the insolvent’s estate and leave nothing. To this proposition there is one exception: certain types of security (floating charges) are postponed by statute to preference creditors.13

B. The values of English law

The basic idea that drives forward the English law of security is that of freedom of contract. This value is most strikingly seen in the ability of a financing creditor to take one single security over all of the assets of a debtor company. When this is accomplished, the security is a floating charge. It may not be desirable for priority reasons to rely upon just the one security but, in contrast with German and French law, for example, English law does not create difficulties for secured creditors by requiring a multiplicity of different forms of security if all or most of the debtor’s assets are to be encumbered. Furthermore, there are no assets of the debtor that may not be encumbered by a floating charge in this way.

Two further points deserve particular emphasis. First, there are very few practical limitations placed upon the extent to which creditors can help themselves to security, even though the standard bank debenture is presented to the debtor on a take it or leave it basis. There is hardly any room at all for negotiation. In the case of individuals and partnerships, there are some limited controls by way of debtor protection in the Bills of Sale Acts 1878--1891. These were created as a reaction to certain forms of oppressive behaviour in the Victorian era and in practical terms are little more than an historical footnote. The Acts do not apply to company debtors,14 for whom there is no equivalent form of debtor protection.

Secondly, contract is a bilateral relationship, particularly so in English law given its commitment to the doctrine of privity, which is indifferent to the interests of third parties.15 Distributional considerations are foreign to contract law.16 Admittedly, in the case of most but by

13Insolvency Act 1986 ss. 40, 175; Companies Act 1985 s. 196.

14See Bills of Sale Act (1878) Amendment Act 1882 s. 17 (inapplicability of Act to debentures issued by incorporated companies).

15A major reform, permitting contracting parties to create enforceable third-party rights, was proposed by the Law Commission (Privity of Contract: Contracts for the Benefit of Third Parties (Law Commission No 242, 1996)) and enacted in substantially that form by the Contracts (Rights of Third Parties) Act 1999.

16And especially restitution, which is threatening the borders of contract law.

no means all security granted by company debtors, it is a condition of the secured creditor’s right to repel the competing claims of third-party creditors that the charge be publicly registered.17 That does nothing for pre-existing unsecured creditors and it does not do much for future trade creditors. Individually, they may not challenge an unregistered charge. It is only upon liquidation that a liquidator, acting on the collective behalf of the unsecured creditors, can do so. When competing with registered charges, trade creditors supplying goods also come up against the limits of title reservation in English law, in that their reservation of title clauses only work as such for the original goods supplied and not for new goods manufactured out of them.18 Trade creditors commonly have no real alternative to supplying goods on credit to the debtor buyer. Their status as purchase money financiers is recognised but only to a limited degree,19 such recognition taking the form of a refusal to see them as taking security in the first place over the original goods supplied. They are therefore not obliged to register their title reservation.

The recognition of freedom of contract in the taking of security is complemented by the absence of any organised collocation or comprehensive legislative statement of the ranking of various creditors of the debtor. A table of rankings could no doubt be informally drawn up but only with some difficulty after synthesising a range of bilateral priority comparisons drawn from the case law and from statutory provisions.20 In its commitment to freedom of contract, English law condones a type of individualistic free-for-all creditor mentality that might be regarded in some quarters as more American than US law itself. It could benefit from some of the efficiencies that are characteristic of Article 9. The introduction of notice filing of security interests would be an improvement on the current practice of filing particulars of charge which are checked by Companies House staff against the instrument of charge itself. Although the legislation permits brief particulars of the charge to be given, it is common practice for details running to scores of pages to be filed. Furthermore, the right of secured creditors to make future advances that can draw upon an existing priority position has not been taken as far in

17Companies Act 1985 ss. 395--396.

18See for example Re Peachdart Ltd [1984] Ch 131. A purported reservation of title interest in new goods will be treated as tantamount to a charge that must be registered for perfection under ss. 395--396 Companies Act 1985.

19See Bridge, Oxford Journal of Legal Studies 12 (1992) 333--361.

20See the difficulties posed by expenses of the liquidation in Re MC Bacon Ltd [1991] Ch 127.

English law as it has in Article 9.21 On the other hand, English law was receptive to the taking of security over fluctuating future assets long before Article 9 swept away restrictions22 on this type of security. This is exemplified by the invention in Equity in the middle to late nineteenth century of the floating charge.23 It therefore did not have the same compelling need as US law for major reform of the law of security to satisfy business’s thirst for credit.

English law recognises only three types of consensual security device, namely, pledge, charge and mortgage.24 Charges may be floating or fixed (sometimes called specific). Within these limited types, however, English law permits a significant degree of freedom so that few creditors with the contractual power to bargain for a security are frustrated in their desire to extract an effective security. In the law of secured transactions, there is quite a close similarity to that body of law that distinguishes between tax evasion and tax avoidance. In a similar way, the law tolerates artificial transactions. It will, however, strike down sham transactions, but a sham transaction is one that misrepresents the legal steps taken by the parties. It is not enough that the transaction is an implausible one designed for legal rather than economic effect. The rather far-fetched transaction called hire purchase would never have been invented had it not been for constraints imposed by bills of sale, title transfer and moneylender legislation.25 English law attached a substantial premium to legal ingenuity in the service of major institutional lenders. The following example of this approach at work is instructive.26 Numerous other examples could be provided.27

This example concerns the lightweight floating charge.28 To understand this creation, it must first be appreciated that administration was introduced in the mid-1980s as an insolvency procedure, to confer upon a designated office-holder, the administrator, powers of management of

21There are restrictions on the so-called ‘tacking’ of later advances on to an earlier mortgage: Law of Property Act 1925 s. 94. This section applies to all types of property, not just land, and ‘mortgage’ is defined so as to include ‘charge’: ibid., s. 205(1)(xvi).

22As exemplified by Benedict v Ratner (1925) 268 US 353.

23Re Panama, New Zealand and Australia Royal Mail Co. (1870) 5 Ch App 318.

24Re Cosslett (Contractors) Ltd [1998] Ch 495.

25See Helby v Matthews [1895] AC 471; McEntire v Crossley Bros. [1895] AC 457.

26For others, see Bridge, Canadian Business Law Journal 27 (1996) 196 ff.; Bridge/Macdonald/Simmonds/Walsh, McGill LJ 44 (1999) 567.

27See for example Welsh Development Council v Export Finance Guarantee Co. Ltd [1992] BCC 270.

28Oditah, Journal of Business Law 1991, 49.

the company in excess of those possessed by liquidators, in order to achieve one or more stated statutory purposes. These include the better realisation of the assets of the company than could be achieved by a liquidator and the survival of the company as a going concern.29 The essential idea was to provide for the appointment of an administrator in those cases where a bank debenture did not exist under which there could be appointed a private receiver with extensive powers. This receivership procedure had in the past, besides benefiting the bank, been credited with having beneficial effects on the position of creditors and shareholders of the company. In order to achieve the statutory purpose or purposes, the administrator was given rights of interference with security and title reservation rights.30 Since the administrator, while respecting security and title reservation rights, had a duty to act in the interests of all creditors, and the private receiver was bound only to act in the interest of the appointing bank, it meant that banks with the power to appoint a receiver would normally wish to prevent the appointment of an administrator. The Insolvency Act 1986 permitted them to do this in stated conditions.31

In brief, a bank appointing a receiver classed as an administrative receiver could block the appointment of an administrator.32 But the extensive powers of an administrative receiver were associated with an appointment under the terms of a debenture containing a floating charge. On the face of it, the bank was faced with an invidious choice: it could either avail itself of a floating charge, and thus block the appointment of an administrator who would not serve exclusively its interests, or it could protect itself by a series of fixed, not floating, charges over as many of the assets of the company as it could, thus ranking ahead of preference creditors, who in turn ranked ahead of creditors with a floating charge. It did not appear that it could protect itself from preference creditors and from the appointment of an administrator at the same time.

Nevertheless, a closer examination of the definition of an administrative receiver is instructive. Section 29(2) of the Insolvency Act 1986 states that an administrative receiver is one who is ‘a receiver or manager of the whole (or substantially the whole) of a company’s property appointed by or on behalf of the holders of any debentures of the company secured

32Ibid. The Government has recently signalled an intention to remove the powers of secured creditors outside the capital markets to block the appointment of administrators in this way: Insolvency -- A Second Chance (Cmnd 5234, July 2001).

by a charge which, as created, was a floating charge, or by such a charge and one or other securities’ (emphasis added). It means that, provided the receiver controlled almost all of the company’s property, which could be done by a combination of fixed and floating charges, that receiver qualified as an administrative receiver and the debenture-holder with the power of appointment could thereby block the appointment of an administrator. A floating charge was, however, a sine qua non if this was to be achieved.

In Re Croftbell Ltd,33 it was demonstrated just how insubstantial this floating charge could be. The company was a special corporate vehicle, not engaged in trading, whose only substantial asset was its ownership of the share capital of another company which owned a valuable plot of land. The bank took a fixed charge over the debtor company’s shareholding and a floating charge over any residual assets the company might have, which were, and were expected to be, negligible. Although the only true purpose of the floating charge was to put the bank in a position to block the appointment of an administrator upon the petition of other creditors of the company or of one or more directors, the floating charge was recognised. This was a triumph of form over substance.34

Re Croftbell Ltd reveals in collateral terms what has happened to the floating charge. From being the all-encompassing instrument, the English equivalent of the floating lien, that resembles the blanket security interest under Article 9, it has now become a sort of final flourish in an instrument of charge catching only those items that are not susceptible to a fixed charge. English law, in a series of cases decided over the last thirty years or so,35 has permitted fixed charges over book debts (accounts receivable) to be taken by banks, always provided that the proceeds are paid into an account controlled by the bank.36 This means

35Siebe Gorman v Barclays Bank [1979] 2 Lloyd’s Rep 142; Re Armagh Shoes Ltd [1984] BCLC 405 (NI); Re Brightlife Ltd [1987] Ch 200; Re Permanent Houses (Holdings) Ltd [1988] BCLC 563; Re a Company (No 005009 of 1987) [1989] BCLC 13; Royal Trust Bank v National Westminster Bank plc [1996] BCC 613. See generally, Ferran, Company Law and Corporate Finance 517--29.

36But see the extraordinary decisions of Re New Bullas Trading Ltd [1994] 1 BCLC 485; Re Atlantic Computer Systems plc [1992] Ch 505; Re Atlantic Medical Ltd [1992] BCC 653. The first of these, at least, which recognised a distinction between a debt and its money proceeds, permitting a fixed charge over the former even if no controls at all were exercised over the proceeds, must now be regarded as unsound and unsafe in the aftermath of the Privy Council decision in Agnew v Commissioner of Inland Revenue [2001] 2 BCLC 108.