Company Specialities Flashcards
What are the rules on registration of company charges?
NB the rules on Registration of charges changed on the 6 April 2013 and therefore the textbooks fail to cover this. However the rules largely replicate the rules that have been in existence in Scots law since the early 1960s. Thus for the purposes of the exam just refer to the current rules.
The provisions were inserted by statutory instrument into the Companies Act 2006 s 859A onwards [must read this**]. Part 25 is most important. So this section applies when you have a charge and requires that you register it within a certain period….unless there is a court order that makes it longer.
The 2006 Act has a requirement that securities granted by a company require to be registered.
Registration not of “charge” itself but of “particulars.”
This requirement is additional to general law. So eg standard security by company must be registered twice: (1) Land Register (or GRS); (2) Company Register. Latter must be within 21 days. Sanction: nullity. But Court can authorise late registration. However, they will not do so if the debtor company is insolvent – see Salvesen, Petrs [2009] CSOH 161 http://www.scotcourts.gov.uk/opinions/2009CSIH161.html (although note speciality that these charges were created in England by a Scottish company)
*s 859A
This section applies where a company or LLP makes a ‘charge’.
s 859A (7)
a charge is either a standard security, a floating charge or an assignation in security[ But don’t worry about this too much. Despite the fact that an assignation in security is not an asset in the strict sense.], and any other right of security which constitutes such in the law of Scotland…(but not including a pledge)
⁃ Since it applies where a company creates a charge the lien and landlord’s hypothec are not covered by these provisions.
s 859A(2)
the registrar must register the charge in the Companies Register within 21 days beginning with the day after the date of creation of the charge (s 859A(3))
*s 859E
⁃ The day of creation of the charge is determined in *s 859E in which there is a table.
⁃ A standard security is created on the date of its recording in the Register of Sasines or its Registration in the Land Register of Scotland.[ This means that for standard securities you must DOUBLE REGISTER. First in the Land register/ Sasines then in the Companies Register.
If you fail to DOUBLE REGISTER then the standard security is VOID. (s 859H(3)
Very important!!!!!!]
*******[This means that a standard security created by a company needs to be registered twice (in the land register and in the companies register)].
⁃ A floating charge - probably the date of execution (s 859/s859(E) is not clear but this was the common law position).
- [Nick Greir takes the view that the floating charge takes effect on the date of execution — we do not know. The safest option is to choose the earlier date].
The Registrar issues a certificate of registration which contains a unique identification code, and is conclusive evidence that the requirements of registration have been complied with: 2006 Act, s 859I.
What happens if the charge is not registered?
⁃ If the charge is not registered in the Companies register within the 21 day period then the charge is void (s 859H(3)). “void … against
(a) a liquidator of the company;
(b) an administrator of the company; and
(c) a creditor of the company”
Can you do anything to remedy the situation if you miss the 21 day period?
⁃ S 859H provides that where a company commits a charge and they are not delivered before the end of the relevant period…must register twice within 21 days or it ceases to have effect and the loan becomes a personal right.
- NB Under s 859F (2)(a) of the 2006 Act the court can[ But it is extremely uncommon.] extend the period for delivery if satisfied that failure to register “(i) was accidental or due to inadvertence or to some other sufficient cause, or (ii) is not of a nature to prejudice the position of creditors or shareholders of the company”. The court has a residual power to allow late registration where it “is just and equitable to grant relief”.
- Must show cause to the court.
What are the other issues on registration of charges?
⁃ 1) When the charge is discharged of if you are releasing property from the security, you must register this in the Companies Register too (s 859L)
⁃ 2) Double registration may become a thing of the past in the future since *s 893 (saviour in the legislation) of the Act provides that the Secretary of State can make a statutory instrument which allows registration in one register to be equivalent to registering in another. BUT the secretary of state has not done so.
• Not clear if this provision will ever be used (but good news for trainees who will only have to register once).
What are floating charges?
Floating charges originated in English law. It is granted over the entire asset base of the company. This is in effect a creation of English equity. Equity, in english law, (“look at what you could have won”) the law will protect your position where you have not gone through certain procedural hoops (e.g. where a person contracts to buy this protects them). Equity is about trying to be fair to the parties and floating charge is about protection against every creditor.
What introduced floating charges?
They were introduced in Scotland by the Companies (Floating Charges) (S) Act 1961.
Where is the current law on floating charges found?
The current law on floating charges in found in the Companies Act 1985[ Primarily ss 462, 463, 464, 466]. There is a set of provisions in the Bankruptcy and Diligence Act which were passed in 2007 but have not been brought into force.
Who can grant a floating charge?
⁃ Companies, LLPs or ‘miscellaneous others’ (not too important).
- Must be registered in Companies Register
What is the creation of floating charges governed by?
s 462(1) of the Companies Act 1985. [Must read**] ⁃ "It is competent under the law of Scotland for an incorporated company (whether a company within the meaning of this Act or not), for the purpose of securing any debt or other obligation (including a cautionary obligation) incurred or to be incurred by, or binding upon, the company or any other person, to create in favour of the creditor in the debt or obligation a charge, in this Part referred to as a floating charge, over all or any part of the property (including uncalled capital) which may from time to time be comprised in its property and undertaking[ "Property and undertaking" seems to be a concept which is narrower than 'property'.
To explain this, if you were to say you can grant a floating charge over all the assets you own and other things - this would suggest you could grant a security over things you don’t own which goes against nemo dat quod non habet. This will be considered in more detail later when looking at Sharp v Thomson.].”
⁃ The floating charge is fluid which means assets can enter and exit. The floating charge crystallises when the company goes bust.
How do you create a floating charge?
⁃ It must be registered within 21 days (invisibility period) [ It exists but it is not on the register]of the date of creation (which is probably the date of execution: see above s 859A and s 859E - 2006 Act).
- The floating charge would be void against the receiver, administrator liquidator etc.
“Property and undertaking” of company = everything in patrimony. But can be less, eg all corporeal moveables.
Can be for all sums.
Can affect heritable property without need to register in GRS or LR.
Assets disposed freed of charge without juridical act of creditor.
Assets acquired subjected to charge without juridical act of debtor.
Not a real right before attachment.
Becomes real right on attachment: National Commercial Bank v Telford 1969 SC 181
There is no prescribed form on how to create a floating charge - you can use any form you like.
- Usually the company will expressly provide that “we…do hereby grant a floating charge (mirror wording within s642). This deed is prepared and sign by the company and the floating charge then has to be registered within 21 days of the date of creation.
- Possible Reform? The BAD Act - makes various proposed changes to the law of floating charges but they are unlikely to happen (see p.25 in handbook) for information only.
Is a floating charge a real right?
Not at the time of creation. It only becomes a real right on attachment (made clear by the case of National Commercial Bank v Telford 1969)
- The creditor gets a right in the assets of the debtor, meaning that the asset is subject to the rights in security and the creditor has a right in the property.
“Property and undertaking” of company = everything in patrimony. But can be less, eg all corporeal moveables.
Can be for all sums.
Can affect heritable property without need to register in GRS or LR.
Assets disposed freed of charge without juridical act of creditor.
Assets acquired subjected to charge without juridical act of debtor.
Not a real right before attachment.
Becomes real right on attachment: National Commercial Bank v Telford 1969 SC 181
When does a floating charge attach?
⁃ A floating charge attaches in one of three ways (on attachment, the creditor gets a real right in security):
⁃ 1) Company is liquidated -(on winding up) floating charge automatically attached. (s 463 Companies Act 1985 (s 45 BAD Act))
⁃ 2) If the company goes into receiver[ receivership is the principle mechanism for the enforcement of a floating charge up to 15 September 2003 - any charge created before this, the principle mechanism was receivership. it was the floating charge holder could say if the debtor had breached the loan agreement, the creditor could then say that they appoint a receiver and the receiver replaces the manager of the company. Receiver became agent/representative of the company but they did not become an agent of the floating charge holder. So they effectively served two masters (creditor and ??).]ship and there is a floating charge created before the 15th September 2003[ Not sure the significance of this case.] then the moment the receiver is appointed the floating charge is attached. (s 53(7) Insolvency Act 1986).
⁃ 3)[ This virtually never happens ] If the company goes into administration the floating charge will only attach in Scotland if the administrator has reviewed the assets of the company and decided there is not enough to pay the creditor and notified company house. When the company registrar is told that there is not enough to pay the creditors, at that point the floating charge attaches : para 115(3) of Schedule B1 Insolvency Act 1986.
If the creditor wishes to ensure that the floating charge can be fully enforced then it should contain a statement that para 14 of Sch B1 to the Insolvency Act 1986 applies to it.
What is the effect of attachment of the floating charge?
⁃ Under the Insolvency Act s 53(7), everything which is subject to the charge at the time of attachment is caught by it.
⁃ Such attachment has effect “as if it were a fixed security” over the property to which it has attached. This is actually giving a subordinate real right (concept jumbling). The key thing however (often missed in exam) (usually set as an exam question!!!) is that a floating charge attaches to every asset so you must consider every individual asset. You need to think about the effect on each individual asset in competition with other creditors**.
⁃ This is referred to as the statutory hypothesis - this is that the floating charge attaches in relation to every individual piece of property as if it were the default security which could be granted over that property.
⁃ So a floating charge attaches to land and buildings as if it were a standard security.
⁃ A floating charge attaches to moveable property as if it were a pledge.
⁃ A floating charge attaches to incorporeal property as if it were an assignation in security. This was clarified in the Forth and Clyde case — treated not as a transfer of personal rights but as an assignation in the security of the property.
When can a receiver be appointed?[ Not 100% clear about this - look up textbook.]
If the floating charge was granted before the 15th September 2003 then a receiver can be appointed. The appointment of a receiver is typically based on the terms of the floating charge itself - the floating charge will indicate various grounds on which it is breached and which justify the receiver being appointed.
⁃ These grounds will typically include non-payment of the debt. The receiver goes in and replaces the manager of the company and takes over the management of the company. The purpose is to realise assets to make sure that the floating charge holder gets paid.
⁃ This is an odd mode of enforcement of rights in security since in most modes of enforcement the creditor gets a right to sell the asset. But this is because in relation to a floating charge a creditor has no power of sale - the power of the creditor is a power to change the management of the company - this is either by putting a receiver in place (if granted before 15th September 2003) or putting an administrator in place (if granted on or after 15th September 2003).
⁃ This power means that the prior management can no longer make managerial decisions in relation to the company.[ Not 100% clear about this - look up textbook.]
**Read Companies Act 1985, s 462: “
“It is competent under the law of Scotland for an incorporated
company….comprised in its property and undertaking”.
So this section tells us (1) competency (2) it can only be granted by a incorporated company (3) to
secure a debt incurred [so far fits with the broad approach to rights in security generally].
Company can “create in favour of the creditor in the debt or obligation a charge…” Charge is not
defined within the Companies Act 1965. A charge is not a term of art in relation to securities in Scots Law.
But a charge is a term of Art in English law - it is a right in security.
You can create a floating charge over all of the assets comprised in property and undertaking.
