1. See R M Goode ‘Security in Cross-Border Transactions’ (1998) 33 Texas ILJ 47.

2. See J W Head ‘Evolution of the Governing Law for Loan Agreements of the World Bank and Other Multilateral Development Banks’ (1996) 90 AJIL 214.

3. The transition from one economic regime to another allows the opportunity for fresh examination of the basic assumptions of the other system that are often taken for granted. See U Drobnig ‘The Conversion of a Socialist Economic System to a Market Economy: Legal Implications’ in R Cranston and R M Goode (eds) Commercial and Consumer Law (Oxford: Clarendon Press, 1993) ch 15.

4. The EBRD secured transactions project was established in 1992 to encourage countries in the former Soviet Bloc to modernise their collateral security laws and offer technical assistance. The European Bank for Reconstruction Model Law on Secured Transactions (1994) identifies the core principles of a model secured transactions regime as being: first, reducing the risk for creditors on default; second, simplicity in the creation of security interests; third, expeditious satisfaction on default; fourth, prompt enforcement to the market value of the charged assets; fifth, priority on insolvency; sixth, creation and maintenance of security should be at a low cost; seventh, security should be available over all types of assets to secure all types of debts and between all types of person and organisations; eighth, there should be an effective means of publicising the existence of security rights; ninth, clear rules governing priority; and tenth, the parties should be able to adapt security to the needs of their particular transaction. The approach of the EBRD is to present the Model Law as an illustration of the principal rules for secured transactions. It is deliberately ‘non-national’ in terms of its approach, the emphasis being inspiration for reform rather than imposition. For a discussion, see M Andenas and D Fairgrieve ‘Securing Progress in Collateral Law Reform: The EBRD Regional Survey of Secured Transactions Law’ [2000] Law in Transition (Autumn) 28; C Averch, H Chen, F Dahan, P Moffat and A Zuerev ‘The EBRD's Legal Reform Work: Contributing to Transition’ [2002] Law in Transition (Autumn) 42.

5. Work is in progress on a chapter on security interests as part of the project for a European Civil Code under the direction of Professor von Bar. See R M Goode ‘Harmonised Modernisation of the Law Governing Secured Transactions: General-Sectorial, Global-Regional’ [2003] 1/2 Uniform Law Review 341.

6. See, for example, United Nations Convention on the Assignment of Receivables in International Trade (2001). A legislative guide to secured transactions is currently being drafted by UNCITRAL.

7. See Convention on International Interests In Mobile Equipment and Aircraft Protocol Thereto (the Cape Town Convention and Protocol), November 2001. For a background discussion see M Stanford ‘From Ottawa to Cape Town: UNIDROIT's Role In The Modernisation of the Law Governing Leasing And The Taking of Security’ in I Davies (ed) Security Interests In Mobile Equipment (Aldershot: Dartmouth Press, 2002) ch 11.

8. See U Drobnig ‘Secured Credit in International Insolvency Proceedings’ (1998) 33 Texas ILJ 47.

9. The ‘credit prone’ countries in this respect have been listed in the following order: US, Anglophonic Canadian Provinces, Germany, UK, France. Compare P R Wood Comparative Law of Security and Guarantees (London: Sweet & Maxwell. 1995) pp 5–6.

10. T H Jackson and A T Kronman ‘Secured Financing and Priorities Among Creditors’ (1979) 88 Yale LJ 1143.

11. Since the debtor offering security decreases the creditor's risk of not being paid, the price for the utilisation of the creditor's money expressed in the interest rate charged should be lower for a secured rather than for an unsecured credit. The difficulty is to determine precisely the lowering of risk as a result of the security which should then be reflected in the interest rate charged. See A Schwartz ‘Security Interests And Bankruptcy Priorities: A Review of Current Theories’ (1981) 10 JLS 1.

12. Note ‘The Inefficient Common Law’ (1983) 92 Yale LJ 862 at 885.

13. D G Baird ‘Notice Filing and the Problem of Ostensible Ownership’ (1983) 12 JLS 53.

14. This is an aspect of Code methodology. The UCC was not perceived by Gilmore as a Civil Law Code as he believed that the common law would fill the gaps left by the UCC: ‘[t]he solid stuff of the pre-Code law will furnish the rationale of decision quite as often as the Code's own gossamer substance.’ See G Gilmore ‘Article 9: What It Does for the Past’ (1966) 26 La LR 285 at 286. In this respect, the UCC sanctions the continuation of ‘the principles of law and equity, including the law merchant’ as a source of US commercial law whilst Article 1:201(1) provides that: ‘This Act shall be liberally construed and applied to promote its underlying purposes which are identified as including the simplification, clarification and modernisation of the law governing commercial transactions.’ However, a dilemma does occur in respect of drafting errors because whilst judges can create common law rules to fill in the gaps, judges cannot create common law exceptions to statutes because of legislative supremacy. There is inherent ambiguity concerning which source is to be applied in resolving cases that do not expressly fall within the letter and purpose of the provisions of the UCC. The dilemma in this context is whether intra-code concepts or meta-code concepts such as the common law should apply.

15. Article 9:101 Comment.

16. A distinction is drawn under Article 9 between the enforceability of the security interest inter se and as against third parties. An agreement which creates or provides for a security interest, together with ‘attachment’ of the security interest are all that is required. Normally, three conditions have to be fulfilled for attachment to occur, namely, the parties must intend attachment; value must be given; the debtor must have rights in the collateral. In order to obtain priority as against third parties on the other hand. it is necessary to ‘perfect’ the security interest. This occurs when the security interest has attached and all the steps required for perfection have been completed, which means either possession or registration of a financing statement. See UCC, Article 9:203(1). For a general overview see I Davies ‘The Reform of Personal Property Security Law: Can Article 9 of the US Uniform Commercial Code be a Precedent?’ (1988) 37 ICLQ 465.

17. Article 9:204(1) of the UCC envisages that ‘a security agreement may provide that any or all obligations covered by the security agreement are to be secured by after-acquired collateral’ whilst Article 9:204(3) provides that: ‘Obligations … may include future advances …’ One major exception to Article 9:204 concerns consumer goods other than accessions, unless the debtor acquires them within ten days after the secured party gives value. Undoubtedly, questions of public policy dictated this restriction on the ability of a private individual to mortgage all his present and future personal effects.

18. There is a Permanent Editorial Board of the UCC which meets twice a year to deal with problems of interpretation of the UCC and makes recommendations for revision. A major revision of the UCC was also completed in 1972.

19. The revised Article 9 is referred to as R9. It came into force in July 2001 and has been adopted in all the states in the US, including Louisiana. The text can be found at http://www.accusl.org.

20. The new Article 9(R9) facilitates the creation of security interests in deposit accounts, expands the financier's automatic claims to proceeds of collateral, permits filing against a corporate debtor in its state of incorporation, even though the collateral assets are located in other jurisdictions. It also assists the securitisation of rights to payment.

21. The literature is voluminous. For recent English contributions see G McCormack ‘The Priority of Secured Credit: An Anglo-American Perspective’ [2003] JBL 389; R Mokal ‘The Search for Someone to Save: A Defensive Case for the Priority of Secured Credit’ (2002) 22 OJLS 687; V Finch ‘Security, Insolvency and Risk: Who Pays the Price?’ (1999) 62 MLR 633. For a full discussion in the US see two symposiums on secured credit (1997) 82 Corn LR 1279; (1994) 80 Vir LR (no 8).

22. See A Schwartz ‘Priority Contracts and Priority in Bankruptcy’ (1997) 82 Corn LR 1396.

23. In 1971, the proposed Lending and Security Act, suggested by the Crowther Committee Report On Consumer Credit (Cmnd 4596, 1971) leaned very heavily on Article 9. In addition, the Scottish Law Commission's Working Party on Security over Moveable Property (1986). the Halliday Report, as well as the DTI Paper prepared by Professor Diamond, A Review of Security Interests in Property (1989), drew on the Crowther Report. The Diamond Report recommended that the law should be reformed by the introduction of a new law of security and the creation of a notice-filing system. The Halliday Report, whilst recommending the establishment of a register of security interests with notice filing, was more selective in its drawing on the Crowther Report and, in particular, avoided recommendations that would introduce alien concepts into Scots law. Similar consideration can be seen in the debate in Canada in respect of the application of personal property security legislation modelled on Article 9 and adopted in the Anglophonic Canadian Provinces to Quebec. A fully online personal property security regime has been introduced in other Commonwealth countries, notably the New Zealand Personal Property Securities Act 1999 (NZPPSA). The Australian Law Commission in its Report Personal Property Securities No 64 (1993) is also consulting widely in respect of introducing a similar system. See J Goldring ‘A Commentary On Chapters by Professor Ralph Simmonds and Tony Duggan’ in M Gillooly (ed) Securities over Personalty (Sydney: Federation Press, 1994) pp 298–299.

24. The Company Law Review Steering Group, in its final report, Modern Company Law for a Competitive Economy (July 2001) provisionally concluded that the present company charges registration system should be replaced with the notice filing model adopted in Article 9. This conclusion was further endorsed in the Law Commission Consultation Paper Registration of Security Interests: Company Charges and Property other than Land (No 164, 2002).

25. In particular, the Law Commission Consultation Paper, Registration of Security Interests: Company Charges and Property other than Land (No 164, 2002) in recommending the introduction of a new law on security interests draws heavily on Article 9 of the UCC and similar personal property security interests legal regimes. There are various layers to the scheme of reform set out in the Law Commission Consultation Paper No 164: first, extending notice filing as distinct from the current English system of transaction filing for the registration of company charges, although this was not the favoured option; second, extension of that system to all transactions which have the function of security; third, extension of the entire system to unincorporated businesses and individuals which create security; lastly, a radical restatement of the law of security extending to all of the above. The first three alternatives would require a radical restatement and accommodation of the floating charge. This would be problematical, not least because the issue of characterisation of the floating vs fixed charges would still remain. See Agnew v Comr of Inland Revenue [2001] AC 710; Smith v Bridgend County Borough Council [2002] 3 WLR 1347. Crystallisation of the floating charge would be registrable so purchasers of capital equipment and receivables will take subject to it (para 4.143), and an execution creditor who contemplated execution after crystallisation would not gain priority. At the same time, the areas of uncertainty in relation to the current law with floating charges would still remain. See L Gullifer ‘Will the Law Commission Sink The Floating Charge?’ [2003] LMCLQ 125 at 128–138.

26. For a discussion see G McCormack ‘“Quasi-securities” and the Law Commission Consultation Paper on Security Interests - A Brave New World’ [2003] LMCLQ 80.

27. Above n 25. Whilst the Law Commission considered that the notice-filing system could be applied to the charges that are currently registrable under the Companies Act 1985 (paras 1.17–1.18), it added that there would be advantages in following a functional approach to what amounts to a security interest and that a system of registration of quasi-security interests would be advantageous to creditors and purchasers (see para 7.20).

28. See G Gilmore ‘The Good Faith Purchase Idea and the UCC: Confessions of a Repentant Draftman’ (1981) 15 Ga LR 605.

29. See nn 13–14 above. The jurisprudential basis of ‘security interest’ is problematical. There is no unitary concept of security interest among the families of legal systems and secured financing law is grounded in concepts of property and also reflect public policy choices that vary greatly among states or in the case of federal structures, subdivisions of states. See R C Cuming ‘The Internationalization of Secured Financing Law: The Spreading Influence of the Concepts of UCC, Article 9 and its Progeny’ in R Cranston (ed) Making Commercial Law - Essays in Honour of Roy Goode (Oxford: Clarendon Press, 1997); I Davies ‘The Emergence of a Substantive International Legal Regime in High Value Equipment Moving Between Frontiers’ (2003) 1 JICL 351.

30. Article 1:201(37) UCC; SPPSA, s 3(1); NZPPSA, s 17(1). This was also the provisional approach adopted by the Law Commission Consultation Paper No 164, n 25 above, para 7.20.

31. For example, this also arises in the case of a pledgee's physical possession of goods.

32. See, for example, Parts II and IX of the Law Commission Consultation Paper No 164, n 25 above.

33. Inherent in the idea of acquiring an absolute right in property is exclusivity of possession, and in this context Blackstone referred to a double right, jus dupliatum or droit droit. See Blackstone Commentaries on the Laws of England II (1857) para 199.

34. There are three possible scenarios:

(i) T steals the goods from A (the owner) and disposes of them to B.

(ii) T defrauds A into giving up possession of the goods and then wrongfully disposes of them to B.

(ii) T is a bailee or agent lawfully in possession of A's goods and wrongfully disposes of them to B.

35. See generally Gilmore, G The Commercial Doctrine of Good Faith Purchase’ (1954) 63 Google Scholar Yale LJ 1057; J B Waite ‘Caveat Emptor and the Judicial Process’ (1925) 25 Col LR 129.

36. See Dolan, J F The UCC Framework: Conveyancing Principles And Property Interests’ (1979) 59 Google Scholar Boston Univ LR 811.

37. Nemo dat quod (qui) non habet. This is the first-in-time rule in law and as a principle first appeared in Perkins Profitable Bonk which was published in 1532 in law-French citing the Yearbooks as authority. Its equitable counterpart is qui prior est tempore potior est iure. The logic here, as Lord Westbury explained in Phillips v Phillips (1861) 4 De GF & J 268 at 275, is that the transferor disposes of only that to which he is justly entitled.

38. Barthelmess v Cavalier (1934) 2 Cal App 2d 477 at 487: ‘Title like a stream cannot rise higher than its source.’

39. Courts and legislatures have often rationalised the departure from the logic of the security of property principle on the following bases: first, fault or negligence on the part of the owner, for example, estoppel; second, the true intent of the owner, for example, through the concept of void and voidable title; third, an economic justification in order to promote commerce, for example, treating the bailor in possession as a bailor for certain purposes under s 25(2) of the Sale of Goods Act 1979. The latter approach employs a fiction and can be seen in ss 2, 8 and 9 of the Factors Act 1889 where a purported transfer is treated as being valid as if ‘expressly authorised by the owner of the goods to make the same’. This approach makes a counterfactual state of affairs as being its standard. Compare L Fuller Legal Fictions (Stanford, California: Stanford University Press, 2nd edn, 1967) p 28.

40. Above n 25, para 4.181.

41. Above n 25, paras 4.182–4.184.

42. The difficulty will be even greater if consumers were required to check the register in the case of capital equipment.

43. The reform of the entire law relating to the nemo dat rule was beyond the terms of reference of the Law Commission. Compare Diamond Report, n 23 above, ch 13. See also Department of Trade and Industry Consultation Document Transfer of Title: Sections 21 to 26 of the Sale of Goods Act 1979 (1994) where three propositions are put forward for discussion:

1. The law should be simplified, and protection for innocent purchasers extended, by replacing the present detailed provisions of the Sale of Goods Act 1979 with a broad principle, that where the owner of goods has entrusted those goods to, or acquiesced in their possession by another person, then an innocent purchaser of those goods should acquire good title.

2. The rule of market overt should be abolished.

3. The principle already embodied in Part 3 of the Hire Purchase Act 1964 (as amended) should be extended to all goods subject to hire purchase or conditional sale agreement, and also to goods held on lease or covered by a bill of sale.

Only proposition 2 has been acted upon following the Sale of Goods (Amendment) Act 1994.

44. K Llewellyn ‘Through Title to Contract and a Bit Beyond’ (1938) 15 NYULQ 159. Even after the passage of Articles 2 and 9 of the UCC there are numerous examples of US case law which embrace title. Moreover, ‘rights in collateral’ is the central concept of attachment for the purpose of Article 9. See I Davies ‘The Reform of Personal Property Security Law: Can Article 9 of the US Uniform Commercial Code be a Precedent?’ [1988] ICLQ 465.

45. The importance of title in English sale of goods should not be underestimated. Thus, it is an implied condition of a sales contract that the seller has a right to sell the goods. It is noteworthy that s 15(A) of the Sale of Goods Act 1979, which prevents a non-consumer buyer from rejecting goods where the defect is so slight that it would be unreasonable to reject them, does not extend to the implied condition that the seller has a right to sell under s 12 of that Act. See M Bridge ‘The Title Obligations of the Seller of Goods’ in N Palmer and E McKendrick (eds) Interests in Goods (London: LLP, 1998) ch 12.

46. The concept of ownership as an a priori determination of legal disputes was considered by Llewellyn to be too abstract in resolving such disputes. See W L Tabac ‘The Unbearable Lightness of Title Under the Uniform Commercial Code’ (1991) 50 MLR 408.

47. 25 UCC Rep Serv (Callaghan) 437 Banker D Me, aff'd s 88 F2d (1st Cir, 1978).

48. 25 UCC Rep Serv (Callaghan) 437 Banker D Me at 448.

49. It is not fatal to the characterisation of bailment that the bailee is under no duty to return the bailed goods to the bailor as it is only necessary for the bailee to deal with the goods in accordance with the bailor's instructions. It is for this reason that persons fraudulently converting to their own use goods held by them on a ‘sale or return’ basis have been convicted of larceny by a bailee. See, for example, R v Henderson (1870) 11 Cox CC 593; R v Richmond (1873) 12 Cox CC 495.

50. Compare Re Bond Worth [1980] 1 Ch 229 where the possessors of acrilan subject to a retention of title clause reserving ‘equitable and beneficial ownership’ in the supplier were held to enjoy rights in respect of the acrilan which were equivalent to being sui juris owners of it.

51. Often, the distinction is a fine one which can be illustrated in the US in the different litigation surrounding the liquidation of Sitkin Smelting. See Eastman Kodak Co v Harrison (Re Sitkins Smelting and Refining Inc) 639 F 2d 1213 (5th Cir, 1981); Re GTE Products Corpn (Wesgo Division) v Harrison (Re Sitkin Smelting and Refining Inc) 648 F 2d 252 (5th Cir, 1981). For a discussion on these cases see R A Hillman, J B McDonnell and S H Nickles Common Law and Equity Under the UCC (Boston: Warren Gorham and Lamont, 1985) s 18 03[2][d].

52. See Kinetics Technology International Corporation v Fourth National Bank of Tulsa 705 F 2d 396 (USCA 10th Cir, 1983).

53. See, for example, SPPSA, s 12; NZPPSA, s 40.

54. See n 39 above.

55. Curiously, the approach adopted can also be under-inclusive. Thus, for example, contractual rights of set-off are excluded from the registration requirements of Article 9-type regimes because ‘such transactions are often quite special, do not fit easily under a general commercial statute and are adequately covered by existing law’ (Article 9:104(1) Official Comment 7). This approach was accepted by the Law Commission, n 25 above, para 7.52, on the premise that set-off is not a security interest. However, the policy line between set-off and security interests can be a fuzzy one and Murray has argued: ‘The set-off principle when confined to two parties who are both creditors and debtors of each other is most logical because it facilitates the quick and economic adjusting of their affairs … When rights of third parties arise, the answer seems less clear… Reduced to its basic terms: Why should any unsecured creditor (banker or non-banker) receive more than his pro rata share merely because he has been lucky enough or astute enough to keep his hands on other property of the debtor?… If pro rata sharing of loss is the touchstone of creditor's rights, set-off seems to be an aberration.’ See D E Murray ‘Bank Versus Creditors of Their Customer: Set-Offs Against Customers’ Accounts' [1997] Commercial LJ 449 at 464.

56. The systems in Saskatchewan and New Zealand provide that the definition of a security interest includes consignment sale, notwithstanding that it does not secure payment or performance of an obligation. See SPPSA, s 2(1)(qq)(ii); NZPPSA, s 17(1)(b). In their Consultation Paper, n 25 above, para 7.29, the Law Commission sought views as to whether or not such an approach should he adopted in England and Wales. See below.

57. See T E Plank ‘Sacred Cows and Workhorses: The Sale of Accounts And Chattel Paper Under The UCC And The Effects of Violating A Fundamental Drafting Principle’ (1994) 26 Connecticut LR 397.

58. G Gilmore Security Interests in Personal Property (Boston: Little Brown and Co 1965) p 128 n 3: The factor purchases the receivables without recourse against the borrower … Thus, in form, the transaction is an outright sale of the receivables and not a loan coupled with a security transfer. Nevertheless, factoring is a financing arrangement and has always been so regarded … In substance, the factor is a supplier of working capital, not a joint venturer in a business enterprise. In that sense, one may properly describe him as a financier, a ‘banker’, a lender of money against security.’

59. Above n 25, para 6.25.

60. An exception is proposed when book debts are part of a larger transaction such as the sale of a business and also in the case of negotiable instruments. See n 25 above, para 7.45.

61. See Law Commission Consultation Paper, n 25 above, paras 7.3.7, 7.3.9, 7.4.1. At present, priority between successive assignments goes to the first assignee who gives notice of the assignment to the debtor, provided that the assignee does not have actual or constructive notice at the time of the assignment of an earlier assignment. See Dearle v Hall (1829) 3 Russ 1. This rule has been criticised in the factoring context because unless the factor/assignee gives notice to the debtor or makes all subsequent assignees aware of the assignment of receivables in its favour, the right to receive a debt in priority to others is open to challenge. But it is often not practicable for assignees wishing either to purchase or take security interests in receivables to notify all debtors or subsequent debtors. Applying a notice filing system to all assignments, whereby priority goes to the first assignee to file, is a straightforward way of resolving priority matters. For a discussion see J de Lacy ‘Reflections on The Ambit of The Rule In Dearle v Hall And The Priority of Personal Property Assignments’ [1999] Anglo-Am LR 87; R Brown ‘Preserving Priority In Receivables Financing: Time to Revisit Dearle v Hall’ (1995) 10 JIBL 3; C Walsh ‘Registration, Constructive Notice and the Rule in Dearle v Hall’ (1997) 12 Banking and Finance LR 129.

62. See Diamond, n 43 above, para 18.2.4. This approach was also endorsed by the Law Commission, n 25 above, para 7.38.

63. See below. If a purchaser of book debts under an Article 9-type regime fails to file, or incorrectly files, then he will have a claim for damages against the seller. The purchaser of the account has taken on the credit risk of the account debtor. If the account is worth much less than an unsecured claim for damages, a trustee in bankruptcy will have little motivation to avoid the interest. If, on the other hand, the account has value, then the purchaser's interest will be in jeopardy, that is, the buyer takes all the risks but will lose the rewards.

64. See G McCormack ‘Quasi-securities and the Law Commission Consultation Paper on Security Interests - A Brave New World’ [2003] LMCLQ 80. The continuing significance of the sale versus security issue of accounts receivable financing can be seen in the decision of the Supreme Court of Canada in R v Alberton (Treasury Branches) (1996) 133 DLR (4th Cir) 609 discussing the provisions of s 224(1.2) of the Canadian Income Tax Act. For a discussion see G McCormack ‘Personal Property Security Law Reform in England and Canada’ [2002] JBL 113.

65. The issue of these securities is an important source of revenue for the originators of these receivables, mainly banks and finance companies. To issue asset-backed securities an originator must transfer them to a bankruptcy-remote entity and, properly structured, this entity will obtain a high rating on the securities from a credit rating agency. With such a rating, the originator can sell the securities to investors who would not otherwise purchase or lend against the accounts/debts themselves. However, in order to obtain the necessary rating, there must have occurred a true sale of receivables from the originator to the bankruptcy-remote entity.

66. In the Statement of Standard Accounting Practice No 21 (SSAP 21) the distinction is stated as follows: ‘The distinction between a finance lease and an operating lease will usually be evident from the terms of the contract between the lessor and the lessee. An operating lease involves the lessee paying a rental for the hire of an asset for a period of time which is normally substantially less than its useful economic life. The lessor retains most of the risks and rewards of ownership of an asset in the case of an operating lease. A finance lease usually involves payment by a lessee to a lessor of the full cost of the asset together with a return on the finance provided by the lessor. The lessee has substantially all the risks and rewards associated with the ownership of the asset, other than the legal title. In practice, all leases transfer some of the risks and rewards of ownership to the lessee, and the distinction between a finance lease and an operating lease is essentially one of degree.’

67. In recent years, the finance lease has been recognised as constituting a unique and asset-based financing device. Significantly, at the private international level, UNIDROIT recognises the sui generis characterisation of the finance leasing transaction. Indeed, the Convention on International Financial Leasing (1988) attempts to reflect the economic reality of the transaction, as evidenced by the parties in their respective contracts, so as to facilitate the removal of certain legal impediments to the international financial leasing of equipment. In a similar vein, Article 2A of the American UCC recognises a finance lease as a unique kind of lease which is defined in s 103(1) of the UCC as follows: “‘Finance lease” means a lease in which (i) the lessor does not select, manufacture or supply the goods; (ii) the lessor acquires the goods or the right to possession and sue of the goods in connection with the lease, and (iii) either the lessee receives a copy of the contract evidencing the lessor's purchase of the goods on or before signing the lease contract, or the lessee's approval of the contract evidencing the lessor's purchase of the goods is a condition to effectiveness of the lease contract.’ A finance lease is unique because of the control that the lessee exercises in the selection, acquisition by the lessor, and approval of the equipment subject to the lease. This can be illustrated by reference to the standard terms and conditions of a typical finance lease where the onus is firmly placed on the supplier and the lessee.

68. In this context, a lease is defined as a transfer of a temporal property right of use to a lessee with a property right in the residual value retained by the lessor. See H Kripke, Book Review (1982) 37 Business LR 723; J D Ayer ‘On the Vacuity of the Salekease Distinction’ (1983) 68 Iowa LR 667.

69. In the case of the true lease, following default, the lessor is entitled to repossess and retain the entire value in the collateral, whereas a secured creditor must pass over the proceeds of the disposition, less the remaining unpaid balance of the secured obligation. The significance of the lessor's residual interest in the equipment should also not be underestimated or ignored. See C W Mooney’ The Mystery and Myth of ‘Ostensible Ownership’ and Article 9 Filing: A Critique of Proposals to Extend Filing Requirements to Leases' (1988) 39 Alabama LR 683.

70. See SPPSA, ss 3(2) and 55(2)(a). This is also the position in New Zealand: NZPPSA, ss 17(1) and 105(b)(ii). This was also the approach suggested by Diamond, n 43 above, para 9.7.11. A similar approach can also be seen in the context of consignment sales. See Law Commission, n 25 above, para 7.29.

71. See, for example, D G Baird and T H Jackson ‘Possession and Ownership: An Examination of the Scope of Article 9’ (1983) 35 Stan LR 175. At the same time it is acknowledged that some leases and bailments should be excepted from general filing where there is notorious possession, such as that of pawnbrokers or where there is possession for a short time or where there is another notice mechanism, such as certificates of title in the case of car financing within the US. See Davies, I ‘Absolute Title Financing in Commercial Transactions’ (1985) 14 Google Scholar Anglo-Am LR 71.

72. See above.

73. See G Gilmore ‘The Good Faith Purchase Idea and the Uniform Commercial Code: Confessions of a Repentant Draftsman’ (1981) 15 Ga LR 605 at 612: ‘In a society that recognizes property as something more than theft, you do not go around lightly destroying property rights; you must have a compelling reason for awarding A's property to C

74. P A Alces ‘Abolish the Article 9 Filing System’ (1995) 79 Minn LR 679.

75. If priority was dependent on the parties' own records for the determination of priority, this would give an incentive to competing creditors to manipulate their agreements and advance the relevant dates. See J B McDonnell ‘The Floating Lienor as Good Faith Purchaser’ (1977) 50 SCLR 129. The Article 9 filing system does operate as an anti-fraud mechanism because the filing system establishes the date for perfection of the security interest so that it frustrates an attempt to usurp priorities. See Alces, n 74 above, at 702.

76. Scott, R E The Politics of Article 2’ (1994) 80 Google Scholar Vir LR 1783 at 1793–1794.

77. Whilst contracting creditors may be aware of the competing priority claimants by virtue of the Article 9 filing procedures, involuntary creditors such as tort claimants are not protected.

78. Security interests which arise by operation of law are not revealed and they represent a potential trap for even well-informed and diligent creditors. In addition, the filing mechanism itself inevitably will contain omissions. For example, filings against the debtor's predecessor in title; defective filings; filings in the former name of the debtor; effective filings in other jurisdictions; filings relating to goods whose characterisation has changed; automatic perfection by possession. For a discussion here see L M Lo Pucki ‘Computerization of the Article 9 Filing System: Thoughts on Building the Electronic Highway’ [1992] Law and Contemporary Problems 5.

79. For example, security interests in fixtures are unavoidably subject to land registration. The Law Commission Consultation Paper, n 25 above, excludes‘specialist registers’ such as those relating to intellectual property rights from the scope of its notice-filing registration recommendations. See para 4.211.

80. See J Kanda and S Levmore ‘Explaining Creditor Priorities’ (1994) 80 Va LR 2103; Baird, D G ‘Notice Filing and the Problem of Ostensible Ownership’ (1983) 12 Google Scholar JLS 53.

81. Law Commission Consultation Paper, n 25 above, para 4.54.

82. See below.

83. Under the SPPSA the search fee by email is Canadian $7 which rises to Canadian $10 by mail or in person. The registration fee is Canadian $20 and $7 per year for renewal. In New Zealand the cost of registration is NZ$5 with a renewal fee of NZ$5 and the cost of searching is NZ$5.

84. Prior to the passage of R9, additional costs to filing were imposed linked to the delays in the then non-computerised indexing system. Furthermore, the task of determining the proper place of filing, where there existed interstate commerce, was significant. The secured party could also sustain considerable litigation costs concerning the issue of perfection and proper filing. Cumulatively, these costs were estimated as being $30m per annum during the period 1980–90. See White, J J Revising Article 9 to Reduce Wasteful Litigation’ (1992) 26 Google Scholar Loy LA LR 823.

85. See below.

86. In an attempt to reduce these, the Law Commission Consultation Paper, n 25 above, recommends in para 4.46 an objective approach in respect of filed financing statements which are ‘seriously misleading’. R9 provides that a financing statement is effective if it substantially satisfies the Code requirements if it contains ‘minor errors’ so long as these are not ‘seriously misleading’ (R9:506(a)). The original Article 9 did not specify what test to apply and this was a matter of inconsistent court rulings. The objective test applied in R9:506(b)-(c) is whether an actual search under the correct name would expose the financing statement.

87. For a discussion on the liability of the registry for loss caused by registry errors see Law Commission Consultation Paper, n 25 above, paras 4.215–4.219. One solution is insurance to guarantee the integrity of the filing record. This has been the approach adopted in England in respect of private motor asset registries such as HPI, where motor finance companies do not have an obligation in law to supply finance information by way of hire purchase and analogous agreements to HPI. See Moorgate Mercantile Co Ltd v Twitchings [1977] AC 890. Notwithstanding this, HPI indemnifies its inquirers who have relied upon the accuracy of a defective record up to a sum of £10,000.

88. Tax considerations will often drive the structure of the agreement, in particular, depreciation deductions and tax credits. Accounting principles are also relevant, for example, the off-balance sheet treatment of the obligations of a lessee in an operating lease. It is proposed that finance and operating leases should be treated in the same way. See Accounting Standards Board Discussion Paper ‘Leases: Implementation of a New Approach’ (1999). If this is implemented, the lessee would have to record in its accounts the fair value of the rights and obligations transferred by the lease, which would be large in relation to a finance lease and small in relation to an operating lease.

89. This is important in respect of bankruptcy treatment. Thus, for example, in the US, true lessors are entitled to receive full current rental payments or to repossess their equipment under 11 USC, s 365 so long as it is a true lease. If the lease is viewed as an unperfected security interest, the trustee in bankruptcy will not be bound by it. See Re Tulsa Port Warehouse Co Inc (1982) 690 F 2d 809. If it is a perfected security interest and not a true lease, the lessor is entitled to recoup the extent of its security interest, for example, the loss in the depreciation value of the collateral. See Associates Commercial Corpn v Rash (1997) 520 US 953.

90. See On Demand Information plc (in administrative receivership) v Michael Gerson (Finance) plc [2002] 2 All ER 949. For a discussion on remedies under lease and hire contracts see I Davies Equipment And Motor Vehicle Leasing and Hiring (London: Sweet & Maxwell, 1997) pp 98–114.

91. Compare the issues raised in Car and Universal Finance Co Ltd v Caldwell [1964] 1 All ER 290.

92. Above n 73.

93. See M G Bridge, R A Macdonald, R C Simmonds and C Walsh ‘Formalism, Functionalism and Understanding the Law of Secured Transactions’ (1994) 44 McGill LJ 567.

94. See Staughton LJ in Welsh Development Agency v Export Finance Co Ltd [1992] BCC 270.

95. Lloyds and Scottish Finance Ltd v Cyril Lord Carpet Sales Ltd (1979) 120 NLJ 336, [1992] BCLC 609; The Curtain Dream plc [1990] BCLC 923; Welsh Development Agency v Export Finance Co Ltd [1992] BCC 270; Orion Finance Ltd v Crown Financial Management Ltd [1996] 2 BCLC 78.

96. Re George Inglefield Ltd [1933] Ch 1 at 23, per Romer LJ. However, in Orion Finance Ltd v Crown Financial Management Ltd [1996] 2 BCLC 78 at 84, Millett LJ pointed out that the presence or absence of any of these requirements is not conclusive.

97. Aluminium Industrie Vassen BV v Romalpa Aluminium Ltd [1976] I WLR 676. Typically, there are three parts to the retention of title clause. The first part is concerned with reserving ownership in the goods themselves which arises from the English legal rule that property passing is the result of contract rather than conveyance. See ss 17 and 19(1) of the Sale of Goods Act 1979. The second part of the clause is concerned with the proceeds due to or received by the buyer and seeks to create a trust in which the original buyer holds these proceeds on behalf of the original seller. The third part of the clause is concerned with the case where the goods have been delivered to the buyer and are then used in the process of manufacture. The device often employed here is to declare the finished products as belonging to the seller through, for example, the application of tenancy in common doctrine. For a discussion of the current position see R Bradgate ‘Twenty-Five Years of Romalpa’ in I Davies (ed) Security Interests in Mobile Equipment (Aldershot: Dartmouth Press, 2002) ch 2.

98. In one administrative receivership in the UK there were over 400 retention of title claims. See Lipe Ltd v Leyland DAF Ltd [1993] BCC 385.

99. Armour v Thyssen Edelstahlwerke AG [1991] 2 AC 339.

100. In Clough Mill Ltd v Martin [1985] 1 WLR 111 at least two members of the Court of Appeal (Goff LJ and Sir John Donaldson) assumed in that case that the parties intended that the seller should only be entitled to the amount outstanding and should account for any surplus.

101. The Court of Appeal in Stockloser v Johnson [1954] 1 QB 476 specified two criteria: first, that the forfeiture was penal; second, that it was unconscionable for the performing party to retain the money. The application of the doctrine in the context of hire purchase and leasing is controversial and was in fact rejected in the cases in which it was considered. See Transag Haulage Ltd v Leyland DAF Finance plc [1994] 2 BCLC 88; On Demand Information plc v Michael Gerson (Finance) plc [2002] 2 WLR 919. The case law is discussed by P Giddins ‘Rights of Ownership in Goods’ in Davies (ed), n 97 above, pp 125–140.

102. In Re Charge Card Services Ltd [1987] CL 150, Millet J, as he then was, held that it was conceptually impossible for a bank as debtor to become its own creditor. See R M Goode Legal Problems of Credit and Security (London: Sweet & Maxwell, 2nd edn, 1988) pp 110 and 125; M G Bridge ‘Fixed Charges and Freedom of Contract’ (1994) 110 LQR 340. Compare A Berg ‘Charges over Book Debts: A Reply’ [1995] JBL 433.

103. In Re Bank of Credit and Commerce International GA (No 8) [1998] AC 214, Lord Hoffman held a ringing endorsement of charge-backs that they are like any other charge except that instead of the beneficiary of the charge having to claim payment from the debtor, the realisation takes the form of a book-entry. Compare R M Goode ‘Charge-backs and legal fictions’ (1998) 114 LQR 178. Under the revised Article 9 of the UCC, deposit accounts as original collateral can only be perfected by ‘control’ as distinct from filing. See generally ‘Security Interests in Deposit Accounts: An Anglo-American Perspective’ [2002] Insol L 7.

104. See F Oditah ‘Lightweight Floating Charges’ [1991] JBL 49. The lightweight floating charge was a technical device to prevent the appointment of an administrator who, under s 9(3) of the Insolvency Act 1986, could not be appointed if the administrative receiver was in place without the consent of the administrative receiver.

105. See s 72A of the Insolvency Act 1986 inserted by s 250 of the Enterprise Act 2002. This approach emerged after considerable consultation. See DTI/Treasury Working Group Report A Review of Company Rescue and Business Reconstruction Mechanisms (1999). The Enterprise Act 2002 restricts the use of administrative receiverships. Subject to certain exceptions, new floating charge-holders will no longer enjoy the right to appoint administrative receivers but this does not affect existing floating charge-holders. Under the legislation, floating charge-holders can appoint administrators out-of-court but they will have to function with the objective of rescuing the company where this is reasonably practicable. Even where rescue is not reasonably practicable, the administrator must not harm unnecessarily the interests of the creditors of the company as a whole.

106. Re New Bullas Trading Ltd [1994] 1 BCLC 485.

107. The distinction goes to the issue of priority. Fixed charges include both legal and equitable charges and mortgages, whilst floating charges are necessarily equitable in character. See Law Commission Paper No 164, n 25 above, paras 2.38–2.47.

108. Siebe Gorman and Co Ltd v Barclays Bank Ltd [1979] 2 Lloyd's Rep 142; Re Keenan Bros Ltd [1985] IR 401.

109. [2001] 2 AC 710. In this case, more commonly referred to as Brumark Investments, the Privy Council held that Re Bullas was wrongly decided. The Brumark case has now been upheld before the Vice-Chancellor in England in National Westminster Bank plc v Spectrum Plus Ltd (in creditors' voluntary liquidation) and others [2004] EWHC 9 (Ch).

110. The categorisation of a contractual lien over sub-freight is, for example, problematical. In Re Welsh Irish Ferries Ltd [1986] Ch 471 it was held that the lien on sub-freights created an equitable charge on the company's book debts and was therefore registrable by virtue of an equitable assignment. More recently, the contractual lien has been categorised as being more akin to a personal right to intercept the sub-freights and therefore not registrable. See Lord Millett, Agnew v Comr of Inland Revenue [2001] 2 AC 710 at 727; Law Commission Paper No 164, n 25 above, paras 2.76–2.79.

111. Significantly, under the European Directive on combating late payments in commercial transactions between enterprises in the private sector and between such enterprises and the public sector (Directive 2000/35/EC of the European Parliament and of the Council of 29 June 2000, OJ L200/35), member states are required to take under Article 4(1) of the Directive, appropriate steps to ensure that all national legislation contain provisions according to which the seller can retain title to the goods sold until the buyer has made payment and, further, that the seller should be able to recover them if payment is not made. See I Davies ‘Retention of Title Clauses and Non-Possessory Security Interests: A Secured Credit Regime within the European Union?’ in I Davies (ed) Security Interests in Mobile Equipment (Aldershot: Dartmouth Press, 2002) ch 9.

112. One aspect of the Romalpa decision which is worthy of note is the reliance on what Mocatta J in that case referred to as the ‘equitable remedy’ of tracing. The basis of the decision was that, as the buyers held foil as the seller's bailee, and sold as their agent, the sellers were entitled to ‘trace’ their property into the proceeds of sale, which the buyers held in the same capacity. See ReHallett's Estates (1880) 13 CLD 696. A distinction is now drawn between tracing and claiming. See Foskett v McKeown [2000] 3 All ER 97.

113. Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567; Twinsectra Ltdv Yardley [2002] 2 AC 164. See text accompanying nn 136–141 below.

114. For a general discussion see, for example, A Burrows ‘Proprietary Restitution: Unmasking Unjust Enrichment’ (2001) 117 LQR 412; P Birks ‘Property and Unjust Enrichment: Categorical Truths or Unnecessary Complexity?’ [1997] NZLR 668.

115. ‘Would not the operation of the general lien necessarily throttle such competition [among providers of credit] by the blanketing or freezing over the borrower's credit position?’ 2 NY Law Rev Comm, 1954 Report, p 1034. See I Davies ‘The Trade Debtor And The Quest For Security’ in Rajak (ed) Insolvency Law: Theory And Practice (London: Sweet & Maxwell, 1993) ch 3.

116. There is no provision for the debtor to contract with the creditor not to create a PSMI based upon his expectations of future financing needs. In this sense, monitoring costs for the first secured creditor will increase, which in theory should adversely affect the cost of credit. See S D Walt and E L Sherwin ‘Contribution Agreement in Commercial Law’ (1993) 42 Emory LJ 897.

117. The justification for the PMSI is often based upon the fact that it adds to the pool of assets and that if the after-acquired property clause were to attach to it then if no extra value is given, the creditor has enjoyed a windfall. This is the explanation for the approach seen in s 245 of the Insolvency Act 1986 which makes floating charges created at the onset of insolvency invalid, unless given for new value. See L Gullifer ‘Will the Law Commission Sink The Floating Charge?’ [2003] LMCLQ 125. An extension of credit enables a debtor to continue in business and any form of credit indirectly enables the debtor to acquire or produce assets. Only those loans which are linked to particular additional assets have priority, that is, security interests arising from directly contributing loans are second in time but first in right. Whether the acquisition of ‘new’ assets is more valuable to the debtor's business than, for example, the provision of funds to meet the wage bill of the business is at least questionable. See G McCormack ‘Quasi-securities and the Law Commission Consultation Paper on Security Interests - A Brave New World’ [2003] LMCLQ 80. For a general discussion on the role of the PMSI see A Schwartz ‘A Theory of Loan Priorities’ (1984) 8 JLS 209.

118. The Revised Article 9 does not answer many thorny problems associated with old Article 9. For example, how strict are the tracing rules for a lender PMSI? Both the old and the new Article 9 require that for a lender to have PMSI status, its money must have been used to acquire rights in the collateral in question (see Article 9:107(b) and R9:103(a)(2)). In some cases under the old Article 9 the courts relaxed this rule, as in N Platte State Bank v Prod Credit Ass 200 NW 2d 1 (Neb, 1972). The drafters of the new R9 do not indicate whether or not they approve of this approach. Further, the term ‘rights in the collateral’ is not defined and there is still little guidance in R9, although the wording has been altered slightly so that the debtor must have ‘rights in the collateral or the power, as distinct from a right to transfer rights in the collateral’. The purpose of this is to cover the case where the debtor has the power to transfer another person's rights to a certain class of transferees.

119. Under the old Article 9:107 there was no statutory prohibition on a secured creditor being a PMSI for intangibles or other non-goods collateral. Under R9, the PMSI is specifically restricted to sellers and lenders who enable the debtor to acquire rights in goods or in software that is or will be embedded in goods (R9:103(a)(1)). Thus, if collateral is not a good or software that will become a good, a secured creditor cannot be a PMSI holder (R9:103(a)–(c)). This is anomalous because there is no reason in principle why intangible collateral should be excluded from the scope of the PMSI, thereby cutting off financiers of an intellectual property right.

120. This approach also extends to livestock. The Official Comments justify the distinction on policy grounds. Inventory financiers often make periodic future advances against the receipt of incoming inventory. The notification requirement thwarts potential fraudulent conduct on the part of the debtor who might otherwise seek an advance from the inventory financier who might otherwise have given a PMSI lender priority in the new inventory. See G T McLaughlin ‘Purchase Money Lending Under Revised Article 9: Teaching an Old Dogma New Tricks’ (2003) 35 UCC LJ 1. In some jurisdictions, more onerous notice requirements are placed on the inventory financier. Thus, in Canada, notice must be given to any prior secured creditor before the debtor takes possession. See SPPSA, s 34(3); OPPSA, s 33(1).

121. For a discussion see McLaughlin, n 120 above, at 7–20.

122. For example, Article 9:336 of the UCC deals with commingled goods. If a security in collateral is perfected before the collateral becomes commingled goods, the security interest that attaches to the product or mass is perfected. If more than one security interest is perfected, the security interests rank equally in proportion to the value of the collateral at the time that it becomes commingled goods. Article 9:335 governs accessions. A security interest may be created in an accession and continues in collateral that becomes an accession. It is, however, subordinate to a security interest in the whole which is, for example, perfected by compliance with certificate-of-title legislation as seen in motor vehicles. See Davies, n 71 above.

123. See Borden v Scottish Timber Products Ltd [1981] Ch 25; Re Peachdart Ltd [1984] Ch 131; Hendy Lennox (Industrial Engines) Ltd v Grahame Puttick [1984] 1 WLR 485. The Law Commission's Consultation Paper, n 25 above, simply asks at para 8.77 whether a restatement of the law of security should set out rules on fixtures, accession and processed or commingled goods.

124. For a recent discussion here see R Bradgate ‘Twenty-Five Years of Romalpa’ in I Davies (ed) Security Interests in Mobile Equipment (Aldershot: Dartmouth Press, 2002) ch 2.

125. The courts have been prepared to recognise the reselling seller as acting as an agent of the original seller and as a principal as far as resale buyers are concerned. The courts have more recently moved away from this analysis, holding that the original seller's entitlement to the resale proceeds arise by way of a charge. See, for example, Pfeiffer Weinkellerei-Weineinkauf GmbH Co v Arbuthnot Factors Ltd [1988] 1 WLR 150; Compaq Computer Ltd v Abercorn Group Ltd [1991] BCC 484. This goes to the matter of accounting for surplus as seen in Clough Mill Ltd w Martin [1985] 1 WLR 111 where one of the issues before the Court of Appeal was restitution of part payment when goods subject to a retention of title clause are repossessed. In addition, there is the question of cross collateralisation, such as that seen in a retention of title context with a current account clause, that is, where title is retained until all debts are discharged, even though they may not be linked to the contract of sale. See Armour v Thyssen Edelstahlwerke AG [1991] 2 AC 334.

126. Article 9:103(f) provides that a PMSI does not lose its status as such, even though it secures an obligation that is not a purchase-money obligation. As a matter of principle, the PMSI should be limited to the actual asset acquired by the advance and once the purchase price is paid, the PMSI is lost. An ‘all monies’ current account clause is vulnerable under a PMSI regime, not least because such a clause is liable to attack on the basis of total failure of consideration. For suppliers who operate a running account balance payment system it would still be possible for the sale contract to deem that payments relate to the purchase price already sold, thus maximising the PMSI priority. See B Brown and J Sampson ‘Retention of Title under New Zealand: Personal Property Securities Act 1999’ [2002] JIBL 102 at 105.

127. For a discussion on the impact of a PPS A regime on retention of title clauses within a common law jurisdiction see B Brown and J Sampson ‘Retention of Title under New Zealand: Personal Property Securities Act 1999’ (2002) 17 JIBL 102. See also McCormack, n 117 above, which considers the impact of the Law Commission Consultation Paper No 164 on the retention of title line of case law.

128. See above. The drafters considered that there was no need to insert a notification requirement in R9:324(a) with respect to non-inventory purchase money lending. Thus, for example, in the case of capital equipment, PMSI status is gained if the PMSI is registered within 20 days of the debtor's acquiring possession of the collateral. The difference in legal treatment is justified on the basis of risk to earlier creditors. See McLaughlin, n 120 above.

129. See Bridge, M G, Macdonald, R A, Simmonds, R C and Walsh, C Formalism, Functionalism and Understanding the Law of Secured Transactions’ (1999) 44 Google Scholar McGill LJ 567.

130. See above. Compare Cuming ‘The Internationalization of Secured Financing Law’ in R Cranston (ed) Making Commercial Law: Essays in Honour of Roy Goode (Oxford: Clarendon Press, 1999) ch 22, p 499 at pp 522–523: ‘There are two features of the UCC, Article 9 approach that appear to be troublesome even to those who are attracted to it. The first is the total reconceptualization that it requires in the context of types of transactions that traditionally are not viewed as secured financing devices … The second feature … is the extent to which it requires a bifurcated approach to the characterisation of certain types of transactions. Since a title retention sales contract or a lease falls within a secured financing regime because it functions as a security device, it follows that the seller or lessor is not the owner of the goods sold or leased … What is troublesome is that outside this regime the recharacterisation might not be acceptable, with the result that the same transaction is viewed differently depending on the legal issues being addressed.’

131. This is not the case under existing English law because of the rule in Dearle v Hall (1829) 3 Russ 1, n 61 above. Proceeds claims in retention of title clauses are now construed as charges. See Tatung (UK) Ltd v Galex Telesure Ltd (1988) 5 BCC 325; Compaq Computers Ltd v Abercorn Group Ltd [1991] BCC 484; Re Weldtech Equipment Ltd [1991] BCC 16; E Pfeiffer Weinkellerei-Weineinkauf GmbH and Co v Arbuthnot Factors Ltd 1988] 1 WLR 150. In these cases, an attempt to establish a fiduciary relationship in respect of the proceeds of sale was considered to be inconsistent with the terms of the contract.

132. Article 9:324(a); SPPSA, s 34(b).

133. OPPSA, s 33; NZPPSA, s 74.

134. Any attempt to draw a distinction between factoring and purchasing an entire portfolio of book debts, that is block discounting is artificial and dysfunctional, although this appears to be the case in Saskatchewan under the SSPA, s 31 (7).

135. See C Walsh’ Super Priority for Asset Acquisition Financing in Secured Transactions Law: Formalism or Functionalism? in S Worthington (ed) Commercial Law and Commercial Practice (Oxford: Hart Publishing, 2003) ch 16 at p 460.

136. In Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567, the House of Lords held that under these circumstances the money in the hands of the recipient is impressed with a trust for the specified purpose and that the failure of this purpose led to the money being held on a secondary or resulting trust in favour of the original transferor. It is in fact debatable whether the primary purpose had actually failed in the Quistclose case. In addition, it is difficult to identify the beneficiary underlying the primary trust and this has led some commentators to refer to an ‘illusory trust analysis’. See M G Bridge ‘The Quistclose Trust in a World of Secured Transactions’ (1992) 12 OJLS 335; P J Millett ‘The Quistclose Trust: Who Can Enforce It?’ (1985) 101 LQR 269.

137. This can be explained on the basis of corrective justice theory and the need to reduce incentives for misappropriation by allocating all profits to the victim. See E J Weinrib ‘Legal Formalism: On the Imminent Rationality of Law’ (1988) 98 Yale LJ 949.

138. In some cases, the courts have held the existence of a trust even when money is paid over without explicit or not sufficiently explicit trust language on the part of the payer, as in Re Kayford [1975] 1 WLR 279. Many of the cases can be explained on the basis of ‘discretionary justice’, that is, trust liability is imposed where a company's activity could otherwise amount to wrongful trading. See Carreras Rothmans Ltd v Freeman Matthews Treasure Ltd [1985] Ch 207; Re EVTR, Gilbert v Barber [1987] BCLC 646; Re Goldcorp Exchange [1995] 1 AC 74; Box v Barclays Bank [1998] Lloyds Rep Banking 185.

139. Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567; Twinsectra Ltd v Yardley [2002] 2 AC 164.

140. Compare Re Bond Worth [1980] Ch 238.

141. Law Commission Consultation Paper, n 25 above, para 7.54.

142. See Bridge, Macdonald, Simmonds and Walsh, n 129 above, at 664.