The revised bill, published by the Law Commission, would allow individuals, sole traders and partnerships to have more flexibility in the way in which they secure their debts.
The new goods mortgage would replace bills of sale as the way which individuals and unincorporated businesses (such as sole traders and partnerships) can use goods which they currently own to secure debts, while retaining possession of those goods. The Bills of Sale Acts 1878 and 1882, which currently govern the area, are outdated and cause a number of problems for lenders, borrowers and third parties. The new legislation would impose fewer burdens on lenders and grant more protection to borrowers and third party purchasers.
Limitations of current legislation
Current legislation sets rigid boundaries which prevent unincorporated businesses and individuals from freely using their goods as security and discourages lenders from accepting them. For example, bills of sale can only be used to secure loans of a fixed amount and repayment date. Therefore, it cannot be used by individuals, sole traders or partnerships for revolving credit facilities, overdrafts and guarantees. They require a highly technical document under which the lender loses all rights to the goods and the ability to sue for repayment of the loan if the exacting requirements are not satisfied. Registration, too, is problematic, offering no protection to purchasers of assets subject to a bill of sale. The Bills of Sale Acts are so antiquated that it is uncommon to see the use of a bill of sale other than for logbook loans in the automotive market. Here, the owner of a vehicle gives a bill of sale to the logbook lender while continuing to use the vehicle. In the current economic climate, borrowers and other security providers wish to have more flexibility over their financing arrangements.
Opportunities offered by proposed legislation
The Goods Mortgages Bill would permit an individual, sole trader, partnership or other unincorporated business owning qualifying goods" to create a charge over the goods as security to discharge a monetary obligation. Qualifying goods broadly means tangible moveable property other than aircraft, ships or currency. An individual could, for example, use a valuable piece of artwork to secure an obligation while that artwork remains on the wall of his study. High net worth individuals would be able to use a goods mortgage to secure a guarantee or indemnity and, along with unincorporated businesses borrowing over £25,000, would be able to secure running-account credit, such as an overdraft or revolving facilities made up to a specified credit limit. Provided they exceed the high net worth threshold, this will offer directors a new avenue for securing obligations owing under guarantees given for a company's obligations.
Changes to registration requirements
The bill tackles the current problems regarding the registration of bills of sale. The current registration requirements are complicated and involve registering the charge at the High Court. In the case of general assignments of book debts, the cost of doing this can be excessive and disproportionate to the value of the loan. Once complete, registration offers little benefit, as searches are difficult to conduct. While the precise details of the registration process are the subject of a separate consultation by HM Treasury, the Law Commission has made simplifying the registration requirements a key aim of the reform and if the aim is achieved, this will be welcomed by all parties.
Opening up the market
The reform would open up the market for business loans to be secured on goods currently owned and remaining in the chargor's possession and make it easier for high net worth individuals and unincorporated businesses to use their goods as collateral. The Law Commission hopes that the bill will pass through Parliament in the near future using the Law Commission's special parliamentary procedure for uncontroversial bills.