Reforming the law of security

What next for the law of security in England and Wales? Louise Gullifer, barrister, professor of commercial law at the University of Oxford, and executive director of the Executive Committee of the Secured Transaction Law Reform Project, explains the need for law reform.

Where are we now with reforming the law of security?

There have been several reports in the UK recommending reform of the law of secured transactions. The most recent was the work done by the Law Commission culminating in a report in 2005 (LC296), which recommended a scheme based on the Personal Property Security Acts in Canada and New Zealand, though more limited in scope. These recommendations were not enacted, but since then there have been some reforms to the law relating to registration of company charges.

First, overseas companies are no longer required to register charges created over their UK property at Companies House, but are required to keep a register of certain charges if they have an establishment in the UK (the Overseas Companies (Execution of Documents and Registration of Charges) Regulations 2009, SI 2009/1917 as amended by the Overseas Companies (Execution of Documents and Registration of Charges) (Amendment) Regulations 2011, SI 2011/2194).

Second, a new registration regime has been introduced by the Companies Act 2006 (Amendment of Part 25) Regulations 2013, SI 2013/600. All charges are now registrable unless specifically exempt, and electronic registration is now a possibility. These reforms, however, are still narrow in scope.

The Secured Transactions Law Reform Project is looking at the need and shape of future reform much more widely. We are taking, as our starting point, the Law Commission’s consultative report (CP176), which sets out a scheme based on the Saskatchewan and New Zealand Public Sector Accounting Standards (PPSAs). The working groups of the project are examining four areas of secured transactions law:

  • registration
  • priorities
  • insolvency, and
  • financial collateral

Work is still in progress in assessing both the need for reform and what form reform should take, although it has become apparent that there are particular areas causing concern in the lending market. Two of these are the law relating to the ban on assignment clauses in the context of receivables financing, and the distinction between fixed and floating charges. The Financial Law Committee of the City of London Law Society is also looking into these two areas, particularly the latter, and we continue to discuss the issues with them.

Receivables financing is a very important source of finance for small businesses, so anything which limits the availability of this type of financing, or which increases its costs, requires examination. Concern has been expressed by the industry that the inclusion of ban on assignment clauses in supply contracts is inhibiting the financing of the invoices resulting from those contracts.

The project has issued a survey on ban on assignment clauses and the preliminary results indicate that the presence of these clauses does cause some problems and increased costs in certain contexts. The UK government has included a power to make regulations providing that a ban on assignment clause has no effect, either generally, or in relation to persons of a prescribed description, or only for prescribed purposes, in its Small Business, Enterprise and Employment Bill (clauses 1 and 2), which is the first step towards a limited control of such clauses.

The law concerning the distinction between fixed and floating charges raises particularly complex issues. The distinction relates particularly to the funding of insolvency proceedings, and one of the project’s working groups is considering this issue, with particular regard to how the issue is dealt with in other jurisdictions, particularly Australia.

Australia reformed its personal property security law by the Australian Personal Property Securities Act 2009, and, recently, a review has been instigated. The project is closely in touch with experts from all PPSA jurisdictions (as well as other jurisdictions where the law has recently been reformed) and is monitoring the Australian review closely. These comparative viewpoints are helpful in assessing the benefits of future reform, as well as any possible risks.

What does the future hold? Will the proposed reforms be adequate?

One of the aims of the Secured Transactions Law Reform Project is to investigate how the law can be made more modern and able to deal with the challenges faced by financiers and borrowers in the future, both in this country and internationally. Advances in technology now mean that transparency can be achieved more cheaply and easily than before, and we are investigating techniques such as communication between registers and simpler electronic registration.

It is imperative for efficient commercial activity that the law is as clear and simple as possible. The existing law is complex and not readily accessible to non-lawyers or those in other jurisdictions. The object of the project is to seek to put the law in this area into an up-to-date and coherent form—easier and simpler to understand and operate than the existing and (in some cases) somewhat outdated systems. The project seeks to engage all those involved in secured lending in its work, and welcomes comments and offers to be involved. More details of the work of the project can be found on the Secured Transactions Law Reform Project website.

Interviewed by Nicola Laver.

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

First published on LexisPSL Banking & Finance. Click here for a free trial.

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