Reforming bills of sale—what might the Goods Mortgages Bill look like?

Daria Popescu, lawyer at the Law Commission, considers the draft proposals made by the Law Commission for the Goods Mortgages Bill to modernise bills of sale.

Original news

The government intends to introduce legislation to deliver a consumer credit market that provides a better deal for consumers. It is proposing, among other things, to repeal the Bills of Sale Acts and replace them with a Goods Mortgages Act that will allow individuals to use their existing goods (such as a vehicle, or a piece of art) as security for a loan.

Why was reform needed, what is the objective of the new law?

Bills of sale are a way for individuals to use their goods as security for loans or other obligations, while retaining possession of those goods. Bills of sale are regulated by the Victorian Bills of Sale Act 1878 and the Bills of Sale Act (1878) Amendment Act 1882. The Bills of Sale Acts are unfit for modern business practices, as they:

  • fail to offer adequate protections to borrowers or to third parties who acquire interests in the goods
  • impose unnecessarily burdensome formalities for creating and registering security, which result in significant costs for lenders, and
  • work within rigidly defined boundaries, which stifle the ability of unincorporated businesses and high net worth individuals to use their goods as security

The Law Commission recommended that a new Goods Mortgages Bill repeal the Bills of Sale Acts and replace them with a system of goods mortgages. The Bill is intended to:

  • protect vulnerable borrowers and innocent private purchasers of mortgaged goods
  • reduce administrative requirements for lenders, and
  • make it easier for high net worth individuals and unincorporated businesses to use their goods as collateral

What is the target timescale?

The Goods Mortgages Bill was announced by the government in the Queen’s speech in June 2017. The Law Commission has prepared draft clauses which it is consulting on over the summer. It is hoped that this Bill could be introduced under the special procedure for uncontroversial Law Commission Bills.

What types of financing transactions will fall within the scope of the new law?

The Bill covers a wide-range of financing transactions. The main market affected by the proposed law is logbook lending, a type of consumer credit secured against the consumer’s car.

Unlike bills of sale, the Bill allows goods mortgages to be used to secure revolving credit, guarantees and indemnities if the mortgagor is high net worth or (in the case of revolving credit) secures business credit over £25,000. Together with the reduced formality requirements (see below), this could boost lending against high value assets, such as art, antiques, jewellery and watches. It could also facilitate business-to-business transactions where one of the businesses is unincorporated and wishes to obtain better terms on the security of its assets.

In the consultation document, the Law Commission asks whether goods mortgages should only be granted to secure monetary obligations (ie loans), or whether individuals should be able to secure any obligation.

The draft clauses also propose to require registration of those ship mortgages which are currently not required to be registered in the central ship register. The Law Commission proposes an alternative to ship owners: either they register their ships in a part of the ship register which allows registration of mortgages, or they grant (and register) a goods mortgage over their ship.

How will the process for taking security under the new law differ from existing law?

Security bills of sale must be drafted in accordance with a prescribed form, in antiquated language, and are subject to 12 requirements, including:

  • specifying the exact amount of the loan secured, the interest rates and the repayment dates
  • attaching a declaration of receipt of monies by the borrower
  • attaching a separate schedule with a specific description of the security
  • Registering bills of sale also requires an affidavit to authenticate the fact that the bill of sale was properly signed and witnessed.

In contrast, the proposed formalities for goods mortgages are less burdensome:

  • no requirement for a fixed sum, interest rates and exact repayment dates
  • no requirement for a declaration of receipt
  • no requirement for separate schedules or for the goods mortgage to be a separate document from the underlying agreement
  • no requirement for an affidavit

Lenders would have more flexibility in structuring the goods mortgage agreement and would be able to use electronic signatures.

What sanctions will lenders who fail to follow it face?

Failing to comply with bills of sale formalities has draconian sanctions—not only is the security void, but the lenders lose the right to repayment of the loan. Under the draft Goods Mortgages Bill, non-compliance with formalities results in invalidity of the goods mortgage, but the mortgagee is still entitled to performance of the secured obligation.

Non-registration also renders bills of sale void. In contrast, an unregistered goods mortgage would still be valid against the mortgagor, but not their trustees in bankruptcy or third parties (other mortgagees and purchasers of the secured goods).

How will the process for enforcing security under the new law differ from existing law?

Currently, lenders can seize the goods following a single default, even if the majority of the loan has been paid off. The Consumer Credit Act 1974 (CCA 1974) grants additional limited protection to bills of sale securing regulated credit agreements—a default notice and the possibility for a borrower to apply for a time order (ie more time to pay).

The Goods Mortgages Bill introduces a requirement for lenders to serve a ‘possession notice’. If the borrower has paid back at least one-third of the loan and is not exempt (high net worth individuals and business credit over £25,000 can choose to be exempt), the lender would have to send the borrower a notice outlining three options for the borrower:

  • require the lender to obtain a court order to take possession
  • exercise the right to voluntary termination, or
  • ask for more time (28 days) to seek advice

Where no possession notice is required, the lenders can enforce as under bills of sale, with the proviso that (similarly to CCA 1974, s 92) they would not be able to enter premises without a court order or the permission of the occupier.

If the goods have been sold on to an innocent private purchaser with no actual knowledge of the goods mortgage, the goods mortgage would not be enforceable against them. However, the lender would still be entitled to repayment of the debt by the borrower.

What is the expected impact of the borrower protections upon the lending market?

Most lenders are supportive of the recommendations and agree that the law needs to be modernised. The Law Commission hopes that the additional costs to lenders will be offset by the savings resulting from streamlined formality and registration requirements.

The draft Goods Mortgages Bill and a copy of the consultation document can be downloaded hereThe consultation closes on Monday 7 August.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

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