formerly Deputy Head of the School of Law, University of Wolverhampton and Company Law Conference Speaker
The rules governing the registration of charges were amended by delegated legislation as from 6 April 2013. The purpose of this piece is to review and summarise the current position. Many of the old rules governing registration remain the same, but some are significantly changed.
Companies need capital. Essentially this can be provided in the form of share capital or loan capital, or a combination of the two. Loan capital can come from a number of sources, including the directors and shareholders of a company, as well as banks, venture capitalists and institutional investors. Public companies can additionally raise loan capital through a public market. Perhaps somewhat curiously there are no specific statutory requirements regarding loans to companies other than that there must be the registration of most charges at Companies House.
Sometimes a loan to a company is formalised by the issue of a debenture, a word which itself is often misunderstood. Unhelpfully there is no formal definition of the word in our company legislation. In banking circles it is often referred to as a secured loan; but this is not necessarily the case. The leading judicial definition is to be found in the judgment of Romer J in Levy v Abercorris Slate and Slab Company Ltd (1887) 37 ChD 260: 'A debenture means a document which either creates a debt or acknowledges it, and any document which fulfils either of these conditions is a debenture.' In other words, it is a written memorandum of a loan, an IOU. There is no mention in this definition of its having to be secured. It can be secured but it can also be unsecured. The difference between the two lies in the remedies available on default. The holder of an unsecured debenture can sue for the money, and the advantage of this is that, having obtained judgment, he can levy execution, and by so doing get ahead of the generality of the creditors. He can also petition for a winding up if he is owed more than £750, but this carries little benefit for him since he is merely an unsecured creditor ranking alongside all the other unsecured creditors. The holder of a secured debenture has these rights, but could also traditionally appoint a receiver under an express term of the debenture or, in the absence of this, seek the appointment of the receiver by the court. Usually today enforcement is by the appointment of an administrator rather than a receiver, but just as with a receiver, the appointment of an administrator is somewhat biased in favour of the holder of a secured debenture.
The mechanics of registration
For the first time, electronic filing of registration is possible. The new procedure requires a certified copy of the document which created or is evidencing the charge to be delivered to Companies House together with form MG01. E-filing carries a fee of £10. Conventional paper filing carries a fee of £13. It is possible for a person presenting a charge for registration to upload a PDF version of the charge instrument as an attachment to the electronic form MR01. Having been registered, a charge will be allocated a 12 digit Unique Reference Code (URC).
No longer does a company have to maintain a register of charges at its registered office. It will, however, have to keep a copy of all charge documents at its registered office which may be inspected by any member or creditor of the company, and, on payment of the prescribed fee, by any other person.
Which charges require registration?
The essential practical rule is that all charges require registration with the Registrar of Companies if they are to be enforceable. However, the Companies Act 2006, as originally enacted and like previous legislation, rather unhelpfully listed those charges which had to be registered. These included charges on land, shares, book debts, ships, aircraft, intellectual property and all floating charges on the company's undertaking or property. Excluded from that list were things such as financial collateral arrangements, which are discussed elsewhere in this issue. There was often uncertainty as to whether a charge fell within a particular registrable category; for example, what was a charge over 'book debts'? One case even concerned whether registration was necessary where the charge was over animals such as racehorses. This uncertainty has now been cleared away. The Companies Act 2006 (Amendment of Part 25) Regulations 2013 have now amended the Companies Act so that all charges must be registered other than:
a charge in favour of a landlord on a cash deposit given as security in connection with a lease of land (a rent deposit);
a charge created by a member of Lloyd's to secure its Lloyd's underwriting obligations; and
a charge excluded from registration under part 25 by any other legislation, such as financial collateral created under the Financial Collateral Arrangements (No 2) Regulations 2003.
However, the practical advice must be that if a document creates some form of security, it should be registered. There is no penalty for registering something which does not need to be registered, but failure to register that which should be registered is fatal to the security.
The effect of failure to register
It used to be that failure to register that which should be registered was a criminal offence on the part of both the company and every officer of it who was in default, though it was something which was seldom prosecuted. For this reason, such criminality has now been abolished by the Companies Act 2006 (Amendment of Part 25) Regulations 2013. Traditionally of greater practical significance is the fact that such failure means that the charge is void as far as any security is concerned against any liquidator or administrator of the company, and also against any creditor.
Time for registration
Registration of a charge must generally take place within 21 days of its being created, though in the case of a charge which was created outside the United Kingdom on property which is also situated outside the United Kingdom, the 21-day period runs from that day when the instrument which created the charge or a copy of the instrument could have been expected to be received within the United Kingdom in the ordinary course of post and assuming that it was despatched with due diligence. In either case should the 21-day deadline be missed then the charge is void as described above unless the court allows late registration on the ground of accident, inadvertence or other sufficient cause, or that the failure to register was not of a nature as to prejudice the position of the creditors or the shareholders of the company. Over and beyond these grounds, the court can also permit late registration if it is satisfied in the circumstances that it is just and equitable to grant relief.
The question of priorities
The traditional order of payment of debts on an insolvency of a company is as follows:
Thus fixed charges would rank ahead of floating charges. Because of this it has been commonplace for many years for a charge taking the benefit of a floating charge to require the charger company to give an undertaking that it would not create any subsequent fixed charge over any property which was subject to the floating charge. Such a negative pledge would usually be identified in the form registering the floating charge, but there was no doctrine of constructive notice of such a pledge. Therefore priority could only ever be obtained by the holder of a floating charge if it could be shown that a person taking a later fixed charge actually knew of the negative pledge. This was obviously an unsatisfactory and an unfair state of affairs. It was intended in the Companies Act 1989 that this should be rectified, but that part of the Act which would have changed this was never brought into force. However, the Companies Act 2006 (Amendment of Part 25) Regulations 2013 have at least rectified this defect in the law. Form MR01 now contains a box in which a negative pledge can be, and should be, noted. So long as this is done, anyone taking a later fixed charge is deemed to have constructive notice of the pledge. Thus the payment of debts now would be as follows:
Any other earlier fixed charges
Floating charge containing a negative pledge which has been noted on form MR01
Any later fixed charge
It might be rather puerile, but it is certainly helpful, to think of the effect of this change in terms of snakes and ladders. The registration of the negative pledge does not put the floating charge on a ladder. On the contrary, the floating charge remains where it always was, after the preferential creditors. What the negative pledge does is to put the fixed charge on a snake, down which it slithers to tank after the floating charge.