Proposed changes to the law on registration of charges

The Department for Business Innovation and Skills issued a consultation paper on 12 March 2010 seeking views on proposals to amend the current scheme for registration of company charges, under the Companies Act 2006.

26th May 2010

The Department for Business Innovation and Skills issued a consultation paper on 12 March 2010 seeking views on proposals to amend the current scheme for registration of company charges, under the Companies Act 2006. Most of the proposals in the BIS consultation document originate from the recommendations of the Company Law Review in 2001 (Modern Company Law for a Competitive Economy: Final Report URN 01/942 (2001)), and the subsequently instructed Reports of the Scottish Law Commission in 2004 and the Law Commission in 2005, and some are fairly substantial moves away from current procedures. A few of the most significant changes proposed for the Scottish system are considered here. Links to the two law commission Reports are given below.

Abolish the 21-Day rule?

The current system

The current system requires any registrable charge created by a UK company to be registered with the Registrar of Companies within 21 days of its creation. The sanctions for failure to register within this deadline are:

  • the security is void against a liquidator, administrator and creditors of the company;
  • the money debt intended to be secured becomes immediately payable; and
  • the company and its officers are liable for a fine for every day of default.

The proposal

The consultation asks whether the 21-day time limit should be abolished. The rule would simply be that a charge that has not been registered at Companies House would be void against the liquidator, administrator and creditors, and against any charge previously registered (except for a floating charge without a negative pledge clause i.e. a restriction on the company granting any charges of higher or equivalent priority. 

There would be no 21-day comfort zone within which you could register and still maintain the date of creation of the charge as the relevant date for priority purposes, as there is at present, but the charge could be registered at any time. 

The date of creation of the security would not be relevant to the validity of the charge, as there would be no time period to start running, and there would equally be no such thing as late registration. 

Publication

The consultation document notes however, that this approach, which would remove the need to make the charge public within a certain time period following creation, would go against the primary purpose of registration which is to ensure public notice of encumbrances. However, this could be of less concern in Scotland, if the provisions of the Bankruptcy and Diligence etc (Scotland) Act 2007 creating a Scottish Register of Floating Charges come into force, because under those  provisions the securities will already have been made public by way of either the Land Register or General Register of Sasines (where fixed charge standard securities must be registered) or the Scottish Register of Floating Charges. 

There could however be a publication gap if the Scottish Register of Floating Charges had not been introduced before the 21-day rule was abolished. For example, there would be nothing to stop a chargee who is linked to a chargor company, such as a director of that company, delaying registration of the floating charge with Companies House until they absolutely have to e.g. when the company is approaching insolvency.  This would allow the company to trade in the meantime on the basis of a false credit rating. In those circumstances there may be an argument for prohibition of floating charges in favour of such connected persons being registered within a certain period prior to insolvency of the company.

No invisibility period

In terms of benefits, getting rid of the 21-day period would eradicate much of the uncertainty for third parties that arises from the current invisibility period, during which, although a charge may have been created, with its priority being based on that date of creation and therefore affecting any further security granted to a third party, there is not yet a record of that at Companies House (and may not be for up to 21 days). It would encourage the chargee to get their security registered at Companies House as soon as possible so that they get the necessary protection and priority. Property lawyers would of course have to take account of the change in their standard Letters of Obligation.

Registration procedures - no submission of Certified Copy Instrument to Companies House?

The current procedure for registration of charges at Companies House is for the particulars of a charge to be detailed on a form and delivered to Companies House with a certified copy of the instrument creating the charge (the original is required in England) within 21 days of the date of creation. Usually the chargee, i.e. the person benefiting from the charge, registers.

The BIS consultation notes that if there was no requirement to deliver a certified copy instrument to Companies House the electronic registration of charges, and information-sharing with other specialist registers, such as the Land Register, would be possible. While this might introduce a risk of resultant malicious registration, the consultation suggests, as a safeguard, that only the company creating the charge could register it. The chargee could make timeous registration a condition of the loan. An alternative protection could be for it to be sufficient for the instrument to be submitted in PDF format. However, while this would aid electronic registration it could bring a higher risk of fraud, and a similar threat of malicious registration, as if there was no instrument submitted at all. 

Specialist registers and interaction with Companies House - dual registration

Section 893(3) of the Companies Act 2006 allows for provision to be made so that charges do not have to be registered at both Companies House and a "specialist register" - a charge registered at a specialist register would be treated as if it was also registered at Companies House without the need for separate registration. In other words, the charge would be dual registered using one application. This requires appropriate information-sharing arrangements to be set up between the specialist register and Companies House. The specialist registers in Scotland at present are the Land Register of Scotland and General Register of Sasines, and will include the proposed Scottish Register of Floating Charges if that is created.

Information Sharing

The consultation lists four sensible aspects to be considered in information-sharing:

  • any filing that would have been rejected by Companies House e.g. for absent or incorrect information, will not be treated as if registered at Companies House even if the specialist register accepts the registration under its own procedures;
  • inspection of a company's records at Companies House must reveal sufficient information about any charge registered at the specialist register to ensure that third parties are not disadvantaged by the charge not having been separately registered at Companies House This could be achieved by an online link between the registers;
  • the specialist register would need to accept a Memorandum of Satisfaction of any charge registered with it, and share that information with Companies House. This is less of an issue for standard securities registered in the property registers, as a Discharge would have to be registered in any event; and
  • the arrangements must not increase costs for parties registering charges, or those who use the Companies House information, to assess the financial position of companies (although specialist register charges would apply to any further inspection of a charge registered with it). 

The Keeper of the Registers of Scotland has provided a list of the information that she believes she would be able to provide to Companies House, which appears to cover the majority of the details required. There would of course be detailed legal and technical points to be ironed out should dual registration go ahead. 

Dual Registration and Automated Registration of Title to Land (ARTL)

Dual registration would allow companies to use the ARTL system at the Scottish Land Register for registration of standard securities. Currently ARTL is used predominantly for residential purposes because of the additional requirement for companies to register their standard securities at Companies House. 

While there is the possibility of extending dual registration to paper applications, clearly the first step envisaged is electronic applications only. The 2004 Scottish Law Commission Report recommended that as standard securities already require publicity to create the real right and gain the protection expected of a security, there is "no sufficient reason" to have to comply with an additional registration requirement, merely because the grantor of the security is a company. It would seem sensible not to limit the benefit of dual registration to ARTL registration, particularly as that would lead to different registration requirements for electronic and paper submissions.  Presumably one reason for the distinction being made is because in an electronic submission, most of the necessary Companies House information would be provided by the applicant to the property register in an easily transferable form at the outset, reducing the costs and time by minimising the need to re-key the information.

Scottish Register of Floating Charges

Part 2 of the Bankruptcy and Diligence etc (Scotland) Act will require floating charges to be registered in a Scottish Register of Floating Charges, and the date of creation will be the date of registration in that Register. This sits more easily in Scots property law than the current system whereby floating charges are registered only at Companies House. It also means that there will be an even greater pull towards dual registration - under the current system, introduction of the new Register would mean that there would be an additional registration requirement to create a floating charge in Scotland, as it would still require to be filed at Companies House, and so simplification of the process on both sides of the border is to be welcomed.

Responses to the consultation are sought by 18 June 2010

The full consultation paper can be viewed on the Department for Business Innovation and Skills website

The 2004 Report on Registration of Rights in Security by Companies (Scot Law Com No. 197) can be viewed on the Scottish Law Commission website

The 2005 Report on Company Security Interests (Law Com No. 296, Cm 6654) can be viewed on the Law Commission website