A Reform of Secured Transactions Law is Long Overdue
29 July 2020
Secured transactions law in England and Wales is in serious need of reform and The City of London Law Society has a solution.
At some point in our lives, most of us will need to borrow money from a bank or other financial institution.
Many of those who contemplate a legal career do so because they see it as a means to make the world a better place. Human rights, environmental, and criminal law are hugely attractive subjects for prospective law students as they manifestly deal with some of the major issues that face the world today, notably freedom of expression, climate change and access to justice.
But the vital role played by corporate and commercial lawyers in society is often overlooked, including – as will be discussed here – in the context of secured transactions reform.
Secured transactions reform is important, because having good secured transactions laws goes straight to the heart of enabling access to finance. And being able to access finance has a social consequence: it is extremely important for everyone, whether you are a large corporation with a staff of thousands, a small to medium enterprise trying to grow your business, a sole trader needing to buy a new van, or simply an individual hoping to obtain a mortgage.
The bottom line is that at some point in our lives, most of us will need to borrow money from a bank or other financial institution (a “transaction”). But borrowing money comes at a cost. The higher the risk to the bank of non-repayment, the higher the borrower’s costs. These costs can be reduced, however, if the borrower offers security in return for the loan – effectively giving the bank certain rights to its property. If the borrower fails to repay the bank, the bank can sell the property to recoup its losses.
It would be foolhardy to enter into a secured transaction without legal advice. The potential consequences of getting it wrong are serious. The bank needs to know that it is protected on the borrower’s insolvency, and the borrower needs to understand the risks of losing all its property. Legal advice costs money and the more complicated the law that sits behind a secured transaction, the greater the cost of the legal advice.
Although existing secured transactions law in England and Wales works very well in practice, the law is extremely complicated. It has developed organically over the last four hundred years with incremental changes resulting in complex rules.
The rules we have for signing hard copy legal documents may have seemed reasonable even as recently as the turn of the century, but they are increasingly proving an unnecessary stumbling block in corporate transactions. With the arrival of COVID-19, they are challenged even further as society shifts its mode of doing business online.
Then there is the terminology: understanding and distinguishing between the different types of security interest on offer is a major challenge for most law students, let alone the uninitiated. By way of example, we have mortgages (legal and equitable), charges (fixed and floating), assignments (statutory and equitable – although the statutory ones are often confusingly also referred to as legal) as well as contractual liens. Yet the reality is that all these security interests pretty much do the same thing.
Secured transaction reform has been on and off the legislative agenda for almost fifty years – it is long overdue. There are two blocks to reform: the first is that it is very difficult, the second is the historic lack of consensus as to how the law is best reformed.
Which is where practising corporate and commercial lawyers come into the debate. Recognising the social and economic imperatives for reform, the City of London Law Society (CLLS) has drafted a Secured Transactions Code in a bid to accelerate reform.
The CLLS has not undertaken this exercise lightly, and the latest version of the code is the result of over five years’ painstaking work. The approach has been to modernise and update the existing law, so that it is available in one place. It is intended to be accessible to all, with simplification one of the main objectives. This means that, amongst other things, the Code introduces a single security interest (the Charge), minimises formalities where practicable to do so, and clarifies the rules on priorities.
The CLLS has recognised the importance of listening to, and accommodating where possible, the views of all who are interested in secured transactions reform, including those who would have preferred a different solution. There is great strength in this approach as it means that the solutions that have been found within the Code are robust and have been interrogated with rigour by practitioners and academics alike.
Although there are still some outstanding matters (particularly concerning the interface with insolvency law), the Government would do well to recognise that enacting the Code as legislation would be greatly to its advantage.
Simplifying secured transactions law is a social good and one which will also ensure that English law, one of our greatest exports, remains an attractive choice of law in an increasingly competitive world. Possibly not quite saving the world, but important, nonetheless.
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