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Registration and Ranking of Company Charges in Zambia
Published online by Cambridge University Press: 18 September 2009
Abstract
This article discusses the effect of the registration requirements under the Zambian Companies Act on the rules for determining priority among company charges in Zambia. In light of the Supreme Court decision in Zambia National Commercial Bank Ltd v Mwila, the article also analyses the scope for applying common law rules on the ranking of charges, vis-à-vis section 101 of the Companies Act.
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- Research Article
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- Copyright © School of Oriental and African Studies 2009
References
1 Chap 388 of the Laws of Zambia (1995 edition (revised)).
2 For detailed and further reading on charges, see Gough, WJCompany Charges (3rd ed, 2007, Lexis Nexis Butterworths)Google Scholar; Getzler, J and Payne, J (eds) Company Charges: Spectrum and Beyond (2006, Oxford UP)Google Scholar; Calnan, RTaking Security: Law and Practice (2006, Jordan Publishing)Google Scholar; McCormack, GRegistration of Company Charges (2nd ed, 2005, Jordan Publishing)Google Scholar; “The floating charge and the Law Commission consultation paper on registration of security interests” (2003) Insolvency Lawyer 2–13; Farrar, JH “Floating charges and priorities” (1974) 38 The Conveyancer 315Google Scholar; “The availability of the floating charge as a security device in the United States” (1928) 28(3) Columbia Law Review 360–66; Law Commission of England and Wales “Registration of security interests: Company charges and property other than land law” (consultation paper no 164, June 2002). The Law Commission recommended that the scheme for registering charges under the Companies Act 1985 should be replaced with a more comprehensive legislative scheme which would eliminate the need to register a charge over land at the Companies Registry, rendering registration at the Land Registry sufficient.
3 Re Sapco Fibreboard & Wood Products Ltd (in receivership) – An Application for Directions under s 113 of Cap 388 2001/HPC/0225 (unreported) per Chulu J.
4 In the end, the court held that it was the parties' intention, as evidenced by specific references in the security documents, that the debenture and floating charge should rank equally.
5 SCZ appeal no 94 of 1999 (unreported) (11 November 1999 and 6 April 2000) per Ngulube CJ.
6 Attorney General v Zambia Sugar Co Ltd and Nakambala Estate Ltd (1977) ZR 273 (SC) at 273 per Gardner, acting DCJ.
7 Halsbury's Laws of England (4th ed, Butterworths) vol 16, para 780.
8 (1897) AC 81 at 86, HL.
9 (1904) AC 355 at 358, HL.
10 See Romer LJ in Re Yorkshire Woolcombers Association Ltd (1903) 2 Ch 284 at 295, CA. Also, see Lingard, JRBank Security Documents (3rd ed, 1993, Butterworths) at 155Google Scholar, stating that: “It is of the essence of a floating charge that the company has apparent authority to deal with its assets in the ordinary course of business unless a third party has actual notice of restrictions which preclude this. It does not have authority to undertake transactions outside the ordinary course of business (such as to hive down its assets) and any such transactions if the third party has notice of the irregularity will be subject to the floating charge.”
11 Wheatley v Silkstone and Haigh Moor Coal Co (1885) 29 Ch D 715 per North J, where a mortgage made “in the ordinary course of business and for the purpose of the business” was found to be “a good mortgage upon and a good charge upon the property comprised in it”, and thus “not subject to the claim created by [a] debenture … intended to be a general floating security over all the property of the Company”.
12 Lingard Bank Security Documents, above at note 10 at 156.
13 Goode, RPrinciples of Corporate Insolvency Law (2nd ed, 1997, Sweet & Maxwell) at 419–21Google Scholar.
14 Id Commercial Law (3rd ed, 2004, Penguin) at 647.
15 Id at 648.
16 Ibid, stating additionally that, where “a security interest is otherwise unperfected”, it may “be perfected vis-à-vis a particular third party by notice to that party or by knowledge aliunde [of that other party] on his part”.
17 Report of the Committee on Consumer Credit (1971, HMSO, cmnd 4696) para 5.7.13 (chaired by Lord Crowther). According to Roy Goode, “[t]he distinction is of substance, for the filing of a security instrument or copy is public notice of its contents, whereas according to the orthodox view registration of particulars of the security interest constitutes notice only of the existence of the security and of the other particulars registered”: Goode Commercial Law, above at note 14 at 650, n 25 and 664.
18 See sec 4 of the Lands and Deeds Registry Act, cap 185 of the Laws of Zambia.
19 Company charges over land which may be registrable under legislation such as the Agricultural Credits Act (cap 224), Co-operative Societies Act no 20 of 1998 or the Trades Charges Act (cap 145) must also be registered under the Companies Act. Note that, where another statute provides rules for determining priority among charges, the rules under the Companies Act do not apply.
20 Cap 185 of the Laws of Zambia.
21 Compare with Re Castell & Brown Ltd [1898] 1 Ch 315, which involved equitable encumbrances in the form of debentures and an equitable mortgage by deposit of deeds which, though subsequent in date to the debentures, was taken without notice of the debentures. The case held that the bank which held the deeds of title had a stronger equity than the debenture holders and was thus entitled to priority. Also see Perry Herrick v Attwood (1857) 2 De G & J 21, where a mortgagee left the title deeds to the mortgaged property with the mortgagor, so that the mortgagor could obtain a further mortgage on the same property. It was agreed that the second mortgage would have priority to the first. In fact, the mortgagor obtained two further mortgages and eventually defaulted on all of them. The first mortgagee claimed that his mortgage had priority over at least the third mortgage, if not the second, because it was the earliest and had been created by deposit of title deeds. The court held, however, that the mortgagee had lost his priority by his careless handling of the deeds; as Lord Crownworth LC said: “To hold that a person who advances money on an estate, the title deeds of which are under such circumstances left in the hands of the mortgagor, is not to have preference, would be to shut our eyes to the plainest equity.”
22 Companies Act, sec 97(2).
23 Id, sec 98(1).
24 Id, secs 99(1)(d) and (2)(b).
25 Id, sec 97(4).
26 Also, note that sec 348 provides: “A floating charge on the undertaking or property of the company created within twelve months before the commencement of the winding-up shall, unless it is proved that the company immediately after the creation of the charge was solvent, be invalid except to the amount of any cash paid to the company at the time, or subsequently, in consideration for the charge, together with interest on that amount at the rate fixed by the terms of the charge.”
27 Goode Commercial Law, above at note 14 at 651.
28 Ibid.
29 Ibid. Note that all the UK company law provisions of the 1985, 1989 and 2004 acts have been consolidated in the Companies Act 2006. At the time of writing, the British government had announced that the final implementation date of the Companies Act 2006 would be postponed from 1 October 2008 to 1 October 2009.
30 Goode, ibid.
31 See sec 99(2), Companies Act.
32 Id, sec 99(11).
33 Ibid. Subsec (2) contains the actual requirement obliging companies to register, while subsec (3) stipulates the particulars required for the purposes of registration.
34 Id, sec 2.
35 See id, sec 99(1)(e). Note that subsec (6) provides: “Debentures entitling the holder to a charge on land shall for the purposes of this section be deemed not to be an interest in land.” Sec 395 of the UK Companies Act 1985 creates similar mandatory registration requirements for charges by companies created by the deposit of title deeds.
36 According to sec 99(10), “that person shall be entitled to recover from the company the amount of any fees properly paid by him to the Registrar on the lodgement”. The documents for this purpose include the prescribed form for particulars as required by sec 99(3) and particulars or copies of the instrument creating or evidencing the charge.
37 For more analysis, see Goode Commercial Law, above at note 14 at 51.
38 The common law and the doctrines of equity are applicable in Zambia subject to the provisions of the constitution and any other written law. See English Law (Extent of Application) Act, cap 11 of the Laws of Zambia, sec 2(a) and (b).
39 This is in keeping with the maxim that “where the equities are equal, the law prevails”.
40 Dearle v Hall (1828) 3 Russ 1 [1824–834] All ER 28. This case established a controversial English common law rule to determine priority between competing equitable claims to the same asset. The beneficial owners of a trust of land mortgaged their beneficial interest to two different mortgagees. The question arose as to which mortgage had priority. It was held that the deciding factor was the order in which the mortgages had been notified to the trustees, regardless of the order in which the mortgage was granted. This is provided that the holder of the subsequent interest takes title without notice of the first interest, in which case the former obtains priority. It was subsequently extended to all assignments of a beneficial interest by sec 137 of the UK Law of Property Act 1925. The rule has been severely criticized. For example, see Lord Macnaghten in Ward v Duncombe [1893] AC 369, stating [at 393]: “I am inclined to think that the rule in Dearle v Hall has on the whole produced at least as much injustice as it has prevented”; see also Oditah, FLegal Aspects of Receivables Financing (1991, Sweet & Maxwell)Google Scholar; Goode Commercial Law, above at note 14 at 652, stating that “[i]t is high time that the rule in Dearle v Hall was abolished”.
41 Per Lord Macnaghten in Governments Stock and Other Securities Investment Co Ltd v Manila Pty Co (1897) AC 81 at 86.
42 Lingard Bank Security Documents, above at note 10 at 156 and 159; Re Hamilton's Windor Ironworks, ex p Pitman and Edwards (1879) 12 Ch D 707. Also, see Goode Commercial Law, above at note 14 at 686, stating (at 665): “The peculiarity of the floating charge is that, by virtue of the powers of disposition left to the debtor company, it is in principle subordinated to a subsequent fixed charge, whether legal or equitable”.
43 Re Benjamin Cope & Sons Ltd, Marshall v Benjamin Cope & Sons Ltd [1914] 1 Ch 800; Re Household Products Co Ltd (1981) 124 DLR (3d) 325.
44 Re Automatic Bottle Makers Ltd, Osborne v Automatic Bottle Makers (1926) Ch 412.
45 Farrar, JH, Furey, NE and Hannigan, BMFarrar's Company Law (3rd ed, 1991, Butterworths) at 277Google Scholar.
46 Goode Commercial Law, above at note 14 at 686–87.
47 Id at 666.
48 Dearle v Hall (1828) 3 Russ 1; Wheatley v Silkstone & Haigh Moor Coal Co (1885) 29 Ch D 715.
49 Under sec 24 of the Companies Act, notice or knowledge of the contents of a document concerning a company is not to be presumed by reason only that the document has been lodged at the Companies Registry or is held by the company and available for inspection. Also, see Re Valletort Sanitary Steam Laundry Co Ltd, Ward v Valletort Sanitary Steam Laundry Co Ltd [1903] 2 Ch 654; Re Standard Rotary Machine Co (1906) 95 LT 829.
50 Halsbury's Laws of England, above at note 7, vol 16, para 1327.
51 Megarry, R and Wade, HWRThe Law of Real Property (4th ed, 1977, Stevens & Sons) at 959Google Scholar.
52 Id at 970.
53 Id at 969.
54 Companies Act, sec 99(11).
55 Id, sec 99(2).
56 Id, sec 99(3).
57 Note that the decision in Re Sapco (above at note 3) is inconsistent with the superior precedent in Mwila on the applicability of the common law rules.
58 Mwila, above at note 5.
59 Companies Act, sec 99(11). The word “instrument” must obviously be taken to mean a “legal instrument”, in which case it refers to any document, however duly executed and authenticated, for the purpose of stating some contractual relationship or granting some right. Martin, EA and Law, J (eds) A Dictionary of Law (6th ed, 2006, Oxford UP) at 279Google Scholar define an “instrument” as “a formal document, such as a will, deed, or conveyance, which is evidence of [for example] rights and duties”.
60 See Companies Act secs 2 and 99(1)(e) respectively. Sec 2 of the Land and Deeds Registry Act (cap 185) provides that a “mortgage includes a deposit of title deeds or documents with the object of creating an equitable mortgage on the property comprised in such deeds or documents and any charge”.
61 The argument can be framed differently by arguing that the applicable rules are the pre-1925 rules in any event, since the exemption relating to security by deposit of title deeds only applies to charges over unregistered land.
62 See Goode Commercial Law, above at note 14 at 689.
63 Companies Act, sec 99(11)(a).
64 Goode Commercial Law, above at note 14 at 689.