It has long been recognised that the secured transactions law of England and Wales (hereafter English law) needs reform. The challenge has been to agree what that reform should look like, as became apparent from the discussions that followed the Law Commission’s work of the early 2000s which led to their proposals being shelved.
In a bid to resolve the subsequent impasse, the City of London Law Society (CLLS) has taken the unorthodox step of ‘reverse engineering’ the legislative process by drafting and interrogating the necessary reforming legislation in a Secured Transactions Code (the Code). The Code could – with some finessing – be presented to parliament for legislative approval as a fait accompli having already completed a rigorous process of scrutiny.
As the UK moves to re-position itself post-Brexit, it will need to demonstrate globally that it has laws that are not only flexible, but easily comprehensible. And in a world where Covid-19 means that individuals can no longer meet in person to execute documents, discussions around transaction formalities have become acute. In this context, reforming secured transactions laws makes sense because clear, up-to-date rules can only help to facilitate inward investment and assist society in adapting to the new reality of social-distancing.
Developing the Code
Secured transactions reform is difficult. Whilst the law works well in practice, its piecemeal development over the last 400 years has resulted in an over-complicated and sometimes outdated set of rules. These rules cut across the legal foundations of contract, trusts and land law, as well as company, insolvency and property law. Inevitably, this complexity fosters uncertainty, and uncertainty leads to increased transaction costs.
The good news is that much of the thinking about how the English law of secured transactions should be reformed has already been done by the Secured Transactions Law Reform Project (the Project) and the City of London Law Society’s Financial Law Committee (CLLS), albeit that they have approached the problem from different perspectives.
The Project has explored secured transactions policy, examining the secured transactions regimes of other jurisdictions to determine what might be needed to make English law ‘best in class’.
The CLLS has approached the matter from the perspective of practising English lawyers, who consider that the current law, whilst complicated, nevertheless works well in practice. From this viewpoint, the current law does not need to be superseded by a different (and differently complex) set of rules derived from the legislative systems of other jurisdictions – it just needs to be modernised.
Whilst the perspectives of the Project and the CLLS differ, their work demonstrates a common understanding of the underlying jurisprudence, supplemented by a desire to modernise and improve the existing law.
The Code has already undergone several iterations since it was first published in 2015. Changes have been made as a result of detailed consultation with a wide range of interested parties. These include senior expert academics, representatives of the Project, solicitors (including corporate, insolvency and shipping practitioners), the Law Commission and financial institutions. The discussions have been robust and wide-ranging, covering issues of detailed drafting as well as broader matters of policy. The purpose of the discussions has been to refine the drafting to reflect the concerns raised across the consultation group, and so to achieve consensus on as many points as is possible.
What does the Code do?
The Code creates a new law of secured transactions which is based on the existing law but simplifies and modernises it. The Code changes and codifies the law in as clear and straightforward a way as possible and is drafted at a level of principle which retains the flexibility of the current law – a feature that is important in enabling the Code to give effect to changing commercial practices.
Crucially, the Code uses a single term, ‘Charge’, to encompass all forms of consensual security interests. Subsumed into this definition, therefore, are mortgages (legal and equitable), charges (fixed and floating), assignments (legal and equitable), pledges and contractual liens. A policy decision was made not to adopt a functional approach in defining the term ‘Charge’ on the basis that the definition reflects English law as it is currently understood. This means that a Charge will not include, for example, retention of title clauses as English law would not view them as security interests.
Key provisions of the Code include the removal of the distinction between fixed and floating charges; the simplification of the formalities required to create a charge, including provision for the electronic execution of documentation; and the simplification of the priorities rules as between chargees.
It would be easy to view this project as an irrelevance when there is so much else for the UK government to consider in the middle of a global pandemic. That would be a mistake. There is added impetus to resolving the impasse as the UK’s Brexit transition period starts to run down, and the practical and economic consequences of Covid-19 become increasingly apparent. The concept of the Code has been welcomed in principle by academics and practitioners from all sides, even though some aspects of its current iteration merit further debate.
Our inexperienced and busy government would do well to see the Code both as a pragmatic solution to a complex problem and as an easy win for a government that needs to reaffirm the UK as ‘a country to do business with’ in an increasingly challenging economic environment.
Professor Paula Moffatt is director of external engagement, Nottingham Law School, Nottingham Trent University, and a member of City of London Law Society’s Advisory Group on the Secured Transactions Code
The latest draft of the Secured Transactions Code and Commentary (March 2020) is available on the City of London Law Society’s website