Quasi Security Devices revision PDF

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Quasi Security Devices revision 2019: 7 ‘We should continue to recognise Quistclose trusts and retention of title arrangements without further formality because they each incentivise desirable transactions with financially distressed companies.’ Discuss 2017: ‘Title retention, Re Kayford and Quistclose trusts should be supported because, as a matter of principle, insolvency law should look favourably on rescue transactions which swell the assets of the company so as to provide creditors with an incentive to support it when it is in financial difficulties.’ Discuss.

 What is ROT o Retention of title is when the supplier retains title in goods until payment o S.17 SoGA 1979 and s.19  Scope: o The original position  When the customer deals with goods by selling the products, he is acting as the seller’s agent until it has paid the agent back  Acts as a fiduciary to the supplier  Supplier can trace into the product and proceeds as it is acting as the principal – agents have to account to their principal which would be the trade supplier  Avoids pari passi as it keeps assets at issue outside of insolvency assets/estate o the modern position  refined the scope fo ROT – it is unlikely that a supplier would be able to trace beyond the original goods on the basis of any fiduciary relationship  what happens if you sell the original goods?  Modern cases say when you sell supplied goods, you are not an agent  Reality is that all businesses rely on selling products to pay for the supply itseld – cash flow must be generated!  Supplier might retain title but in reality we know they are authorising their customer to sell the good to consumers – can really trace into the proceeds of such authorised sales – seller = / = agent  Same goes for proceeds of sale – unless goods are identifiable or separate, you cant really trace into the products  Labour and other goods are also used ot make the final product so they ar also untraceable  Tracing beyond the original goods on the basis of fiduciary/agency is unlikely to be upheld  Modern cases have led us to the restriction of ROT to the original goods in the hands of the ustomer – once the customer has made something of the goods or cannot be separated, you cannot trace into the product  Basicallt unless it is the raw product in the hands of the customer o Caterpillar exception to modern position  Two relevant clauses in the contract  1. ‘title and risk of loss: buyer acting as seller’s agent and should keep goods separate from buyer’s other goods – before title passes, the buyer can resell or use products in the ordinary course of business and shall account to the seller for the proceeds of sale  2. Nothing herein shall be deemed to create an agency  Judge at first instance said that buyer is selling as principal – sub-sale is not an agency sale

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Majority of CA disagreed  they saud sub-sale made as agent of supplier and not as principal  this was the literal interpretation of the ROT clause  Implications: seller cannot sue for the price in Caterpillar o Bunker – difficult case  Credit oayment of bunker fuel for a ship – fuel was consumed at the end of the credit period  Traditional ROT would say there is nothing to retain title over because fuel ahas been consumed!  Criticism of ROT – doesn’t work for consumed or perishable goods  Sui generis contract – UKSC  This is a specific type of contract which allows consumption prior to payment with regards to contractual debt obligation  This wasn’t even a SOG contract  Implications of Bunker  SC were concerned in Bunker that contractual provision that property passes on payment and no term could be implied to contradict this  The sui generis nature of the contract make sus question how broad its scope is  If the modern position was used, no title would be able to be retained upon concumption – this proves ROT has limited utility  All monies clauses – is this a solution? o Title retained in goods until payment is made in full or for all goods sold by the seller to the buyer o Seller can recover all identifiable and separable goods even where the buyer has paid for some of them  Does this mean the supplier also gets the profits from the goods? How is the buyer supposed ot make any money? o All monies clauses after Bunkers? o Scenario:  Seller retains title over goods until all goods have been paid for – AM clause  Say if buyer pays for some goods but still has some on their site that they haven’t paid for and then becomes insolvent  Supplier can recover all goods even if some has or hasn’t been paid for  This may mean supplier makes a profit – recover enough of the goods when you add up what they pay for and what they’ve given and It proves a profit  What does Bunkers do to this analysis – what if some of the goods have perished and others haven’t?  Little discussion around Bunker – probably because cases will be narrowly consumed on their facts  Transaction filing vs notice o England has a transaction filing regime – this means where secured loans are registered o ROT is not registrable – impractical If you dela frequently with a customer o Perhaps a notice filing regime would be better and requires registration o No longer having to register but instead  Supplier must disclose that he has an ROT  Description of the types or classes of goods covered by ROT  Disclosire of maximum amount that at any one time could be secure by ROT – Finch and Milman  More practical  Not as much detail given as for registration but you can contact company to ask for more details

 The case for registration for ROT o Invisibiluty of ROT makes it impossible for creditors to predict o Other unsecured creditrs don’t take action to protect themselves against risk by demanding interest or higher prices – ROT holder in better position o Uncertiantiesin lending – Finch and Milman  ROT fails to work well themselves  Even claimants with the strongest cases face a formindable series of obstacles to recovery  Those insolvency practitioners who act as administrative receivers or liquidators enjoy huge expertise and ‘repeat player’ advantages over claimants that the overall result is that only 15% of claimants succeed in recovery  ROT achieves the worst of both worlds: perceived wrongly as a hife threat by holders of floating charges and this escalates credit costs  Device fails at the end of the long and legally uncertain day, to deliver real protection to the quasi-secure creditor o Lack of empirical evidence on effects in practice o The legal uncertainty of using an ROT undermines the protection it actually fives o Efficiency concerns:  Quasi-security devices may produce transfers of insolvency wealth away from those unsecured crediors who cannot adjust to the use by others of such devices  Companies may have excessive incentive to rely on unsecured credit and their managers may be under-deterred from making high risk decisions that affect the interests of unsecured creditors  ROT – ‘virtually emasculated’ insolvency procedures for unsecured creditors as an effective remedy – nothing left in the estate for them – Cork Committee  ROT contracted for by larger better-placed companies who would otherwise be unsecred creditors – they exploit this position o Quasi-security devices do not have to be registered  lack of info available to creditors and concerns their position  Trade creditor may deal with customer who displays large warehouses with stocked shelves but in reality htye velong to third party – infor on this not known to lender o Crowther and Diamond Committees argues in facour of registering security interests which includes mortgages, charges and security but also and ROT  o  The case against registration for ROT o General unsecured creditors can protect themselves at low cost and low formalities and when looking at difference in bargain power of parties, it might be deemed reasonable to allow finance crediotrs to continue using ROT o ROT has a limited scope in England – modern interpretation is limited to goodsin the hands of the customer  trade off between allowing general unsecured creditors some level of protection but not going too far as to causing them detriment o Registration is also painful and complex – should we make UC go thorugh this? Can creditors adjust their position evne if they consulted the register? o Will the costs of trying to find out if an ROT exists just increase the cost for an insolvency practitioner? o Value of ROT: debtor company’s assets do not belong to the company and cannot be claimed by insolvency practitioner and are not available for distribution – creditors cannot make a claim against these goods  powerful trade suppliers are well placed to use bargaining

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power to avoid severe consequences on a corporate insolvency of status as unsecured creditors o Advantages to trade creditor: ROT clause for supplier of goods is more attractive than security e.g. floating charge because floating charge may be seen as an expensive and cumbersome resort to a legal framework because retaining title in comparison to FC involves a simple standard contractual term not requiring general disclousure because the customer, when approached for security, might refuse and look elsewhere for supply and because requests for security might drive customers away as these are hostile actions evididencing lack of goodwill and trust o Trusts are another way of keeping goods separate from the insolvency estate – liquidator can only take on free assets of insolvent companies but not if they have trusts over them o Many trust claims fail – Re BA Peters Plc – Lord Neuberger cautioned the courts should be wary about extenind gthe idea of propriterary claims in cases of alleged trust because of the negative effect of such a claim on the general body of unsecured creditors Quistclose Trust o If A lends money to company B on the terms that company B holds the monies on trust and may only use them for a specific purpose o Barclays Bank v Quistclose: primary trust with a secondary trust in favour of lender if primary trist failed – two-strust structure o Twinsectra v Yardley: property vested in lender on a resulting trust with the borrower hodlding money as trustee for the lender and having either a power or duty to apply the money for the state dpurpose  QC doubted  Property vested in lender on resulting trust, not 2 trust structure Requirements for a Quistclose Trust Lord Wilberforce two-trust analysis: o Primary trust for the initial prupose o Secondary trust for the lender that commences with the failure of the purpose o Case law gives some guidance: has to be an obligation to hold money on trust and trust has to be present before o Must be an obligation to hold the money on trust and monies must be impressed with the trust before receipt – Farepak 2006  Families were unsecured creditors with no priority  Christmas gifts saving scheme targeting poorer families  Legal terms and arragements showed no trust  A fair result would be to find a trust on behalf of customers – the scheme said the opposite to this  Company can never acquire beneficial interests in funds and sit outside the company’s estate and for the customer  this is what a QC trust is  The crucial point is that the company never acquires beneficial interest in the funds and funds never become part of the company’s estate – they are separate Re Kayford o Company declares that money received from customers will be held on trust and only applied for a specific purpose – Farepak failed to to this A preference? o Does Re Katford fall foul of insolvency law’s preference regime o In transaction avoidance, preference is putting someone in a better position than they would have if the company becomes insolvent o In a QC trust, the creditor sets out terms of how funds will be kept separate o In Re Kayford, the company voluntarily declared the trusts

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The company itself said it would hold the money on the terms of the trust – does it hold consimer in higher priority to other creditors? If so, it is vulnerable to being set aside on preference law regime… Re Kayford came before the preferences regime 0 would it be decided the same otday? Sarah Paterson: it is probably possible to navigate this issue as English preference law upholds arrangements where company had good commercial reason for preferring a certain party – its not that they wanted their consumer to do better – desired result makes sense in commercial terms So long as terms are put in place before monies are advanced by customers and company acts on professional advice given, the problem of keeping the consumer’s money separate to the company’s estate is solved Distinguish between – monies lent on QC terms where the lender insists on an arrangmenet vs Re Kayford arrangements where the company volunteers the terms There has been a change in the law since re kayford  If the terms are put in place before the monies are advanced and the company acts on professional advice to continue trade

 Why are QC Trusts not susceptible to registration o Despite having the same economic effect as security, they are not registrable o This is because the moneu never becomes part of the cimpany’s assets 0 when the monies arrive in the hands of the company they are already empressed with the trsut o Monies are still held for the benefit of the original provider and never become aprt of the company’s assets o In Farepak no trust in favour of customer because it was given to an agency  How would the position change if England moved to a notice filing scheme? o (M Bridge, ‘The Quistclose Trust in a World of Secured Transactions’ (1992) 12(3) OJLS 333, 345) o He basically asks if the conomic effect is the same as security then the functional approach suggests it is the same as a security interest o Under article 9 of Uniform Commercial Code in the US, QC trust would be seen as security and require registration o Australia has also moved towards a notice-filing scheme but expressly excluded QC trusts despite causing ROT to be registered  Expressly excluded from reform when Australia moved to a notice filing scheme  The case for requiring registration of QC Trust o Invisibility  Creditors will not know that the monies are subject to a QC trust  At leas tin ROT we have an idea of the types of commercial arrangement where we expect some ROT to be put inplace  QC trusts are more bespoke – impossible to know if theyre put in place!  They give a misleading impression – Finch and Milman  Legal uncertainty and effectiveness  When will courts find it  Is QC trust worth it if you don’t know that it will work?  Wouldn’t it be better to introduce new legislation to say when there is a QC trust? – Finch and Milman  It is only available to those who have enough bargaining power  Not everyone can benefit from them  ROT is also restricted to those with non-consumable goods – as soon as it leaves customers hands by consumption or sale it is gone!  In a re kayford trust, they were a means of protecting consumers

 The case against requiring registration for QC Trust o WC trusts can prove useful in encouraging parties to provide resuce financing o Uses:  If rescue financing is provided this way, we as creditors would want to know about it  Taking steps to protect customers during periods of uncertain trading  Consumers do not often undersand if they pay deposits on things they become low priority unsecured creditor  If customers suffer widespread loss in solvency, it may attract high profile and make other customers nervous in buying goods 0 we need consumer to have confidence in the economy to keep businesses alive especially where consumer purchasing is paramount  Should companies be using consumer prepayments as working capital without providing them any security ot interest?  Cheap form of capital – no protection given to consumer  Balance between not wanitng consumers to stop praying deposits and protecting thema.s weakly adjusting creditors  Reasons to protect consumers: finch and milman  Consumer expectations vs law  Importance of consumer confidence for economy  Use of consumer payments as working capital without seucirty interest  Incentives to increase consumer prepayments in distress  Law Commission consultation exercise – ‘Consumer Prepayments on Retailer Insolvency’ o Commission highlighted 4 reasons for examining better forms of protection in the case of consumer prepayment 1. Discrepeancy between consumer expectation of protection and the law 2. Dependency of the retail economy on consumer confidence which could be detned even by a handful fo retailer insolvencies 3. The propensity of consumer prepayments to act as loands that are made without taking security and without charging interest 4. The increntive for businesses with financial problems who find it difficult to borrow from sophisticated lenders to seek increase rpepayments from consumers in the knwoeldge that goods or services may never be delivered (a position benefitting floating charge holders) 5. This unfaiirness can be avoided bt instituting a statutory framework to oblige suppliers to hold consumer prepayments in separate accounts and on trust a. Treating consumer-creditors preferetntially might be argued for on the basis of their special vulnerability – less wealthy tha other creditors, elss likely to spread risks through diversification or self-insurance and are not fully voluntary crediots because they are poorly informed concerning insolvency reisks and are ill-informed to negotiate terms with traders and do not see themselves as trade suppliers b. Cork Committee didn’t care for these argumetns i. Small unsecured trade creditors who are not inconitnuing relationships with debtor company may also be the same level of vulnerable ii. Consumer is only deprived of a luxury ite whereas the small trade creditor may lsoe out on the payment which allows his whole business to ocntunye iii. Consumer suffers personal losse but trader’s loss affects employees too iv. Ant rationale based on vuknerability might have to include consumers and unsecured trade credutors ...