Company Security Interests
The Association of Chartered Certified Accountants (ACCA) is pleased to comment on the consultation paper of the above title. We have not addressed all the issues covered by this very substantial and extremely thorough document but concern ourselves principally with a small number of specific matters which we think are likely to prove of greatest significance to accountants and insolvency practitioners.
As a general point we support the proposed move towards a system of notice filing for company charges. We can see that there are deficiencies in the present, long-standing system and agree that some stream-lining is long overdue.
The proposed abolition of the statutory distinction between fixed and floating charges will necessitate a substantial amount of consequential changes to insolvency legislation. This is not in itself a reason not to proceed with the reform along these lines, though there will clearly be a need to accommodate outstanding creditor rights with respect to administrative receivers. Our main concerns about the Commission's paper revolve around the reduction in useful information which the proposed reforms may lead to.
The security agreement (SA)
Under the proposals, there is no requirement for a SA to be put in writing or retained by either party to the agreement. In most cases, �perfection' of the agreement will depend solely on specified elements of it being registered with Companies House via the proposed financing statement.
We consider it is in the essential interests of both parties, and of any insolvency practitioner who might be appointed at a later stage, for there to be a clear statement of the full terms of the SA. Without it, the accuracy of the information contained in the financing statement could be disputed at any time. Specifically, an insolvency practitioner seeking to establish the true extent of claims on a company's assets will need to be able to cross-refer to undisputed evidence of charges granted by a company and their financial value; he will be concerned not solely with issues of priority but with the scope of the charges. We therefore consider that there needs to remain a requirement for companies to retain the original charge documents. Apart from their relevance to establishing the priority of claims, the keeping of accurate records on charged assets is an essential means of ensuring that companies conduct their financial affairs properly and are in a position to prepare their financial statements in accordance with the law.
The financing statement (regulation 47)
It is proposed that the financing statement to be filed at Companies House need not include details of the amount secured by the associated charge. We accept that, in many cases, no amount will be actually specified in a charge and, in any case, perfection under the new system will depend on the date of registration of the statement. But where a fixed amount does form part of the SA, we believe that this will form part of the core information which readers of the company's file should be entitled to have. We do not see why there could not be provision for the new financing statement to include a statement of the amount charged (where such a fixed amount forms part of the SA).
We also have a concern about the proposal for financing statements to be capable of being filed, and �perfected', before a SA has actually been entered into. As we understand the proposal, the idea would be open to abuse � one valid charge could enjoy a lower priority than another �charge' which has not even been actually granted by the company concerned, solely because an �advance' financing statement had been filed in respect of it. In our view, perfection of an agreement must be on the basis of a valid SA entered into by two or more parties, in respect of which there is evidence. The financing statement would then be capable of specifying, additionally, the date of the SA in respect of which it is being filed.
�Control' (regulation 7)
It is proposed that the filing of a financing statement would not be required where �control' was taken of a particular financial asset; control is to be defined in a way which fits with commercial good practice. We suggest that, even with the abolition of the distinction between fixed and floating charges, the granting of a charge which is essentially �fixed' will be a matter of interest to at least some readers of a company's public file, including those who may be considering taking a charge themselves. To exclude details of �fixed' charges would be to allow an incomplete picture of a company's indebtedness to appear on the public record. It would also complicate matters for insolvency practitioners, who would have no complete public record of valid charge-holders to refer to.
The proposed definition of �control' in draft regulation 7 would deem a bank to be in �control' of a bank account merely by virtue of it itself being the secured party. This would be so even if the debtor retained the right to dispose of funds in the account. If the intention were to approximate the qualifying criteria for establishing a fixed charge under current law, then the proposed definition would of course not succeed. Even if the intention were not to do this, we query whether a bank can truly be said to be in control of a bank account if it does not impose clear conditions on use of the funds in that account. The issue is a significant one not least because of the proposal referred to above regarding the non-notification of SAs based on �control'.
Liability in damages (regulation 71)
We consider that to extend a cause of action to any party �who can reasonably be expected to rely on the performance of a duty or obligation' under the system of notice filing would be too wide. The right to recover damages should attach to the party to whom the duty or obligation concerned is owed.
Definition of �security interest' (regulation 3)
The draft Regulations define �security interest' as, inter alia , an interest in �personal property'. We query whether this is appropriate terminology in the corporate context.