terminates on one of these events, the charge is said to crystallise and settle as a fixed charge on the current assets embraced by the charge. Some of these events, such as entry into receivership and liquidation, would exist as implied terms of the contract even if they were not spelt out expressly in it. Other common stipulations provide for automatic and semi-automatic crystallisation. An automatic crystallisation clause is one under which crystallisation occurs upon the occurrence of any one of a number of stated events of default without any further action being required of the chargee and whether the chargee is aware or not of the occurrence of the event. A semi-automatic clause adds to the event of default the requirement that the chargee serve notice on the chargor that the charge has crystallised. Although crystallisation alters the nature of the charge and converts it into a fixed charge, with a retraction of the authority given to the chargor to deal with the assets, its effect is more limited than might be supposed. The parallel with agency continues in that the chargor retains the apparent authority to deal with its assets until third parties have notice of the crystallisation. The Companies Act 1985 does not provide for registration of crystallisation, so even if third parties might have been expected to examine the register there will be nothing to put them on notice. Crystallisation is more effective when accompanied by a visible event, such as the sending in of a receiver.

Classically, the way to take a floating charge was to take a charge over the entire undertaking of the company.42 A floating charge could even extend to uncalled share capital if sufficient express language were used.43 English law, by the way, does not recognise the concept of oversecurity with or without any accompanying penal consequences; freedom of contract prevails. It was and is quite possible, however, to take a floating charge over a narrower range of assets and, in the case of revolving assets, such as accounts receivable, a floating charge would be inferred in the absence of controls exercised over the assets by the chargee. The history of floating charges shows a series of attempts by chargees to limit the chargor’s freedom to deal with its assets when conducting relations with other creditors. These limits did not take the form of restricting outright alienations: trading is the life blood of companies and such restrictions imposed by the chargee would be self-defeating. By means

42Re Florence Land Co (1878) 10 Ch D 530 (‘all their estate property and effects’).

43Re Colonial Trusts Corp (1879) 15 Ch D 465 (a general reference to all the company’s property would not suffice).