On 6 April 2013 we expect secondary legislation to come into force1, introducing new rules for registering security created on or after that date. Charlotte Drake looks at what will change, what will stay the same, and some potential issues arising from the new regime.
At the time of writing, we understand the secondary legislation setting up the new registration regime for companies is in final draft form.
What is changing?
The main changes under the new regime are as follows:
- There will be a single set of rules and forms for security granted by companies incorporated in Scotland, Northern Ireland and England and Wales.
- The criminal sanction against the company and officers for non-registration of a registrable charge will no longer apply.
All charges granted by UK companies and LLPs will be registrable other than:
- Rent deposits.
- Charges by Lloyd’s members to secure their underwriting business.
- Charges excluded by another statute. For example, The Financial Collateral Arrangements (No.2) Regulations 2003 exclude any requirement to register "security financial collateral arrangements". As a result, as under the current rules, fixed security over bank accounts and shares will often not be strictly registrable.
- The new particulars of charge will include the ability to state whether the charge includes a negative pledge and, if so, its scope.
- There will be significant changes in the formalities of registration:
- Introduction of electronic filing at Companies House (although hard copy filing remains possible).
- New, much shorter, forms for the particulars of charge. "Yes" or "no" tick boxes will address much of the content.
- A certified copy of the signed charge document will be submitted with the particulars of charge (rather than the original). This will then be available on the public register. However, it will be possible to redact signatures, bank account details and "personal information" from the certified copy.
What survives from the existing regime?
- The time period for registration remains 21 days, beginning with the day after the date of creation of the charge. However, the new rules clarify what the "date of creation" of a charge means.
- If a registrable charge is not registered within the 21-day period, it becomes void against an administrator, liquidator or creditor of the company, and any debt secured by the charge becomes immediately repayable.
- If registration does not occur within the time limit for registration, it remains necessary to apply to court to extend the time period.
- All security granted by overseas companies remains non-registrable.
Registration as notice to third parties: is there any change?
Why notice matters
Security is not registered at Companies House primarily to protect its priority. It is registered to ensure it will not be void on insolvency and against other creditors. However, registering security at Companies House can affect priority. This is because the extent to which a third party can acquire a right in
an asset free from, or with priority over, existing security may be determined by whether that third party has:
- notice of the existing security; or
- where the existing security is a floating charge, notice of a negative pledge in favour of the floating charge holder,
at the time of acquiring its interest.
The information on the register is clearly notice to those who actually check it. However, registering any information that must be registered also probably gives constructive (or deemed) notice to those who could reasonably be expected to look for it. An incidental benefit of registering security at Companies House can therefore be that it helps to protect the priority of the security holder.
Do the new rules affect the position on constructive notice?
The new registration regime potentially affects the position on constructive notice described above in the following ways:
- Registration is no longer compulsory (i.e. there is no criminal sanction for a failure to register). One could therefore argue that registration under the new scheme does not give constructive notice of anything registered.
It seems unlikely that a court would agree with this argument. From the security holder’s perspective, registration of registrable security is no more "voluntary" than it was before: unregistered security will be void. Even for the security provider, registration is hardly voluntary, given that on a failure to register the secured debt becomes immediately repayable.
- Unlike under the old rules, the registration form must now state whether the security document contains a negative pledge. On that basis one could now argue that a later security provider has constructive notice of any negative pledge to the same extent as it has constructive notice of the charge itself. If that is the case, the new rules may make a registered floating charge less vulnerable to subsequent security interests.
- The security document rather than the registration form is now the key registered document for providing information about the security to third parties. Secured parties should therefore ensure that security documents contain full details of the scope of the security. In particular, definitions of any assets subject to the security should be included in the security document itself (rather than by reference to definitions in a facility agreement or other document). This will ensure a third party has the best possible notice of the scope of the security.
Until the court looks at the issue of constructive notice under the new registration regime there will remain some uncertainty as to whether there has been any substantive change on these points