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Reforming registration of company charges

1 December 02

Chairman of the Scottish Law Commission identifies aspects of the system of registering company charges proposed for reform in a Commission discussion paper

by Lord Eassie

The requirement that particulars of certain securities or "charges" granted by Scottish companies should be registered with the Registrar of Companies dates from 1961, when floating charges were introduced into Scots law. The statutory provisions relating to registration of charges by Scottish companies – now to be found in sections 410 to 424 of the Companies Act 1985 – are largely modelled on equivalent English provisions which have existed since 1900. There are four main categories of charges which require to be registered, namely (i) securities over land wherever situated; (ii) securities over certain kinds of incorporeal moveable property, including what the statute terms "book debts"; (iii) securities over ships or aircraft and (iv) floating charges. The consequences of failing to register particulars of a registrable security within 21 days of its creation include the security's being "void against the liquidator or administrator and any creditor of the company". The provisions relating to registration of particulars of securities granted by Scottish companies have been the subject of criticism over the years.1

As part of its wider programme of reform of company law the Department of Trade and Industry submitted, in May 2002, a reference to the Scottish Law Commission requesting the Commission to examine the present scheme for the registration of charges and priority of rights in security as it applies to companies registered in Scotland and to security granted under Scots law by overseas companies and companies having their registered office in England and Wales. In pursuance of that remit, the Scottish Law Commission has published a discussion paper on the topic2 and would welcome views and comments from members of the Law Society of Scotland on the matters raised in that discussion paper.

A parallel but more extensive reference respecting the law in England and Wales was submitted earlier by the DTI to the Law Commission in London which has published its proposals in a consultation paper.3 The law of rights in security is of course an area in which there are substantial differences between the legal systems in Scotland and in England and Wales. Given those differences and its wider remit the Law Commission proposals for companies with a registered office in England and Wales include the introduction of a system of "notice-filing" on the North American model which may extend to embracing the registration of particulars of not only security rights as such but also transactions described as "quasi securities" such as hire-purchase contracts, finance leases or contracts for the sale of goods which contain a reservation of title clause.

Present Defects

So far as concerns the registration of securities granted by Scottish companies, some of the unsatisfactory aspects of the current arrangements are relatively well known. As a source of information regarding the extent to which a company may have granted securities over its property, the register of charges is both incomplete and in some respects unreliable. The register of charges may be incomplete in respect that not all securities or types of security are covered by the current statutory list of registrable securities. The register contains only particulars of the security and not a copy of the security deed itself. However, inaccuracy in the particulars on the register does not invalidate the registration nor does it affect the actual measure of the security right. So reliance on the particulars in the register may be unwise. Even if the particulars recorded initially are accurate they may become out of date. Since the Companies Act requires registration of the particulars within 21 days after the creation of the charge there is what is often described as an "invisibility period". Thus, an inspection of the register of charges which does not disclose the existence of any charge by the company cannot be relied upon as meaning that no floating charge exists, since the company may have created a floating charge in the preceding 21 days.

In so far as the register of charges may be seen as having the function of giving publicity to securities which would otherwise remain covert or secret, it is to be noted that the creation of a fixed security as a real right under Scots law is generally dependent on other forms of publicity, namely, either registration, in the case of standard securities over land and certain other securities, such as ship mortgages, registrable in a specialist register or, in the case of assignations of incorporeal moveable property, intimation to the account debtor.4 Seen from that standpoint the utility of the register of charges in those instances is also questionable. Where the security is given over land or other forms of property for which specialist registers exist, the need to register particulars with the Registrar of Companies presents a duplication of work for the legal profession and conveyancers will be familiar with the need to ensure not only that particulars of a standard security are registered with the Registrar of Companies within 21 days of registration in the Sasine or Land Registers but that the Registrar's certificate of registration is sent to the Keeper of the Land Register within 60 days, if indemnity is not to be excluded by him.

The sanctions for failure to register particulars in time are also seen as presenting some difficulty. The statute places the duty of registering the particulars on the company and accordingly exposes the company and its officers to a fine and to a daily default fine (even though, after the lapse of the 21 days, registration is impossible except with the authority of the court). It also provides that money secured by the charge becomes immediately payable. However, in the event of non-registration the principal sufferer is likely to be the security holder whose security is then "void against the liquidator or administrator and every creditor of the company" – a formula which in itself sits uneasily in the structures of Scots law.

Fixed Securities – an end to registration

In light of these unsatisfactory features of the current arrangements, the present view of the Scottish Law Commission is that the law requires reform. In summary, the principal proposals which the Commission advances in the discussion paper for comment by members of the legal profession and other consultees are that, with the exception of floating charges, the need to register particulars of securities granted by Scottish companies with the Registrar of Companies should cease. Information about standard securities, and other securities constituted by registration in a specialist register, may of course be reliably obtained through a search in those registers. Assignations in security of incorporeal property, which generally require intimation for their constitution, are not widely found in practice – from a survey carried out for the purposes of the discussion paper it appears that standard securities and floating charges together account for 95% of registered charges – and it is not evident why an assignation in security by a company should be treated differently from an outright assignation or an assignation in security by a non-corporate debtor. It is indeed unclear why, in providing for registration of floating charges in 1961, it was thought appropriate to extend registration to other existing forms of security. Giving effect to this proposal would mean that, as respects securities other than floating charges, one would return to the position which obtained in Scotland prior to 1961 and that there would again be no distinction as regards the constitution and validity of those securities, between corporate and non-corporate debtors.

Floating Charges – registration to equal constitution

So far as floating charges granted by Scottish companies are concerned, it is clear that such charges should continue to be subject to some form of registration in order that they receive publicity and the Commission proposes that they should continue to be registered at Companies House in Edinburgh. However, in contrast to the present arrangements, what is proposed is that registration be essential to the creation or constitution of a floating charge. Such a rule would be consonant with the usual rôle of registration in Scots law as constitutive of the right and, perhaps more importantly, it avoids the need for a 21-day or other period for registration and concepts of supervening partial invalidity or other sanctions. As with a standard security, a creditor concerned to have an effective floating charge and concerned to ensure its priority will be alert to effect the registration promptly. The Commission also proposes that transfers of a floating charge from one creditor to another, variations or discharges of a floating charge should be effective only on registration of the assignation variation or discharge. The register of charges being thus concerned only with floating charges, might it not be re-named the "register of floating charges"?

Negative pledges
The discussion paper also contains suggestions for amendment of the law relating to priority. The current "default" rules which apply in so far as there is no relevant ranking agreement or a negative pledge clause in the floating charge are that floating charges rank with one another by date of registration and rank with fixed securities by date of the real right. Since floating charges do not become a real right of security until crystallisation, the effect of the default rules is that floating charges are usually postponed to fixed charges. To avoid this, most floating charges contain a negative pledge clause intended to displace that rule by prohibiting the creation of any future security ranking with or ahead of the floating charge. On the view that a default rule which is almost invariably disapplied is not satisfactory, the Commission proposes that, subject to any ranking agreement, floating charges should rank with other securities (whether fixed or floating) by the date of their creation, and that for this purpose creation should mean, in the case of a floating charge the date of registration, and in any other case the date on which the security was constituted as a real right.

The discussion paper canvasses views on a number of other matters connected with the registration of company securities which it is not possible to discuss in detail in this article. Thus one matter upon which views are sought is whether it would be preferable to register the actual deed granting a floating charge rather than simply particulars of the floating charge. A similar point would arise if, contrary to the Commission's provisional view, a scheme providing also for registration with the Registrar of Companies of securities other than floating charges were to continue, in which event the question arises whether the existing catalogue of registrable charges should be extended or restricted.

Another topic to which the discussion paper adverts is whether within Great Britain the existing reciprocal arrangements whereby Scottish companies register only in Edinburgh and companies incorporated in England and Wales in Cardiff should be preserved, the Commission's preference being for preservation.

The discussion paper can be viewed on the Scottish Law Commission website - www.scotlawcom.gov.uk - and copies may also be purchased from The Stationery Office Bookshop. The Commission would be grateful for comment or observation on the discussion paper. Because of the timetable envisaged by the DTI it is necessary that comments be received by the Commission by 31 January 2003.

The Hon Lord Eassie is a Senator of the College of Justice in Scotland and Chairman of the Scottish Law Commission.