Part 6	
List of recommendations
We make the following recommendations:
6.1	There should be a new scheme of registration of company charges, to replace Part XII of the Companies Act 1985, and for the priority of security over company property. The scheme should apply also to sales of receivables by a company.
the core scheme
Scope 
6.2	The scheme should apply to security created by companies registered in England and Wales and by Limited Liability Partnerships. (Paragraph 3.12)
6.3	Any charge created by a company should be registrable unless specifically exempted. (Paragraph 3.16)
6.4	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. (Paragraph 3.21)
6.5	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. (Paragraph 3.25)
6.6	Liens that arise by operation of law should be subject to the scheme only for the purposes of priority. (Paragraph 3.27)
6.7	For the purpose of the scheme, pledges should include contractual liens. (Paragraph 3.29)
6.8	In relation to land:
(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 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. (Paragraph 3.38)
6.9	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. (Paragraph 3.41)
6.10	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. (Paragraph 3.45)
6.11	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. (Paragraph 3.48)
6.12	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. (Paragraph 3.58)
6.13	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. (Paragraph 3.63)
6.14	There should be no need to file a fresh financing statement when a company changes its name. (Paragraph 3.66)
6.15	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. (Paragraph 3.68)
The requirement to register
6.16	There should be a Company Security Register in electronic form and the Registrar should make rules requiring information for registration to be submitted in an electronic form. (Paragraph 3.71)
6.17	The duty on the company to send particulars of charges for registration should be removed. (Paragraph 3.73)
6.18	The charge document should no longer be presented for registration, and the Registrar should no longer check the accuracy of the particulars or issue a conclusive certificate of registration. (Paragraph 3.76)
6.19	It should not be compulsory to register a charge but 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. (Paragraph 3.78)
6.20	The time-limit for registration should be removed. (Paragraph 3.82)
6.21	Section 245 of the Insolvency Act 1986 should 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). (Paragraph 3.85)
6.22	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. (Paragraph 3.91)
Details of filing and searching
6.23	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. (Paragraph 3.98)
6.24	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. (Paragraph 3.103)
6.25	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. (Paragraph 3.106)
6.26	There should be no word limit on the description of collateral in the financing statement. (Paragraph 3.109)
6.27	A filing (unless discharged) should be effective either indefinitely or until such date as is indicated on the financing statement. (Paragraph 3.111)
6.28	Charges over property held by the debtor company in trust should be registrable in the same way as charges over property held beneficially. (Paragraph 3.115)
6.29	The financing statement should permit the party filing to record that the chargee is a trustee for others. (Paragraph 3.117)
6.30	The Registrar should have power to make Rules that may require further information on the financing statement. (Paragraph 3.120)
6.31	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. (Paragraph 3.123)
6.32	In relation to errors on the financing statement:
(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. (Paragraph 3.131)
6.33	The following rules on the correction or removal of a financing statement should be adopted:
(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 at the end of 90 days or such longer period as the court may direct, the debtor should be able 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. (Paragraph 3.137)
6.34	In relation to the effect of an unauthorised or accidental discharge:
(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. (Paragraph 1.139)
6.35	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). (Paragraph 3.141)
Priority
6.36	There should be the following ‘residual’ priority rules for fixed charges:
(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). (Paragraph 3.155)
6.37	Priority between a charge and a pledge should be determined by whether the financing statement relating to the charge is registered before the pledge is created. (Paragraph 3.157)
6.38	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. (Paragraph 3.175)
6.39	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. (Paragraph 3.180)
6.40	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. (Paragraph 3.187)
6.41	A lien that arises by operation of law should take priority over a charge, whether registered or unregistered. (Paragraph 3.189)
6.42	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. (Paragraph 3.194)
6.43	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. (Paragraph 3.196)
6.44	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. (Paragraph 3.200)
6.45	As regards execution creditors:
(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. (Paragraph 3.204)
6.46	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. (Paragraph 3.207)
6.47	A registered charge, whether fixed or floating, should have priority over the right of a local authority to distrain for rates. (Paragraph 3.209)
6.48	In relation to transferees (other than secured parties):
(1)	Transferees for value 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 a 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. (Paragraph 3.216)
6.49	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. (Paragraph 3.218)
6.50	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. (Paragraph 3.221)
6.51	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. (Paragraph 3.224)
6.52	The scheme should have no special provisions for the registration or priority of charges over fixtures. (Paragraph 3.226)
6.53	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. (Paragraph 3.228)
6.54	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. (Paragraph 3.230)
6.55	Where the legislation that establishes a 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. (Paragraph 3.235)
6.56	In relation to land:
(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. (Paragraph 3.245)
Territorial application
6.57	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. (Paragraph 3.258)
6.58	The full scheme should apply to charges created by any oversea company over assets in England and Wales. (Paragraph 3.268)
6.59	Existing charges over goods brought into the country by an oversea company should have to be registered within 60 days of the import. (Paragraph 3.270)
6.60	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. (Paragraph 3.272)
6.61	A charge created by an English company over assets in Scotland should be subject to the scheme, including the normal rules of registration. (Paragraph 3.280)
6.62	In relation to charges created by Scottish companies over assets in England and Wales:
(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. (Paragraph 3.284)
Transitional provisions
6.63	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. (Paragraph 3.287)
6.64	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. (Paragraph 3.290)
Provisions of Companies Act 1985 Part XII
6.65	The new scheme should provide for the registration of the appointment of a receiver or manager. (Paragraph 3.294)
6.66	From the point of view of the law of security, there is no reason to require the company to keep its own register. (Paragraph 3.300)
Should charges be evidenced in writing signed by the debtor?
6.67	For charges over collateral (other than financial collateral) there should be no requirement that the charge agreement be in writing. (Paragraph 3.306)
Sales of receivables
Registration and priority of sales of receivables
6.68	Priority of sales of receivables by companies should depend on the date of registration of the financing statement relating to the sale in the Company Security Register. (Paragraph 4.18)
6.69	The sale of a receivable by a company should not be effective against an administrator or liquidator of the company unless it has been registered by the onset of insolvency. (Paragraph 4.25)
6.70	The definition of a receivable for the purpose of our scheme should include only a monetary obligation, whether or not it has been earned by performance, arising from goods or services supplied, energy services supplied or brokerage fees. (Paragraph 4.29)
6.71	The following should be exempt from the scheme:
(1)	the assignment of an unearned right to payment under a contract to a person who is to perform the transferor’s obligations; 
(2)	the assignment of receivables solely to facilitate collection on behalf of the person making the assignment;
(3)	the assignment of a single receivable to an assignee in full or partial satisfaction of a pre-existing indebtedness; and
(4)	the sale of receivables as part of the sale of a business out of which the receivables arose (Paragraph 4.31)
6.72	A sale of receivables should not need to be registered if the sale (by itself or in conjunction with other sales to the buyer) is of such a small proportion of the assignor’s receivables that it would not influence a reasonable person deciding whether to make an advance to the company. For priority purposes, it should be treated as if it had been registered on the date of the sale. (Paragraph 4.34)
Prohibitions against assignments of receivables
6.73	In a contract between a company and a third party creating a receivable payable to the company, a term that purports to prohibit or restrict assignment of the account should be of no effect against a third-party assignee. (Paragraph 4.40)
Territorial application
6.74	The provisions on sales of receivables should apply only to sales by companies registered in England and Wales. (Paragraph 4.45)
Transitional arrangements
6.75	Existing agreements to sell receivables should have to be registered within two years of the commencement of the scheme. During the transitional period, an interest arising under an existing agreement should have priority over any conflicting charge or sale entered into after commencement (whether registered or not). An existing sale registered within the transitional period should be treated as if it had been registered at the date of commencement. (Paragraph 4.48)
Financial collateral
Scope of the provisions on financial collateral
6.76	The regulations should refer to ‘financial instruments’, reflecting the definition of ‘financial  instruments’ in the Financial Collateral Arrangements (No 2) Regulations 2003 (‘FCAR’) with the qualifications that:
(1)	the definition should apply only to directly-held financial instruments, since indirect holdings are treated differently and are covered by other definitions, and
(2)	the definition should include CREST Depository Instruments and similar assets that are constituted as uncertificated securities. (Paragraph 5.27)
6.77	Rights under commodity contracts and to commodities held with an intermediary should be treated in the same way as other financial collateral. (Paragraph 5.32)
6.78	The rules on control over financial collateral should apply to bank accounts and all other forms of ‘cash’ within the meaning of the FCAR. (Paragraph 5.35)
6.79	The regulations should use terminology that reflects that of the Hague Convention on the Law Applicable to Certain Rights in respect of Securities held with an Intermediary and the FCAR. They should refer to ‘financial assets held with an intermediary’ and ‘account holder’ and should define ‘securities account’ and ‘intermediary’ in ways that fit with the Convention and the FCAR. (Paragraph 5.41)
6.80	A charge over financial collateral should be effective in the insolvency of the debtor although not registered before the onset of insolvency provided that either 
(1)	the collateral has been ‘delivered, transferred, held, registered or otherwise designated so as to be in the possession or under the control of the collateral-taker or a person acting on its behalf’ within the meaning of the FCAR; or 
(2)	the secured party has taken control as defined in the regulations, namely, if the debtor is no longer able to deal with the collateral without the agreement of the chargee or pledgee. (Paragraph 5.68)
6.81	In relation to the test of control:
(1)	The draft regulations should set out the methods by which control may be taken over different forms of investment property and cash. 
(2)	There should also be a general provision that the secured party should be regarded as having control over financial collateral for the purposes of the regulations if it has taken steps to ensure that the debtor cannot deal with the collateral without the secured party’s consent. (Paragraph 5.70)
6.82	A chargee or pledgee should not have control of financial collateral unless the charge or pledge and the provision of the collateral are evidenced in writing. For the purposes of defining ‘control’, writing should include an electronic recording of a conversation. (Paragraph 5.77)
6.83	A security interest over financial collateral of which the secured party has negative control should have priority over one where the secured party does not have negative control, and priority as between competing charges perfected by control should depend on the date on which negative control was obtained. (Paragraph 5.94)
Purchasers
6.84	A purchaser for value (including a secured party) who takes financial collateral into its own name without knowledge that the disposition is in breach of a previous charge agreement should take free of the earlier charge. (Paragraph 5.102)
An automatic charge in favour of an intermediary
6.85	Charges should arise automatically as follows:
(1)	An intermediary who credits assets to a buyer’s account before being paid for the assets should have a fixed charge over the assets. 
(2)	A person who delivers certificated financial instruments or assets to a buyer before being paid for them should have a floating charge over the assets. 
In neither case will the charge need to be registered; but nor will the chargee be treated as having control. (Paragraph 5.105)

(Signed)			ROGER TOULSON, Chairman, Law Commission
				HUGH BEALE
				STUART BRIDGE
				JEREMY HORDER
				MARTIN PARTINGTON

STEVE HUMPHREYS, Chief Executive
7 July 2005