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Optimizing English and American security interests.

C. Rights in Insolvency Proceedings

Both English and American insolvency laws generally yield to and enforce the non-insolvency rights of security interest holders. (186) The creditor's "secured claim" is defined in the United States as the amount of the debt owed to the creditor that is secured by collateral. (187) Any excess over the value of the collateral is treated as an unsecured claim and will rank pro-rata with the claims of other unsecured creditors. (188) English law takes the same approach. A creditor has a "secured claim" for purposes of insolvency law "to the extent that [the creditor] holds any security for the debt ... over any property of the person by whom the debt is owed." (189) If the creditor "realizes [its] security [it] may prove for the balance of [its] debt, after deducting the amount realized" (190) for which it will rank pro-rata along with the unsecured creditors, (191)

Both systems, however, also modify those rights in some respects. In this section, we compare the functions of English fixed charges and American security interests in connection with insolvency proceedings. Although general differences in the insolvency procedures of the two countries may indirectly affect secured creditor recoveries, we confine our discussion to differences that directly affect secured creditor recoveries.

In the United States, three proceedings are commonly employed by business debtors: (1) Chapter 7 (liquidation), (2) Chapter 11 (reorganization), and (3) Chapter 13 (debt adjustment). We omit Chapter 13 debt adjustment from our comparison, because only individuals (natural persons) can file under Chapter 13.

In England, four proceedings are commonly employed by business debtors: (1) Winding-up (liquidation), (2) Administration (reorganization), (3) Administrative Receivership (reorganization), and (4) Bankruptcy (distribution of bankrupt's estate and discharge), (192) We omit Administrative Receivership from our comparison, because recent legislation has sharply curtailed its use. (193) We also omit Bankruptcy from our comparison, because a bankruptcy order can only be made against individuals (natural persons). (194)

Thus, following Segal, (195) we make essentially two comparisons. The first is of liquidation under American Chapter 7 with English Winding-up. The second is of reorganization under American Chapter 11 with English Administration.

In theory, floating charges crystallize upon the commencement of an insolvency proceeding and so become fixed charges. But for purposes of insolvency proceedings, the metamorphosis seems to make little difference. The Insolvency Act defines a floating charge as a charge that was a floating charge at the time of its creation, (196) and continues to treat the floating charge differently in many respects. Accordingly, in this section we compare the insolvency treatment of charges that were created as fixed charges with American security interests. The comparison of charges that were created as floating charges with American security interests is the subject of Part IV.C. below. There are, nevertheless, many respects in which floating charges are treated the same as fixed charges. For economy of presentation, we mention some of them here.

The insolvency treatment of English fixed charges is highly similar to the insolvency treatment of American security interests. We describe the similarities in subsection 1 before we turn to the differences in subsection 2.

1. Similarities in Treatment

Initiation. Secured creditors commonly initiate English insolvency proceedings. (197) They seldom do so directly in the United States. In the United States, unsecured creditors--which include secured creditors for the amounts by which their claims exceed the amounts of their collateral--have the legal right to initiate "involuntary" insolvency cases. (198) But American law is hostile toward direct creditor-initiation. Creditor petitions probably account for fewer than three percent of American business bankruptcies, (199)

This difference in the ability of English and American secured creditors to directly initiate insolvency proceedings is, however, of little functional importance. Once the debtor is in default, an American secured creditor can force the debtor to file a "voluntary" petition by moving against the collateral, or merely threatening to move against the collateral. For example, an American creditor with a security interest in accounts can notify account debtors to pay the secured creditor directly, thus depriving the debtor of its cash flow. (200) An American creditor with a security interest in goods can file an action for replevin and probably have the sheriff poised to seize the debtor's property within ten to twenty days. (201) The debtor must then file a "voluntary" bankruptcy to avoid the seizure. Thus, although they use different devices, secured creditors commonly initiate both English and American insolvency proceedings.

Automatic stay. In both England (202) and the United States, (203) the filing of an insolvency case stays the efforts of secured creditors to collect the debts owing to them, except through the insolvency case. In both systems, secured creditors are entitled to protection against loss resulting from the delay in realizing their collateral, (204) In both systems, secured creditors can petition the insolvency court for relief from the stay. (205)

After-acquired property. After-acquired property, as the term is used here, refers to property that the debtor acquires after the commencement of the insolvency case and that fits within the security agreement description of collateral. In American insolvency proceedings, property acquired after the commencement of the case is not the secured creditor's collateral. Bankruptcy Code [section] 552(a) provides that "[P]roperty acquired by the estate or by the debtor after the commencement of the case is not subject to any lien resulting from any security agreement entered into by the debtor before the commencement of the case." (206) Such property is, however, subject to such a lien if it is also the proceeds, products, offspring, profits, or rents of collateral in existence at the time the insolvency proceeding was filed. (207) The purpose of the American rules is to distinguish situations in which the after-acquired property represents the value of the secured creditor's prepetition collateral, from situations in which the new value is contributed by the debtor's estate (308)

English law makes essentially the same distinction in Winding-up proceedings. As Professor Goode states:

   So firmly is this principle [that security interests created prior
   to the insolvency proceeding are unaffected by the winding up]
   applied that where the instrument of charge provides for security
   in after-acquired property the secured creditor can assert rights
   even over moneys or other assets falling in after the commencement
   of the winding-up, provided that the consideration for these was
   already executed before that time, as opposed to being furnished by
   the liquidator himself, e.g., by performance of a contract entered
   into by the company. (209)

Doctrinally, English law reaches this result through the construct that assets in the hands of a liquidator in Winding-up are subject to a statutory trust and so the company never becomes the beneficial owner of the after-acquired property. (210)

Although authority with respect to fixed charges in Administration is sparse, Segal describes the scope of the English charge holder's right in after-acquired property as broader than the corresponding American right: "[W] here a post-petition product is made using assets or cash not previously subject to the lender's security interest, the new product will not be subject to the lender's lien. This is different from the position in an English administration...." (211) Segal does not say how, but does confirm that "the practical significance of the differences between the two systems is limited." (211)

If we include authority regarding floating liens, the picture is clearer. The English statute addressing the sale of floating charge collateral employs the term "acquired property" essentially to mean "proceeds." The statute provides:

[section] 70 (1) The administrator of a company may dispose of or take action relating to property which is subject to a floating charge as if it were not subject to the charge.

(2) Where property is disposed of in reliance on sub-paragraph (1) the holder of the floating charge shall have the same priority in respect of acquired property as he had in respect of the property disposed of.

(3) In sub-paragraph (2) "acquired property" means property of the company which directly or indirectly represents the property disposed of. (213)

Under this provision, a floating charge holder retains its priority date only with respect to property "which directly or indirectly represents the property disposed of." (214) That is essentially the American concept of "proceeds." Segal's example confirms this interpretation:

   Accordingly, if the administrator, for example, sells plant
   machinery subject to the floating charge, the proceeds of the sale
   will fall within the floating charge and the holder of the charge
   will be entitled to the same priority as against third parties
   (e.g., holders of subsequent floating charges) in respect of the
   proceeds as he had over the disposed of plant machinery. (215)

Thus, the distinction that after acquired property clauses continue to operate in English insolvency proceedings but cease to operate in American insolvency proceedings may make no difference. Whether the charge is fixed or floating, the English charge holder, like the American secured creditor, has effectively only the right to proceeds of its collateral during insolvency proceedings.

Administrators. In a Chapter 7 liquidation case the United States Trustee, a government official, appoints a disinterested trustee to administer the liquidation. In a voluntary Winding-up, the debtor appoints a liquidator; (216) in an involuntary Winding-up the creditors appoint a liquidator. (217) The objectives of the three kinds of cases are similar: to liquidate the debtor's property and distribute it in accord with statutory priorities. (218) In Administration, a "qualified insolvency practitioner"--typically an accounting firm chosen by the qualifying floating charge holder who initiates the proceeding--is placed in control. (219) The administrator has the power to remove and appoint directors. (220) In Chapter 11, the debtor's managers formally remain in office, and administer the reorganization. But this formal difference is mitigated by practices in both countries. In England, the administrator may retain the debtor's management in a subordinate position. And in the United States, the debtor-in-possession's attorneys--who must pledge loyalty to the debtor company, not its managers (221)--sometimes arrange with creditors for the managers' and directors' removal. (222) Despite these mitigations, we think managers do have greater control in American Chapter 11 cases than in English Administrations.

The two proceedings nevertheless remain similar in fundamental respects. Although left in control, the American debtor-in-possession is a fiduciary bound to act in the interests of all parties. (223) The same is true of the English administrator. (224) During the insolvency proceedings, both are obligated to serve as "neutrals," working in the interests of all parties. (225)

Sale of collateral. English administrators and liquidators and American debtors in possession and trustees all have the practical ability to sell secured creditors' collateral for a price in excess of the amount of the secured debt. That is because, in both the English and American systems, the debtor is entitled to redeem the collateral from the security interest by paying the full amount owing. (226) In addition, American insolvency law specifically authorizes sale of the collateral free of liens if the sale price exceeds the "value of the liens:"

   The trustee may sell property ... free and clear of any interest in
   such property of an entity other than the estate, only if ... such
   entity consents; [or] such interest is a lien and the price at
   which such property is to be sold is greater than the aggregate
   value of all liens on such property.... (227)

Sale of the collateral by the administrator for more than the amount of the secured obligation will, in both systems, entitle the secured creditor to payment in full. To the extent estates can sell free of security interests in either system, they can do so only with court approval. (228)

In the English system, an administrator can sell the collateral free of a fixed charge for a price that is less than the amount owing to the secured creditor provided that the price is at least the market value of the property. (229) It appears that a liquidator cannot. (230)

In the American system, no distinction is made between reorganization and liquidation. The majority rule is that neither debtors-in-possession nor trustees can sell collateral free of a security interest for a price less than the face amounts owing the secured creditors. (231)

Thus, English law differs from American law principally in the ability of English administrators to sell for less than the amounts of the liens. As we explain below, we consider this difference to be compensatory for the English lack of cramdown.

Insolvency Priorities. Both English and American insolvency laws create priorities in favor of certain classes of creditors. They include administrative expenses and certain debts owing to employees. But these priorities are not priorities over English fixed charges or American security interests.

In an insolvency proceeding under English law:

   [A] secured creditor is not a contender in the priority stakes.
   Assuming his security to be valid against the liquidator and
   creditors, he is entitled to have recourse to it before anyone
   else. Even the costs of the liquidation cannot be taken out of an
   asset given as security before the secured creditor has realized
   what is necessary to pay his debt. (232)

As will be discussed in Part IV.C. below, floating charges are subordinate to administrative expenses, preferential creditors, and an unsecured creditors' prescribed share, but fixed charges are senior to all creditors except prior fixed charges.

The same is true of security interests in American insolvency proceedings. Security interests are senior to expenses of administration, creditors with statutory bankruptcy priorities, and unsecured creditors. (233)

Expenses of collateral preservation and disposition. In both the United States and England, insolvency administrators often incur expenses in preserving and disposing of secured creditors' collateral. Under American law, the estate--and the unsecured creditors claiming through the estate--generally bear these expenses. The expenses are imposed on the secured creditor only "to the extent of any benefit to the holder of [the secured] claim." (234)

To illustrate the operation of this "benefit" test, assume that the trustee incurs expenses of $10,000 in preserving and selling an asset for $100,000, and that the asset is subject to a security interest in the amount of $75,000. The trustee cannot recover the $10,000 from the secured creditor's $75,000 share of the proceeds because the expenditures do not benefit the secured creditor. They do not benefit the secured creditor because, even if the trustee had not incurred them, the secured creditor would have incurred them, added them to the amount of the secured debt, (235) and collected the entire $85,000 through foreclosure. Thus, whether the trustee spends the $10,000 or the secured creditor spends the $10,000 and adds it to the amount of the secured debt, the ultimate outcome is the same. The expenses are paid, the secured creditor receives $75,000 and the estate receives $15,000. (236)

If, instead, the amount of the secured debt had been $100,000, the trustee would have been able to recover the $10,000 from the $100,000 proceeds of sale. That is because the expenditures would have benefitted the secured creditor. The expenditures would have done so because, if the trustee had not paid them, the secured creditor would have had to pay them. The secured creditor could not have recouped them by adding them to the debt and collecting them from the sale proceeds, because the sale proceeds would have been insufficient to pay both the costs and the secured debt. As one American court put it in holding a trustee entitled to recover the commission it paid to a broker to sell the collateral of such an undersecured creditor:

   [In bankruptcy,] Twin City did not have to foreclose on the
   property and incur the financial burdens, and time burdens, that
   are usually associated with such action. Instead, Twin City was
   freed from these problems by virtue of the broker's prompt
   disposition of the property. Further, had Twin city lifted the stay
   and taken possession of the realty and the personalty, it would
   have had to sell same and pay its broker a commission also. (237)

Thus, on the facts of this example, the trustee recovers the $10,000 in expenses from the sale proceeds and the remaining $90,000 goes to the secured creditor.

English law does not make the benefit distinction expressly. The express rule is that "[t]he [administrator or liquidator] receives his fees and costs incurred in realising assets subject to a fixed charge from the sale proceeds of the assets in question, rather than from the assets available to the creditors of the company as a whole." (238) But the English and American formulations are sufficiently similar that they produce the same result on the facts of our two prototypical examples. In the first of those examples, the administrator or liquidator incurs $10,000 in expenses to sell collateral encumbered by a fixed charge in the amount of $75,000 for $100,000. We take the English authorities to mean that the first $10,000 of the proceeds of sale go to reimburse the administrator or liquidator. (239) The next $75,000 goes to the fixed charge holder and the remaining $15,000 goes to the estate--the same result as under American law.

In the second example--fixed charge of $100,000 against collateral sold for $100,000--the administrator or liquidator would again take the first $10,000 of proceeds to reimburse the expenses of liquidation. The fixed charge holder receives the remaining $90,000--again yielding the same result as under American law. Thus although the reasoning is different in the two systems, they seem to allocate the expenses of collateral preservation and disposition in essentially the same manner.

The remaining difference between the two systems is that the American system addresses the possibility of a difference in the price that the secured creditor and the bankruptcy administrator can get for the property. Assume, for example, that the secured creditor held a $75,000 security interest in collateral that the administrator could sell for $100,000 along with other estate property, but that the secured creditor could sell for only $70,000. If the administrator sold the collateral for $100,000, the secured creditor would be entitled to $75,000 under the English rule, but only $70,000 under the American rule. Under the American rule, the trustee could "recover from property securing an allowed secured claim"--that is, from the secured creditor's share of the proceeds--"the reasonable, necessary ... expenses of ... disposing of [the] property to the extent of any benefit to the [secured creditor]" (240)--that is, the $5000 that the secured creditor could not have recovered without the trustee's intervention.

2. Differences in Treatment

The treatment of fixed charges in English insolvency cases does differ significantly from the treatment of security interests in American insolvency cases in two important respects.

Cramdown. American security interests are subject to modification in Chapter 11 cases through "cramdown." Cramdown is typically the substitution of a new debt for the previously secured debt. (241) The new debt may be in a smaller amount or payable on a different schedule with interest at a different rate, provided that the present value of the new debt is equal to the lesser of the amount of the previously secured debt or the value of the collateral. (242) The secured creditor is entitled to retain its lien. (243)

Segal points out that "[i]n England, in an administration and company voluntary arrangement (CVA), the secured creditor's right to enforce his security is entrenched and cannot be prejudiced by the administrator's proposals or the terms of the CVA, without the consent of the secured creditor." (244) Segal concludes, "English law does not have a true equivalent to the cram-down that arises in Chapter 11 proceedings." (245)

English law does, nevertheless, have a functional equivalent. The administrator can sell the collateral. (246) To understand the equivalency, consider the example of a debtor that owns $500,000 in collateral that is subject to a security interest in the amount of $900,000. In an American Chapter 11 case, the debtor in possession could propose a plan that paid the secured creditor $500,000 plus interest at the market rate, treated the remaining $400,000 in the same manner as other unsecured claims, comply with the absolute priority rule by cancelling the equity, and cram the plan down over the secured creditor's objection. (247) In an English Administration, the administrator could, with the court's approval, sell the collateral for $500,000 on credit, transfer the fixed charge to proceeds of sale, and treat the remaining $400,000 as an unsecured claim. The sale need not be to a third party. It can be a "phoenix sale" (248) to a shell corporation owned by the same persons who own the debtor. (249) The two transactions produce identical results.

Thus, both the English and the American systems accept the basic principle that a secured creditor should not be able to prevent a restructuring that benefits others without harming the secured creditor. In the American system, the debtor can retain the collateral. In the English system, the debtor must sell the collateral, but the sale can be to the debtor's principals.

Priming. In the English system, the administrator cannot grant liens with priority over pre-existing fixed charges. With respect to English Administration, Segal notes:

   [W] here the administrator needs to borrow funds for the purpose of
   the [A] dministration, these provisions allow him to do so, and to
   create new, post-[A]dministration security interests, with priority
   over pre-[A]dministration floating charge assets. However, there is
   no ability to prime and subordinate assets subject to a
   pre[A]dministrafion fixed charge. (250)

In the American system, the administrator can grant such liens with priority over a pre-existing security interests.

   (d)(1) The court, after notice and a hearing, may authorize the
   obtaining of credit or the incurring of debt secured by a senior or
   equal lien on property of the estate that is subject to a lien only
   if--(A) the trustee is unable to obtain such credit otherwise; and
   (B) there is adequate protection of the interest of the holder of
   the lien on the property of the estate on which such senior or
   equal lien is proposed to be granted. (251)

To grant a priming lien, the American debtor-in-possession or trustee must obtain court approval and must provide adequate protection against resulting loss to the holder of the security interest. But the secured creditor nevertheless may suffer uncompensated losses if the protection turns out to be inadequate. For that reason, this power to "prime" a secured creditor does constitute an important functional difference in the operation of security between the two systems. (252) But the difference is incidental in the sense that, if the American system functions as intended, secured creditors would suffer no losses as a result of the priming.


Abstract concepts play an important role in English legal reasoning. The theoretician imbues a concept with characteristics and then the concept behaves in accord with them, sometimes seeming to determine concrete outcomes. This has been especially so with floating charges. The following passage is, for example, a classic explanation of the floating charge:

   A specific charge, I think, is one that without more fastens on
   ascertained and definite property or property capable of being
   ascertained and defined; a floating charge, on the other hand, 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. (253)

From this explanation, one jurist concluded that "[i]t is inconsistent with the nature of a floating security that the holder should be able to pounce down on particular assets and to interfere with the company's business while still keeping his security a floating security; he cannot at once give freedom and insist on servitude." (254) Alternatively, the floating charge is sometimes described as "a licence or permission by the [creditor] to the [debtor] to deal with the [collateral] ... as though a [charge] had not been executed" until that license is revoked by crystallization of the floating charge. (255) These conceptualizations are sometimes said to lead to the concrete conclusion that "third parties dealing with the [debtor] in the course of their business [can] ignore [floating charges]." (256) In keeping with this conceptualization of the floating charge as conveying no rights in the collateral until crystallization, Lord Scott said in Spectrum Plus, that

   [t]here can ... be no difference in categorisation between the
   grant of a fixed charge expressed to come into existence on a
   future event in relation to a specified class of assets owned by
   the [debtor] at that time and the grant of a floating charge over
   the specified class of assets with crystallisation taking place on
   the occurrence of that event. (257)

Seemingly inconsistently, English judges and commentators also maintain that a floating charge is "a present security, which presently affects all the assets of the company expressed to be included in it." (258) "[T] he floating charge, though ambulatory, is a present security, not a mere contract right, so that restrictions contained in it will constitute an equity binding those who have notice of them." (259)

Of course, no concrete outcomes flow from such legal conceptualizations except those that judges decide, in particular cases, to allow. Legal doctrine and metaphor are almost infinitely malleable. As we develop in this Part, sophisticated third parties dealing with the debtor do not ignore floating charges, and those third parties who do ignore them do so at their peril.

A comparison of the English floating charge with the American floating lien in revolving assets illustrates the point. The American floating lien is[section]regarded as attached to each specific account or item of inventory. The lien exists and is a "property," or in English terminology a "proprietary," interest in the collateral. Yet, even if the American floating lien is fully perfected, the American grantor, like its English counterpart, remains free to sell goods that are collateral in the ordinary course of business. (260) The American grantor, like its English counterpart, is also free to modify or substitute accounts if the underlying contracts have not yet been fully performed (261) and to collect or compromise accounts if the underlying contracts have been fully performed. (262) The American floating lien neatly slips off each item of collateral as the debtor disposes of inventory or substitutes or collects accounts. It attaches to each new item of collateral as the debtor acquires it. The English floating charge only hovers; the American floating lien lands and attaches. But the consequences are virtually the same.

In this Part, we seek to infer the true nature of the English floating charge by comparing those consequences with respect to buyers of the collateral, competing security interests, execution creditors, insolvency administrators and other claimants in insolvency cases. We conclude that the English floating charge is sufficiently effective in those competitions that it is the functional equivalent of an American floating lien.

A. Sale of Collateral

1. Original Collateral

As we noted in Part III., buyers of collateral generally take subject to English fixed charges and American security interests. But buyers of inventory in the ordinary course of business take free of both English floating charges and American security interests, even if buyers know that the charges or interests exist. (263) The American rule is found in U.C.C. [section] 9-320(a), which provides that "a buyer in ordinary course of business ... takes free of a security interest created by the buyer's seller, even if the security interest is perfected and the buyer knows of its existence." (264) The English rule is found in judicial interpretation. "It is in the nature of a floating charge that the company retains, until crystallisation, the power to dispose of its assets in the ordinary course of business free of the charge, and thus a purchaser will take free of the charge...." (265)

In neither system can a buyer take free if the buyer is aware that its purchase violates the security agreement. American law defines "buyer in ordinary course of business" to mean "a person that buys goods in good faith, without knowledge that the sale violates the rights of another person in the goods, and in the ordinary course from a person ... in the business of selling goods of that kind." (266) The English rule with respect to floating charges is that "a purchaser will take free of the charge unless she has actual knowledge that it has crystallised or that the disposition is not permitted because of some explicit restriction in the charge." (267)

As previously noted, the "buyer in ordinary course" concept is narrower under American law than under English law. We doubt, however, that debtors' ability under English law to transfer capital assets to ordinary course buyers free of floating charges makes any significant difference in system function. That ability exists only with respect to floating charges against capital assets, (268) which is to say, only in situations in which the secured creditor, by making the charge floating, consents to the debtor selling the collateral free of the charge. (269) ff the secured creditor consents to sale in the American system, the result would be the same, even if the sale is not considered to be in the ordinary course of business. (270)

Accounts receivable are another category of assets that debtors may be more able to sell free of a security interest under English than American law. Although American debtors have the right to collect, compromise, and substitute accounts until the secured creditor notifies the account debtor to the contrary, American debtors have no right to sell the accounts to third parties. (271) English debtors arguably do because "[i]t is in the nature of a floating charge that the company retains, until crystallisation, the power to dispose of its assets in the ordinary course of business free of the charge, and thus a purchaser will take free of the charge...." (272) Thus, in theory, an English debtor that granted a floating charge over its accounts could later sell or grant a fixed charge in those accounts.

We doubt the practicality of that transaction. First, "transactions which are intended to bring to an end, or have the effect of bringing to an end, the company's business are not transactions in the ordinary course of its business." (273) Thus, if an English debtor sold its accounts or inventory in bulk as part of a plan to terminate its business, the transaction would be outside the ordinary course. The buyer would take subject to the floating charge, just as the buyer would under American law. Only the doctrinal explanation would be different.

Second, security agreements in both countries are likely to restrict sales of accounts free of security interests. For example, the sample Debenture (security agreement) in Goode, Commercial Law, imposes these restrictions:

4.1 You must collect and realise all Receivables and immediately on receipt pay all money which you receive in respect of them into your bank account with us, or into any other account designated by us.... You may not, without our prior written consent, charge, factor, discount, assign, postpone, subordinate[,] or waive your rights in respect of any Receivable in favour of any other person or purport to do so ....

5 You must not, except with our prior written consent ... 5.2 sell, assign, lease, license or sub-license, or grant any interest in, your Intellectual Property Rights, or purport to do so, or part with possession or ownership of them, or allow any third party access to them or the right to use any copy of them. (274)

One who buys with actual knowledge of these restrictions, buys subject to the charge--even if the sale is in the ordinary course. The Law Commission states that

   It is in the nature of a floating charge that the company retains,
   until crystallisation, the power to dispose of its assets in the
   ordinary course of business free of the charge, and thus a
   purchaser will take free of the charge unless she has actual
   knowledge that it has crystallised or that the disposition is not
   permitted because of some explicit restriction in the charge. (275)

Although the Law Commission's view was that the doctrine of constructive notice "does not apply to restrictions in the charge as these are not registrable," at least some commentators think otherwise. (276) The gist of their argument is that restrictions against extraordinary transactions are so common that buyers expect such restrictions, and to avoid conflicts, search for them. Nolan maintains that:

   Even before a floating charge crystallises, the equitable interest
   created by it is capable of binding a third party who acquired
   property within the scope of the charge other than in the ordinary
   course of the company's business, and with actual or constructive
   notice both of the nature of the charge and of the circumstances of
   the transfer. (277)

Thus it is an exaggeration to say that until crystallization of a floating charge, the debtor "is left free to use the charged asset and to remove it from the security" (278) or that "third parties dealing with the [debtor] in the course of their business [can] ignore" floating charges. (279) Although the Law Commission recites that "a buyer of goods in the ordinary course of business cannot be expected to search against her seller in the Companies Register," (280) if the transaction is more than a routine purchase of goods from inventory, the buyer would be well-advised to do so. (281) Once the buyer has conducted a search, it will have actual knowledge of the restrictions, and so will be bound by them. Thus, when the security agreement includes customary restrictions, the English rule's application yields results virtually indistinguishable from the results of the American rule's application.

2. Proceeds

An American floating lien attaches to "any identifiable proceeds of [the] collateral." (282) Thus, if an American debtor sells inventory in the ordinary course of business on credit, the floating lien does not continue in the inventory, but does attach to the accounts receivable thus created.

An English floating charge does not attach to the proceeds of sale. (283) Thus, Professor Goode states that "[a] floating charge covering assets of a particular description will not carry through to proceeds of a different description, for this would be inconsistent with the power of disposition inherent in the floating charge." (284) As Professor Ferran points out, however, charge holders can opt out of the default rule by drafting the security agreement to expressly cover "receivables and their proceeds." (285) In practice, it is likely that most professionally drafted security agreements will do so. We see no reason why the typical floating charge, which includes "all your undertaking, property, assets, rights[,] and revenues," would not be adequate to do so. (286) Accordingly, there may not be a functional difference between a U.S. security interest and an English floating charge with respect to the ability to reach the proceeds of collateral sales.

B. Encumbrance of Collateral

1. Competing Secured Creditors

In a competition among American security interests, each has priority as of the date of registration or perfection, whichever occurs first. (287) Thus an American floating lien will have priority over any later taker of a security interest in the same collateral.

Similarly, an English floating charge holder has priority over any later taker of a floating charge. (288) The order in which the floating charges crystallize does not matter. (289) The recent case of Griffiths v. Yorkshire Bank PLC., (290) held to the contrary--that a later created floating charge that crystallized before an earlier created floating charge did take priority over the first charge. But commentators have uniformly disapproved Griffiths and we doubt the precedent will survive. (291)

An English law floating charge holder does not, however, have priority against subsequent fixed charge holders. (292) The earlier floating charge "can be displaced by a [later created fixed charge]." (293)

Floating charge holders can attempt to achieve priority over subsequent fixed charge holders through the use of automatic crystallization and "negative pledge" clauses in their security agreements. We previously discussed the use of automatic crystallization clauses. (294) A negative pledge prohibits the creation, without the consent of the floating charge holder, of subsequent charges that would rank ahead of the floating charge. (295)

A subsequent fixed charge holder may take subject to an automatically crystallized floating charge even if it lacks actual notice of crystallization. Thus, in the Brightlife case, "the effect of the validity of ... automatic crystallization ... was such that it did in a quite profound way affect the other third party creditors of the company, notwithstanding the fact that they may not have known (although the company did) that the floating charge had crystallised." (296)

A subsequent fixed charge holder's actual notice of a floating charge that incorporates a negative pledge clause prohibiting or restricting the grant of additional higher-ranking security is sufficient to give the floating charge holder priority over the subsequent fixed charge. (297) Constructive notice is not sufficient, (298) but actual notice can be imputed if the fixed charge holder has been "willfully" negligent to an extent that "amounts to evidence of fraud." (299) Merely failing to make an "investigation or inquiry" does not amount to the willful negligence required for notice to be imputed. (300)

These rules suggest that the courts would usually find creditors taking subsequent fixed charges to have priority over earlier floating charges. But "usually" is not enough to make the taking of subsequent fixed charges commercially feasible. The Law Commission stated:

   We understand that in practice a subsequent creditor will not take
   the risk that there may be a negative pledge or automatic

   crystallisation clause and that it might be found to have had
   notice of it. If it wants to ensure its priority it will make a
   subordination agreement with the floating charge-holder. (301)

Thus, as a practical matter, an English floating charge is sufficient to deter the taking of subsequent fixed charges that might have priority. Here again, the differences in legal doctrine between the English and American systems largely disappear in actual practice.

2. Lien Creditors

As previously discussed, (302) English fixed charges and American security interests have priority over execution liens with later priority dates. Before lending, secured creditors generally discover and clear execution liens with earlier priority dates. As a result, English fixed charges and American security interests almost invariably have priority over execution liens.

On its face, the English system appears to operate differently with respect to floating charges. Even after registration, English law gives floating charges no priority over subsequent lien creditors so long as the charges float. (303) As the Law Commission put it, "[i]n principle an execution creditor takes free of a floating charge if it has completed execution before crystallisation of the charge." (304) The English rules led Professor Picker to conclude that English judgment creditors could obtain priority over floating charge holders through execution and that, as a result, there was a functional difference between the English and American systems:

The Article 9 security interest in inventory is good against the lien creditor, both genuine lien creditors under Revised section 9-317(a) and hypothetical lien creditors under section 544 of the Bankruptcy Code. The uncrystallized floating charge is not good against a lien creditor nor is it spared from the invasion of claims given a statutory preference in a liquidation. The structure of this system means that a group of assets--those that can be subject to no more than a floating charge--are always up for grabs. (305)

The Law Commission takes a different view. They start with the observation that the judgment creditor must "complete" its execution before crystallization to have priority over the floating charge. (306) Goode concurs. (307) The English authorities are vague as to when an execution is complete. (308) Completion seems to be a reference to the Insolvency Act, which states that "If] or purposes of this Act ... an execution against goods is completed by seizure and sale...." (309) An execution against goods may not be complete until the collateral is sold, (310) or even until the proceeds of sale are distributed. (311)

As a practical matter, floating charge holders can crystallize their charges before judgment creditors can complete their executions. They can do so in two ways. The first is through automatic crystallization:

   In practice the attempted execution is likely to trigger an
   automatic crystallisation clause in the floating charge. An
   automatic crystallisation clause is likely to be effective in this
   type of case, since the rights of the execution creditor do not
   depend on whether it had notice of the clause or of the
   crystallising event. Thus if there is such a clause the execution
   creditor will be unable to claim any of the debtor's property.

The second is by discovering the execution in progress and giving notice of crystallization before the execution is complete. Discovery is not difficult because execution sale is a public event. (313) Because the floating charge holders can act more quickly than the execution creditors, no assets are "up for grabs" in any meaningful sense.

The competition between floating charges and garnishment works in essentially the same way. The garnishing creditor is entitled to keep any money received prior to crystallization, but loses any money not received prior to crystallization. (314) The floating charge holder can prevail through the use of the same two strategies.

To employ these strategies, the secured creditor must crystallize the charge with respect to all of the charged assets. (315) That may force the debtor to close its business or to file an insolvency proceeding. Thus, crystallization strategies are not costless for the secured creditor. But secured creditors are likely to prefer an insolvency proceeding when their debtor is unable to resolve an execution. Crystallization followed by de-crystallization after the collateral has been released from the execution is another possible strategy. (316)

In summary, floating charge holders can, through legal strategies, gain the very priorities over buyers, competing charge holders, and execution creditors that legal doctrine denies to them. As a result, in the absence of insolvency proceedings, the English floating charge functions in essentially the same manner as the American floating lien. Both allow the debtor to sell inventory free of the security interest in the ordinary course of business without the secured creditor's consent. Both, as a practical matter, make it difficult or impossible for other buyers, competing secured creditors, or lienholders to gain priority over the floating charge or floating lien once they have been perfected through registration.

C. Rights in Insolvency Proceedings

In Part III.C., we argued that the treatment of English fixed charges in insolvency proceedings is highly similar to the treatment of American security interests in insolvency proceedings. The differences--cramdown and priming--are unlikely to reduce secured creditors' recoveries.

In this section, we compare the treatment of English floating charges in insolvency proceedings to the treatment of American security interests in insolvency proceedings. Because we have already compared fixed charges with American security interests, we limit this discussion to aspects of floating charges that differ from fixed charges.

1. Initiation

In Part III.C.1., we noted that, although fixed charge holders have greater rights to directly initiate insolvency proceedings than do American secured creditors, the difference is unimportant. American secured creditors can easily initiate insolvency proceedings indirectly by proceeding against their collateral.

The holders of floating charges have even greater rights in the initiation of insolvency proceedings than do the holders of fixed charges. (317) The holder of a fixed charge must have court approval to initiate; (318) the holder of a qualifying floating charge does not need court approval. Unlike the holder of a fixed charge, the holder of a floating charge who initiates an Administration can choose the insolvency practitioner who will serve as administrator. (319) Unlike a fixed charge holder, a floating charge holder can apply to remove a debtor company from compulsory Winding-up into Administration. (320) Together, these rights confer on floating charge holders considerable control over their insolvent debtors. They may partly explain the British banker saying reported by Westbrook: "The fixed charge for priority; the floating charge for control." (321) As previously noted, however, the additional control

does not easily translate into a higher recovery, because the administrator chosen is required to conduct the case in the interests of all parties, not the floating charge holder's interests. (322)

2. Administrative Expenses

Administrative expenses are the expenses of the insolvency process. In both the English and American systems, they include the expenses of operating the business during the insolvency case and the fees and out-of-pocket expenses of some of the professionals who work during the insolvency case.

For purposes of this analysis, they do not include the expenses of preserving and disposing of collateral. As stated by Lord Millett in Buchler v. Talbot:.

   The costs of realising a particular property, however, must be
   distinguished from the general expenses of the winding up or
   receivership. The costs of realisation are deductible from the
   proceeds of the property realised, whether it is realised by the
   liquidator or the receiver, for it is only the net proceeds
   of the property which are comprised in the winding up or
   receivership as the case may be.(323)

Expenses of preserving and disposing of collateral were discussed in Part III.C., above.

In the American system, secured debts have priority over administrative expenses. (324) In the English system, fixed charges have priority over administrative expenses, (325) but floating charges are subordinate to administrative expenses. The latter is true even if the floating charge crystallized prior to insolvency. (326) These priorities are, by statute, applicable in both Administration (327) and Winding-up. (328)

The subordination of floating charges to administrative expenses causes the English system to operate differently from the American system. Neither system provides significant public funding for the administration of particular estates. In either country, a company with no unencumbered assets with which to pay insolvency professionals may be unable to reorganize or liquidate in insolvency proceedings. (329) A common strategy is to deplete or fully encumber a company's assets before placing the company in bankruptcy, leaving no assets available to pay administrative expenses. (330) The insolvency case will be dismissed and the company liquidated through less-effective procedures. The resulting losses may be substantial.

Most businesses have revolving assets. Under Spectrum, those assets cannot be encumbered by fixed charges. In most cases, those unencumbered assets assure the availability of at least some funding for the continued operation of a viable business, the orderly liquidation of a non-viable one, the bringing of necessary litigation on behalf of the estate, (331) and the general functioning of the insolvency process. (332) That increases the likelihood that the insolvency system can function as intended.

The American rule does not assure the availability of funds to pay administrative expenses. Most debtors in need of insolvency proceedings have already fully encumbered their assets. (333) Because they have no funds with which to pay administrative expenses, many are unable to file and are liquidated. (334) Others find a work-around. The owners of the business may fund the insolvency proceeding, either because they personally guaranteed debts or because they seek to buy the business back from the bankruptcy court at a discount. (335) Secured creditors may agree to "carve-out" some portion of the collateral to fund a reorganization or liquidation that has been scripted to the secured creditors' requirements. (336) If funds are unavailable to pay bankruptcy professionals to investigate the debtor's financial affairs, the obligation to conduct such an investigation routinely goes unfulfilled. (337) Thus, in the common situation in which the debtor's assets are fully encumbered, the American insolvency system is subject to manipulation.

3. Preferential unsecured debts

In both the English and American systems, some unsecured debts that do not have priority in the absence of insolvency proceedings are given priority in their presence. In the English system, these debts are principally obligations owing to, or payable on behalf of, employees for back pay, benefits, or pension contributions. They are referred to as "preferential unsecured debts." (338) In the American system these debts cover a broader range, include some debts owing to or on behalf of employees for pay or benefits, and are referred to as "bankruptcy priority claims." (339)

In the American system, bankruptcy priority claims are subordinate to secured claims. (340) In the English system, preferential unsecured debts are subordinate to fixed charges, but have priority over floating charges in both administration (341) and liquidation. (342) The probable result is that preferential unsecured debts are more often paid in English than in American insolvencies.

4. General Unsecured Creditor Carve-outs

As previously noted, English law creates an insolvency carve-out from floating charge collateral in favor of general unsecured creditors. To the extent of the "prescribed part," general unsecured creditors rank ahead of floating charge holders. The Prescribed Part Order specifies that extent:

(1) The prescribed part of the company's net property to be made available for the satisfaction of unsecured debts of the company ... shall be calculated as follows--

(a) where the company's net property does not exceed 10,000 [pounds sterling] in value, 50% of that property; (343)

(b) subject to paragraph (2), where the company's net property exceeds 10,000 [pounds sterling] in value the sum of--

(i) 50% of the first 10,000 [pounds sterling] in value; and

(ii) 20% of that part of the company's net property which exceeds 10,000 [pounds sterling] in value.

(2) The value of the prescribed part of the company's net property to be made available for the satisfaction of unsecured debts of the company pursuant to [the statutory provision] shall not exceed 600,000 [pounds sterling]. (344)

AS of this writing, the exchange rate is that 1 [pounds sterling] is equal to $1.57. The Insolvency Act requires that in both administration and liquidation the prescribed part be paid to unsecured creditors before any distributions are made to floating charge holders. (345)

Carve-outs from secured creditors' collateral in favor of unsecured creditors exist under the laws of many other countries. (346) The United States is not, however, among them. Professor Elizabeth Warren proposed a carve-out for the United States that would have applied in or out of insolvency proceedings. (347) Not a single member of the Uniform Commercial Code drafting committee thought it should even be considered. (348) A few American bankruptcy courts have imposed such a carve-out informally, as a condition of bankruptcy relief in cases the filing of which might not otherwise have been appropriate. (349) As one such court noted:

"Historically, bankruptcy courts do not view themselves as an alternative to a state court foreclosure process. That is to say if the DIP or Trustee is proposing a sale where the only parties to benefit are the secured creditors and the professionals, the court will generally disapprove the sale. To that end, sellers should propose a 'carve out' for priority or unsecured creditors. This carve out can range from 1% to over 20% ... [.] One can also reasonably anticipate that in sales where there are significant issues about employee retention, courts may be sympathetic to a reduction in the proposed carve out." (350)

Such imposition is, however, rare. Generally speaking, the American system is one in which the priority of secured creditors over unsecured creditors remains absolute.


English charges are often portrayed as fundamentally different from American security interests. (351) But, as we have shown in this Article, the two function in essentially the same way. In both countries, creditors generally require that their debtors grant security interests in all of the assets of their businesses. If the English security interest is in revolving assets--inventory, accounts receivable, and bank deposits--it can, as a practical matter, be only a floating charge. If it is in other assets, it can be both a floating charge and a fixed charge. Typically, the result is that the English secured creditor has a floating charge on the revolving assets and a fixed charges on the capital assets. (352) Together, the charges combine to cause all of the assets to secure all of the debt.

Following any necessary registration, American security interests and English fixed charges have priority in existing and after-acquired collateral. Their priority is over later-created security interests, the liens of judgment creditors, and the rights of unsecured creditors.

In theory, English floating charges do not have priority over later-created security interests or lien creditors who obtain interests before the floating charges crystallize. But in practice, creditors employ the English floating charge in combination with negative pledges and automatic crystallization provisions to achieve a de facto priority. As a result, even before crystallization, the floating charge effectively reserves priority over the later lenders and purchasers. In 2005, the Law Commission recommended this de facto priority be converted to full, formal priority. (353) Adoption would eliminate this often-asserted difference between English and American security interests.

In both countries, debtors can sell inventory in the ordinary course of business, free of security interests. Absent insolvency proceedings, in neither country can the debtor sell capital assets without the secured creditor's consent.

Under current law in both countries, the filing of an insolvency proceeding stays enforcement of security interests. In both countries, the court has broad discretion to decide when the secured creditor can proceed with enforcement. In both countries, the security interest remains effective during the bankruptcy case and retains its priority, with three exceptions.

First, in the American system, the court can permit a new lender to prime prepetition secured creditors. An English court has no corresponding power. But the American adequate protection requirement limits the practical importance of this difference.

Second, in the American system, the court can cram down, over the objection of the secured creditor, a reorganization plan that pays less than the full amount owing to the secured creditor. In the English system the court can accomplish the same thing, but only somewhat awkwardly, by approving a sale of the collateral for less than the amount of the secured debt.

Third, the English system has a carve-out in favor of unsecured creditors. The American system does not. The English Carve-out is a statutory subordination of floating charges to expenses of administration, preferential creditors, and the unsecured creditors' prescribed share.

Both England and the United States award priority in order of time. Both use security interest registration systems to alert those who later deal with a debtor to the security interests and liens in favor of those who earlier dealt with the debtor. Neither set of registration systems employ state of the art technology. Both make exceptions to the registration requirement that result in secret liens.

There are, however, important differences in those registration systems. First, the registration exceptions are not, as one would expect, with respect to the same kinds of collateral. Second, English law creates an "invisibility period" of up to twenty-one days during which a charge has priority but cannot be discovered through a search. The American system generally gives effect to filings only when made, and so does not create such an invisibility period. (354) Third, the English view their system as serving the public. The Americans view their system as serving only debtors and secured creditors. As a result, the English make more information available to a wider range of users than do the Americans.

Our claim is that the differences we have identified between the English and American systems represent a range of policy choices within which reform is practical. To recommend the nature of that reform requires another step. Researchers must evaluate the alternative functions that have been shown to exist. That evaluation, though in some respects already under way, is beyond the scope of this Article.

We nevertheless offer some preliminary observations. Both secured and unsecured creditors perform the function of lending money. Whether secured creditors perform some additional function, such as monitoring, remains unclear. Yet the American system gives secured creditors absolute priority over nearly every other party.

American policymakers did not reason their way to the conclusion that absolute priority was desirable. They adopted it because they could see no way to avoid it.

   The widespread nineteenth century prejudice against the floating
   charge was based on a feeling, often inarticulate in the opinions,
   that a commercial borrower should not be allowed to encumber all
   his assets present and future, and that for the protection not only
   of the borrower but of his other creditors a cushion of free assets
   should be preserved. That inarticulate premise has much to
   recommend it. This [a]rticle decisively rejects it not on the
   ground that it was wrong in policy but on the ground that it was
   not effective. In pre-Code law there was a multiplication of
   security devices designed to avoid the policy: field warehousing,
   trust receipts, factor's lien acts and so on. The cushion of free
   assets was not preserved. In almost every state it was possible
   before the Code for the borrower to give a lien on everything he
   held or would have. There have no doubt been sufficient economic
   reasons for the change. This [a]rticle, in expressly validating the
   floating charge, merely recognizes an existing state of things.

Grant Gilmore, the principal draftsman of Article 9 later famously asked "does it make any sense to award everything to a secured party who stands idly by while a doomed enterprise goes down the slippery slope into bankruptcy?" (356)

On the English side, the critique has been even sharper. Addressing the floating charge, the English Cork Report concluded that it "is capable of working great injustice" (357) and "had given rise to a widespread and long-standing sense of grievance in the commercial community." (358) The report continued:

   [t]he matter for wonder is that such a device should ever have been
   invented by a Court of Equity. It is not easy to discern on what
   principle of equity the holder of a floating charge should obtain
   security over goods for which his money has not paid, in priority
   to the claim of the unpaid supplier of the goods. (359)

The secured credit carve-outs adopted in England and many other legal systems (360) are the principal response to these perceived inequities. To the extent it is effective, the English Carve-out solves the problem of financing the operation of the insolvency system, insures the employees of payment of at least part of their wages without requiring public funds, and restores more appropriate incentives to business owners by forcing the maintenance of a "cushion of assets."

The question raised by the Article 9 drafters in the comment cited earlier--whether it is possible to force maintenance of a cushion of assets--has not been answered. Professor Armour has argued that the English Carve-out has not made floating lien collateral available to unsecured creditors, but merely caused debtors to avoid the Calve-out by selling their accounts receivable rather than by borrowing against them. (361) He charges that "the statutory scheme is an expensive, and not particularly effective, way of protecting the interests of its 'beneficiaries[.']" (362) This charge should be a principal focus of future research.

With respect to the filing system, there seems to be a consensus that security interests should rank in order of filing and have priority as of the date of filing. The key policy choice remaining is between the American view--that security agreements should be private because the filing system exists only for the benefit of secured creditors and their debtors--and the English view that security agreements should be public because the filing system exists for the benefit of everyone affected by security interests. We prefer the English view because it better enables affected parties to adjust to the harsh reality of secured creditor privilege.

With respect to cramdown, we are inclined toward the American view. In reorganization in either country, the debtor can, with court approval, sell the collateral. Thus the debtor can limit the secured creditor's recovery to the value of the secured creditor's collateral, plus the secured creditor's pro rata share of the estate with respect to the uncollateralized portion of its claim. That is the same limit cramdown imposes on the secured creditor. The virtue of cramdown is that it strips the secured creditor of its "hold-up" rights. By "hold-up rights" we mean the right of the secured creditor to veto a plan that pays the secured creditor as much as the secured creditor would get through sale. Because such a veto can destroy the value that would otherwise be available to pay the unsecured creditors, its threat can enable the secured creditor to demand more than its legal entitlement. In the countries with which we are familiar, insolvency law has evolved steadily in opposition to secured creditor hold-up rights. (363) The American cramdown is simply the logical ending point for that evolution.

Comparison of legal systems that use sharply different doctrinal explanations can be difficult. In this Article, we have demonstrated that the systems approach can provide a solution to this problem in at least some circumstances. Even the systems with the sharpest doctrinal differences may exhibit surprising similarities in function. Despite their doctrinal differences, the security systems of England and the United States function in essentially the same ways. To understand one of these systems functionally is, in a very real sense, to understand them both.

(1) 4 JAMES J. WHITE & ROBERT S. SUMMERS, UNIFORM COMMERCIAL CODE, [section] 31-2 (6th ed. 2010) ("[I]t is enough for the debtor to write on the back of an envelope, 'I hereby grant bank a security interest in my cattle, John Jones.").

(2) E.g., First Nat'l Bank of Ind. v. Gabonay, 545 N.E.2d 1130, 1133 (Ind. Ct. App. 1989) ("The Bank's security interest in the corporation's personal property was perfected long before the three months preceding the corporation's demise when the employees' claim for unpaid wages accrued.").

(3) E.g., Les Realty Corp. v. Hogan, 714 A.2d 366, 370 (N.J. Super. Ct. Ch. Div. 1998) ("[C]hild support judgments are not given any special treatment in so far as priority of liens and are therefore subject to the general rule of 'first in time, first in right.'").

(4) E.g., United States v. McDermott, 507 U.S. 447, 449 (1993) ("Federal tax liens do not automatically have priority over all other liens. Absent provision to the contrary, priority for purposes of federal law is governed by the common-law principle that 'the first in time is the first in right.'" (citation omitted)).

(5) E.g., Bank Leumi Trust Co. of N.Y. v. Liggett, 496 N.Y.S.2d 14, 16 (App. Div. 1985) (stating that "[i]t has long been established that first in time priority obtains as between mortgages and judgments," and awarding priority to mortgage over judgment for fraudulent transfer).

(6) E.g., People v. Green, 22 Cal. Rptr. 3d 736, 738 (Ct. App. 2004) (holding that a criminal defendant's attorney's security interest for attorneys' fees had priority over the state's claim pursuant to California's "Freeze-and-Seize Law").

(7) E.g., Ninth Dist. Prod. Credit Ass'n v. Ed Duggan, Inc., 821 P.2d 788, 797 (Colo. 1991) ("The UCC priority system thus reflects the legislative judgment that the value of a predictable system of priorities ordinarily outweighs the disadvantage of the system's occasional inequities.").

(8) The principal exception is that property tax liens have priority over earlier-perfected security interests and mortgages. E.g., ALASKA STAT. [section] 29.45.300(b) (2012) ("Property taxes, together with penalty and interest, are a lien upon the property assessed, and the lien is prior and paramount to all other liens or encumbrances against the property.").

(9) David W. Leebron, Limited Liability, Tort Victims, and Creditors, 91 COLUM. L. REV. 1565, 1646 (1991). On the English side, Gerard McCormack stated:

   The question arises why the law should permit the taking of
   security. Three justifications are usually offered.

   The first reason is based on freedom of contract: security is seen
   as resenting a fair exchange for the loan. In other words, the
   secured creditor has bargained for rights of a proprietary nature
   over the debtor's property whereas the general creditors have not.


(10) U.C.C. [section] 9-201(a) (2012).

(11) See, e.g., Elizabeth Warren, Essay, Bankruptcy Policymaking in an Imperfect World, 92 MICH. L. REV. 336, 354 (1993) ("Because involuntary creditors, such as tort victims and environmental cleanup funds, were unable to negotiate in advance for the kind of superior treatment at state law that secured creditors demanded, they would likely come into the claims process only after others had taken the most valuable assets.").


(13) Steven L. Harris & Charles W. Mooney, Jr., A Property-Based Theory of Security Interests: Taking Debtors' Choices Seriously, 80 VA. L. REV. 2021, 2051 (1994) (footnotes omitted).

(14) See, e.g., Lawrence Ponoroff & F. Stephen Knippenberg, Having One's Property and Eating It Too: When the Article 9 Security Interest Becomes a Nuisance, 82 NOTRE DAME L. REV. 373, 374-75 (2006) (arguing that, under reigning conceptualization of security interest as property, "secured parties are figures of privilege among all creditors, enjoying a pervasive 'property priority' under state law and even in bankruptcy.").

(15) See, e.g., Louise Gullifer & Jennifer Payne, The Characterization of Fixed and Floating Charges, in COMPANY CHARGES: SPECTRUM AND BEYOND 51, 56 (Joshua Getzler & Jennifer Payne eds., 2006) (discussing three different theories that have been put forward regarding whether a floating lien is "proprietary").

(16) See U.C.C. [section] 9-623 (2012) (granting to debtors the right to redeem collateral by paying the debt at any time prior to the secured party's disposition of the collateral).

(17) See Jonathan C. Lipson, Secrets and Liens: The End of Notice in Commercial Finance Law, 21 EMORY BANKR. DEV. J. 421, 426 (2005) ("Article 9 of the UCC ... appears increasingly tolerant of secret liens." (footnote omitted)); Lynn M. LoPucki, The Unsecured Creditor's Bargain, 80 VA. L. REV. 1887, 1891 (1994) ("[T]he deceptive nature of security enables secured creditors and debtors to extract a ... subsidy from relatively uninformed unsecured creditors who predictably miscalculate their likelihoods of recovery."); Xuan-Thao Nguyen, Collateralizing Intellectual Property, 42 CA. L. REV. 1, 29 (2007) ("The concept of secured financing with intellectual property assets is deceptively simple....").

(18) See Tramp. Equip. Co. v. Guar. State Bank, 518 F.2d 377, 381 (10th Cir. 1975) ("The ostensible ownership exercised through possession is demonstrated through simple physical control. One who controls the collateral possesses it, and leads others to believe it is his." (emphasis omitted) (quoting In re Automated Bookbinding Servs., Inc., 471 F.2d 546, 552 (4th Cir. 1972) ("Exercise of ... ostensible ownership could perpetrate fraud on potential creditors who, not being able to know of the creditor's security interest, would think the collateral belonged to the debtor."))).

(19) See, e.g., LAW COMMISSION, REGISTRATION OF SECURITY INTERESTS, CONSULTATION PAPER NO. 164 [paragraph] 1.9 (2002), available at docs/cp164_Company_Security_Interests_Consultation.pdf ("The risk of the impression of 'false wealth' and the lack of a means whereby the existence of non-possessory secured lending could be discovered resulted in the introduction of the requirement to register the existence of many non-possessory securities, whether created by companies or by individuals.").

(20) Prominent recent examples of such liability-producing activities were the BP-Deepwater Horizon oil spill and the securitization of mortgage debt that precipitated the financial panic of 2008.

(21) See Lynn M. LoPucki, The Death of Liability, 106 YALE L.J. 1, 14-19 (1996) (explaining the strategy of judgment proofing through secured debt).

(22) The UCC provides that "[t]he existence of a security interest, agricultural lien, or authority given to a debtor to dispose of or use collateral, without more, does not subject a secured party to liability in contract or tort for the debtor's acts or omissions." U.C.C. [section] 9-402 (2012).

(23) See generally Lynn M. LoPucki, The Essential Structure of Judgment Proofing, 51 STAN. L. REV. 147 (1998) (arguing that current law allows businesses, especially large businesses, to successfully judgment-proof); S. Shavell, The Judgment Proof Problem, 6 INT'L REV. L. & ECON. 45 (1986) (using a theoretical model of accidents to explore the problem of judgment proofing).

(24) See Jay Lawrence Westbrook, The Control of Wealth in Bankruptcy, 82 TEX. L. REV. 795, 843-52 (2004) (explaining the secured creditor's disincentive to maximize value for the benefit of other claimants).

This inefficiency can be mitigated in a variety of ways. The government can require the purchase of insurance. LoPucki, supra note 21, at 71-88. The government can impose criminal liability on individuals for the irresponsible managers and imprison them. The irresponsible management may happen to affect the value of the collateral, giving the secured party some incentive to prevent it. The secured debt may be less than the full value of the collateral, leaving the debtor with an equity to be concerned about. These potential mitigants are, however, rarely capable of overcoming the fundamental inefficiency of secured credit. The judgment-proofing tendency of secured credit virtually always distorts incentives to some degree.

(25) Lynn M. LoPucki & Walter O. Weyrauch, A Theory of Legal Strategy, 49 DUKE L.J. 1405, 1430 (2000) ("Delivered law is the pattern of outcomes the legal system delivers.").

(26) Zweigert and Kotz explain the starting point for our approach:

   The basic methodological principle of all comparative law is that
   of functionality.... Incomparables cannot usefully be compared, and
   in law the only things which are comparable are those which fulfill
   the same function.... The proposition rests on what every
   comparatist learns, namely that the legal system of every society
   faces essentially the same problems, and solves these problems by
   quite different means though very often with similar results. The
   question to which any comparative study is devoted must be posed in
   purely functional terms; the problem must be stated without any
   reference to the concepts of one's own legal system.

KONRAD ZWEIGERT & HEIN KOTZ, INTRODUCTION TO COMPARATIVE LAW 34 (3d ed. 1998). See generally Lynn M. LoPucki, The Systems Approach to Law, 82 CORNELL L. REV. 479, 514-16 (1997) (describing the application of this approach to a comparison of U.S. and Canadian reorganization).

(27) See Lynn M. LoPucki & George G. Triantis, A Systems Approach to Comparing U.S. and Canadian Reorganization of Financially Distressed Companies, 35 HARV. INT'L L.J. 267, 269 (1994) (reporting "striking similarities in function" between the U.S. and Canadian reorganization regimes). Zweigert and Kotz state:

   [T]he comparatist can rest content if his researches through all
   the relevant material lead to the conclusion that the systems he
   has compared reach the same or similar practical results, but if he
   finds that there are great differences or indeed diametrically
   opposite results, he should be warned and go back to check again
   whether the terms in which he posed his original question were
   indeed purely functional....

ZWEIGERT & KOTZ, supra note 26, at 40.

(28) McCORMACK, supra note 9, discusses both English and American secured transactions law, but does so in largely separate essays. There is little point-by-point comparison. The same is true of Nick Segal, The Effect of Reorganization Proceedings on Security Interest: The Position Under English and U.S. Law, 32 BROOK. J. INT'L L. 927 (2007). Both describe the English and American legal regimes, but neither attempts to explain what is the same or different about them.

(29) English law recognizes mortgages, pledges, contractual liens, and equitable charges (fixed or floating). See ROYSTON MILES GOODE, LEGAL PROBLEMS OF CREDIT AND SECURITY 5 (3rd ed. 2003). American law recognizes a variety of security interests that have been excluded from Article 9 coverage, including security interests in insurance, noncommercial tort claims, and compensation of employees. U.C.C. [section] 9-109(d)(3), (8), (12) (2012).

(30) LAW COMMISSION, supra note 19, [paragraph] 2.5 n.10.

(31) U.C.C. [section] 9-203(a)-(b) (3) (A) (2012).

(32) Law of Property (Miscellaneous Provisions) Act, 1989, c. 34, [section] 2(1) ("A contract for the sale or other disposition of an interest in land can only be made in writing...."); id. [section] 2(6) ("In this section ... 'interest in land' means any estate, interest or charge in or over land....").

(33) U.C.C. [section] 9-102(a)(7) (2012) (defining "authenticate").

(34) ROY GOODE, GOODE ON COMMERCIAL LAW 671 (Ewan McKendrick ed., 4th ed. 2010) ("[I]f the intended security interest is an interest in land, it must be made in writing and signed by or on behalf of both parties...."); LAW COMMISSION, COMPANY SECURITY INTERESTS, CONSULTATION PAPER No. 176, [paragraph] 3.76 ("Present law does not require writing for every kind of non-possessory security agreement.").

(35) LAW COMMISSION, supra note 19, [paragraph] 2.5 n.10.

(36) U.C.C. [section] 9-203(b)(3)(A) (2012).

(37) Id. [section] 9-108(a).

(38) LAW COMMISSION, supra note 19, [paragraph] 2.5 n.10.

(39) U.C.C. [section] 9-203(b)(2) (2012).

(40) LAW COMMISSION, supra note 19, [paragraph] 2.5 n.10.

(41) U.C.C. [section] 9-203(b)(1) (2012).

(42) LOPUCKI & WARREN, supra note 12, at 143 ("Although [[section] 9-203(b)(1)] does not say who must give value, the assumption seems to be that it is the creditor.").

(43) In re Pan., N.Z., and Austl. Royal Mail Co. (1870) 5 Ch. App. 318 (holding that where a company had charged its "undertaking, and all sums of money arising therefrom," the word "undertaking" signified not merely the income from the business but also present and future property of the company); ROBERT PENNINGTON, COMPANY LAW 163 (2009) ("The floating charge enabled companies effectively to create a security over their business undertakings as a going concern....").

(44) U.C.C. [section] 9-108 (2012).

(45) See, e.g., Nat'l Ropes, Inc. v. Nat'l Diving Serv., Inc., 513 F.2d 53, 57 (5th Cir. 1975) (describing collateral in security agreement as "all property of the undersigned of every name and nature whatsoever" not sufficient); ProGrowth Bank, Inc. v. Wells Fargo Bank, N.A., 2009 WL 2982939, *3 (D. Minn. Sept. 14, 2009) ("[U]se of such an all-encompassing (or 'supergeneric') provision is not permitted to 'describe' the collateral when granting a security interest as it 'does not reasonably identify the collateral.'" (citation omitted)).

(46) See, e.g., Donald v. Madison Indus., Inc., 483 F.2d 837, 840 (10th Cir. 1973) (upholding a description that began "[a]ll items of personal property," listed categories, and ended "[t]his is intended to cover everything owned by this business"); Rosenberg v. Rudnick, 262 F. Supp. 635, 636 (D. Mass. 1967) (finding a valid grant of security over inventory where the security agreement described the collateral as "all the equipment, machinery, fixtures, inventory and accounts receivable of the debtor, together with all additions thereto and all property now or hereafter substituted therefor or otherwise acquired in the ordinary course of business").

(47) Harris & Mooney, supra note 13, at 2064 ('[W]e see nothing unfair or untoward about permitting a secured creditor to go to the head of the line when earlier-in-time creditors have not chosen to obtain security themselves and all creditors have an opportunity to discover the existence of the secured creditor.").

(48) U.C.C. [section] 9-322(a) (1) (2012) ("Conflicting perfected security interests ... rank according to priority in time of filing or perfection. Priority dates from the earlier of the time a filing covering the collateral is first made or the security interest ... is first perfected, if there is no period thereafter when there is neither filing nor perfection.").

(49) Langley v. FDIC, 484 U.S. 86, 95 (1987).

(50) Macmillan Inc. v. Bishopsgate Inv. Trust Place (No. 3), [1995] W.L.R. 978 (Ch. D) at 1000. This rule was first articulated in Rice v. Rice, 2 Drew 73, 78 (1853) ("[A]s between persons having only equitable interests, if their equities are in all other respects equal, priority of time gives the better equity...." (emphasis omitted)).

(51) See LOPUCKI & WARREN, supra note 12, at 537 (noting that rule ranking mortgages in the order of grant "has a much wider effect, because the priority thus gained is not so easily upset by the recording of one of the mortgages").

(52) Palmer v. Carey, [1926] A.C. 703 (HL) at 706-07 (appeal taken from Austl.).

(53) The Act provides:

(1) The period allowed for registration of a charge created by a company is--

(a) 21 days beginning with the day after the day on which the charge is created, or

(b) if the charge is created outside the United Kingdom, 21 days beginning with the day after the day on which the instrument by which the charge is created or evidenced (or a copy of it) could, in due course of post (and if dispatched with due diligence) have been received in the United Kingdom.

Companies Act, 2006, c. 46, [section] 870.

(54) The Act provides:

(1) If a company creates a charge to which section 860 applies, the charge is void (so far as any security on the company's property or undertaking is conferred by it) against--

(a) a liquidator of the company,

(b) an administrator of the company, and

(c) a creditor of the company,

Id. [section] 874.

(55) LAW COMMISSION, supra note 19, [paragraph] 2.37


(57) See Companies House, Form MG07, CHFP000, 05/10 Version 4.0, available at the_registration_of_a_charge_to_secure_a_series_of_debentures.pdf (last visited Jan. 16, 2013). Item 1 on that form makes submission of both the Company number and the Company name mandatory. Id.

(58) See generally Aneta Ferguson, The Trademark Filing Trap, 49 IDEA 197 (2009) (finding empirically that 15% of secured creditors filed notice in the wrong filing system and failed to file in the right system, making their security interests unenforceable against third parties); Rachelle Soderstrom, An Imperfect System of Perfection: Fixing the Debtor Name Error Problem (unpublished paper 2010) (finding empirically that 17% of filings in the Vermont UCC filing system were ineffective).

(59) For example, Maine combined UCC and incorporation records in a manner that allows users to file against a corporation the user selects from among those registered in the state. The system is at shtml. Select "File a Financing Statement--Form UCC-1, then select "Standard UCC Lien," then select "Registered Organization," then enter "Pickles" to see the names of Maine corporations that contain "Pickles."

(60) See AMENDMENTS TO UNIFORM COMMERCIAL CODE ARTICLE 9, July 21, 2010, at 63-64 (specifying deletion of U.C.C. [section] 9-516(h)(5)(C)(iii) that had required, as a condition of filing, "an organizational identification number for the debtor or indicate that the debtor has none").

(61) See id. at 49 (declaring in U.C.C. [section] 9-503(a)(1) that financing statement names are "sufficient" only if the financing statements provide the names of debtors as indicated on the "public organic record[s] most recently filed"); id. at 14 (defining "public organic record" to mean "a record consisting of the record initially filed with or issued by a State ... to form or organize an organization" in U.C.C. [section] 9-102(a) (68)). Most states charge a fee for a copy of the "public organic record" making the search cumbersome.

(62) Companies Act, 2006, c. 46, [section] 860(7)(g) ("This section applies to ... (g) a floating charge on the company's property or undertaking...."). An exception to this rule arises under Regulation 4 of the Financial Collateral Arrangements (No. 2) Regulations 2003 (SI 2003/3226), which implements Directive 2002/47/EC of the European Parliament and of the Council of June 6, 2002 on financial collateral arrangements, as amended, into English law. The regulation exempts floating charges involving a "security financial collateral arrangement" (as defined in SI 2003/ 3226, Regulation 3) from the registration requirements of the Companies Act. However, the only English case to interpret this exception found that to constitute a "security financial collateral arrangement" control by the chargee was required. See, Gray & Ors v G-T-P Group Ltd Re F2G Realisations Limited (in Liquidation) [2010] EWHC 1772 (Ch). According to SI 2003/3226, Regulation 3, for a floating charge to constitute a "security financial collateral arrangement" the floating charge must be "registered or otherwise designated so as to be in the possession or under the control of the collateral-taker." This has been interpreted by at least one English commentator as meaning that the "definition of 'security financial collateral arrangement' and of 'security interest' in the Regulations means that they do not apply to floating charges before the charge has crystallised and some control over the collateral has passed to the charge holder." G MCCORMACK, REGISTRATION OF COMPANY CHARGES (3d ed. 2009). We agree with the view expressed by Professor McCormack. Given the limited applicability of this exception (particularly given that it only applies to crystallized floating charges, which arguably are not floating charges at all), this Article treats all floating charges as needing to be registered.

(63) The Act provides:

(1) A company that creates a charge to which this section applies must deliver the prescribed particulars of the charge, together with the instrument (if any) by which the charge is created or evidenced, to the registrar for registration before the end of the period allowed for registration....

(7) This section applies to the following charges--

(a) a charge on land or any interest in land ...,

(b) a charge created or evidenced by an instrument which, if executed by an individual, would require registration as a bill of sale,

(c) a charge for the purposes of securing any issue of debentures,

(d) a charge on uncalled share capital of the company,

(e) a charge on calls made but not paid,

(f) a charge on book debts of the company,

(g) a floating charge on the company's property or undertaking,

(h) a charge on a ship or aircraft, or any share in a ship,

(i) a charge on goodwill or on any intellectual property.

Companies Act, 2006, c. 46, [section] 860.

(64) See Paul & Frank Ltd. v. Discount Bank (Overseas) Ltd., [1967] Ch. 348 (holding that a fixed charge over an insurance policy did not require registration and was valid against the liquidator of the company); LOUISE GULLIFER & JENNIFER PAYNE, CORPORATE FINANCE LAW 267 (2011).

(65) See Arthur D Little Ltd. (In administration) v. Ableco Finance LLC, [2003] Ch. 217 (holding that a charge on shares was a fixed charge not requiring registration); ELLIS FERRAN, PRINCIPLES OF CORPORATE FINANCE LAW 399 (2008).

(66) LAW COMMISSION, supra note 19, [paragraph] 3.10.

(67) See U.C.C. [section] 9-109(d)(8) (2012) (excluding security interests in insurance from Uniform Commercial Code coverage); id. [section] 9-310(b)(5), (6), (8) (excusing filing to perfect a security interest in securities).

(68) See, e.g., Lipson, supra note 17, at 421 ("[R]ecent revisions to Article 9 of the UCC ... tolerate secret liens that may arise on such increasingly important assets such as data, intellectual property, bank accounts, and securities.").

(69) U.C.C. [section] 9-310(b) (2012) ("The filing of a financing statement is not necessary to perfect a security interest ... (8) in deposit accounts...."); id. [section] 9-309(1) ("The following security interests are perfected when they attach: (1) a purchase-money security interest in consumer goods....").

(70) Id. [section] 9-314(a) ("A security interest in ... deposit accounts ... may be perfected by control of the collateral under Section ... 9-104....").

(71) Id. [section] 9-104(a)(2).

(72) Id. [section] 9-104(b).

(73) Id. [section] 9-342.

(74) Id. [section] 9-310(b) (8) ("The filing of a financing statement is not necessary to perfect a security interest ... (8) in ... investment property ... which is perfected by control under section 9-314."). Section 9-314(c) states that "[a] security interest in investment property is perfected by control under Section 9-106." Id. [section] 9-314(c). Section 9-106 provides that a "person has control of a certificated security, uncertificated security, or security entitlement as provided in Section 8-106." Id. [section] 9-106. Section 8-106(f) provides:

   A purchaser who has satisfied the requirements of subsection (c) or
   (d) has control, even if the registered owner in the case of
   subsection (c) or the entitlement holder in the case of subsection
   (d) retains the right to make substitutions for the uncertificated
   security or security entitlement, to originate instructions or
   entitlement orders to the issuer or securities intermediary,
   or otherwise to deal with the uncertificated security or security

Id. [section] 8-106.

(75) A fixed charge could be taken over an account that is segregated and blocked, that is, where control over the account rests with the creditor. Such fixed charges are, however, difficult to administer, and, as a consequence, are used in limited contexts.

(76) See infra Part II.B.

(77) Companies Act, 2006, c.46, [section] 860(7)(g) (requiring registration of "a floating charge on the company's property or undertaking"). See supra note 62.

(78) U.C.C. [section] 1-201 (b) (35) (2012) ("'Security interest' includes any interest of ... a buyer of accounts...."); id. [section] 9-109(a)(3) ("[T]his article applies to ... a sale of accounts....."); id [section] 9-310(a) ("[A] financing statement must be filed to perfect all security interests....").

(79) Michael Bridge, England and Wales, in CROSS-BORDER SECURITY OVER RECEIVABLES 147, 166 (Harry C. Sigman & Eva-Maria Kieninger eds., 2009).

(80) LAW COMMISSION, supra note 19, [paragraph] 3.9 ("[R]egistration was originally introduced to provide information to the public about whether a company had charged its assets, in order to prevent it giving an impression of 'false wealth' by appearing to own assets that in fact were charged in favour of others."). But see id. [paragraph] 4.73 ("We provisionally propose that there should not be a general requirement to provide further information or a copy of the security agreement to a member of the public upon request, but we would welcome consultees' views.").

(81) Id. [paragraph] 2.21 (footnote omitted).

(82) Companies Act, 2006, [section] 875(1).

(83) Id. [section] 876(1).

(84) Id. [section] 876(2).

(85) Id. [section] 877(4).

(86) Id.

(87) U.C.C. [section] 9-210 cmt. 3.

(88) Id. [section] 9-502 cmt. 2.

(89) Typically, an American "notice filing" will include only the name and address of the debtor, the name and address of the creditor, and an indication of the collateral. See id. [section] 9-521(a) (official form for notice filing).

(90) See id. [section] 9-609(a) ("After default, a secured party ... may take possession of the collateral...."); id. [section] 9-609 (b) ("A secured party may proceed ... without judicial process, if it proceeds without breach of the peace.").

(91) See GOODE, supra note 34, at 680 ("The right to take possession ... invariably is[ ] expressly reserved in the security instrument, and is ... equally available, whether the creditor is the holder of a legal mortgage, an equitable mortgage or a charge.... If the security comprises goods which can be seized without entry on to the premises of the debtor, the creditor may use self-help, taking the goods without an order of the court...." (footnote omitted)).

(92) For the United States, see Spinks v. Equity Residential Briarwood Apartments, 90 Cal. Rptr. 3d 453, 480 (Ct. App. 2009) ("The statutes ... reflect a policy, with deep roots in English law, barring the use of forceful self-help to enforce a right to possession of real property and requiting instead the use of judicial process to gain possession." (quoting Glass v. Najafi, 92 Cal. Rptr. 2d 606, 608 (2000)) (internal quotation marks omitted). For England, see GOODE, supra note 34, at 680-81 ("[W]here the asset given as security is land, the creditor will ... appoint a receiver to take possession for him or apply for a possession order so as to avoid the possibility of a breach of the peace, as well as liability to prosecution if he were to make a violent entry.... [A] court order is necessary to enforce a tight to possession of land under a mortgage securing a regulated agreement within the Consumer Credit Act 1974...." (footnotes omitted)).

(93) For England, see Law of Property Act, 1925, 15 & 16 Geo. 5, c. 20, [section] 101, which provides:

(1) A mortgagee, where the mortgage is made by deed, shall, by virtue of this Act, have the following powers, to the like extent as if they had been in terms conferred by the mortgage deed ... :

(i) A power, when the mortgage money has become due, to sell ... the mortgaged property, or any part thereof, either subject to prior charges or not....

(94) For the United States, see U.C.C. [section] 9-601(a) ("A secured party [ ]may reduce a claim to judgment, foreclose, or otherwise enforce the claim [or] security interest ... by any available judicial procedure...."). For England, see Law of Property Act, 1925, [section] 91 ("(2).... [T]he court, on the request of the mortgagee ... may direct a sale of the mortgaged property ... (6) ... 'mortgaged property' includes the ... interest which a mortgagee would have had power to convey if the statutory power of sale were applicable."). See also id. [section] 205(1) (xvi) ("'Mortgage' includes any charge ... on any property for securing money or money's worth....").

(95) For the United States, see U.C.C. [section] 9-610(a) (stating that after default a secured party may sell or otherwise dispose of any or all of the collateral); id. [section] 9-615(a) ("A secured party shall apply ... the cash proceeds of disposition under Section 9-610 in the following order to [expenses of sale and] the satisfaction of obligations secured by the security interest ... under which the disposition is made...."). For England, see Law of Property Act, 1925, [section]105 ("The money ... received by the mortgagee, arising from the sale, after discharge of prior incumbrances to which the sale is not made subject, if any ... shall be ... applied by him, first, in payment of all costs ... and expenses properly incurred by him as incident to the sale ... and secondly, in discharge of the mortgage money, interest, and costs ... due under the mortgage; and the residue ... shall be paid to the person entitled to the mortgaged property ...."). See also id. [section] 205(1) (xvi) ("'Mortgage' includes any charge ... on any property for securing money or money's worth....").

(96) E.g., U.C.C. [section] 9-623(a) ("A debtor ... may redeem collateral."); id. [section] 9-623(b) ("To redeem collateral, a person shall tender ... fulfillment of all obligations secured by the collateral...."); id. [section] 9-623(c) ("A redemption may occur at any time before a secured party ... has disposed of collateral or entered into a contract for its disposition...."). On the English side, Ferran states:

   Any provision in the terms of a mortgage which purports to remove
   the mortgagor's right to redeem, or which would indirectly tend to
   have the effect of making the mortgage irredeemable, is regarded in
   equity as a 'clog' or 'fetter' on the equity of redemption and, as
   such, it is void. The principle that clogs on the equity of
   redemption are void applies to all types of mortgages and also to
   charges, including floating charges.

FERRAN, supra note 65, at 365-66 (footnotes omitted).

(97) Insolvency Act, 1986, c. 45, [section] 251 (purporting to define a floating charge as "a charge which, as created, was a floating charge"); id. [section][section] 40(1), 176A(9). That is not a definition of floating charge, but merely a statement that crystallizations will be ignored for most purposes in insolvency cases. See Smith (Adm'r of Cosslett (Contractors) Ltd.) v. Bridgend Cnty. Borough Council, [2002] 1 A.C. 336 (HL) at 357 (Lord Scott of Foscote L.J.) ("[T]here has never been any statutory definition of 'floating charge.' The definitions are all judicial ones and, in most cases, expressed in order to distinguish floating charges from fixed charges.").

(98) Roy Goode, The Case for Abolition of the Floating Charge, in COMPANY CHARGES: SPECTRUM AND BEYOND, supra note 15, at 21.

(99) [1903] 2 Ch. 284; aff'd sub nom. Illingworth v. Houldsworth, [1904] A.C. 355.

(100) In re Yorkshire Woolcombers Ass'n. Ltd., [1903] 2 Ch. at 295.

(101) GOODE, supra note 34, at 724. ("The concept underlying a floating charge is therefore one of a class of revolving assets....").

(102) Id.

(103) In re Yorkshire Woolcombers, [1903] 2 Ch. at 295.

(104) See, e.g., In re Croftbell Ltd., [1990] BCLC 844 (holding that a charge on subsidiary shares was floating despite the absence of regular turnover); In re ASRS Establishment Ltd., [2000] 2 BCLC 631 (holding that a charge over an escrow account was floating despite the account not being subject to fluctuation); Smith v. Bridgend Cnty. Borough Council, [2002] 1 A.C. 336 at 357 (holding that a charge on heavy duty coal-washing plants was floating despite the absence of turnover in the collateral).

(105) [2001] 2 A.C. 710.

(106) Id. [paragraph] 13.(Lord Millett L.J.).

(107) Id.

(108) In re Spectrum Plus Ltd., [2005] 2 A.C. 680, [paragraph] 107, (Lord Scott L.J.).

(109) In re Yorkshire Woolcombers Ass'n Ltd., [1903] 2 Ch. 284 at 294.

(110) Agnew v. Commissioner of Inland Revenue, [2001] 2 A.C. 710 at 719-20.

(111) Id. [paragraph] 13. (Lord Millett L.J.).

(112) On October 1, 2009, The Supreme Court replaced the Appellate Committee of the House of Lords as the highest court in the United Kingdom.

(113) In re Spectrum, [2005] 2 A.C. 680, [paragraph] 111 (Lord Scott).

(114) GOODE, supra note 34, at 726. See also FERRAN, supra note 65, at 378 ("The essence of the floating charge ... is that the assets that are the subject-matter of the security remain under the management and control of the [debtor].").

(115) The distinction between the English ordinary course and the American ordinary course is discussed infra notes 158-161 and accompanying text.

(116) GOODE, supra note 34, at 726.

(117) Id. See In re Spectrum, [2005] 2 A.C. 680, [paragraph] 80 ("There is no doubt that ... it is in law possible for a company to create a security consisting of a fixed charge over all its present and future book debts."). "Revolving assets" is synonymous in meaning to "circulating assets."

(118) George L. Gretton, Reception Without Integration? Floating Charges and Mixed Systems, 78 TUL. L. REV. 307, 315 (2003).

(119) See In re Spectrum, [2005] 2A.C. 680, [paragraph] 101 (Lord Scott LJ) ("[T]he lenders are usually in the stronger bargaining position and able to stipulate the terms to be included in the debenture which will constitute their security. So it is not in the least surprising to find attempts by lenders to obtain fixed charges as security rather than floating charges....").

(120) In re Woodroffes (Musical Instruments) Ltd., [1986] Ch. 366 at 377-78 ("The thinking behind the creation of [floating] charges has always been a recognition that a fixed charge on the whole undertaking and assets of the company would paralyse it and prevent it from carrying on its business...." (citing In re Florence Land and Public Works Co., Ex parte Moor [1878-79] 10 Ch. D. 530, at 541 (Sir George Jessel M.R.))).

(121) In re Spectrum, [2005] 2 A.C. 680, [paragraph] 139.

(122) Id. [paragraph] 138 (Lord Walker LJ.).

(123) Id. [paragraph] 140 (citations omitted).

(124) Addressing the credit agreement provisions regarding the accounts, Lord Hope stated "[t]here is no doubt that their effect was to prevent the company from entering into transactions with any third party in relation to the book debts prior to their collection. The uncollected book debts were to be held exclusively for the benefit of the bank." Id. [paragraph] 55.

(125) Id, [paragraph] 81 (Lord Scott L.J.) (quoting the provision).

(126) One states:

   [I]t would ... be necessary that the consent to the transfer to the
   current account was, for every transfer, an independent act of will
   by the chargee, so that the chargee was not under any obligation to
   permit transfers. There are ... practical problems with this.
   First, it is expensive and time-consuming for the chargee and
   secondly it has the effect that the chargor cannot be assured of
   having cash available to meet the expenses it incurs in the
   ordinary course of business.

GULLIFER & PAYNE, supra note 64, at 253-54 (footnotes omitted).

(127) In re Spectrum, [2005] 2 A.C. 680, [paragraph] 141 (Lord Walker L.J.). The preferential creditors are employees and funds for the payment of employees, including pension and health benefit funds. The policy appears to be that employees should be paid before floating charge holders. Rationales probably include (1) that employees frequently lack the ability to compete with floating charge holders in contracting and (2) the government might otherwise have to reimburse the employees through welfare payments.

(128) E.g. Michael Bridge, England and Wales in CROSS-BORDER SECURITY OVER TANGIBLES 125, 130 (Harry C. Sigman & Eva-Maria Kieninger eds., 2007) ("In recent times, the controls required for a fixed charge have been reemphasized, so that in practical terms it is impossible to take a fixed charge over a debtor's circulating capital." (footnotes omitted)).

(129) Goode, supra note 98, at 22.

(130) GOODE, supra note 34, at 726. "Fixed assets" are assets like equipment or land, which a debtor expects to hold on a long-term basis. "Circulating assets" are assets such as inventory/stock-in-trade, accounts/receivables, and crops. The debtor is constantly acquiring and disposing of these short-term assets. They represent the asset side of the debtor's working capital.

(131) In re Cimex Tissues, Ltd., [1994] BCLC 626 at 635.

(132) GOODE, supra note 34, at 726.

(133) See In re Spectrum Plus Ltd., [2005] 2A.C. 680,[paragraph] 108 (Lord Scott L.J.) ("[O]n the occurrence of a crystallization event, [e.g.,] liquidation, the [collateral] at that time would be subject to the fixed charge....").

(134) FERRAN, supra note 65, at 388 (footnotes omitted).

(135) "Default" is not defined in the U.C.C. Professors LoPucki and Warren define "default" as "the debtor's failure to pay the debt when due or otherwise perform the agreement between the debtor and creditor." LOPUCKI & WARREN, supra note 12, at 217. Early English cases used the term "default" to refer to what is now known as a "crystallization event." See, e.g., Evans v. Rival Granite, [1910] 2 K.B. 979, at 990 (Lord Williams L.J.) ("[The floating charge holder] may exercise his right[s] [over the collateral] whenever he pleases after default." (quoting The Governments Stock and Other Securities Investment Co. v. Manila Ry. Co., [1897] A.C. 81, at 86) (internal quotation marks omitted)).

(136) See infra Part IV (discussing the effect of crystallization on third parties).

(137) See Edward Nelson & Co. v. Faber & Co, [1903] 2 KB 367, at 376.

(138) See. In re Woodroffes (Musical Instruments) Ltd., [1986] Ch. 366, at 377-78.

(139) See In re Panama New Zealand and Australian Royal Mail Co., [1869-70] 5 Ch. App. 318, at 322-23.

(140) See Mercantile Bank of India Ltd. v. Chartered Bank of India, Australia & China, [1937] 1 All E.R. 231, at 240-41.

(141) See Evans v. Rival Granite, [1910] 2 K.B. 979, at 986-88, 1000.

(142) Insolvency Act, 1986, c. 45, sch. B1 [paragraph] 14.

(143) FERRAN, supra note 65, at 390 ("The commencement of administration proceedings in respect of a company in accordance with the Insolvency Act 1986 does not constitute an implied crystallizing event."); GULLIFER & PAYNE, supra note 64, at 244 & n.204 (stating that the appointment of an administrator "by the directors or by the court" does not result in crystallization because this does not constitute an "intervention by the chargee").

(144) In re Permanent Houses (Holdings) Ltd, [1988] BCLC 563, 567 (stating that "there [is] no conceptual reason why the parties should not agree that any specified event should cause the charge to crystallize"). See also In re Brightlife Ltd., [1987] Ch. 200 at 214-15 ("I do not think it is open to the courts to restrict the contractual freedom of parties to a floating charge on such grounds.... [A]rguments for and against the floating charge are matters for Parliament rather than the courts ... [the] limited and pragmatic interventions by the legislature make it ... wholly inappropriate for the courts to impose additional restrictive rules....").

(145) LAW COMMISSION, supra note 19, [paragraph] 2.44 ("Presumably the aim [of automatic crystallization clauses] is now ... to preserve the priority of a floating charge as against subsequent fixed charges.").

(146) FERRAN, supra note 65, at 390 ("[A]n automatic crystallization clause may be coupled with an express clause entitling its holder to de-crystallize it again.").

(147) For an example of the use of a de-crystallization clause, see the decision of the High Court of New Zealand in Covacich v. Riordan, [1994] 2 NZLR 502.

(148) FERRAN, supra note 65, at 390.

(149) Id.

(150) GOODE ON LEGAL PROBLEMS Or CREDIT AND SECURITY [paragraph] 4-57-59 (Louise Gullifer ed., 4th ed. 2008) [hereinafter GULLIFER, LEGAL PROBLEMS]. (151) The statutory period ranges between twelve months and two years ending with the onset of insolvency (unless new value was given for the charge at the time of its creation or re-creation). See Insolvency Act, 1986, c. 45, [section] 245.

(152) For an example of the use of a notice-crystallization clause, see In re Woodroffes (Musical Instruments) Ltd., [1986] Ch. 366, 377-78.

(153) FERRAN, supra note 65, at 389-90.

(154) In re Brightlife Ltd., [1987] Ch. 200, 207-08 (holding that a clause with the quoted language was enforceable).

(155) LAW COMMISSION, supra note 56, [paragraph] 3.49.

   If the company sells property that is subject to a charge, and the
   sale is not authorised by the [creditor], the buyer will take
   subject to the charge unless it [is] protected by one of the
   exceptions to the principle that a person cannot transfer a better
   rifle than he has. The [creditor]'s rights are not affected and it
   can enforce its rights against the buyer.

Id. (footnotes omitted)

(156) GOODE, supra note 34, at 664.

(157) U.C.C. [section] 9-315(a) (2012). ("(1) a security interest or agricultural lien continues in collateral notwithstanding sale, lease, license, exchange, or other disposition thereof unless the secured party authorized the disposition free of the security interest or agricultural lien; and (2) a security interest attaches to any identifiable proceeds of collateral.")

(158) Id. [section] 9-320(a).

(159) Id. [section] 9-320 cmt. 3. See United States v. Handy & Harman, 750 F.2d 777, 782 n.4 (9th Cir. 1984) ("The official text of U.C.C. [section][section] 1-201(9) and 9-307(1) (1977) is worded so that only buyers of goods that are inventory in the hands of the seller can

take the goods free of security interests."). But see In re Morristown Lincoln-Mercury, Inc., 25 B.R. 377, 388 (Bankr. E.D. Tenn. 1982) ("It is unnecessary for the court to classify the van as either inventory or non-inventory. The statutory definition of buyer in the ordinary course of business does not require a conclusion that the goods purchased were inventory. The fact is that Smith purchased a motor vehicle from a seller in the business of selling goods of that kind.").

(160) A "bulk sale" of inventory is a sale of all or large portion of the debtor's inventory, at a reduced price, to a competitor or dealer in inventories, rather than to a customer.

(161) See Stevenson v. Rogers, [1999] Q.B. 1028 at 1028 (holding that a sale by a fisherman of his old working boat was held to be made in course of business within section 14(2) of the Sale of Goods Act 1979); Brown, Sales of Goods in the Course of a Business, (1999) 115 L.Q.R. 384, 387 ("Undeniably, the position adopted in Stevenson is inflexible: a seller now sells goods in the course of a business where there is an isolated sale of goods which are not his principal stock-in-trade and other factors such as regularity of dealing or business proficiency are immaterial.")

(162) Heath v. Crealock, [1874] 10 Ch. App. 22 at 33 (stating that it "is a rule without exception, that from a purchaser for value without notice this Court takes away nothing which that purchaser has honestly acquired"); Pilcher v. Rawlins, [1872] 7 Ch. App. 259 at 268-69 (stating that "a purchaser for valuable consideration, without notice, obtaining, upon the occasion of his purchase, and by means of his purchase deed, some legal estate, some legal right, some legal advantage; and, according to my view of the established law of this Court, such a purchaser's plea of a purchase for valuable consideration without notice is an absolute, unqualified, unanswerable defence").

(163) See HUGH BEALE ET AL., THE LAW OF PERSONAL PROPERTY SECURITY 435 (2007) (stating that "[i]t seems generally agreed that purchasers in the ordinary course of business should not have constructive notice").

(164) LAW COMMISSION, supra note 19, [paragraph] 2.60. GULLIFER, LEGAL PROBLEMS, supra note 150, [paragraph] 2-29 ("[R]egistration is notice only to those who could reasonably be expected to search. This would normally exclude a buyer in the ordinary course of business....").

(165) LAW COMMISSION, supra note 19, [paragraph] 2.61 (footnotes omitted).

(166) [2004] EWHC 1517 (Ch). The case contains a detailed discussion of the law defining "ordinary course of business" per Judge Etherton. Id. at [paragraph][paragraph] 202, 216, and 227. See also Stevenson v. Rogers, [1999] Q.B. 1028 at 1028 (holding that a sale of a fishing boat by a fisherman was in the ordinary course of business).

(167) Ashborder, [2004] EWHC 1517 (Ch) at 635.

(168) LAW COMMISSION, supra note 56, [paragraph] 3.217 (footnotes omitted).

(169) Id. (footnote omitted).

(170) Beale and his coauthors state:

   It seems generally agreed that purchasers in the ordinary course of
   business should not have constructive notice but it is not entirely
   clear who are such purchasers. In particular, it is not clear
   whether it is limited to purchasers of stock-in-trade (inventory)
   or whether it includes purchasers of capital equipment.

BEALE ET AL., supra note 163, [paragraph] 13.04 at 435.

(171) U.C.C. [section] 9-315(a)(2) (2012).

(172) LAW COMMISSION, supra note 56, [paragraph] 3.51 (stating that "[i]f the sale was authorized ... because the ... chargee had consented to the particular disposition, the chargee's only claim will be to the proceeds"); see also Buhr v. Barclays Bank Place, [2001] EWCA Civ. 1223, [paragraph] [paragraph] 11, 39 (quoting Professor Goode and accepting as correct his statement that "security in an asset extends to the proceeds of sale of an authorized disposition by the debtor").

(173) Professors LoPucki and Warren provide the following example to illustrate how the value of collateral can multiply upon disposition in the United States:

   Nevertheless, the multiplication of collateral that can result from
   the rules of U.C.C. [section][section] 9-102(a) (12) and (64) and
   9-315(a) is striking. Assume, for example, that ZBank has a
   security interest in Jack's cow. Without authorization from ZBank,
   Jack sells the cow to Barbara for $2000. Zbank's security interest
   continues in the collateral (the cow) and also in the identifiable
   proceeds of that sale (the $2000). If Jack then uses the $2000 of
   proceeds to buy some beans, the beans will also be proceeds under
   U.C.C. [section] 9-102(a)(64) (recall that the proceeds of proceeds
   are proceeds) and Zbank's security interest will continue in the
   beans under U.C.C. [section] 9-315(a). ZBank can foreclose against
   the cow and the beans, and collect its money where it can.

LOPUCKI & WARREN, supra note 12, at 171.

(174) See, e.g., Foskett v. McKeown, [2001] A.C. 102 at 127 (Lord Millett) (stating in the context of trusts that a beneficiary "is entitled to a continuing beneficial interest not merely in the trust property but in its traceable proceeds also, and his interest binds every one who takes the property or its traceable proceeds except a bona fide purchaser for value without notice").

(175) United Australia, Ltd. v. Barclays Bank, Ltd., [1941] A.C. 1 at 30 (explaining that when a party has two inconsistent rights an "unequivocal act" showing that it is pursuing one means that it no longer has the other).

(176) The choice of a fixed charge holder between pursuing an interest in the original collateral or in the proceeds has been characterized as one between two inconsistent rights, which cannot both be pursued:

Suppose that C has taken a specific mortgage of D's motor car and D wrongfully sells the car to E. In the absence of any applicable exception to the nemo dat rule C can recover his vehicle from E. Alternatively he can adopt the wrongful sale and treat his security interest as attaching to the proceeds received by D. But can he claim security in both the car and the proceeds at the same time? No, because the remedies are inconsistent. C's equitable tracing claim to the proceeds rests on his implied adoption of the wrongful sale. He cannot have his cake and eat it. He must elect which right to pursue....

GULLIFER, LEGAL PROBLEMS, supra note 150, [paragraph] 1-62, at 45-46. The view that a creditor must elect between pursuing an interest in the collateral and the original proceeds of an unauthorized disposition has been endorsed by the Court of Appeal in Buhr v. Barclays Bank Place as "supported by principle and authority." [2001] EWCA Civ 1223, [paragraph] 39.

(177) LAW COMMISSION, supra note 56, [paragraph] 3.50.

(178) FERRAN, supra note 65, at 368.

(179) See, e.g., GOODE, supra note 34, at 634 (sample credit agreement providing that the debtor grants a fixed charge in "all trade debts now or in the future owing to you; all other debts now or in the future owing to you").

(180) See, e.g., FERRAN, supra note 65, at 393 ("[W]here the equities are equal the first in time prevails. This is the priority rule that governs ... priority disputes between two fixed equitable charges on the same property. The charge that was created first has priority....""); GULLIFER & PAYNE, supra note 64, at 273 ("The basic priority point in English law is the date of creation. This is articulated in relation ... to equitable interests by the proposition that the first in time has priority.").

(181) Dearie v. Hall, [1827] 38 ER 475, 482-83 (stating that the order in which creditors notify the account debtor determines the priority of competing claims over accounts receivable); LAw COMMISSION, supra note 19, [paragraph] 2.48 ("Where the assets charged are debts, provided again that the charge is registered in the Companies Register within 21 days of its creation, priority depends on the date of notice to the debtor.") (footnote omitted).

(182) LAW COMMISSION, SUpra note 56, [paragraph] 14.

(183) See id. [paragraph] 15.

(184) WILLIAM JAMES GOUGH, COMPANY CHARGES 13 (2d ed. 1996); see also Law COMMISSION, supra note 56, [paragraph] 3.201 ("Under current law, an execution creditor cannot seize property that is subject to a duly registered fixed charge.").

(185) In re Standard Mfg. Co, [1891] 1 Ch. 627 at 641. See also GOUGH, supra note 184, at 13 (discussing priority over personal claims).

(186) E.g., Tidewater Fin. Co. v. Moffett, 356 F.3d 518, 521 (4th Cir. 2004) ("Yet, while federal law defines in broad fashion what property interests are included within the bankruptcy estate, state law determines the nature and existence of a debtor's rights."); ROY GOODE, PRINCIPLES OF CORPORATE INSOLVENCY LAW 69 (3d ed. 2005)

(stating as the "first principle" that English "corporate insolvency law recognizes rights accrued under the general law prior to liquidation").

(187) See 11 U.S.C. [section] 506(a)(1) (2006).

An allowed claim of a creditor secured by a lien on property in which the estate has an interest ... is a secured claim to the extent of the value of such creditor's interest in the estate's interest in such property ... and is an unsecured claim to the extent that the value of such creditor's interest ... is less than the amount of such allowed claim.


(188) See id.

(189) Insolvency Act, 1986, c. 45, [section] 383(2).

   Subject to the next two subsections and any provision of the rules
   requiring a creditor to give up his security for the purposes of
   proving a debt, a debt is secured for the purposes of this Group of
   Parts to the extent that the person to whom the debt is owed holds
   any security for the debt (whether a mortgage, charge, lien or
   other security) over any property of the person by whom the debt is


(190) The treatment of the debtor's unsecured claim is set out in two identical provisions of the Insolvency Rules, 1986, c. 45 [section] 2.83, which applies in administration, and [section] 4.88, which applies in liquidation; both provide: "If a secured creditor realises his security, he may prove for the balance of his debt, after deducting the amount realised." Insolvency Act, 1986, c. 45, [section][section] 2.83, 4.88.

(191) The pari passu nature of unsecured debt is set out in the Insolvency Act, 1986, c. 45, [section] 328(3) ("Debts which are neither preferential debts nor debts to which the next section applies also rank equally between themselves and, after the preferential debts, shall be paid in full unless the bankrupt's estate is insufficient for meeting them, in which case they abate in equal proportions between themselves.").

(192) Individuals carrying on businesses are eligible to file bankruptcy. Insolvency Act, 1986, c. 45, [section] 265 (referring to bankrupts "carrying on of business").

(193) See GULLIFER & PAYNE, supra note 64, at 285 ("[T]he official statistics show[] a rapid drop-off in [administrative] receiverships after [15 September] 2003 [the date on which the relevant provisions of the Enterprise Act 2002 entered into force], coupled with a rapid rise in administrations, indicating that charges were preferring to appoint an administrator rather than an administrative receiver, even [in the limited circumstances in which they continue to have] the right to do so.").

(194) Insolvency Act, 1986, c. 45, [section] 264(1) ("A petition for a bankruptcy order to be made against an individual may be presented to the court in accordance with the following provisions of this Part....").

(195) Segal, supra note 28, at 933 ("I have focused on the operation and effect of the administration and Chapter 11 regimes as they relate to secured creditors....").

(196) See supra note 97

(197) Goode states:

   In the normal case, administration is initiated by the appointment
   of an administrator by the holder of a qualifying floating
   charge.... The alternative route to administration is the
   appointment of an administrator by the court on application by the
   company, the directors, one or more creditors ... or a combination
   of these persons.

GOODE, supra note [section] 4, at 928-29. (footnotes omitted).

(198) 11 U.S.C. [section] 303(b) (2006) (specifying the unsecured creditors eligible to file an involuntary petition).

(199) LOPUCKI & WARREN, supra note 12, at 94 (reporting otherwise unpublished finding of Warren and Westbrook).

(200) U.C.C. [section] 9-607(a) (2012) ("If so agreed, and in any event after default, a secured party ... may notify an account debtor ... to make payment ... to or for the benefit of the secured party.... "); U.C.C. [section] 9-406(a) ("After receipt of the notification, the account debtor may discharge its obligation by paying the assignee and may not discharge the obligation by paying the assignor.").

(201) E.g., Del's Big Saver Foods, Inc. v. Carpenter Cook, Inc., 603 F. Supp. 1071 (W.D. Wis. 1985) (writ of replevin issued and served on the same day the case was filed).

(202) In administration, the Insolvency Act of 1986 provides: "No legal process (including legal proceedings, execution, distress and diligence) may be instituted or continued against the company or property of the company except--(a) with the consent of the administrator, or (b) with the permission of the court." Insolvency Act, 1986, c. 45, sch. B1 [paragraph] 43(6). Goode states that:

   The effect of administration, whether out of court or by court
   order, is to place an almost total freeze on the enforcement of
   real and personal rights, including enforcement of security rights,
   rights of repossession under hire-purchase agreements, a landlord's
   right of forfeiture, or any legal process, including proceedings,
   execution or distress, except with the consent of the administrator
   or the approval of the court.

GOODE, supra note 34, at 930. Segal argues that:

   The automatic stay resulting from the commencement of either a
   Chapter 11 or an administration proceeding are broadly similar as
   they relate to secured creditors. Still, the ambit of the Chapter
   11 stay is clearly wider in a number respects. In particular, it
   protects the debtor from informal acts to recover pre-petition

Segal, supra note 28, at 929.

In liquidation, the Insolvency Act of 1986 provides: "When a winding-up order has been made or a provisional liquidator has been appointed, no action or proceeding shall be proceeded with or commenced against the company or its property, except by leave of the court and subject to such terms as the court may impose." Insolvency Act, 1986, c. 45, [section] 130(2).

(203) In the United States, Bankruptcy Code [section] 362 (a) enacts a stay "applicable to all entities" which prohibits "any act" to collect a pre-bankruptcy debt. 11 U.S.C. [section] 362(a) (2006). Section 362(d) provides that secured creditors can move to lift the stay if there is no equity in the collateral or if it is not necessary for an effective reorganization. Id. [section] 362 (d).

(204) Segal, supra note 28, at 929 ("[W]hile both jurisdictions allow secured creditors relief from the automatic stay on broadly similar grounds, the adequate protection doctrine is more clearly articulated under the Bankruptcy Code.").

(205) English law gives the court wide discretion in determining whether to grant relief:

   The court is given a general discretion and, in accordance with
   ordinary principles, it must have regard to all relevant
   circumstances. If, having regard to those circumstances, it can be
   seen to be appropriate that the secured creditor should be given
   leave to enforce its security, then, even if there be no criticism
   capable of being made of the administrator, I do not see why leave
   should not be given.

Royal Trust Bank v. Buchler (Re Meesan Inv. Ltd.), [1989] BCLC 130, [1988] BCC 788 (Ch. D. 1988).

Segal described English law as "without any statutory explanation as to how the discretion should be exercised," and acknowledges that "while both jurisdictions allow secured creditors relief from the automatic stay on broadly similar grounds, the adequate protection doctrine is more clearly articulated under the Bankruptcy Code." Segal, supra note 28, at 929.

(206) 11 U.S.C. [section] 552(a) (2006).

(207) Id. [section] 552(b).

(208) See LOPUCKI & WARREN, supra note 12, at 182-93; see, e.g., In re Wiegmann, 95 B.R. 90, 94 (Bankr. S.D. Ill. 1989) ("The lender is entitled to the same percentage of the proceeds of the post-petition milk as its capital contribution to the production of the milk bears to the total of the capital and direct operating expenses incurred in producing the milk.") (citing In re Delbridge, 61 B.R. 484, 491 (Bankr. E.D. Mich. 1986)).

(209) GOODE, supra note 186, at 72 (emphasis added).

(210) See Segal, supra note 28, at 931 ("[A]n English winding up ... divests the debtor of the beneficial interest [in] its property. It is at least arguable that upon the commencement of the winding up, such assets become subject to a statutory trust so that products created therefrom or their proceeds are not property of the debtor to which the security interest can attach.") (footnote omitted). See also In re Collins, [1925] Ch. 556 (Eng.) (holding that monies to be earned in the course of business were included in bankruptcy); Ayerst (Inspector of Taxes) v. C. & K. Constr. Ltd., [1976] A.C. 167, 178 ("[A] person could only be the legal owner without being at the same time the beneficial owner in cases where it was possible to identify some other person or persons in whom the beneficial ownership had become vested. Executorship of an estate during administration provides one example...."); GOODE, supra note 186, at 72 n.13 (stating that when the liquidator receives money as a result of procuring performance on the company's contract this money does not fall into the after acquired property clause). Segal is less supportive of our thesis elsewhere in his article. See, e.g., Segal, supra note 28, at 955 ("The after acquired property clause is effective to catch property coming into the company's hands after the commencement of the winding up....").

(211) Segal, supra note 28, at 930-31.

(212) Id. at 930.

(213) Insolvency Act, 1986, c. 45, sch. B1, [paragraph] 70.

(214) Id.

(215) Segal, supra note 28, at 961 (footnote omitted).

(216) Insolvency Act, 1986, ch. 45, [section] 91(1) ("In a members' voluntary winding up, the company in general meeting shall appoint one or more liquidators for the purpose of winding up the company's affairs and distributing its assets.").

(217) Insolvency Act, 1986, ch. 45, [section] 100(1), (2) ("The creditors and the company at their respective meetings ... may nominate a person to be liquidator for the purpose of winding up the company's affairs and distributing its assets.... The liquidator shall be the person nominated by the creditors....").

(218) E.g., GOODE, supra note 186, [paragraph] 1-24, at 24 ("The principal role of the liquidator is to collect in and realise the assets, ascertain claims, investigate the causes of failure[,] and, after covering the expenses of the liquidation, to distribute the net proceeds by way of dividend to creditors in the order of priority laid down by the Insolvency Act and the Insolvency Rules.").

(219) GOODE, supra note 34, at 929 ("The holder of a qualifying floating charge has first choice in appointing an administrator."); Segal, supra note 28, at 944 ("[T]he holder of a qualifying floating charge is given the right to appoint an administrator, chosen by him, merely by serving a notice at court with the requisite statutory declaration.").

(220) GOODE, supra note 186, at 369.

(221) See, e.g., In re KenDavis Indus. Int'l, Inc., 91 B.R. 742, 762 (Bankr. N.D. Tex. 1988) (requiring debtors' attorneys to disgorge two million dollars in fees because they had represented the interests of the debtors' principals rather than the interests of the debtor company).

(222) For example, the debtor-in-possession's attorneys in Enron describe a management succession process in which they, not the debtors' board, chose the new CEO: "Ken Lay did not choose a successor. The Enron statutory creditors' committee named two potential successors, neither of whom Ken Lay knew, and Enron's attorneys selected Stephen F. Cooper from that list." Martin J. Bienenstock et al., Response to "Routine Illegality in Bankruptcy Court, Big-Case Fee Practices, "83 AM. BANKR. L.J. 549, 552 (2009).

(223) See, e.g., Ford Motor Credit Co. v. Weaver, 680 F.2d 451, 462 n.8 (6th Cir. 1982) ("A trustee in bankruptcy or a debtor in possession, as a fiduciary, represents both the secured and unsecured creditors of the debtor.").

(224) See Insolvency Act, 1986, ch. 45, sch. B1, [paragraph] 3(2) (requiring that "the administrator of a company must perform his functions in the interests of the company's creditors as a whole"); Royal Trust Bank v. Buchler (Re Meesan Invs. Ltd.), [1989] BCLC 130, [1988] BCC 788 ("The administrator has to have regard to the interests not only of secured creditors but also of unsecured creditors.").

(225) See Westbrook, supra note 24, at 825 (arguing that "neutrality" of the administrator is a "core idea" of a bankruptcy priority regime).

(226) See supra note 96 (presenting English and American authority for the right to redeem).

(227) 11 U.S.C. [section] 363(f)(2)-(3) (2012).

(228) For the United States, see 11 U.S.C. [section] 363(b)(1) ("The trustee, after notice and a hearing, may use, sell, or lease, other than in the ordinary course of business, property of the estate....."). For England, see BEALE ET AL., supra note 163, [paragraph] 15.11, at 528-29 ("The administrator has power to dispose of these assets for the purposes of the administration but, except in the case of floating charge assets, must first apply to the court for permission to do so.").

(229) Insolvency Act, 1986, Schedule B1 [paragraph] 71 provides in relevant part:

(1) The court may by order enable the administrator of a company to dispose of property which is subject to a security (other than a floating charge) as if it were not subject to the security.

(2) An order under sub-paragraph (1) may be made only--

(a) on the application of the administrator, and

(b) where the court thinks that disposal of the property would be likely to promote the purpose of administration in respect of the company.

(3) An order under this paragraph is subject to the condition that there be applied towards discharging the sums secured by the security--

(a) the net proceeds of disposal of the property, and

(b) any additional money required to be added to the net proceeds so as to produce the amount determined by the court as the net amount which would be realised on a sale of the property at market value.

Insolvency Act, 1986, ch. 45, sch. B1, [paragraph] 17.

(230) GOODE, supra note 186, at 71 ("As a corollary of the rule that only the company's assets are available for its creditors, the liquidator has no power as liquidator to sell assets not beneficially owned by the company or subject to a security interest....").

(231) The sale must meet one of the requirements of 11 U.S.C. [section] 363(f). See Clear Channel Outdoor, Inc. v. Knupfer (In re PW, LLC), 391 B.R. 25, 29 (B.A.P. 9th Cir. 2008) (holding that a sale meets the requirement of [section] 363(f) (3) only if it is for the face amount of the lien); In re Boston Generating, LLC, 440 B.R. 302, 331 (Bankr. S.D.N.Y. 2010) (holding that a sale meets the requirement of [section] 363(f) (3) if it is for the collateral's fair value).

(232) GOODE, supra note 34, at 914 (footnotes omitted).

(233) 4 COLLIER ON BANKRUPTCY [paragraph] 507.02 [4] [a] (Alan N. Resnick & Henry J. Sommer eds., 16th ed. 2011) ("The rights of holders of priority claims are subject to the rights of holders of liens against property. The right to priority does not grant or imply any right to affect the rights of holders of secured claims....").

(234) 11 U.S.C. [section] 506(c) (2006). The entire provision reads:

   (c) The trustee may recover from property securing an allowed
   secured claim the reasonable, necessary costs and expenses of
   preserving, or disposing of, such property to the extent of any
   benefit to the holder of such claim, including the payment of all
   ad valorem property taxes with respect to the property.


(235) Security agreements generally provide that expenses of preserving a selling collateral are included in the secured obligation.

(236) LOPUCKI & WARREN, supra note 12, at 120-22 (presenting a similar example regarding the sale process of an asset and assignment of the sale expenses).

(237) In re Wine Boutique, Inc., 117 B.R. 506, 508-09 (Bankr. W.D. Mo. 1990).

(238) Practical Law Company, How Are Assets Distributed to Creditors in Corporate Insolvency Procedures?, available at (last visited Jan. 18, 2013); see also Insolvency Rules, 1986, S.I. 1986/1925, [section] 2.92 (in administration) ("(3) If the administrator redeems the security, the cost of transferring it is payable out of the assets."); id. [section] 4.97 (in liquidation) ("(3) If the liquidator redeems the security, the cost of transferring it is payable [out of the assets].').

(239) See In re Berkeley Applegate (Inv. Consultants) Ltd. (No. 3), [1989] 5 B.C.C. 803, 805, per Gibson L.J. ("[E]xpenses that are referred to as being incurred in the winding up cannot be expenses in relation to what are not assets of the company."); GOODE, supra note 186, [paragraph] 7-23, at 192 ("It is well established that where [an administrator or] a liquidator incurs expense in preserving or realising assets for the benefit of a third party, for example, where he sells assets subject to a security interest, the costs are to be recouped from the proceeds recovered for the benefit of that party.").

(240) 11 U.S.C. [section] 506(c) (2006).

(241) See id. [section] 1129(b)(2)(A).

(242) The relevant Code section requires that:

   With respect to a class of secured claims, the plan provides ...
   that each holder of a claim of such class receive on account of
   such claim deferred cash payments totaling at least the allowed
   amount of such claim, of a value, as of the effective date of the
   plan, of at least the value of such holder's interest in the
   estate's interest in such property....

Id. [section] 1129(b)(2)(A)(i)(II).

(243) Id. [section] 1129(b)(2)(A)(i)(I) (requiring that "the holders of [secured] claims retain the liens securing such claims").

(244) Segal, supra note 28, at 932.

(245) Id.

(246) See supra notes 229-230 and accompanying text.

(247) The Chapter 11 requirement is that:

With respect to a class of secured claims, the plan provides--

(i) (I) that the holders of such claims retain the liens securing such claims, whether the property subject to such liens is retained by the debtor or transferred to another entity, to the extent of the allowed amount of such claims; and

(II) that each holder of a claim of such class receive on account of such claim deferred cash payments totaling at least the allowed amount of such claim, of a value, as of the effective date of the plan, of at least the value of such holder's interest in the estate's interest in such property....

11 U.S.C. [section] l129(b) (2) (A). Under 11 U.S.C. [section] 1111(b)(2), a secured creditor can elect to have its entire claim treated as secured and be paid the secured amount. But the debtor can pay it without interest over time, with the result that the secured creditor is usually not entitled to any more value. Id. [section] l129(b) (2) (A) (i) (II).

(248) The term "phoenix sale" generally refers to the "tendency for a bankrupt business to start up again under a new 'identity' with the same owners." INT'L ASS'N OF INSOLVENCY REGULATORS, THE REGULATION OF PHOENIX COMPANIES 5 (2004), available at %20Phoenix %20Companies%20Fina141029.pdf.

(249) See Adam Gallagher & Margaret Rhodes, Pre-pack Sales in the U.K.: Smoke Without Fire, AM. BANKR. INST.J., May 2009, at 38 ("The purchaser will sometimes be an unconnected third party, but often it will be a special-purpose vehicle owned by the secured creditors or the owner of the failing entity."); id. ("If the purchasing company has the same owner as the selling company, the pre-pack is sometimes known as a 'phoenix' because it involves the same business being born again from its own ashes."); Sally Willcock, UK Pre-Pack Proposals Given the Thumbs Down, BANKRUPTCY BLOG (Aug. 1, 2011), pack-proposals-given-the-thumbs-down/#axzzllSzPowIb (discussing pre-packaged sales of businesses by English administrators to the business' former owners).

(250) Segal, supra note 28, at 967.

(251) 11 U.S.C. [section] 364(d)(1)(A)-(B) (2006).

(252) Segal, supra note 28, at 967 ("[T]here is no ability [in an English Administration proceeding] to prime and subordinate assets subject to a pre-[A]dministration fixed charge.").

(253) In re Spectrum Plus Ltd., [2005] 2 A.C. 680, 718 (Lord Scott) (quoting Illingworth v. Houldsworth, [1904] A.C. 355, 358 (Lord Macnaghten) (internal quotation marks omitted)).

(254) Evans v. Rival Granite Quarries Ltd., [1910] 2 K.B. 979, 998, (Moulton, LJ).

(255) In reYorkshire Woolcombers Ass'n, Ltd., [1903] 2 Ch. 284, 298 (Cozens-Hardy, LJ.); see also In re Spectrum Plus Ltd., [2005] 2 A.C. 680, 722 (Lord Scott) (stating that until crystallization "the [debtor] is left free to use the charged asset and to remove it from the security").

(256) Cretanor Mar. Co. v. Irish Marine Mgmt. Ltd, [1978] 3 All E.R. 164, 173 (Buckley, LJ). See, e.g., GULLIFER, LEGAL PROBLEMS, supra note 150, [paragraph] 5-38 ("[W]hilst the [floating] charge is a present security it is non-specific and in principle does not affect third parties at all while it continues to float.").

(257) In re Spectrum Plus Ltd., [2005] 2 A.C. 680, 720-21 (Lord Scott).

(258) Evans v. Rival Granite Quarries Ltd., [1910] 2 K.B. 979, 999 (Buckley, LJ).

(259) Nat'l Westminster Bank PLC v. Spectrum Plus Ltd., [2004] EWCA (Civ) 670, [29] (Lord Phillips MR) (quoting RoY GOODE, LEGAL PROBLEMS OF CREDIT AND SECURITY [paragraph] 5-40 (3d ed. 2003)), available at 2004/670.html.

(260) U.C.C. [section] 9-320(a) (2012) ("[A] buyer in ordinary course of business .. takes free of a security interest created by the buyer's seller, even if the security interest is perfected and the buyer knows of its existence.").

(261) Id. [section] 9-405(a) ("A modification of or substitution for an assigned contract is effective against an assignee if made in good faith.").

(262) Id. [section] 9-404(a)(1)-(2) ("IT]he rights of an assignee are subject to ... all terms of the agreement between the account debtor and assignor and ... any other defense or claim of the account debtor against the assignor which accrues before the account debtor receives a notification of the assignment....").

(263) See supra Part III.A. (explaining the treatment of a U.S. security interest upon disposition of collateral).

(264) U.C.C. [section] 9-320(a) (2012).

(265) LAW COMMISSION, supra note 19, [paragraph] 2.59, at 39-40.

(266) U.C.C. [section] 1-201(b)(9) (2012).

(267) LAW COMMISSION, supra note 19, [paragraph] 2.59, at 40 (footnote omitted).

(268) See supra Part III.A.1.

(269) See the discussion of Ashborder, supra note 166 and accompanying text.

(270) U.C.C. [section] 9-315(a)(1) (2012) (stating that "a security interest ... continues in collateral notwithstanding ... disposition ... unless the secured party authorized the disposition free of the security interest").

(271) Absent agreement of the secured creditor, only buyers of goods and nonexclusive licenses take free of security interests under American law. Id. [section] [section] 9-320(a), 9-321. Some sales of accounts are excluded from Article 9 coverage. See id. [section] 9-109(d) (4) (excluding sale of accounts as part of a sale of the business out of which they arose); id. [section] 9-109(d) (5) (excluding sale of accounts for the purpose of collection only); id. [section] 9-109 (d) (7) (excluding an assignment of a single account in satisfaction of a preexisting indebtedness). Exclusion from Article 9 coverage may or may not mean that no security interests exist in such accounts.

(272) LAW COMMISSION, supra note 19, [paragraph] 2.59, at 39-40.

(273) Singh Sandhu v. Jet Star Retail Ltd., [2011] EWCA Civ 459, [paragraph] 10 (Moore-Bick LJ.).

(274) GOODE, supra note 34, at 636-37.

(275) LAW COMMISSION, supra note 19 [paragraph] 2.59, at 39-40 (footnote omitted).

(276) LAW COMMISSION, supra note 56 [paragraph] 3.219 n.274, at 83.

(277) R.C. Nolan, Property in a Fund, 120 L.Q. REV. 108, 127 (2004) (emphasis added). Ferran, on the other hand, "suggests that the relevant dicta in these cases are unsound, but that the effect of a charge on a third party in the circumstances can be justified on the grounds that the charge had crystallised." Id. at 127 n.84 (citing Eilis Ferran, Floating Charges--The Nature of the Security, 47 CAMBRIDGE L.J. 213, 231-33 (1988)). See, e.g., Hamilton v. Hunter [1982] 7 A.C.L.R. 295; Reynolds Bros. (Motors) Party Ltd v. Esanda Ltd., [1983] 8 A.C.L.R. 422; 1 A.C.L.C. 1, 333.

(278) In re Spectrum Plus Ltd., [2005] 2 A.C. 680,[paragraph] 111 (Lord Scott L.J.).

(279) Cretanor Mar. Co. v. Irish Marine Mgmt. Ltd, [1978] 3 All E.R. 164, 173 (Buckley, L.J.).

(280) LAW COMMISSION, supra note 19, [paragraph] 2.60, at 40.

(281) See LAW COMMISSION, supra note 56, [paragraph] 3.217, at 83 ("There is some doubt as to when a purchaser who does not have actual knowledge of the charge will be put on notice of it because it has been registered.").

(282) U.C.C. [section] 9-315(a)(2) (2012).

(283) LAW COMMISSION, supra note 56, [paragraph] 3.52, at 45 (stating that in the event the collateral is sold "if the charge were merely a floating charge ... the court would infer that the charge did not cover the proceeds").

(284) GOODE, supra note 34, at 659 n.142.

(285) FERRAN, supra note 65 at 368.

(286) GOODE, supra note 34, at 632.

(287) U.C.C. [section] 9-322(a)(1) (2012) ("Conflicting perfected security interests.... rank according to priority in time of filing or perfection.").

(288) In re Benjamin Cope & Sons Ltd., [1914] 1 Ch. 800, 807 ("[I]t would in my view be as incompatible with the company's bargain with the [floating charge holders] to put their debentures behind or on the same footing as subsequent debentures giving a charge of the same character as if the debentures had constituted a specific charge and it were then attempted to create a subsequent specific charge ranking pad passu with them or in priority to them."); see also In re Household Products Co., [1981] 124 D.L.R. 3d 325 (holding that a later charged debenture is subordinate to earlier floating charge debenture).

(289) GOODE, supra note 34, at 733 ("By contrast, the grant of a subsequent floating charge ranking in priority to the first floating charge is prima facie against the intention of the earlier charge and, even if the later charge is the first to crystallize, it is ineffective vis-a-vis the holder of the earlier charge except in so far as thereby authorized.").

(290) [1994] 1 W.L.R. 1427.

(291) See FERRAN, supra note 65, at 388 ("Although there is one case [Griffiths] that suggests otherwise, the better view is that crystallization does not affect the priority of a floating charge against other interests in the same property which pre [-] date crystallization." (footnote omitted)); id. at 393 n.281 (" Griffiths, which is to the effect that a second floating charge can take priority by being the first to crystalize, is inconsistent with earlier authorities." (citation omitted)); GOODE, supra note 34, at 733 n.79 (stating that two earlier cases "were, unfortunately, not drawn to the attention of Morritt J in Griffiths").

(292) LAW COMMISSION, supra note 56, [paragraph] 3.177, at 73 ("Under current law, the general rule is that a floating charge will lose priority to a subsequent fixed charge.").

(293) In re Benjamin Cope & Sons, [1914] 1 Ch. at 806; see also In re Ind, Coope & Co., [1911] 2 Ch. 223 at 234 (holding that "[t]he effect of ... the debenture[] ... being a floating security only, was to reserve ... a power to the [debtor] to give a security on a particular asset in priority to the debenture[ ]"); Wheatley v. Silkstone & Haigh Moor Coal Co., [1885] 29 Ch. 715 at 724 (holding that a later created mortgage was "not subject to [a] claim created by [a preexisting floating charge]').

(294) See supra Part II.C.

(295) See GOUGH, supra note 184, at 225.

(296) Andrew Wilkinson, Automatic Crjstallisation of Floating Charges, 8 COMPANY LAW 75, 77 (1987); see also Charles Mayo & Ellis Ferran, Registration of Company Charges--The New Regime, J.B.L. Mar. 1991, 152, 165-66 (explaining that one argument against automatic crystallization is that it is "unfair to other persons dealing with the company who are unable to discover the true position" and thus, without notice, may take subject to a crystallized floating charge).

(297) In re Spectrum Plus Ltd., [2004] Ch. 337 at 365-66 (Lord Phillips MR) (citing Professor Goode and endorsing the proposition that "[i]f [a floating charge] imposes restrictions on sales or subsequent encumbrances and the particular sale or charge, though in the ordinary course of business is in breach of such restrictions, the floating charge will, on crystallisation, retain its priority if the buyer or encumbrancer took with notice of the restrictions, whether his interest is legal or equitable"). But see Siebe Gorman & Co. v. Barclays Bank Ltd., [1979] 2 Lloyd's Rep. 142 (Ch.D.) 157 (holding that a negative pledge clause would not operate to subordinate a later created fixed charge as "neither Siebe Gorman nor its solicitors had any actual knowledge of any of the [relevant provisions] of the debenture").

(298) See Wilson v. Kelland, [1910] 2 Ch. 306 at 306 (stating that registered particulars "would have amounted to constructive notice of a charge affecting the property but not of any special restrictions upon dealings by the company with its property in the usual manner when the subsisting charge is a floating security").

(299) English & Scottish Mercantile Inv. Trust Ltd. v. Brunton, [1892] 2 Q.B. 1 at 10.

(300) Wilson, [1910] 2 Ch. at 306 (holding that a fixed charge holder's failure to make an "investigation or inquiry" into whether a negative pledge clause existed did not subordinate the fixed charge to a preexisting floating charge).

(301) LAW COMMISSION, supra note 56, [paragraph] 3.179, at 74.

(302) See supra Part III.B.2.

(303) See LAW COMMISSION, supra note 19, [paragraph] 2.41, at 34 ("Further an uncrystallised floating charge has no priority against execution creditors, landlord's distress, set-offs and possessory liens.").

(304) LAW COMMISSION, supra note 56, [paragraph] 3.201, at 79.

(305) Randal C. Picker, Perfection Hierarchies and Nontemporal Priority Rules, 74 CHI.-KENT L. REV. 1157, 1185 (1999) (footnote omitted).

(306) See LAW COMMISSION, supra note 56, [paragraph] 3.201, at 79.

(307) See GOODE, supra note 34, at 733 ("Since no specific asset is affected by the floating charge until crystallization, it follows that an execution creditor who completes his execution before crystallization gets priority." (footnote omitted)).

(308) See, e.g., Supreme Court Act, 1981, c. 54, [section] 138 ("(1) Subject to subsection (2), a writ of fieri facias or other writ of execution against goods issued from the High Court shall bind the property in the goods of the execution debtor as from the time when the writ is delivered to the sheriff to be executed."); Bankers Trust Co. v. Galadari, [1987] Q.B. 222 at 224 ("It should be noted that the property in the goods is bound from the time of delivery of the writ and not from the time when the sheriff obtains possession under the writ.").

(309) Insolvency Act, 1986, c. 45, [section] 183(3). Goode follows this trail. See GOODE, supra note 34, at 733 n.79 (offering cross reference from crystallization to the Insolvency Act definition).

(310) See In re Opera, Ltd., [1891] 3 Ch. 260 (Lord Lindley).

   [T]he rights of the [floating charge holder] must prevail even as
   against the execution creditor, at least before sale. What the
   position of the [floating charge holder] is after the property is
   sold and the money handed over, I do not know, and I will not say
   at this moment....

Id. at 263. For further discussion on the academic literature and the scarce case law authority on this point, see GULLIFER, LEGAL PROBLEMS, supra note 150, [paragraph] 5-44, at 201.

(311) See Robinson v. Burnell's Vienna Bakery Co., [1904] 2 K.B. 624 (holding that a creditor with a crystallized floating charge could not pursue money received by an execution creditor after seizure and sale of the collateral).

(312) LAW COMMISSION, supra note 56, [paragraph] 3.201, at 79.

(313) See, e.g., Cuckmere Brick Co. v. Mut. Fin. Ltd., [1971] Ch. 949 at 950 (holding that duty of care to "obtain a proper price" in exercising his power of sale was violated where mortgagee failed to properly advertise collateral to be sold at public auction); Standard Chartered Bank Ltd. v. Walker, [1982] 1 W.L.R. 1410 (holding that it was a triable issue of fact whether receiver had violated duty of care and been negligent in preparing and conducting public auction sale at short notice and with minimum publicity).

(314) See, e.g., Cairney v. Back, [1906] 2 K.B. 746 (holding that a garnishment order did not transfer the accounts receivable to the lien creditor as property and that the holder of the crystallized floating charge was entitled to the proceeds of the accounts receivable in priority to the lien creditor); Robson v. Smith, [1895] 2 Ch. 118 at 126 (holding that a lien creditor is entitled to garnishment proceeds if a floating charge is uncrystallized).

(315) Evans v. Rival Granite Quarries, Ltd., [1910] 2 K.B. 979, 982 (Lord Williams L.J.) ("The debenture-holder cannot pick out one particular asset of the company and make his charge attach to that asset, while allowing the company to go on carrying on business and the charge to remain a floating charge as concerns other assets....").

(316) See supra Part II.C.

(317) See Insolvency Act, 1986, c. 45, sch. B1 [paragraph] 14 ("Power to appoint[:] (1) The holder of a qualifying floating charge ... may appoint an administrator of the company. (2) ... [A] floating charge qualifies if created by an instrument which--(a) states that this paragraph applies to the floating charge, [or] (b) purports to empower the holder of the floating charge to appoint an administrator of the company.... (3) ... [A] person is the holder of a qualifying floating charge ... if he holds one or more debentures of the company secured--(a) by a qualifying floating charge which relates to the whole or substantially the whole of the company's property....").

(318) See id. [paragraph] 12(1) ("An application to the court for an administration order in respect of a company ... may be made only by ... one or more creditors of the company...."); id. [paragraph] 13(1) ("On hearing an administration application the court may..... make the administration order sought; ... dismiss the application; ... make any other order which the court thinks appropriate.").

(319) Id. [paragraph] 36 (requiring that the court grant the application of a floating charge holder "to have a specified person appointed as administrator ... unless the court thinks it right to refuse the application because of the particular circumstances of the case").

(320) The Insolvency Act of 1986 further provides:

(1) This paragraph applies where the holder of a qualifying floating charge.... could appoint an administrator under paragraph 14 but for paragraph 8(1) (b) [because a winding-up order has been made in respect of the company].

(2) The holder of the qualifying floating charge may make an administration application.

(3) If the court makes an administration order ... the court shall discharge the winding-up order....

Id. [paragraph] 37.

(321) Westbrook, supra note 24, at 795; see also Buchler v. Talbot, [2004] 1 All E.R. 1289 (H.L.) at 1293 (Lord Nicholls) ("Typically a floating charge extends to substantially all the assets of a company. On its face this gives a charge holder a high degree of control over the assets and fortunes of a company.").

(322) See supra note 224 and accompanying text.

(323) Buchler v. Talbot, 1 All E.R. at 1304-05 (Lord Millett).

(324) See supra note 233 and accompanying text.

(325) See supra note 232 and accompanying text.

(326) See Insolvency Act, 1986, c. 45, [section] 251(b) ("'[F]loating charge' means a charge which, as created, was a floating charge....").

(327) Schedule B1 [paragraph] 99(3) provides:

The former administrator's remuneration and expenses shall be--

(a) charged on and payable out of property of which he had custody or control immediately before cessation, and

(b) payable in priority to any security to which paragraph 70 applies.

Id. sch. B1 [paragraph] 99(3). Paragraph 70 applies to floating charges. Id. [paragraph] 70.

(328) Section 176ZA provides:

   The expenses of winding up in England and Wales, so far as the
   assets of the company available for payment of general creditors
   are insufficient to meet them, have priority over any claims to
   property comprised in or subject to any floating charge created by
   the company and shall be paid out of any such property accordingly.

Insolvency Act, 1986, c. 45, [section] 176ZA.

(329) E.g., In re Jer/Jameson Mezz Borrower II, LLC, 461 B.R. 293, 306 (Bankr. D. Del. 2011) ("[T]he Debtors' budget proves that any net operating income that is being realized is insufficient to cover the costs of this case. Allowing such a case to remain in chapter 11 when it is administratively insolvent is not appropriate.").

(330) INT'L ASS'N OF INSOLVENCY REGULATORS, supra note 248, at 7 ("In some insolvency situations, unscrupulous directors may deliberately deplete a company's assets, so as to result in insufficient assets being left to justify the appointment by a creditor of an insolvency practitioner to the insolvent company.").

(331) With the approval of the court, floating charge collateral can be used to pay the expenses of litigation brought by the estate. See Insolvency Rules, 1986, S.I. 1986/ 1925, [paragraph][paragraph] 4.218A-4.218E.

(332) Segal, supra note 28, at 936 ("The combination of this provision of the Enterprise Act and the In re Spectrum decision means that in many cases, administrators will now have access to funds to cover the costs of the administration without the need to obtain the consent of the secured creditor.").

(333) See Claire A. Hill, Is Secured Debt Efficient?, 80 TEX. L. REV. 1117, 1176 (2002) ("Among lower-quality firms, the use of secured credit is virtually ubiquitous. Almost all the firms secure all their assets, giving 'blanket liens' to a lender. The divergence of interest between lenders and firms is sufficiently high that lenders need the level of constraints blanket liens provide."). Hill's definition of "lower-quality firms" is firms with bond ratings lower than BBB+. Id. at 1136. Thus, she probably looked principally at the largest 10% of firms in the relevant population. See Elizabeth Warren & Jay Lawrence Westbrook, Financial Characteristics of Businesses in Bankruptcy, 73 AM. BANKR. L.J. 499, 543 (1999) (stating 91% of Chapter 11 bankruptcies involve cases with assets less than $5 million).

(334) For example, Westbrook states:

   The existence of the cases where the secured party agreed to
   carve-out necessarily implies other cases--one would think a
   substantial majority of those involving a dominant secured
   party--in which the secured party would have no interest in a
   bankruptcy proceeding, would refuse a carve-out, and would
   therefore leave the proceeding unfinanced and unsustainable.

Westbrook, supra note 24, at 817 n.72.

(335) See Bank of Am. Nat'l Trust & Sav. Ass'n v. 203 N. LaSalle St. P'ship, 526 U.S. 434, 458 (1999) (requiring that such buy-backs be subjected to some kind of market test) ; see generally LYNN M. LOPUCKI & CHRISTOPHER R. MIRICK, STRATEGIES FOR CREDITORS IN BANKRUPTCY PROCEEDINGS [section] 11.11[B] (5th ed. 2007) (describing the techniques debtors employ and creditors' responsive strategies).

(336) E.g., In re Debbie Reynolds Resorts, Inc., 255 F.3d 1061, 1064 (9th Cir. 2001) ("In effect, RFI attempted to buy 'closure' by agreeing to a $50,000 surcharge in exchange for assurance that there would be no further challenges to collection of its secured debt."); In re Ocean Power Corp., 2007 WL 949598, at *4 (Bankr. S.D.N.Y. 2007) (finding carve-out conditioned on sale of the debtor's property to the secured creditor).

(337) On the English side, Armour notes that "[l]iquidators frequently investigate fraudulent conduct by company directors, and if floating charge assets are not available to them, they may not be able to do so." John Armour, Should We Redistribute in Insolvency?, in COMPANY, CHARGES: SPECTRUM AND BEYOND, supra note 15 at 189, 222. On the American side, LoPucki explains:

   The job of discovering, investigating, and litigating over
   dishonesty by a Chapter 7 debtor is delegated to the trustee. The
   trustee is paid for these tasks from the debtor's estate. If there
   is no money in the estate, the trustee is paid $60 of the filing
   fee paid by the debtor to commence the case. The $60 is paid on the
   trustee's representation that the trustee has performed whatever of
   these services were necessary in the particular case; the trustee
   earns no more by discovering dishonesty and litigating over the
   discharge. Hence, in a no-asset case, the trustee has a strong
   economic disincentive to discover fraud of a nature that requires
   objection to discharge.

Lynn M. LoPucki, Common Sense Consumer Bankruptcy, 71 AM. BANKR. L.J. 461, 467 (1997) (footnotes omitted).

(338) See Insolvency Act, 1986, c. 45, [section] 386, sch. 6.

(339) 11 U.S.C. [section] 507(a) (2006).

(340) See supra note 233.

(341) The Insolvency Act, 1986, c. 45, sch. B1 [paragraph] 65(1) (in Administration), provides that "[t] he administrator ... may make a distribution to a creditor of the company" and that "Section 175 shall apply in relation to a distribution under this paragraph as it applies in relation to a winding up." Id. [paragraph] 65(2). Section 175 gives preferential debts priority over floating charges in winding up.

(342) The Insolvency Act, 1986, c. 45, [section] 175(2)(b) (in Winding-Up). (2) Preferential debts ... (b) so far as the assets of the company available for payment of general creditors are insufficient to meet them, have priority over the claims of holders of debentures secured by, or holders of, any floating charge created by the company, and shall be paid accordingly out of any property comprised in or subject to that charge.

(343) The Insolvency Act, 1986, c. 45, [section] 176A(3)(a), subject to the discretion of the administrator, requires a minimum amount of value before applying the prescribed part calculation. The Insolvency Act, 1986, (Prescribed Part) Order 2003 [paragraph] 2, defines "the minimum value of the company's net property" as "10,000 [pounds sterling]." The interaction between these provisions seems to leave the administrator with broad power to control the amount, if any, payable under this subparagraph.

(344) Insolvency Act, 1986, (Prescribed Part) Order 2003 [paragraph] 3.

(345) Insolvency Act, [section] 176A provides that:

(2) The liquidator, administrator or receiver--

(a) shall make a prescribed part of the company's net property available for the satisfaction of unsecured[] debts, and

(b) shall not distribute that part to the proprietor of a floating charge except in so far as it exceeds the amount[] required for the satisfaction of unsecured debts.

Insolvency Act, 1986, c. 45, [section] 176A(2)(a)-(b).

(346) See, e.g., CODE DU TRAVAIL [C. TRAV.], arts. L. 143-10, L. 143-11, L. 742-6, L. 751-15 (Fr.) (granting, by French labor code, of absolute superpriority to employees' claims for wages covering the last 60 days' wages prior to opening of insolvency proceedings); CODE DE COMMERCE [C. COM.], art. 622-17 (providing in the French commercial code for priority of administrative expenses, employees' claims for wages and approved post-petition funding over secured and unsecured pre-petition claims in procedure de sauvegarde, the French equivalent of U.S. Chapter 11 and English Administration proceedings); INSOLVENZORDNUNG [Insolvency Statute], Oct. 5, 1994, BGBL. I at 2866, [section][section] 170, 171 (Ger.) (imposing on secured creditors, by German statute, a cumulative 9% surcharge against collateral to permit the estate to recoup the costs of determination and disposition of collateral in insolvency proceedings plus turnover tax at the rate of 19%, for a total possible cost to the secured creditor of 28%); Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3, [section][section] 81.1-2 (providing, in Canadian statute, for priority over secured creditors of claims by unpaid suppliers, farmers, fishermen and aquaculturists under defined circumstances); id. at [section] 81.3 (1) (providing employees with "security on the bankrupt's current assets on the date of bankruptcy for six months of prepetition wages up to $2,000); id. at [section] 81.3 (4) (stating that "a security under this section ranks above every other ... charge or security against the bankrupt's current assets--regardless of when that other ... charge or security arose"); id. at 81.5 (1), (2) (providing same with respect to certain pension contributions required but not made); Ley de Concursos Mercantiles [LCM] [Bankruptcy Law], Diario Oficial de la Federacion [DO], 12 de Mayo de 2000, art. 217 (Mex.), translated in INTERNATIONAL STATEMENT OF MEXICAN BANKRUPTCY LAW 261-64 (A.L.I. 2003) (providing, in Mexican law, for the payment of "creditors having a security interest"); id. at 224, 225 (providing for the payment of certain wages and administrative expenses "prior to any debts referred to in Article 217").

(347) See Memorandum from Elizabeth Warren, Council Member, Am. Law Inst., to the Council of the Am. Law Inst., Article 9 Set Aside for Unsecured Creditors (Apr. 25, 1996), reprinted in LOPUCKI & WARREN, supra note 12, at 679-81.

(348) See LOPUCKI & WARREN, supra note 12, at 682 (quoting Professor Charles Mooney as saying that the Warren carve out proposal "died for lack of a first" in the drafting committee).

(349) E.g., Order Authorizing the Sale of Assets of the Debtor Free and Clear of Liens, Claims, Encumbrances, and Other Interests and Memorandum in Support at 3, In re Pulliam Motor Co., No. 07-01555-dd (Bankr. D.S.C. Apr. 17, 2007) ("From the proceeds of the Sale, the Debtor will create a carveout for distribution to the unsecured creditors of the estate in an amount not less than $300,000 (the 'Carveout'), which the Debtor estimates is approximately 20% of the known unsecured claims.").

(350) In re Merit Grp., Inc., 464 B.R. 240, 251 (Bankr. D.S.C. 2011) (citations omitted) (quoting In re StarTrans Inc., Case No. 09-07468 (Bankr. D.S.C. Nov. 5, 2009)).

(351) See Jeanette L. Goldsberry, Perfection of Nonpossessory Security Interests Under Revised Article 9: Consequences of the Practical and Conceptual Incompatibility of US and English Secured Transactions Law, 3 CHI.J. INT'L L. 241, 244 (2002) (referring to uncrystallized floating charges as "an 'intermediate state of perfected but non-specific or floating' prior to crystallization of the floating charge, which is not accommodated within the Article 9 notice filing system" (citation omitted)); id. at 243-44 ("The floating charge is much broader [than the Article 9 floating lien], potentially covering 'all the property of the debtor, in all countries of the world.'" (citation omitted)); Brian M. McCall, Money, Money Everywhere but Not a Drop to Secure: A Proposal for Amending the Perfection Rules for Security Interests in Money and Deposit Accounts, 74 TENN. L. REV. 669, 705 (2007) ("Unlike Article 9, though, English law allows a secured party to take a floating charge over the revolving pool of money and deposit accounts held by a debtor without having to take possession or control of them.").

(352) GOODE, supra note 34, at 630 ("Typically, a debenture will contain both a fixed and a floating charge, the former covering fixed assets and debts, the latter covering the remaining types of asset...."); Segal, supra note 28, at 937 ("Banks and other secured lenders in England will frequently be granted an all assets debenture containing both a fixed and a floating charge."); Westbrook, supra note 24, at 819 ("The creditor who holds the floating charge in this system almost always has a 'fixed' charge as well, often over most, if not all, of the debtor's assets.").

(353) LAW COMMISSION, supra note 56, [paragraph] 3.179; id. [paragraph] 3.180 ("We recommend that the priority of a charge against another charge or a pledge should depend on the date of registration of the financing statement whether the charge is fixed or floating.").

(354) But see U.C.C. [section] 9-324(a) (2012) (allowing a 20-day grace period to perfect a purchase money security interest).

(355) U.C.C. [section] 9-204, cmt. 2 (1994).

(356) Grant Gilmore, The Good Faith Purchase Idea and the Uniform Commercial Code: Confessions of a Repentant Draftsman, 15 GA. L. REV. 605, 627 (1981). [The floating charge] is similar in many ways to the scheme contemplated by Benedict, and all of this suggests that we should be cautious in embracing Article 9's choice in favor of perfected floating security interests on inventory and receivables without the secured creditor exercising some control over the collateral. See Picker, supra note 305, at 1185. Other scholars have also noticed that the rule requiting English floating charge holders to exercise control over their collateral is essentially the same rule the American courts adopted in Benedict v. Ratner, only to be overturned by adoption of the Uniform Commercial Code. See Segal, supra note 28, at 937-38.

(357) Cork Report, [paragraph] 105.

(358) Id. [paragraph] 106.

(359) Id. [paragraph] 107.

(360) See supra note 346.

(361) Armour, supra note 337, at 203-05; id. at 204 (noting that "invoice discounting has grown dramatically over the period since [1999]"); id. at 199-200 (describing studies showing that banks have reduced their exposure to the English Carve-out by reducing their reliance on floating liens).

(362) Id. at 206.

(363) See, e.g., John Armour et al., Corporate Ownership Structure and the Evolution of Bankruptcy Law: Lessons from the United Kingdom, 55 VAND. L. REV. 1699, 1738 (2002) (saying of the pre-2002 administrative receivership regime in England that "[t] he pivotal right a secured creditor has, once there has been a default, is a license to seize and sell the security to satisfy the amount owed"); LoPucki & Triantis, supra note 27, at 277 ("The CCAA scheme of reorganization became more popular than reorganization under the Canadian Bankruptcy Act because it was capable of binding secured creditors.").

[c] 2013 Lynn M. LoPucki, Arvin I. Abraham, and Bernd P. Delahaye. Individuals and nonprofit institutions may reproduce and distribute copies of this Article in any format at or below cost, for educational purposes, so long as each copy identifies the authors, provides a citation to the Notre Dame Law Review, and includes this provision in the copyright notice.

Lynn M. LoPucki, Security Pacific Bank Distinguished Professor of Law, UCLA School of Law. This author can be contacted at

Arvin I. Abraham, Associate, Sullivan & Cromwell LLP (London); J.D., Harvard Law School; LL.M. (Commercial Law), Cambridge University.

Bernd P. Delahaye, Associate, Sullivan & Cromwell LLP (New York); B.A., M.A. (Jurisprudence), Oxford University; LL.M. (International Finance), Harvard Law School.

We thank Eilis Ferran, Frances Foster, Louise Gullifer, Look Chan Ho, Craig Jones, Gerard McCormack, Jennifer Payne, John Pottow, Adam Rachlis, and Nick Segal for comments on earlier drafts and Amanda Wolin for assistance with research.
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Title Annotation:III. Fixed Charges Compared with Security Interests C. Rights in Insolvency Proceedings through Conclusion, with footnotes, p. 1823-1863
Author:LoPucki, Lynn M.; Abraham, Arvin I.; Delahaye, Bernd P.
Publication:Notre Dame Law Review
Date:Apr 1, 2013
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