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Published online by Cambridge University Press: 05 August 2022
A key novelty of the unitary system of personal property security law is the concept of security interests or rights developed to address the rather complex categorizations of security rights under the common law. With respect to the limitations of floating charges as security devices for loans under the common law, there were expectations that the unitary security interest could provide an alternative security device capable of addressing the problems faced by hitherto inhibited business borrowers. This article compares the floating charge device to the unitary security interest in some critical areas to ascertain whether the latter ameliorates the difficulties associated with floating charges or whether it merely creates an added conceptual burden within the framework of an already convoluted secured transactions system.
*MPhil in Law (Oxon), PhD Candidate, University of Middlesex, UK. Barrister & solicitor of the Supreme Court of Nigeria.
1 The archetypal classification of devices that constitute floating charges remains Romer LJ's dictum in Re Yorkshire Woolcombers Association Ltd [1903] 2 Ch 284, 285 (Re Yorkshire).
2 See Holroyd v Marshall [1862] 10 HL Cas 191.
3 For a comprehensive discussion of the problems associated with floating charges, see WJ Gough Company Charges (2nd ed, 1996, Butterworths Law), chaps 5–16.
4 See Re Yorkshire, above at note 1.
5 For a discussion of the impact of small business enterprises on states’ economies, see Gullifer, L and Tirado, I “Financing micro-businesses and the UNCITRAL Model Law on secured transactions” (2017) Oxford Legal Studies Research Papers 1Google Scholar.
6 For example, sec 1 of the Nigerian reform enactment, the Secured Transactions in Movable Assets Act 2017 (STMA), No 58, provides as the main objective of the act the stimulation of responsible lending to small- and medium-scale enterprises.
7 A 2012 survey by the International Finance Corporation, published by the International Monetary Fund (IMF) as a diagnostic tool and informational source for policymakers, development practitioners and legal experts in collateral registries reform, notes that about 300 countries have implemented PPSL reforms since 2002. See International Finance Corporation “Making security interests public: Registration mechanisms in 35 jurisdictions”, available at: <http://www.doingbusiness.org/content/dam/doingbusiness/media/Special-Reports/Making-Security-Interests-Public.pdf> (last accessed 17 June 2022).
8 This is achieved by the definition of security interest or rights in respective reform enactments. For example, the STMA defines a security interest as “a property right in collateral that is created by agreement and secures payment or performance of an obligation, regardless of whether the parties have denominated it as a security interest but it does not include a personal right against a guarantor or other person liable for the performance of the secured obligation”. See sec 63(1) of the act.
9 The Nigerian reform experience provides an apt illustration of partial harmonization. While obviously adopting the unitary system through its definition of security interest, sec 2(3) of the STMA provides that “Nothing in this Act shall prevent the creation of a security interest in the form of charges by companies registered under the Companies and Allied Matters Act.” The implication of this provision is that the STMA creates a dual regime of secured transactions in Nigeria, which could result in complexities considering the possibility of assets emanating from a transaction in one regime potentially filtering into the other and the absence of a statutory provision for determining priorities across both regimes. Such problems could result in the adoption of the unsatisfactory common law rules in resolving priority issues against the actual intention of the Nigerian legislature.
10 Nigeria adopted English law as a consequence of British colonial rule in Nigeria, which ended in 1960. By sec 45 of the Interpretation Act 1958, cap 89, the English common law and doctrines of equity, together with statutes that were in force in England as of 1 January 1900, were adopted in Nigeria subject to local enactments. This remains the case to date. See AEW Park Sources of Nigerian Law (1st ed, 1963, Sweet and Maxwell), chap 1.
11 These include the UNCITRAL Model Law on Secured Transactions (2016, United Nations), the UNCITRAL Legislative Guide on Secured Transactions (2010, United Nations) and the Australian Personal Property Security Act 2009, No 130.
12 Y Chevrel La Littérature comparée (5th ed, 2006, Presses Universitaires de France) at 3.
13 See D Pearce et al Australian Law Schools: A Discipline Assessment for the Commonwealth Tertiary Education Commission (1987, Australian Government Publishing Service), cited in T Hutchinson “Doctrinal research” in D Watkins and M Burton (eds) Research Methods in Law (2013, Routledge) 10.
14 Pennington, R “The genesis of the floating charge” (1960) 23 Modern Law Review 630CrossRefGoogle Scholar.
15 The first English law limiting the liability of members was the Limited Liability Act of 1855, which empowered a company incorporated under the Joint Stock Companies Act of 1844 to limit the liabilities of their members to the capital unpaid on their shares.
16 The need for directors to take greater care in the early days of the application of corporate personality was aggravated by the fact that the management of the early companies was replete with unethical and fraudulent behaviours by those acting on their behalf, which generally shone a light on businesses. See JE Abugu “The monster theory: Setting the boundaries of corporate financial malpractice” (inaugural lecture delivered at the University of Lagos, 8th April 2015), available at: https://ir.unilag.edu.ng/handle/123456789/8237 (last accessed 17 June 2022).
17 Although the current version of art 9 of the UCC became effective in 2010, the first version was enacted in 1951. For a discussion of the history of art 9, see P Winship “An historical overview of UCC article 9” in L Gullifer and O Akseli (eds) Secured Transactions Law Reform: Principles, Policies and Practice (2016, Hart Publishing) 21.
18 See Llewellyn, KN “Problems of codifying security law” (1948) 13 Law & Contemporary Problems 687CrossRefGoogle Scholar.
19 See the UNCITRAL Legislative Guide, above at note 11 at 1.
20 Llewellyn “Problems”, above at note 18 at 687.
21 G Gilmore Secured Transactions (1964, Boston, Little Brown & Co) at 27.
22 Winship “An historical overview”, above at note 17 at 22.
23 Ibid.
24 Gilmore, G “Security law, formalism and article 9” (1968) 47 Nebraska Law Review 659Google Scholar at 660.
25 Gilmore Secured Transactions, above at note 21 at 288–90.
26 Id at 290.
27 See the UNCITRAL Legislative Guide, above at note 11 at 1.
28 See for example sec 38 of the Companies Clauses Consolidation Act 1845, cap 16.
29 [1868] LR 6 Eq 514.
30 Ibid.
31 [1870] LR 5 Ch App 318.
32 [1897] AC 81.
33 Id at 86.
34 Above at note 31.
35 Evans v Rival Granite Quarries Ltd [1910] 2 KB 979.
36 Subnom Re Yorkshire, above at note 1.
37 Id at 358.
38 This classification arguably remains the basis for the current law on floating charges in many common law countries. For example, see sec 203(1) of the CAMA, which defines a floating charge as an equitable charge over the whole or a specified part of the company's undertakings and assets, including cash and uncalled capital of the company both present and future, but so that the charge shall not preclude the company from dealing with such assets until (a) the security becomes enforceable and the holder thereof, pursuant to a power in that behalf in the debenture or the deed securing the same, appoints a receiver or manager or enters into possession of such assets; or (b) the court appoints a receiver or manager of such assets on the application of the holder; or (c) the company goes into liquidation.
39 Re Yorkshire, above at note 1 at 358.
40 L Gullifer Goode on Legal Problems of Credit & Security (4th ed, 2008, Sweet & Maxwell) at 36.
41 Ibid.
42 STMA, sec 63(1). This is similar to the definition of security rights under similar reform enactments, eg art 2(kk) of the UNCITRAL Model Law, where a security right is defined to include “a property right in a movable asset that is created by an agreement to secure payment or other performance of an obligation, regardless of whether the parties have denominated it as a security right, and regardless of the type of asset, the status of the grantor or secured creditor, or the nature of the secured obligation”. Similarly, the Australian Personal Property Securities Act 2009 (APPSA) defines a security interest as “an interest in personal property provided for by a transaction that, in substance, secures payment or performance of an obligation (without regard to the form of the transaction or the identity of the person who has title to the property)” (APPSA, sec 12(1)). Unlike the UNCITRAL Model Law, however, the APPSA further enumerates in secs 12(2) to 12(6) specific devices that create security interests and those that do not. For example, sec 12(2) provides that a security interest includes an interest in personal property provided by any of the following transactions, if the transaction, in substance, secures payment or performance of an obligation: (a) a fixed charge; (b) a floating charge; (c) a chattel mortgage; (d) a conditional sale agreement (including an agreement to sell subject to retention of title); (e) a hire purchase agreement; (f) a pledge; (g) a trust receipt; (h) a consignment (whether or not a commercial consignment); (i) a lease of goods (whether or not a PPS lease); (j) an assignment; (k) a transfer of title; (l) a flawed asset arrangement.
43 G McCormack Secured Credit under English and American Law (2004, Cambridge University Press) at 71.
44 See the decision of the Supreme Court of Canada in Royal Bank of Canada v Sparrow Electric Corp [1997] 143 DLR (4th) 385.
45 See H Beale “An outline of a typical PPSA scheme” in Gullifer and Akseli Secured Transactions, above at note 17 at 9.
46 For example, UNCITRAL recognizes as one of its basic approaches to secured transactions the use of possessory forms of security and considers situations in which the grantor retains physical possession of the encumbered asset as non-possessory security rights (and not pledges), irrespective of how the parties have designated such transactions. See the UNCITRAL Legislative Guide, above at note 11 at 43.
47 STMA sec 8(2).
48 STMA part 5.
49 Some academics have expressed doubts about whether the unitary system permits the right to deal where the reform enactment expressly permits such a right being contrary to floating charges in which the debenture has to contemplate the existence of such a right to exist. Some learned commentators have described the similar security interest under the APPSA, which omits such a right as “a fixed security interest over circulating assets”, with the implication that the limitations placed on the rights of debtors to deal on assets that are subject to fixed charges invariably deny debtors any such rights to deal under the unitary security interest. See A Duggan and D Brown Australian Personal Property Securities Law (2nd ed, 2006, LexisNexis Butterworths) at 128.
50 See National Provincial and Union Bank of England v Charnley [1924] KB 431.
51 Above at note 1.
52 For a detailed discussion of licences in real property, see generally Clark, CE “Licenses in real property law” (1921) 21 Columbia Law Review 757CrossRefGoogle Scholar. It must be highlighted that many of the principles expounded in this article apply to other forms of licences.
53 Gough Company Charges, above at note 3, chap 5.
54 See the bundle of rights theory on the impact of ownership as the basis of granting further rights. For a discussion of this theory, see AM Honore “Ownership” in AG Guest (ed) Oxford Essays in Jurisprudence (1969, Oxford University Press) 107.
55 For a detailed discussion of the defeasible fixed charge theory, see Worthington, S “Floating charges: An alternative theory” (1994) 53 Cambridge Law Journal 81CrossRefGoogle Scholar.
56 Id at 84.
57 [2005] UKHL 41.
58 [1979] 2 Lloyd's Rep 142.
59 [1888] 13 AC 523.
60 [1994] 1 BCLC 485.
61 See note 8 above.
62 For a discussion of priorities, see generally S Worthington Equity (2nd ed, 2006, Clarendon Law Series), chap 4.
63 Ibid.
64 Id at 96.
65 The STMA defines a PMSI as a) a right in collateral taken or retained by the seller to secure all or part of its purchase price; b) a right taken by a person who provides credit to enable the grantor to acquire the collateral if such credit is in fact so used; and c) the right of a financial lessor. See sec 63(1).
66 This is justified by several policy considerations and theories, with perhaps the most convincing being the money theory, which postulates that the PMSI holder adds new money to the grantor's enterprise by facilitating the acquisition of new assets for the business. By so doing, it assures the entity of increased profitability, which guarantees other creditors of the entity's fulfilment of its obligation to them, or at the very least that they do not become worse off. For an account of this theory and its criticism see Schwartz, A “A theory of loan priorities” (1989) 18 Journal of Legal Studies 209Google Scholar.
67 See STMA sec 27.
68 It must be highlighted that conditional sellers constitute item (b) of the STMA's definition of PMSIs in sec 63(1) discussed above.
69 McCormack Secured Credit, above at note 43 at 60.
70 STMA sec 27.
71 Gullifer Legal Problems, above at note 40, chap 3.
72 Ibid.
73 Ibid.
74 Ibid.
75 It is noteworthy that sec 3(1) of the STMA omits the phrase “provided the grantor has rights in the asset or the power to encumber it”, which forms part of art 6(1) of the UNCITRAL Model Law.
76 This also aligns with art 6(2) of UNCITRAL's Model Law, above at note 11.
77 The APPSA, however, provides for the concept of attachment as a prerequisite for perfection: sec 19(1) provides that a security interest is enforceable against a grantor in respect of particular collateral only if the security interest has attached to it.
78 Sec 5 of the STMA defines the content of a security agreement to (a) reflect the intention of the grantor and creditor; (b) identify both parties; (c) describe the secured obligation, including the maximum amount for which the security interest is enforceable; (d) describe the collateral adequately; (e) indicate the tenor of the obligation; (f) confirm the parties’ agreement to submit to arbitration as first recourse in a situation where any civil dispute arises. In respect of item (d), sec 6(1) provides that the collateral would be considered described if it contains a statement that the security is taken in present and future assets of the grantor.
79 See CAMA sec 222(1).
80 See for example CAMA sec 222(1), which requires the charge instrument created by a company to be registered.
81 For a detailed discussion of the notice filing system see McCormack, G “American private law writ large? The UNCITRAL Secured Transactions Guide” (2011) 60 International & Comparative Law Quarterly 597CrossRefGoogle Scholar at 614.
82 See the UNCITRAL Model Law, above at note 11, art 19.
83 McCormack Secured Credit, above at note 43 at 39.
84 McCormack “American private law”, above at note 81 at 615.
85 In Nigeria, for example, where the STMA's creditor enforcement powers include the repossession of the secured asset with support from the police, there is a strong likelihood of potential borrowers acceding to pressures brought on them after the filing of financing statements in order to avoid police harassment occasioned by creditors’ recovery efforts. See STMA secs 39–40, containing the extensive enforcement powers of creditors under the act.
86 See Gullifer Legal Problems, above at note 40 at 152.
87 Id at 151.
88 See NW Robbins & Co Ltd v Witney Warehouse Ltd [1963] 3 All ER 613.
89 See Gullifer Legal Problems, above at note 40 at 151.
90 Some enactments also support the chargee's repossession of the secured asset; see for example CAMA sec 203(1)(a).
91 In Nigeria the law generally frowns on self-help remedies, including repossession, as evidenced by the line of cases following the decision in Ellochim Nigeria Ltd and Ors v Mbadiwe [1986] NWLR (part 14) 47, in which the use of self-help remedies was criticized. However, several other cases distinguish re-possessory rights for other purposes from the repossession of collateral in secured transactions. In Umeobi v Otukoya [1978] All NLR 140 and Awojugbagbe Light Industry Ltd v Chinukwe [1995] 5 NWLR (part 390) 409, the courts approved the use of self-help in the repossession of collateral.
92 See Gullifer Legal Problems, above at note 40 at 159.
93 See Insolvency Act 1986, sec 72(a).
94 See for example Downsview Nominees Ltd v First City Corporation Ltd [1993] AC 295. See also the decision of the Nigerian Court of Appeal in Jukok International Ltd v Diamond Bank plc [2016] 6 NWLR (pt 1507) 55.
95 See Royal Trust Co v Montex Apparel Industries Ltd [1972] 2 OR 673.
96 See art 72 of the UNCITRAL Model Law (note 8), which empowers creditors to enforce their rights either under the provisions of the Model Law or under their security agreement.
97 See STMA secs 39–40.
98 See APPSA sec 116.
99 Duggan and Brown Australian, above at note 49 at 370.
100 See STMA sec 39(5).
101 Esangbedo, G “Receiverships and the reform of personal property security law in Nigeria” (2019) The Commonwealth Law Bulletin 3CrossRefGoogle Scholar at 3.
102 Id at 20.
103 See for example CAMA sec 205, which empowers the Federal High Court to appoint a receiver to manage the affairs of a company as a means of enforcing the charge.