law – the legal 500


Providing security could be about to change


The Secured Transactions Law Reform Project was established to consider the effectiveness of the law and how it can be improved. The Project has published discussion papers on certain aspects of security.


Potential changes to the law considered include replacing the distinction between fixed and floating charges, filing notice of security at Companies House before creation as well as determining priority by the date notice of security is filed at Companies House. Below we consider these aspects as they relate to security provided by companies.


The Project considered replacing the different types of consensual security interest with one concept. This would replace the distinction between fixed and floating charges.


Currently the distinction between fixed and floating charges can be significant. A floating charge is subordinated on insolvency to a certain extent. Preferential creditors and the expenses of an insolvency rank ahead of floating charge holders. Some of the proceeds from selling assets subject to a floating charge are allocated to unsecured creditors.


Whether a charge is fixed or floating depends upon the amount of operational control the security holder has over the


assets. Whether a security holder has sufficient control for a charge to be fixed can require complex analysis. The answer can be debateable and result in litigation.


The Project thought the distinction between fixed and floating charges, based on operational control, should be abolished, and that it could be replaced by a distinction based on the assets subject to the security.


The Project thought security over inventory, receivables and money could be subordinated, and that subordinated security could include other types of what are sometimes called “circulating assets”, such as raw materials and crops.


Replacing a distinction between types of charge based on operational control with those based on the assets would simplify the law. Advantages of simplifying the law include making it easier for overseas lenders to understand. This may increase funding from overseas, thereby stimulating the economy.


The Project also considered advance filings and priority. Currently the law provides for security registerable at Companies House to be registered after creation. If security required to be registered at Companies House is not registered within 21 days, beginning on the day after creation, it will be void against creditors, a liquidator and an administrator.


Provided security is registered within the 21-day period, priority is determined by the date of creation, not the date of registration. A lender funding and taking security on the same day, as often happens, risks its security ranking behind security created earlier which is subsequently registered within the 21-day period.


The Project suggested a scheme under which security could be registered before creation. The Project thought the default priority rule should be: the first to register has priority. This would enable a lender to advance funds without the risk of a prior created security interest being subsequently registered and having priority. A creditor could still register security after it is created. The 21-day period would be abolished.


The Project also suggested a scheme under which, if registration relates to security not yet created, the register would show this. The parties would decide how long the registration is to last. If security is created during this time the creditor would be obliged to update the register within a specified period. If updated within this period the date for determining priority would be that of the initial registration. If updated after this period the date for determining priority would be that of the update.


Rich Eldridge


John Chater


Note: Specialist advice should be obtained before taking, or refraining from taking, actions based on comments in this article which is only intended as a brief note. © Penningtons Manches LLP, 2017.


penningtons.co.uk


THE BUSINESS MAGAZINE – OCTOBER 2017


businessmag.co.uk


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