Changes Under The Bill
The Companies Bill 2012 (the "Bill") will make significant changes to the categories of charges that are affected by company law. Section 408 of the Bill will introduce a definition of "charge" for the purposes of the charge registration and priority provisions of the Bill.
The definition of "charge" is drafted broadly to include any mortgage or charge in any agreement (written or oral) that is created over an interest in any property of a company, and includes a judgment mortgage where the provisions of the Bill have relevance to judgment mortgages, but the definition excludes mortgages and charges created over certain specified categories of assets and claims ("excluded charges").
There is a substantial overlap between the excluded charges and financial collateral within the meaning of the European Communities (Financial Collateral Arrangements) Regulations 2010 (as amended) (the "Financial Collateral Regulations"). As the Financial Collateral Regulations contain provisions to simplify enforcement of a financial collateral arrangement and exempting financial collateral arrangements from registration requirements (including the requirement to deliver charge particulars to the Companies Registration Office ("CRO") where financial collateral is owned or controlled by the collateral taker (broadly, a central bank, financial institution, public authority, other regulated financial services provider or person taking financial collateral from one of them), it makes sense to exclude financial collateral arrangements from the priority and registration provisions of the Bill. Unfortunately, the Bill appears to go further by excluding categories of assets that do not constitute financial collateral and charge arrangements that do not constitute financial collateral arrangements. As a result, the Bill provisions on charges could undermine well established security arrangements, cause inconvenience to corporate borrowers and produce different priority rules for different categories of company assets.
Under the Companies Acts 1963 to 2013, specified categories of charges must be registered within 21 days of their creation in order to be enforceable as against a liquidator of the company creating the charge or any creditor of that company. The categories of charges include charges on land, book debts, a ship or aircraft, goodwill, intellectual property and floating charges. If a charge does not come within a specified category, it is not registerable.
Solicitors have developed a practice of being extremely cautious about whether a charge could come within a specified category. For example, charges on shares and rights (principally, dividend rights) deriving from shares are registered typically because of a concern that a declared dividend on a share could constitute a book debt or that permission to use dividends until the charge holder becomes entitled to enforce the share security could result in the share charge having a floating charge element. This practice has persisted even after introduction of the Financial Collateral Regulations, possibly because of concerns that insufficient control is being taken over dividend entitlements to bring that element of the charge within the control requirements of the Financial Collateral Regulations.
Section 409 of the Bill provides, with regard to the provisions of the Bill dealing with registration of charges and priority (Part 7 of the Bill), that "charge” in relation to a company, means a mortgage or a charge, in an agreement (written or oral), that is created over an interest in any property of the company (and in section 409(8) and sections 414 to 421 of the Bill includes a judgment mortgage) but does not include a mortgage or a charge, in an agreement (written or oral), that is created over an interest in:
- money credited to an account of a financial institution, or any other deposits, shares, bonds or debt instruments;
- units in collective investment undertakings or money market instruments; or
- claims and rights (such as dividends or interest) in respect of any thing referred to in any of the foregoing paragraphs.
As stated above, mortgages and charges excluded from the definition of "charge" are described in this note as "excluded charges"
While the excluded charges correspond substantially to financial collateral arrangements within the meaning of the Financial Collateral Regulations, there are significant respects in which excluded charges encompass security arrangements that are not covered by the Financial Collateral Regulations. In particular, security over cash, credit balances on account, shares, bonds or debt instruments or claims to any of those items given by one trading company to another or an individual (when neither party to the security arrangement is a central bank, financial institution, public authority or other regulated financial services provider) will not have the benefit of the Financial Collateral Regulations. More significantly, "cash" for the purposes of the Financial Collateral Regulations is limited to monies credited to an account or a claim for the repayment of money (for example, money market deposits). Therefore, the Financial Collateral Regulations do not extend to trading or book debts, though it is hard to see how trading or book debts could not be described as falling within the meaning of claims to cash. If trading and book debts are properly described as claims to cash, charges on book debts will no longer fall within the registration and priority protections of company law when the Bill is enacted. In addition, the ambit of the floating charge, which is intended to function as a comprehensive security over a company's assets, will be reduced because it will no longer extend to claims against debtors.
While there is merit in introducing a charge registration system for companies that deals comprehensively with charges and mortgages created by a company regardless of the company assets affected by those charges and mortgages, the merits have been undermined significantly by the broad brush approach taken to excluding financial collateral arrangements.
It seems likely that charges on book debts (whether fixed or floating) have been swept into the excluded charge category, which may well result in inconvenience for company borrowers and lenders alike. Lenders will likely move to protections akin to those taken by debt factors at present so that trade debtors will be notified of the security arrangements on invoices and separate accounts will have to be established for receipt of debts charged. If a fixed charge is required, withdrawals from the separate accounts will be subject to lender approval. As the Bill priority rules will not apply to fixed or floating charges on book debts, the common law rules will continue to have relevance.
Solicitors will likely look for opportunities to put third parties on notice of security interests over book debts, and it is probable that attempts will be made to register particulars of them with the CRO to that end. Given that the Bill does not include provisions stipulating that those particulars cannot be registered (unlike the position that will apply in relation to negative pledges), it may well be that the CRO will continue to accept and register particulars of fixed and floating charges on book debts even though common law priority rules (as opposed to those introduced by the Bill) will determine priority between competing charges.