учебный год 2023 / Pennington, The Genesis of the Floating Charge

Nov. 1960 THE GENESIS OF THE FLOATING CHARGE 631

currenttransactions,such as the purchaseof raw materialsand the carmiageof finishedgoods, so that when a company failed, bondholdersofteu found that other creditorshad claims to be satisfied rateably with their own,4 and if the company's assets were insufficientto pay all the clairns in full, the bondholderswent partly unpaid. To overcome this risk, investors who supplied long-termloan capital5 came to insist on better security for their loans, but the problem was, what security could the company legally give them?

The forms of security availableat commonlaw were the mortgage of land or goods and the pledge of goods. Under a mortgage the ownershipof the mortgaged property was transferredto the lenderso that on defaultby the borrowerhe could sell the property and dischargehis loan,6 but until the lender took steps to reaiise his security possession of the property was retained by the borrower. Undera pledgethe ownershipof the goods was retainedby the borrower,but the lendertook and kept possessionof them until the loan was repaid and had an implied contractualright to sell them on default by the borrower.

These forms of security did not meet the needs of compantes. The greaterpart of a company'sassets would usually compriseraw materials, manufactured or semi-manufacturedgoods, stock in trade and trade debts payable to it, and its land, buildings and fixed eqliipmentwould often form a mere fraction of the value of its undertaking. But the forms of security available at common law permittedit to raise money only on the securityof these latter fixed assets, and preventedit from giving an effectivesecurityover its other assets, which commerciallywere its soundestpotentialfor raising loans. The reason for this, apart from the fact that the commonlaw, unlikeeqliity, did not recogniseassignmentsor mortgages of debts owed to the company, was that the current or circulatingassets of a companywere constantly changing, and the commonlaw insistedthat mortgagesor pledgesshouldbe of land or goods owned by the company and identifiedat the time the mortgage or pledge was created. Now this was a practicalimpossibility in the case of a class of assets the constituentitems of which were constantly changing. If the precept of the common law were

4 Until 1856 unincorporatedcompaniesand companiesformed und-erthe first Joint Stoek CompaniesAct of 1844 (7 & 8 Vict c. 110) could be wound up by the Courts of Bankruptcy. The rule giving bond creditorspriority over simple eontract creditors, whieh applied in the administrationof deceased persons' estates until 1869, never applied in bankruptcy,and BO bondholders of a eompanyenjoyedno preferenceover trade creditors.

5At this time loan capital was rarely raised for a period of more than five or sis years. It vv-asnot until the last quarterof the nineteenth century that debenturesredeemableas much as twenty or twenty-five years after issue began to appear.

6The mortgagee'sownershipwas subject to the mortgagor'sequitable right to redeem,and BO an expresspowerof sale was always insertedin the mortgage to enable the mortgagee to sell the property free from the equity of redemption.

carriedout, therewouldhave to be a freshmortgageor pledgeeach timea new item was addedto the class of assets, and a releaseby thelendereach time an item was disposedof out of it. 14, in

The commonlaw was foundedon Bacon's Masctms,regula whichhe observed:

" The law doth not allow of grants except there be a foundationof an interest in the grantor; for the law will not acceptof grantsof titles or of thingsin actionwhichare imper- fect interests; much less will it allow a man to grant or incumberthat which is no interest at all, but merely future."

Consequently,a sale or a mortgage7 of goods which the seller or borrowershould thereafteracqliirewas void to pass a legal title, eventhough the goods were adequatelydescribedand easily ascer- tainablewhen they came into the seller'sor borrower'sownership. Thetransactionmight very well constitute a contractby the seller orborrowerto transfera legal title when he did acquireownership, butthe commonlaw courts could not specificallyenforcethe con- tract,and so it createdno obligationwhich attached to the goods andwhich might be enforcedagainst other persons, such as judg- mentcreditorsof the seller or borrower,or his assigneesin bank- ruptcy. A sale or mortgage of future goods was not wholly ineffective,however. The quotation from Bacon given above

continued:

" But of declarationsprecedentbefore any interest vested the law doth allow, but with this difference,so that there be some new act or conveyance to give life and vigour to the

declarationprecedent."

In other words, if the intention of the seller or borrowerennced by the original transactionwas confirmedby a fresh transfer or mortgageafter he acquiredthe goods, the buyer or lender would obtaina legal title thereby. The problemwas whetherany lesser " new act " would suffice. During the nineteenth century there wereelaboratedthe circumstanceswhen a " new act " by the seller of goods wouldappropriatethem to the contractand pass the legal title to the buyer,8but no such rules were evolved in respect of mortgages. Consequently,the lender acquiredno legal title unless the goods weretransferredto him by a confirmatorydeed executed after the borrower acquired them, or unless the goods were deliveredto him,9or, possibly,unlessthe borrowerattornedto him after acquiring the goods.10 The lender might obtain delivery, however, by the original mortgage empoweringhim to seize the after-acquiredgoods,l1 and after some initial reluctance,l2it was

the principleseems to have been of general application).v. Thotnton (supra). Congrevev. Evetts (1854)10 Exch. 298. 12 See Lunn

Nov. 1960 TEE GENESIS OF TEE FLOATING CEARGE 633

held that a mortgageof goods to be acquiredby the borrowerin the future impliedly authorisedthe lender to seize them so as to perfecthis title.l3 But the licenceto seize was uselessunlessit had been exercised before some third party, such as a purchaseror judgment creditor, had obtained the goods,l4 and so it really affordedthe lenderlittle security.

The other form of security, the pledge of goods, was no more helpful. Admittedly, a pledge did not involve the transferof the legal title to the lender, and his powersof realisationwere delived from the contractof loan and not from his being the ownerof the goods, but it was held early on that a pledge was effective only when the goods were delivered to the lender,l5 so that it was impossibleto pledge goods which the borrowerdid not yet own. Moreover,it was not possible to constitute a pledge by making merely a token delivery of goods to the lender and the lender allowing the borrowerto retain possession of them for his own purposessubjectto recall by the lender. A lender might redeliver the goods to the borrowerso as to enable him to deal with them as the lender's agent and the pledge would not thereby be destroyed,le but a redelivery to the bolsower for his own benefit terminatedthe bailment which was the foundationof the pledge, and so destroyed the lender's security.l7 Equally, it was not possibleto pledge goods by deliveringto the lender documentsby which possessionof them might be obtained, such as a warehouse keeper'swarrant18 or a railwaydeliverywarrant,lofor the common law did not equate possessionof such documentswith possession of the goods themselves. The only exceptions to this were if the documentwas a bill of lading,20or if the borrowerwas a mercantile agent within the Factors Acts 21 whether acting for a principalor on his own account,°2but such exceptions did not help manufacturing companieswhich bought their raw materialsfrom dealersin this countryand did not import them themselves.23

13Hope v. Hayley (1856)5 E. & B. 830.

14Hallas v. Robinson(supra).

15Ryall v. Rolle (1749)1 Atk. 165, per Burnet J. at p. 166. See also Maxtinv.

Reed (1862)11 C.B.(N.s.) 730.

6 Reeves v. cappeT (1838) 5 Bing.N.C. 136; North Western Bank v. Poynter, Son and Macdonald[1895] A.C. 56.

Tod and Son v. MerchantBank (1883)10 R. (Ct. of Sess.) 1009, distinguished in NoTth WesteTn Bank v. Poynter, Son and Macdonald(supra) by Lord HerschellI..C. at pp. 71-72.

WilliamM'Ewanand Sons v. Smith (1849)2 H.L.C.309.

OfficialAssignee of Madrasv. MercantileBank of India Ltd. [1935] A.C. 53

e2rpressedin generalterms, the Factors Act, 1889, 8. 3 applies onlg to pledges by mercantileagents (Inglis v. Robertson[1898] A.C. 616).

22Lloyds Bank Ltd. v. Bank of AmericaNational TTustand Savings Assoczation [1938] 2 iE.B. 147.

23Thereis a furtherexceptionin the Sale of GoodsAct, 1893, 8. 25 (2) (re-enact- ing the Factors Act AmendmentAct, 1877, 6. 4 and the Factors Act, 1889, 8. 9), but these statutes lie outsidethe periodof developmentof the commonlaw underconsiderationhere.

634 THE MODERN LAW REVIEW V()L. 23

Roman law was far more flexible than English commonlaw in respect of pledges, and was in consequenceable to devise a form of securityover after-acqliiredgoods and also over things in action which in this country has only been achievedby the development of equitableprinciples. The originalRoman pignus was the same as our pledge, involving the delivery of the pledged goods to the lender. But Roman law permittedthe lenderto redeliverthe goods to the borrowerwho held them as a bailee at will of the lender, and the pledge remainedintact notwithstanding. Under a later development of the pignus, the borrowernever delivered possessionof the goods to the lender at all, but merely gave him a contractualright to seize them on the borrower'sdefault.24 The lender retainedhis right to insist on delivery of possessionof the goods, however,and becauseof this could recoverthem from anyone to whomthe borrowerdeliveredthem, subject,of course,to the possessor'sright to redeem the pledge. This developed form of security,the hypotheca,was freefrom the limitationsof the pledge, and so could be used to give a security over propertywhich could not be pledged,such as after-acqliiredgoods,25or debts owed to the borrower,26and it was even possibleto create a chargeover a class of assets which was constantlychanging,such as stock in trade of a business.27 English law early rejectedthe hypotheca,however,28 and it was only after many years of judicialoppositionthat equity was able to devise a similarform of security.

2. THEINTERVENTIONOF QUITY

The first leading case 29 in which equity intervenedto remedy the defects of the commonlaw was one in which the mortgagecreated what was later identifiedas a floatillg charge, althoughit was too early at that date for the oourt to recogniseit as such. A debtor assignedthe machineryand implementsat his mill to a trustee for his creditorsubject to the usual proviso for redemption,and the deed of assignmentprovidedthat the trust thereby created should extend to all other machinery and implements which should be brought on to the mill in addition to or in substitution for the originalitems. The debtorretainedpossessionof the mill and sold some of the original machinery and bought new machinery to replaceit. A judgmentcreditorof the debtor seized some of the new machineryundera . fa., and the questionraisedwas whether bhesecured creditor, who had never taken possessionof the new machinery, had a prior claim thereto. The House of Lords, reversingLordCampbellL.C.,30held that he did have a priorclaim.

24Gaius, Instttutes, 8.64.

25Digest. 13.7.41.

26Itvid.13.7.18 pr

27I6id. 20.1.34 pr.

28RqJallV. Rolle (supra).

29Holroydv. Marshall(1862)10 E.L.C. 191

30 (1860) 2 De G.F. &;J. 596.

after-acquiredproperty.ascreatinga contractfor the creationof a proper mortgage which equity will specificallyenforce when the property is acquired, and because of the availability of specific performance,the mortgagorbecomesa trustee of the propertyfor the mortgagee, and the mortgagee's proprietary rights thus obtainedare bindingon third persons. Lord Chelmsford,too, sees the originalmortgageas a contract, but a contract which is selfexecuting as soon as the mortgagoracquiresthe propertyin question, so that whether the rnortgageecould obtain an order of specificperformanceor not, he obtains equitableproprietaryrights automatically.

Lord Chelmsford'sview has on the whole prevailed in later cases. It was adoptedin a later decisionof the House of Lords33 vrherea trader assignedby way of mortgageall book debts " due or owing or which may during the continuanceof this security become owing " to him, and then later became bankrupt. The book debts in questionbecamedue beforethe bankruptcyand the mortgageehad in fact given notice of the mortgageto the debtors, but the majorityof the membersof the House of Lords held that the mortgagee's title prevailed over the claim of the trustee in bankruptcysimply on the ground that the equitable title to the debts passed to the mortgagee as soon as they became owing.34 LordMacnaghten,indeed, was at some pains to explain away Lord Westbury'sjudgmentin the earliercase as supportingthis view.35 An early decision36 cited by LordMacnaghten37 also lends SUppOIt to Lord Chelmsford'sreasoning. In that case a clergyman had purportedto chargeany beneficehe shouldthereafteracquirewith repaymentof a loan. He later acquireda beneSce, but before he executed a confirmatorymortgage of it, a statute was enacted prohibitingthe giving of security over benefices in the future. Lord CottenhamL.C. held that the lender had a valid equitable chargeover the beneficeas soon as it was acquired,and he rejected the suggestion that the lender's rights depended on whether he could obtain specific performanceof the clergyman'spromise to execute a legal mortgage,a remedywhichwas.now clearlyunavailable because of the statutory prohibition. The only case which has cast doubt on Lord Chelmsford'sview is a House of Lords decisionon appealfrom Scotland.38In that case a companywhich was indebtedto its bankobtainedthe releaseof a collateralsecurity over its goods by promisingto procurea debenturefrom another companyas substitutedsecurity. The debenturewas issued to the first company, but it was wound up before the debenture was

33Tailby v. O#iczal Receiver (1888)13App.Cas523. .

34Lord Fitzgeraldconcurredon the groundthat the mortgageehardperfectedhis title by giving notice of the mortgageto the debtors.

35(1888)13 App.Cas.517.

36 Metcalfe v. Archbtshop of York (1836) My. & Cr. 547.

37(1888)13App.Cas549. .

38Bank of Scotland v. Macleod tl914] A.C. 310.

transferredto the bank. It was held that the bank had no claim to the debenture. The iudgments in the IIouse of Lords relied heavily on the need to preserve equality between creditors of a company in liqliidation, and neither of the two IIouse of Lords decisionsin the English cases dealt with above was cited. Lord Kinneardid, however, commentthat a dictum by Lord Westbury in another Scottish case 39 that " an obligationto do an act with respect to propertycreatesa trust," did not operateto perfectthe bank's title in the presentcase,40and this, of course, amountsto a completerejectionof both Lord Westbury'sand Lord Chelmsford's reasoningin Holroyd v. Alarshall. It should be noted, however, that in the Scottish case, the company had not purported to mortgagethe debentureto the bank, but had merely agreedto do so, and it may well be that Lord Chelmsford'sview that an equitable interest passes immediatelyto the mortgageeon the acquisition of the property by the mortgagor applies only when the transactionis expressedin the form of a mortgageand not in the form of a contractto execute a mortgage.

The result of the equitable gloss on the effect of mortgagesof after-acqliiredproperty is that until the mortgagor acquires the property the mortgagaehas merely a personal contractual right against him, but when the propertyis acquired,an equitablepro prietaryinterestimmediatelyvests in the mortgagee,and the legal title, too, may be obtained by the mortgagorexecuting a supplemental mortgage, or, *n the case of goods, by deliveringthem to the mortgagee.41 The position of an equitable chargee of afteracqliiredpropertyis preciselythe same.36 The protectionafforded by equity is not complete,however,becausethe mortgagee'seqliitable proprietaryinterest may be overreachedin favour of a subsequent purchaseror mortgageeof the legal title who has no notice of the equitableinterest,44and because so long as the mortgagee's rights are purely contractual,they may be defeated by the mortgagor becoming bankrupt and obtaining his discharge in bankruptcy,43or by the mortgagormerely becomingbankrupt,for the mortgagee's contractual rights cannot ripen into an eqliitable

89 Fleemingv. Howden (1868)IJ.R. 1 E.I.Sc. 372 383. 40 [1914] A.C. 32>325.

41 The Bills of Sale Acts are disregardedin this article because they rarely affected companies carrying on commercialundertakings. Even before the Bills of Sale Act (1878) AmendmentAct 1882, s. 17 esempted debentures issued by incorporatedcompanies mortgagesof goods by commercialconcerns whetherincorporatedor not were usually esempted from the Acts under the provisionof the Bills of Sale Act, 1854 8. 7 and the Bills of Sale Act 1878 s. 4 which excludedfromthe definitionof a bill of sale " transfersof goodsin the ordinarycourseof business of any trade or calling."

brouaht thereon" became bankrupt and acquired further goods which he broughton to the premisesafter his dischargein bankruptcy;held the mortgagee could not seize such goods as his contractualrights against the mortgagor ceasedon his dischargein bankruptcy).

proprietaryinterest as against the mortgagor'strustee in bankruptcy after the bankruptcyhas commenced.44These considerations are of no importancein connectionwith floatingchargeson a company's property, however, for notice of the charge can be given by registeringit at the CompaniesRegistry,45and it has been held that for reasonsother than those applicablein a bankruptcy, a floating charge cannot attach to property which the companyacquiresafter the commencementof its windiIlgUp.46

3. MORTGAGESUNDERTHECOMPANIESCLAUSESCONSOLIDATION ACT,1845

One of the less obvious factors in the developmentof the floating charge was the form of mortgage sanctioned by the Companies ClausesConsolidationAct, 1845,for use by companiesincorporated by statute.47 By such mortgages the company assigned to the mortgageeits " undertakingand all future calls on shareholders and all the tolls and sums of money arisingby virtue of " its act of incorporation. The expression " undertaking" was unhelpfully definedas " the llndertakingor works, of whatevernature, which shall by (the company'sact of incorporation)be authorisedto be executed," 48 and so it fell to the courtsto decideto what property of the company the mortgage attached and what remedies a mortgageehad for the realisationof his security.49

Most statutory companiescarriedon public utility undertakings which the court was unwillingto allow mortgageesto breakup by selling their assets piecemeal, and this reluctance undoubtedly colouredthe interpretationwhichthe court gave to the mortgagees security. Thus, in one such action where the mortgageesapplied for the appointmentof a receiverwith powerto break up and sell a railwaycompany'sundertaking,CairnsL.J. rejectedthe application partly on the groundsof public policy, and partly because-the mortgagesof the company'sllndertakingcreated a chargeon it as an integratedwhole and as a going concern. He said 50

" Whatever may be the liability to which any of the propertyor effects connectedwith it (the company) may be subjected through the legal operation and consequencesof a judgmentrecoveredagainstit, the undertaking,so far as these

44Re Jones, ex p. Nichols (1883)23 Ch.D. 782 (a mortgagorof debts to accrue in the future under a certain arrangementwith a third party became bankrupt; the mortgageewas held not to be entitled to the debts which became owing after the bankruptcybegan).

45Wilsonv. Kelland [1910] 2 Ch. 306.

46Re YagerphoneLtd. [1935] Ch. 392. The floating charge becomesa specific charge on the assets owned by the company at the commencementof the windingup, and 80 cannotextend to assets acquiredby it thereafter.

47CompaniesClausesConsolidationAct, 184B,Sched. C.

48Ibid. 8. 2.

49The Act of 1845 enabled mortgagees to apply to the maaistrates for the appointmentof a receiverof the company'stolls and other money chargedby the mortgages(88. 53 and 54), but this remedywas little used.

50Gardnerv. London,Chathamand Doser Ry. (1867)2 Ch.App.201, 217.