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

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law comes to such a list is in the way that the various heads of expenses of the liquidation are ranked,91 and these are only one element in the priority rankings.

The most important priority rule is that equitable property interests rank behind legal interests. Since a charge is an encumbrance that attaches itself to property to the extent of the amount owed from time to time, which will fluctuate, and since it does not as such constitute the transfer of an interest in the property, it is not a security recognised at common law. A mortgage, on the other hand, can amount to a security at common law. It will do so if all the required forms, notably a deed in the case of land, have been executed and the property is of a type recognised at common law. This latter requirement rules out intangible forms of property, such as debts, and interests in trust property. A legal mortgage may therefore be taken over fixed tangible items such as land and equipment but not over book debts. The mortgagee, if it does not have notice of any prior equitable interest, will take clear of that interest. As stated above, constructive notice exists of registered charges, but it is only fixed charges that will be accorded priority. The authority (or freedom) of a company to deal with its assets by way of floating charge in the ordinary course of business extends to the grant of a prior-ranking security. It is not enough for the mortgagee to have constructive notice of the floating charge: it must also have notice of any restrictions upon the grant of a mortgage if it is not to rank ahead of that prior floating charge.

For similar reasons, a later fixed equitable charge will rank ahead of an earlier floating charge, unless the later chargee has actual notice of a negative pledge clause. As between floating charges, the first in time will prevail unless the latter attaches to a narrow range of assets within the scope of a permission to deal.92 As with all matters equitable, the first in time prevails where the equities are equal, which is not always the case. It has been stated that the priority of floating charges depends upon whichever charge is the first to crystallise,93 but, since crystallisation only prospectively turns a floating into a fixed charge by revoking the chargor’s authority to deal with assets in the normal course of business, this is unsound. It is also inconsistent with other authority.94

Unlike article 9 of the Uniform Commercial Code, there is no formal recognition of the principle that certain types of secured creditors should rank ahead of earlier secured creditors because they provide purchase money finance. The broad idea here is that a situational credit monopoly can be avoided if the debtor is able to give a purchase money secured creditor a higher priority ranking than the first in time rule would afford, in a case where the finance is used to bring new assets into the company and broaden the security base. Although English law does not formally recognise the principle, it gives it a significant amount of tacit recognition. First of

91Insolvency Rules, r 4.218.

92Re Automatic Bottle Makers Ltd [1926] 1 Ch 412.

93Griffiths v. Yorkshire Bank Plc [1994] 1 WLR 1427.

94Re Woodroffe’s (Musical Instruments) Ltd [1986] Ch 366.

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all, a reservation of title clause is not treated in English law as a type of security. This means that, since the buyer obtains delivery of goods already subject to the clause in favour of the seller, the seller necessarily ranks ahead of a chargee whose charge extends to some or all of the buyer’s assets, even though the charge is of earlier date. In addition, the reservation of title clause need not be registered, so there is no risk of defeasance arising from a failure to register.

There are also cases where funds have been advanced to allow for the purchase of particular property in cases where the buyer has already granted a charge over all of its assets to an earlier secured creditor. A later secured creditor provides the funds for the particular property, taking a charge over the property. If the normal rules of priority were to be applied in such a case, the earlier secured creditor would defeat the later, since there would be at least a brief moment, or scintilla temporis, when the buyer had the full legal and beneficial interest in the property before carving out an interest in favour of the later creditor. This reasoning, which is hard to refute, has nevertheless been rejected by English courts on the ground that the property comes into the hands of the buyer already encumbered in favour of the later secured creditor.95 Since the grant of a charge in favour of that creditor is made by the buyer, and since it is hard to conceive how one without an interest in property can grant an interest in it to another, the logical difficulty presented by this line of cases speaks for itself. The cases nevertheless give tacit support to the primacy of a purchase money security interest.

In the case of certain types of intangible property, notably book debts (or accounts receivable), there is a rule of priority that applied the first in time rule in a rather special way. This is the so-called rule of priority known as the rule in Dearle v. Hall.96 According to this rule, where the same asset is assigned, whether outright or by way of security,97 priority is accorded to the assignee whose assignment is first notified to the account debtor. It is important to understand that an assignment can take full effect in English law as an equitable assignment without the account debtor being notified at all.98 Consequently, the assignee’s property rights will not be affected at all by the insolvency of the assignor before the account debtor is notified of the assignment. To this rule of priority, there is an exception. If the later assignee has notice of the earlier assignment, then it cannot advance the priority of its own assignment by being the first to notify the account debtor.

The rule in Dearle v. Hall was severely criticised in the House of Lords more than a hundred years ago99 but it has survived intact. It applies to all forms of assignment of book debts.100 The so-called legal assignment that follows the form

95Abbey National Building Society v. Cann [1991] 1 AC 56; Re Connolly Bros Ltd (No 2) [1912] 2

Ch 25.

96Dearle v. Hall (1828) 3 Russ 1.

97Colonial Central Mutual Insurance Co Ltd v. ANZ Banking Group (New Zealand) Ltd [1995] 3 All ER 987.

98Gorringe v. Irwell India Rubber Works (1886) 34 Ch D 128.

99Ward v. Duncombe [1893] AC 369.

100E Pfeiffer Weinkellerei-Weinenkauf GmbH v. Arbuthnot Factors [1988] 1 WLR 150.

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laid down by statute, which includes written notice being given to the account debtor, is in reality a form of equitable assignment.101 Consequently, a later legal (or rather statutory) assignee, taking without notice of an earlier unnotified equitable assignment, cannot claim priority on the familiar ground that a later legal interest prevails over an earlier equitable interest if the legal purchaser acted in good faith and without notice of the earlier equitable interest.

7. Comparison with UCC article 9

In terms of the broad philosophy of security law and the results achieved, there is a quite close similarity between English and US law. The great achievement of article 9 of the Uniform Commercial Code102 was to capture all forms of security, functionally identified as such, and to bring them all under the same statutory roof. Thus title reservation was treated as a form of security, which has never been the case in English law. In addition, article 9 removed restrictions on the taking of security over revolving present and future assets which made it very difficult to use accounts receivable as a source of collateral for secured lending. These restrictions, however, were not present in England.103 Article 9, in addition, encouraged the taking of security for future advances so that a single registration, or filing, could generate a priority position in respect of all advances to the debtor, regardless of date and of the creation of intervening securities in favour of other creditors. English law, on the other hand, permits so-called tacking, namely the attachment of a later advance to a security for an earlier advance, within limited conditions.104 If a later advance is discretionary, it cannot partake of the priority of the earlier security unless intervening secured creditors agree to subordinate their security. This is one of the few really important substantive differences between English law and US law.

Another difference of great importance concerns notice filing. It is only skeleton details of the security that are presented for registration (or filing). The instrument giving rise to the security is not. A potential creditor seeking details of existing securities will have to approach the debtor or secured creditor to learn more. Moreover, registration under article 9 does not go to defeasance; it is a priority point, the first to register having priority, subject to exceptions like the one in favour of the purchase money financier. English law, in contrast, orders priority according to the date of creation, subject to defeasance if registration takes place outside the stipulated 21 days.

101Torkington v. McGee [1902] 2 KB 427; E Pfeiffer Weinkellerei-Weinenkauf GmbH v. Arbuthnot Factors (supra).

102Article 9 was the subject of an extensive overhaul in 2000.

103Tailby v. Official Receiver (1888) 13 App Cas 523.

104Law of Property Act 1924, s 94.

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8. Remedies

In English law, the seller with a reservation of title clause may recover the goods and dispose of them, accounting to the buyer for any surplus as a matter of implied contract or restitution, depending upon whether the contract has been terminated or not.105 In the case of genuine security, a mortgage carries with it numerous remedies upon default. First of all, there is foreclosure, which amounts to depriving the mortgagor of the equity of redemption so as to allow the conveyance to the mortgagee to take full effect. It is rarely exercised. Then there is the right to go into possession, again rarely exercised because of the almost penal nature of the mortgagee’s duty to account in the case of misfeasance.106 The mortgagee may also apply to court for the property to be sold and may also apply for the appointment of a receiver. These are the remedies available as a matter of law.

For a charge, the only remedies available, since there is no conveyance to the chargee, are receivership and application to the court for a sale of the charged assets. In practice, instruments of charge usually contain the additional remedies of a mortgagee, thereby erasing the technical legal difference between a charge and a mortgage.

The above account of remedies would be incomplete if mention were not made of an express contractual remedy almost invariably to be found in any charge or mortgage. It is the appointment of a receiver, not by the court, but under a power contained in the instrument of charge. The way it works is that the chargee is given an irrevocable power, acting as agent for the debtor company, in the event of default to exercise on behalf of the company itself a power to appoint a receiver whose mandate is to step in and deal with the assets of the debtor company in such a way as to pay off the charge. It is a curious reverse kind of agency107 in which the receiver, though the agent of the company, pursues single-mindedly the interests of the company’s secured creditor. Acting in this way, the receiver may dispose of any of the assets at any time he chooses and need not take account of the interests of the company. In the act of disposing of the assets, however, the receiver must exercise care to obtain the best price.108 As limited as this latter qualification on the contractual receiver’s powers may be, it was only with some difficulty that it came to be judicially recognised at all.109

The receiver’s agency relationship with the company is terminated automatically once insolvency proceedings commence,110 but the receiver’s power to deal with the assets so as to pay off the chargee remains. In practice, a liquidator is powerless to act until the receivership has run its course. Indeed, those receivers dealing with a security that extends to substantially the whole of a debtor company’s assets,

105Clough Mill Ltd v. Martin [1985] 1 WLR 111.

106See Gaskell v. Gosling [1896] 1 QB 669, 691-93 (Rigby LJ).

107Gomba Holdings v. Minories Finance [1989] BCLC 115, 117.

108Medforth v. Blake [1999] 3 All ER 97.

109See the restrictive decision of the Privy Council in Downsview Nominees v. First City Corporation Ltd [1993] AC 295.

110American Express International Banking Corp v. Hurley [1985] 3 All ER 564.

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known under the Insolvency Act 1986 as administrative receivers,111 are treated to an extent as insolvency office holders and have certain powers of inquiry, property recovery and compulsory contracting (in the case of utilities).112 This remedy is a very powerful one and avoids the chargee or mortgagee having to go into possession with all of its penal consequences. Receivership represents creditor self-help in a highly visible way.

9. Future reform

There are signs of impending major changes in the English law of security. First of all, a recent somewhat jejune White Paper113 signalled the end of contractual administrative receivership as it exists outside the capital markets. It may be that the conferment upon such receivers by legislation in the 1980s of the status of insolvency office holder has proven to be a poisoned chalice. Standards of openness, accountability and ‘properly aligned incentives’ were referred to in the White Paper as a reason for abolition of this remedy which works to the exclusive benefit of the creditor procuring the administrative receiver’s appointment. The Enterprise Bill 2002, currently before Parliament, contains provisions that would carry the recommendations in the White Paper into effect. Apart from vested entitlements to procure the appointment of an administrative receiver, and with the exception of a number of exceptions relating to capital markets, project finance and the private finance initiative, a creditor with extensive charges over the debtor’s assets will now have to take advantage of a streamlined administration procedure. The administrator, however, will have to act in the interests of other creditors in a way that the administrative receiver does not have to do. Where the new provisions apply, a creditor will therefore derive no real advantage from a lightweight floating charge. Despite these impending changes, there is no empirical evidence at all to suggest that other creditors suffer as a result of the appointment of an administrative receiver and no reason to suppose that filling the gap with a streamlined version of the collective process of administration will improve matters. Such evidence as there is suggests indeed that administrative receivership is efficient in maximising the value of the debtor company’s assets.114 It is a fallacy to believe that the administrative receiver lazily realises enough value to pay off the oversecured bank. In the great majority of cases, the charge or charges are ‘under water’, which means that the assets realised are insufficient to pay the bank in full.

Another reform proposed in the White Paper, the abolition of the Crown’s status as a preference creditor, is also carried forward in the Enterprise Bill. This still leaves employees and pension funds, and the Crown itself in those cases where it is subrogated to the rights of employees. The White Paper makes it plain that the

111S 29(2) (the security must include a floating charge).

112Insolvency Act 1986, ss 233-36.

113Insolvency – A Second Chance (Cm 5234, July 2001).

114See ARMOUR and FRISBY, ‘Rethinking Receivership’, 21 Oxford J of Leg Stud (2001) 73.

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benefit of the abolition of the Crown’s preference will go to unsecured creditors and not to the holder of any floating charge. This will be achieved by ‘ringfencing a proportion of the funds generated by the floating charge’ for the benefit of those unsecured creditors.115 Provisions to this effect are again to be found in the Enterprise Bill, though the precise details will depend upon secondary legislation made under the new Act when it has been passed. The proposed reserve fund revisits an idea first floated by the Cork Committee back in 1982, widely reputed to have been worked out on the back of an envelope. The idea at that time was that unsecured creditors should have a reserved fund of 10 per cent of the assets, which has a round enough appearance to overcome any lack of scientific rigour. The idea made no positive impression on the Government of the day and did not take on legislative shape in the insolvency reforms of the mid-1980s. It cannot yet be estimated what figure the present Government has in mind or whether the reserve fund will prove to have any real impact upon the plight of unsecured creditors.

Lastly, account should also be taken of the recent final report of the Company Law Review Steering Group.116 It recommends certain reforms in the area of registration of company charges that will diminish the gap between English law and US law. After consultation and deliberation, the Steering Group proposes117 the retention of the registration system but recommends that all charges should be registered apart from particular cases where an exception can be justified. The effectiveness of registration depends upon the amount of useful information that the register contains. Partial information of a company’s security or quasi-security position may cause more harm than good. The proposed reform is a step in the right direction. In addition, it is recommended that only the particulars of charge should be presented to the Registrar and that registration should serve a priority rather than a defeasance purpose. Difficult provisions of existing law permitting late registration can therefore be dispensed with. The criminal penalty for non-registration should be abolished, likewise the company’s separate register of charges. It is expected that space will be made for these proposals in forthcoming legislation and that subsequent changes to this very technical area of law will be made by statutory instrument. Given its limited terms of reference, the Company Law Revision Group could not make recommendations concerning the merger of corporate and non-corporate security. The separate corporate and non-cor- porate regimes is a major stumbling block to a wide-ranging reform.

As stated earlier in this paper, the subject of security in the case of corporate and non-corporate debtors alike has now been referred to the Law Commission which will very soon issue a consultation paper. It is widely expected that the Law Commission will recommend a reform along the lines of Article 9. Even without account being taken of developments in Europe and elsewhere, the future looks to be an eventful one.

115Insolvency – A Second Chance (Cm 5234, July 2001), para 2.19.

116Modern Company Law for a Competitive Economy (June 2001) «http://www.dti.gov.uk/cld/ review.htm».

117See ch 12.