The Reform of UK Personal Property Security Law

Comparative Perspectives

John de Lacy, John de Lacy

• Publisher: Routledge-Cavendish
• Year: 2009
• ISBN:
  9781135332723
• Edition: 1
• Topic: Law
• Subtopic: Law Theory & Practice
• Index: Law

There has been much discussion in the last ten years about the need to reform the law governing company charge registration, with many bodies including the Department of Trade and Industry and Law Commissions considering the case for reform of this area in the context of a wider scheme of personal property security reform. This has culminated in the coming into force of Part 25 of the Companies Act 2006, which is concerned with company charge registration.

This major book features the work of international experts on personal property security law. It focuses on the reform of UK company charge law and argues that the Companies Act 2006 did not go far enough in reforming the law. It addresses the question as to whether the UK should follow the lead of other jurisdictions that have adopted US Article 9 type personal property security schemes. As well as considering current UK law the book also addresses the changes proposed by the Law Commissions and, despite current government inaction, considers whether these reform proposals should be adopted.

The book contains major international comparisons and, in particular, looks at law reform in the USA, Canada, Australia, New Zealand, Singapore and Europe. This comparative treatment gives the reader a full perspective on this difficult and constantly developing area of law.

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The evolution and regulation of security interests over personal property in English law

John de Lacy

Introduction

The passage and coming into force of the company charge provisions of the Companies Act 2006,¹ has, for the time being at any rate, signalled the end of serious debate about the reform of English personal property security (PPS) law.² Given the amount of work that has gone into reforming this area, it is a modest statement to say that the ‘new’ company charge provisions are a disappointment. The topic of reform has been on the agenda since 1998 when the Company Law Review project started, but the reform issue has a much longer pedigree stretching back to the early 1970s.³ This chapter will charter the evolution of security interests under English law and the regulatory response to the growth and take-up of security which has fuelled the economy since the earliest days of the Industrial Revolution. Given the current economic crisis that started with excessive risk taking in the financial sector,⁴ which quickly spread to the general economy, it is opportune to consider the fundamentals of security and the risk management process that the taking of security implies.

The concept and meaning of ‘security interest’

Fundamental to the basis of this chapter is the notion of security and it is, therefore, appropriate at this stage to consider the basic concept of a security interest. The question of classifying the nature of a security interest has prompted much conflicting academic debate⁵ and it is safe to say that the security concept, in a definitional sense,

1 See generally Companies Act 2006, Part 25, ss. 860–877.

2 That is to say at governmental levels, at any rate.

3 See the Crowther Report (1971) Cmnd 4596, which is discussed in this volume, pp. 43–47.

4 The so-called ‘credit crisis’ which began in the USA in mid-2007 and quickly spread to the UK in September 2007 with the collapse of the Northern Rock Bank plc, which had to be nationalised by the UK government. By October 2008 the crisis had intensified in the UK and a wholesale ‘bail-out’ of the UK’s banking system was under way. In February 2009 the UK government admitted that the economy had entered into the worst recession since the 1930s.

5 The most notable examples of this debate are the articles by Allan and Goode entitled: ‘Security: some mysteries, myths and monstrosities’ (Allan) and ‘Security: a pragmatic conceptualist’s response’ (Goode), (1989) 15 Monash Law Review 337 and 361 respectively; see also: Goode Legal Problems of Credit and Security (3rd edn, 2003), pp. 1–38; Oditah Legal Aspects of Receivables Financing (1991), pp. 4–14; Gretton ‘The concept of security’, in Cusine (ed.), A Scots Conveyancing Miscellany (1987), pp. 126–51; Sykes The Law of Securities (5th edn, 1993), pp. 3–27.

remains one of the more elusive notions in legal science. On a general level there is no statutory concept⁶ of a security interest and one is forced to look to the common law to furnish an answer.

Under the broad rubric of security it is possible to find two main types of situation in which the term is used:

(a) consensual security which arises by way of contractual agreement; and⁷

(b) legal security which arises by operation of law.⁸

A further sub-division, applicable to both types of security, is also warranted in that both can be sub-divided into:

(a) real security; and

(b) quasi security.

The difference between these sub-classes is that in the case of real security we are concerned with the grant of an interest by way of security, whereas in the case of quasi security recourse is gained against some form of proprietary interest otherwise than by way of grant. This essay is primarily concerned with the regulation of consensual security interests and it is to them that we must now turn.

The consensual security interest

We must, therefore, now address our attention to consensual security interests. This heading has been subdivided into real security and quasi security to encompass two main threads of reasoning behind the main heading, although some commentators

6 A notable exception is provided by the Insolvency Act 1986, ss. 248(b)(i) and 425(4) which state that ‘security’ means ‘any mortgage, charge, lien or other security’. Section 93 of the Companies Act 1989 would have introduced a new s. 395(2) providing that a ‘charge’ means ‘any form of security interest (fixed or floating) over property, other than an interest arising by operation of law’ (author’s emphasis); this provision is discussed in this chapter, p. 29.

7 It should be noted that the concept of personal security also falls under this heading. This arises where a third party undertakes to the creditor that he will assume some form of responsibility should the debtor default in the performance of his obligation. This type of security interest does not involve any form of proprietary rights and it will not be dealt with in this chapter. As this type of security is personal in nature its efficiency is dependent on the continued solvency of the third-party guarantor, which makes proprietary security so much more valuable in practice. However, there is no reason why a creditor cannot make use of both personal and proprietary security; see China & South Sea Bank Ltd v. Tan [1990] 1 AC 536. Sykes has doubted the legitimacy of the label personal security because it does not involve the exercise of any proprietary rights: ‘The transaction [i.e. personal security] merely super-adds one personal obligation to another and the personal obligation of the guarantor in itself is merely enforceable by action of debt in the same manner as the obligation of the original debtor himself … It is thought, therefore, that the so-called personal security is not security at all, that is to say, all securities are “real”’ (op. cit., Sykes, fn 5, p. 11).

8 There are numerous specified situations where both statute and common law recognise security in favour of a debtor generally by imposition of a lien over property until a debt is paid. The policy behind such security is to protect a potentially vulnerable creditor who might not be in a position to contract for such protection. It is for this reason that most registration systems contain an express exemption from the registration requirement in favour of security rights arising by operation of law.

would deny that there is any division at all.⁹ To a layperson the concept of possessing a right of security might be described (if one will forgive the tautology) ‘as the condition of being secure’.¹⁰ Given such a definition, one would simply look at a commercial transaction and see if the lender was ‘secure’ in the event of the debtor’s failure to repay a debt or perform some other type of obligation, in order to determine whether a security interest could be said to exist. The condition of being ‘secure’ under such a test would probably remain a subjective assessment, although in practice it would mean no more than that the debtor had some additional means of recovering the debtor’s deficiency, from whatever source.

From a legalistic approach, the question of defining a consensual security interest is more problematic. Although the lay definition given above is general enough to cover a real security interest, the legal definition is far more circumspect. It may be described as follows: a real security interest arises by agreement of the contracting parties and involves the grant of an interest over the property of the debtor (i.e. the person who owes the obligation) in order to secure the performance of the primary duty or obligation the debtor is under.¹¹ For these purposes a declaration of trust by a debtor that he holds property as a trustee in order to secure his performance of a duty or obligation towards the creditor/beneficiary also creates a security interest. The existence of a real security postulates at least a two-party consensual agreement to such effect, since a person cannot have a charge over his own property because

9 See: Allan, op. cit., fn 5; Oditah, op. cit., fn 5. Although Oditah (p. 11) does use the term quasi-security, he uses it as a residual class covering types of arrangements outside his own definition (p. 8) and not to cover arrangements such as retention of title, which, it will be argued, are not forms of real security interest known to law. See generally pp. 28–37.

10 See OED (2nd edn, 1989), vol. 14, p. 853, point 1. However, ‘security’ is also defined in more legalistic terms as: ‘Property deposited or made over, or bonds, recognizances, or the like entered into, by or on behalf of a person in order to secure his fulfilment of an obligation, and forfeitable in the event of non-fulfilment’ (Ibid., p. 854, point 8). See also Re Marwalt plc [1992] BCC 32,42H–43A, per Judge Paul Baker, QC (use of the word ‘security’ is a ‘wide expression’ which did not, on the facts of the case, cover a registrable charge interest).

11 In many cases this will simply involve the repayment of money, but security can be taken to ensure the perf...