Legal Issues In The Creation of Security - Part 2

SECURITY OVER FUTURE ASSETS

The common law has always denied the legality of taking

security over future assets (ie assets which do not yet exist).

At common law, therefore, security over future property by way

of a mortgage or a charge is invalid. However, in Holroyd v

Marshall37, the House of Lords held that

security over future assets is valid in equity by virtue of the

contract of assignment. Hence, while it is not possible to have

a legal mortgage over future assets, it is possible to take an

equitable mortgage or charge over future assets. Security by

way of pledge or lien, however, can never be taken over future

assets, because there can be no physical delivery of future

assets.

Attachment of security to existing assets takes place, when

possession passes (pledges and liens), when legal title is

conveyed (legal mortgages) or when the security agreement is

made or when money is advanced (equitable mortgages and

charges). Before Holroyd, however, it was difficult to

conceive of when attachment would take place in the case of a

security over future assets. In Holroyd, it was

decided that security over future assets attaches automatically

once the assets are acquired, with no fresh consideration

needed.

Once attachment has taken place, the security still takes

effect from the date of creation of the security agreement.

This means that even though attachment does not happen until

the assets are acquired, once they are acquired priority will

be governed by the date of the original security agreement.

SECURITY OVER BOOK DEBTS

Security may be taken over a book debt either by a mortgage

or a charge. Strictly speaking, the security will be over

either the right to payment of the debt or the proceeds of the

debt.

Security by legal mortgage

A legal mortgage over a debt is created by a legal

assignment. An assignment must be by writing, must not purport

to be by way of charge only and must be of the whole debt. The

assignee will take subject to equities such as a prior

perfected equitable assignment and accrued rights of set off.

The assignee does not therefore have the full rights of a bona

fide purchaser for value. He will however, after having given

express notice in writing to the debtor, be able to sue for the

debt in his own name.

Security by equitable mortgage

An equitable mortgage over a debt is created by equitable

assignment. Any other equitable assignment can be created

informally subject to an act by the assignor manifesting an

intention to make a present assignment. Additionally, if the

assignment is over future debts, the assignment will only take

effect in equity as an agreement to assign and must be

supported by consideration.

There is no requirement that notice need be given to the

debtor. However, if an equitable mortgagee wishes to convert

its security to a legal mortgage, it can do so by giving notice

to the debtor. Often, however, an assignee will not wish to

give notice for commercial reasons - such as the assignor

not wishing the debtor to know about the assignment or the

assignee preferring that the assignor continues to collect

payment of the debt.

An equitable mortgagee differs from a legal mortgagee in

that he cannot sue the debtor without joining the assignor as a

party to the proceedings either as plaintiff or defendant.

Security by charge

A mere chargee in respect of a charge over a debt has no

right to sue the underlying debtor. He may require the chargor

to sue and he will then be entitled to the proceeds of the

debt. A charge over receivables should confer on the chargee

power to convert it into a mortgage and should therefore

contain a power of attorney to the chargee to execute an

assignment in the name of the chargor.

Priority

It is possible for a number of people to have taken security

over the same debt. The rules as to who takes priority will

depend on whether or not the claimants have notice of the

security taken before theirs.

1. Claimant has no notice

   Between all permutations of legal assignees and equitable

   assignees, priority is governed by the date notice is given

   to the debtor, regardless of the time that the assignment was

   actually made.38 Here, it is only necessary that the second

   chargee has no notice of the first charge at the time of

   creation of the second charge. It is irrelevant if he has

   notice of the first charge at the date he notifies the

   debtor.39 Where neither party has given notice, the charge

   created first in time has priority.

   The rules as to priority between a legal or equitable

   assignee and a mere chargee are still unclear. It is possible

   that it will be governed by the date of notice to the debtor.

   However, the better view is that priority is governed by the

   date of creation of the competing interests.

   The rules as to priority between two mere chargees are

   also unclear. It is thought here also that the better view is

   that the priority will be governed by the date of creation of

   the charges.

2. Claimant has notice

   If a chargee or mortgagee has actual and constructive

   notice of a prior interest, he will take subject to that

   prior interest.

3. Freedom of dealing

   Where there is a floating charge, priority may be affected

   by the terms of the charge itself.

   If the floating charge permits the debtor to remove debts

   from the scope of the floating charge, then prior to

   crystallisation, any assignees of debts will take priority to

   the chargee.

   Often, however, there is a prohibition in the charge on

   the creation of further charges having priority to a floating

   charge. Whether a party with a subsequent interest will take

   subject to this floating charge will then depend on whether

   they have actual notice.

   RECHARACTERISATION OF FIXED AND FLOATING CHARGES

   Book debts

   Before Spectrum Plus Limited v National Westminster Bank

   plc40, it had been judicially accepted that, in

   the right circumstances, a fixed charge may be created over

   book debts. This comes from Siebe Gorman & Co v

   Barclays Bank Ltd41. Similar decisions

   were reached in Re Keenan Bros Ltd42 and in

   Oakdale (Richmond) Ltd v National Westminster Bank

   plc43. Siebe Gorman was approved and

   followed in the Court of Appeal in National Westminster

   Bank plc v Spectrum Plus Ltd44. Given

   the rationale employed by the court in Siebe Gorman,

   the court categorised a charge as floating if the company could

   use the proceeds of book debts without the consent of the

   chargee. This logic was used to reach that very result in

   Re Brightlife Ltd45.

   In Re New Bullas Trading Ltd46 the Court

   of Appeal recognised a third option open to the court in such

   cases - that is to find that the charge on book debts is,

   in fact, a divisible one, which can be both fixed and floating.

   The Court of Appeal were prepared to see two assets (one a

   debt; the other its proceeds) and so were able to accept that

   one could be subject to one type of charge and one another.

   Nourse LJ said that was how the parties had labelled the

   charges and that the court's interpretation that there were

   two assets allowed the court to respect the parties'

   wishes. The approach has been criticised by academics, for

   example, Goode, Charges Over Book...