Fully charged

In my last article (Journal, January 2006, page 44) I highlighted the proposed changes to the regime on floating charges in the Bankruptcy and Diligence etc Bill currently before the Scottish Parliament. The changes are set out in Part 2 and have a potential impact on the profession well beyond insolvency practitioners.

Creation by registration

Clause 31 proposes that the Keeper of the Registers establish and maintain a register to be known as the Register of Floating Charges (“the ROFC”). The Keeper is to make the ROFC available for public inspection, and supply copies if asked. Subordinate legislation will provide for fees for registration and for the application form and additional information required for registration purposes. The implication is that contrary to present practice, the floating charge itself will be registered rather than simply certain information relating to it. This will have implications on the drafting of floating charges, and perhaps also in situations where the floating charge is created in England as part of a general all-assets charge and the chargor subsequently acquires Scottish assets, which will presumably trigger the registration requirements: clarification will be required on this.

Clause 32 proposes to change the current law in relation to the date of creation of floating charges (currently the date of execution), to become the date on which the document granting the charge is registered in the ROFC.

Clause 33 introduces prior notice filing. Where a company proposes to grant a floating charge, the company and the person in whose favour the charge is to be granted will be able to apply jointly to have notice of the proposed charge registered in the ROFC. The form and content of such a notice is to be prescribed. Where such a notice is registered and within 21 days a floating charge is registered in the ROFC, the charge will be treated as having been created when the notice was registered and not at the later date when the charge is registered. The effect therefore is to introduce a priority arrangement which will by statute create a floating charge up to 21 days before its registration in the ROFC. This will of course mean that a charge may be created before it is executed – a novel concept!

Ranking and discharge

Clause 34 sets out the ranking of floating charges both as between other floating charges and with fixed securities, and essentially does not change the present law, although it does extend the ambit as between fixed and floating charges. For that purpose the clause restates that the date of creation of a fixed security is the date on which the right to the security was constituted as a real right (i.e. the date on which it is registered in the Land Register or Register of Sasines). The existing date of creation of a floating charge (the date of execution) is preserved for charges granted before the section comes into force, as is the provision that a fixed security has priority over a floating charge where both are charged over the same property of the company.

Where this may give rise to difficulty is where a borrower grants a fixed charge (presumably in breach of a negative pledge) and notifies the holder of a pre-existing floating charge, where the effect of the new clause will be immediately to “rule off” the floating charge. The proposals in clause 34 are not on all fours with section 464 of the Companies Act 1985, and the consequences may be challenging!

Provision is made for assignation of floating charges to be registered in the ROFC, as also the terms of any document altering a floating charge. The bill requires the document of alteration to be subscribed by the company granting the charge, the chargeholder and the holder of any other subsisting floating charge or any subsisting fixed security which is adversely affected by the alteration. The exception would be an alteration which relates only to the ranking of the floating charge with any other charge and does not adversely affect the interests of the company which granted the charge, in which case the company which granted the charge need not be a party.

Consent to the release from the charge of any of the property to which the charge relates is to be treated as constituting an alteration to the terms of the document granting the charge, and will therefore fall to be registered as an alteration in the ROFC.

The discharge of a floating charge will also fall to be registered, although this provision is stated to be without prejudice to any other means by which a floating charge may be discharged or extinguished. That provision may be considered otiose as it is difficult to conceive of a position in which the continued existence of a charge on the face of the ROFC would not be treated by third parties as evidence of the continuing existence of such a charge, notwithstanding any purported evidence produced to the contrary. However presumably this provision will allow transactions to settle without the discharge being physically registered in the ROFC, as it will be open to parties to treat the charge as discharged when the relevant document of discharge or notice of same has been completed and is ready for presentation for registration.

Effect on the 1985 Act

The repeals, savings and transitional arrangements repeal Part XVIII (Floating Charges in Scotland) of the Companies Act 1985, but provide that nothing in the bill is to affect the validity or operation of floating charges subsisting before the coming into force of the Act. The ranking provisions of section 464 of that Act are specifically preserved. There appears to be no intention to alter or repeal Part XII of that Act, which deals with registration of charges, and particularly no changes to sections 410 to 424. At this stage we are not aware of any proposed changes to this part of the Act by the Company Law Reform Bill.

This means that effectively there will be two parallel requirements for registration of a floating charge in Scotland – with the Keeper and, as at present, in the companies charges register maintained by Companies House. This also has the effect that the Companies House charges register will become a subsidiary register, as the provision as to creation of a floating charge being the date of registration in the ROFC means that the 21 day period for registration in the Companies House register will only run from the date on which the charge is registered in the ROFC. Some difficulties may arise where a priority notice is given, as the effective backdating of creation will accelerate the timetable for registration at Companies House. However a charge not registered in the Companies House charges register will continue to be void in accordance with section 410.

Drafting issues

Other concerns arise. Clause 32(1) states: “It continues to be competent, for the purpose of securing any obligation to which this subsection applies, for a company to grant in favour of the creditor in the obligation a charge…”. The difficulty here is that a security trustee holding a floating charge for a lending syndicate may not be “the creditor in the [secured] obligation”.

Clause 36(3), “the granting, by the holder of a floating charge, of consent to the release from the charge of any property to which the charge relates is to be treated as constituting an alteration to the terms of the document granting the charge”, gives rise to a concern that this is rather widely drawn. The rationale for a floating charge is that assets move in and out of the ambit of the charge in the ordinary course of business and there is generally an implied grant of consent to the release of such property from the ambit of the charge. The clause needs amending to make it clear that disposals in the ordinary course of business will not require filing as an alteration to the charge.

Alistair S Burrow,Tods Murray LLP