SEMO MODIFICATIONS
COMMITTEE WORKING
GROUP
Mod 02 13
Registration of Charge v2
13th March 2014
Trust Provisions under the Trading & Settlement
Code
•Sections 6.30 – 6.38 of the Code
•Trust Language - slightly misleading
•Two interpretations: Analysis 1 & 2
ANALYSIS 1
Figure 1
CODE WORDING
Section 6.30 – 6.38
CONSTRUCTIVE TRUST
Trustee: Market Operator
Beneficiaries: Participants (A, B, C, etc.)
DOES THIS
ARRANGEMENT
CONSTITUTE A
SECURITY INTEREST:
ANALYSIS 1
YES
 Smith (as Administrator of Cosslett (Contractors) Ltd) v Bridgend County Borough Council [2001]
 National Westminster Bank plc v Spectrum Plus Limited [2005] (fixed v floating charge)
IS THIS SECURITY
INTEREST REGISTERABLE
OR IS IT EXEMPT UNDER
THE REGULATIONS:
THE REGULATIONS
(Financial Collateral Arrangements (No 2) Regulations
2003 (SI 2003/3226)) (as amended)
 Gray v G-T-P Group Ltd (Re F3G Realisations Ltd) [2010]
 Re Lehman Brothers International (Europe) (in administration) [2012]
ANALYSIS 1
CHARGE IS REQUIRED AND IT
NEEDS TO BE REGISTERED
ANALYSIS 1
CONSTRUCTIVE TRUST
• over the monies deposited in the Collateral Reserve
Accounts
SECURITY INTEREST
• Deposit Account Scenario
• Rights of Market Operator
ANALYSIS 1
CONSTRUCTIVE TRUST:
• Trustee = Market Operator (‘MO’)
• (Potential) Beneficiaries =
>>Participants
>>SEM Creditors
>>Market Operator
ANALYSIS 1
CONSTRUCTIVE TRUST:
• Why constructive?
• Trusts arise in circumstances as set out in the Code (per
s.6.30).
• No clearly identifiable trust fund prior to the occurrence
of certain events which are set out in s.6.32.
ANALYSIS 1
• Trust Property = contingent interest arising in the
Collateral Reserve Accounts
• Legal Title is vested in the MO
• The Participants can give a charge over their equitable
interest in the Collateral Reserve Accounts
ANALYSIS 1
SECURITY INTEREST:
• Arrangements between the parties
• MO rights of set-off and deduction
• MO appropriation & application rights give rise to
security interest over the Participants’ interest in the
credit balances
ANALYSIS 1
Smith (as Administrator of Cosslett (Contractors) Ltd) v Bridgend County
Borough Council [2001]
•
Bridgend Council advanced £1.8m to Cosslett Ltd to purchase plants and machinery
for producing coal. Repayment to the Council was from sums Cosslett would
otherwise have been paid for the coal production;
•
Contract stated the Council could complete the contract if Cosslett abandoned it and
condition 63 gave Council the right to enter the plant, sell it and the machinery, and
apply the proceeds of sale to satisfy the sums owed on foot of the contract.
•
Cosslett went into administration and abandoned the contract. The Council
appointed another company to complete the works and sold the plant and machinery
•
Administrator sued the Council for damages for conversion of the plant and
machinery (as the Council could no longer deliver up same)
•
Argued that Condition 63 amounted to an unregistered floating charge which was
therefore void for lack of registration.
ANALYSIS 1
SMITH:
• Court held that a creditor's contractual right to sell debtor
assets and appropriate the proceeds of sale and apply
them in satisfaction of payment obligations, amounted to a
charge which was void for lack of registration.
This supports the analysis that:
• a security interest arises under the Code provisions; and
• it needs to be registered or it will be void against an
administrator / liquidator
ANALYSIS 1
Intention to create a security interest:
• s.6.20.3: "the relevant Participant thereby charges all
sums paid into and accruing on that account by way of
first fixed charge over cash at the SEM Bank in favour of
the Market Operator as agent and trustee for it and the
SEM Creditors to secure the relevant Participant's
payment obligations under the code, subject always to
the provisions of paragraphs 6.32 to 6.36 inclusive"
ANALYSIS 1
Intention to create a security interest:
• s.6.21 "to ensure the enforceability of the charge
created…the Participant…shall complete and sign the
particulars of charge in respect of such SEM Collateral
Reserve Account and SEM Collateral Reserve Assets for
registration of the charge with the relevant companies
registry or other appropriate body…and the Participant
shall do all such things and execute all such documents
as necessary to facilitate such registrations"
ANALYSIS 1
Does the security interest created by s.6.30-6.38
constitute a Floating vs. Fixed Charge?
• National Westminster Bank plc v Spectrum Plus Limited
and others [2005]
• House of Lords held that determining whether a charge
over book debts takes effect as a floating rather than
fixed charge will mainly depend on the degree of control
that the chargor has in respect of the secured assets.
ANALYSIS 1
Applying Spectrum Plus:
Market Operator has a hybrid role
• Collateral Reserve Accounts in sole name of MO
BUT
• MO does not have absolute title; and
• Participants have right to deal with monies in the
Collateral Reserve Accounts, provided that certain
conditions are satisfied (6.35).
ANALYSIS 1
Applying Spectrum Plus:
Rights of participants per 6.35
Provided that the participant is not in default:
• the MO must transfer quarterly interest to the Participant
unless they request otherwise
• if the Participant so requires, the MO must transfer any
excess credit cover in the Collateral Reserve Accounts
to the Participant
ANALYSIS 1
Applying Spectrum Plus:
Rights of participants per 6.35 (continued)
Provided that the participant is not in default:
• the Participant can change the composition of its Posted
Credit Cover by, for example, substituting cash collateral
with a Letter of Credit;
• upon request of the Participant, the MO must transfer
from the Accounts an amount specified by the
Participant in order to make payment against an
outstanding invoice.
ANALYSIS 1
Applying Spectrum Plus:
• Participant has a degree of control
• Therefore, per Spectrum Plus, the charge over
the Participant's beneficial interest in the
Accounts =
FLOATING not fixed.
ANALYSIS 1
Is this floating charge exempt from registration?
Consider:
• Financial Collateral Arrangements (No.2) Regulations
2003 (SI 2003/3226) (the 'Regs').
• Does the security = a ‘security financial collateral
arrangement‘?
• If yes = exemption from requirement to register with
Companies House
ANALYSIS 1
Is this floating charge exempt from registration?
Consider:
• Gray and others v G-T-P Group Limited: Re F2G Realisations
Limited (in liquidation) [2010]
• Charge arose in the context of a trust over a bank account.
• For Regs to apply collateral must be ‘in the possession or
under the control’ of the collateral-taker
• Meaning of ‘in the possession or under the control’ not
defined in the Regs or the European Directive implemented
by the Regs
ANALYSIS 1
GRAY:
Court considered meaning of 'control‘:
• concept of 'control' construed very narrowly
• high degree of 'legal control' required for a floating
charge to qualify as a 'security financial collateral
arrangement'
• administrative or practical control over collateral will not
be sufficient
ANALYSIS 1
GRAY:
Court considered meaning of 'control‘ (continued):
• can the collateral-taker prevent the collateral-provider
from dealing with the collateral? ‘dispossession'
• legal right to the secured assets must be removed from
the collateral-provider - right of a collateral-provider to,
for example, withdraw collateral is inconsistent with this
requirement
ANALYSIS 1
Is the floating charge exempt from registration?
No, in our view the charge created by the trust
arrangements under the Code does not fall
within the scope of the Regulations (and thus
would not be exempted from the registration
requirement)
ANALYSIS 1
Amended Regulations, 2010:
• 'possession' can include rights of the collateralprovider to substitute financial collateral of the
same value or to withdraw excess collateral
• BUT no clarification in relation to definition of
‘control’
ANALYSIS 1
• Still much ambiguity in respect of ambit of Financial Collateral
Regulations
• Financial Markets Law Committee recommended further
clarifications on the meaning of ‘possession’ and ‘control’ (Jan
2013)
• Little judicial authority
• new UK registration regime (6 April 2013) introduced
voluntary registration - any charge created by a company
'may' be registered
• Therefore, prudent practice to register ANY charge, even if it
may on the face of it fall within the scope of the Regs
ANALYSIS 1
• Charge created by the trust arrangements under
the Code must be registered to avoid the
security interest being void against an
administrator or liquidator
• A supplemental and standalone charge
document reflecting the security interests
created by the trust arrangements is required for
registration purposes
ANALYSIS 2
Figure 2
CODE WORDING
Section 6.30 – 6.38
CONSTRUCTIVE TRUST:
AGENCY RELATIONSHIP
(in accordance with the contractual obligations
between the parties)
ANALYSIS 2
WOULD THIS CONTRACTUAL
ARRANGEMENT BE ROBUST
ENOUGH TO SURVIVE THE
APPOINTMENT OF A LIQUIDATOR?
NO
Agency relationship will be terminated per
Sowman v David Samuel Trust Ltd [1978].
YES
Agency relationship is terminated by liquidation
BUT a Power of Attorney will survive.
POWER OF ATTORNEY IS REQUIRED*
AMENDMENTS TO T&S CODE ARE REQUIRED
NO NEED TO REGISTER AT COMPANIES HOUSE
*Power of attorney 'by way of security' (s.4 Powers of Attorney
Act 1971 and s.3 Powers of Attorney (NI) Act 1971).
ANALYSIS 2
S.6.30-6.38 of the Code
Contractual arrangement results in an AGENCY
RELATIONSHIP:
• MO is the agent of the Participants
• clear contractual agreement between the parties
empower MO to administer the Accounts, make
deductions, etc.
ANALYSIS 2
S.6.30-6.38 of the Code
• Contractual matrix constitutes an arrangement under
which the MO can enforce its rights
• Would this contractual arrangement survive the
insolvency of a Participant?
ANALYSIS 2
• Participant liquidation / administration?
• Contractual arrangements will not be sufficiently robust
• Sowman v D Samuel Trust Limited [1978]
ANALYSIS 2
Sowman:
• Following the winding up of a company, a receiver of a
company (as deemed agent of the company) was
subject to termination (in the event of liquidation)
• on the facts, the ‘attorneyship’ survived as given ‘by way
of security’ and it was irrevocable
• 'a winding up or liquidation of a company will put an
end to the agency, it will not put an end in any way
to the powers of a receiver'
ANALYSIS 2
Power of Attorney 'by way of security' (s.3 Powers of
Attorney (Northern Ireland) Act 1971)
• given by a Participant in favour of the MO in respect of
its interest in the Collateral Reserve Accounts
• gives the MO the right to fully deal with and administer
the Collateral Reserve Accounts as the attorney of the
Participants in accordance with the trust arrangements
under the Code
• In the circumstances such attorneyship by way of
security would be irrevocable on the appointment of an
administrator or liquidator
ANALYSIS 2
EQUITABLE RIGHT OF SET-OFF?
• It was suggested in Smith, above, that even though the
charge over the debtor's assets was void for lack of
registration, surely the contractual obligations between
the parties gave rise to an equitable right of set-off
between the parties, which allowed the creditor to set-off
payments owed by the debtor on foot of the agreed
terms between the parties
ANALYSIS 2
EQUITABLE RIGHT OF SET-OFF?
• Court disagreed with this analysis stating that if
permitted this would simply allow the exercise of rights
which should have been registered as a charge and
dismissed this argument as an indirect attempt to avoid
the consequences of non-registration
CONCLUSION
• Analysis 1 is the most ‘true’ interpretation of the
Code provisions
• It reflects the spirit of the Code & the drafters’
intentions
• It provides certainty to the MO and to
Participants
• It is the safest approach
QUESTIONS?
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