Part 3	
The Core scheme for company security 
Introduction
3.1	In this Part we set out in detail the scheme that we now recommend for the registration of company charges and the priority of company charges and pledges. We refer to it as the ‘core’ scheme to distinguish it from the provisions on sales of receivables that we recommend in Part 4 and the special provisions for charges over financial collateral, which are explained in Part 5. The draft regulations implementing our recommendations are in Appendix A, together with explanatory notes.
3.2	This Part is divided into eight sections. We start by looking at (1) terminology, (2) the scope of the scheme and (3) the requirement to register. This is followed by (4) the details of filing and searching and (5) priority rules. The section on priority rules includes an explanation of our recommendation to retain the distinction between fixed and floating charges, at least for the time being. We then consider (6) territorial application and (7) transitional provisions. We conclude (8) by explaining why we are not recommending the adoption of a proposal that all charges (other than charges over financial collateral) should have to be evidenced in writing signed by the debtor. 
Terminology and concepts
3.3	In drafting the regulations contained in Appendix A of this report we have tried to use terminology and concepts that are familiar. Thus the regulations refer to charges and pledges, and to the chargee or the pledgee, rather than to the terms ‘security interests’ and ‘secured party’ used in the draft regulations in the CR.
3.4	We have retained some terminology that was used in the earlier draft regulations where it is convenient and is already used widely. For example, we use ‘collateral’ to describe the property that is subject to a charge or pledge. The word is already widely used in the context of ‘financial collateral’ and it is a convenient way to refer to the relevant property. The draft regulations refer to the company that creates the charge or pledge as the ‘debtor’. 
3.5	There are a few terms that are wholly new. The most obvious examples occur in relation to the new procedures for registration, where the draft regulations refer to ‘filing’ a ‘financing statement’ or an ‘additional statement’. In respect of the core scheme however, the number of new terms is small. Most of the less familiar terms used in the regulations relate to financial collateral.
3.6	The draft regulations in the CR used concepts such as ‘attachment’ and ‘perfection’ that were defined in a way that applied to all ‘security interests’. As we explained in the CP, some writers already use these concepts to explain English law; but it became clear from the responses that the concepts are unfamiliar to many consultees and were not always understood. Definitions would be essential. With the simplified scheme that we now recommend we have found it unnecessary to employ ‘attachment’. ‘Perfection’ is used only occasionally, when it is desirable to have a single word to refer to any steps necessary to render a type of security effective in the debtor’s insolvency.
3.7	Because the new draft regulations refer simply to existing types of security – charges (including mortgages) and pledges – those forms of security are not defined. The core scheme deals only with the steps necessary (if any) to render them effective in the debtor’s insolvency and with their priority.
Scope
Companies and LLPs
3.8	Like Part XII of Companies Act 1985, the scheme we recommend applies to charges created by companies registered in England and Wales and by Limited Liability Partnerships. (We deal with oversea companies and companies registered in Scotland below.) 
3.9	When we discussed this aspect of the scheme in the CR, some consultees were uncertain what it meant. They asked, for example, whether the scheme would apply if one party to a security agreement were a company but not another; or if a charge were given to secure a third party’s obligation and the third party were not a company. It is important to set out the position as clearly as possible. 
3.10	The scheme applies to charges created by a company over its property. If a company charges its property, the charge must be registered if it is to be effective in the event of the company’s insolvency. It does not matter whether the chargee is a company or not. Equally it is immaterial whether the charge secures the company’s own obligations or those of a third party, and whether the third party is a company. Conversely, a charge given by an individual or unincorporated business to secure the debt of a company is not affected by the scheme proposed in this report. 
3.11	The scheme deals more fully with questions of priority than does Part XII of the Companies Act 1985. Part XII merely renders a charge that is not ‘registered’ within the permitted period void against other creditors; and it does not deal with purchasers other than creditors. However, the rule that a charge that is not registered in time is void against other creditors applies whoever the other creditor is. The same is true of the rules of our scheme governing the priority of a charge or pledge as against other charges or pledges. Equally the rules of our scheme that govern the effect of a charge as against a buyer apply whether or not the buyer is a company. 
3.12	We recommend that the scheme should apply to security created by companies registered in England and Wales and by Limited Liability Partnerships.
Types of security subject to the scheme
3.13	The ‘core’ scheme applies only to traditional types of security: mortgages, charges, and (to a limited extent) pledges and liens. Pledges are within the scheme only to the extent that (1) in some cases in which the debtor has factual possession of the collateral they are treated as if they were charges and (2) the scheme governs the relative priority of pledges and other competing interests over the same collateral.  Liens are within it for the purposes of priority only.
Mortgages and charges
3.14	Mortgages and charges will have to be registered to be effective in the company’s insolvency, subject to various exemptions. These are considered below. 
3.15	In both the CP and CR we proposed that the current list of registrable charges should be replaced by a requirement to register any charge that is not specifically exempted. This was supported by a large majority of consultees.
3.16	We recommend that any charge created by a company should be registrable unless specifically exempted. 
Pledges
3.17	Pledges in general will not be subject to a registration requirement. A few respondents to the CP suggested that pledges should also be registrable, on the ground that lenders would not always check that a company had physical possession of the property. However, it is widely accepted that a creditor who has taken possession of the collateral should not have to register. 
3.18	The draft regulations in the CR, like Article 9 of the UCC and the PPSAs, set out a complete scheme to cover all transactions that have a security purpose. It did not refer separately to pledges. Instead it provided that security interests over those types of collateral that can be pledged (‘goods, instruments, negotiable documents of title and money’) could be perfected by possession of the collateral by the secured party or its agent. A separate regulation dealt with perfection of security interest over goods in the possession of a bailee. With the simplified scheme we are recommending we do not see the need for provisions on ‘perfection’ of what are simply pledges. Subject to the exceptions mentioned below, under current law a pledge is valid, and thus effective in the debtor’s insolvency, only if the goods are in the possession of the creditor. The possession may be actual or constructive, as where a third party bailee has attorned to the creditor. 
3.19	Under current law, there are two cases where there may be a pledge although the goods or other collateral are in the possession of the debtor. These are (1) where the debtor has attorned to the creditor and (2) where the pledgee has released the goods to the debtor under a trust receipt or similar arrangement.
Attornment by the debtor
3.20	There is authority to the effect that a pledge may be created over goods that are in the possession of the debtor, if the debtor has attorned to the creditor by, for example, undertaking to the creditor to hold the goods to its order. In the CP we pointed out that, currently, an attornment by the debtor (if in writing) would require registration as a bill of sale or under the Companies Act 1985, section 396(1)(c). We said that such attornments should continue to be registrable under a notice-filing system. There was broad agreement with this, and with the provision in the draft regulations in the CR to the effect that a secured party would not have possession of collateral if it was in the possession of the debtor or the debtor’s agent. Under our revised scheme, it should be necessary to register a pledge which arises only because the debtor or the debtor’s agent has attorned to the creditor as if it were a charge.
3.21	We recommend that a pledge under which the debtor has possession of collateral and attorns to the pledgee should have to be registered as if it were a charge.
Trust receipts
3.22	Trust receipts are arrangements under which a pledgee allows the pledgor to have the goods or documents of title for a limited purpose, such as for sale. The pledgor acts as the pledgee’s agent in selling the goods and it holds the goods and any proceeds of sale on trust for the pledgee. Under current law they are regarded as a method of securing the continuance of the pledge rather than as an independent security device, and they are not registrable as company charges. The arrangement will normally be of short duration and if so it does not seem to pose a great threat to third parties. It is unlikely to mislead other creditors into thinking the debtor owns the assets concerned outright. Nor is it likely to damage purchasers, as normally the debtor has authority to sell the goods or documents so that a purchaser will take free of the pledge. 
3.23	However, other creditors might be misled were the arrangement to continue, as it constitutes a form of non-possessory security; and if the debtor were not given authority to sell, but (for example) only to re-package the goods, innocent third party buyers might also suffer. Therefore in the CP and CR we proposed that the pledge should remain perfected only if the debtor has possession of the goods or documents for less than 15 days. This should apply not only when the goods are handed over to the pledgee to sell but also when they are handed over for the purpose of such things as processing with a view to sale or trans-shipping. A buyer who did not know of the security interest should take free of it. 
3.24	Most consultees who responded on this point agreed that there should be a provision making this kind of arrangement registrable, and that an innocent buyer should be protected. There was disagreement, however, over the period after which registration should be required. Some wanted the security to be registrable immediately, others after only a much longer period such as 90 days. Even though it would only be necessary for a pledgee to file one financing statement for each debtor, we think that it would be unnecessarily burdensome to make registration necessary immediately, because (as we explained above) we do not think the immediate risk to third parties is great. However we think that there might be a risk long before 90 days had passed. We think our original proposal (which is closely modelled on the PPSAs) strikes a sensible balance.
3.25	We recommend that if negotiable instruments or documents of title have been pledged, or goods are held by a third party bailee to the order of a pledgee, and the collateral is released into the possession of the debtor for limited purposes such as sale, the pledge (and the pledgee’s interest in the proceeds) should be treated as a charge over the goods and their proceeds. The charge must be registered within 15 days unless the collateral is returned to the creditor’s possession before that time. A buyer who does not know of the pledge will take free of it.
Liens that arise by operation of law
3.26	In some cases a lien will arise by operation of law, that is, without an agreement between the parties. An example is a repairer’s lien. These do not fall within Part XII of Companies Act 1985. We see no need to require their registration. However the scheme deals with their priority as against other charges.
3.27	We recommend that liens that arise by operation of law should be subject to the scheme only for the purposes of priority. 
Contractual liens
3.28	Generally a lien over goods that arises by operation of law typically allows the lienee to retain the goods only until payment of charges for work done on the goods and not until other sums owed by their owner have been paid. Any right to retain the goods against payment of other sums must be agreed. A contractual lien is also a form of security: for instance, the goods must be released once the sums covered by the lien are paid. It differs from a pledge in that (1) the possession of the goods was not given with the (primary) purpose of securing payment and (2) the lienee has no power of sale. Contractual liens should therefore be included within our scheme but, as the only question will be as to their priority as against other interests, they can be treated like pledges.
3.29	We recommend that for the purpose of the scheme, pledges should include contractual liens. 
The property subject to the scheme
Personal property and land
3.30	The scheme we now recommend will apply to charges over both personal property and land, as does Part XII of the Companies Act 1985. However, charges over land will have to be registered on the Companies Security Register only if they are not registered, or the subject of a notice, on the Land Register. 
3.31	The scheme we provisionally recommended in the CR applied only to personal property. We recommended that charges over land should be exempt from the scheme, principally to avoid the need for dual registration. To meet the concern to have information about company charges available from a single source, the CR recommended that the Land Registry should forward information about registered charges to Companies House for information purposes only (that is, this would not affect validity or priority).
3.32	There was a general welcome for making it unnecessary to register at Companies House before a proper entry can be made in the Land Register, provided that there is no reduction in the information about charges available from the register at Companies House. Most consultees accept that forwarding of information will resolve this issue. The Land Registry also welcomed the CR proposals in general. However, unlike the proposals in the CR, our final recommendations do not exclude all interests in land. This is principally because our assumptions about the number of charges over registered land that would not be registered at the Land Registry once electronic conveyancing is introduced have turned out to be incorrect. We have also changed our view on charges over unregistered land.
Fixed charges over Registered land
3.33	We had assumed that with the advent of e-conveyancing almost all charges over registered land, including equitable charges, would have to be notified to the Land Registry by means of a document in electronic form. This would end the current practice of taking informal equitable mortgages or charges over a company’s land without notifying the Land Registry, and relying simply on registration at Companies House. Although we knew that some other mortgages and charges over land would not be notified to the Land Registry, we doubted whether there would be enough of them to worry about. We have now learned that the Land Registry has not yet decided how to deal with equitable mortgages and charges over registered land when e-conveyancing is introduced. It is possible that these will not need to be notified in order for them to valid as between the parties. If so, there may be a significant number of mortgages and charges over land that would not be notified to the Land Registry and that would be invisible to third parties if they did not have to be registered at Companies House. We therefore now consider that only mortgages and charges over registered land that are registered or made the subject of a notice on the Land Register should be exempt from registration on the Company Security Register. Information about such charges should be forwarded to the Company Security Register for information purposes only. Other fixed charges over registered land should be registered on the Company Security Register in the same way as charges over assets in general.
Floating charges over registered land
3.34	In practice, an equitable charge can be protected by registration under the Land Registration Act 2002 only in relation to land already owned by the company or land it has already contracted to buy. The Land Registry reports that it receives relatively few applications to note floating charges. We suspect that nearly all floating charges over the company’s land will be accompanied by a fixed charge and that in practice floating charges over land will have little practical importance. However, we think that if the scheme for registration of company charges is to apply to some charges over land in any event, then floating charges should remain registrable on the Company Security Register.
Charges over unregistered land
3.35	Our recommendation that charges registered on the Land Register should be exempt from registration on the Company Security Register depends on information about them being forwarded so as to be available for searchers. The Land Registry tell us that this would also be technically possible with charges registered on the Land Charges Register and would provide an acceptable solution. However, given the small numbers involved, they question whether it would be worthwhile. We agree. We recommend that charges over unregistered land should be registrable on the Company Security Register whether or not they are registered on the Land Charges Register.
3.36	In practice lenders taking a legal charge over unregistered land may find it not worth filing a financing statement. A legal mortgage is an event that triggers registration of the title to the land. Where first registration is compulsory, application for registration must be made within two months of the date of completion of the transaction concerned (although this period can be extended for good reason). Thus within two months the charge will be registered on the Land Register and exempt from registration under our scheme. 
3.37	The priority rules under the companies scheme will be modified to preserve the priority rules applying to land. These issues are considered in more detail below. 
3.38	We recommend that: 
(1)	Fixed charges over registered land should not have to be registered on the Company Security Register if they are registered or made the subject of a notice on the Land Register. 
(2)	Information about charges registered at the Land Registry should be forwarded to the Company Security Register and made available with other information about company charges. 
(3)	Charges over unregistered land, and any floating charge affecting land, should be registrable on the Company Security Register whether or not they are registered on the Land Charges Register.
Personal property for which there is a specialist mortgage register
3.39	In the CR we proposed to exclude from the scheme all charges over personal property such as registered aircraft, registered ships and the forms of intellectual property for which there is a specialist mortgage register. The principal aim was to avoid the need for dual registration. There was serious concern at this. It was said that it would result in a significant reduction in the information available to those dealing with a company, as (1) charges over the assets concerned would not always be registered on the specialist register and (2) it is not always possible to search the relevant register by name of the company that owns the asset. Moreover it would become necessary to search the specialist register as well as the company charges register, which would add to the cost and trouble of searching. Put simply, it is convenient to have all information about a company’s charges in one place. 
3.40	The general opinion appears to be that the cost of double registration is worthwhile for the information and general peace of mind that it would bring. Therefore we now recommend that charges over personal property for which there is a specialist mortgage register (registered aircraft, registered ships and certain types of intellectual property) should be included in the scheme. Charges over these assets will thus be registrable in the normal way. Below we recommend provisions to preserve the effect of any statutory provisions on the priority of such charges.
3.41	We recommend that charges over registered ships and aircraft, and over the forms of intellectual property for which there is a specialist mortgage register, should be registrable on the Company Security Register whether or not the charge is registered on the specialist register.
Charges over property outside England and Wales
3.42	We consider how the scheme should apply to charges over property outside England and Wales in a separate section on territorial issues.
Charges excluded from the scheme: Lloyd’s trust deeds
3.43	In the CR we provisionally recommended that certain transactions should be partially or wholly exempt from the scheme. We have already considered charges over land and other charges registered in a specialist register. In the light of our revised recommendations for the scheme as a whole, only one other exemption remains relevant to the core scheme being considered in this Part. This is for charges that arise under certain types of trusts that must be established by corporate members of Lloyd’s. In the CP we explained that a corporate member of Lloyd’s is obliged to enter into several categories of trust deed to ensure that funds are available to pay policy-holders. These are currently registrable as charges. Some categories, particularly the trust deeds that some overseas regulators require each syndicate to enter, generate very large numbers of registrations. However most of the registrations serve little useful purpose, since persons dealing with corporate members of Lloyd’s (who are not permitted to undertake any other business) will know the nature of the arrangements. We therefore suggested that it is unnecessary for the charge constituted by these trusts to be registrable. This was supported Lloyd’s and by consultees generally.
3.44	Under the regulations, the ‘Lloyd’s Deposit Trust Deed’ or ‘Lloyd’s Security and Trust Deed’ created by each corporate member will continue to be registrable. This will serve as a warning to all concerned that the company is a corporate member of Lloyd’s and will probably have entered other trust deeds. Other trust deeds will cease to registrable. Charges other than trust deeds created by corporate members will need to be registered in the normal way.
3.45	We recommend that Lloyd’s trust deeds other than a Lloyd’s Deposit Trust Deed or a Lloyd’s Security and Trust Deed should be exempt from the scheme. 
Charges that will not require registration
Supporting obligations
3.46	It appears to be the current law that if a right to payment is guaranteed or supported by an indemnity or letter of credit, and the right is assigned, the assignee is entitled (unless the parties agree otherwise) to the benefit of the guarantee or indemnity, or to the proceeds of the letter of credit, without showing a separate assignment of the ‘supporting obligation’. In the CR we proposed that these supporting obligations would not need to be registered separately. Instead, where the main charge is registered, the charge over the supporting obligation would also be treated as registered. It would be granted the same priority as the main charge. This was supported by consultees. 
3.47	We no longer think it is necessary to make provision as to when a charge arises over a supporting obligation. However we think that the charge should not have to be registered separately from that over the principal obligation. 
3.48	We recommend that special provisions should apply where a charge is taken over a receivable, a document of title, a negotiable instrument or investment property and the charge covers a right to the proceeds of a letter of credit or a guarantee or indemnity which supports the principal obligation. If the charge over the principal obligation has been registered, the charge over the ‘supporting obligation’ should not have to be registered.
Rights to the proceeds of collateral
Current law
Unauthorised dispositions when buyer takes subject to the charge
3.49	If the company sells property that is subject to a charge, and the sale is not authorised by the chargee, the buyer will take subject to the charge unless it protected by one of the exceptions to the principle that a person cannot transfer a better title than he has. The chargee’s rights are not affected and it can enforce its rights against the buyer.
3.50	In addition, if the debtor purported to sell outright, so that it purports to sell the chargee’s asset, the chargee may claim the proceeds of sale. However, the chargee may not be able to claim both the original property and the proceeds. The chargee may of course claim both if the charge covers the type of asset that comprise the proceeds as original collateral. Thus a fixed charge over the debtor’s equipment and its book debts will obviously apply first to goods and then, when they are sold, to the book debts generated by the sale. However, if the charge does not cover the proceeds as a distinct category of asset, the chargee must opt between claiming the original asset and adopting the sale and claiming the proceeds. 
Authorised dispositions 
3.51	If the sale was authorised, either because the charge was an uncrystallised floating charge or because the chargee had consented to the particular disposition, the chargee’s only claim will be to the proceeds. 
3.52	Again there is no difficulty if the charge covers the type of asset that comprise the proceeds as original collateral. In other cases it has been said that the security interest will ‘extend to proceeds of an authorised disposition where it is effected on behalf of the creditor rather than for the debtor’s own account’. We think that the general principle is that the security interest will extend to the proceeds unless it is expressly or impliedly agreed that the debtor is free to use the proceeds for its own purposes. Thus if the charge were merely a floating charge over the debtor’s stock in trade and nothing else, the court would infer that the charge did not cover the proceeds.
Other cases where the original collateral is lost to the chargee
3.53	It appears that the chargee is also entitled to compensation paid on compulsory purchase and to insurance payments, provided that the insurance was not merely on the debtor’s own interest in the property.
Fruits and income
3.54	It seems that while the debtor is in lawful possession of the property charged, it is entitled to the fruits derived from the property, such as the progeny of livestock. With investment securities we understand market usage to be that the dividend income and other distributions should be for the debtor. Where the property is under the chargee’s control there will often be contractual provisions to achieve this result. 
A new charge?
3.55	A tricky issue is whether any right to proceeds constitutes a new charge which arises when the property is sold or is a continuation of the existing charge. This would have implications for priority and possibly registration (if the description does not cover proceeds). We think Goode is correct to say that ‘there are compelling reasons for treating the security interest as an indivisible and continuous security interest which moves from the original asset to the proceeds’. In other words, under current law there is no need for a separate registration of rights over the proceeds, except when these arise only because the charge covers them expressly. 
Proceeds under the new scheme
3.56	The draft regulations in the CR gave the secured party an automatic right to proceeds. We think that under the reduced scheme we are now recommending, an automatic right to proceeds is not required. In most cases in which the debtor disposes of collateral subject to a charge and the transferee takes free, current law will in fact reach the same result. This may be because the charge is a floating charge over a wide range of collateral and the proceeds will be within its terms. With a fixed charge it may happen because, when the charge-holder consented to the disposition, it was implied that the debtor was not acting on his own account but on the account of the chargee. The debtor will hold the proceeds for the chargee. We see no need to provide for an express right to the proceeds of an authorised disposition or one under which the buyer takes free for other reasons. 
3.57	The CR scheme, like the UCC and PPSAs, contained an elaborate provision on when it would be necessary to file in order to perfect an interest over proceeds. If rights to proceeds are to be limited to rights that arise under the existing law, we think it is necessary merely to ensure that a charge that is properly registered in respect of the original collateral is treated as registered also in respect of any proceeds to which the chargee is entitled. It should only be necessary to register a financing statement covering the proceeds when the chargee is entitled to them solely because they are a form of collateral that falls within the terms of the original charge.
3.58	We recommend that where a charge is duly registered in respect of the original collateral, any right to the proceeds of the collateral arising other than only as a result of the terms of a floating charge should also be treated as registered. 
Property acquired subject to a charge
3.59	Where a company acquires property that is subject to a registrable charge, section 400 of the Companies Act 1985 requires the company to have the prescribed particulars of the charge delivered to the Registrar of Companies for registration within 21 days of acquisition. The particulars must be accompanied by a copy of any instrument by which the charge was created or is evidenced, certified in the prescribed manner to be a correct copy. The consequences of failing to register are different from when the company created the charge. The company and every officer of it who is in default is liable to a fine and, for continued contravention, to a daily default fine; but the charge is not void against a liquidator or administrator, nor against creditors of the company.
3.60	In the CR we provisionally recommended that where collateral is disposed of by the debtor subject to the charge, the security interest should continue in the collateral. In other words, if the chargee had registered its charge before the transfer, it would not be necessary to file a financing statement against the transferee. There would be no equivalent of section 400.
3.61	Consultees generally agreed. However one raised the question of property that a company acquires from an individual or unincorporated body, subject to a charge, for example, where a business incorporates and assets that are subject to a charge are transferred from the old unincorporated business to the new company. We have considered the question and think that in this case it is also unnecessary to require the chargee to register. In practice the issue will arise very rarely. 
3.62	The most common situation will be where land is sold by the old business to the company. Assuming that the existing charge was registered in the Land Charges Register or the Land Register, or was protected by the deposit of title deeds, the transfer of ownership cannot be made without the agreement of the chargee, who would take a new charge against the new company and then register. With other assets for which there is a specialist register the same will normally be true. It is conceivable that goods that are subject to a registered bill of sale might be transferred to the new company. However, there are so few such charges that they do not merit special provision. The position will remain as at present: the charge will be valid but will not appear on the Company Security Register. 
3.63	We recommend that where a company acquires property from another company subject to a registered charge, or acquires property from an individual or unincorporated business subject to a valid charge, the charge should be effective in the insolvency of the acquiring company although no financing statement has been filed against that company.
Other situations in which no filing will be required
3.64	It is convenient to deal here with two other cases in which a chargee will not have to make a fresh filing.
Changes in the company name
3.65	The first is when a company changes its name. There should be no need to file a fresh financing statement in this case. For companies registered in Great Britain it should be possible for the registry to transfer the financing statements into the name of the new company. They can also ensure that anyone searching the register under the name of the old company will be warned of the change of name. With oversea companies that have not registered a place of business in Great Britain, that will presumably not be possible unless Companies House has been notified voluntarily of the change of name. However, we think it should be adequate if there is a warning that those searching against an oversea company should find out whether the company has changed its name. They should then search against all the relevant names. 
3.66	We recommend that there should be no need to file a fresh financing statement when a company changes its name. 
Transfers by the chargee
3.67	The second is when a security is assigned by the chargee to a new chargee. Provided the security is a charge that has been registered, no new filing will be required. However the new chargee may wish to change the register to reflect its interest. This will mean that any notices about the charge (for example, if the debtor claims that the financing statement should be discharged because all the obligations under the charge have been satisfied) will be sent to the new chargee. It should be possible to achieve this by filing an ‘additional statement’.
3.68	We recommend that it should be possible to alter the financing statement to record the transfer of a charge from one party to another, but this should not be required in order to preserve the effectiveness of the charge.
The requirement to Register
Electronic on-line filing
3.69	In both the CP and CR we proposed that the current system by which particulars of a charge and the charge document must be sent to the Registrar of Companies for registration should be replaced by a scheme of electronic ‘filing’ on-line.
3.70	As we reported above, there was overwhelming support for allowing the submission of documents to Companies House in electronic form. Although we have not thought it appropriate to include in the draft regulations requirements that the register and the communications referred to (such as the financing statement) be wholly electronic, that is our firm recommendation. 
3.71	We recommend that there should be a Company Security Register in electronic form and that the Registrar should make rules requiring information for registration to be submitted in an electronic form.
Responsibility for registering
3.72	Under current law it is the company that is responsible for sending the particulars for registration, default being punishable by a fine. In practice it is often the chargee who sends the documents, since it is the chargee whose interests are mainly at stake. In both the CP and CR we proposed that the obligation be removed from the company. Only one consultee disagreed. 
3.73	We recommend that the duty on the company to send particulars of charges for registration be removed.
The charge document and the certificate of registration
3.74	We also proposed in the CP and CR that to register a charge, it should be necessary only to file particulars of the charge in a simple, electronic ‘financing statement’. It should no longer be necessary to send the original charge document. The Registrar of Companies would no longer be responsible for checking the particulars that have been filed and would not issue a conclusive certificate of registration. The charge would be validly registered in respect of property listed in the particulars, but not in respect of any that was omitted. 
3.75	A number of consultees were reluctant to see the abolition of the conclusive certificate of registration. There is no doubt that the certificate is convenient to lenders and their advisors because it means that the charge will be effective and enforceable according to the terms of the charge document even if the registered particulars are not correct. However, as we explained in Part 2, even most of those who expressed reluctance accepted that it is no longer justifiable for the Registrar of Companies to be responsible for checking the particulars of charges and issuing a certificate of registration. It requires a large staff who are, in effect, needed only to check against errors by the chargee or its advisers. Provided that it is made easy for the chargee to provide a correct description of the collateral, the responsibility for registering correctly should lie on the chargee. Below we explain our recommendations on the collateral description required for the financing statement. We believe these should make it easy to prevent errors.
3.76	We recommend that the charge document should no longer be presented for registration, and that the Registrar should no longer check the accuracy of the particulars or issue a conclusive certificate of registration.
The sanction for failing to register
3.77	Our provisional proposal in the CP was that there should be no criminal sanction on any party for failing to file. The decision whether to file would be a commercial one for the secured party. Consultees agreed almost unanimously. Most agreed also that the consequences of failure to file (or perfect in some other way, for example by taking possession of the collateral) should be that the charge would be ineffective against an administrator or liquidator and as against execution creditors, and should be vulnerable to loss of priority against a subsequent secured creditor who files first. 
3.78	We recommend that it should not be compulsory to register a charge but that an unregistered charge should be:
(1)	at risk of losing priority to one that is registered first; and 
(2)	ineffective against a liquidator or administrator on insolvency, and against execution creditors.
Removal of the time-limit for registration and last-minute filing
3.79	Current law requires that particulars of the charge be sent for registration within 21 days of the creation of the charge. Late registration may be made, or an omission or misstatement rectified, with the court’s permission. Its order may be on such terms and conditions as seem to the court just and expedient. A normal condition is that registration is without prejudice to the rights of parties acquired during the period between the date of creation and the date of its actual registration.
Removal of the time-limit
3.80	In the CP and CR we proposed that there should be no time-limit for filing, though there should be amendments to the Insolvency Act 1986 to prevent ‘last-minute filing’ of floating charges in the run-up to insolvency. This was supported by a majority of respondents to the CP. Among those who responded to the CR, removal of the time-limit was supported by some and not by others. The objection given was that if registration can be made at any time, the register would be less reliable as a source of information. We think this argument is misconceived. With ‘priority by date of filing’, other secured parties need not worry about unregistered charges. The same is true of buyers. Unsecured creditors could be affected by unregistered charges but under current law they are vulnerable to charges created at any time (except to floating charges created during the run-up to insolvency, which would remain the case). Moreover, when the court permits late registration, there is no method of protecting unsecured creditors. 
3.81	The time-limit causes practical problems. Each year, Companies House rejects around 3,000 applications because they are submitted late. Usually, the debtor is asked to re-execute the documents, at some inconvenience. We do not think the arguments for retaining the time-limit outweigh this cost. 
3.82	We recommend that the time-limit for registration be removed. 
‘Last-minute filing’
3.83	Insolvency Act 1986, section 245 provides for the partial or entire avoidance of floating charges given in various situations. These include where the charge was given within the last two years to a ‘connected person’, or where the charge was given to anyone else within the last 12 months before insolvency, unless new value was given or the company was solvent at the time. In the CR we provisionally proposed that section 245 should be amended to apply to any security interest in favour of the persons mentioned in that section that is filed within the times stated before the onset of insolvency, save when new value is given or the company is not insolvent at the time, as provided in section 245(3) and (4). 
3.84	There was general acceptance that such a change would be needed. In the light of our recommendation that the distinction between fixed and floating charges should be retained at least for the time being, we see no reason to extend the scope of section 245 beyond floating charges. It will still need to be modified, however, to catch floating charges that may have been created earlier but that were only filed in the run-up to insolvency. 
3.85	We recommend that section 245 of the Insolvency Act 1986 be amended to apply to any floating charge in favour of the persons mentioned in that section that is created or filed within the times stated before the onset of insolvency, save when new value is given or the company is not insolvent at the time, as provided in section 245(3) and (4).
Advance filing or priority filing 
3.86	The scheme proposed in the CP and CR would allow filing in advance of the creation of the charge. At present, it may only be registered after it has been created. Allowing filing in advance enables a party negotiating a charge to safeguard its position; and also to make a single filing for a number of charges between the same parties. 
3.87	Some consultees explicitly supported this. Others would prefer that only actual charges should be registered, to prevent the register from being cluttered with filings that do not represent actual charges. A third group would prefer the compromise of a ‘priority notice’ scheme, as is available in some other registers. Here, notice would give priority to a charge created within, say, the next 21 days; if not taken up, the notice would expire automatically after that period. 
3.88	We think that the system should permit at least the filing of priority notices. However we recommend advance filing. In Part 4 we recommend that outright sales of receivables be brought into the registration scheme. If filing had to be made separately for each sale, there would be difficulties. Receivables financing is often on a ‘facilitative’ basis: that is, the agreement is that the company may be entitled to decide which receivables to offer to a factor, and the factor may be entitled to decide which to accept. There is no sale or agreement to sell until a particular batch has been offered and accepted. It would be inconvenient were it not possible to register in advance of the sale and to cover all the sales that might be made under the agreement. 
3.89	The chief reasons against advance filing were fears that the register would become cluttered with unwanted filings that did not represent actual charges, and that ‘false’ filings might be made deliberately as a way of injuring the reputation of a company against which the filing was made. Neither argument can be dismissed out of hand. However, clutter has not proved to be a problem in other jurisdictions. There have been some instances of ‘malicious filing’ in the United States, though those of which we have heard seem to have been against individuals.
3.90	If there is a charge agreement, the chargee should be entitled to file. Otherwise we think that no financing statement should be made without the debtor’s consent. The difficulty lies in enforcing this provision. It is not feasible to require the party filing to prove that the debtor has consented, since this would require (at a minimum) that the debtor authenticate a form of consent and that the Registrar somehow check the validity of the authentication. However, we think that it would be adequate to provide three safeguards. First, the party filing should be required to certify, by means of a check-box on the electronic financing statement, that the financing statement is in respect of an existing security agreement or the debtor has agreed to the filing in advance. This will act as a reminder. Secondly, a party who files when there is no charge agreement and the debtor has not consented to the filing should to be liable to the debtor for any loss caused, unless the party filing had a reasonable excuse. Thirdly, there should be a penalty for knowingly making the statement falsely. We understand that the Companies Bill is likely to make it an offence knowingly to register false information.
3.91	We recommend that it should be possible to file a financing statement before any security agreement has been made. However: 
(1)	The filing party should be required to state that the filing relates to an existing security agreement or the debtor has consented to filing in advance. 
(2)	Parties who file when there is no security agreement and the debtor has not consented to the filing should be liable to the debtor for any loss caused, unless they had a reasonable excuse. 
(3)	There should be a penalty for making the statement knowing that it is false. 
Searching
3.92	We have recommended that the register should be electronic. Any person should be entitled to search it on-line on payment of the appropriate fee. A proper search should reveal a financing statement as soon as it has been registered by the system, which will record the date and time and allocate a number to it.
3.93	Searches will be by company name, company number or financing statement number. Below we explain that with oversea companies that have not registered a branch or place of business in Great Britain, so that Companies House cannot verify the name of the company, we envisage that it will be possible to request that the search include ‘near misses, that is, companies with names close to the name by which the search was made. 
The details of filing and searching
3.94	We have already recommended that the Company Security Register should be in electronic form and that the Registrar should make rules requiring information for registration to be submitted in an electronic form. In this section we consider in more detail how the system would work.
3.95	The CR included a detailed description of how filing would operate, and we are grateful for the many comments we received on this. We pointed out that many of the details would be more appropriate for Rules made by the Registrar under the powers to be given in any Companies Bill. The Rules are likely to contain detail of the kind contained in the subordinate legislation of the overseas PPSA schemes. In any event, the precise nature of the filing system cannot be determined or provided for until the system is commissioned and the necessary software is created.
3.96	In the paragraphs that follow, we outline the scheme and discuss consultees’ views. Before we do so it may be helpful to describe the process for those filing via the internet under the draft regulations and the Rules that we anticipate being made: 
(1)	Someone wishing to file a ‘financing statement’ to register a charge (in practice, the chargee) would first have to register as a ‘user’ with the registry, which would probably include registering a payment method (such as establishing a direct debit facility or entering credit card details) and providing an email address for communications from the Registrar. The user would then be given an identification number and password that could be used to gain access to the system for this and future filings. (This process would be all on-line.)
(2)	In order to file a financing statement, the user would enter data onto a series of screens. Once the information has been transmitted to and accepted by the system, a financing statement registration number would be generated by the system. The financing statement number would appear on the ‘verification statement’, which would be sent automatically to the chargee and (usually) to the debtor. 
(3)	In addition, a ‘financing statement personal identification number (PIN)’ and a ‘debtor PIN’ would be generated. The financing statement PIN would be sent to the chargee separately; it should be kept private by the chargee. It would be used by the chargee to access the system to make changes to the financing statement. Likewise the debtor PIN would be sent to the company identified as the debtor, to enable it to make changes to correct the financing statement under a procedure we will describe below.
The financing statement
3.97	In the CR we provisionally recommended that the financing statement should contain 
(1)	the name of the debtor and its registered number (if any);
(2)	the name and address of the secured party or its agent;
(3)	a description of the collateral;
(4)	whether the filing is to continue indefinitely or for a specified period; and
(5)	such other matters as may be prescribed by the Rules. 
There was general agreement that the financing statement should contain this information.
3.98	We recommend that the financing statement should contain: 
(1)	the name of the debtor and its registered number (if any);
(2)	the name and address of the chargee or its agent;
(3)	a description of the collateral;
(4)	whether the filing is to continue indefinitely or for a specified period; and
(5)	such other matters as may be prescribed by the Rules.
3.99	We consider below various further points about the content of the financing statement.
The name of the debtor and its registered number
3.100	In the CR we explained that it should be possible for the system to check automatically that the name and number entered match the number recorded for that company on their existing records. It is envisaged that unless both the name of the debtor and its registered number are given, and they match each other, the filing will not be accepted. This should go a long way to reducing the risk of making a mistake in recording the details of the debtor. Consultees regarded this as an important safeguard.
3.101	Below we recommend that the scheme should apply to charges created by companies incorporated outside Great Britain where the charge is over assets here, even though the company has not registered or does not have a place of business here. Thus there will be instances where the debtor will not have a Companies House registration number. In such a case automatic checking of a name/number match will not be possible. 
3.102	Thus the party filing must either enter a matching name and number or confirm that the company is an oversea company that has not registered a branch or place of business in Great Britain. 
3.103	We recommend that a filing against a company registered in Great Britain, or that has a registered place of business or branch here, should not be accepted unless both the name and company number are given and they match.
The name and address of the chargee or its agent
3.104	Most of those who commented on this issue agreed that the name and address of the chargee or its agent should be required. Some expressed concern that lenders to companies conducting controversial business, such as research on animals, may be subject to intimidation. Consultees thought that in such circumstances it would be important that the financing statement could show an agent’s name rather than the chargee’s own.
3.105	The financing statement will be effective even if the information relating to the chargee is wrong or out-of-date. The debtor can supply the information if need be. However, it is in the parties’ interest to ensure these details are accurate, as requests for further information and any demands for changes to the financing statement are likely to be sent to the party shown as the chargee using the details recorded.
3.106	We recommend that it should be possible for the chargee to file in its own name or through an agent, so that only the name of the agent will appear on the financing statement.
A description of the collateral
3.107	In the CP we proposed that that the description should be ‘brief’. A large majority expressed agreement. In the CR, ‘description’ was not defined further in the draft regulations but we recommended that the description should be brief, with a word limit on the amount of information that could be provided. This was to prevent the current practice of just ‘cutting and pasting’ large amounts of the charge document onto form 395. 
3.108	In the light of discussions with consultees we now think that this policy was mistaken. It should still be possible for the chargee to use a brief description if it wishes to do so, even if the description is over-inclusive. The system might even be designed to allow the collateral to be described by checking one of a series of tick-boxes. (For example, there might be one for ‘all present and after-acquired property’ and others each referring to types of collateral which are commonly the subject of more charges with a more limited scope, such as ‘proceeds of sale of goods supplied by the chargee’.) If the debtor objects to an over-wide description, it may demand that the description be corrected to cover only what falls within the charge agreement, but the inaccuracy should not prevent the financing statement being effective to register the charge. However, we no longer think that the description should be required to be brief. The parties may prefer a precise description and it may be difficult to produce one that is both brief and accurate. We have been told that some US jurisdictions which have imposed a word-limit on collateral descriptions have found it causes difficulties. We now think that the chargee should be able to give a full description of the collateral. The safest way to do so may be to cut and paste the relevant clauses of the charge agreement into the financing statement. We think it should be possible to do this. It will add to the volume of any search results but this disadvantage is outweighed by the increased accuracy and reliability of the filing. 
3.109	We recommend that there be no word limit on the description of collateral in the financing statement. 
Duration of the filing
3.110	In the CP we provisionally proposed that a filing should not necessarily be for a limited duration; it should be effective for the period indicated on the financing statement. A large majority of consultees agreed that it should be possible to file for the security interest to last indefinitely; most considered it appropriate to permit filings for a fixed duration as an alternative. In the CR we provisionally recommended that a filing (unless discharged) should be effective either indefinitely or for such period as has been indicated on the financing statement. This was generally accepted by those who commented. With the more limited scheme that we are now proposing, which will apply only to charges and sales of receivables, it is probable that almost all filings will be for an indefinite period. Nonetheless we see no reason to prevent a creditor filing a financing statement to have effect for a limited period, and we confirm our recommendation. However, we accept the suggestion of Companies House that it would be more certain were the party filing required to state the date at which the financing statement should cease to have effect.
3.111	We recommend that a filing (unless discharged) should be effective either indefinitely or until such date as is indicated on the financing statement.
Trustees
3.112	Either the debtor or the chargee may be a trustee. Where the debtor company is a trustee the registration of charges over trust property has given rise to difficulties. There is doubt whether such a charge is registrable under the Companies Act 1985, section 395, since that section applies only to ‘a security on the company’s property’ and property held beneficially for another may not be ‘the company’s property’. The current practice of Companies House is to register a charge submitted by a trustee and to record on the register that the chargor is acting as a trustee. The responses to the Steering Group’s consultation document pointed out that the position of commercial trustee companies under Part XII Chapter I of the Companies Act 1985 is unsatisfactory and should be clarified, but there was little agreement on the solution. 
3.113	In the CP we provisionally proposed that a charge created by a trustee company over trust property should be registrable, since otherwise it might be difficult for those dealing with the property to discover that it was subject to a charge. We also proposed that the financing statement should disclose that the chargor is merely a trustee. This was supported by a large number of those who responded on the question. We confirm the first recommendation, but we now think that it is not necessary that the financing statement disclose that the property is held in trust. There is no general scheme for registration of the fact that a company holds property in trust rather than beneficially and it would be illogical to impose one in relation only to property that has been charged. 
3.114	We would point out that where a company charges its beneficial interest under a trust, that will be registrable against the beneficiary company in the normal way.
3.115	We recommend that charges over property held by the debtor company in trust should be registrable in the same way as charges over property held beneficially.
3.116	The chargee may also be acting as a trustee for a group of lenders. In this case the trustee can be entered as the ‘chargee’ on the financing statement. However, there will be a provision for the chargee to record that it is acting as a trustee if it wishes to do so. This is because, as we will see, when a chargee is a trustee a different procedure applies if the debtor complains that the financing statement is inaccurate or should be discharged.
3.117	We recommend that the financing statement should permit the party filing to record that the chargee is a trustee for others.
Other matters
3.118	A few respondents to the CP argued that the amount secured, or the maximum amount, should have to be stated on the financing statement. Some thought that the financing statement should state whether a charge has actually been created. In the CR we rejected these suggestions. The statement of the amount secured is not a useful piece of information since, unless the charge is for a fixed amount, it is most unlikely to be accurate by the time anyone searches the register. To provide the date on which the charge was created is not possible in a system that has the advantage of allowing filing before the charge has been agreed or has attached, unless a second registration is to be required. Although some respondents argued that the date of creation may be useful, we do not think that the benefits of including this justify the costs of a second registration. 
3.119	We do not envisage the system requiring any other information on the financing statement. However, it seems only sensible to include a power to prescribe other information by the Rules should experience show that it is needed. 
3.120	We recommend that the Registrar should have power to make Rules that may require further information on the financing statement.
Verification statement
3.121	In the CP we said that there should be a mechanism to ensure that the debtor is aware of the filing after it has been made. A large majority of respondents agreed. In the CR we provisionally recommended that, when a financing statement has been filed, the Registrar should have to send a verification statement to the party who had filed (typically the secured party). We did not think that the Registrar should be responsible for notifying the debtor; the debtor might be an oversea company of which Companies House has no record. Instead we suggested that the party who had filed should be obliged to send a copy of the statement to the debtor within 10 business days, unless the debtor had waived the right to receive a copy.
3.122	There was general agreement that the party who filed should receive a verification statement but there was concern over the proposal that the party who has filed should be responsible for notifying the debtor. By accident, or if the filing were a malicious one, the notice might never be sent to the debtor. On reflection we think this argument has weight. We think that it is proper to require the Registrar to send a notice to a debtor that is a registered company or that has registered a place of business, unless the debtor had waived the right to receive a copy. The requirement would be satisfied by the Registrar dispatching a notice by post to its registered address. Where the company is not registered in Great Britain and has not registered a branch or place of business here, the party who files should be obliged to send a copy of the statement to the debtor within 10 business days, again unless the debtor had waived the right to receive a copy. The chargee who without a reasonable excuse omits to do this will be liable in damages for any loss caused to the company named as debtor.
3.123	We recommend that when a financing statement has been filed: 
(1)	The Registrar should have to send a verification statement to the party who has filed, unless that party has waived the right to receive a verification statement.
(2)	Where the debtor is a company that is registered in Great Britain or has registered a place of business or branch in Great Britain, the Registrar should be obliged to send a copy of the verification statement by post to its registered address (or by e-mail to any e-mail address registered for the company), unless the debtor has waived the right to receive a copy. 
(3)	Where the debtor is a company that is not registered in Great Britain and has not registered a place of business or branch in Great Britain, the Registrar should be obliged to send a verification statement to the party who has filed, and the latter should be obliged to send a copy of the statement to the debtor within 10 business days, unless the debtor has waived the right to receive a copy. A chargee who fails to do this without reasonable excuse should be liable in damages to the company named as debtor.
Errors in the financing statement
3.124	As we explained earlier, under the system we recommend the party registering a charge will file only the financing statement. The charge document will no longer be sent, and the Registrar will no longer check the accuracy of the particulars or issue a conclusive certificate of registration. It follows that it will be up to the party filing – normally the chargee – to ensure that the particulars on the financing statement are correct. 
3.125	The financing statement should contain the debtor’s and the chargee’s (or its agent’s) details, the duration of the filing and a description of the collateral. The system will probably be configured so that the filing will be rejected unless each required field is completed. The filing will not be rejected because some of the information entered is incorrect. The effect will depend on the mistake that is made.
3.126	We have said that the system will check the name and number of registered companies and, we anticipate, will not accept a filing against a company registered in Great Britain unless both match. This should prevent mistakes about the debtor’s identity, except where the filing identifies entirely the wrong company as debtor. Where the company is an oversea company that does not have a registered branch or place of business in Great Britain, cross-checking will not be possible. Then the effect of the filing will depend on the test set out in the draft regulations. The filing will be effective where a reasonable search, conducted in accordance with the requirements of the draft regulations and the Rules relating to searches, would reveal the financing statement.
3.127	In contrast, an error in the collateral description will result in the charge being ineffective in the debtor’s insolvency, and at risk of loss of priority, in relation to collateral that was omitted. However, it will be effective as regards other collateral that is described in the financing statement.
3.128	An error in the duration of the financing statement will result in it being effective only for the period stated. (The system might be configured to send an electronic reminder to the party who filed shortly before any filing for a fixed period is due to expire, which would lessen the effect of any mistake in that field.) A mistake in the details of the chargee will not affect the effectiveness of the filing.
3.129	If a mistake has been made, it may be corrected by means of a financing change statement. This may be done voluntarily by the party who filed or on the demand of the debtor. This is considered below.
3.130	These features of the scheme were explained more fully in the CR. Although several consultees regretted the loss of a conclusive certificate, most of those who commented on the detail of the proposals accepted our approach. 
3.131	We recommend that: 
(1)	The effectiveness of a filing should not be prejudiced by a defect, irregularity, omission or error in the financing statement unless it would have the result that a search that is conducted in a reasonable manner, in accordance with the requirements of the draft regulations and the Rules relating to searches, would not reveal the financing statement. 
(2)	An error in the collateral description should result in the charge being ineffective in the debtor’s insolvency, and at risk of loss of priority, in relation to collateral that was omitted. However, it should be effective against other collateral described in the financing statement.
Additional statements
Amendments by the chargee
3.132	From time to time it may be necessary to amend a financing statement, for example to show that a charge has been discharged or that collateral has been added to or released from the charge. This will be done by the chargee or its agent filing an additional statement. An additional statement may also be used to extend the registration of a financing statement that was for a limited period, or to enter a notice of transfer or subordination of the security. It is envisaged that the additional statement will be made by the party who filed using its PIN. If the registration is being extended or collateral added, the Rules will require the party filing to confirm that there is an agreement to the relevant effect or the debtor has consented.
Amendments by the debtor
3.133	The registration process is in effect managed by the party who files, the chargee or its agent, with little or no intervention from the Registrar. As a counter-balance, the debtor should have the right to demand that, for example, an overly broad description of the collateral be corrected. It should be entitled to demand that a financing statement is discharged when all the secured obligations relating to it has been performed, or if a filing is made without the its consent where no security agreement exists, that the filing be removed. In the CR we recommended that the debtor (or any other person with an interest in the property) should be able to obtain the correction or removal of a financing statement by giving a notice in writing (a ‘requirement’ notice) to the secured party. This would require the secured party to file a financing change statement within 15 days or commence court proceedings. If no court order has been obtained by the end of 90 days, or such longer period as the court may direct, the debtor can amend or remove the filing itself.
3.134	The majority of those who responded, agreed that the secured creditor should file financing change statements at the debtor’s request where the changes proposed are not disputed. However some were concerned that the procedure for enforcing a debtor’s requirement notice would put undue pressure on creditors. They argued it would lead to an early recourse to unnecessary and expensive litigation by placing the onus on the secured party to initiate proceedings in order to maintain a filing. They feared that it could create an incentive for fraudulent debtors to argue about the scope of the security they created. They would prefer the onus of initiating court proceedings to be on the debtor, not on the secured party.
3.135	In the proposed system there can be no check on whether a charge exists or on whether the debtor has consented to the filing, other than the word of the party filing. Nor will there be any other check on whether the financing statement describes the collateral correctly. We have concluded that it is important that the debtor – or if no charge exists, the putative debtor – should have a ready method of challenging an inaccurate filing. We do not think that debtors are likely to abuse the system, since to do so would make it hard for them to obtain credit in future. Therefore we recommend the scheme proposed in the CR.
3.136	However, we have concluded that there should be an exception in cases in which the chargee is shown on the financing statement as being a trustee for others (for example, for a group of lenders). An oversight by the trustee might lead to the beneficiaries losing their security through no fault of their own. If the financing statement indicates that the chargee is a trustee (which will be optional), the person named as debtor should have to obtain a court order to have the financing statement amended or discharged. 
3.137	We recommend that: 
(1)	The chargee should be able to amend the financing statement by filing an ‘additional statement’.
(2)	The debtor (or any other person with an interest in the property) should be able to obtain the correction or removal of a financing statement by giving a notice in writing (a ‘requirement’ notice) to the party named as chargee (or its agent). This would require the chargee to file a financing change statement within 15 days or commence court proceedings. 
(3)	If no court order has been obtained by the end of 90 days or such longer period as the court may direct, the debtor should be able to amend or remove the filing itself. 
(4)	If the financing statement indicates that the chargee is a trustee, the person named as debtor should have to obtain a court order to have the financing statement amended or discharged.
Effect of unauthorised or accidental discharge
3.138	It is possible that the chargee or its agent might file an additional statement that is effective to discharge a financing statement by accident or without authority. In the CR we argued that the scheme should permit the re-activation of the filing on two conditions: (1) that other secured parties or buyers are not prejudiced and (2) that it is done within a short enough time that unsecured parties are unlikely to have relied on the apparent discharge. Therefore we provisionally recommended that where there has been mistaken or unauthorised discharge of a financing statement, the chargee should be able to re-activate the financing statement within 30 days. Where this is done, the discharge should not affect the priority ranking of the security interest as against those security interests which, prior to the discharge, were subordinate in priority to it. However, this should not apply to the extent that the competing security interest secures advances made or contracted for in the period between discharge and re-activation. Most of those who commented on this proposal agreed with it.
3.139	We recommend that: 
(1)	where there has been a mistaken or unauthorised discharge of a financing statement, the chargee should be able to re-activate the financing statement within 30 days of discharge. Where this is done, the discharge should not affect the priority ranking of the charge as against charges or pledges which, prior to the discharge, were subordinate in priority to it. 
(2)	However, this should not apply to the extent that the competing charge secures advances made or contracted for in the period between discharge and re-activation. The Rules should deal with the procedure for re-activation of the financing statement.
Search criteria
3.140	It should be possible to search by company name, company number or the number of the financing statement. Now that the proposed scheme is limited to charges, the search criteria can be simpler than those proposed in the CR, which included searching by unique identifying number.
3.141	We recommend that it should be possible to search the register on-line by the company name, the company registered number, if any, or the financing statement number (the number allocated by the registry on filing).
System failure
3.142	In the CR we said that the risk of major loss being caused by a system failure is low: if the system ‘goes down’ it will be evident to both filers and searchers, so that they will know that they must wait and try again. However there is inevitably a slight risk that a defect in the software, or hackers deliberately interfering with the system, might prevent a properly conducted search from revealing a registered charge. We asked consultees whether there should be a statutory, no-fault compensation fund for system failures; and fault-based liability for loss caused by errors in the system. 
3.143	There was little enthusiasm among consultees for a no-fault compensation fund. Many thought that in principle the Registrar should be liable for losses caused by any failures that were the result of negligence by Companies House. We think that the question of the Registrar’s liability goes wider than just liability for any failings of the Company Security Register. Either it should be the subject of a comprehensive review (which is outside our terms of reference) or it should be left to the courts. 
3.144	We make no recommendation on whether the Registrar should be liable for loss caused by errors in of failure of the Company Security Register.
Priority
Introduction
3.145	The CR set out a detailed scheme of rules to govern the priority of security interests as against both other security interests and as against purchasers other than secured parties. As we explained in Part 2, many consultees were critical of the complexity of the rules on the priority of competing security interests. In contrast, there was wide, though not universal, support for simplifying the existing law so that priority would normally depend on the date of registration, and for clarifying the rules that apply to buyers and similar transferees of property that is subject to a charge.
3.146	We have explained that we are no longer recommending that the scheme for company security interests should apply to title-retention devices. Most of the complexity in the rules of priority was caused by the provisions on priority for purchase-money security interests. These were aimed principally at title-retention devices and are not needed if the latter are to be outside the scheme. It is therefore possible to simplify the priority rules substantially. 
3.147	Our recommendation that for the time being the distinction between fixed and floating charges should be preserved, at least so far as insolvency is concerned, raises some issues about priority, since under current law the rules of priority vary according to whether the first charge is fixed or floating. In this section we will first consider the relative priority of fixed charges and pledges and then consider floating charges. Similarly, our discussion of the rules on ‘buyers’ will distinguish between fixed and floating charges. 
3.148	This Part does not consider the special priority rules that are necessary for financial collateral. They are discussed in Part 5.
Priority between competing security interests
Fixed charges
3.149	Under current law, the relative priority of two fixed charges or mortgages depends upon the order of creation, subject to 
(1)	particulars of each charge being sent for registration within the 21-day period. A charge that is not registered in time will be void against any other creditor. However, priority does not depend on date of registration. An equitable charge that has not been registered will take priority over a subsequent equitable charge provided that the earlier charge is subsequently registered within 21 days of its creation, even if the second charge was registered first; and 
(2)	the rule that a bona fide purchaser of the legal estate for value and without notice will take free of an equitable interest. Thus if the second charge is a legal mortgage which is taken before the earlier charge has been registered, the legal mortgage will gain priority, even if the earlier mortgage is subsequently registered within 21 days of its creation. 
3.150	In the CP we criticised these rules as overly complex and obscure. The problem of ‘21-day invisibility’ has the potential to do real injustice. Although respondents said that few priority disputes arose in practice, there was wide agreement with our criticisms. There was also broad agreement that it would be more satisfactory were priority between competing (fixed) charges to depend upon date of filing. 
3.151	In the CR we proposed a set of rules that would apply unless displaced by a more specific rule. These ‘residual’ rules were as follows:
(1)	Perfected security interests take priority over unperfected ones.
(2)	As between secured parties with perfected security interests, priority is determined by whoever was first to file or perfect.
(3)	As between unperfected security interests, priority is determined by date of attachment.
(4)	The priority that a security interest has under the rules above applies to all advances, including future ones (whether or not made under an obligation).
3.152	As far as fixed charges were concerned, all those who wanted to see a change to the priority rules agreed with (1) and (2). It was pointed out that it might be more consistent with current law were the contest in (3) to be settled by the date of creation rather than ‘attachment’. We agree; indeed, we no longer see a need to define or use the concept of ‘attachment’ in the draft regulations. 
3.153	Rule (4) differs from current law and was more controversial. Under current law, after a chargee has received notice of a second charge over the same collateral, it may only ‘tack’ further advances if it is obliged to make them or if the second chargee agrees. Although most of those who responded to the CP agreed with our proposed rule, others argued that no case had been made for a change in the law. 
3.154	Rule (4) is integral to our recommendations. It follows from the nature of a notice-filing system, where priority depends on date of filing even if the filing was made before the charge came into existence. If a chargee can register a financing statement to cover a new agreement and thereby gain priority for any advances made under the new agreement over a charge registered in the intervening period, it makes sense to allow it to tack further advances to an existing charge. We pointed out that it would always be possible for a second potential creditor to reach a subordination agreement with the first creditor. It will often be in the first creditor’s interest for a further advance to be made by another creditor. 
3.155	We recommend as ‘residual’ priority rules for fixed charges that:
(1)	Registered charges should take priority over unregistered ones.
(2)	As between secured parties with registered charges, priority should be determined by whoever was first to file its financing statement;
(3)	As between unregistered charges, priority should determined by date of creation.
(4)	The priority that a charge has under the rules above should apply to all advances, including future ones (whether or not made under an obligation).
Priority of pledges
3.156	In both the CP and, in effect, the CR we proposed that, as in the UCC and PPSAs, the priority of a pledge as against a (fixed) charge should in general depend on whether the financing statement relating to the charge was registered before or after the pledge was created. This nearly replicates the effect of the current law. Most of those who wished to see the rules of priority altered agreed with this rule. 
3.157	We recommend that priority between a charge and a pledge be determined by whether the financing statement relating to the charge is registered before the pledge is created.
The distinction between fixed and floating charges
3.158	Before we consider the priority of floating charges we need to refer to back to a point made in Part 1. We explained that in the light of responses to the CR we have decided that, for the time being at least, the distinction between fixed and floating charges should be retained. In this section we explore the issue and explain our reasons in detail. We then return to issues of priority.
The distinction between fixed and floating charges under current law
3.159	The most important distinction in practice between fixed and floating charges is that a floating charge allows the company to continue to dispose of assets subject to the charge in the ordinary course of business. This continues until the charge crystallises, for example when the chargee appoints an administrative receiver. The charge then attaches to whatever assets the company owns at that moment. It is this flexibility that enables a lender to take a security interest over the whole undertaking. Unless the company could (i) sell its stock-in-trade free of the charge and (ii) pay its employees and ‘trade’ creditors, it could not function.
3.160	It is the right to dispose of stock-in-trade and to make payments that is crucial. Other assets such as equipment can be, and frequently are, made subject to fixed charges. To some extent it is also possible to take a fixed charge over book debts. However, in its recent judgment in the Spectrum Plus case the House of Lords has held that a charge over book debts will be a fixed charge only if the proceeds of the debts have to be paid into an account over which the chargor has control. It seems that it not enough that the chargor has the right to prevent the chargee from drawing on the account without its consent; the account must actually be operated as a blocked account. Alternatively, book debts may be subjected only to a floating charge but the charge may include a prohibition on factoring or other disposition of the book debts (often also referred to as a negative pledge clause).
3.161	In practice, lenders use a combination of fixed and floating charges to permit debtors to dispose freely of their stock-in-trade and cash payments. However, the devices that have to be employed to prevent other disposals (for example, fixed charges over book debts or clauses prohibiting assignment of receivables) are unreliable and uncertain in their operation. For example, a negative pledge clause or a clause in the charge document prohibiting assignment of receivables will only affect a party who has notice of it. Registering the clause does not put third parties on constructive notice.
The CR proposals
3.162	The scheme proposed in the CR provided (1) that under any charge there would be a right and a power to make the two essential kinds of disposition free of the charge; but (2) that the company would not have the right or power to dispose of any other asset unless this had been agreed between the parties. Thus the holder of a ‘general’ security interest over the whole of a company’s existing and future assets would have priority over the company’s equipment and its receivables against another secured party or an outright buyer of the receivables unless it agreed (in the charge agreement or subsequently) to the company disposing of them free of the charge. There would be no need, for example, to use a floating charge qualified by a prohibition on factoring or to combine a floating charge with a fixed charge over those assets that the lender did not want the company to be free to dispose of.
3.163	It would have remained possible to provide that the company could dispose of any other type of asset in the course of business. This might be useful if the company wanted that freedom. 
3.164	Responses on our proposals to change the distinction between fixed and floating charges were particularly difficult to analyse. First, it has been hard to gauge whether there is real opposition to our proposals when correctly understood. The floating charge is viewed as enormously important. Some respondents appeared to think that we were suggesting that it should no longer be possible to create floating charges. That was not at all our intention. The scheme proposed was designed to enable fixed and floating charges as they currently exist to be superseded by a new single form of charge that would be more flexible and give the lender better protection. We believe that in terms of the law of security there is a good case for this change. 
Insolvency law and the floating charge
3.165	The main issue that concerned most consultees was apparently not the proposed change just described in itself but the impact it would have on insolvency law. Several key provisions of the Insolvency Act 1986 turn on the distinction between fixed and floating charges.
3.166	It is true that, were the scheme set out in the CR to be implemented, significant numbers of consequential amendments would be needed in particular to the Insolvency Act 1986. We believe, however, that few of them involve any issues of particular difficulty. The only really significant problem relates to preferential creditors and the unsecured creditors’ fund introduced by the Enterprise Act 2002. The current rule that preferential creditors and the fund have priority over the holders of a floating charge clearly would not work effectively if floating charges were to become obsolete.
3.167	The effect of the distinction between fixed and floating charges on insolvency has provoked a considerable amount of litigation, and insolvency experts have told us they would like to see the distinction abolished if a suitable substitute can be found. Reform of insolvency law in its own right is outside our terms of reference. We must therefore assume that the priority of preferential creditors over floating charges and the unsecured creditors’ fund is to be preserved. Therefore, were we to recommend its effective abolition, we would have to find some other formula that we could commend to Government as a replacement for the distinction between fixed and floating charges. It would need to be more-or-less insolvency ‘neutral’ in that it would not alter the position of preferred creditors very much; and it would have to be no more complex, and preferably simpler, than the current one.
3.168	We believe that it is possible to devise such a formula. With respect to preferential debts, the New Zealand legislation closely replicates under the notice-filing scheme the position of preferential creditors under the previous floating charge scheme. In essence, preferential creditors have priority over the claims of any secured creditor to the extent that the security:
(1)	is over all or any part of the company's receivables and inventory or all or any part of either of them; and
(2)	does not arise from a security over a receivable for which new value was provided at the time. 
3.169	We would not follow this exactly. The test of ‘value was paid at the time’ could be complex to answer and give receivables financiers and banks operational difficulties. We were told that even in the context of factoring, in which there is supposedly a direct correlation between the debts sold and the funds advanced, it is in practice common for the factor to ‘over-advance’, that is, to advance more than is represented by the company’s existing debts, in the expectation that there will be further receivables that will make up the shortfall. It would be arguable that no ‘new value’ was given for the relevant receivables at the time they were received. This is even more likely with receivables charged to a bank to secure an overdraft. Even if it were possible for the bank to prove that it had advanced funds to match the receivable, the need to do so would require expensive monitoring and record-keeping. We think it would be simpler to give preferential creditors preference over all receivables.
3.170	Thus, were the proposals in the CR to be adopted, so that the distinction between fixed and floating charges would become obsolete, we would recommend that preferential creditors and the unsecured creditors’ fund should have first claim on:
(1)	any ‘inventory’ (raw materials and stock-in-trade) or receivables belonging to the company; and
(2)	any other asset of the company that, under the charge agreement, the company had the right to dispose of free of the charge.
We believe that the effects of adopting this test would be broadly ‘insolvency neutral’ and that the test would be a good deal easier to apply that the current one.
Conclusion on floating charges
3.171	We believe that there is a good case for including in our scheme the provisions that would remove the distinction between fixed and floating charges. We also think an adequate substitute test is available to determine which assets preferential creditors and the unsecured creditors fund should have priority over. 
3.172	However we recognise that insolvency law has undergone significant changes in recent years, and that there is great unwillingness to see further changes in the immediate future. To maintain it means that the scheme will have to be more complex than we like. It means that lenders will have to continue to use a ‘cocktail’ of fixed and floating charges when under the more radical approach advocated in the CR a single charge would have sufficed. However it does not make the scheme unworkable or prevent it being a substantial improvement on the current law.
3.173	In the light of this, we have decided not to recommend at present the changes proposed in the CR that would have had the result of removing the distinction between the fixed and the floating charge. The proposed rules should be considered again when insolvency law is next reviewed.
3.174	As a result, there need be only a few amendments of substance to the Insolvency Act 1986. We have already mentioned the amendment we recommend to section 245. Below we discuss two further recommendations, to clarify the position of preferential creditors.
3.175	We recommend that the distinction between fixed and floating charges should be retained for the time being. The issue should be revisited when insolvency law is next reviewed.
Priority of floating charges
3.176	It does not follow from the recommendation just made that all the current rules governing the priority of floating charges as against other interests should remain unchanged. In what follows we recommend changes that will make floating charges more effective than they are at present.
Floating charges and subsequent charges
3.177	Under current law, the general rule is that a floating charge will lose priority to a subsequent fixed charge. This is because the company is authorised to carry on its ordinary course of business and creation of subsequent fixed charges is taken to be in the ordinary course of business. In practice many floating charges attempt to prevent this by means of a negative pledge clause forbidding the company to create charges that rank ahead of or equally (‘pari passu’) with the floating charge. The clause works simply by limiting the company’s authority. A creditor who takes a fixed charge with knowledge of this provision will take subject to it - in other words, will not gain priority over the floating charge. However, the negative pledge clause itself is not required to be registered. Even if particulars of it are included in the registration, subsequent creditors will not have constructive notice of it, as the doctrine of constructive notice applies only to those items that must be registered. Thus the clause does not provide reliable protection to the floating charge-holder. 
3.178	Another way lenders may seek to preserve their position is through automatic crystallisation. The floating charge may include an automatic crystallisation clause, under which the charge is said to crystallise on any attempt by the company to create a charge that would rank above or alongside the floating charge. However, such a device may be ineffective unless the subsequent chargee has actual knowledge of the clause. If it does not, the company will still have apparent authority to dispose of its assets in the ordinary course of business. Nor will the subsequent chargee be fixed with constructive notice of the clause, even if particulars of it are on the register at Companies House. Moreover, automatic crystallisation clauses are risky. It is possible that if the charge has crystallised but the chargee (perhaps not knowing that the clause has been triggered) allows the company to continue trading in the ordinary course of business, the charge will be held not to crystallise on other specified events. 
3.179	We understand that in practice a subsequent creditor will not take the risk that there may be a negative pledge or automatic crystallisation clause and that it might be found to have had notice of it. If it wants to ensure its priority it will make a subordination agreement with the floating charge-holder. It would therefore be much simpler and it would strengthen the floating charge significantly if the charge-holder did not have to use these cumbersome and unreliable devices to protect its priority. This explains why a good number of respondents to the CR who thought that the distinction between fixed and floating charges should be maintained for some purposes nonetheless considered that the rules on their respective priority should be simplified, so that priority as between a floating charge and a fixed charge would depend simply on the date of registration. We agree.
3.180	We recommend that the priority of a charge against another charge or a pledge should depend on the date of registration of the financing statement whether the charge is fixed or floating.
Floating charges and preferential creditors
3.181	The scheme should contain provisions to clarify or prevent certain problems of ‘circularity’ that can arise under current law and might also arise under the scheme we recommend. Take the case in which a floating charge over all the company’s assets in favour of the bank is registered, and later the company creates a fixed charge over some of the same property in favour of another lender. Under current law, the ‘default position’ is that the fixed chargee will be paid off first, then the preferential creditors and the unsecured creditors’ fund, (we will refer to both as ‘the preferentials’), then the floating chargee. 
3.182	Under the existing law it can happen, however, that the fixed chargee takes with notice of a negative pledge clause in the floating charge, or that the fixed chargee agrees to be subject to the floating charge, as has happened in a number of reported cases. Similarly, under our scheme, the floating charge will have priority over the fixed chargee. What should be the position of the preferentials, who have priority over the floating charge but not the fixed charge? 
3.183	We think this is and will remain an uncommon situation. Save in unusual circumstances, it is unlikely that a lender will rely on a fixed charge that is junior to a floating charge. Rather, the second lender will not advance funds unless it can get the floating chargee’s agreement that the fixed charge will have priority. 
3.184	However, we think it is best to avoid any doubt in both the case where the floating charge has priority by virtue of being registered first and when the parties have agreed that the fixed charge should have priority over an already-registered floating charge. 
3.185	When there is no agreement, so that the floating charge has priority over the fixed charge, the floating charge-holder should have priority over the preferential creditors to the extent of any fixed charges over which it has priority. Suppose that when the company becomes insolvent it has net assets of £500,000; that £350,000 would be due to the preferential creditors and the unsecured creditors fund; that the floating charge-holder is owed £200,000 and the fixed charge-holder £100,000. The assets should be distributed as follows:
Floating charge-holder		£100,000 (in right of the fixed charge over which it has priority)
Preferential creditors, etc	£350,000
Fixed charge-holder		£50,000.
3.186	When there is an agreement that the fixed charge should have priority over the floating charge, that should also give it priority over the preferentials. Assuming the same figures as above, the distribution will be:
Fixed charge-holder		£100,000
Preferential creditors, etc	£350,000
Floating charge-holder		£50,000.
This replicates, in effect, the current law in the absence of an agreement. 
3.187	We recommend that the Insolvency Act 1986 should be amended to provide that: 
(1)	As against the preferential creditors and the unsecured creditors’ fund, a floating charge should have priority to the extent of any fixed charges over which it has priority. 
(2)	A subordination agreement by which the floating charge holder agrees that a subsequent fixed charge will have priority, or any other arrangement that a fixed charge will have priority to a floating charge, should result in the fixed charge also having priority over the preferential creditors and the unsecured creditors’ fund.
Liens
3.188	Although interests arising by operation of law, such as liens, are generally excluded from the scope of the draft regulations, there may be a conflict between a lien and a charge over the collateral that is the subject of the lien. The CR recommended that the lien should have priority over other security interests and consultees agreed. Few consultees objected to the substance of the proposal. 
3.189	We recommend that a lien that arises by operation of law should take priority over a charge, whether registered or unregistered.
Supporting obligations
Supporting obligations in general
3.190	Earlier we explained that where a charge is taken over a receivable, a document of title, a negotiable instrument or investment property which is supported by a right to the proceeds of a letter of credit or a guarantee or indemnity, a charge will also arise over the ‘supporting obligation’, unless the parties agree otherwise. If the charge over the principal obligation has been registered, the charge over the ‘supporting obligation’ should not have to be registered. 
3.191	Subject to one exception, the charge over the supporting obligation should have the same priority as the charge over the principal obligation.
Sums due under a letter of credit
3.192	The one exception relates to charges over sums due under a letter of credit. Suppose that a receivable (such as the contract price owed to the seller of exported goods) is to be paid by a letter of credit. The letter of credit will be a supporting obligation; whoever takes an assignment of the receivable will be entitled to the sums paid under the letter of credit automatically, and there will be no need to file separately for them. It is conceivable that the receivable will be assigned twice, for example once under a general assignment of receivables, and then again (probably by mistake) under some more specific arrangement. Under the rule recommended in the last paragraph, priority will depend on the order of filing. However it is possible that the second party to file will contact the bank that is liable on the letter of credit before the other chargee does. That should, we think, give it priority ahead of the earlier-filed charge. It means that the creditor who has to be paid by the bank is not the junior creditor because the other creditor had filed first. 
3.193	Article 9 of the UCC achieves this by treating the secured party that contacts the bank as having ‘control’ over the sums due under the letter of credit, and giving priority to the party who has control. We have adapted that approach.
3.194	We recommend that a charge over a supporting obligation that is not separately registered should have the same priority as the principal obligation; but when the charge is over the sums due under a letter of credit, a chargee who notifies the bank of its charge should have priority over one who has merely registered.
Priority in transferred collateral
Transfers by the chargee
3.195	We recommended above that when a charge is transferred from one party to another it should be possible to alter the financing statement to record the transfer, but that this should not be required in order to preserve the effectiveness of the charge. The transferee should have the same priority as the transferor had at the time of transfer.
3.196	We recommend that where a chargee transfers its rights, the transferee should acquire the same priority with respect to the charge as the transferor had at the time of transfer.
Transfer by the debtor
3.197	If the debtor company transfers collateral that is subject to a charge, the transferee will take subject to the charge unless the transfer is authorised or the situation is one in which the transferee will take free. There may be implications for the priority of the charge. In the CR we explained that some of the PPSAs require a party who knows of the transfer to file against the transferee within a fixed period. We explained that we thought this imposed an unacceptable burden on the chargee while not offering much additional protection to subsequent persons dealing with the collateral. The charge would only have to be registered against the transferee if the chargee knew of the transfer, so enquiries about the provenance of the collateral would still have to be made. We provisionally recommended that if collateral were transferred by the debtor to a party who took subject to the security interest, then provided the chargee’s interest was perfected at the time of transfer and has remained so, it should have priority over any security interest created by the transferee. This should be so whether the security interest created by the transferee was created or filed before or after the security interest created by the transferor.
3.198	Several consultees expressed concern that creditors who are unaware of the transfer or the identity of the transferor may not be able to find out about the charge. However, we still think that this rule is preferable to the alternatives, which may involve a loss to the first chargee. 
3.199	We referred earlier to the issue of property that a company acquires from an individual or unincorporated body, subject to a charge. We explained that there is no need to require the chargee to register against the new owner. The priority of the charge should also be protected as against charges created by the transferee company, whether before or after the transfer. 
3.200	We recommend that if collateral is transferred by the debtor to a party who takes subject to the charge, then provided the chargee’s interest was (if necessary) registered at the time of transfer and has remained so, it should have priority over any charge created by the transferee. This should be so whether the charge created by the transferee was created or filed before or after the charge created by the transferor.
Priority as against unsecured creditors
Execution creditors
3.201	Under current law, an execution creditor cannot seize property that is subject to a duly registered fixed charge. In principle an execution creditor takes free of a floating charge if it has completed execution before crystallisation of the charge. In practice the attempted execution is likely to trigger an automatic crystallisation clause in the floating charge. An automatic crystallisation clause is likely to be effective in this type of case, since the rights of the execution creditor do not depend on whether it had notice of the clause or of the crystallising event. Thus if there is such a clause the execution creditor will be unable to claim any of the debtor’s property. However, we have seen that an automatic crystallisation clause is a risky device to have to use. 
3.202	In the CR we proposed that execution creditors should not be affected by a security interest that was not registered when the creditor attempts execution, but should take subject to any registered security interest. Some consultees argued that the case for this change was not made out. We think it is justified because it will simplify the law and remove the need for complex and uncertain clauses in floating charge documents. We do not believe it will make much practical difference to execution creditors, who are already at risk of automatic crystallisation clauses, and who have a powerful alternative: where the debt amounts to more than £750, they can threaten insolvency proceedings. 
3.203	However, we also recommended in the CR that a secured party should not have priority in respect of further advances made after it knows that the execution creditor has acquired an interest in the goods, unless the secured party was under an obligation to make the advance. This drew little comment.
3.204	We recommend that: 
(1)	An execution creditor should have priority over a charge that is unregistered at the time the execution creditor’s interest arises.
(2)	An execution creditor’s interest should be subject to a charge that was registered at the relevant time, whether the charge was fixed or floating. 
(3)	However, a chargee or pledgee should not have priority in respect of further advances made after it knows that the execution creditor has acquired an interest in the goods, unless at that time the chargee was under an obligation to make the advance.
Distress for rent
3.205	The issue of the priority of a charge as against a distraining landlord was not discussed in the CR. The position appears to be that the landlord: 
(1)	can seize goods that are subject to an uncrystallised floating charge; and 
(2)	may be able to seize goods that are subject to a fixed charge (including a floating charge that has crystallised). 
There is doubt about a landlord’s rights against a mortgagee, but it seems that if the tenant has any equity of redemption then the landlord may seize the goods and take the whole value. Further, if the chargee or mortgagee has, in addition to security over the assets distrained, a fixed charge or mortgage over the lease of the premises, then it seems reasonably clear that it cannot claim protection against the landlord’s distraint. 
3.206	The Law Commission published a report on distress for rent in 1991. It recommended the abolition of distress for unpaid rent for both commercial and residential tenancies. In March 2003, the Lord Chancellor’s Department (as it then was) published a White Paper as part of its Enforcement Review. This accepted the Commission’s recommendations to abolish distress for rent against residential tenancies, but proposed its reform rather than abolition in commercial cases. No further action has been taken. We therefore need to cover the topic. We should at least resolve the uncertainty of the current law. We propose to do this by providing that a landlord’s right to distrain on goods for unpaid rent takes priority over any mortgage or charge over them, whether registered or not.
3.207	We recommend that a landlord’s right to distrain on goods for unpaid rent should take priority over any mortgage or charge over them, whether registered or not.
Distress for rates
3.208	This right of the local authority is now statutory. It was considered in In re ELS Ltd. The relevant regulation gave the local authority power to levy the amount of overdue rates by distress and sale of the goods of the debtor. Ferris J held that goods covered by a crystallised floating charge were not ‘goods of the debtor’ and so the chargee had priority. An automatic crystallisation clause will therefore protect the chargee. We think that it is sensible to deal with distress for unpaid rates in the same way as execution creditors. In other words, a registered charge, whether fixed or floating, should have priority.
3.209	We recommend that a registered charge, whether fixed or floating, should have priority over the right of a local authority to distrain for rates. 
Priority as against buyers
3.210	In this section we deal with the priority of a purchaser other than a secured party - for example, a person who buys the collateral or takes it on a finance lease. The CR proposed that an unregistered security interest would not affect a buyer who did not know of it. However, a registered security interest would normally bind a buyer, unless the sale (or other disposition not by way of security) was authorised by the security agreement (or subsequently). We proposed that
(1)	under any charge there would be a right and a power to sell its stock-in-trade free of the charge and pay its employees and ‘trade’ creditors; but 
(2)	the company would not have the right or power to dispose of any other asset unless this had been agreed between the parties. 
As we explained earlier, this would have led to the floating charge being superseded.
3.211	Consultees by and large agreed with the underlying principle that an unregistered charge should not affect an innocent buyer whereas a registered one should. However, in the light of our recommendation that the distinction between fixed and floating charges should be preserved at least for the time being, we have had to revise the rules that should apply to buyers and similar transferees of property subject to a charge.
3.212	The CR also proposed regulations dealing with buyers of vehicles and similarly uniquely-numbered goods, and with low price goods bought for private purposes. Since the revised scheme does not cover title-retention devices these provisions are no longer needed.
Buyers and unregistered charges
3.213	In the CP we explained that although a charge that is not properly registered under the Companies Act 1985 will be invalid as against the administrator, liquidator or creditors, other parties are not affected. Thus the charge will be valid against a buyer. Whether the buyer takes free of the charge will depend on the nature of the charge and the general rules of priority. We proposed that any unregistered charge should be invalid against a buyer.
3.214	There was wide support for this, but some consultees pointed out that to allow the buyer to take free even when it knows of the unregistered charge would give opportunities for fraud. For example, a director of a company might buy equipment from the company knowing that it was subject to an unperfected charge. Therefore in the CR we provisionally recommended that a buyer of collateral subject to an unperfected security interest should take free of it, providing value was given and the buyer was without knowledge of the security interest. This proposal was generally supported.
3.215	Where the unregistered charge is a floating charge the buyer should not be bound by it even if they know of it, unless the disposition is not in the ordinary course of business or they know that it is in breach of the security agreement.
3.216	We recommend that: 
(1)	Transferees for value (other than a secured party) of collateral that is subject to an unregistered fixed charge should take free of the charge unless they know of it.
(2)	Transferees of collateral subject to an unregistered floating charge, who acquire the collateral in a transaction which was in the ordinary course of the transferor's business, should take free of the charge unless they know that the transfer is in breach of the terms of the floating charge.
Buyers and registered fixed charges
3.217	In the CP we explained that a buyer will take subject to a registered fixed charge, unless the doctrine of a bona fide purchaser of a legal estate without notice applies. There is some doubt as to when a purchaser who does not have actual knowledge of the charge will be put on notice of it because it has been registered. It is possible that a buyer of a capital asset would be expected to search the register but not one who buys stock-in-trade. We think that it is desirable to clarify the law by providing that a buyer should be bound by a registered fixed charge. (It is not feasible to create, or at least to maintain, a fixed charge over stock-in-trade, so sales of stock-in-trade will fall under the rules for floating charges discussed below.)
3.218	We recommend that a transferee (other than a secured party) of collateral that is subject to a registered charge which is a fixed charge should take subject to the charge unless the chargee has authorised the sale or other disposition.
Buyers and registered floating charges
3.219	It is in the nature of a floating charge that, until crystallisation, the company retains the power to dispose of its assets in the ordinary course of business free of the charge. Thus buyers will take free of the charge unless they know that the disposition is not permitted because of some explicit restriction in the charge or because the charge has crystallised. In practice buyers will not be affected by crystallisation of the charge except where they know that a receiver or administrator has been appointed or the company has ceased trading. Although crystallisation in other circumstances will remove the company’s actual authority to dispose of the assets in the ordinary course of business, it will usually still have apparent authority to do so. 
3.220	Had the relevant Part of the Companies Act 1989 ever been brought into force it would have empowered the Secretary of State to make regulations for registration of crystallising events. No consultee suggested that we should follow this approach, which we think is unnecessary. However, it would be valuable to set out the position of buyers clearly. We recommend that the new regulations should set out what in practice is the current position, that a purchaser of property subject to a floating charge should take free of it unless the buyer knows that the charge has crystallised so that the disposition will be in breach of the charge agreement. 
3.221	We recommend that a transferee (other than a secured party) of collateral subject to a registered charge which is a floating charge, who acquired the collateral in a transaction which was in the ordinary course of the transferor's business, should take free of the charge unless the transferee knew that the sale was in breach of the terms of the charge.
Transferees of negotiable collateral and money
3.222	It is vital to ensure that the transferability of negotiable instruments, negotiable documents of title and money (whether transferred in cash or by cheque or electronic transfer) is not compromised by the scheme. The draft regulations in the CR contained a number of provisions, derived from similar provisions in Article 9 of the UCC and the PPSAs, that were designed to ensure this. They provided in essence, that a holder in due course (whether a secured party or any other transferee) or other transferee for value who did not know of the security interest over the collateral would take free of it. 
3.223	Several consultees questioned the need for these rules, which seem either to overlap with provisions of the Bills of Exchange Act or to encapsulate rules of common law. We agree, and in the new scheme they are replaced by simple ‘saving’ provisions.
3.224	We recommend that the rules of the scheme should be without prejudice to the rights of transferees of negotiable instruments, negotiable documents of title and money, whether transferred in cash or by cheque or electronic transfer.
Fixtures 
3.225	In the CR we asked whether the scheme should contain specific rules dealing with fixtures; it was our tentative view that they are unnecessary. Those consultees who responded on the point agreed. 
3.226	We recommend that the scheme have no special provisions for the registration or priority of charges over fixtures.
Crops
3.227	We provisionally recommended that a perfected security interest in growing crops (whether planted or natural) should have priority over a conflicting interest in the land, if the debtor has an interest in or is in occupation of the land. The Land Registry supported this proposal on the grounds that it closely mirrors the provision in section 8(6) of the Agricultural Credits Act 1928.
3.228	We recommend that a registered charge over growing crops (whether planted or natural) should have priority over a conflicting interest in the land, if the debtor has an interest in or is in occupation of the land.
3.229	Finally, we asked consultees whether growing trees should be treated like other crops or should be left outside the scheme. There was no clear view among the few who responded. The Land Registry pointed out that the Agricultural Credit Act 1928 probably applies to fruit trees but not timber. We think it is sensible to take the same approach. The provisions on crops will not apply to uncut timber; for the purposes of priority they will be treated as part of the land. Timber that has been cut when it is charged, however, will come within the definition of goods. 
3.230	We recommend that the definition of crops should exclude timber, so that timber that has not yet been cut will not fall within the definition of either crops or goods.
Priority and Assets for which there is a specialist register
Registered aircraft and ships and intellectual property rights
3.231	As we explained above, we now recommend that all charges created by companies registered in England and Wales over registered aircraft and ships and intellectual property rights should be registered in the Company Security Register if they are to be effective in the debtor’s insolvency, irrespective of whether the charge is also registered in the relevant specialist register.  
3.232	Under current law, registration at Companies House of charges over assets for which there is also a specialist register has some effect on priority. If particulars of the charge are not delivered within the 21-day period, the charge is ineffective against other creditors, while once it is registered other secured creditors will be treated as having constructive notice of the charge. However the schemes normally have their own rules of priority. For example, Article 14 of the Mortgaging of Aircraft Order 1972 stipulates a priority rule for the aircraft mortgage register. The basic rules are that registered aircraft mortgages have priority over unregistered ones; and that between two registered aircraft mortgages, priority is governed by the order of registration. There is a provision for entering priority notices on the register. Similarly, in the Register of Shipping and Seamen, there is a priority rule for registered ships to which the ‘private law provisions’ relating to transfers and the registration of mortgages apply. Priority between competing registered mortgages is governed by the date and time of registration not by the date of creation or reference to any other matter. There is a provision allowing priority notices. 
3.233	Patents, registered trade marks and registered designs each have a specialist register at the Patent Office. They allow for registration of mortgages, assignments and other interest in these intellectual property rights, and priority is determined broadly by reference to the date of registration. In the Patents Register, an unregistered mortgage or charge of which notice has not been given to the comptroller and of which a subsequent mortgagee or chargee is not aware would lose priority to that subsequent mortgage or charge. 
3.234	Because those involved with financing these types of assets expect to look at the specialist register, these specialist rules should not be affected by the general rule of our scheme that priority of competing charges will be by date of filing. For example, if two charges over a registered ship have both been registered in the Company Security Register and the Ship Mortgage Register, but in differing order, it is the order of registration in the Ship Mortgage Register that should prevail. This replicates the effect of the current law. 
3.235	We recommend that where the legislation that establishes the specialist registry contains rules determining the priority of competing charges, those should apply in place of the general rule of priority from date of filing.
Land
3.236	Earlier we recommended that charges over unregistered land would have to be registered irrespective of whether they are also registered in the Land Charges Register. Registration must take place before the onset of insolvency if they are to be effective against an administrator or liquidator.
3.237	With registered land, a fixed charge over land registered or noted on the Land Register should not also have to be registered on the Company Security Register in order for it to be effective in an insolvency. Information about the registration or notice of a fixed charge should be forwarded by the Land Registry to Companies House for the purposes of information. However, where charges are not so registered or noted on the Land Register or are floating charges, they should be registered on the Company Security Register. 
3.238	In this section we consider the issue of priority of competing charges over land. 
3.239	Our general approach is that priority between competing charges over land should be governed by the relevant real property legislation. Accordingly, where the rules of the Law of Property Act 1925, the Land Registration Act 2002 or the Land Charges Act 1972 apply, these will prevail over the scheme established for company charges in general. This will be the case irrespective of whether one or all of the competing charges over land have been registered at Companies House.
Unregistered land
3.240	When the competition is between fixed charges over unregistered land, Law of Property Act 1925 section 97 provides that ‘[every] mortgage affecting a legal estate in land… whether legal or equitable (not being a mortgage protected by the deposit of documents relating to the legal estate affected) shall rank according to its date of registration as a land charge pursuant to the Land Charges Act’. The order of priority of fixed charges over unregistered land should not be affected by the order in which the charges were registered in the Company Security Register. In other words, the priority scheme of the real property legislation should have priority over that of the scheme for company charges in general, as will generally be the case with charges over assets for which there is a specialist mortgage register.
3.241	In the case of a floating charge over unregistered land, the current law on priority is not completely clear. It seems likely that the rule in the Law of Property Act 1925 does not give priority to a floating charge over a subsequent fixed charge. That said, it seems that the subsequent fixed charge may be postponed to the floating charge if the latter contains a negative pledge clause that was known to the subsequent fixed chargee. If this is so, it would be consistent with our general policy that under our scheme priority should be by date of registration in the case of unregistered land. 
3.242	To make the point clear, we recommend that the scheme should provide expressly that the priority of a floating charge over a company's unregistered land as against competing charges over the same land depends on their respective dates of registration. If the financing statement covering the floating charge was registered before the date of registration of the financing statement covering the competing charge (or, where relevant, the date of registration of the charge in the Land Charges Register) then the floating charge should take priority. If it was registered after that date, then the competing charge should take priority.
Registered Land
3.243	By statute, a legal mortgage or charge over registered land will have priority over an earlier charge unless the earlier charge has been registered or is the subject of a notice on the Land Register. In other respects the priority of competing charges is left to be determined by general law. The priority of competing fixed equitable charges is determined by the order of creation and is not affected by the entry of a notice on the register. We recommend that the priority of competing equitable charges should remain subject to the general law and that the general changes in the law to the priority of competing company charges should therefore take effect to determine their priority. The charges should rank in order of registration, whether that be registration of a financing statement on the Company Security Register (which may take place in advance of creation) or registration of a charge or entry of a notice at the Land Registry. In practice this change will make little difference, since the order of registration is likely to be the order of creation. 
3.244	Under current law a floating charge will normally lose priority to a subsequent fixed charge over the same property, unless the subsequent chargee has notice of a negative pledge clause in the floating charge agreement. It seems that under current law a negative pledge clause in a floating charge can readily be made effective in relation to registered land. There would be little practical change if the priority of the floating charge as against the fixed were determined by order of registration under the general rule of our scheme. The only difference would be that a negative pledge clause would no longer be needed to achieve this result. We recommend the scheme should provide that the priority of a floating charge over a company's registered land as against competing equitable charges over the same land depends on their respective dates of registration. If the financing statement covering the floating charge was registered before the date of registration of the financing statement covering the competing charge (or, where relevant, the date of registration of the charge in the Land Register) then the floating charge should take priority. If it was registered after that date, then the competing charge should take priority.
3.245	We recommend that:
(1)	The priority of fixed charges over unregistered land should not be affected by the date of registration in the Company Security Register.
(2)	The priority of a floating charge over a company's unregistered land as against competing charges over the same land should depend on their respective dates of registration. If the financing statement covering the floating charge was registered before the date of registration of the financing statement covering the competing charge (or, where relevant, the date of registration of the charge in the Land Charges Register) then the floating charge should take priority. If it was registered after that date, then the competing charge should take priority. 
(3)	Subject to the provisions of the Land Registration Act 2002, the priority of fixed charges over registered land should depend on the order of registration, whether that be registration of a financing statement on the Company Security Register or registration or notice at the Land Registry.
(4)	The priority of a floating charge over a company's registered land as against competing equitable charges over the same land should depend on their respective dates of registration. If the financing statement covering the floating charge was registered before the date of registration of the financing statement covering the competing charge (or, where relevant, the date of registration of the charge in the Land Register) then the floating charge should take priority. If it was registered after that date, then the competing charge should take priority. 
Territorial application
3.246	In this section we consider two broad issues: charges created by companies registered in England and Wales over assets elsewhere, and charges created by companies registered in other jurisdictions over assets that are in England and Wales. In this context, private international law ascribes a location to even intangible assets – so, for example, shares are usually treated as located where the issuer has its register or, if they are held through an intermediary, where the intermediary keeps its register. We deal first with assets that are outside Great Britain and with ‘oversea’ companies, and then consider the position in respect to charges over assets in Scotland and charges created by companies registered in Scotland over their assets in England. 
3.247	In the CR we explained that we had considered following the North American and New Zealand models, which set down relatively comprehensive schemes dealing with the issues of private international law that may arise in relation to the validity, perfection and the effect of non-perfection, and priority of security interests. We concluded that it would not be sensible for us to try to regulate such issues of private international law. 
3.248	First, it seems unnecessary to do so. It is true that the some aspects of the current law - for example, on what law governs the assignment of receivables - seem either unclear or less than wholly satisfactory, but we have not heard that the problems cause such serious difficulty in practice that we should embark on this difficult topic as part of this project. 
3.249	Secondly, we think that it would not be practicable for England and Wales to alter its law in the way in which the law of North America has been altered. To put it simply, some of the rules adopted there make good sense if the ‘foreign’ jurisdictions that are likely to be involved have adopted broadly similar systems, but would not make sense in the European or wider international context, in which there is enormous diversity. The necessary changes to English law would either be difficult to introduce, or would be ineffective because the ‘new English rules’ would probably not be followed in other jurisdictions. 
3.250	Therefore in the CR we took the view that the scheme should deal only with questions of the registration and priority of security interests created by companies registered in England and Wales over their assets outside the jurisdiction, and to security interests created by companies incorporated elsewhere, or registered in Scotland, over assets here. Consultees broadly agreed with this approach and in making our final recommendations we follow it.
Companies registered in England and Wales 
3.251	Current law requires an English company to register at Companies House charges over its property wherever the property is situated. Issues over the law governing validity and priority are left to the general law. 
3.252	The registration requirement - or rather its only effective sanction, that an unregistered charge is ‘void against the liquidator or administrator or any creditor of the company’ - is of limited effect in relation to collateral that is overseas. 
3.253	The effectiveness of a charge over assets situated in another jurisdiction may arise in two different contexts. First, it may arise under the law of the place where the asset is situated, for example if there is a dispute between two parties each of whom claims an interest in the collateral, or if a creditor claims to have security over the assets but this is disputed by the liquidator acting on behalf of the unsecured creditors. Secondly it may arise on insolvency, in a dispute between a potential chargee and the body of unsecured creditors, when the law of the insolvency applies.
3.254	In the first situation - for example when the dispute is between a chargee and an execution creditor – the matter will be determined according to the lex situs. The issue of whether the charge is registered under English law is unlikely to be relevant to the legal system according to which the question is decided. For example, a charge might be recognised by English law but give no rights under the lex situs (for example, because the lex situs does not recognise non-possessory security over that type of asset). The charge will not therefore be enforced. If on the other hand the lex situs does recognise that the chargee has an interest in the assets, it is likely to enforce that right whether or not the charge has been registered in England and Wales. 
3.255	In the second case, as the Scottish Law Commission put it in their report:
… on liquidation or receivership a question may arise as between the holder of the security and the body of general, unsecured creditors whether assets beyond the territorial jurisdiction of the country in which the company is incorporated and under whose system of law the charge security was created are embraced by the… charge. The decision in re Anchorline v Henderson Brothers Ltd is such an example, a floating charge granted by an English registered company being held, in England, to give its holder right to the proceeds of the company’s assets situated in Scotland. Such a question appears essentially to be one for the law of the country of liquidation or receivership, that is to say, normally the law of the country of incorporation.
In English insolvency proceedings such as those in Anchorline, a registered charge was effective against the unsecured creditors even though (at that time) a floating charge was not valid under the law of Scotland where the assets were. 
3.256	The main reason for including overseas assets within our scheme is to deal with the second situation, in which there are insolvency proceedings in England and Wales. The English court may exercise its jurisdiction in personam over the liquidator to enforce the contract between the chargee and the company, and may require the liquidator to pay the proceeds to the chargee, as it did in Re Anchorline. This outcome under current law depends upon the charge being properly registered in England and Wales. We thought that any change would risk misleading unsecured creditors and possibly subsequent secured parties. We concluded that we should maintain the approach of the current law, so that a charge over assets should be registrable no matter where the assets are situated. The overwhelming majority of consultees who commented on this question agreed. 
3.257	However, we also agree with some consultees that it should be made clear in the regulations that they do not affect rights acquired by the chargee or third parties in assets that are in another jurisdiction according to the law of that jurisdiction. This is for two reasons. First, a chargee then will know that if it has acquired rights under the lex situs its interest will be valid without registration here, and that the priority of its charge will depend on the lex situs. Secondly, it respects the fundamental rule of private international law that proprietary issues such as perfection and priority are governed by the lex situs. 
3.258	We recommend that the regulations should apply to charges created by a company registered in England and Wales over its assets wherever they are located but without prejudice to the rights acquired by the chargee or third parties in assets according to the law of the jurisdiction where the assets are situated.
Companies incorporated outside Great Britain 
3.259	There is universal agreement that the current law that applies to charges created by companies incorporated outside Great Britain (‘oversea’ companies) is profoundly unsatisfactory and must be changed. The current law was examined in detail in the CP. In brief, Companies Act 1985 section 409(1) extends the provisions of Part XII, Chapter I to charges on property in England and Wales which are created by an ‘oversea’ company which has an established place of business in England and Wales. In NV Slavenburg’s Bank v Intercontinental Natural Resources Ltd Lloyd J held the effect of the provisions to be that if the company has a place of business here, particulars of the charge must be sent for registration even though the place of business has not been registered, and thus the company did not appear on the companies register. It will often be far from clear to the lender that the company has no place of business in England and Wales that should have been registered. The rule leads to frequent precautionary attempts to register. In practice Companies House merely records that the documents were sent and returns them, with a letter confirming that the charge was sent for registration and thus that any statutory requirement has been met. It is impossible for searchers to find out about such ‘registered’ charges, which defeats the object of registration. 
3.260	Since the Slavenburg decision, amendments have been made to Companies Act 1985 in order to implement the Eleventh Company Law Directive. Companies that have a branch here must register that under s 690A; they are then exempt from having to register a place of business even if they have one. Companies with a registered branch here must deliver particulars of charges over property in Great Britain but there is no such requirement on a company that has a branch but has not registered. 
3.261	Those who responded to the CR were divided on what should replace the current law. There was support for three views: (1) that no charge created by an oversea company should be registrable. The place for registration and searching is the state in which the company is incorporated or registered; (2) that charges created by oversea companies that have in fact registered a place of business should be registered but not others; (3) that any charge created by an oversea company should be registered, as we recommended in the CR.
3.262	The first option, that no charge created by an oversea company should be registrable, has its attractions. In some ways it would be very much easier if for each company there were just one place in which it is necessary to file or to search, and the natural place is the state in which the company is incorporated or registered. Revised Article 9 of the UCC provides, in effect, that filing should take place in the jurisdiction in which the debtor company is registered. However, we reject this approach because it is not workable in our context in which most of our trading partners, particularly in Europe, have no directly equivalent registers. Although many jurisdictions require registration of certain types of charge, they are likely to apply only to charges that are recognised in the jurisdiction, and there can be no certainty that they will require registration even of those types of charge when the collateral is in what to them is a foreign jurisdiction. If charges created by all oversea companies were to be exempted from registration, those seeking to buy or take security over the ‘English’ assets of the oversea company, or simply trying to assess its credit-worthiness, would have great difficulty in discovering information about charges that would affect them.
3.263	In addition it seems appropriate that domestic English law, as the lex situs, should continue to apply to questions of priority over collateral that is in England and Wales; and under our scheme priority depends principally on date of registration. It would certainly be possible to exempt charges created by oversea companies over their assets here from all the rules of the scheme but it would result in them being left subject to the current law. That would create unfortunate fragmentation of the law.
3.264	There is no doubt that the second approach, that charges created by oversea companies that have in fact registered a place of business should be registered but not others, would be in some ways be the easiest of the three. By definition Companies House will have a record of such companies and the company can have a registration number against which the name can be cross-checked. However, we said in the CR that a scheme that applied only to companies with places of business here would not offer sufficient protection to buyers or potential secured parties. We also suspected that modern business methods may enable companies to operate in Britain on quite a large scale without having a ‘place of business’ here, for example, if their goods are stored with third parties. Moreover, a ‘registered place of business’ solution would not be appropriate were the scheme to be extended to unincorporated debtors, which will not have any obligation to register even if their sole place of business is in England and Wales.
3.265	In the CR we favoured the third solution, that the scheme should apply to charges created by any oversea company over its assets in England and Wales. We argued that this approach has advantages for all concerned. First, whether the company is a British one or a foreign one, parties who are thinking of buying or taking security interests over the goods in England will want to able to check to see what SIs may exist over them already, as will unsecured creditors wishing to know whether they have any chance of being able to levy execution against the company’s goods in England. Secondly, we thought that secured parties taking security interests over the ‘English’ assets of foreign companies would appreciate the certainty of knowing that if they had registered, their interest would be valid and (subject to the normal rules) its priority will be protected. Thirdly, this would help the debtor company, as it would be able to offer better security to creditors.
3.266	One argument used against the third approach was that overseas lenders taking security over an oversea company’s ‘English’ assets might not be aware of this ‘local’ registration requirement and might find their charge unexpectedly unenforceable. We are not convinced that this is a serious problem. First, particulars of charges created by oversea companies that do not have a registered place of business here are sent in large numbers to Companies House. This suggests a degree of awareness of ‘local’ registration requirements. Secondly, we think that any lender relying on security over assets outside the company’s ‘home’ jurisdiction should be aware that the lex situs may have different or additional requirements. We still think these arguments carry weight.
3.267	Thus while none of the three solutions can be shown conclusively to be the best, on balance we prefer the third solution, at any rate until such time as a majority of our trading partner states have registers of charges (including those created by companies registered in the state over their assets in other jurisdictions). We are reinforced in this view by the fact that the third solution was the one supported by a majority of the members of the working group established by the Law Society, which made a particular study of this issue. We are very grateful to them for the trouble they took.
3.268	We recommend that the full scheme should apply to charges created by any oversea company over assets in England and Wales. 
3.269	Goods owned by an oversea company may be brought into this country while they remain subject to security of some kind created in another jurisdiction. If this amounts to a charge under English law it should be registered, so that other creditors will know that the goods are subject to a charge, but there seems to be no need for registration to be made immediately. Unsecured creditors are very unlikely to rely on the company’s possession of apparently unencumbered goods until some time has elapsed; and potential secured creditors can be expected to discover that the goods have been imported recently and make appropriate enquiries. Therefore, like the scheme proposed in the CR, the regulations provide a 60-day grace period for registering existing charges over imported goods. If the charge is registered within the 60-day period it will be treated as having priority from when the original charge was created. However a party who buys the goods before the charge is registered and does not know of it will take free.
3.270	We recommend that existing charges over goods brought into the country by an oversea company should have to be registered within 60 days of the import. 
3.271	Some goods, for example, aircraft, ships and lorries, are likely to be brought into the country and taken out again regularly. Under the regulation just described any charge over them would only have to be registered if any stay were to exceed 60 days. However even this may be inconvenient and with registered aircraft and registered ships belonging to oversea companies it can be avoided to some extent by treating them as ‘situated’ in the country where they are registered, regardless of their actual location at the relevant time. 
3.272	We recommend that for the purposes of the scheme, registered aircraft and registered ships belonging to oversea companies should be treated as ‘situated’ in the country where they are registered, regardless of their actual location at the relevant time. 
Collateral in Scotland
3.273	In this section we deal with the case of security created by a company that is registered in England and Wales over assets in Scotland. 
3.274	The law of security in Scotland is different from that in England and Wales. For example, Scots law does not recognise fixed non-possessory charges over goods, nor can a fixed security be created over an incorporeal such as a debt unless the debt is assigned and notification of the assignment is given to the account debtor. Thus were a company registered in England to purport to give a fixed charge over equipment that was in Scotland, the charge would simply be ineffective to confer any proprietary right on the chargee. If it were to create a fixed charge over its book debts payable in Scotland, the charge would only be effective to confer any proprietary rights if the chargee notified the account debtors. 
3.275	The floating charge was introduced into Scots law by statute in 1961. Particulars of charges created by companies registered in Scotland are registrable at Companies House in Edinburgh. It appears that under current law, a floating charge created by an English company will be treated as effective in Scotland provided that it was properly registered in England and Wales.
3.276	The Scottish Law Commission has also been considering the registration of rights in security created by companies. In its report it recommends that in order to constitute a floating charge under Scots law it should be necessary to register the text of the deed in a Register of Floating Charges. There should no longer be any requirement to register any security created by a company with the Registrar of Companies.
3.277	If this recommendation were implemented it would mean the end of the ‘reciprocal registration’ arrangements, even if no change is made to the law of England and Wales affecting company charges. As the SLC report puts it, ‘a floating charge granted by a company incorporated in England and Wales and intended to be effective in Scotland as respects assets located in Scotland should require to be registered in the Register of Floating Charges’. The practical effect would be that those taking floating charges over all the assets of ‘English’ companies that have property north of the border might find it necessary both to submit particulars to the Registrar of Companies in Cardiff (or under our recommended scheme, to file a financing statement on the company securities register) and to register the terms of the deed on the Register of Floating Charges in Scotland. 
3.278	It would in principle be possible to provide that a floating charge that applied only to the ‘English’ company’s ‘Scottish’ assets should not have to be registered in England and Wales; searchers could discover the charge by searching the Register of Floating Charges. However that seems unattractive. First, it would mean that a party interested in the overall state of the company would have to search in two places. Secondly, we think it will be very uncommon that the company will create separate floating charges over its assets in Scotland and its assets in England and Wales respectively. There would be no saving in so doing. We therefore conclude that even such a charge should in principle remain registrable in England and Wales, though (as with charges created by English companies over their assets in jurisdictions outside Great Britain) this will be without prejudice to the rights acquired by the chargee under the lex situs. 
3.279	Other forms of security granted by an English company over its assets in Scotland will continue to be enforceable in Scotland only so far as the security is recognised by Scots law and is duly registered in England and Wales. These too should remain registrable in England and Wales, subject to the same proviso. 
3.280	We recommend that a charge created by an English company over assets in Scotland should be subject to the scheme, including the normal rules of registration.
Charges created by Scottish companies over assets in England and Wales
3.281	Under current law, most charges created by a company registered in Scotland over its assets south of the border are registrable at Companies House in Edinburgh. It seems that an English court will enforce them provided they have been so registered. 
3.282	If the SLC’s recommendations were to be implemented, no charges created by companies would be registrable at Companies House in Edinburgh. We think that charges created by companies registered in Scotland over their assets in England and Wales should then be treated in the same way as those of oversea companies; they should be registered in the Company Security Register and should be subject to the other rules of the scheme. This should include floating charges, even if they were registered in the Register of Floating Charges.
3.283	Were Scots law to remain unchanged, we think that it would be possible to exempt charges over their English assets from the requirement to file at Companies House in Cardiff; registration in Edinburgh could be treated as a surrogate. The information that would be registered in Edinburgh could, we understand, be made available to anyone who searched the Company Security Register; the information is much the same as would be on the financing statement. Priority would depend on the normal rules of the scheme.
3.284	We recommend:
(1)	If the scheme of registration of charges created by companies registered in Scotland remains unchanged, registration at Companies House in Edinburgh should be treated, in relation to the company’s assets in England, as due registration for the purposes of English law; the remainder of the scheme should apply to charges created by a Scots company as it does to an oversea company. 
(2)	If the recommendations of the Scottish Law Commission are implemented, charges created by a company registered in Scotland over assets in England and Wales should be treated in the same way as charges created by an oversea company.
Transitional provisions
Existing charges that have been duly registered 
3.285	In the CR we provisionally recommended that pre-commencement registrable charges that were registered before commencement should be treated as perfected under the scheme. They should retain their existing priority as against other pre-commencement charges and pledges. As against post-commencement security interests, their priority should depend on the normal rules of priority of the new scheme. In practice this means that a pre-commencement registered charge, whether fixed or floating, will have priority over post-commencement interests. 
3.286	This was generally welcomed, and we confirm it as our final recommendation.
3.287	We recommend that pre-commencement registrable charges that were registered before commencement should be treated as registered under the scheme. They should retain their existing priority as against other pre-commencement charges and pledges. As against post-commencement security interests, their priority should depend on the normal rules of priority of the new scheme.
Existing charges that are not currently registrable 
3.288	On charges that are not registrable under current law (which would include those created by oversea companies that do not have a place of business here), we asked whether there should be a transitional period during which pre-commencement charges that are not registrable under current law should have to be registered. Without that there would continue to exist a set of invisible but effective charges. However the cost would be significant - not so much the cost of the filing itself but the cost of determining whether financial institutions have previously unregistrable charges that need to be perfected. We were told that the records of many secured parties are incomplete or not in a form that makes it easy to determine such a question. 
3.289	The general response to our question was that the additional information that would be gained would not justify the cost involved. 
3.290	We recommend that charges which before commencement of the scheme were not registrable should not have to be registered after the scheme comes into effect. They should retain their existing priority as against other pre-commencement charges and pledges, and (whether fixed or floating) should have priority over post-commencement interests.
Provisions of Companies Act Part XII
3.291	The scheme that we have recommended in this Part would replace the vast majority of provisions in Part XII of the Companies Act 1985. There are some other provisions that require discussion.
Registration of enforcement of security
3.292	Section 405 provides that if a person obtains an order for the appointment of a receiver or manager of a company's property, or appoints such a receiver or manager under powers contained in an instrument, he shall within 7 days of the order or of the appointment under those powers, give notice of the fact to the registrar of companies; and the registrar shall enter the fact in the register of charges.
3.293	We did not discuss this section in the CR. In discussion with consultees, it was suggested that it should be preserved. We see no reason not to do so.
3.294	We recommend that the new scheme should provide for the registration of the appointment of a receiver or manager.
Companies to keep copies of instruments creating charges
3.295	Section 406 requires every company to keep a copy of every instrument creating a charge requiring registration at its registered office. Under section 408 these must then be open to inspection by members of the company and creditors. 
3.296	We see no reason to retain this provision from the point of view of the law of security. Those dealing with the company (a wider group than is covered by section 408) will have access to the Company Security Register. They will thus be able to find out about the charge and they can ask the debtor company to supply further information, including a copy of the charge document if they need it. However, we think that whether or not this provision should be retained may raise issues beyond those of security law, since members of the company may have interests different to those of secured and unsecured creditors. Accordingly we make no recommendation on the point.
3.297	We make no recommendation as to whether or not sections 406 and 408 of the Companies Act 1985 should be retained in any new legislation.
Companies’ registers of charges
3.298	Section 407 requires a company to keep a register of all charges (whether or not registrable at Companies House) at its registered office. It must give a short description of the property charged, the amount of the charge and, except in the case of securities to bearer, the names of the persons entitled to it. Under section 408 the register of charges must be open to the inspection of any other person on payment of a fee not exceeding 5 pence for each inspection.
3.299	In the CP we suggested that the company’s own register of charges fulfilled no useful function in this context, and was not worth maintaining. Consultees in general agreed with our suggestion. From the point of view of securities law, if all charges (save those over financial collateral where the chargee has obtained control) are to be shown on the Company Security Register, there seems no reason to require the company to keep its own register.
3.300	We consider that from the point of view of the law of security, there is no reason to require the company to keep its own register.
Should charges be evidenced in writing signed by the debtor?
Why require writing signed by the debtor?
3.301	In the CP we provisionally proposed that, as under Article 9 of the UCC and the PPSAs, a written security agreement signed by the debtor should be necessary for any non-possessory security interest. There was unanimous support for this from those who commented. In the CR we doubted the value of the requirement and, because it would be complicated to draft, we recommended that there be no requirement. 
3.302	Responses that we received to the CR were generally supportive. For example the Financial Law Committee of the City of London Law Society said they were strongly opposed to any additional requirement of writing. 
3.303	We have been concerned that companies buying goods subject to a retention of title (RoT) clause might find that by accepting the goods on the supplier’s standard terms and conditions they have unwittingly agreed to a charge in the form of an ‘extended’ RoT clause over any new goods that are made from the goods supplied and over the proceeds of sale of either the original or the new goods. 
3.304	The courts have almost invariably held that extended clauses amount to floating charges that are registrable under Companies Act 1985, section 395. In practice these charges are seldom registered, probably because, unless a special ‘master agreement’ were made, it would be necessary to register each transaction under which goods are supplied on RoT. Under our scheme, the reduced cost of filing and the possibility of filing just once to cover a series of transactions between the same parties will make it much less costly to register charges. The supplier may insist on registering the charge created by the ‘extended’ RoT clause and this might affect the buyer’s ability to raise finance on the strength of its stock-in-trade or to factor their debts. Financiers who have existing arrangements with the buyer will normally have filed already and will not be affected, but if the buyer wished to arrange a new source of finance the incoming financier would want to ensure that it would have priority over the supplier’s charge over stock or proceeds.
3.305	We are told that this has not proved to be a problem in either the US or Canada. However, in order to re-assure stocking and receivables financiers, we wondered whether the charge should be unenforceable unless it is evidenced by writing signed by the chargor. We have concluded, however, that a writing requirement is not necessary for this purpose. First, a supplier who has taken a charge is entitled to file in relation to that charge, but it is only entitled to file in respect of future transactions if the debtor has consented. If it has no reasonable excuse for filing when the debtor has not consented, it will be liable for any loss it thereby causes the debtor; and if it is shown to have filed without an honest belief in the debtor’s consent it may incur a criminal penalty. Thus suppliers who want to file to cover ‘extended’ RoT clauses in future transactions would be well advised to obtain the buyer’s specific agreement to the filing. That would be far more effective in making sure the buyer is aware of the charge than a mere requirement of writing. Secondly, if a filing is made the buyer will receive a verification statement. This will act as a warning to check the terms on which the goods are being supplied. If they include a charge that might affect its ability to raise finance in the future the buyer should insist that this be removed before ordering further goods.
3.306	We recommend that for charges over collateral (other than financial collateral) there should be no requirement that the charge agreement be in writing.