Conclusion

Article 9 has effectively facilitated the efficient extension of secured credit in the United States. Despite its complexity, unfamiliar language and foreign style, it is likely to play an important role as a source of ideas, if not also as a model for their implementation, in the context of European domestic, regional and international reform of movables security law.

notion of title and is too mechanical to be acceptable to an American realist.

Instead, a special priority is accorded by Article 9 to the later creditor supplying funds for the acquisition of particular assets (as well as the unpaid seller). It is called a purchase money security interest2 and its unstated statutory justification can be put in various ways. One way, for example, is to say that it permits debtors to go elsewhere for fresh finance and thus helps to break a situational monopoly exercised by that debtor’s general financier.3 Another way is to say that it encourages additional profit-making assets to be brought into the business, part of whose yield goes in payment of the price to the supplier. Payment is not made out of the debtor’s already encumbered assets. Both the existing general creditor and the purchase money creditor therefore gain from an adjustment of the basic priority rule. The great bulk of a voluminous literature deals with the economics and bargaining features of this and other aspects of Article 9 and the bankruptcy laws.4 Its unifying characteristic, apart from the polemical tone of the debate, is its resolute concentration upon matters theoretical and a refusal or at least a marked disinclination to look at the empirical evidence that lies behind credit practices. What is entirely absent from the scene is any principled commitment to ownership. Goods and other items of personal property are for the most part wasting assets with a limited life.

The above philosophy runs throughout the Uniform Commercial Code. Article 2, dealing with contracts for the sale of goods, is similar in its approach towards ownership. The contractual rights of seller and buyer are severed from the passing of title between them, though Article 2 does lay out a transfer rule that may be needed for fiscal, licensing and other reasons falling outside the performance of the contract.5 It can be argued that the UCC pays insufficient regard to the deep sentimental roots of ownership6 and that the formal character of law cannot be eradicated simply by a functionalist insight.7 Article 9 is successful in integrating the treatment of various devices that serve in fact to secure

2Often abbreviated to pmsi. See UCC (2000), sections 9-103 (definition) and 9-324 (super-priority rules).

3A pmsi would also defeat an earlier security that was not a blanket security over the debtor’s assets.

4See for example Kronman/Jackson, Yale Law Journal 88 (1979) 1143; Schwartz, Journal of Legal Studies 10 (1981) 1; Schwartz, Journal of Legal Studies 18 (1989) 209; Buckley, Virginia Law Review 72 (1986) 1393.

7 See Bridge/Macdonald/Simmonds/Walsh, McGill LJ 44 (1999) 567.

payment promises, but it is not quite so successful in establishing the initial test of functionalism, which should serve as a litmus test for determining what transactions are subject to Article 9. In particular, it is by no means clear that the payment of monies subject to a trust that they be applied to a required purpose amounts to a form of security.8 Again, Article 9 systems in Canada and the United States have been far from uniform in the way that they subject types of financial lease9 to their various provisions.

Article 9 is a regulatory statute in this sense. It pays no regard to how the parties themselves structure their transaction, and is indifferent to whether they borrow the trappings of pre-code transactions, though its success has over time ensured the abandonment by parties of old transaction types. What Article 9 does is to regulate the effect of the parties’ transactions. It does not overtly set out its distributional goals, though these are certainly the subject of speculation and informed comment. English law, on the other hand, appears to be driven by one basic idea and to be oblivious to distributional considerations. Those considerations are certainly to the fore in the basic rule of insolvency distribution, which is that the assets of the insolvent are distributed on a pari passu basis amongst all ordinary creditors of the insolvent.10 But it is important to understand how marginal this rule is and how little real assistance it gives to ordinary unsecured creditors. First, there are limited categories of preference creditors, who have no security but who rank pari passu amongst themselves and ahead of ordinary creditors.11 Secondly, secured creditors are allowed to encumber all assets of the debtor so as to leave nothing for distribution to ordinary creditors. Ordinary creditors are then citizens of a democracy in a destitute world: they are free to starve equally. There is no fund of assets that must be left free for insolvency distribution.12 Secured creditors can evacuate

8 See Bridge, Oxford Journal of Legal Studies 12 (1992) 333.

9An accountancy term, rather than a legal term, that corresponds to those leases that are functionally identical to a conditional sale.

10See, e.g., Insolvency Act 1986 ss. 107, 328; Insolvency Rules, r. 4.181; British Eagle International Airlines Ltd v Cie Nationale Air France [1975] 1 WLR 758.

11Insolvency Act 1986 s. 386 and Schedule 6.

12A proposal to ringfence for unsecured creditors a guaranteed 10 per cent of the debtor’s net assets (by the Report on Insolvency Law and Practice (the Cork Report 1982, Cmnd 8558)) was never implemented. Recently, the Government in a White Paper, Insolvency -- A Second Chance (Cmnd 5234, July 2001), has signalled its intention to surrender Crown preference rights (which rank ahead of a secured creditor with a floating charge) in favour of unsecured creditors.