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Part IV Priorities, 13 General Priority Rule: Nemo Dat (First in Time to be Created Wins)

From: The Law of Security and Title-Based Financing (3rd Edition)

Hugh Beale, Michael Bridge, Louise Gullifer, Eva Lomnicka

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2023. All Rights Reserved. Subscriber: null; date: 06 June 2023

Guarantees and security

(p. 495) 13  General Priority Rule: Nemo Dat (First in Time to be Created Wins)

A.  The nemo dat principle

The nemo dat principle

13.01  The basic principle of priority between all kinds of interest is that of nemo dat quod non habet. In the context of priority disputes this is often referred to as the principle that the first in time to be created wins. There are various justifications for this rule in addition to longevity. First, there is the intuitive idea that one cannot give what one has not got. If one owns an asset and gives it to another, one no longer owns it and has nothing to give to someone else. Strictly speaking, the nemo dat formulation only applies to successive legal interests. In relation to equitable interests, the same idea is expressed by the maxim Qui prior est tempore potior est jure, that is the first in time prevails.1 The rationalization, though, is the same: if an equitable interest in an asset has been granted to A, any interest subsequently granted to B must be subject to that of A unless there is a good reason to the contrary.2 Although there are many exceptions to the nemo dat rule, this intuitive idea is the reason why all such exceptions need to be justified in terms of fairness.3 Second, one can argue that if the basic rule were not first in time, parties would normally so arrange their affairs in any case so that priorities, at least between security interests, operated on (p. 496) this basis.4 This is borne out by the fact that even where the basic rule is not first in time (for example where a fixed charge is created after a floating charge) the parties to the first charge usually revert back to the first in time rule with the use of negative pledge clauses.5

Exceptions to the rule

13.02  The first in time rule is subject to a number of exceptions, which are dealt with in more detail below in chapter 14. One major exception is that a legal interest created for value and without notice of a prior equitable interest takes priority over that equitable interest. Thus the classification of an interest as legal or equitable may be critical. Possessory interests are by their nature legal. All charges over personal property are equitable, whereas mortgages may be either legal or equitable.6 Absolute interests may also be legal (for example, a purchase) or equitable (for example, a declaration of trust). Other exceptions are based on authority and statute. This chapter considers the position under the basic rule, both where registrable interests are duly registered and when they are not registered within the required period.7

B.  Priority between possessory security interests and non-possessory security interests

Where the non-possessory interest is registered

A pledge or lien followed by a charge or mortgage

Pledge followed by charge or mortgage

13.03  A pledge is created by the transfer of possession of assets to the pledgee pursuant to an agreement to give security.8 Since a pledge is a legal interest, the first in time rule means that any subsequently created security interest (legal or equitable) in the assets will take subject to the pledge, unless an exception to the first in time rule applies. The only possible exception (which is not really a true exception) would be where the pledgee had authorized the pledgor to create a non-possessory interest ranking in priority to its interest, and this would be very unlikely indeed. The fact that the pledgor does not have possession of the assets9 will not prevent the creation of a valid non-possessory interest, as the pledgor retains its property in the assets, subject to the possessory rights of the pledgee, and can transfer its rights absolutely or by way of security interest to a third party.10 The fact that the non-possessory interest is registered is not relevant to priorities as the interest is subject to the pledge in any event.

Lien followed by charge or mortgage

13.04  The position is the same where goods are subject to a possessory or contractual lien. So long as the lienholder retains possession of the goods, the lien takes priority over any subsequently created non-possessory interests. It cannot (p. 497) be argued that the nature of the lienholder’s interest, being merely possessory and not fully proprietary, is less, and should be subservient to, another’s proprietary interest merely because of the nature of the respective interests.11 For the purposes of priority, a contractual lien is created at the time of the contract creating the lien, rather than at the time that the lienholder takes possession of the chattels, if this is later.12 In the Australian case of Mercantile Credits Ltd v Jarden Morgan Australia Ltd13 the court held that this reasoning also applies to a lien arising at common law, if it arises by virtue of obligations performed under a contract (in that case the lien was a stockbrokers’ lien that arose when the contract to purchase shares was made). Although it was argued that the lien took effect by way of implied term in the contract, it does not appear that the court’s decision depended on this argument but applied to liens arising by operation of law.14 The cases show that where the contract is entered into while a charge is floating, but possession is taken after crystallization, the lienholder will have priority over the chargee,15 and where the contract is entered into before a fixed charge is entered into, the lienholder will equally have priority over the chargee.16 The reasoning in the Mercantile Credits case makes it clear that this result depends upon the operation of the first in time rule, and so it would also apply to subsequent legal interests, both by way of security and by sale or gift.17 The ruling in Mercantile Credits could be said to cause hardship to those taking security interests over assets that are subject to a contract creating a lien. The assets not yet being in the possession of the lienholder, there is nothing apparent to indicate the potential loss of priority, and yet the contract to create the lien is not registrable.18 One limited solution is suggested by Derrington J in the Mercantile Credits case, at least in relation to where the chargee is providing the finance for the purchase of the assets. It is suggested that it could be made a condition of the finance that the shares be acquired free of the lien: if the company had made such an arrangement with the broker, the lien would not arise because of the inconsistency of the contractual arrangements.19 If this is not possible, it appears that the only protection for the party taking the security interest is to make enquiries of the grantor of that interest as to whether the assets are subject to a contract that could give rise to a lien.

(p. 498) A charge or mortgage followed by a pledge or lien

Legal mortgage followed by pledge

13.05  Where goods subject to a validly registered legal mortgage are subsequently pledged by the mortgagor, the first in time rule means that the pledgee takes subject to the mortgage whether or not he knows of it. None of the statutory exceptions to the nemo dat rule would appear to apply,20 since the mortgagor is not a buyer or seller21 nor a mercantile agent. It is possible but very unlikely that the mortgagor had actual or ostensible authority from the mortgagee to create the pledge in priority to the mortgage.22 In fact, it is likely to be the case that the mortgagor is required by the terms of the mortgage to remain in possession of the goods. Merely leaving the mortgagor in possession of the goods would not amount to ostensible authority under s 21 Sale of Goods Act 1979 or the common law.23

Legal mortgage followed by lien

13.06  The same reasoning applies to the creation of a lien by the mortgagor, except that it may be easier to reach the conclusion that the mortgagor had authority from the mortgagee to subject the goods to a lien. The authority is unlikely to be express, but, by analogy to the position where a bailee of goods transfers possession and incurs a lien,24 authority will be implied from the mortgagor’s obligation to keep the property in good repair, or where it was reasonably incident to A’s reasonable use of the property.25

Equitable mortgage or charge followed by pledge or lien

13.07  This is considered below.26

Where the non-possessory interest is not registered

Registrable but unregistered non-possessory interest

13.08  If the non-possessory interest is registrable but has not been registered within the required period it is void against secured creditors, if created by a company,27 and against everyone if it is a bill of sale.28 All possessory security interests, whenever created, would therefore have priority.

C.  Priority between the holder of possessory security interests and buyers

Pledge or lien followed by sale

13.09  If a pledgor sells goods which are the subject of a pledge, the buyer takes subject to the pledge even if he is unaware of it. The buyer can only claim (p. 499) the goods if tendering the sum due.29 However, the pledgor is unlikely to be in possession of the goods, unless he has attorned to the pledgee,30 or the goods have been redelivered against a trust receipt.31 In the former case, the pledge may have to be registered32 but a purchaser would be very unlikely to search the register, and would not have constructive notice of the registered interest.33 In the latter case, the pledgor will have express authority from the pledgee to sell the goods, and so the buyer will take free from the pledge. If the owner of goods that are held by another pursuant to a lien sells them, the buyer takes subject to the lien and must tender the debt before claiming the goods.34 In either case the buyer, if he is unaware of the pledge or lien, is likely to have a contractual claim against the seller for breach for one or more of the terms implied by section 12 of the Sale of Goods Act 1979: either that the goods are and remain free of any charge or encumbrance not disclosed to the buyer35 or that the buyer will enjoy quiet possession of the goods36 or that the seller has the right to sell the goods.37

D.  Priority between non-possessory security interests

Where both are registered

Basic rule: first in time

13.10  The basic rule of priority between non-possessory security interests is first in time of creation.38 Time of registration is irrelevant provided it is carried out within the required period, so that if security interest 1 (‘SI1’) is created on 1 May and registered on 18 May, it will have priority over security interest 2 (‘SI2’), which is created on 8 May and registered on 15 May, even though the holder of SI2 registered first and could not have discovered SI1 from a search of the register. This is because there is a twenty-one-day period in which to register a security interest that runs from the time of creation.39 (p. 500) Lenders can usually safeguard themselves by delaying making the advance until twenty-one days after the creation of the charge, and checking the register before making the advance, although this is not a universal practice and some choose to take the risk of the existence of an earlier charge and rely on their contractual rights against the borrower.

When basic rule applies

13.11  The basic rule of first in time will apply in the following cases: where both interests are legal (this is unlikely to happen in practice, except where a legal mortgage is followed by a sale),40 where both are equitable, and where a legal interest is followed by an equitable one. The order of priority will not be first in time, however, if one of the exceptions to the rule, discussed in the next chapter, applies. Thus, if SI2 is legal and SI1 is equitable, SI2 will have priority unless the security holder had notice of SI1 at the time of creation of SI2. It would not be possible to argue that it had actual or constructive notice of SI1 by reason of registration, if at the time of creation of SI2, SI1 was not registered.41 Further, if the second interest is created with the authority of the holder of the first interest, it will take priority.42 The following paragraphs discuss another qualification of the basic rule.

Qualification of the basic rule: purchase money security interest

13.12  There is one situation where the basic rule does not automatically govern priorities between registered non-possessory security interests. This is where a charge has been created over the chargor’s future property, and subsequently the chargor acquires property of a type that would fall within the first charge with funds lent by another lender. This second lender takes a mortgage or charge on that property to secure that specific loan. Logic would dictate that the first chargee would have priority, since his charge is first in time. The reasoning supporting this outcome is described in the case of Church of England Building Society v Piskor.43 The chargor cannot grant an effective mortgage or charge until he himself owns the property. There therefore must be a moment of time, a scintilla temporis, where the chargor owns the property before the second mortgage or charge takes effect in relation to that property. During that scintilla temporis the first charge attaches, and therefore has priority under the first in time rule. However, there are strong policy reasons for giving priority to the second chargee.44 In particular, such a result would prevent one lender from having a monopoly over lending to the chargor. If subsequent lenders lost priority to the first lender in relation to all assets, they would be disinclined to lend, or at least to lend without charging high rates of interest. Second, it is considered fair that someone who extends credit so as to swell the assets of the debtor should have priority in relation to the actual assets by which the pool of assets is swollen over a financier who has not contributed at all to the swelling of assets. Otherwise the first lender obtains a windfall.45 In many jurisdictions the second lender obtains priority, on the basis that its charge is a purchase money security interest.46

Rejection of scintilla temporis doctrine

(p. 501) 13.13  Although the courts’ reasoning has not always been overtly based on these policy considerations, an analysis has been developed that results in the second chargee having priority over the first. Put simply, since the second charge and the acquisition of the property are so bound up with each other that they are taken to be one transaction, when the chargor acquires the property it is already encumbered with the second mortgage or charge, so that the first chargee’s interest only attaches to the ‘equity of redemption’,47 and therefore loses priority. This analysis is consistent with the basic rule of first in time. The cases which are cited to support this, and which have developed this doctrine over the last few years, however, throw up some complexities, and the limits of the analysis are not entirely clear. These cases all concern competing claims to an interest in land,48 and the more recent cases concern priority contests between interests claimed by the vendor (or other person in occupation) and a lender of the purchase money, rather than between two lenders.

Wilson v Kelland and Re Connolly

13.14  In these two cases49 the chargor granted a floating charge over all its assets, present and future, and later acquired land with money secured by a mortgage on the land. In each case the floating charge contained a negative pledge clause prohibiting the creation of charges ranking in priority to the floating charge. In both cases the purchase money mortgagee had no actual or constructive notice of the negative pledge clause,50 and arguably the courts could have held that the mortgagee had priority on the grounds that the mortgage was impliedly authorized by the floating chargee.51 In both cases, however, the courts did not follow this line of reasoning, but chose to decide the cases on the basis that the land was acquired encumbered with the mortgage, to which the first chargee’s interest was subject.

Security Trust and Abbey National v Cann

13.15  In the former case,52 the chargor granted a floating charge, which had crystallized by the appointment of a receiver by the time the property in question was acquired with money lent by the second chargee. Here, unlike the two cases discussed above, there was no question that the second chargee could have obtained priority under the normal rules, since the crystallization of the first charge terminated the chargor’s ability to create subsequent security interests ranking in priority to the floating charge.53 Further, since crystallization was by the appointment of a receiver, the second chargee could not argue that it had no notice of it.54 However, the Privy Council held that the second charge had priority over the first, on the grounds that the chargor had previously entered into a binding contract to mortgage the property to the second chargee, so that when it acquired the property it was already encumbered. The first chargee’s interest was, therefore, subject to the interest of the second chargee. The same reasoning was (p. 502) followed in the House of Lords decision of Abbey National v Cann.55 Here the priority battle was between a person who claimed an equitable interest in the property by virtue of a constructive or resulting trust and a lender to whom the purchaser of the property had agreed to grant a mortgage to secure the purchase money lent. The House of Lords made it clear that in this situation the property is acquired subject to the mortgage, since the property would not have been acquired unless the funds had been lent, and the funds would not have been lent were it not for the grant of a mortgage to secure them.56 The analysis, used in the Piskor case, that the chargor acquired the unencumbered property for a scintilla temporis during which time the first interest could attach, was firmly rejected.57

Southern Pacific Mortgages Ltd v Scott

13.16  Since the Cann decision, there have been a number of cases applying the doctrine in various contexts, all to do with mortgages over land.58 None have challenged the reasoning in Cann. In the recent Supreme Court decision of Southern Pacific Mortgages Ltd v Scott,59 the priority battle was between A, who sold a property to an ‘equity release’ company on the basis that it purported to grant her a tenancy to stay in the property as long as she liked, and B, who lent the company the funds with which to purchase the property secured by a mortgage over it. B was unaware of the agreement with A and the purported tenancy. When B sought to enforce the mortgage, A claimed that she had a proprietary estoppel which bound the purchaser.60 The parties did not challenge the result or the analysis in Cann, but the Supreme Court addressed two issues which relate to the operation of that doctrine, both of which related largely to the specific context of the case. First, in a move which has been heavily criticized,61 the Supreme Court decided the purchasers did not have sufficient equitable interest in the land between the contract of sale and the conveyance to grant A an interest (by way of proprietary estoppel) during that period.62 As a result, the moment at which priority was determined was the moment the mortgage and conveyance were executed, and the Cann doctrine resulted in B obtaining priority over A. The position would have been different had A’s interest been an equitable mortgage or charge over personal property, since the purchaser could have validly granted this over its future assets, priority dating (normally) from the moment of that grant.63 (p. 503) This decision of the Supreme Court made it, strictly speaking, unnecessary to decide the second issue, which was whether, on the basis that A acquired her interest at the time of exchange of contracts, the contract of sale formed part of the indivisible transaction together with the mortgage and the conveyance. If it did, then an application of the Cann doctrine would have given B priority even on that basis. On the second issue, the majority took the view that whether there was an indivisible transaction at all, and of what it consisted, depended on the precise facts of the case.64 The minority treated the contract as part of the ‘indivisible transaction’, so that any interest acquired by A after the moment of exchange was subject to the prior interest of B, the mortgagee.65 The significance attached to this point by the Supreme Court does raise the question whether, if A’s interest had been a valid security interest in after-acquired property, it would have been necessary to show that B’s interest (including all parts of the ‘indivisible transaction’) had arisen before that of A. Reasoning along these lines is explored in the next paragraph.

The doctrinal basis of Abbey National v Cann

13.17  The doctrinal basis of the decision in Abbey National v Cann is not entirely clear,66 at least as far as it applies to security interests over personal property, even though the result is to be welcomed on policy grounds. On ordinary principles, a charge, or mortgage, cannot attach to property until that property is owned by the chargor, so, in the absence of qualification, logic would seem to favour the scintilla temporis analysis: that since there must be a moment where the chargor owns the property before the charge attaches, the first charge attaches first and the first in time rule leads to the first chargee’s priority. One possible explanation of the Cann decision is that, since a person can charge future property,67 and a contract to charge future property is treated in equity as a present charge, where there is a contract to create a charge which precedes the acquisition of the property on acquisition the charge which is the subject of that contract attaches automatically without more.68 Thus, if the contract for the purchase money charge predates the after acquired property charge, the purchase money charge will have priority. The problem with this analysis is that it limits the scope of the Cann doctrine to when events occur in this order, and does not fit with the facts of all the cases, in that in some of them the ‘second’ charge was not created before the first.69 The reasoning in Cann itself seemed to depend upon there being a pre-existing agreement for a charge (p. 504) (or, presumably, a previously created charge),70 but this may not be critical to the decision, and is not stressed in the discussion of Cann by the Supreme Court in Southern Pacific Mortgages Ltd v Scott.71 The Supreme Court focused on the ‘indivisible transaction’ reasoning in Cann which resulted in the property being acquired already encumbered by the mortgage.

It is difficult to avoid the conclusion that the decision in Abbey National v Cann was driven by the strong policy reasons for giving priority to the purchase money lender, and lacks a clear doctrinal basis. However, if this is the case, it is hard to see why there is a strict requirement of an enforceable pre-existing agreement, rather than a broader requirement merely that the secured loan is used to purchase the property in question,72 and this view seems to be supported by subsequent cases.

Whale v Viasystems Technograph Ltd

13.18  Some support for the view expressed in the previous paragraph comes from the case of Whale v Viasystems Technograph Ltd73 where a company exercised an option to obtain a headlease over some land and granted an underlease for a term three days short of the term of the headlease. The consideration payable by the underlessee for the underlease was financed by a bank who took a charge over the underlease. The Court of Appeal held that the underlessee’s equitable interest74 (and therefore the bank’s charge) had priority over that of a lender who had a fixed charge over (among other things) the after-acquired land of the company. Jonathan Parker LJ said that the Cann principle applied to any situation of priority of equitable interests, and did not merely apply to purchase-money security interests, although that would be the paradigm case. The test, he said, was whether the acquisition of the asset and the grant of the equitable interest were so closely connected commercially that the asset was acquired subject to that equitable interest.75 In that case the connection was merely commercial: the consideration for the underlease financed the purchase of the headlease, so that the completion of the latter was factually dependent upon the payment of the former, but there was no contractual dependency. Notably, the decision was also based on the policy ground that the fixed chargee would gain a windfall if it had priority, as its security would have increased by the advance of the bank that funded the underlease.76 Thus, in effect, a broad commercial view was taken of what amounts to a purchase money security interest.77

Other outstanding questions

13.19  It is perhaps easier to answer other questions that may be outstanding after Cann. First, there appears to be no difference in approach between where the purchase money lender is also the vendor of the property, and where the property is (p. 505) sold by a third party.78 Second, there seems to be no difference between where the purchase money interest is legal and where it is equitable.79 Third, although all the cases considered involved security interests over land, the doctrine seems to be equally applicable to purchase money security interests over personal property.80 Fourth, there seems little doubt that the purchase money security interest is a registrable charge under the Companies Act or under the Bills of Sale Act.81 Fifth, there is the question of the effect of the Abbey National v Cann decision on retention of title clauses.82

Where one is registered

Priority between an unregistered and a registered security interest

13.20  If a registrable security interest is not registered within the required period, then it will be void as against the holder of the registered interest83 and the latter will have priority. This is the case in relation to a subsequent registered interest even if it was taken with actual notice of the first unregistered interest.84 Where the unregistered interest is subsequent to the registered interest, Goode argues that the failure to register has no significance, since the purpose of registration is to give notice to subsequent encumbrancers and it serves no purpose in relation to those who already have acquired their interest.85 Normally this would have no practical significance, since the prior registered interest would have priority on the grounds of first in time, and the unregistered interest would be unlikely to be a legal interest taken without notice of a prior equitable interest, since there would be constructive notice of the prior registered interest. However, it could make a difference in one situation. This is where A has a (registered) security interest over the after-acquired property of C. If C then borrows money from B to acquire a particular asset, the loan being secured on that asset, it can be argued that all C acquires is the equity of redemption, and that B’s security interest takes priority over A’s, in relation to that asset.86 If B’s interest is not registered, does this prevent B having priority over A? This was the situation in the nineteenth-century US case that Goode relies upon:87 there it was held that the holder of the purchase money security interest still had priority and the US Supreme Court said that ‘a failure to register the mortgage for purchase-money makes no difference. It does not come within the reason of the registry laws. These laws are intended for the protection of subsequent, not prior, purchasers and creditors.’ There is, however, no indication from the words of section 859H that it is limited to creditors taking security after the unregistered interest is created. The point is thus subject to some uncertainty.

Situations where questions of priority between registered and unregistered interests arise

(p. 506) 13.21  It is important to consider when questions of priority in relation to unregistered but registrable interests would be relevant in practice. First, if the holder of the unregistered interest applied for leave to register out of time (now called ‘extension of period allowed for delivery’ of the relevant documents to the registrar)88 the leave would be subject to a condition that the intervening rights of secured creditors are not to be prejudiced.89 This would preserve the position of the holders of secured interests who had priority at the time of the late registration. Second, it is reasonably clear that if the holder of either interest comes to court to establish priority or to enforce its rights, then the court will determine priority in accordance with the principles set out above.90 However, what is the position if the holder of the unregistered interest enforces its interest outside of liquidation or administration? Can the holder retain the proceeds as against the holder of a registered interest who has priority?91 The unregistered interest is not void as against the company before liquidation or administration,92 and if the company repays the indebtedness to the holder, or the holder enforces the charge, the unsecured creditors or any subsequent liquidator or administrator have no claim to the payment or proceeds of enforcement.93 By analogy, where repayment or enforcement takes place before a competition arises between the secured creditors, it could be said that the holder of the registered interest has no claim.94 However, the better view is that the unregistered interest is void against the registered one as soon as the twenty-one days for registration of the prior interest lapses, and thus cannot be cured even by applying to register out of time. Therefore, the registered interest has priority and the holder of an unregistered interest who enforces would have to account to it.95 Third, if the company is in liquidation or administration, any unregistered registrable interests are void against the liquidator or administrator. The liquidator can thus take the property that would have been subject to the charge for the benefit of creditors generally.96 Therefore, at this stage, the question of priority between registered and unregistered interests does not arise.

Non-registrable interests

(p. 507) 13.22  If the unregistered security is not registrable, in that it falls within section 859A(6) of the Companies Act 2006, including charges falling within the Financial Collateral Arrangements (No 2) Regulations 2003,97 then the first in time rule (or an exception to that rule) applies. This is so even though the holder of the later registered security interest could not have discovered the earlier unregistrable interest by searching the register.

Interests which arise by operation of law

13.23  The basic first in time rule also applies where one of the non-possessory interests is not registrable, because it arises by operation of law. This is the case, for example, with an equitable lien.98 Where an equitable lien arises, and subsequently the owner of the asset creates another equitable non-possessory security interest over the asset, the holder of the equitable lien will have priority.99 This appears to be the case even though the equitable lien is not registrable, and therefore the subsequent secured party cannot discover its existence from searching the register. If the asset over which the equitable lien arises is already the subject of a non-possessory security interest (legal or equitable), then this latter interest will have priority.

Where neither is registered

Where one security interest is registrable and the other is not

13.24  If one security interest is registrable and the other is not, and neither is registered within the required time period, the former will be void against the latter100 and the latter will have priority, subject to the point made about prior registered interests above.

Where both security interests are registrable

13.25  If both are registrable, the position is unclear. One view is that the interests are valid against each other, and therefore the rules of the general law apply.101 This involved reading section 859H as meaning that an unregistered interest is void against any registered secured creditor of the company. There is support for this in the judgment of Lord Cozens-Hardy MR in Re Monolithic Building Company;102 however, the question of priority in that case arose between an unregistered interest and a subsequent registered interest, and so the statement was not directed towards the situation where both interests were unregistered. Goode’s view is that the lack of registration of the second security interest does not affect the holder of the first interest, and so the second interest is not void against the holder of the first interest while the first interest is void as against the second. This has the effect of reversing the first in time order of priority.103 Another view104 is that each charge is void against each other, with the result that neither (p. 508) can have priority until it applies to the court for leave to register out of time.105 If this does not happen, the two security interests rank pari passu.

Practical importance of priority between unregistered charges

13.26  Does the issue of priority between unregistered charges have any practical relevance? Where the second ranked interest applied for leave to register out of time, it could be argued that such leave should be subject to the preservation of the priority position of the first ranked interest. However, the usual condition for leave is that it is ‘subject to the rights of parties acquired during the period between the date of creation of the charge and the date of its actual registration’.106 But once leave is given and the interest is registered, the ‘right’ of the previously prior ranked holder of an unregistered interest is merely the void interest of an unregistered interest as against a registered one. It is therefore suggested that leave is unlikely to be given subject to preservation of pre-leave priority. It is, however, also suggested that where both interests remain unregistered, and the company is not in liquidation or administration, either can come to court to determine priority or enforce its interest vis-à-vis the company, and the priority rules apply as discussed.107 If the company is in liquidation or administration, the property subject to the unregistered charges can be taken by the liquidator or administrator for the benefit of creditors generally, and it would seem that the chargees would then rank pari passu with all the other unsecured creditors. Since, on this view, priority between unregistered interests does have some practical significance, it is suggested that the principle of priority most consistent with the rest of the law is that the general rules apply.108

E.  Priority between the holder of non-possessory security interests and buyers

Non-possessory interest followed by a sale

13.27  If the non-possessory security interest is equitable (such as a charge or an equitable mortgage) a buyer of the legal interest for value and without notice will take free of the security interest.109 If the non-possessory security interest is a legal mortgage, the operation of the nemo dat rule would lead to the conclusion that the buyer takes subject to the prior legal mortgage, unless any of the exceptions apply. The only possible exception is that found in section 24 of the Sale of Goods Act, but although a mortgage involves the transfer of title to the mortgagee,110 and can even take the form of a sale, section 62(4) of that Act appears to prevent section 24 applying to a mortgage.111 Thus it seems reasonably clear that a buyer from a legal mortgagor would take the goods subject to the mortgage. As a matter of policy, it is very hard to see why there (p. 509) should be a different rule for those who finance by means of retention of title sales (and who therefore fall within section 25 and risk losing their interest to a good faith buyer) and those who lend money on the security of a chattel mortgage. It has been argued that section 62(4) should only apply to those provisions in the Sale of Goods Act concerning the contract between buyer and seller (the ‘two-party sales issues’), and not to those provisions dealing with the transfer of title to third parties.112

Unregistered charge not void against buyer

13.28  One further anomaly is that a buyer would take subject to a legal mortgage even if it was not registered. An unregistered charge is void under section 859H of the Companies Act 2006 only against an administrator, liquidator, and creditors of the company. Buyers are not mentioned, and it is generally accepted that an unregistered charge is not void against them.113 In most cases, involving equitable charges and mortgages, the buyer will take free anyway, so long as he is in good faith and has no notice of the equitable interest,114 but in this particular situation the buyer takes subject to the legal mortgage even though there is no public record of it.

F.  Priority between financing devices involving the transfer or retention of title and other security interests

Quasi-security interest followed by security interest

13.29  Where assets are the subject matter of a quasi-security interest based on retention of title, the nemo dat rule leads to the conclusion that the debtor cannot grant a subsequent security interest. Since the debtor does not own the goods, there is nothing on which the security interest can attach. At least in theory, any surplus value available on enforcement of the quasi-security interest belongs to the creditor, and so there can be no question of the quasi-security interest taking priority over the subsequent security interest: the latter does not attach to the goods at all.115 If the subsequent security interest is a pledge or lien and if the quasi-security is a sale on retention of title terms, it is likely that the exception to the nemo dat rule in section 25 of the Sale of Goods Act 1979 may apply, since there will be delivery to the pledgee or lienee.116

Security interest followed by quasi-security interest

13.30  If assets are acquired on retention of title terms by a party who has already granted a security interest over its after-acquired property, the creditor who retains title has priority, since the assets never fall within the assets of the debtor and thus never become subject to the security interest over after-acquired property. This has the effect of giving priority to a purchase money security interest.117


1  Clarke v Abbot (1741) Barnardiston Chancery 457, 460.

2  Cory v Eyre (1863) DG J & S 149, 167; Phillips v Phillips (1861) 4 De Gex, Fisher & Jones 208, 215, 45. For an explanation of how successive equitable interests in an asset arise, and a rationalization of priority rules as relativity of title, see D Fox, ‘Relativity of title at law and in equity’ (2006) 65 CLJ 330.

3  Cf the view of Kindersley V-C in Rice v Rice (1853) 2 Drewry 73, 76–8, that priority of time is a rule of last resort, where there is no other sufficient ground of preference. In the context of security interests, this view does not give sufficient certainty.

4  T Jackson and A Kronman, ‘Secured Financing and Priority among Creditors’ (1979) 88 Yale LJ 1143, 1162–4.

5  This strategy is likely to be successful, particularly under the current registration regime, see para 12.16.

6  See para 6.01.

7  See para 10.14 in relation to company charges. Unregistered bills of sale are void against everyone including the grantor, and so the priority rules do not apply (see para 11.54), and priority between registered bills of sale is governed by the date of registration, see para 14.32.

8  See ch 5.

9  The pledgor might possibly have actual possession of the goods if it had attorned to the pledgee. See para 5.27.

10  Franklin v Neate (1844) 13 M & W 481.

11  Re Diesels & Components Pty Ltd [1985] 2 Qd R 456, 460 SC Queensland; Mercantile Credits Ltd v Jarden Morgan Australia Ltd [1991] 1 Qd R 407, 417 SC Queensland.

12  George Barker (Transport) Ltd v Eynon [1974] 1 WLR 462, CA; Re Diesels & Components Pty Ltd [1985] 2 Qd R 456 SC Queensland.

13  [1991] 1 Qd R 407 SC Queensland. Note that Australian law changed in 2012 with the bringing into force of the Australian Personal Property Securities Act 2009.

14  Mercantile Credits Ltd v Jarden Morgan Australia Ltd [1991] 1 Qd R 407, 416 & 423 SC Queensland.

15  George Barker (Transport) Ltd v Eynon [1974] 1 WLR 462, CA; Re Diesels & Components Pty Ltd [1985] 2 Qd R 456 SC Queensland. This conclusion also could be said to depend in part on the reasoning discussed in ch 15 based on authorized dispositions.

16  Mercantile Credits Ltd v Jarden Morgan Australia Ltd [1991] 1 Qd R 407, 422 SC Queensland. In that case the charge was a fixed charge.

17  See para 13.09.

18  The reason liens and pledges are not registrable is that the transfer of possession to the lienholder or pledgee makes them apparent. Re Hall (1884) LR 14 QBD 386, 391 (in relation to the Bills of Sale Acts). Report of the Committee on Consumer Credit (1971) Cmnd 4596, para 5.7.61; A Diamond, A Review of Security Interests in Property (1989), paras 9.5.6–9.5.7 and 11.5.2, Law Commission, Registration of Security Interests: Company Charges and Property other than Land (Consultation Paper No 164, 2002), para 3.24.

19  See para 5.72.

20  See para 14.21 et seq.

21  See discussion at paras 13.27 and 14.22.

22  See para 15.01.

23  Cole v North Western Bank (1875) LR 10 CP 354; W Gough, Company Charges (2nd edn, 1996), 837.

24  See para 14.07 and Keene v Thomas [1905] 1 KB 136; Green v All Motors Ltd [1917] 1 KB 625 CA; Williams v Allsup (1861) 10 CB (NS) 417; Singer Manufacturing Co v London and South Western Railway Co [1894] 1 QB 833, DC, Jowitt & Sons v Union Cold Storage Co [1913] 3 KB 1; Tappenden v Artus [1964] 2 QB 185, CA; Pennington v Reliance Motor Works Ltd [1923] 1 KB 127 (where it was held that there was no authority); Jarl Tra AB v Convoys Ltd [2003] 2 EWHC 1488, [2003] 2 Lloyd’s Rep 459; Lukoil-Kalingradmorneft Plc v Tata Ltd [1999] 1 Lloyd’s Rep 365.

25  See para 16.07.

27  Companies Act 2006, s 859H. Re Cardiff Workmen’s Cottage Co Ltd [1906] 2 Ch 627.

28  See para 11.54.

29  N Palmer and A Hudson, ‘Pledge’ in N Palmer and E McKendrick (eds), Interests in Goods (2nd edn, 1998), 631; Franklin v Neate (1844) LR 1 QB 585; Johnson v Stear (1863) 15 CB (NS) 330; Halliday v Holgate (1868) LR 3 Exch 299, 302.

30  Where the pledgor obtains possession of the goods from the pledgee by fraud, and then pledges the goods to a bona fide third party without notice of the first pledge, the third party obtains the goods free from the pledge: see Babcock v Lawson (1880) 5 QBD 284, where this result was said to result by analogy to the sale of goods obtained under a voidable contract. The latter situation is now covered by Sale of Goods Act 1979, s 23, but the common law still governs the situation in relation to a pledge.

31  See para 5.29 et seq. See also Beverley Acceptances Ltd v Oakley [1982] RTR 417.

32  See paras 5.28, 10.25 and 11.16.

33  See ch 12, for discussion of the scope of constructive notice.

34  The cases in n 29 apply by analogy.

35  Sale of Goods Act 1979, s 12(2)(a). The word ‘encumbrance’ (in the context of a similar express clause) was said possibly to cover a possessory lien (Athens Cape Naviera Sa v Deutsche Dampfschiffahrtsgesellschaft ‘Hansa’ Aktiengesellschaft (The ‘Barenbels’)) [1985] 1 Lloyd’s Rep 528, 532, CA, per Goff LJ.

36  Sale of Goods Act 1979, s 12(2)(b).

37  Sale of Goods Act 1979, s 12(1). This includes both a right to pass the property in the machines to the buyer and a right to confer on the buyer the undisturbed possession of the goods: Microbeads AG v Vinhurst Road Markings Ltd [1975] 1 WLR 218, 223, CA, per Lord Denning MR.

38  In the past, when a charge is created by a deed delivered in escrow, it was not entirely clear whether the date of creation was the date of delivery or the date on which the conditions are fulfilled; see Law Commission, Execution of Deeds and Documents by and on behalf of Bodies Corporate (Consultation Paper 143, 1998), para 6.8 n 17 and Alan Estates Ltd v WG Stores Ltd [1982] Ch 511, 521, CA. The date of creation has now been statutorily defined as the date of delivery into escrow in relation to the requirement of registration, see Companies Act 2006, s 859E. The definition does not, in its terms, apply to the date of creation for the purposes of priority, but it would be sensible if the same rule applied in both cases.

39  Companies Act 2006, s 859A(4). See para 10.20.

40  See para 13.27.

41  W Gough, Company Charges (2nd edn, 1996), 744.

42  See ch 15.

43  [1954] Ch 553.

44  The reasons for giving priority to a purchase money security interest have been rehearsed at length in the United States and Canada, where such priority is built into the UCC and PPSA schemes: see paras 23.96–23.97, 23.128.

45  L Gullifer (ed), Goode and Gullifer on Legal Problems of Credit and Security (6th edn, 2017), 5–64; C Walsh, ‘The floating charge is dead; long live the floating charge’ in A Mugasha (ed), Perspectives in Commercial Law (2000), 129 at 134.

46  See para 23.128.

47  This term is used in the cases although it is technically inappropriate where the second interest is a charge and not a mortgage.

48  The principle does, however, appear to apply to personal property as well, see State Securities Plc v Liquidity [2006] EWHC 2644 (Ch), see n 80 below.

49  Wilson v Kelland [1910] 2 Ch 306; Re Connolly Bros Ltd (No 2) [1912] 2 Ch 25, CA.

50  Cf Abbey National Building Society v Cann [1991] 1 AC 56, 91, HL, where Lord Oliver says that the mortgagee in Re Connolly had constructive notice of the terms of the first debenture. This cannot be correct in the light of the cases cited at para 12.15 n 45.

51  See para 15.23.

52  Security Trust Co v Royal Bank of Canada [1976] AC 503 (PC).

53  See para 15.14.

54  See para 15.14.

55  [1991] 1 AC 56.

56  Ibid., at 92 (per Lord Oliver) and 101–2 (per Lord Jauncey).

57  Ibid., at 102.

58  Nationwide v Ahmed [1995] 70 P&CR 381, Whale v Viasystems Technograph Ltd [2002] EWCA Civ 480, Redstone Mortgages Plc v Welch [2009] 3 EGLR 71 and Cook v Mortgage Business Plc [2012] EWCA Civ 17.

59  [2014] UKSC 52; [2015] AC 385.

60  On the basis that it was the equivalent of an ‘overriding interest’ in the Land Registration Act 2002, see [2014] UKSC 52 [39].

61  P Sparkes, ‘Reserving a Slice of Cake’ [2015] Conveyancer and Property Lawyer 301; Emmet and Farrand Bulletin 2014; Emmet and Farrand on Title 5.119.01. The decision is inconsistent with well-established cases such as Shaw v Foster (1872) LR 5 HL 321 and Lysaght v Edwards (1876) 2 Ch D 499. Even the academic debate as to whether the vendor holds the property on trust for the purchaser after exchange of contracts does not appear to throw doubt on the proprietary nature of the purchaser’s interest; W Swadling, ‘The Vendor-Purchaser Constructive Trust’, in S Degeling and J Edelman (eds), Equity in Commercial Law 2005), at 475–6 and 487–8; PG Turner, ‘Understanding the constructive trust between vendor and purchaser’ (2012) 128 LQR 582. While the decision that a purchaser of land cannot grant an equitable interest after exchange of contracts but before conveyance could, probably, be confined to the grant of an interest such as a proprietary estoppel rather than any equitable interest (such as a charge arising under an after-acquired property clause) the decision is in general terms and is not limited in this way, see Emmet and Farrand on Title 5.119.01.

62  [2014] UKSC 52 [55]–[79].

63  See para 6.15 above.

64  [2014] UKSC 52 [115]–[121].

65  [2014] UKSC 52 [87]–[89].

66  See J Jeremie, ‘Gone in an Instant—The Death of “Scintilla Temporis” and the Growth of a Purchase-Money Security Interest in Real Property Law’ [1994] JBL 363.

67  See para 6.13. Holroyd v Marshall (1862) 10 HLC 191. Where there is an equitable mortgage or charge over future assets, the transfer of the equitable interest to the mortgagee or chargee takes place immediately, so that there is never a moment on acquisition of the asset when the mortgagor or chargor is the complete equitable owner of the property (Hadlee v Commissioner of Inland Revenue [1991] 3 NZLR 517).

68  See J de Lacy, ‘The purchase money security interest: a company charge conundrum?’ [1991] LMCLQ 531, 535.

69  In both Wilson v Kelland and Re Connolly the debenture predated the agreement for the mortgage; in the Security Trust case the date when the contract became effective was not entirely clear, and the Privy Council did not feel it necessary to decide that point (at 518). This reasoning also begs the question of whether a charge over future property is presently valid when none of the property charged is owned by the chargor. There is support for the proposition that such a charge is valid in Holroyd v Marshall (1861–62) 10 HLC 191; Re Lind [1915] 2 Ch 345; Peer International Corporation v Termidor Music Publishers Ltd [2002] EWHC 2675 (Ch), [79] and Saw (SW) 2010 Ltd v Wilson [2017] EWCA Civ 1001 especially at [26]–[28] (see paras 6.15 and 6.22).

70  [1991] 1 AC 56, 92, 102, HL.

71  [2014] UKSC 52 [45]–[52].

72  L Gullifer (ed), Goode and Gullifer on Legal Problems of Credit and Security (6th edn, 2017), 5–71.

73  [2002] EWCA Civ 480.

74  The interest was equitable only as it had not been registered.

75  [2002] EWCA Civ 480 [72]–[73].

76  Ibid., [74].

77  The broad reasoning of Jonathan Parker LJ in Whale was used in Redstone Mortgages plc v Welch [2009] 3 EGLR 71 to support a decision that the equitable interest of a vendor (the right to a tenancy) was so closely connected with the sale of a house that the purchaser acquired it subject to that interest and could only grant a charge to a lender subject to that interest. This application of the doctrine must be taken to be overruled by the decision in Southern Pacific Mortgages Ltd v Scott [2014] UKSC 52 and was in fact rejected in the lower courts (see Re North East Property Buyers Litigation [2010] EWHC 2991 (Ch)).

78  In Re Connolly the vendor was a third party and in Wilson v Kelland and Security Trust the vendor was the purchase money lender.

79  W Gough, Company Charges (2nd edn, 1996), 486.

80  J de Lacy, ‘The purchase money security interest: a company charge conundrum?’ [1991] LMCLQ 531, 533. The point appears to have been raised in a battle between a floating chargee and a receivables financier in State Securities plc v Liquidity Ltd [2006] EWHC 2644 (Ch), although the decision, as it concerned an application for an interlocutory injunction, was inconclusive, cf R Boadle, ‘A Purchase Money Security Interest In UK Law?’ (2015) LMCLQ 76, 85–9. See also Stroud Architectural Systems Ltd v John Laing Construction Ltd [1994] 2 BCLC 276, where the application of the Cann case to a retention of title clause is assumed.

81  Capital Finance Co Ltd v Stokes [1969] 1 Ch 261; W Gough, Company Charges (2nd edn, 1996), 486–9.

82  Discussed at para 4.22.

83  Companies Act 2006, s 859H.

84  Re Monolithic Building Company [1915] 1 Ch 643.

85  E McKendrick (ed), Goode on Commercial Law (5th edn, 2016), 24.53.

87  United States v New Orleans Railroad (1870) 79 US 362, 20 L Ed 434, 12 Wall 362 US Supreme Court.

88  Companies Act 2006, s 859F.

89  See para 10.35.

90  For example, Re Monolithic Building Company [1915] 1 Ch 643 (action to enforce security interests); Re Ehrmann Brothers Ltd [1906] 2 Ch 697 CA, 708, where Romer LJ envisages that a chargee could intervene in an action to enforce brought by the holder of an unregistered interest; Re Curtain Dream plc [1990] BCLC 925 (application by receivers for a declaration that a reservation of title agreement was void as an unregistered charge); Bank of Scotland v T A Neilson & Co [1991] SLT 8 (negligence action against solicitors who failed to register the charge, where it was assumed that the time of enforcement was when the priority issue arose).

91  This uncertainty was raised by the Company Law Review Steering Group in ‘Registration of Company Charges’ (2000) URN 00/1213 para 3.4 and by the Law Commission in Consultation Paper No 164, 2002, para 3.25, n 30.

92  Re Monolithic Building Company [1915] 1 Ch 643, 667.

93  Palmer’s Company Law (1989) 13.326 (5) n 2, relying on Mercantile Bank of India v Chartered Bank of India, Australia and China and Strauss & Co [1937] 1 All ER 231, although whether this is a true explanation of this particular case is doubted, see W Gough, Company Charges (2nd edn, 1996), 737 and n 2; see paras 10.32–10.33.

94  W Gough, Company Charges (2nd edn, 1996), 745 suggests that this is the case in relation to repayment, but that enforcement gives rise to a competition and thus a priority point.

95  The liability to account is analogous to that of a junior creditor who enforces, and has to account to the senior: see para 18.58.

96  See para 10.30.

97  See ch 3.

98  London and Cheshire Insurance Co Ltd v Laplagrene Co Ltd [1971] Ch 499, Swainston v Clay (1863) 3 De G J & Sm 558. An equitable lien created by contract may be registrable under the Bills of Sale Act Coburn v Collins (1887) 35 Ch D 373. See ch 6, n 739.

99  This comes from the basic rule of first in time, confirmed in the context of equitable liens in Rice v Rice (1853) 2 Drew 73, 61 ER 646, although in that case, where a lien arose followed by an equitable mortgage, the mortgagee won as the fact that the deeds were deposited with him was said to give him the better equity. See also Mackreth v Symmons (1808) 15 Ves Jun 329.

100  Companies Act 2006, s 859H(3).

101  W Gough, Company Charges (2nd edn, 1996), 744; L Gullifer (ed), Goode and Gullifer on Legal Problems of Credit and Security (6th edn, 2017), 5–27.

102  [1915] 1 Ch 643, 662: ‘I confess my inability to see that it means anything else than exactly what it says, namely, that it is void against any creditor who has a registered charge on the company’s property.’

103  E McKendrick (ed), Goode on Commercial Law (5th edn, 2016), 24.53.

104  R Pennington, Company Law (8th edn, 2001), 635.

105  Under s 859F, Companies Act 2006. See para 13.21. The court will normally make an order subject to the rights of parties acquired before the time of registration. However, this would not seem to include the rights of the holders of unregistered interests.

106  See para 10.37.

107  See chs 13 and 14.

108  This is Gough’s view, Company Charges (2nd edn, 1996), 744. See also Law Commission, Company Security Interests (Law Com No 296, 2005), 3–152.

109  See para 14.01, for a discussion of this exception to the nemo dat principle.

110  Subject to a condition that the title be transferred back on payment of the secured obligation.

111  That section provides: ‘The provisions of this Act about contracts of sale do not apply to a transaction in the form of a contract of sale which is intended to operate by way of mortgage, pledge, charge or other security.’

112  M Bridge, The Sale of Goods (3rd edn, 2014), 5.125–5.126; Diamond Report, para 13.2.9.

113  E McKendrick (ed), Goode on Commercial Law (5th edn, 2016), para 24.52; W Gough, Company Charges (2nd edn, 1996), 733; Re Overseas Aviation Engineering (GB) Ltd [1963] Ch 24, 38 CA; Stroud Architectural Services Ltd v John Laing Construction Ltd [1994] 2 BCLC 276, [1994] BCC 18. Despite an initial proposal to deal with this anomaly (Government ResponseConsultation on Registration of Charges created by Companies and Limited Liability Partnerships (December 2010) (proposal F)), the 2013 regime contained no such provision.

114  See para 14.04.

115  Obviously if there is a provision in the retention of title or hire purchase or lease agreement for any surplus to be paid to the debtor on enforcement, then the true security interest could attach to that money once it is paid, if it falls within the scope of the security agreement.

117  L Gullifer (ed), Goode and Gullifer on Legal Problems of Credit and Security (6th edn, 2017), 5–64. This is justifiable on policy grounds: see para 13.12.