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The floating charge is now an essential part of the modern world of secured finance. It emerged as a creature of equity and there are still a number of issues about it that remain undefined. It is now established that the floating charge is a present security interest in current and future assets of a company. The benefits of the floating charge are multi-faceted but at the most superficial they can be stated thus: a company is able to release the equity in assets which it requires to maintain its business by giving a security which enables the company to remain in possession of those assets and indeed to dispose of those assets in the ordinary course of business. However, the floating charge is an equitable charge and as such ranks behind legal charges granted prior to it. From the charge holder’s perspective, there is a risk that the chargee may deplete the assets available to the charge holder by granting subsequent charges that rank in priority to the floating charge.
The negative pledge clause is now a common feature of any instrument creating a floating charge. It is an attempt by the charge holder to limit the chargee’s ability to grant security to a third party which ranks in priority to the rights of the floating charge holder. The difficulty that appears to arise is that of notice of the existence of the negative pledge clause and whether or not its terms are binding on subsequent chargees. Current academic thinking would seem to suggest that the negative pledge clause is a dead duck in terms of securing priority. This essay seeks to explore the rationale for this assessment and question whether this is in fact the case.
The reasoning for this assessment appears to be based on case law that is outdated and which pre-dated the introduction of the public register of charges. This essay will look firstly at the nature of the floating charge and its emergence into the law of England. It will then look at the introduction of the register of company charges and explore the extent to which registration of charges imputes notice of the content of those charges on third parties. It will then look at the case of The English and Scottish Mercantile Investment Company Limited v Brunton and ask whether this case which was determined prior to the introduction of the registration system stands up to scrutiny in today’s world. It will be argued that it does not. The essay will then look at proposals to the current system of registration of company charges.
Recognition of the floating charge  was first achieved in 1870 in the Court of Appeal in Chancery in the case of In Re Panama, New Zealand and Australian Royal Mail Company  . A creation of English law, the floating charge arose in response to the rapidly changing commercial landscape of the day. Access to the corporate form, the company, had been recently extended by statute  and the benefit of limited liability had been made available to the company by the Limited Liability Act 1885.
Goode notes that the growth in popularity of the company as a vehicle for business was met with a reluctance on the part of lenders to advance funds to such vehicles without appropriate security  . The difficulty that arose in this regard was two fold. Firstly, limited liability meant that lenders could not turn to the assets of the shareholders of companies to secure the debt of the company and, secondly, security as hitherto known under English law did not lend itself well to the corporate form. This was because the assets of greatest value to many companies were non-heritable assets; stock, machinery and receivables  . Any attempt to grant security over such assets, whether by way of lien, pledge or fixed charge, was simply not conducive to carrying on business. The lien and pledge took the assets out of the hands of the company whereas the fixed charge required lender consent for disposal of the assets charged.
The case of Holroyd v Marshall  paved the way for the decision in In re Panama. In this case machinery sold was sold to Holroyd by Taylor. There was no transfer of the machinery which remained in Taylor’s possession. It was agreed that the machinery would be assigned in trust, for the benefit of Taylor, to Brunt. In the even that Taylor paid the purchase price, Brunt was to hold the property exclusicely for the benefit of Taylor. In the event that the purchase price was not paid, Brunt was to have the power to sell the machinery. Under the indenture that created this agreement, a charge was created over Taylor’s mill, properties and machinery. Taylor was entitled to substitute the existing machinery with new machinery and any new machinery was to form part of the charged property. Upon default by the Taylor, Holroyd served notice for payment. Another creditor of Taylor also executed an action for payment against Taylor and was granted a writ. The court was asked to determine whether the title of the Holroyd, the chargee, was to be preferred to that of the execution creditor. It was held that the after-acquired property became subject to the charge immediately upon acquisition by Taylor. The reason given for this was two-fold. Firstly, consideration having been advanced to Taylor in contemplation of future acquired property falling within the terms of the mortgage deed, a Court of Equity would compel Taylor to perform the contract and the contract would have the effect of transferring the beneficial interest in the property to Holroyd. Secondly, if Taylor had attempted to remove the future acquired property other than on accordance with the terms of the mortgage deed, Holroyd would have been entitled to enforce his security.
Holroyd v Marshall, therefore, made clear that it was possible to mortgage future acquired property but the decision fell short of what one would call recognition of a floating charge. That recognition was to come in the judgement of In Re Panama, New Zealand and Australian Royal Mail Company, in which a company charged its “undertaking and all sums of money arising therefrom” in favour of debenture holders. The company was subsequently wound up and the debenture holders claimed a charge upon the proceeds of the sale of the company’s property in priority to the general creditors. The Appellant argued that “undertaking” meant “enterprise” and by this was meant the income of the company, not its property. The Appellant argued that the true test of whether or not the relationship of mortgagor and mortgagee existed was the power of the mortgagee to prevent the removal of property, which it was submitted was not the case.
Sir GM Giffard, LJ, stated that he had:
“…no hesitation in saying that in this particular case, and having regard to the state of this particular company, the word “ undertaking” had reference to all the property of the company, not only which existed at the date of the debenture, but which might afterwards become the property of the company. And I take the object and meaning of the debenture to be this, that the word “ undertaking” necessarily infers that the company will go on, and that the debenture holder could not interfere until either the interest which was due was unpaid, or until the period had arrived for the payment of his principal, and that principal was unpaid. I think the meaning and object of the security was this, that the company might go on during that interval, and, furthermore, that during the interval the debenture holder would not be entitled to any account of mesne profits, or of any dealing with the property of the company in the ordinary course of carrying on their business. I do not refer to such things as sales or mortgages of property, but to the ordinary application of funds which came into the hands of the company in the usual course of business. I see no difficulty or inconvenience in giving that effect to this instrument. But the moment the company comes to be wound up, and the property has to be realized, that moment the rights of these parties, beyond all question, attach.” 
And so we have the first judicial recognition of the floating charge, an instrument which has been described as a “manifestation of the English genius for harnessing the most abstract conceptions to the service of commerce”  . Arguably, that genius is attributable as much to the commercial solicitors of the 19th Century as to the judiciary, for although the Courts accepted the legality of such a contract it was the solicitors who drafted them that saw their potential for commerce. Whoever should be attributed with its creation, it is fair to say that by 1870 English law had recognized had the floating charge and it was there to stay.
Floating Charge Theories
The floating charge was quickly accepted in the commercial world but its foundations in the law of equity meant that it eluded precise definition. By 1910 it was determined that the floating charge created an immediate security interest  but the nature of this interest was and arguably is still unclear.
There are two main academic theories on the nature of the floating charge. Worthington argues that the floating charge gives the floating charge-holder the same proprietary rights as a fixed charge-holder together with a licence to utilise the assets charged  .
The alternative, and academically and judicially preferred, theory is that the floating charge is distinct from the fixed charge and gives the floating charge-holder an immediate proprietary interest in the property of the company although that interest does not attach to any specific asset until crystallisation  . Goode has described the interest acquired as a present interest in the company’s fund of assets. As neither has been conclusively determined to be supreme it is worth looking at each briefly.
Worthington argues for what she terms the “defeasible charge theory”  . Her view is that when a chargor grants a floating charge it creates a fixed charge over all the assets subject to the charge. A licence is granted by the chargee to continue to deal with the charged assets in accordance with the terms of the charge deed. Worthington is of the opinion that if the floating charge is viewed from this perspective, it is possible to resolve any issues that might arise between charge-holders and third parties with competing claims. Although there has not been widespread support for this view, Worthington’s theory is succinct and simplistic.
The preferred approach to the theory underpinning the floating charge appears to be the alternative view. There has been judicial support for this approach also. In Ilingsworth v Houldsworth
Regardless of the differences in the theories underpinning the floating charge all three authors are of a similar opinion with regard to one particular area-the negative pledge.
The negative pledge clause, or restrictive clause, is a clause which is commonly found in the
Registration of Charges
Registration of company charges on a public register was introduced by s.14 of the companies Act 1900. For the first time companies were required to register the details of certain charges granted by them  . The registration requirements introduced by the 1900 Act stemmed from the recommendations of the Davey Committee which found that unsecured creditors were at risk of giving unsecured credit to companies in the belief that their ostensible assets were free to repay unsecured debts  . Prior to 1900 there had been, as indeed there still is, a requirement for companies to maintain an internal register of charges at their registered addresses  . However, The Davey Committee found that there was widespread failure among companies to do so  .
If a company failed to maintain its register unsecured creditors had no means of knowing the extent to which a company had encumbered its assets. Under the provisions in force prior to 1900, which required companies to maintain a register of charges, only existing creditors and members were entitled to see the register. Therefore, as a tool for prospective creditors it would have been of little value  . The difficulties which unsecured creditors faced with the existing internal register were compounded by the recognition of English law of non-possessory securities which permit the charger to remain in possession of charged assets and therefore appear to be the beneficial owner of charged assets. Charged with the task of determining competing claims between unsecured creditors and secured creditors whose charges had not been entered in the internal register, the courts increasingly found themselves bound to find in favour of the secured creditor, whose charge had not been registered in the internal register through no fault of their own, notwithstanding that the unsecured creditors would have had no notice of these pre-existing charges  .
The Diamond Committee acknowledged that the registration of charges system was advantageous to general creditors of a company but noted that the benefits of the system were not limited to general creditors  . It stated that among the benefits of the system include that creditors contemplating extending credit on a secured basis are able to determine whether or not the property over which they intend to take security is already encumbered  . Liquidators are also able to rely on the contents of the register when determining whether or not to recognise a claim  . Furthermore, credit reference agencies and investors or potential investors in companies are able to gain a better insight into the financial position of a company if there is public disclosure of their financial position  .
The 1900 Act required four classes of charge or mortgage to be registered within 21 days of execution  . The four classes were:
1. a charge for the purposes of securing the issue of debentures;
2. a charge on the uncalled capital of the company;
3. an interest which would be registrable as a bill of sale if created by an individual; and
4. a floating charge.
Failure to register within the 21 day period resulted in the mortgage or charge being void against the liquidator of the company and any creditor of the company but did nothing to invalidate the charge between the company and the creditor  . Upon registration the registrar of charges issued a certificate of registration which was conclusive evidence of the fact that the registration requirements had been met.
The system of registration has developed beyond the provisions that were introduced in 1900 but the underlying features remain largely unchanged and are today found in section 860 of the Companies Act 2009. Failure to register within 21 days continues to invalidate a mortgage or charge against a liquidator  . The obligation to register the charge is on the Company  and a failure to do so is now a criminal offence committed both by the company and each of the directors that are in default  . The list of charges that now require to be registered has been increased from four to nine and these can be found at s.860 (7). It is worthy of note that the number of charges which are registrable on the register is limited to those listed in this section. McCormack notes that the Davey Committee realised that certain liens, mortgages and charges were such as were within the ordinary course of business and that it would be cumbersome and inconvenient to require registration of all charges  . This and other elements of the registration system have met with criticism; these shall be explored further in section x.
Registration and Priorities
On the subject of priority rules, the Diamond Report stated that:
“Fixed legal charges which are registered within 21 days of creation rank with one another according to the time of creation and fixed legal charges created before a floating charge crystallises have priority over the floating charge, but subject to this the rules are complicated, resting on the distinction between legal and equitable charges and involving questions of notice.”
It is important to note that the registration system as introduced by the 1900 Act and as it stands today does not purposively act as a mechanism by which to determine priorities among competing charges. DeLacey notes that the effects of the register of charges are “purely negative”  pointing to the fact that the Act prescribes that an unregistered charge is void against the prescribed parties but fails to indicate what positive effect, if any, registration is intended to have. Rather, the rules in relation to priority among charges is left to a complex number of common law and equitable rules.
A succinct summary of the rules of priority can be found in Gerard McCormack’s Registration of Company Charges  . McCormack is clear in stating that “registration is not a reference point for determining priorities.”  He uses the example of two competing fixed charges. Where charge A is duly registered it takes priority over charge B which is unregistered whether charge B be created prior or subsequent to charge A. However, if charge B is created prior to charge A but is registered after charge A (and within 21 days of creation of the charge), charge B takes priority despite the fact that the holder of charge A would have had no notice of the existence of charge B from a search of the register. This is a problem which has been termed “the 21 day invisibility problem”. Consideration of this point shall be given in the section dealing with reform of the registration system.
This essay is concerned with the question as to how priority should be given between a floating charge, duly registered on the register of charges, containing a negative pledge clause and a subsequently granted legal charge where the grantee of the subsequent legal charge is aware of the existence of the floating charge but does not have actual notice of the negative pledge clause contained therein.
It has already been noted that one of the fundamental elements of the floating charge is that the charger remains in possession of the charged assets and is free to dispose of them in the ordinary course of business. When such assets pass to a third party they do so free from the floating charge. It is considered that charging assets of a company is within the ordinary course of business and, therefore, it follows that if a company that has granted a floating charge grants a subsequent fixed charge or mortgage that this charge or mortgage will take priority over the floating charge.
This was authoritatively stated in the case of Wheatley v Silkstone & Haigh Moor Coal Co  . Reviewing some of the earliest cases relating to the floating charge, North, J, took the view that there was:
“…a very clear and intelligible principle is to be followed. In this case I find that the debenture is intended to be a general floating security over all the property of the company, as it exists at the time when it is to be put in force; but it is not intended to prevent and has not the effect of in any way preventing the carrying on of the business in all or any of the ways in which it is carried on in the ordinary course; and, inasmuch as I find that in the ordinary course of business and for the purpose of the business this mortgage was made, it is a good mortgage upon and a good charge upon the property comprised in it, and is not subject to the claim created by the debentures. I find also that the first charge referred to in the debentures is fully satisfied by being the first charge against the general property of the company at the time when the claim under the debentures arises and can have effect given to it.”
If this is the general position, it must then be asked whether or not there are circumstances in which this general proposition can be displaced. One circumstance in which it might be envisaged that it would be fair to displace this general proposition is where the parties to the floating charge have agreed a restriction on the chargor’s ability to further charge their assets. This is often done my means of a ‘negative pledge clause’.
The Negative Pledge Clause
The negative pledge clause first appeared in the first edition of Palmer’s Company Precedents in 1877  . As we will see, most academics today believe that a third party taking security in good faith with knowledge of a pre-existing floating charge, but without actual knowledge that it contains a negative pledge clause, take their security free from the terms of the negative pledge clause. If this is accepted, the result is that the effect of the negative pledge clause is merely to create a contractual right between the charger and chargee, breach of which will entitle the chargee to accelerate repayment of the loan, result in crystallization of the floating charge and entitle the chargee to damages in contract  . It is widely considered that the negative pledge clause does not prevent third parties from acquiring a prior ranking security interest in the property of the chargor.
If this is the case then clearly this is an unsatisfactory result for the floating charge holder, who, having bargained for and included the negative pledge clause in the charge instrument which is held on public record, upon breach of the covenant given by the chargee, will have only the right to enforce his security. The right to enforce the floating charge arises as a direct result of the breach of the covenant in the negative pledge clause and ex hypothesi the funds that will be available from which the floating charge holder can realize his security will have been depleted by the granting of the security to a third party which the negative pledge clause had sought to avoid. This has led one academic to describe the negative pledge clause as being “as primitively useful as a wooden bar without a fulcrum”  .
It seems peculiar that in today’s world of sophisticated financing that this should or could be the case. It is not clear why it should be that the negative pledge clause should be such a widely used clause if its effect is simply to grant a personal right to damages. The author considers that this cannot be the case. However, in order to overcome this unsatisfactory outcome it is necessary to consider whether the decision in Wheatley is absolute. It is fair to say that it is not.
Despite what is said in Wheatley, if a third party were to take a fixed security where he had knowledge of a contractual restriction in the terms of a prior granted floating charge, he would take his fixed charge subject to the terms of the deed that created that floating charge and consequently his fixed charge would rank behind the floating charge. Ferrar suggests that this established equitable principle is consistent with the argument against equitable fraud  . But what, then, of those who take security without actual knowledge of a prior registered floating charge?
Knowledge and Notice
Firstly, it is helpful to understand what is meant by knowledge and notice. Professor Ferrar notes that knowledge and notice are closely linked and that there are different forms of each  . His view is that there are three types of knowledge and notice namely; actual, inferred and constructive. Actual knowledge and notice are not considered to pose any great difficulty. Inferred knowledge is familiar in the circumstances of agent and principle, where the principal is inferred to have the knowledge which his agent acquires.
However, Ferrar notes that constructive knowledge and constructive notice create confusion  . He suggests that constructive notice and constructive knowledge should be understood as arising in “circumstances where acts have been done-particularly where registration has taken place-which the party concerned is presumed to have knowledge of on grounds of public policy.” The important element of constructive notice is that the person on whom constructive notice is conferred is known not to have knowledge of the facts.
We have noted previously that the registration system introduce in 1900 and still in place today did not create a system of priority as has been the case with so many other systems of registration recognised by English law. However, registration can and does amount to constructive notice which may have an effect on priority among competing charges  .
Registration as Notice (remember that you cannot ignore what DeLacey says about registration not giving rise to notice at all)
Judicial wisdom suggests that registration of a charge on the register of charges amounts to constructive notice of the existence of the charge. The two most frequently cited cases in support of this proposition are Wilson v Kelland  and G&T Earle Ltd v Hemsworth Rural District Council  . In Wilson v Kelland, a case where a mortgagee had taken a mortgage over property which was already the subject of a registered floating charge, Eve, J, stated that:
“I should have been prepared to hold that the particulars registered in this case pursuant to s. 14 of the Companies Act, 1900, amounted to constructive notice of a charge affecting the property but not of any special provisions contained in that charge restricting the company from dealing with their property in the usual manner when the subsisting charge is a floating security.”
The same approach was taken in G&T Earle Ltd v Hemsworth Rural District Council in which, again, it was decided that registration amounted to notice of the existence of the charge but not of its contents, specifically a negative pledge clause. However, it is suggested that these cases arise as a result of the decision in The English and Scottish Mercantile Investment Company Ltd v Brunton. It is submitted that whereas this case may have been correctly decided in the context of the regime that was in place at the time of the decision, the subsequent introduction of the statutory regime for the registration of charges impacts upon this decision and, were the same matter to have come to be decided in today’s world the decision could and should have been decided differently.
The English and Scottish Mercantile Investment Company Limited v Brunton
The English and Scottish Mercantile Investment Company Limited v Brunton  is the seminal case in English law to address the question of the effect that a negative pledge clause has on a third party taking subsequent security over assets previously charged by way of floating charge in contravention of the terms of the negative pledge clause.
In this case the English and Scottish Mercantile Investment Company
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