Issues in International Commercial Law

Iwan Davies

• Publisher: Routledge
• Year: 2019
• Print ISBN: 9780815389880
• eBook ISBN: 9781351155229
• Edition: 1
• Topic: Law
• Subtopic: Commercial Law
• Index: Law

Originally published in 2005. It is now possible to identify, within the discipline of law, a distinct body of international commercial law. This engaging book consists of a wide-ranging series of essays which demonstrates the breadth and scope of the subject matter of international commercial law. Many of the themes identified bridge both national and international commercial law. The volume consists of three parts: Credit and Security; Contractual Issues; International Commercial Regulation. It is evident that international commercial law is concerned with private and public law within which there are particular disciplines ranging from banking law, e-commerce, intellectual property, insolvency and increasingly international regulation through criminal law extending beyond frontiers.

PART I
CREDIT AND SECURITY ISSUES

Chapter 1

Quasi-security Interests: Functionalism and the Incidents of Security

Louise Gullifer

Introduction

In 2002 the Law Commission of England and Wales published a Consultation Paper which considered the reform of the law of the registration of personal property security interests.¹ Recently, it published a further Consultative Report² including Draft Regulations, which clarifies and expands many of the provisional recommendations in the Consultation Paper. This is not the first time such reform has been considered in this country,³ and the Consultation Paper and Consultative Report builds on the earlier work. There is, however, one important impetus to the current work which has never been realistic before: the system now under consideration would be completely online. Not only does this mean that there will be considerable savings in cost and improvements in efficiency were such a system to be adopted, but also that there is a considerable imperative towards at least some reform of the English system: it is surely totally unsatisfactory for a developed economy such as the UK not to have an online registration system. Given, therefore, that some reform is inevitable, the Law Commission have the task of determining the best possible system for England and Wales.

There is no shortage of comparisons. The law of personal property security has been comprehensively reformed in a large number of countries and states over the past 70 years, ranging from the introduction of Article 9 of the Uniform Commercial Code in the United States of America in 1952 to the reform of the law of security in the Slovak Republic which became effective on 1 January 2003.⁴ It is tempting to consider copying wholesale a system from a country similar in legal tradition to our own, such as the recently introduced and fully online personal property security regime in New Zealand.⁵ However, while the Law Commission are very sensibly considering adopting wholesale the computer system that seems to be working very well in New Zealand, they are consulting widely and with an open mind on the legal details of the system for England and Wales.⁶

In this chapter I wish to consider the most controversial part of the proposed reforms: the inclusion of quasi-security interests in the scheme, focussing particularly on whether they should be treated for all purposes as security interests. The options, I will argue, are reasonably open in relation to this area, and it is important to consider the whole spectrum of possibilities that are to be found exemplified in other legal systems. The policy considerations in the UK are not necessarily the same as those found in other common law countries, and it is important to consider the ramifications of adopting a particular system both in the light of our domestic concerns, and in the light of the UK’s position in the international trading community.

The Scheme in General

It is necessary to refer very briefly to the various components of the Law Commission’s scheme. First, it is proposed that there should be a registration system based on notice filing, so that only brief details of a security transaction need be filed: this can be done before the interest is created, so that notice of intention to create can be filed, and one filing will suffice for a series of transactions between the same parties. Secondly, priorities will be determined largely on the basis that the first to file wins, with some exceptions (notably a super-priority for purchase money security interests). Thirdly, the scheme may extend to quasi-security interests. Fourthly, there will be a restatement of the law relating to security interests: the incidents of security such as the mode of enforcement. Fifthly, the scheme is initially proposed to cover interests created by companies, but can be extended to cover interests created by non-corporate debtors. In this chapter, I will refer solely to interests created by companies, although much of the argument can also apply to non-corporate debtors.

Quasi-security Interests: The Problem

The orthodox definition of a security interest⁷ under English law has been that it is a grant of an interest less than absolute ownership by a person who already has or will obtain an interest⁸ in property. A security interest cannot be created by reservation.⁹ Thus transactions where a party giving credit (the ‘creditor’) seeks to protect itself by reservation of title are not classified as security and are not registrable under the current system.¹⁰ Further, even where an interest is granted by the debtor, this can either be a security interest or an absolute interest by way of sale.¹¹ The difference between these two has been the subject of a considerable body of case law and refinement,¹² with the English courts taking an approach that attempts to find the “substance of the transaction”, while allowing the parties to define that substance by reference to the form of the obligations between them, rather than the purpose of the transaction. Thus the indicia of a security interest are said¹³ to be the following:

• The ability of the debtor to redeem its interest in the property by repaying the debt;

• The obligation of the creditor to account to the debtor for any surplus value in the property over and above the outstanding amount of the debt;

• The survival of the obligation of the debtor to pay any outstanding amount over and above the value of the property, once the creditor had appropriated the property to the satisfaction of the debt.

Parties frequently enter into transactions involving reservation of title, or granting of an absolute interest, or a combination of both, in order to fulfil similar purposes to transactions involving the creation of security interests as defined above,¹⁴ that is, from the debtor’s point of view, the obtaining of credit or the raising of finance, and from the creditor’s point of view, protection against default and insolvency of the debtor. This similarity in function has led many to argue that all transactions with the purpose of security to be treated equally under a personal property security regime, and has led to the functionalist approach of UCC Article 9 and the Personal Property Security Act regimes in Canada and New Zealand (”PPSA regimes”).

Functionalism has had its critics¹⁵ and I will explore some of its drawbacks shortly. First, it is important to examine some of the arguments in favour of similar treatment of security interests and quasi-security interests. In doing so, it is necessary to touch on a related argument, which has inspired much of the Article 9 type thinking. This is that unreformed systems suffer from legal complexity even with regard to security interests in the strict sense, in that different rules apply to different types of interests in relation to perfection, priorities and the incidents of security. Thus a reformed scheme which only has one kind of security interest, with one set of applicable rules is very attractive.¹⁶ It is possible to react to this argument merely by unifying the rules applicable to security interests in the strict sense. In England this would have the effect of abolishing the distinction between a mortgage and a charge, so that the same registration and priority rules would apply to both, and that the method of enforcement would be the same.¹⁷ The registration requirements for possessory interests (pledge and lien) would be likely to be different, but they would also fall within the priority and enforcement rules. However, it would also be possible merely to specify the rules relating to perfection and priority, and leave the question of enforcement up to the specific provisions of the security agreement.

What arguments are made in favour of treating quasi-security interests in the same way as security interests?

1. The transactions have the same function and so should be treated alike.¹⁸ This is partly at least an extension of the simplification argument referred to earlier; rather than have a number of different rules applying to similar agreements and interests, there should be one set of universal rules. However, this begs the question of what interests and agreements are similar. It is no more logically necessary to draw the line at the difference between quasi-security interests and absolute transfers, than it is to draw it between security interests in the strict sense and quasi-security interests. The choice is a policy one, and as such needs to be justified on coherent policy grounds. Points 2 to 5 below examine arguments based on perceived similarities in various areas of personal property security law.

2. The transactions all share a common need for publicity. If is accepted that a public registration system is necessary,¹⁹ then arguably all non-possessory interests should be registered, since all carry the same danger of giving the impression of “false wealth”. This argument based on ostensible ownership, while popular among the supporters of Article 9 style regimes,²⁰ is not necessarily enough by itself to justify registration requirements.²¹ It has been criticised on the grounds that non-possessory security and title retention devices (including leases) are so common that possession is no longer indicative of ownership, nor is there any evidence that potential creditors are misled.²² Justification of a filing requirement for quasi-security interests needs to be on th...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Table of Contents
• List of Contributors
• Introduction
• Part I: Credit and Security Issues
• Part II: Contractual Issues
• Part III: International Regulation
• Index