While it may come as a surprise, the pace at which laws change in the UK can be painfully slow. The Bills of Sale Acts 1878 and 1882 are a particular case in point.
They were criticised in 1888 by a member of the House of Lords who said: “The more I have occasion to study the Act, the more convinced I am that it is beset with difficulties which can only be removed by legislation.”
Some 128 years later the Law Commission has finally given hope that this should now happen.
What is a bill of sale?
The definition of a bill of sale in the original legislation runs to 218 words. Essentially, however, it is a chattel mortgage created by an individual or unincorporated entity.
This article concentrates on security bills of sale and does not comment on either absolute bills or general assignments of book debts.
Problems with bills of sale
Bills of sale are inflexible and complex. The legislation requires them to take a particular form and to be registered at the High Court in London within seven days.
From the lender’s point of view, they are expensive to put in place and any mistakes either in the form of the document or in registering it in time make the security void. From the borrower’s point of view, they offer significantly less protection than for regulated hire purchase.
Until recently, bills of sale seemed to be a dying species. They were rarely encountered in practice and tended to be used for one-off high-value transactions, such as loans secured against works of art or classic cars or against the inventories of pubs to support brewery loans.
This changed dramatically with the growth of the logbook loan industry. The Law Commission’s report indicates that of a total of 52,580 bills of sale registered in 2014, 52,223 were registered against vehicles. This has clearly created impetus for change.
While the Commission did consider banning bills of sale altogether, it concluded that this would not be helpful. In particular, logbook loans provide an important source of credit for many borrowers, and banning them would simply drive customers towards loan sharks. It also felt that the ability to create security over moveable plant and equipment would help the funding needs of small, unincorporated businesses.
The report recommends that the Bills of Sale Acts be repealed and replaced with a new Goods Mortgages Act. This will distinguish between goods mortgages, which will apply to goods generally, and vehicle mortgages, which speak for themselves.
The proposed legislation would not cover security over intangible assets, such as shares or intellectual property rights, or to ships and aircraft. It also proposes leaving the current agricultural charges regime untouched.
Goods mortgages must be in writing and signed by the borrower in the presence of a witness. They can be in a separate document to the credit agreement. They will be capable of being signed electronically.
The proposed contents of goods mortgages are very simple, with just six required items:
- The date of the mortgage.
- The names and addresses of the borrower and the lender
- The amount or obligation which is secured
- A statement that ownership of the goods is being transferred to the lender in order to secure the obligation
- Details of the witness
- A description of the goods
Additional health warnings are proposed for cases where the mortgage secures a regulated agreement.
The report recommends that there should be separate registration regimes for vehicle mortgages and goods mortgages. It is proposed that vehicle mortgages cannot be enforced unless they are registered with a designated asset finance registry.
Priority of vehicle mortgages will be determined by the date and time that the logbook lender sends the details of the mortgage for registration. In other words, the penalty for failing to register, or in delaying it, is that the lender may lose priority to a subsequent lender.
For goods mortgages the current High Court register will be retained, but the legislation will allow for electronic registration to be introduced in future.
Registrations can be lodged by email and will be much simpler – there will no longer be a requirement to submit original documents or an affidavit of a witness.
Enforcement of Goods Mortgages
The Commission felt that the existing framework on enforcement achieves a reasonable balance between the interests of lenders and borrowers.
As a result, it recommends that court orders should be required to repossess goods securing regulated credit agreements, or where the lender wishes to repossess goods from private premises and in all other cases after one-third of the total loan amount has been repaid.
There is also an interesting mechanism under which it is proposed that borrowers can opt in to the court process. This is designed to streamline the many cases where the borrower does not engage in the termination process.
Where a goods mortgage secures a non-regulated agreement, the report recommends that goods can be repossessed without the need for a court order and there should be no statutory right of voluntary termination.
Protection of third parties
The current bills of sale regime operates very harshly against buyers of vehicles who subsequently discover that the vehicle is subject to a bill of sale.
The Commission proposes that a private purchaser who buys in good faith and without actual notice of a goods mortgage should obtain good title to the goods.
It goes on to caveat this by indicating that this protection should be repealed where vehicle provenance checks become free (or almost free) and become a routine part of buying a second-hand vehicle.
The recommendations in the report are well thought out and, in most areas, take into account the views of the majority of the organisations which responded to the Commission’s consultation paper.
This is a good indicator that lenders, borrowers and consumer organisations all agree that bills of sale have finally had their day. Let’s hope that the recommendations in the report can be turned into legislation sooner rather than later.