Compared to many countries in the world, the English law relating to the taking of security over personal property permits a very wide range of assets to be given as collateral for loans and other credit, and is flexible enough to enable parties to tailor bespoke arrangements according to their needs. However, as with any system of law which has largely developed through case law, much of which dates back to the nineteenth century, it has become complicated and opaque, and includes many areas of uncertainty and inefficiency. Further, much of the system fails to take account of technological developments which could make registration (in particular) a great deal quicker and cheaper. These features particularly impact on two markets.
Limitations of the current English law, and its consequences
First, the fragmented and complex nature of the law, the difficulty in sourcing definitive rules and uncertainties in certain areas give rise to difficulties in cross-border transactions. Many jurisdictions have reformed their law according to modern principles, based on the Uniform Commercial Code Article 9 and the Personal Property Securities Acts (PPSAs) in Canada, New Zealand and Australia. The more these principles become the market standard, the greater is the cost of understanding and working round law that is not based on these principles. While cross-border transactions are obviously still possible, the cost and availability of credit are likely to be affected.
Second, difficulties in accessing the law and costs in administrating it impact disproportionately on finance to small businesses, where the cost of the transaction may become a deal breaker. Workarounds, while possible, may render the deal uneconomic: one example of this can be seen in the effect of anti-assignment clauses on notification receivables financing. This type of financing is often all that is available at the lowest end of the market, and factors (notification financiers) will simply refuse to finance receivables which contain such clauses. While those providing finance may be prepared to take some credit risk inherent in the system (for example, as a result of the period of invisibility between when a security interest is created and when it is registered) in a high value transaction, this kind of uncertainty may well not be acceptable where the loan is of low value. The system for the provision of security by unincorporated businesses, governed by the Bills of Sale Acts 1878 and 1882, is particularly inefficient, and has recently been the subject of a study by the Law Commission of England and Wales.
The need for reform, and the role of the Secured Transactions Law Reform Project (STR)
Given the status of London as one of the world’s leading financial centres, and of English law as one of the leading systems of transactional law, it is particularly important that we should have a modern personal property security law which is responsive to the needs of the commercial and financial community. The Secured Transactions Law Reform Project (STR) was established under the Executive Directorship of Professor Sir Roy Goode, in order to involve interested parties from the professions, and the relevant sectors of finance, commerce and industry, as participants in the work of considering the effectiveness of the current law, and the ways in which it can be improved. It is guided by a Steering Committee chaired by Lord Saville of Newdigate, and its Executive Director is now Professor Louise Gullifer.
Work on the reform of the current law is also being undertaken by a working group of the Financial Law Committee of the City of London Law Society (the CLLS working group), who have drafted a Secured Transactions Code. Although the approach of this group is a little different from that of the STR, the two groups are working together, and cooperating in moving forward the debate.
The current work of the STR, and call for comments
The current approach of the STR is to identify the irreducible core aspects of a modern secured transactions law: these form the agreed basis of the STR’s current proposals. Having identified these, the project has commenced work on two very important aspects. The first is to engender debate on the details of how these principles could be incorporated into a reformed English law; the second is to look at areas of law which do not fall within the core aspects, and to consider whether and how the law in these areas should be reformed.
The academic members of the project have been involved in writing papers which discuss the issues by setting out the arguments for and against various types of reform, and which are informed by extensive comparative law analysis.
It is very much hoped that the issues raised by these papers will be the subject of comment by practitioners, bankers, the business community, policy makers and all involved in the provision of secured finance in England and Wales. All comments can be sent to email@example.com