In August 2012, the UK Department for Business, Innovation and Skills (BIS) published draft statutory instruments, amending the UK regulations as to security1 registration for companies registered in England, Wales, Scotland or Northern Ireland (the Draft Company Regulations) and Limited Liability Partnerships registered in England, Wales, Scotland or Northern Ireland (LLPs) (the Draft LLP Regulations), as well as explanatory notes in respect of these draft statutory instruments (the Explanatory Notes).2 The Draft Company Regulations and the Draft LLP Regulations (together, the Draft Regulations) are intended to revise the regime in the Companies Act 2006 (the CA 2006) for the registration at Companies House of security created by companies and LLPs.
The existing obligation on UK companies to register registrable security (including mortgages and a wide range of charges over assets), with a criminal sanction for failure to do so, is to be removed and replaced by a permission for all security (with a few exceptions) to be registered with no criminal sanction for failure to do so (except in limited circumstances). There will instead be a commercial motivation to register charges, as any registrable charge will become void if it is not registered within 21 days of being deemed to have been created. The Draft Regulations also create a more modern filing system to allow better identification and tracking of security creation and enforcement.
The proposed changes are positive, as they should improve transparency and will make filings in respect of security easier. However, the detail of some of the Draft Regulations is unclear and requires further explanation and development.
The key proposals of the Draft Regulations are as follows:
- Introducing a single UK-wide system of registration of security.
- Introducing electronic filing to simplify the security registration process, including requiring a certified copy of the entire security instrument and a brief statement of particulars to be filed.
- Removing criminal sanctions, which currently apply to the company and every officer who is in default,3 for failing to register a registrable security in time (however, commercial sanctions will remain in that such security may be invalid against a liquidator, administrator or creditor of the security provider).
- Introducing the permission for almost all types of security,4 created in any jurisdiction, by a company or LLP registered in England and Wales, Scotland or Northern Ireland, to be registered.
- Improving the access to and use of information available at Companies House and ensuring security providers allow access to copies of their security.
It is expected that the Draft Regulations, which may be amended further once a consultation which finished in early September is fully considered, will come into full force in the UK in April 2013.
2. CURRENT REGIME
The categories of security which must be registered under the current regime5 are detailed.6 The requirement to register at Companies House applies whether the asset over which the charge is created is situated in the UK or not.7
Charges do not need to be registered when the chargeholder is either the Bank of England, the central bank of a country or territory outside the UK, or the European Central Bank.8 Certain security over financial collateral such as cash, financial instruments, and credit claims9 are also exempted from the registration requirements under English law.10
However, irrespective of the above exemptions, most security is registered in practice because security documents generally contain more than one type of charge, at least one of which is registrable. Additionally, the sanction of invalidity (and possible criminal sanction) means that companies tend to take a cautious approach, registering security if they are in doubt as to whether or not it is registrable.
3. THE DRAFT REGULATIONS
3.1 Must security be registered and by whom?
The Draft Regulations alter the dynamic of security registration in the UK from an obligation which carries criminal sanctions for non-compliance to a judgment on the part of the presenter of the security or the company as to whether the particular security needs to be registered. If a company/LLP does not register a registrable security along with particulars of that security, within the given time limit, that security instrument will be void.11 Therefore, in practical terms, registrable security must still be registered.
Registrable charges are varied and include a mortgage, a standard security, an assignation of security, and a series of debentures. However, certain charges need not be registered:12
- cash held by a landlord as security for a tenant’s obligation under a lease;
- a charge created by a member of Lloyd’s to secure its obligations in connection with its underwriting business; anda
- pledge or lien over property.
3.2 21-day registration time limit
The Draft Regulations do not modify the current 21-day time limit from creation, for registration of registrable security, in a material way. However, they do set out in detail what the “date of creation” means in relation to different types of security and, therefore, when the 21-day period allowed for delivery starts to run.13
For simple contracts, the period begins to run on the date on which it takes effect. For deeds, there are three possible dates of creation: for a deed that has been executed and has immediate effect on execution and delivery, the date of delivery; for a deed that has been executed and held in escrow, the date of delivery into escrow; and for a deed that has been executed and held as undelivered, the date of delivery.
3.3 Notifications to Registrar
The requirement to notify the Registrar of matters relating to the enforcement of security is set out in some detail in the Draft Regulations.14 If informing Companies House that a receiver or manager has been appointed in respect of security, information such as the date of creation of the security and a short description of the instrument creating or evidencing the security, are required. The Draft Regulations provide that this information will be placed on the register at Companies House, allowing users of the register to track the enforcement process in relation to that security. The requirement to notify the Registrar as to the initiation or cessation of enforcement action remains mandatory and is subject to criminal sanction.
The Draft Regulations also clarify the process for notifying Companies House of the full or partial satisfaction of obligations secured by any registered security and the full or partial release of that security. The Draft Regulations state that any person may deliver a statement of full or partial satisfaction or release of security. However, there is no requirement to explain why the statement is made by persons other than the security holder, only that the person making the statement gives an indication of their interest in the charge. Previously expressed BIS concerns about possibly fraudulent satisfaction/release filings have not been addressed in the Draft Regulations.
3.4 Status of certificate of registration
The Draft Regulations indicate that the certificate of registration issued by the Registrar will only be conclusive evidence that the documents required by the section concerned were delivered to the Registrar before the end of the relevant period allowed for delivery. There is no indication that the certificate will contain any more information than the registered name and number of the security provider and the unique reference code (URC) allocated to the security.15
3.5 Unique Reference Code
A key feature of the revised regime is the allocation of a URC to each security. The URC should allow more consistent tracking of a security, including whether it has been fully or partially satisfied and will assist with the presentation of a more accurate picture of the extent to which a company’s assets are encumbered.
3.6 Electronic filing, Brief Particulars, and publicly available information
- Electronic filing of security will be possible under the Draft Regulations. However, guidance as to the precise manner in which electronic filing will work is yet to be published.
- Brief particulars (BPs) regarding the security will be required, as will certified copies of security instruments.16 The detail of the BPs will depend on whether a security instrument exists or not. BPs will have to include such details as the names of each of the persons in whose favour the security has been created, or of the security agents or trustees holding the security for the benefit of one or more persons. In some circumstances, a short description of the underlying asset relating to the security is required. For security where no instrument exists, the BPs are prescriptive, requiring such details as a description of the nature of the charge and the obligations secured by the security. The Explanatory Notes indicate that the BPs are intended to improve the ease of searching the register at Companies House. The searcher will now also be directed to any other relevant UK register where information is held relating to that security.
- The Draft Regulations confirm that, for registrations after 6 April 2013, the full text of the security instrument will be publicly available at Companies House. However, “personal information,” which is not defined in the Draft Regulations, may be redacted.17 The Draft Regulations require a certified copy of the entire security instrument to be filed and it does not appear to be possible to redact commercially sensitive information. It remains to be seen whether it will be possible to file a shorter form version of the security instrument rather than the full version, though this is unlikely. We await guidance from Companies House or BIS which should provide further detail as to how this will work in practice.
3.7 Removal of criminal penalty
- The Draft Regulations remove the criminal penalty for failing to register security.18 However, commercial sanctions remain, in that unregistered security may be invalid against a liquidator, administrator, or creditor of the security provider and, in practice, this will mean that most security, other than certain short-term or interim security, will be registered (or at least an attempt will be made to do so).
- Certain criminal sanctions will nevertheless apply in the following instances:
- to any person who appoints a receiver or manager in respect of a company, or obtains an order for such an appointment but does not notify Companies House within seven days of such an appointment or order;t
- o any person who ceases to act as receiver or manager of a company, but does not notify Companies House within seven days of such cessation; and
- to the company in question and to every officer of the company in default, for failing to keep copies of instruments creating and amending registrable security available for inspection; or failing to inform Companies House of the place that copies of the security instrument are kept available for inspection or of any change in that place, whether or not that security is actually registered.19
3.8 Negative Pledges
The Draft Regulations state that if a negative pledge is registered (the Registered Negative Pledge) along with security (the Negative Pledge Security) this will be sufficient to give rise to constructive notice.20 Therefore, a subsequent lender who attempts to take security in priority to the Negative Pledge Security (the Subsequent Security) will be deemed to have had knowledge of the existence of the Registered Negative Pledge, even if they did not have actual knowledge of the existence of the Registered Negative Pledge. The Subsequent Security would therefore be subordinated to the Negative Pledge Security. However, BIS has made it clear that this particular draft provision is subject to further consultation.
4. NEXT STEPS
Although further changes may be made to the Draft Regulations following the public consultation which ended in early September, BIS intends to lay the Draft Regulations before Parliament in Autumn 2012 and has said that it expects the changes to come into force in April 2013.