The nature of both devices

The development of the law of floating charges in England was far from seamless. At the onset, it was unclear what constituted the “mortgage of undertakings”, the phrase employed by early statutes to empower corporations to grant such security.Footnote ²⁸ Subsequently, the Companies Act of 1862 inadvertently omitted the right of companies to secure loans, and such rights had to be discerned from their respective constitutions. The consequent litigation arising from this omission provided judges with an avenue to exercise their judicial discretion. In Re New Clydach Street and Bar Iron Co,Footnote ²⁹ the court held that an assignment, by way of a charge affecting the undertaking and all real and personal estate of a company, effectively charged all the assets owned by the company at the date of the charge but excluded subsequently acquired property. However, driven by the need to align judicial discretion with business impetus, a complete reversal of Re New Clydach Footnote ³⁰ was made by the Court of Appeal in Chancery in what became the first judicial endorsement of floating charges as security devices in England. In Re Panama, New Zealand and Australian Royal Mail Co,Footnote ³¹ it was held that the term “undertaking” included all properties of the company, both existing at the date of the debenture and subsequently acquired.

The confusion besetting the early development of floating charges, and litigants’ resort to judicial intervention, soon intensified, and became evident in other areas of the law of floating charges. For example, judicial pronouncements on what constituted a floating charge often varied, were sometimes ambiguous, and at other times were unconvincing. In Government Stock and Other Securities Investment Co Ltd v Manila Railway Co Ltd,Footnote ³² Lord Macnaghten provided the following definition of a floating charge:

Several features of the charge readily emerge from Macnaghten's definition that are worth further examination. The first is that floating charges are equitable charges; while this is indicative of the fact that their history was influenced by equity, this feature also delineates the quality of the rights they confer on chargees, considering the disparity between equitable and legal interests under the common law. The second issue is that the charge is on the assets “for the time being” of a going concern, which indicates that the assets being charged are current or existing assets, thus excluding future assets. Considering the recognition of future assets as part of charged assets in the earlier decision in Re Panama,Footnote ³⁴ this feature of Macnaghten's definition is questionable. Third, the definition states that a floating charge remains dormant either until the company ceases to be a going concern or until the chargee intervenes. The use of the term “dormant” raises difficult conceptual questions; for example, does dormancy refer to the fact that crystallization is delayed or that the chargor lacks a proprietary interest in the assets until crystallization? With the benefit of hindsight, one can now propose that Macnaghten's definition falls short of the current state of the law, since it is now indubitable that floating charges confer proprietary interests on charges right at the onset of the transaction.Footnote ³⁵ Further, since crystallization is the enforcement mechanism of the devise, it must, as with the enforcement mechanism of other security devices, be conditioned on a breach of contractual terms, which is necessarily delayed.

In the subsequent case of Illingworth v Houldsworth,Footnote ³⁶ Lord Macnaghten had the opportunity of expounding further principles in respect of floating charges. While distinguishing fixed charges from floating charges, he provided the following description of a floating charge: “a floating charge … is ambulatory and shifting in its nature, hovering over and so to speak floating with the property which it is intended to affect until some event occurs or some act is done which causes it to settle and fasten on the subject of the charge within its reach and grasp.”Footnote ³⁷ While there is no apparent contradiction between Macnaghten's two definitions, they nevertheless emphasize different characteristics of the charge – a further reflection of the amorphous state of the law at that time. In the first definition, the description emphasized the floating charge's origin and the quality of rights it confers on the chargee. However, in describing the charge as ambulatory in the subsequent case, his emphasis was on the relationship between the chargee's interest and the secured assets, since ambulation suggests that such assets, unlike those subject to fixed charges, are shifting and therefore inaccessible to a chargee until crystallization.

In apparent recognition of the potential limitations of definitions, rather than constricting himself to one, Romer LJ, on appeal in the subsequent case, delineated the following rules for ascertaining when a security device could be classified as a floating charge. This remains the archetypal means of identifying floating charges:Footnote ³⁸

Being a form of charges, floating charges only represent an agreement between a creditor and a debtor by which a particular asset or class of assets are appropriated to the satisfaction of the debt, so that the creditor is entitled to look to the asset and its proceeds to discharge the indebtedness, in priority to the claims of unsecured creditors and junior encumbrancers.Footnote ⁴⁰ Floating charges therefore only constitute encumbrances, weights hanging on the asset which travel with it into the hands of third parties other than a bona fide purchaser of the legal title for value without notice.Footnote ⁴¹

In summary, floating charges remain equitable devices, are ambulatory or hover over the class of assets placed under them; they also permit the chargor or borrower a right to deal with the secured assets in the ordinary course of business until the occurrence of a crystallizing event as defined in the debenture establishing the charge. Their potency as security devices does not depend on the chargee's ownership or possession of the charged assets but on the right to appropriate the asset in settlement of the debt.

The nature of the unitary security interest or right has never really elicited any debate as it is typically defined by relevant reform enactments. The unitary security interest encapsulates security or quasi-security devices which are already known and confers on holders the generic security interest unknown to the common law. 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”.Footnote ⁴² In describing the general features of the unitary security interest by reference to article 9, McCormack opines that “all the old terminology of the law and the favourites beloved of lawyers such as pledge, mortgage, conditional sale, trust receipt etc. have been consigned to the corridors of legal history and replaced by the unitary concept of a security interest”.Footnote ⁴³ Similarly, the unitary security interest does not distinguish between legal and equitable security interests or between fixed and floating charges.Footnote ⁴⁴ The uniqueness of the unitary security interest is further underscored by the fact that although it may be structured under an existing device, as indicated above, the parties to the secured transaction may nevertheless choose to avoid any formal characterization, as it is perfectly possible for the debtor simply to specify that a security interest is granted over the asset and for the secured party to file accordingly.Footnote ⁴⁵

However, following the unitary security interest's encapsulation of various types of security device, it follows that, irrespective of the general effect of the interest, the nature of a specific security interest depends on the type of security transaction consummated by the parties, as evidenced by the security agreement. Thus, if the underlying agreement between the parties is a pledge, then under the unitary security interest, the pledgee would have possession of the secured asset, with such a transaction lacking the feature of ambulation synonymous with floating charges.Footnote ⁴⁶ Consequently, unlike floating charges, which are never possessory, the unitary security interest could either be possessory or non-possessory depending on the nature of the underlying transaction.

Generally, where a creditor takes possession of a security interest, such possession is typically a means of perfection, which dispenses with the need to register such an interest. The STMA, however, introduces a slight twist to this general rule, because although it recognizes the right of a secured lender to take possession of the pledged asset, it provides, curiously, that such possession does not perfect the security interest.Footnote ⁴⁷ Since repossession of assets in enforcement of a security is separately provided for under the act,Footnote ⁴⁸ the objective of section 8(2) appears confusing, as it apparently provides an avenue by which the creditor could overreach the borrower's interest prior to crystallization, perhaps as an extra layer of protection for the secured assets.

Despite this twist, the unitary security interest generally mirrors floating charges, especially through its key features of permitting the grantor's continued right to dealFootnote ⁴⁹ when the parties favour a non-possessory type of transaction, and its recognition of after-acquired assets, features that enhance the value of floating charges to business borrowers. Further, unlike traditional forms of security transactions such as mortgages and pledges, in which the hallmark of the creditor's interest is the passing of either title or possession to the secured assets, the interests conferred by both forms of device are devoid of either ownership or possession.Footnote ⁵⁰

The nature of the creditor's proprietary interest

Closely related to the need to understand the nature of floating charges is the need to explain the precise nature of the proprietary interest they confer on chargees in respect of the charged assets prior to crystallization. This latter need was necessitated by the fact that despite being devoid of ownership or possession, floating charges nevertheless conferred present security interests on chargees. Thus it appeared difficult to reconcile how a device that was ambulatory and not attaching to any specific asset could nonetheless confer such a present security interest on its holder.

Further underscoring the need to ascertain the nature of the chargee's present security is the statutory requirement for the registration of floating charges; for example, by virtue of section 222(1) of the CAMA, certain categories of charges (including floating charges) that confer security on the assets of the company are invalidated against third-party competitors and the chargor's liquidator unless such charges are registered. The objective of registering a charge is to perfect the security interest by providing notice of its existence and of the creditor's interest in the secured asset to third parties. With floating charges, therefore, perfection or registration precedes the attachment of the chargee's interest to specific assets, an alteration of the usual order of occurrence of the concepts of attachment and perfection. While this appears controversial, it nevertheless affirms the position that for the chargee's interest to be considered perfectable, such interest ought to be of sufficient weight to be worth protecting. While the precise nature of the interest appears unclear, its weight certainly exceeds that of a general creditor who does not require perfection. This accentuates the desire to explain the chargee's pre-crystallization interest with sufficient precision

It must be further highlighted that the need to ascertain the nature of the present security interest conferred on chargees is buttressed by the demarcation of the chargee's interest into the pre- and post-crystallization periods of the charge. While the post-crystallization position appears straightforward, as it constitutes a fixed charge which confers on the chargee the rights of a fixed chargee over the then existing assets, the pre-crystallization position, however, remains unclear. Further, equity's innovative recognition of security in after-acquired property exacerbates the above confusion, as it apparently blurs the distinction between fixed and floating charges as both types of charge could be given over after-acquired property. With academics often intent on outdoing themselves in explaining novel concepts, it is perhaps unsurprising that different theories have been formulated to explain the pre-crystallization rights of chargees. A thorough review of two of the popular theories, the licence theory and the defeasible fixed charge theory, however, uncovers the immense confusion generated by this debate.

The licence theory attributes the pre-crystallization situation, in which the chargor retains control of the secured assets subject to the charge, as an implied licence by the chargee to the chargor subject to the chargee's overarching proprietary interest. This theory apparently developed from the dicta of judges in some of the earlier cases. In Re Yorkshire Footnote ⁵¹ the court opined that “the security must be read as containing a licence or permission by the mortgagee to the association to deal with the mortgage property for a certain time as though a mortgage had not been executed”. The strength of the licence theory lies in its apparent alignment with the overarching objective of floating security, ie to provide a platform through which corporations can raise funds using their stock-in-trade as security without the usual disruption associated with traditional forms of security. A licence conveniently explains how this is achieved, especially as, first, it recognizes the chargee's lingering interest in the assets despite the chargor's control of them and, second, the chargee's ability to intervene at almost any time to protect the secured assets for licences generally justifies such interventions.Footnote ⁵²

The consequence of having the chargee as the implied licensor evokes, ironically, the core criticism of this theory. As licences are usually curtailed, the existence of a licence should necessarily restrict the extent to which the licensee should deal in the assets, contrary to the floating charge mechanism under which the right to deal is typically only curtailed by the crystallization of the charge. In response to this criticism, however, Gough asserts that the term “licence”, in the context of floating charges, must be interpreted to mean the power, right or freedom of the chargor to deal with the charged assets during the floating phase of the transaction, without the term being given any special meaning or treated with excessive preoccupation. He further argues that one must deemphasize the precise rights and limitations of the parties to the licence at the expense of its objective. This could assume that the licence may not necessarily be one granted by a licensor to a licensee but be something of a “self-generating” licence that becomes effective once a floating charge agreement is executed.Footnote ⁵³ Despite its attractiveness, however, it is improbable that a licence or empowerment can exist that emphasizes its objective while deemphasizing the rights and limitations of the parties. Thus Gough's position of a fluid right is at best academic, because for a licence, power or right to exist, it would be questionable not to seek to identify the rights and obligations of the parties to it – more so when such a licence also confers on the grantor a proprietary interest over the asset that is subject to the licence. Thus, if a licence exists in favour of the chargor over the charged asset, then it is indisputable that the chargee is the grantor of such a licence, and as such could suffer some detriment from the chargor's unhindered dealing in the assets.

Further, the licence theory only superficially explains the nature of the chargee's interest during the subsistence of the licence. The author contends that the theory's acknowledgment of the existence of a licence does little more than affirm the obvious position of the law that, despite the floating chargee's present security interest, the chargor has a continued right to deal in the assets. It fails to explain, however, the platform upon which the chargee grants the licence to the chargor, since at the time the licence is supposedly granted, the chargee has no appropriation over any specific asset and is therefore constrained from exercising proprietary rights in rem in respect of the assets.Footnote ⁵⁴ The critical question which the licence theory obviously fails to address is “what impact does the lack of appropriation of specific assets within the pool of assets have on the chargee's ability to grant a licence?” Thus, while the dominion exercisable by the chargor may be attributable to a licence, the very existence of a licence without an underlying justification for its being granted impinges the integrity of the theory.

The defeasible fixed-charge theory, on the other hand, treats the floating chargee's pre-crystallization interest as a fixed charge which defeases or is partly extinguished whenever and to the extent that the chargor alienates any charged asset, or any interest in a charged asset, in accordance with the licence to deal. The theory, which significantly relies on the licence theory in explaining the chargor's pre-crystallization rights to deal, asserts that the use of the term “floating” implies that the charge is defeased to allow the chargor to deal with the charged assets in accordance with the licence.Footnote ⁵⁵ In essence, the licence provides the platform on which the chargor has a continued right to deal in the assets despite the chargee's security interest. Consequently, any dealing by the chargor within the licence terms has the effect of defeasing the chargee's interest in the assets in favour of third parties. In explaining the pre-crystallization status of the floating charge as equivalent to a fixed charge, contrary to the generally understood legal position that the floating charge only becomes fixed upon crystallization, the theory relies on the similarity between fixed and floating charges, and particularly the element of potentiality applicable to both. The theory's proponent, Worthington, asserts that “with both fixed and floating charges, the chargor may deal with the assets only with the consent of the chargee: the difference is that with fixed charges no dealing is permitted unless and until otherwise provided, while with floating charges all dealings are permitted unless and until otherwise provided”.Footnote ⁵⁶

The defeasible fixed-charge theory clearly contradicts the current state of the law of floating charges, because irrespective of any dealing in the secured assets by the chargor, the expression of the transaction as a floating charge invariably excludes the assets from immediate appropriation by the chargee. This makes it inconceivable for the transaction to be described as a fixed charge, as asserted by this theory. Further, the apparent relationship between the chargor's licence to deal and defeasance of the chargee's interest upon the chargor's dealings in the assets is tenuous, as it cannot be explained by reference to any known legal principle, other than perhaps that the right to deal arises from the automatic relinquishment of the chargee's interest in accordance with the licence they grant to the chargor. In that case, asserting that the chargee's interest defeases becomes superfluous, since the granting of a licence provides an adequate, even if debatable, explanation of the chargor's continued dealing in the assets. The theory's immense dependence on the licence theory constitutes its Achilles heel, as it is also subject to the shortcomings of that theory. With the control of the charged assets being a critical element of floating charges, the defeasance of the chargee's interest becomes infinite until crystallization. The extensive, almost uncontrolled, dominion of the assets by the chargor therefore renders defeasance the rule rather than the exception and questions the status of the pre-crystallization interest as a fixed charge as asserted by this theory.

Although both theories attempt to explain the nature of the chargee's pre-crystallization interest, some difficult conceptual issues remained unresolved until the 2005 decision of the House of Lords in Re Spectrum Plus Ltd.Footnote ⁵⁷ In this case, it was held that a charge over book debts in a debenture which required the proceeds of those debts to be paid into an account, with the bank placing no restriction on the use that the debtor could make of the balance on the account thereafter, created a floating charge and not a fixed charge. This decision overruled the earlier decision in Siebe Gorman & Co Ltd v Barclays Bank Ltd,Footnote ⁵⁸ in which an identical debenture was held to create a fixed charge. While affirming the decision in Tailby v Official Receiver Footnote ⁵⁹ that a fixed charge could be created over book debts, the court in Re Spectrum held that the essential characteristic of a floating charge, which distinguished it from a fixed charge, was that the asset subject to the charge was not finally appropriated as security for the payment of the debt until the occurrence of some future event, and that prior to crystallization, the chargor could use the charged asset and remove it from the security. The decision in Re Spectrum also overruled the decision in Re New Bullas Trading Ltd,Footnote ⁶⁰ to the extent that where the chargor remained free to remove the charged assets from the security, the charge should, in principle, be categorized as a floating charge, and that it was not possible to create a charge on book debts which was fixed while uncollected but floating in respect of the collected proceeds. Thus, irrespective of the description or hypothesis proffered by lawyers to explain the nature of the chargee's pre-crystallization interest, it now appears settled that a device would be classified as floating if it conforms to the above requirement.

The nature of the interest the unitary security confers on secured creditors is devoid of any complex analysis, as it is again typically defined under the reform enactment. Thus, once an interest falls within the ambit of a security interest or right under a reform enactment,Footnote ⁶¹ it enjoys all the benefits of a security interest holder as defined by the reform statute, irrespective of the type of underlying transaction the parties may have consummated.

Apart from the conceptualization issue, a further difference in the interest of the secured party under both devices is that, unlike a floating chargee, who lacks the right to take possession until crystallization, the vast encapsulation of various types of interest under the unitary system permits the secured party the right to take possession if the underlying agreement between both parties is possessory. Thus, if the underlying agreement is a pledge, for example, the secured party would be empowered to take possession of the secured assets prior to the enforcement of their interest.

Priorities under both devices

The priority of floating charges in comparison to the interest of other creditors in respect of secured assets is governed by common law principles, which in turn are determined on a graduated scale of considerations. The first consideration is a determination of the grantor's legal right to grant the security interest, often expressed in the Latin maxim nemo dat quod non habet.Footnote ⁶² Upon overcoming this requirement, further considerations include whether the requirement for the creation of such interest fulfils the relevant general conditions, such as registration requirements, the time of the creation or registration of the respective interests, and, irrespective of that time, the existence of any special circumstance that places a specific claimant in a privileged position compared to others (ie the exceptional priority rule).

The exceptional priority rule is that a bona fide purchaser for value of the legal estate without notice of prior equitable interest takes free of such prior interest.Footnote ⁶³ Explaining how the principle works, Worthington says that “B must have purchased a legal interest without having either actual or constructive notice of A's earlier equitable interest … The principle is commonly justified by the need to make legal transfers of property secure, which presupposes that legal ownership is the pre-eminent property right.”Footnote ⁶⁴ The bona fide principle is one of the core exceptions to the first-in-time rule which relies on the nature of interest held, as opposed to the time of the creation of the interest, ensuring in support thereof that notice or the lack of it remains an extenuating factor in determining priorities.

As floating charges are equitable devices which confer only equitable interests on chargees, the operation of the exceptional priority rule results in chargees’ interest being generally inferior to the interests of bona fide purchasers for value without notice of the prior equitable interests. This often has statutory backing, such as section 657 of the CAMA, which defines the order of settlement of debts on the liquidation of a company and provides that the interest of floating chargees is only superior to those of unsecured or general creditors, with a long list of other preferential and secured creditors ahead of floating chargees in the debt settlement queue. This generally renders floating charges an unsatisfactory form of security device for creditors.

On the other hand, priority under the unitary system is governed by the relevant reform enactment. Such enactments, just like under the common law, typically also adopt the first-in-time of registration as the basis for determining priorities. As an example, under section 23 of the STMA, priorities among completing claims are determined by the time of registration, without reference to the time of creation.

Although reform enactments typically do not adopt the exceptional priority rule, they do, however, accord rights similar to those of the bona fide purchaser on acquisition financiers, who hold acquisition security rights or purchase money security interests (PMSIs) in secured assets, subject to ensuring their third-party effectiveness.Footnote ⁶⁵ However, the marked difference in the nature of both rights cannot be ignored. While the superiority accorded to bona fide purchasers is for no other reason than their being viewed as preeminent legal interests, the priority of acquisition financiers is justified by their role in the acquisition of the secured asset.Footnote ⁶⁶ Further, while bona fide purchasers are not required to register their interest in order to gain super-priority, holders of PMSIs must register their interests before other competing interests or forfeit their super-priority.Footnote ⁶⁷

A related perspective on PMSIs that requires some attention is the difference between their treatment and that of conditional sellers, whose interests are generally subsumed under PMSIs.Footnote ⁶⁸ This disparity, which constituted a major source of disillusionment to creditors under the common law system, ensured that despite the super-priority conditional sellers could enjoy by inserting title retention clauses in their sales agreements, they were not legally bound to register their interest, thus exposing unsuspecting subsequent creditors to immense risks.Footnote ⁶⁹ Thus, while priorities could be conferred under the common law on conditional sellers holding title retention clauses without obligating such sellers to register their interests, the priority of PMSIs under the unitary system is typically predicated on their registration of a financing statement before a competing interest holder.Footnote ⁷⁰ The author suggests that the requirement for the registration of PMSIs under reform enactments better protects subsequent creditors, as it eliminates the unpredictability of the common law priority scheme, although it seems to question the quality of the PMSIs, which have super-priority.

Perfection under both devices

The perfection of a security interest usually determines its effectiveness against third parties and thus plays a critical role in defining priorities among conflicting interests.Footnote ⁷¹ Under the common law, perfection was achieved through attachment and registration, both concepts typically occurring in that order.Footnote ⁷² While attachment involves the creation of the security interest in favour of the creditor, registration essentially provides notice of the existence of the creditor's fastened interest to third parties.Footnote ⁷³ The following ingredients of the attachment of a security interest under the common law underline this order of occurrence of both concepts: a) the existence of an agreement for security, conforming to statutory formalities; b) the proposed asset being identifiable; c) the debtor having an interest in the asset; d) the debtor having some current obligation to the creditor, which the asset is designed to secure; e) the fulfilment of any contractual conditions for attachment; and f) in the case of a possessory kind of security such as a pledge, actual or constructive possession must have been given to the creditor.Footnote ⁷⁴

Although floating charges generally satisfy the above conditions, concerns may still arise in construing the condition that grantors should have rights in the collateral, since the very fact of a grantor having rights in or the power to encumber the collateral assumes that it exists, which appears contrary to the case of future acquired assets recognized under floating charge devices. A different but related issue also arises under some reform enactments; for example, by virtue of section 3(1) of the STMA, a security interest is created by a security agreement.Footnote ⁷⁵ Although this section affirms item (a) of the above ingredients of attachment, section 3(2), however, provides that the security interest in an asset acquired by the grantor after the coming into force of the security agreement shall take effect without the further consent or act of the grantor. Thus, contrary to the requirements in items (b) and (c) above that the asset be identifiable and that the grantor should have rights in it,Footnote ⁷⁶ it is irrelevant under the STMA that at the time of consummating the security agreement, the grantor had no such interest in the asset. By a combined interpretation of sections 5 and 6(1) of the STMA,Footnote ⁷⁷ a security agreement should clearly identify the collateral, with identification being sufficient if the security is taken in present and future assets. It therefore appears that the STMA dispenses with the requirement of the grantor having an interest in, or empowerment over, the asset, critical ingredients for attachment under the common law; its recognition of a security interest is therefore predicated on the satisfaction of the provisions of section 5.Footnote ⁷⁸ It would therefore appear that the STMA neither considers the concept of attachment key to the creation of a security interest nor deems it a prerequisite for its perfection.

Although the effect of non-registration appears similar under both devices, ie ineffectiveness against third-party competitors,Footnote ⁷⁹ critical differences apparently exist in the mechanisms for perfection. As the key benefit of floating charges was the provision of a means by which budding businesses could obtain loans using their stock-in-trade as collateral, these devices were necessarily non-possessory and therefore could only be perfected by registration. On the other hand, the unitary system's encapsulation of different forms of security device implies that its scope accommodates both possessory and non-possessory forms. Thus, depending on the nature of the underlying transaction, perfection could be achieved through one of two means, ie by registration or by possession. This is, however, subject to the exception under section 8(2) of the STMA discussed earlier.

The unitary system introduces a significant innovation in respect of perfection by registration. It changes the registration procedure from the common law's document filing system, used for the registration of charges, to the notice filing system. Unlike the document filing system, which requires the filing of the security agreement,Footnote ⁸⁰ the notice filing system involves the filing of a financing statement containing abridged details of the security transaction. The financing statement usually indicates, among other things, that a security interest has been created in the collateral, without necessarily providing the detailed terms of the transaction. It also invites further inquiry to ascertain the complete state of affairs, as the information filed is not a synopsis of the transaction.Footnote ⁸¹ Under the scheme, a single filing may cover a succession of security interests, provided the parties remain the same and the security falls within the description used in the registration.Footnote ⁸²

The obvious benefit of the notice filing system is its convenience and flexibility, as it enables the secured party to quickly establish an interest in the security while negotiations are still ongoing between the parties, thus seemingly extending the time available for registration rather than if left until after the transaction.Footnote ⁸³ As has also been highlighted, a situation where a single filing extends to multiple transactions “renders more concrete the possibility of extending registration requirements to trade credit transactions where there may be a number of separate transactions between the same buyer and seller”.Footnote ⁸⁴

However, the notice filing system is not without some concerns, especially in states rife with unscrupulous business practices. By recognizing a secured party's interest in the collateral before negotiations are concluded, the notice filed could potentially alter the normal order in which the attachment and perfection of the security occurs, with perfection capable of occurring earlier than, or at the same time as, attachment. This would arise where a secured creditor registers their interest and takes a position in the queue of claimants before finalizing negotiations with the borrower, bearing in mind that it is only at that later stage that the secured creditor's interest attaches. This is made possible by the fact that, because the filing of the security agreement is not required, there is a likelihood that an agreement may not have been executed, even though the transaction's broad details, as required by the financing statement, may have been agreed. Dishonest creditors could exploit this possibility during negotiations, at the expense of desperate borrowers, by imposing additional terms in the security agreement after registering their financing statements, bearing in mind that the agreement is incomplete when the statement is registered.Footnote ⁸⁵

Unlike with floating charges, the unitary system generally offers flexibility by providing dual options for perfecting collaterals. However, while obviously an improvement over the common law's document filing system, the sheer simplicity of the unitary system's notice filing system could expose it to fraud in some jurisdictions.

Enforcement under both devices

The enforcement of a floating charge occurs upon the crystallization of the charge following the occurrence of a crystallizing event.Footnote ⁸⁶ It is generally agreed that crystallization puts an end to the authority conferred on the debtor company to manage the assets comprising the security.Footnote ⁸⁷ In consequence, the charge is converted to a fixed charge, fastening on all assets which the company then has or subsequently acquires.Footnote ⁸⁸ Although crystallization does not necessarily put an end to the life of the company, it does preclude the company from dealing with the crystallized assets without the consent of the chargee, who cannot give a blanket permission without re-floating the charge.Footnote ⁸⁹

Floating debentures often empower chargees to take possession of the secured asset as a means of enforcing the charge.Footnote ⁹⁰ However, such empowerment is typically subject to the prescribed order of settling debts on the insolvency of the chargor. With floating charges low in the debt settlement queue, the right of repossession is seldom a potent means of enforcement, especially when the company becomes insolvent or goes into liquidation. With some jurisdictions generally averse to self-help remedies such as repossession,Footnote ⁹¹ creditors generally prefer to include the right to appoint an administrative receiver in their debentures, a mechanism widely considered the preferred method of crystallizing a floating charge.Footnote ⁹² Although now abolished in England,Footnote ⁹³ administrative receiverships have long been viewed with suspicion, as they illicitly alter extant priority settings in favour of debenture holders.Footnote ⁹⁴ They were also known to result in the demise of most companies rather than providing curative measures for disgruntled creditors.Footnote ⁹⁵

While there is no guarantee that a floating chargee could effectively enforce the charge, because of the charge's low priority ranking, the unitary security interest holder is often assured of the ability to enforce their interest as this is defined by reform enactment. However, the mechanism of enforcement often varies in line with the recognition of the parties’ freedom to contract, considered sacrosanct in many such enactments.Footnote ⁹⁶ With PPSL reforms consigning the differences between legal and equitable interests to history, such disparities no longer affect a creditor's enforcement rights on the debtor's insolvency. Consequently, the right of a secured party holding a non-possessory unitary security interest to enforce the security is generally superior to that of a floating chargee, provided such non-possessory interest has been duly registered in accordance with the applicable reform enactment.

On the mechanism for enforcement, unlike floating charges, under which receiverships appeared to be the most potent means of enforcement, reform enactments typically empower creditors to enforce their interest either by application to a court or subject to certain conditions provided in the enactment. A secured creditor under a reform enactment may also repossess and sell the secured asset.Footnote ⁹⁷ It is noteworthy that most reform enactments dispense with receiverships, which were known for their volatility under the common law. In fact, neither the UNCITRAL Model Law nor the Legislative Guide mentions the word “receivership” in any form or context. However, under the Australian Personal Property Security Act 2009, receiverships are recognized as alternative enforcement mechanisms,Footnote ⁹⁸ an approach frowned on as making “the law governing enforcement of security interests subject to arbitrary variables”,Footnote ⁹⁹ an unjustifiable position under a system that should be harmonized and predictive. Perhaps in line with its adoption of partial harmonization, the reform enactment in Nigeria adopts receiverships in addition to other enforcement mechanisms under the act.Footnote ¹⁰⁰ As I observed in a previous article,Footnote ¹⁰¹ this has the potential of introducing many of the adverse consequences of receiverships under the common law into the implementation of the STMA, worsened by the fact that the receiver's right to take possession, where exercised in respect of unincorporated entities or single promoter businesses, could result in the seizure of not only assets belonging to the businesses but to promoters’ personal assets.Footnote ¹⁰²

Apart from the mechanism for enforcing security interests discussed above, a critical disparity exists in respect of courts’ jurisdiction in enforcing the interests conferred by both security devices. By virtue of section 868(1) of the CAMA, the reference to a court in relation to a company means the Federal High Court (FHC). It can therefore be inferred that the FHC has jurisdiction in respect of matters arising from the enforcement of a security interest, such as a floating charge granted to a company.Footnote ¹⁰³ On the other hand, the jurisdictional issues regarding the enforcement of security interests under the STMA are not that straightforward. While section 51(5) of the STMA provides that the law applicable to the enforcement of a security interest in tangible assets is the law of the state in which the enforcement takes place, section 52 further provides that the law applicable to the mutual rights and obligations of the parties to a secured transaction shall, in the absence of a choice of law, be the law applicable to the security agreement. This implies that while a different law could apply to the enforcement of the parties’ rights, the obligations of the parties could be defined under a different set of laws. It cannot be overemphasized that this could create significant conflict, especially as the STMA does not provide for how conflict between laws should be resolved.

This situation is further exacerbated by section 56 of the STMA, which confers jurisdiction in respect of any matter arising out of the act on relevant state courts charged with commercial borrower and lender issues. The author suggests that the implication of section 56 is that state courts, as opposed to the FHC (which is a federal court), are charged with jurisdiction over all matters arising out of the STMA, even in cases where the parties choose a federal enactment such as the CAMA to govern their transactions – more so with the STMA adopting remedies under the CAMA, such as receiverships, for use by parties whose transactions are subject to the STMA. The author contends that the implementation of the CAMA by state courts under these circumstances clearly violates the provisions of section 868(1) of the CAMA, and further argues that empowering typically overburdened state courts with jurisdiction over these matters, instead of the less burdened FHC, has the potential of further delaying the administration of justice under the notoriously slow Nigerian court system.