A brief introduction to some of the fundamental changes proposed to be made to the system of registration of security interests created by companies and the consequent effect on priorities of competing interests. The changes, proposed to be introduced by way of secondary legislation, will also bring within the scope of registration some transactions which do not even contain a grant of security. The consequences for banking practice will be significant.

As part of the current lengthy process of corporate law reform the DTI has now produced, separately to the Company Law Reform Bill, the draft form of the proposed Company Security Regulations 2006 (the "2006 Regulations").

Most readers will be well aware of the various shortcomings of the present system of registration of company security interests as set out in Part XII of the Companies Act 1985. In particular, the following are generally considered to require some resolution:

  • The "invisibility" of registrable charges created by companies for a period of up to 21 days;
  • The lack of clarity in the definitions of what constitutes a registrable charge, in particular with reference to charges over "book debts";
  • The unsatisfactory situation regarding Slavenburg filings in relation to overseas companies.

Many readers will no doubt be aware of the proposals contained in the Companies Act 1989 to overhaul the system of registration. That legislation itself contained many problems and shortcomings with the result that it has not taken effect and it is now almost certain that the relevant provisions of the 1989 Act will never come into force. The 2006 Regulations are intended to be introduced pursuant to the general power contained in clause 774 of the Company Law Reform Bill 2005 allowing the Secretary of State to make "Company Law Reform Orders". The 2006 Regulations would constitute such an Order.

The 2006 Regulations are currently in draft form and will be subject to continued discussion. We will therefore deal with them in more detail in future issues of the Banking Law Briefing. For present purposes, it is sufficient to point out that rather than simply attempting to overcome the well known defects in the present system, the 2006 Regulations make, in some respects, fundamental changes to the procedures for and effect of registration of company security interests.

The most significant alteration will be the abolition of the rule that registrable securities (subject to being properly registered) will generally rank in order of their date of creation. It is instead proposed to give priority to such security on the basis of the date and time of filing.

It is also proposed that not only "security interests" as that term would normally be understood will be covered by the new regime. It is proposed that sales of receivables will also require registration even in circumstances where such sales are entered into otherwise than in the context of a financing transaction.

In their current form, the 2006 Regulations do not address the Slavenburg problem referred to above in that registration of security interests will still not be limited to overseas companies with a registered place of business in England and Wales.

The 2006 Regulations have not met with widespread support and, partly for this reason, the DTI has confirmed that implementation will be delayed and that further consultation and discussions will be held. Future articles will address particular aspects of the regulations as they are developed and will consider any amendments to the current draft that may be proposed.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.