On 9 September 2015 the Law Commission published a consultation paper proposing that the Bills of Sale Acts (i.e. the Bills of Sale Act 1878 and the Bills of Sale Amendment Act 1882) be repealed and replaced with a new "Goods Mortgages Act" to govern how individuals can use already owned goods as security for loans whilst at the same time retaining possession of the goods.
The main impact of the new legislation would be on logbook loans (where a motor vehicle is being used as security for borrowing) which constitute the majority of the bills of sale currently registered. However, because bills of sale are also used to create security over other personal chattels (such as valuable works of art and antiques left in the possession of an individual borrower), the effect of the new legislation would be much wider, potentially simplifying this complicated area of law.
The following is a brief summary of some of the proposed changes:
- Simplifying the document requirements. The intention is to simplify the documentary form to make it more suitable for business lending. A goods mortgage (i.e. security interest over goods other than vehicles) would need to be set out in a written document, separate from the loan agreement, and signed by both parties, with the borrower's signature witnessed. It would not be necessary for the document to contain a fixed sum or repayment instalments which would make it possible for this type of security to secure revolving facilities, overdrafts and guarantees. If the lender failed to comply with the document requirements, it would lose any right to the secured goods, as against both the borrower and any third parties, but would still be entitled to repayment of the loan.
- Modernising the registration regime. All goods mortgages (other than logbook loans) would continue to be registered at the High Court but through a new simplified process including allowing submissions by email, removing the affidavit requirement and abolishing the time limit for registration.
- Providing greater protection to borrowers. The Law Commission proposes to apply to goods mortgages securing regulated credit agreements the two protections currently afforded under the hire purchase law. The lender would only be entitled to repossess the secured goods with a court order where the borrower has paid off one third of the total loan amount. In addition, the borrower would be able voluntarily to terminate the loan agreement by handing over to the lender the secured goods in full and final settlement of the loan. This right is proposed to be available at any time up until the lender has incurred costs to repossess the goods.
- Protecting private purchasers. It is proposed that a private purchaser (defined as someone who is not a trade or finance purchaser) should acquire ownership of the goods if they act in good faith and without actual notice of the lender's security interest. The lender would need to go to court to show that a private purchaser had not acted in good faith or without actual notice.
The consultation has been addressed by the Financial Law Committee of the City of London ("CLLS") (in a paper published on 17 December 2015), criticising the proposal to introduce new legislation and instead advocating the abolition of bills of sale without any substantial replacement. The arguments raised by CLLS in favour of the latter include (in relation to security over valuable assets) the availability of other methods to obtain security over such assets whilst allowing the individual to retain possession of them (e.g. through a corporate ownership).
The consultation is now closed and will be followed by a final report to be released this summer. Watch this space for further updates on this topic!