Insolvency law—key areas of reform
Why does the law on fixed and floating charges need reviewing?
Richard Calnan, banking partner at Norton Rose Fulbright, and chairman of the working party of the Financial Law Committee of the City of London Law Society, comments on the Committee’s paper on the issues.
Original News Brief
Consultation: Secured transactions reform—Discussion paper 2—Fixed and floating charges on insolvency, LNB News 26/02/2014 136
The Financial Law Committee of City of London Law Society (the Committee) has published its second discussion paper on secured transactions reform. The paper focuses on the requirement to draw a distinction between fixed and floating charges under insolvency legislation. It follows an earlier discussion paper published in November 2012 in which the Committee identified two areas of the law concerning secured transactions which deserved further investigation. The first matter regards the requirement to draw a distinction between fixed and floating charges, and the second being the law relating to the assignment of receivables and contract rights. The Committee views the first issue as the area of law concerning secured transactions which is most in need of review.
What is the background to this paper?
The Committee has been commenting on proposals for reform of the law of secured transactions for a very long time. It seemed to us that, rather than just react to requests for comments on proposed changes to the law, we should be more proactive to consider which areas of the law of secured transactions are in need of reform. We therefore set up a working party to do so.
The first step was the publication of a discussion paper on Secured Transactions Reform in November 2012. The purpose of this paper was to identify those areas of the law which we considered were in need of reform—and to encourage the discussion of the issues by interested parties, with a view to seeing if there was a consensus for reform in particular areas.
It became clear from the discussions following the publication of that discussion paper that the one area of the law which was generally considered to be in need of reform was the requirement to draw a distinction between fixed and floating charges under insolvency legislation.
Why did the Committee decide that the law concerning fixed and floating charges is most in need of review?
The collective experience of the members of the working party was that this was the main area where the law really was not working well. The problem is caused by insolvency legislation and, for that reason, any improvement requires a change to insolvency law.
The key problem is that a secured creditor with a fixed charge gets the net proceeds of sale of the charged assets but a secured creditor with a floating charge ranks behind a large number of other people. The problem is exacerbated by the difficulty of deciding in practice whether a charge is fixed or floating. The uncertainty which this engenders is particularly unfortunate in an area where certainty is of paramount importance.
To what extent do you think there is a desire in the market for the law concerning fixed and floating charges to be tackled?
The comments which we received on our first Discussion Paper of November 2012 showed that this was the main concern of those working in the market. It was for that reason that we decided that the next paper should concentrate on this topic.
Which of the three solutions identified by the Committee do you think is preferable?
Although everyone on the Committee recognised the need for reform, there was no unanimity on which of the options would be best. We would like to see if there is any consensus on this point among those who comment on the discussion paper.
How do you hope that lawyers will join the debate?
We are hoping for comments from interested parties. We look forward to receiving emails of any length expressing views on the issues which we have raised. We will also convene a meeting in the next few months to give those people who are interested a chance to express their views and discuss them round the table.
What is next for the Committee?
The other issue which a large number of commentators thought should be examined was restrictions on the assignment of receivables and contract rights. We are now starting to consider that issue with a view to publishing our third Discussion Paper at some time in the future.
Interviewed by Nicola Laver.
The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.