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Preface to the Third Edition

From: The Law of Security and Title-Based Financing (3rd Edition) Hugh Beale, Michael Bridge, Louise Gullifer, Eva Lomnicka

Content type:Book content Published in print:08 March 2018

Product:Financial Law [FBL] ISBN:9780198795568

The firstedition of this book was entitled The Law of Personal Property Security The second edition was published under the currenttitle, The Law of Security and Title-based Finance. The change was made because the book is a genuine attemptto cover both security and quasisecurity in one exposition, and we feltthatthis wide scope was notproperly reflected by the first title Despite the omission of the words ‘Personal Property’ in the new title, the book has not changed in this regard; itcovers all forms of property exceptland, which is dealtwith incidentally only so far as may be necessary

The second edition also saw a re-ordering, the introduction of a number of new chapters and a good deal of re-writing. We have had to make fewer changes for this third edition, and the structure of the book remains much as itwas in the second edition We hope this will make iteasy for readers who are familiar with the second edition to find their way in the new edition

Nevertheless, within individual chapters we have made significantchanges to reflectnew legislation and new case law Many of the developments are reflected in more than one chapter, so itseems more helpful to listthe principal legislation and cases with brief indications of the principal point:

Legislation:

Companies Act2006, new PartA1 (new scheme of registration of company charges)

Tribunals, Courts and EnforcementAct2007 (implementation respecting the abolition of distress and its partial replacementby commercial rentarrears recovery process; limitations on a landlord’s rightto interceptsub-rents; changes to enforcementof judgments)

Co-operative and Community BenefitSocieties Act2014 (charges created by registered societies)

Insolvency Act2015ss 251A etseq (on individuals, debtrelief orders and moratoriums)

Small Business, Enterprise and EmploymentAct2015(on assignmentof liquidators’ and administrators’ causes of action)

International Interests in AircraftEquipment(Cape Town) Regulations 2015

Securities Financing Transaction Regulation (Regulation (EU) 2365/2015, arts 12 and 13

Commission Delegated Regulation EU/2016/2251, art20 (regulatory constraints on the rightof use of financial collateral)

Directive 2014/65/EU of the European Parliamentand of the Council of 15May 2014 on markets in financial instruments (MiFID II) art16 (transactions with retail clients)

Cases:

Akers v Samba Financial Group [2017] UKSC 6 (trusts in the conflictof laws) (p vi) Alpstream AG v PK Airfinance Sarl [2015] EWCA Civ 1318 (duties of mortgagee)

Bassano v Toft [2014] EWHC 377 (bills of sale; whatconducthas the effectof determining a pledge)

Bibby Factors Northwest Ltd v HDF Ltd [2015] EWCA Civ 1908 (assignment, particularly absence of duty on obligor to notify assignee of cross-claims againstobligee/assignor)

Cavendish Square Holdings v Makdessi and ParkingEye Ltd v Beavis [2015] UKSC 67 (penalty clauses)

Chatfields-Martin Walter Ltd v Lombard North Central Plc [2014] EWHC 1222 (QB) (estoppel againstfinance company thataltered hire-purchase register)

Cukurova Finance International Ltd, Cukurova Holding AS v Alfa Telecom Turkey Ltd [2013] UKPC 2 (relief fromforfeiture in relation to appropriation)

Eason v Wong [2017] EWHC 209 (Ch) (equitable liens)

Fons HF (In Liqudation) v Corporal Ltd [2014] EWCA 304 (meaning of ‘debenture’)

FSC v Lemma Europe Insurance Company Limited BVIHC (Com) No 318 of 2012 (whether an agreementcreates a security interest)

Gillan v Hec Enterprises Ltd [2016] EWHC 3179 (Ch) (equitable liens)

JD Brian Ltd (In Liquidation), Re [2015] IESC 62 (Supreme Courtof Ireland decision on automatic crystallization clauses)

Jervis v Pillar Denton Ltd [2014] EWCA Civ 180 (expenses of the administration)

Lehman Bros International Europe (No 4), Re [2017] UKSC 38 (provable claims and set-off)

Lehman Brothers International (Europe) (In Administration, Re) [2012] EWHC 2997 (Ch) (security financial collateral arrangements)

Lutz v Bäuerle, Case C-557/13 (2015) (Insolvency regulation)

Metall Market OOO v Vitorio Shipping Company Ltd (The Lehman Timber) [2013] EWCA Civ 650 (paymentof storage of goods subjectto a possessory lien)

Pars Ram Brothers (PTE) Ltd v ANZ Banking Group Ltd [2017] SGNC 38 (whether a pledge survives mixture of the pledged goods with other goods)

Private Equity Insurance Group SIA v Swedbank AS (C-156/15) (security financial collateral arrangements)

PST Energy 7 Shipping LLC v OW Bunker Malta Ltd [2016] UKSC 23 (‘Bunkers’) (retention of title clause)

Re Nortel GmbH [2013] UKSC 52 (expenses of the administration)

Ready Rentals Limited v Kaamran Ahmed [2016] EWHC 1996 (Ch) (whether a freezing order creates a security interest)

Saltri Iii Limited v MD Mezzanine Sa Sicar [2012] EWHC 3025(Comm) (duty of mortgagee)

(p. vii) Saw (SW) 2010 Ltd v Wilson [2017] EWCA Civ 1001 (lightweightfloating charges)

Secure Capital SA v Credit Suisse AG [2017] EWCA Civ 1486 (bearer notes in the conflictof laws)

Southern Pacific Mortgages Ltd v Scott [2014] UKSC 52; [2015] AC 385(priority between mortgagee and person claiming proprietary estoppel: Abbey National v Cann)

Your Response Ltd v Datateam Business Media Ltd [2014] EWCA Civ 281 (whether electronic documents can be the subjectof a possessory lien)

There is also coverage of two imminentreforms: the Goods Mortgages Bill, recommended by the

Law Commission and announced in the Queen’s Speech in 2017, which would replace the Bills of Sale Acts, and the Business ContractTerms (Assignmentof Receivables) Regulations 2018 (to be made under powers conferred by the Small Business, Enterprise and EmploymentAct2015), which are expected to be laid before Parliamentin early 2018 and which would render ineffective prohibitions on the assignmentof trade receivables.

Atthe time of writing there is uncertainty over the impactthatBrexitwill have on English law that implements or is based on EU legislation The third edition has been prepared on the basis of the currentsituation, namely thatthe UK remains a member of the EU; and we have notspeculated on the possible effectthatwithdrawal will have However, itseems likely thatthe UK legislation most dependenton EU legislation, the Financial Collateral Arrangements (No 2) Regulations 2003, will be keptin force by virtue of the European Union (Withdrawal) Bill Clause 2(1) of the Bill provides that, in general, “EU-derived domestic legislation, as ithas effectin domestic law immediately before exit day, continues to have effectin domestic law on and after exitday.” The question of the extentto which interpretation of thatlegislation by the Courtof Justice, either before or after “exitday”, will have to be followed by UK courts is yetto be settled.

As with the two previous editions, the four authors have collaborated closely on the whole of the work and acceptjointresponsibility for the whole However, itmay be useful to record thatprincipal responsibility for the firstdrafts of various chapters was as follows:

Hugh Beale: Chapters 3, 9–11, 14(D) (part), 23

Michael Bridge: Chapters 1, 8, 14(E)–(F), 16–17, 18(A), 20–22

Louise Gullifer: Chapters 2, 4–6, 14(A)–(C), 14(D) (International interests in aircraft equipment), 12– 13, 15, 18 (B)–(D)

Eva Lomnicka: Chapters 7 and 19

We are very grateful to the staff atOxford University Press for their help and encouragementin the writing and production of this book Louise Gullifer would like to thank Wei Jian Chan, for his excellentresearch assistance. She would also like to thank Universidad Carlos III de Madrid, where she held Santander Chair of Excellence while completing this third edition

Hugh Beale

Michael Bridge

Louise Gullifer

Eva Lomnicka(p viii)

Oxford University Press - Master Gratis Access; date: 09 March 2018

Contents

From: The Law of Security and Title-Based Financing (3rd Edition) Hugh Beale, Michael Bridge, Louise Gullifer, Eva Lomnicka

Content type:Book content Published in print:08 March 2018

Product:Financial Law [FBL] ISBN:9780198795568

Listof Abbreviations xv

Table of Cases xvii

Table of Legislation lxi

I Introduction

1 Introduction

A Scope of book 1 01

B. Reasons for security 1.07

C. The contribution of equity 1.13

D Categories of security interests in English law 1 17

E Quasi-security: reservation of title 1 21

F Formand substance and recharacterization risk 1 27

G. Statutory interventions on behalf of unsecured creditors 1.30

H Creditors’ preferences 1 33

2 Use of Security and Quasi-security Interests in DebtFinancing

A Introduction 2 01

B General map of debtfinancing 2 05

C. Use of security and quasi-security in general debtfinancing 2.10

D Specialized financing 2 20

3 Financial Collateral

A The Directive on Financial Collateral Arrangements 3 01

B Forms of financial collateral 3 18

C. Key concepts of the FCARs 3.35

D Charges over financial instruments 3 74

E Charges over ‘cash’ 3 91

F Charges over ‘creditclaims’ 3 103

G Evaluation of the FCARs 3 111 (p x)

II Description of Interests

4. Types of Interest

A Security interests and absolute interests 4 01

B Characterization of interests as security interests or absolute interests 4.13

5. Possessory Security

A. Pledge 5.01

B Possessory lien 562

6 Non-possessory Security

A Consensual 6 01

B. Non-consensual 6.142

7. Financing Devices Involving the Transfer or Retention of Title

A General 7 01

B Goods 7 07

C Title transfer financial collateral arrangements 7 58

D. Receivables 7.75

8. Rights notIncluding the Transfer or Retention of Title 334

A Non-consensual 8 01

B Consensual 8 71

III Registration and Other Perfection Requirements

9. Registration and Other Perfection Requirements

A. Meaning of perfection 9.01

B Purpose and significance of perfection requirements 9 04

C Specialistregisters 9 23

D Registration of hire purchase agreements 9 25

10. Interests Created by Companies

A. Overview 10.01

B Registration under the Companies Act2006 10 07

11 Interests Created by Debtors Who are notCompanies

A Introduction 11 01

B. The Bills of Sale Acts 11.04 (p. xi)

C. General assignments of book debts 11.63

D Agricultural charges 11 64

E Charges created by cooperative, community benefit, and building societies 11.73

IV Priorities

12 Introduction to Priorities

A Introduction 12 01

B Registration as constructive notice 12 04

13. General Priority Rule: Nemo Dat (Firstin Time to be Created Wins)

A. The nemo dat principle 13.01

B. Priority between possessory security interests and non-possessory security interests 13 03

C. Priority between the holder of possessory security interests and buyers 13 09

D Priority between non-possessory security interests 13 10

E Priority between the holder of non-possessory security interests and buyers 13.27

F Priority between financing devices involving the transfer or retention of title and other security interests 13 29

14. Exceptions to the Nemo Dat Rule

A. Purchaser of legal interest14.01

B The rule in Dearle v Hall 14 09

C Statutory exceptions to the nemo dat rule 14 21

D. Priority normally established by date of registration 14.31

E. Future advances and priority 14.83

F Priority agreements 14 108

15 Authorized Dispositions

A Introduction 1501

B. Authority to make absolute disposition 15.02

C. Authority to create prior ranking security interest15.19

16 Priority between Consensual and Non-consensual Security Interests

A Introduction 16 01

B Possessory liens 16 02

C. Lienholder and owner 16.03 (p. xii)

D. Lienholder and secured creditor 16.08

E Statutory rights of detention 16 09

F Equitable liens 16 10

G Priority of maritime and statutory liens 16 11

H. Execution creditors 16.12

Oxford University Press - Master Gratis Access; date: 09 March 2018

I Distress 16 19

17 Other Priority Issues

A Priority between holders of security and absolute interests in assets and unsecured creditors 17.01

B Circularity 17 11

V Enforcement

18 Enforcementof True Security Interests

A General issues in relation to true security interests 18 01

B. Pledge 18.10

C. Lien 18.14

D Non-possessory security 18 19

19 Enforcementof Financial Devices Involving the Transfer or Retention of Title

A Introduction 19 01

B. Goods 19.03

C Title transfer financial collateral arrangements 19 43

D Receivables 19 44

20 Enforcementof Security in Insolvency

A General 20 01

B. Liquidation and bankruptcy 20.02

C Administration 20 46

D Receivership 20 67

E Other insolvency procedures 20 83

21. Enforcementof Rights notIncluding the Transfer of Title

A. Non-consensual 21.01

B Consensual 21 03 (p xiii)

VI Conflictof Laws

22 Conflictof Laws

A The applicable law 22 01

B. Security and the applicable law 22.53

C International uniformsecurity interests 22 146

VII Criticismand Law ReformProposals

23 Criticismand ReformProposals

A Introduction 23 01

B. Reports recommending reformand reforms elsewhere 23.03

C. Proposed amendments to the registration and priority of company

charges 23 25

D Reformof the Bills of Sale legislation 23 62

E Radical reform23 91

F. Currentprospects for radical reformin England and Wales 23.161 Index 877 (p xiv)

Part I Introduction, 1 Introduction

From: The Law of Security and Title-Based Financing (3rd Edition) Hugh Beale, Michael Bridge, Louise Gullifer, Eva Lomnicka

Content type:Book content Published in print:08 March 2018

Subject(s):

Product:Financial Law [FBL] ISBN:9780198795568

Assignment of credit Mortgage Pledge Debt Collateral agreement Set-off

(p. 3) 1 Introduction

A Scope of book 1 01

B Reasons for security 1 07

Theory and practice 1 07

Security and insolvency 1.10

Protection by other devices 1.12

C The contribution of equity 1 13

D Categories of security interests in English law 1 17

E Quasi-security: reservation of title 1 21

Conditional sales 1.22

Finance leases and hire purchase 1 25

Discounting 1 26

F Formand substance and recharacterization risk 1 27

G. Statutory interventions on behalf of unsecured creditors 1.30

Preferential and similar rights 1.30

Registration 1 31

H Creditors’ preferences 1 33

A. Scope of book

Proprietary security and ‘quasi-security’ over personal property

1.01 This book is aboutproprietary security taken by creditors fromdebtors to supportthe repaymentof loans or, much less frequently, the performance of other obligations The security will normally take the formof a pledge, mortgage, or charge over the debtor’s property. The book also deals with a number of transactions thaton a traditional analysis do notinvolve the taking of security butthathave a similar economic function, in thata party thatprovides creditretains property rights over assets thatin practice are being purchased by the debtor with the credit provided: for example, goods thatare leased to the debtor for their economic lifetime on terms that require the debtor to pay their full costplus the costof the creditsupplied. Itwill be seen thatthese transactions involve whatis often called ‘vendor credit’ as opposed to ‘lender credit’ These devices thatare ‘equivalent’ to security we term‘quasi-security’ The book deals also with the outrightsale of ‘receivables’, i.e. debts (typically ‘book debts’) thatare due to the debtor. If these debts are assigned to, for example, a factor in exchange for an immediate paymentata discounted rate, and the factor then obtains paymentof the receivables fromthe various ‘accountdebtors’ when the debts fall due, this too may be seen as functionally similar to lending on the security of the receivables. The sums collected by or on behalf of the factor, which exceed the discounted value for the debts paid by the factor, are tantamountto the repaymentof a loan of thatdiscounted value coupled with interest The equivalentof security may also be produced by a hostof other contractual devices, such as priority agreements, contractual set-off and liens over (p. 4) subfreights In the interestof a comprehensive treatmentof a complex subject, these too mustbe included.

Companies, unincorporated business debtors, and consumers

1.02 The debtors who feature in the cases in the book, and to whommany of the statutes dealt 1 2

with in the book apply, will mostfrequently be company debtors Traditional forms of security over personal property are far more commonly created by corporate debtors than by unincorporated business debtors (such as a sole trader or partnership) or by ‘consumers’ who borrow for purposes thatare notconnected to a business In part, this is because currentlaw makes itdifficultand risky for creditors to take effective mortgages or charges over the personal property of unincorporated business debtors or consumers In contrast, unincorporated business debtors regularly sell their receivables, and both they and consumers regularly enter into ‘quasi-security’ transactions. Transactions entered into by non-corporate debtors are therefore also covered in the book, though a systematic treatmentof consumer creditis leftto more specialistworks

Parties and debt obligations

1.03 The law of creditand security is often expressed through two-party transactions, taking, say, A as the lender and B the borrower. Butthird parties can become involved in the structure in various ways So, in return for a loan made by A to B, C may provide personal security, in the form of a personal guarantee or similar instrument, or in the formof a proprietary security over designated assets In the latter case, the security may or may notbe given in addition to a personal undertaking thatthe moneys advanced to B will be repaid by B In addition to B’s personal covenant, A has C’s assets to resortto in the eventof B’s default In the world of syndicated lending, where provision is made for banks thatare members of the lending syndicate to retire and to be replaced by new members, itis common for any security to be granted, notto the banks themselves butrather to a security trustee A rarer three-party case arose in one decision where the issue was whether, in return for a loan advanced by A to B, B could give security in favour of C. The view expressed in the case was thatsuch an arrangementshould stand This apparently odd arrangementmay, of course, be explained by background circumstances, and the presence of contractual obligations between A and C may determine the fate of any proceeds fromthe security realized by C Thatsaid, there seems no good reason to deny the essential validity of the security arrangement.

‘Proprietary’ as opposed to ‘personal’ security

1.04 This book deals only with proprietary security, as opposed to personal security of the sort represented by guarantees and by instruments such as performance bonds and standby letters of credit. Personal guarantees (p. 5) are often closely allied with proprietary security, as where the directors of a debtor company provide personal guarantees in addition to the proprietary security taken fromthe company itself Although the book does notdeal with personal security itdoes, as stated above, deal with a number of devices relating to property that, notunlike personal security, have an economic effectakin to the grantof proprietary security

Security over personal property

1.05 Furthermore, this book does notdeal with all cases of proprietary security butrather is limited to security over personal property, which can be understood for presentpurposes as all forms of property other than land Nevertheless, the distinction between security over personal property and security over land is less clearly pronounced in English law than the general difference between personal property law and land law This is because of the law and practice of security in the case of company debtors A debenture or instrumentof charge executed by a company debtor will frequently deal with security over both the land and the personal property of the company. Moreover, thatinstrumentof charge as a whole will need to be registered under section 859A of the Companies Act2006 and notjustso much of itas relates only to the debtor company’s personal property So far as the company’s land is concerned, itwill be advisable (and in order to create a legal mortgage over land, now essential) to register with the Land Registry. The difficulty of separating security over land and security over personal property is evidenced in other cases too For example, before an administrator may be appointed outof courtby a creditor and sentin to enforce security taken froma defaulting company, itmustbe demonstrated, inter alia, thatthe

appointing creditor’s security is over the whole or substantially the whole of the company’s property This quantitative testcompels in its application a cumulation of the company’s real property (land) and its personal property. The law of personal property and real property is also closely interwoven in the area of mortgages, where so much authority is derived fromcases dealing with land.

Secured debt rather than ‘equity’

1.06 The book deals with security for loans. For a business, debtfinance is an alternative to inviting investmentfromshareholders or partners, who will become part-owners of the business When long-termfinancing is required, so-called ‘equity financing’, as well as various forms of hybrid finance thatbridge the difference between debtand equity, will often be an alternative to debtfinancing, butthe latter may still be used; short- and medium-termfinance is normally obtained by borrowing. This book deals only with secured debt-financing and notwith equity finance and hybrid finance

(p. 6) B. Reasons for security

Theory and practice

Theoretical insights

1.07 The practical starting pointwith security is to ask why security is taken by creditors. In the voluminous American literature, however, the theoretical focus is largely placed on the reasons why debtors grantsecurity. This latter approach is closely tied to a broader concern with the raising of capital and with the division between equity and debtfinance, arising outof the theory that, in a perfectmarket, a company debtor is indifferentto whether itraises capital by borrowing or by issuing shares since the costto the company is the same. This same body of literature also follows economic assumptions thatcreditis cheaper if security is given, because the risk of default in the case of security is offset, atleastin part, by the creditor’s enforcementof its security rights over collateral belonging to the debtor company The literature also speaks to the ‘puzzle’ of secured creditin that, once obtained ata price discounted by the provision of security, itpushes up the costof borrowing on a later, subordinated basis. Itis by no means certain that, in practice, a precisely calculable interestrate spread separates the costof secured and unsecured credit In addition, empirical evidence shows thatthe average recovery of secured creditors in the eventof defaultand insolvency is very significantly less than the amountof capital and interestremaining unpaid.

Practical matters

1.08 A more practically orientated approach observes thatdebtors grantsecurity because creditors require themto do so Itis more a case of creditors insisting upon security There are some debtors powerful enough to resistthe grantof security The Law Commission has reported thatwell-established public companies are often able to borrow on an unsecured basis. However, many smaller enterprises can obtain crediton significantly better terms, and sometimes can only obtain it, if the borrower is able to offer security to the lender. There has also been a change in the pattern of secured lending in the lastcentury or so, fromthe issue of transferable secured debentures to the investing public to advances frombanks and syndicates of banks. Increasingly, however, lending (p 7) is being secured againstindividual assets or an assetstream, especially receivables, rather than againsta debtor with a range of assets Itis therefore the assetrather than the debtor thatis the primary focus of risk assessment.

From: Oxford Legal Research Library (http://olrl ouplaw com) (c) Oxford University Press, 2015 All Rights

Oxford University Press - Master Gratis Access; date: 09 March 2018

1.09 Protecting its interests in the eventof the debtor’s insolvency is notthe creditor’s only possible motive for taking security Fromthe creditor’s pointof view, security, when allied to enforcementrights often operative withoutrecourse to the courts, gives the creditor the opportunity to take speedy measures to abate future losses A secured creditor, moreover, is able to control the affairs of the debtor atcritical moments and is equipped with the means to monitor the affairs of the debtor Control and monitoring needs can also be served in unsecured loans by detailed financial covenants, coupled with rigorous events of defaultclauses thatpermitthe creditor to call in the loan in the case of a breach of covenantor the occurrence of an insolvencyrelated event Before the Enterprise Act2002, which limits the rights of the holder of a floating charge to appointan administrative receiver to run the company, itwas common to take a socalled ‘light-weight’ floating charge primarily to give the creditor this opportunity to take control of the debtor’s affairs. The appointmentof an administrator outof courtby a secured creditor makes the same case for a light-weightfloating charge, but, as we shall see, restrictions introduced recently by the courts on the taking of fixed charges over book debts will ensure in many cases thatthe floating charge is notlight-weightafter all.

Security and insolvency

Insolvency advantages of security

1.10 A more compelling reason for the taking of security, however, is thatitseparates secured fromunsecured creditors in the eventof the debtor’s insolvency The latter creditors, subjectto exceptional cases, receive on average a very modestdividend when the debtor’s estate is distributed by a company liquidator or a trustee in bankruptcy Indeed, mostof themhave, until recently atleast, notreceived a dividend atall. Secured creditors, however, do nothave to submita proof of indebtedness to the liquidator or trustee and can avail themselves of their security rights before the estate is distributed Where the security is insufficient, they may prove for the balance of the debt. Apartfromthe same exceptional cases again, the estate of the debtor is defined by whatremains after the secured creditors have enforced their security So far as the security is insufficientto repay the creditor, the creditor is free to submita proof for the unpaid balance This powerful reason for taking security is fortified by the creditor-friendly way in (p 8) which English law allows security to be taken and by the relative inexpensiveness of taking security.

Enforcement despite insolvency

1.11 Another feature of the intersection of security and insolvency merits consideration here Itis notjusta case of security defining the scope of the debtor’s unencumbered estate In addition, the secured creditor is able to enforce its security withouthindrance fromthe debtor’s insolvency representative, whose powers of intervention are in practice limited to waiting on the sidelines until the secured creditor’s rights have been enforced. Furthermore, itis a marked feature of the English law of security thatitallows for security over future property of the debtor to such an extentthatitcatches property falling in after the commencement, and even termination, of insolvency proceedings.

Protection by other devices

Contractual devices for the protection of creditors

1.12 Those extending creditmay also use other consensual devices giving limited protection againstnon-paymentby the debtor, although they do notinvolve the transfer or retention of title Examples are contractual set-off, negative pledge clauses, flawed assetclauses, and subordination agreements The extentto which these devices are effective if the debtor is insolvent has been the subjectof some debate and is considered below. However, where the debtor’s

creditrating is good, or where cross-border enforcementof security is problematical, these devices are often preferred to secured lending There are also non-consensual rights thatgive some protection, such as the rightof set-off, which, when itexists, gives extensive protection in insolvency

C. The contribution of equity

The flexibility and reach of security under English law

1.13 A particular characteristic of the English law of security is its flexibility, evidentin the way thatthe assets secured may be identified in general terms First, security is notconfined to identifiable assets thatare owned by the debtor atthe time the security is taken butcan take effect over assets thatthe debtor acquires in the future (‘after-acquired property’) withouta further actof transfer by the debtor Secondly, itis possible to take a presentsecurity over assets thatare changing fromtime. This allowed for the taking of a so-called ‘floating charge’ over the entirety of a company’s undertaking Both developments occurred in the courts of equity in the nineteenth century.

Future assets and assignment

1.14 The facility with which security can in English law extend to future as well as to existing assets is one of its mostdistinctive features, as well as being one of the outstanding achievements of the courts of equity. The common law did not, as such, prohibitthe taking of security over future assets, butitinsisted on a fresh conveyance (p 9) for each assetcoming into existence, an impracticable requirementin the case of revolving and future assets The common law, moreover, did notrecognize the assignmentof intangible assets such as debts. Equity, on the other hand, did notrequire a fresh conveyance butrather treated future assets as being automatically transferred or encumbered once they came into existence once value for the transfer or encumbrance had been given by the creditor The assignmentof intangible rights was also an equitable creation. Consequently, in equity, a debtor was able to raise finance on the basis of an ever-changing assetbase such as presentand future book debts With the invention of the floating charge by equity draftsmen and courts, debtors were able to treattheir entire undertakings as a single assetthatcould be the subjectof a flexible, unified security agreement. This same unitary character of the English law of security persists today, in contrastwith certain continental systems of law thathave created separate compartments of differenttypes of security (and quasi-security) device Nevertheless, for reasons thatwill be developed in the remaining chapters of this book, the single floating charge has been superseded in factby a combination of separate fixed charges over as many differentassets as can supporta fixed charge, together with a residual floating charge thatsweeps up all assets thatescape the row of fixed charges As stated above, changes in the law restricting the freedomwith which creditors can take fixed charges have accorded a more expansive role to the floating charge, a device whose demise had previously been forecastin some quarters.

Freedom now coupled with protection later

1.15 This combination of fixed and floating charges gives the debtor freedomto continue to trade in the ordinary way, disposing of stock-in-trade and other smaller items withouthaving to obtain the creditor’s consent, exceptif itwishes to dispose of items (for example, a major piece of capital equipment) thatthe parties have agreed should be subjectto a fixed charge or a reservation of title If this flexibility to allow the debtor to carry on its ordinary course of business were not possible there would be serious risks to the creditor, since itcannoteffectively waituntil things start to go wrong and then look for security or title transfer Taking security after a loan has been advanced, because of a subsequentdecline in the financial fortunes of the debtor, is nota straightforward matter Itis notthe law of contractthatcreates difficulties in the way of enforcing

promises to grantsecurity for an existing loan advance: the creditor’s forbearance fromenforcing the loan atthe request, sometimes implied, of the debtor, amounts to sufficientconsideration for this purpose. Rather, the difficulties in the way of the creditor arise outof the law’s requirement thatsolidarity amongstunsecured creditors be preserved in the run-up to insolvency proceedings This is why security may, for example, be open to challenge as an unlawful preference if granted in a defined period before the commencementof insolvency proceedings The purpose of the law here is to keep intactthe company’s assets so thatthey remain available to unsecured creditors as the beneficiaries of a deemed trust once the debtor’s insolvency regime supervenes. But security thatis taken (p 10) well before the debtor’s insolvency, even if itleaves the debtor free to trade in mostof its assets, will notnormally be open to challenges of this kind.

Floating charges and unincorporated debtors

1.16 The freedomto create floating charges over all a business’s assets is limited, however, to debtors thatare companies This is because charges over many forms of personal property (including mosttypes of goods) created by unincorporated debtors (whether sole traders, partners, or individuals) are subjectto the Bills of Sale Acts 1878–1891 These effectively preventcharges frombeing granted over such assets if the debtor does notown thematthe time Itis possible for unincorporated debtors to create floating charges over personal property thatfalls outside the scope of the Bills of Sale Acts, and itis thoughtthatthey quite commonly give floating charges over shares and similar types of investmentproperty, buta floating charge over the assets of an unincorporated business as a whole is normally notpossible

D. Categories of security interests in English law

Pledge, contractual lien mortgage, and charge

1.17 English law is flexible in its approach to the taking of security butin one matter itis somewhat formalistic Thatmatter concerns the differenttypes of security available in English law Apartfrom security arising by operation of law, such as common law and equitable liens, and certain statutory rights akin to liens, English law recognizes butthree types of security interests properly so called, namely, the pledge, the mortgage and the charge Itshould notbe thought, however, thatEnglish law is deficientin this respect, since those three securities are wide enough to cater for the creditor’s needs, are broadly available, and in any eventcan be supplemented or substituted by devices akin to security, so thatno new type of security is needed to fill any gaps.

Pledges

1.18 The pledge is a common law security that, unlike continental European securities of the same name, requires possession to be held by the creditor, subjectto cases where a temporary or limited release is allowed. This rules outpledge for intangible property, exceptfor negotiable instruments Pledge also is either unavailable or notemployed in the case of land Pledges by ‘consumers’ to ‘pawnbrokers’ are a very old institution thathas had something of a revival in recentyears as more consumers have come to own (p. 11) valuable goods. In the commercial contextpledge is used frequently in the case of short-termadvances againstshipping documents in the exporttrade, butfor business security generally itis of less practical utility. A pledge cannot sensibly be used in the case of revenue-generating assets thatthe debtor mustputto work to create an income streamto service the debt

Mortgages and charges

1.19 Non-possessory security devices consistof mortgages and charges. For personal property, a mortgage is a defeasible outrighttransfer of the property subjectto the mortgage thatis automatically reconveyed to the debtor upon repaymentof the mortgage advance A charge, however, is an encumbrance over property thatis lifted when the advance is repaid. There is no

transfer of the property to the creditor A mortgage may be legal or equitable, which is a distinction of no consequence for insolvency purposes, which is where the taking of security really matters. A charge, on the other hand, is necessarily equitable since the common law requires a strictmeasure of identification of particular assets to a security thatis notrequired in equity In principle, a wider range of remedies is available to a mortgagee creditor than to a chargee creditor, butthe ability of chargee creditors to drafta fuller range of remedies for a charge than is otherwise provided for eliminates the distinction in practice In such cases, itwould usually make no practical difference between identifying the enhanced security as an extended charge and identifying itas a mortgage, though called a charge

Non-consensual security interests

1.20 There are also a number of security interests thatarise by the operation of law Many of themdate back several centuries, and itis hard to find a coherentrationale for when they arise. Certainly, the common law displays no inclination to add to the listof these interests For this reason, lenders will normally prefer to putin place their protection atthe time of lending, and the non-consensual devices are only relied upon as a safety netif the other protection is inadequate

E. Quasi-security: reservation of title

General nature of quasi-security devices

1.21 We said earlier thatthere are a number of transactions involving the retention of title thatare notclassified by the currentlaw as security butthatserve the same economic function The principal forms are the finance lease, the hire purchase contract and various types of conditional sale agreement. The latter may be subdivided into those under which a fairly large item is supplied and the buyer is to pay the price in instalments, and agreements under which goods are supplied for re-sale or as materials or parts for manufacture into other goods under a ‘retention’ or ‘reservation’ of title clause Other transactions include sale and leaseback and sale and buyback, where care (p. 12) mustbe taken in drafting the agreements to avoid the risk of their being recharacterized as charges

Conditional sales

‘Simple’ retention of title not charges

1.22 In the lastforty years, trade creditors supplying goods to the debtor have increasingly availed themselves of rights under the Sale of Goods Act1979 to reserve title to the goods supplied, which otherwise would become the buyer’s property, usually upon delivery. The courts have been insistentthatsuch reservation of title clauses are notcharges so far as they remain confined to the particular goods supplied. This conclusion is of no small advantage to these trade creditors in thatthey thereby enjoy a dual advantage over banks and other financiers First, they do nothave to register their reservation of title clauses in order to assertthemagainstthird parties Secondly, so far as the buyer has notacquired rights to the goods supplied, even a pre-existing mortgage or charge granted to another creditor will notattach to the goods, which ensures thatthe trade creditor will have priority over such earlier creditors in respectof the goods supplied. Furthermore, trade creditors will by virtue of this same principle be able to asserttheir proprietary rights in the eventof the buyer’s insolvency.

‘Extended’ reservation of title clauses are usually charges

1.23 Nevertheless, reservation (or retention) of title clauses have their limitations. They have little practical utility if the goods have a shortcommercial life When sellers have soughtto extend the ordinary reach of such clauses to take in new goods manufactured with the aid of the seller’s

goods, the courts have interpreted attempts to ‘reserve’ title to these goods newly manufactured by the buyer with the help of the seller’s goods as charges The courts have moreover declined to give effectto attempts in other extended reservation of title clauses to treatthe buyer as a trustee or fiduciary of the money proceeds of the resale of goods supplied by the seller as anything other than a charge.

Other conditional sales

1.24 Sales under which the buyer is to pay the price in instalments and the seller reserves title until the price has been paid performthe same function as hire purchase or finance leases The latter forms of transaction were developed to avoid the risk thatthe buyer in possession of the goods mightsell themfree of the original seller’s interest, and for other reasons notdirectly connected to security

Finance leases and hire purchase

Finance leases and hire purchase agreements

1.25 Itis unchallengeable orthodoxy thatfinancial leasing and hire purchase agreements should be treated as whatthey purportto be, namely as transactions reserving title in the financier whilst granting use to the debtor, either indefinitely or until an instalmentpaymentplan has been carried outin full. These agreements are notrecharacterized as charges and, so far as the hirer fails to make payments as they fall due, the agreements permitthe financier to assertits ownership rights to the (p 13) goods in addition to any claimitmay have for debts thathave fallen due and for the hirer’s personal covenantto make payments.

Discounting

Sales of receivables

1.26 In a similar vein, the courts have treated the sale or discounting of book debts (or receivables) as genuine sale arrangements, notwithstanding the close functional similarity these arrangements bear to equitable charges over book debts as security for advances. There is little to differentiate a money advance by way of loan and the purchase price of a debtor debts The judicial treatmentof both types of transaction as notamounting to charges is well established and notlikely to be reassessed in the lightof the judicial treatmentof extended reservation of title clauses

F. Form and substance and recharacterization risk

Meaning of the substance test

1.27 Apartfroma close scrutiny of extended reservation of title clauses and a recharacterization of themas charges, the English courts have shied away fromapplying functional, economic analysis to contractual devices thatare framed as being other than mortgages and charges. They apply instead a so-called substance test, by which such a device will be treated as a security if thatin substance is whatitis. This approach, nevertheless, falls shortof functional analysis and amounts to no more than requiring the parties to follow accurately the steps laid down in their transaction Thatis to say, if the parties say one thing and do another, the transaction will be characterized according to how they actand notaccording to whatthey say. Although in principle contracts are notto be interpreted in the lightof the parties’ subsequentconduct, the characterization of an agreementas giving rise to a charge or otherwise does seemto depend in parton subsequentactions This liberal approach permits contracting parties to keep transactions off a company’s balance sheetand to avoid the registration of charges requirementlaid down in

the Companies Act Itis nevertheless importantto recognize thatcontracting parties are notfree to label a transaction as the one they mightwish itto be They may be free to lay down its incidents the rights and duties to which itgives rise butultimately itis for the courtto characterize the transaction according to type in the lightof those rights and duties

Sham transactions

1.28 A more extreme case where a transaction is recharacterized is thatof the ‘sham’, whereby all the parties to a transaction possess the intention thatthe transaction notgive rise to the rights and duties thatitappears to create Transactions of this kind (p 14) are deceptive and pose the risk of fraud for interested third parties. We shall see, however, thatitis rare in modern times for the courts to recharacterize transactions in this manner

Fixed and floating charges

1.29 A less extreme recharacterization is disclosed by the willingness of the courts, particularly in recentyears, to decide whattype a security is, and in particular whether a charge is a fixed charge or a floating charge, by looking atits substance and ignoring the label the parties may have chosen in their agreement Thus English courts will characterize as a floating charge a security over book debts thatis expressed to be a fixed charge butthatimposes insufficientcontrols over dealings with those book debts and their proceeds to pass the testof a fixed charge

G. Statutory interventions on behalf of unsecured creditors

Preferential and similar rights

Subordinating

floating charges

1.30 Although the English courts have done nothing for the plightof unsecured creditors, apart fromoccasionally expressing sympathy for thatplight, Parliamenthas responded more effectively on their behalf Firstof all, itintroduced a category of preferential creditors who, apartfromtheir classification as such, would have ranked simply as general unsecured creditors. Parliament advanced these preferential creditors, notjustahead of other unsecured creditors, butalso ahead of secured creditors holding a floating charge. A wedge was thereby driven between different classes of secured creditors, and the holders of a floating charge were expropriated in favour of the new class of preferential creditors. In later years, the classes of preferential creditors were reduced in number, whilstParliamentalso reined in attempts by the holders of floating charges to drafttheir way around the rights of preferential creditors with the aid of so-called automatic and semi-automatic crystallization clauses. Secondly, in the Enterprise Act2002, Parliament introduced a fund drawn fromfloating charge assets butlimited in amountand dedicated to all unsecured creditors.

Registration

Publicizing charges

1.31 In other respects, Parliamentleftsecured creditors and debtors to their own devices, with this exception English law has notfor centuries adhered strictly to the notion thatunpublicized transfers or encumbrances are the badge of fraud and are to be struck down on thataccount Nevertheless, for more than a hundred years, non-possessory security in the formof mortgages and charges has had to be registered if itis to be effective againstother secured creditors and the insolvency representatives of the debtor representing the unsecured creditors of the debtor. English law has always (p 15) required registration of the charge or mortgage itself, rather than the filing of a notice thatsuch a security has been taken. Formerly, the registration requirementby no

means provided all the information thatcreditors and potential creditors of the debtor would wish to have butchanges introduced in 2013 now make available online the instrumentof charge itself. Conditional sales, financial leasing, and hire purchase agreements, serving the same economic purpose as security, have never had to be registered The resultis thatthose consulting the register obtain an incomplete picture of the range of those assets possessed by the company thatitowns in an unencumbered state

Limitations of the registration system

1.32 So far as reservation of title creditors mightwish to avail themselves of the registration machinery to take advantage of extended reservation of title clauses, their attempts to do so would be blocked by inherentlimitations in the English law of security Trade creditors supply goods to debtors atintervals and usually notin response to a pre-existing commitmenttaking the formof a requirements contract. The difficulty to which this gives rise is thatEnglish law does notpermitthe trade creditor to register a charge or mortgage for all presentand future supplies A creditor is allowed to ‘tack’ a fresh advance to an earlier security only in very limited circumstances. When a trade creditor, having registered a charge over presentand future assets, then makes a subsequentdelivery, the rule againsttacking will subordinate thatcreditor, to the extentof the new advance, to the rights of secured creditors who have registered their charges in the interval between the trade creditor’s initial registration and the later advance Furthermore, to repeat registrations for relatively small supplies is notan economical proposition.

H. Creditors’ preferences

Different types of creditor

1.33 The broad range of security and devices akin to security covers a range of differenttypes of creditor and their needs. The pledge, a strong security giving the creditor a firmmeasure of control, has been seen to be inaptwhere the assets have to be putto productive use by debtors Banks do notparticipate in business activity with their customers, nor do they adopta passive partnership role, so the hallmark of a working security arrangementis one thatleaves the debtor free to deal with its encumbered assets in the ordinary course of business This is especially true of those assets thatconstitute a debtor’s working capital, such as its book debts. Pledges are therefore useful only for short-termadvances in the exporttrade, as well as for non-productive assets, such as precious and other metals, where documents representing those assets, such as warehouse receipts, can be taken into possession In international loans, a preference has been seen for unsecured lending backed by detailed financial covenants

Banks and their subsidiaries

1.34 In their dealings with borrowers, banks have used a range of fixed and floating charges, the latter type of charge sweeping up everything thatcannotbe accounted for by means of a fixed charge Finance houses, often owned by major banks, are heavily engaged with equipment financing, by means of hire purchase and financial leasing arrangements. They are also highly active in the factoring of book debts, a practice (p 16) thatis likely to become more pronounced now thatthe prospects of taking a fixed charge over book debts are so severely reduced. Factors purchasing book debts are notvulnerable to the claims of preference creditors and unsecured creditors availing themselves of new rights granted by the Enterprise Act2002 in the way thata bank taking a floating charge over book debts is.

Securitization

1.35 In securitization arrangements, where assets are sold to a special purpose vehicle (SPV) that then issues commercial paper to a community of investors, the seller of those assets is protected mainly by keeping the SPV bankruptcy remote and by the dispersal of risk inherentin the size of

thatcommunity The taking of security over receipts in the hands of the SPV amounts therefore to an ancillary source of assurance; likewise the various forms of creditenhancementused in securitization.

Trade suppliers

1.36 The English law of security, with its registration and other requirements, leaves trade suppliers in a difficultposition Quasi-security in the formof reservation of title has been adopted mainly in the case of raw materials and other items with a shortcommercial life, such as stock-intrade Substantial capital assets can be sold to a finance house, which will then make them available to their subsequentusers on hire purchase and similar terms. The original supplier, meanwhile, has its cash-flow needs metoutof the sale price itreceives fromthe finance house

Conclusion

1.37 The diversity of the English law of security and its cognates reflects a diversity of need in the marketplace and the willingness of the law to allow parties to engage in forms of off-balance-sheet financing.

Footnotes:

See para 7 02 etseq

See ch 8.

For a discussion of bills of sale granted by individuals, see ch 11.

R Goode, Consumer Credit Law and Practice (2001, Looseleaf); A Guestand MLloyd, Encyclopedia of Consumer Credit Law (1975, Looseleaf)

Re MS Fashions Ltd v Bank of Credit and Commerce International SA [1993] Ch 425, CA; Re Bank of Credit and Commerce International SA (No 8) [1998] AC 214, HL

See para 2 14

Re Lehman Brothers International (Europe) (In Administration) [2012] EWHC 2997 (Ch) at[43]–[44]

See the discussion in L Gullifer (ed), Goode and Gullifer on Legal Problems of Lending and Security (6th edn, 2017), para 1–16.

The book also does notcover creditinsurance and devices, such as creditdefaultswaps, that serve the cause of insurance withoutbeing insurance

Leading works on personal security include G Andrews and R Millett, Law of Guarantees (7th edn, 2015); J O’Donovan and J Phillips, The Modern Contract of Guarantee (3rd edn, 2016). A briefer accountof suretyship will be found in Chitty on Contracts (32nd edn, 2015), ch 44

See chs 7–8

Cf para 10.54.

The same is true of other assets for which there are specialistregisters, such as registered aircraftand ships and some forms of intellectual property See para 9 23

Or an administrative receiver in those remaining cases where an administrative receiver may still be appointed See para 18 60

See para 20 69

For a discussion of debtfinance, see E Ferran and LC Ho, Principles of Corporate Finance Law (2nd edn, 2014), chs 11–12; L Gullifer and J Payne, Corporate Finance Law (2nd edn, 2015), chs 7–8

2 Ch 697

See, for example, T Jackson and A Kronman, ‘Secured Finance and Priority among Creditors’ (1979) 88 Yale Law Journal 143; A Schwartz, ‘A Theory of Loan Priorities’ (1989) Journal of Legal Studies 209; R Scott, ‘A Relational Theory of Secured Financing’ (1986) 86 Columbia Law Review 901; SL Harris and CW Mooney, ‘A Property-Based Theory of Security Interests’ (1994) 80 Virginia Law Review 2021; L LoPucki, ‘The Unsecured Creditor’s Bargain’ (1994) 80 Virginia Law Review 1887; H Kripke, ‘Law and Economics: Measuring the Economic Efficiency of Commercial Law in a Vacuumof Fact’ (1985) 133 University of Pennsylvania Law Review 929; R Mann, ‘Explaining the Pattern of Secured Credit’ (1997) 110 Harvard Law Review 626 There is a very helpful summary of this literature in G McCormack, Secured Credit under English and American Law (2004), ch 1.

The so-called Modigliani-Miller indifference theory.

See J Armour and S Frisby, ‘Rethinking Receivership’ (2001) 21 Oxford Journal of Legal Studies 73, 96, referring to a survey conducted by the Society of Practitioners of Insolvency, showing that the average return to secured creditors is 37 per centand thatonly 18 per centof secured creditors receive paymentin full

There are other reasons for nottaking security Some creditors are involuntary creditors, for example, tortclaimants

Law Commission, Company Security Interests (Law ComNo 296, 2005) (see further para 23.12), para 1.2. The Reportpointed outthateven public companies frequently make use of forms of security in particular situations, and thatsecured financing is a crucial feature of financial markets: ibid

These have apparently fallen into disuse: see para 23.28.

See e.g. para 2.05on supply chain financing.

See para 20 69

See further para 20 68

See further para 6.109 etseq.

For the priority consequences of this in terms of liquidation and administration expenses, preferential creditors and unsecured creditors, see ch 20

In the past, the recovery amounthas been popularly stated as lying within the 2–5per cent range. The new rights granted to unsecured creditors under s 176A of the Insolvency Act1986 as amended (see para 20 24 etseq) should ensure thatin mostcases there will be atleastsome dividend for all unsecured creditors. Moreover, the average recovery may now be higher than stated in the past

In the case of floating charges, this is notpossible because of the prior rights of preferential creditors (ss 40 and 175and Sch B1 para 65Insolvency Act1986) and, to a limited extent, unsecured creditors (s 176A of the Insolvency Act1986)

Insolvency Rules 2016, r 14 4(g)

Insolvency Act1986, s 283.

Insolvency Rules 2016, r 14.19(1)(b).

See para 20 02

Re Lind [1915] 2 Ch 345, CA; Re Margart Pty Ltd (1984) 9 ACLR 269, NSW

See para 8.88 etseq.

See para 8.36 etseq.

This same advantage is to be found in reformed personal property security regimes such as those in the United States, Canada, Australia, and New Zealand: See paras 23 17–23 20

See ch 6.

Lunn v Thornton (1845) 1 CB 379, 135ER 587

Tailby v Official Receiver (1888) 13 App Cas 523, HL See further para 6 13

See further para 7 75etseq

See HC Sigman and E-MKieninger (eds), Cross-Border Security over Tangibles (2007); HC Sigman and E-MKieninger (eds), Cross-Border Security over Receivables (2009)

See further para 6 109 etseq

Alliance Bank v Broom (1864) 2 Dr & Sm289; Re MC Bacon Ltd [1990] BCLC 324.

See Insolvency Act1986, ss 239–41, 340–42; Re MC Bacon Ltd [1990] BCLC 324.

Ayerst v C&K (Constructions) Ltd [1976] AC 167, HL

See para 20 04 etseq Butnote the priority given to some creditors over floating charges, para 1.29. See also Insolvency Act1986, s 245, which avoids some floating charges before the onsetof insolvency

And now limited liability partnerships: see para 8 03

See para 11 04 etseq

See para 11.40.

See further paras 11 26–11 29

For criticismof this see para 23 90

See further discussion para 4 04

Re Cosslett (Contractors) Ltd [1998] Ch 495, CA (MillettLJ). A lien arising by operation of law can be expanded by contractso thatthe group of three security devices mightbe seen as four For the purposes of the presentdiscussion there is little practical difference between the pledge and the contractual lien and whatis said aboutpledges applies equally to the lien. For further discussion see para 4 04

And so-called ‘pledges’ of financial collateral, which are in law mortgages or charges: see para 3 20 etseq

Re David Allester Ltd [1922] 2 Ch 211 See para 529

Harrold v Plenty [1901] 2 Ch 314 Similarly, intangible property may notbe the subjectof a possessory lien: Your Response Ltd v Datateam Business Media Ltd [2014] EWCA Civ 281, [2015] QB 41

Keith v Burrows (1876) 1 CPD 722

Carreras Rothmans Ltd v Freeman Mathews Treasure Ltd [1985] Ch 207.

See para 18 19 etseq

Ibid See also para 6 52 etseq

Considered atparas 562 etseq and 6 142 etseq

This may include modifying a non-consensual device, so thata possessory lien may be extended by contract

For proposals to treatthe two in the same fashion, see para 23 92

See further para 7 43

See further para 7.34.

E g Re Curtain Dream [1990] BCLC 925

See paras 7 10–7 11

See para 7 12 etseq

See paras 7.36 and 7.46.

See ch 7

Olds Discount v John Playfair [1938] 3 All ER 275; Lloyds and Scottish Finance Ltd v Cyril Lord Carpet Sales (1979) [1992] BCLC 609, HL.

See para 7.105etseq.

Re George Inglefield Ltd [1933] Ch 1, CA; Welsh Development Agency v Export Finance Co Ltd [1992] BCLC 148, CA

Whitworth Street Estates (Manchester) Ltd v James Miller and Partners Ltd [1970] AC 583, HL; LG Schuler AG v Wickman Machine Tool Sales Ltd [1974] AC 235, HL

See, e g , Lord Millettin Agnew v Commissioner of Inland Revenue [2001] UKPC 28 at[32], [2001] AC 710. See paras 4.13 etseq and 6.102 etseq.

Snook v London and West Riding Investments Ltd [1967] 2 QB 786, 802, CA (Diplock LJ)

See para 4 15etseq

National Westminster Bank plc v Spectrum Plus Ltd [2005] 2 AC 680, HL See para 6 99 etseq

Salomon v A Salomon & Co Ltd [1897] AC 22, HL (Lord Macnaghten); Business Computers Ltd v Anglo-African Leasing Ltd [1977] 1 WLR 578 (Templeman J)

See now Insolvency Act1986 as amended, s 386 and Sch 6

See para 20.23.

See Insolvency Act1986, s 176A as amended by the Enterprise Act2002. See para 20.25et seq

Twyne’s Case (1601) 3 Co Rep 80b, 76 ER 809

See Companies Act2006, ss 859A and 859H, replacing Companies Act2006, ss 860 and 874; Bills of Sale Acts 1878–91 Almostall mortgages and charges need to be registered under the Companies Act: see para 10 22

For the registrable particulars, see para 10.08.

The Companies Act2006 (Amendmentof Part25) Regulations 2013, SI 2013/600

See para 14 83 etseq

Part I Introduction, 2Use ofsecurity and quasisecurity interests indebt financing

From: The LawofSecurity andTitle-BasedFinancing(3rdEdition) HughBeale,MichaelBridge,Louise Gullifer,Eva Lomnicka

Content type:Bookcontent Publishedin print:08March2018

Product:FinancialLaw[FBL] ISBN:9780198795568

Subject(s): Assignmentof credit Guarantees and security Debt

(p. 17) 2 Use of security and quasi-security interests in debtfinancing

A Introduction201

B Generalmapofdebtfinancing205

C Use ofsecurity andquasi-security ingeneraldebtfinancing210

D Specializedfinancing220

Structures usingspecialpurpose vehicles 224

Financialcollateral231

A. Introduction

Uses ofsecurityinterests

2.01 Security andquasi-security interests canbe usedwherevera party who is owedan obligationwishes to have a proprietary claimoveranassetofthe obligorto whichitcanhave recourse ifthatobligationis notfulfilled They are usedwidely inthe contextofdebtfinancingof businesses,to secure borrowingandotherforms offinance extendedby banks andotherfinancial institutions They are also usedto secure creditextendedto businesses by those contractingwith them,inany situationwhere a business does nothave to pay immediately forbenefits conferredon itby the counterparty, andalso where a business may become liable to a counterparty inthe future,forexample forbreachofcontract This chaptergives a generaloverviewofthe situations inwhichsecurity andquasi-security interests are usedforthese purposes Its aimis to putinto some sortofcontextthe detaileddiscussionofthe lawthatappears inthe subsequentchapters The discussionis,by its nature,very generalandinpractice there willbe many variations onthe typicalsituations described

Financingofbusinesses

2 02 Mostcompanies are financedby a mixture ofequity anddebt The mixture betweenthe two willbe a functionofa numberoffactors,includingthe size ofthe company,the nature ofits business andthe corporate structure (includingwhetheritis partofa groupofcompanies)andthe availability ofloanfinance andfinance inthe capitalmarkets Non-corporate businesses are financedina similarway,exceptthatequity financingis notrepresentedby share capitalbutby the interestofthe owners orpartners inthe assets ofthe business The nature ofthe generaldebt financingofa business willvary accordingto its size.The firstpartofthis chapterconsists ofa generalmapofthe financingofbusinesses categorizedby size.The differentpossible structures of generaldebtfinancing,(p.18)includingthe role playedby security andquasi-security interests, willthenbe considered The finalpartconsiders particularspecializedstructures,where secured debtfinance plays a crucialpart

Differenttypes ofbusinesses

2.03 As wellas varyinginsize,businesses vary enormously interms ofwhatthey do To give an idea ofthe range ofcorporate businesses,examples include realestate companies,construction companies,manufacturingcompanies,retailcompanies,services companies,financialcompanies, investmentcompanies orspecialpurpose vehicles (SPVs),engaged,forinstance,inproject finance orinsecuritization The type ofbusiness carriedoutby anorganizationwillaffectthe way inwhichitborrows,fromwhomitborrows,the assets thatare available to be givenas security and the type ofinterests grantedorreservedoverthose assets Certaintypes ofbusiness willuse a particulartype offinance (ofteninadditionto generalfinance)regardless ofthe size ofthe business Forexample,a manufacturingbusiness orone involvedinretailorwholesale trade would obtainplantandmachinery usingassetfinance (hire-purchase,conditionalsale orfinance leases) andwouldacquire stock-in-trade fromsuppliers onthe basis ofretentionoftitle sales Businesses involvedinimportingorexportinggoods willuse internationaltrade finance Othertypes of businesses have very specialistfinance needs,forexample aninvestmentcompany This company’s assets are likely to comprise equity anddebtsecurities issuedby othercompanies,and its operations are likely to include tradinginthose securities,usingits assets as financialcollateral forits obligations to its counterparties onthe financialmarkets Anotherexample is a project finance SPV,whichwilltypically only have one mainasset,forexample a revenue-generating contract,onthe strengthofwhichitwillraise loanorbondfinance

From: Oxford Legal Research Library (http://olrl ouplaw com) (c) Oxford University Press, 2015 All Rights

Oxford University Press - Master Gratis Access; date: 09 March 2018

2.04 The sources offinance orcredit,andthus also the holders ofsecurity andquasi-security interests,are diverse Loans tendto be providedby banks,who fundthemeitherfromdeposits or by raisingfinance themselves Holders ofdebtsecurities are usually those whose business is investment,suchas pensionfunds,insurance companies orhedge funds,butcanalso be banks or othercompanies orindividuals Finance forthe acquisitionofassets is providedby specialist finance companies,as is asset-basedfinance,althoughmany ofthese companies are infact affiliatedto the majorbanks Creditcanbe providedby anyone who contracts witha business: typicalsituations where security orquasi-security wouldbe involvedinclude where goods are sold oncredit,where realproperty is rentedto a business andwhere a business carries out transactions onthe financialmarkets A newandinnovative source ofdebtfinancingis via a peerto-peeronline lendingplatform The platformconnects potentiallenders,who couldbe individuals orcorporate lenders,withborrowers,many ofwhomare micro,small,ormedium-sizedenterprises

B. General map ofdebt financing

Micro,small,andmedium-sizedenterprises

2 05 These businesses,usually calledMSMEs,make up(innumber)999percentofallUK businesses Althoughthe definitionvaries,(p 19)itis convenientto thinkofthemas eachhaving a turnoverofless than£25millionperannum They vary insize fromtiny organizations, employinga very fewemployees,to those withupto about250employees Suchbusinesses are oftenincorporated,butthere are also partnerships andindividualtraders Notallthe forms of financingdescribedinthis chapterare available to non-corporate debtors: mostnotably,except forlimitedliability partnerships, they cannotgranta floatingcharge overtheirassets Formany decades incorporatedMSMEs obtainedtheirdebtfinance froma bank,usually by means ofan overdraft,securedby fixedandfloatingcharges overallthe company’s assets.Very oftenthe indebtedness wouldalso be supportedby guarantees givenby the directors orowners ofthe business,securedby charges overtheirhouses: this structure is also available to non-corporate debtors While this patternoffinance is stillcommon, there has beena very markedincrease over the lasttenyears inothermeans offinancing Thus MSMEs have turnedto asset-basedfinancing andsupply chainfinancing,bothofwhichinclude varieties ofreceivables financing Some use is also made ofpeer-to-peerlending,andalthoughthe proportionis small,itis growingfast In additionMSMEs make extensive use offinance securedby various retentionoftitle devices (equipmentfinance) inorderto acquire capitalequipment(whichis usually leasedorobtainedon hire purchase terms) orstock-in-trade (whichis likely to be suppliedonretentionoftitle terms) Since these devices operate by way ofretentionoflegaltitle,the assets acquireddo notfallwithin the company’s assets andso do notfallwithinthe bank’s fixedandfloatingcharges: the asset financiers andsuppliers therefore have priority overthe bankinrelationto those assets

Mid-sizedcompanies

2.06 These businesses (whichare nearly always incorporated)canbe definedas havinga turnoverofbetween£25millionand£500million They exhibita (p 20)similarpicture to SMEs, althoughthey are more likely to have a termloanfroma bankratherthanjustoverdraftfunding Banklendingis stilllikely to be secured,althoughthis willdependonthe creditworthiness ofthe company: the alternative is thatthe bankis satisfiedwithprotectionby a negative pledge clause as wellas financialcovenants inthe loanagreement Mid-sizedcompanies may also use assetbasedfinance inadditionto oras analternative to banklending Some companies ofthis size are financedby private equity,andhave relatively highlevels ofdebt They also may raise money by issuingbonds,by means ofa private placementratherthana public offer These may be secured Mid-sizedcompanies,dependingontheirfunction,are likely also to use equipment finance andto obtaincreditfromsuppliers onretentionoftitle terms

Large companies

2 07 Mostlarge companies (witha turnoverofover£500million)obtaintheirdebtfinance froma mixture ofsyndicatedloans anddebtsecurities,oftenissuedonthe public markets andusually frominternationalsources Inrelationto investmentgrade companies bothloans andbonds are likely to be unsecured Loans willcontainreasonably stringentnegative pledge clauses, as wellas financialcovenants Bondissues oftenonly prohibitthe issuerfromissuingsecuredbonds into the same market,as this wouldadversely affectthe value ofthe originalissue Companies of this size are ofteninvolvedintakingoverormergingwithothercompanies,andborrowmoney on a securedbasis to finance the acquisition Evenlarge companies willuse equipmentfinance: with‘bigticket’items this is likely to be inthe formofa finance lease.Suppliers ofgoods to large companies willusually attemptto supply onretentionoftitle terms: whetherthis is successfulmay

dependonnegotiations betweenthe parties since the large companies are likely to have superior bargainingpower

Financialinstitutions

2.08 Banks andotherfinancialinstitutions provide debtfinance to otherbusinesses by making loans They themselves have to obtainfinance,whichcanbe inthe formofloans fromotherbanks, butis likely to include anissue ofdebtsecurities,oftenina securitizationorcoveredbond structure Inthese structures,discussedbelow,the debtsecurities are backedby assets,namely the loans made by the institutions Allkinds offinancialinstitutions,includingbanks,insurance companies,hedge funds andpensionfunds,take partintransactions inthe wholesale financial markets,suchas tradinginsecurities andderivatives,whichrequire themto provide collateralto theircounterparty orto a centralcounterparty forthe obligations they undertake They may also borrow(p 21)money inorderto undertake these transactions,andare requiredto provide security forthese loans Further,banks are requiredto provide collateralfortheirobligations betweenthemselves inrelationto interbankloans,repos andpaymentsettlements The particular regime thatapplies to the use offinancialcollateralas security orintitle transferarrangements is discussedbelowinchapter3

Specialpurpose vehicles

2 09 SPVs are companies setupfora single purpose,whichcouldbe the buildingandoperation ofanitemofinfrastructure,orthe ownershipofa very large item,suchas a shiporanaircraft,or forthe purposes ofstructuredfinance,suchas securitization Debtfinance to suchcompanies, whetherinthe formofloans orbonds,is always securedonthe assets ofthe company These structures are consideredbelow.

C. Use ofsecurity and quasi-security ingeneral debt financing

Introduction

2.10 This sectionconsiders the structures ofgeneraldebtfinancingofbusinesses The techniques describedcanbe usedincombinationwitheachotherorseparately: this willvary accordingto the size andfunctionofthe business

Fixedandfloatingcharges

2.11 Where a banklends to anSMEora mid-sizedcompany,itis likely to be onthe basis of relationshiplending This is a lendingtechnique whereby the banktakes the decisionto lendbased onits assessmentofthe future cashflowofthe business,andwhichrelies onclose andcontinuing monitoringby the bank The lendingis usually onthe basis ofanoverdraftwithanagreedlimit: this gives the banka gooddegree ofcontroloverits exposure as itwillusually be able to refuse to extendfurthercreditatany time The close relationshipbetweenthe bankandthe business means thatthe bankhas early warningofany potentialfinancialproblems,andis able to take swift action,whichis designedto enable the business to continue ratherthanto obtainrepayment, whichmay wellforce the business into insolvency The role ofsecurity interests is therefore one oflastresort: ifthe business were to become insolvent,security gives the bankpriority overother creditors andcontroloverthe insolvency process The bankwilltherefore take security interests overthe entire undertakingofthe business,consistingoffixedcharges (p 22)overeverythingit can (plus a charge by way oflegalmortgage overany landownedby the business),anda floatingcharge overthe rest This combinationwillgive the bankthe rightto appointan administratoroutofcourtorto encourage the company itselfto do the same,ifthe business is a company This formoflendinghas declinedinrecentyears This has beenfora numberof reasons,mostnotably the difficulties forthe banks ofobtainingfixedcharges overreceivables afterthe decisions inAgnewv Commissionerforthe InlandRevenue andRe SpectrumPlus, andthe difficulties forthe borrowers ofobtainingany bankfinance atallsince the financialcrisis The resultis thatSMEs andmid-sizedcompanies have turnedto otherforms offinancing,whichare discussedinthe nexttwo paragraphs

Asset-basedlending

2 12 Incontrastto relationshiplending,the decisionto lendonthe basis ofasset-basedfinancing is made largely by assessingthe assets available as security,ratherthananassessmentofthe future cashflowofthe business The term‘asset-basedlending’encompasses receivables financing(bothfactoringandinvoice discounting).The receivables are soldto the financier, usually by anabsolute assignment,althoughthe financierwillusually also take a floatingcharge

Oxford University Press - Master Gratis Access; date: 09 March 2018

overallthe assets ofthe company Receivables financingis discussedindetailinchapter8 However,‘asset-basedlending’also includes a widertype offinancing,where the financiermakes advances againstnotonly the receivables ofa business,butalso againstotherrevolvingassets (includingintellectualproperty andstock)andsome fixedassets,suchas plantandmachinery The whole transactionwilluse differenttechniques fordifferentassets,so thatthe financierwill usually buy any receivables outright,butwilltake fixedcharges overotherassets ifpossible andif not,floatingcharges The asset-basedlenderis likely to wanta floatingcharge anyway,so that(p 23)itcanappointanadministrator Fixedcharges overstockare notuncommon,since the lendermay use fieldwarehousingtechniques orotherinformationtechnology mechanisms to achieve the necessary degree ofcontrol

Supplychainfinancing

2 13 This is really a variantonreceivables financing,butwiththe difference thatthe financier deals initially withthe accountdebtorratherthanthe creditor A large business witha numberof suppliers arranges witha financierto purchase the receivables thatthe business,as a customer, owes to its suppliers atthe pointthe debtarises This has a numberofadvantages Itenables the customerto extendthe paymentperiod,thus improvingits cashflow Italso oftenenables the supplierto obtaincheaperfinancingthanitwouldotherwise be able to do,since the costtakes into accountthe factthatthere is only one customer(thus makingthe riskeasierto assess)andthe creditratingofthe customer,whichis likely to be muchbetterthanthatofthe supplier Further,a receivable is soldto the financieronly whenithas beenconfirmedby the customer,thus reducing the riskofits value beingreducedby disputes Thus a customercanensure thatitdeals only with the supplierinthe eventofa dispute,ratherthanwitha financierwithwhomithas no commercial relationship.A customermay achieve this by insertinga clause restrictingassignment(exceptto the supply chainfinancier)into its contractwithits suppliers, thus lockingthe supplierinto a relationshipwiththe financierchosenby the customer.While usefulforlargersuppliers,these supply chainagreements are seldomavailable to smallbusinesses.

Syndicatedloan

2.14 Itis very commonforloans made to large companies to be syndicated,so as to spreadthe riskamonga numberoflenders Where generalfinance is providedto a large creditworthy company by way ofa syndicatedloan,itmay notbe secured However,security is usually providedwhere syndicatedloans are usedforspecialistfinancing,suchas projectfinance oras partofa leveragedbuy-out Security willusually be heldby a security trustee onbehalfofthe lenders andany othersecuredparties,suchas the borrower’s interestrate swapprovider

Issue ofdebtsecurities

2.15 Bonds are more likely to be securedifthe ratingofthe issueris belowinvestmentgrade (high yieldbonds): the interestrate is usually lowerthanforunsecuredbonds to reflectthe decrease in risk Securedbonds are also sometimes usedforthe financingofacquisitionandprivate equity transactions, andinspecialistfinance suchas projectfinance Debtsecurities issuedto funda securitizationare usually securedonthe securitizedassets

Securitytrustee

(p 24)2.16 Where security is givenfora syndicatedloanorbondissue itwillnormally be grantedto a security trustee This means thatthere is only one security interest, andtherefore only one registrationis required(ifthe security interestis registrable),thus savingcomplicationand expense The trustee canholdthe security forthe lenders orbondholders forthe time being,so thatthe trusthas a changinggroupofbeneficiaries This enables the loans orbonds to be transferredvery easily Further,the trustee canenforce the security onbehalfofthe lenders or bondholders,anddistribute the proceeds pro rata,orinaccordance withanagreedpayment waterfall Infact,the lenders orbondholders willbe precludedfromenforcementby a ‘no-action’ clause, so the borrowerwillnothave to dealwithnumerous enforcementactions andthe lenders orbondholders are protectedfroma single creditorenforcingits rights to the detrimentofthe others However,the powers andduties ofa security trustee are otherwise usually very limited, so thatitwillnotbe requiredto monitorthe issuer’s compliance withits obligations orto take steps to enforce withoutexpress instructions froma specifiedmajority ofthe lenders orbondholders

Private equity

2 17 Since the 1970s,private equity has developedas analternative to public ownershipas a way offinancingmid-sizedandlarge companies.Inthis structure,equity fundingis providedby a private equity fund and,to a relatively smallbutcrucialextent,the managers ofthe company.

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This provides tightcontroloverthe managementofthe company There is usually a highlevelof debtfinancing(leverage) Because the company financedinthis way is likely to eitherhave previously beena public company ora large private company,the initialtransferto private equity ownershipis oftencalleda leveragedbuy-out Once the buy-outhas takenplace,the structure remains untilthe private equity fundwishes to exit: this canbe done by refloatingthe company (whichmay thenresultina differentdebtstructure)orby sale to a trade buyeroranotherprivate equity fund(inwhichcase the debtstructure is likely to remainroughly the same)

Leveragedbuy-outfinance: the structure (p 25)2.18 The debtfinance fora leveragedbuy-outis complex,ofteninvolvingseveraltiers of lenders The whole structure willinvolve a series ofnewcompanies,eachofwhichis wholly owned by the one above it Simplified, there willbe Newco 1,into whichthe equity componentfromthe private equity fundandthe managementis put The private equity fundwillalso provide some deeply subordinatedloanfinance,usually inthe formofloannotes (orsometimes redeemable preference shares), whichis lentto Newco 2andonlentthroughintercompany loans downthe chain Newco 1willown100percentofthe shares inNewco 2 Newco 3,to whichmezzanine debt (ifused)willbe lent,is wholly ownedby Newco 2and,inits turn,owns Newco 4,whichis the bid company The seniordebtis lentdirectly to the bidcompany,andis usedbothto acquire the target company andas workingcapital,andto refinance any existingdebt Itis likely to include a combinationoftermloans andrevolvingcreditfacilities,andwilloftenbe indifferenttranches, some amortizingandothers involvingone ormore bulletpayments Any subordinationoftranches ofseniordebtwillbe contractualorby turnovertrust Secondliendebt,whichis oftenprovided by hedge funds orotherinstitutionalinvestors,is subordinatedto the seniordebtandis usually a single termloan.Mezzanine debtis oftenstructurally subordinated(andthus usually involves a higherinterestrate to compensate forthe increasedrisk),andusually consists ofa single termloan repayable inone bulletpayment,whichis onlentby Newco 3to Newco 4.The various loans, especially seniordebt,whichis the largest,are oftensyndicated.

Leveragedbuy-outfinance: security

2.19 The loans are always securedby fixedandfloatingcharges overallthe assets ofthe target company,andalso overthe shareholdings ofthe Newco grantingthe security EachNewco will give guarantees to supportthe borrowingofthe othercompanies,andsecurity overits ownassets As discussedabove,the lenders willseekto take fixedcharges overwhateverassets they can, andfloatingcharges overthe rest Ifthe loans are syndicated,the security willbe heldby a security trustee Juniordebt(suchas secondlienormezzanine debt)canalso be providedby high yieldbonds,inwhichcase they are less likely to be secured

D. Specialized financing

Internationaltrade financing

2.20 Aninternationalsale ofgoods is usually financedby a documentary creditissuedby a bank onthe applicationofthe buyer(the issuingbank) A correspondentbankinthe seller’s jurisdiction(the confirmingbank)willusually confirmthe creditto the seller The confirmingbank willpay the price ofthe goods to the selleronreceiptofthe shippingdocuments,the issuingbank willreimburse the confirmingbank(p 26)andthe buyerwillreimburse the issuingbank The goods are usedas security firstforthe issuingbank’s obligationto the confirmingbank,andthenforthe buyer’s obligationto the issuingbank Ineachcase the security is effectedby a pledge ofthe bill oflading,a documentoftitle to the goods Once the issuingbankhas the billoflading,itmay release itto the buyerundera trustreceiptso thatthe buyercansellthe goods inorderto raise funds to pay the issuingbank

Acquisitionfinance

2 21 The leveragedbuy-outstructure describedabove canalso be usedfora takeoverofa public company,ifitis fundedby debt However,ifthe bidders’borrowingto acquire the shares of the targetcompany is movedonto the balance sheetofthe targetoris supportedby a security interestoverthe assets ofthe targetcompany,care needs to be takennotto breachthe rules on financialassistance insection678Companies Act2006

Ship finance

2.22 Ships are usually constructedto order,andtitle usually remains withthe shipbuilderuntil completionofthe contract,althoughthe buyerwillpay instalments throughoutthe construction

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the others after a distressing wait of ten minutes at the inward lock. “Begob, I thought we was all lost. ’Twas a close shave. But I’ll go no more below. I’ve had enough.” He was thinking of a small bank account—six hundred dollars in all—which he had saved, and of a girl in Brooklyn who was about to marry him. “No more!”

But, at that, as it stood, there was no immediate danger of work being offered. The cave-in had cost the contractors thousands and in addition had taught them that mere air pressure and bracing as heretofore followed were not sufficient for successful tunneling. Some new system would have to be devised. Work on both halves of the tunnel was suspended for over a year and a half, during which time McGlathery married, a baby was born to him, and his six hundred had long since diminished to nothing. The difference between two and five dollars a day is considerable. Incidentally, he had not gone near his old foreman in all this time, being somehow ashamed of himself, and in consequence he had not fared so well. Previously Cavanaugh had kept him almost constantly employed, finding him faithful and hard-working, but now owing to stranger associates there were weeks when he had no work at all and others when he had to work for as little as one-fifty a day. It was not so pleasant. Besides, he had a sneaking feeling that if he had behaved a little more courageously at that time, gone and talked to his old foreman afterward or at the time, he might now be working for good pay. Alas, he had not done so, and if he went now Cavanaugh would be sure to want to know why he had disappeared so utterly. Then, in spite of his marital happiness, poverty began to press him so. A second and a third child were born—only they were twins.

In the meantime, Henderson, the engineer whom Cavanaugh had wanted to consult with at the time, had devised a new system of tunneling, namely, what subsequently came to be known as the pilot tunnel. This was an iron tube ten feet in length and fifteen feet in diameter—the width of the tunnel, which was carried forward on a line with the axis of the tunnel into the ground ahead. When it was

driven in far enough to be completely concealed by the earth about, then the earth within was removed. The space so cleared was then used exactly as a hub is used on a wagon wheel. Beams like spokes were radiated from its sides to its centre, and the surrounding earth sustained by heavy iron plates. On this plan the old company had decided to undertake the work again.

One evening, sitting in his doorway thumbing his way through an evening paper which he could barely read, McGlathery had made all this out. Mr. Henderson was to be in charge as before. Incidentally it was stated that Thomas Cavanaugh was going to return as one of the two chief foremen. Work was to be started at once. In spite of himself, McGlathery was impressed. If Cavanaugh would only take him back! To be sure, he had come very near losing his life, as he thought, but then he had not. No one had, not a soul. Why should he be so fearful if Cavanaugh could take such chances as he had? Where else could he make five dollars a day? Still, there was this haunting sensation that the sea and all of its arms and branches, wherever situated, were inimical to him and that one day one of them would surely do him a great injury—kill him, perhaps. He had a recurring sensation of being drawn up into water or down, he could not tell which, and of being submerged in ooze and choking slowly. It was horrible.

But five dollars a day as against one-fifty or two or none at all (seven, once he became very proficient) and an assured future as a tunnel worker, a “sand-hog,” as he had now learned such men as himself were called, was a luring as well as a disturbing thought. After all, he had no trade other than this he had begun to learn under Cavanaugh. Worse he was not a union man, and the money he had once saved was gone, and he had a wife and three children. With the former he had various and sundry talks. To be sure, tunneling was dangerous, but still! She agreed with him that he had better not, but—after all, the difference that five, maybe seven, instead of two a day would make in their living expenses was in both their minds. McGlathery saw it. He decided after a long period of hesitation that perhaps he had best return. After all, nothing had happened to him that other time, and might it ever again, really? He meditated.

As has been indicated, a prominent element in McGlathery’s nature was superstition. While he believed in the inimical nature of water to him, he also believed in the power of various saints, male and female, to help or hinder. In the Catholic Church of St. Columba of South Brooklyn, at which McGlathery and his young wife were faithful attendants, there was a plaster statue of a saint of this same name, a co-worker with St. Patrick in Ireland, it appears, who in McGlathery’s native town of Kilrush, County of Clare, on the water’s edge of Shannon, had been worshipped for centuries past, or at least highly esteemed, as having some merit in protecting people at sea, or in adventures connected with water. This was due, perhaps, to the fact that Kilrush was directly on the water and had to have a saint of that kind. At any rate, among other things, he had occasionally been implored for protection in that realm when McGlathery was a boy. On his setting out for America, for instance, some few years before at the suggestion of his mother, he had made a novena before this very saint, craving of him a safe conduct in crossing the sea, as well as prosperity once he had arrived in America. Well, he had crossed in safety, and prospered well enough, he thought. At least he had not been killed in any tunnel. In consequence, on bended knees, two blessed candles burning before him in the rack, a half dollar deposited in the box labeled “St. Columba’s Orphans,” he finally asked of this saint whether, in case he returned to this underground tunnel work, seeing that necessity was driving him, would he be so kind as to protect him? He felt sure that Cavanaugh, once he applied to him, and seeing that he had been a favorite worker, would not begrudge him a place if he had one. In fact he knew that Cavanaugh had always favored him as a good useful helper.

After seven “Our Fathers” and seven “Hail Marys,” said on his knees, and a litany of the Blessed Virgin for good measure, he crossed himself and arose greatly refreshed. There was a pleasant conviction in his mind now, newly come there before this image, that he would never come to real harm by any power of water. It was a revelation—a direct communication, perhaps. At any rate, something told him to go and see Cavanaugh at once, before the work was well under way, and not be afraid, as no harm would come to him, and

besides, he might not get anything even though he desired it so much if he delayed. He bustled out of the church and over to the waterfront where the deserted shaft was still standing, and sure enough, there was Cavanaugh, conversing with Mr. Henderson.

“Yis—an’ what arr ye here fer?” he now demanded to know of McGlathery rather amusedly, for he had sensed the cause of his desertion.

“I was readin’ that ye was about to start work on the tunnel again.”

“An’ so we arr. What av it?”

“I was thinkin’ maybe ye’d have a place fer me. I’m married now an’ have three children.”

“An’ ye’re thinkin’ that’s a reason fer givin’ ye something, is it?” demanded the big foreman rather cynically, with a trace of amusement. “I thought ye said ye was shut av the sea—that ye was through now, once an’ fer all?”

“So I did, but I’ve changed me mind. It’s needin’ the work I am.”

“Very well, then,” said Cavanaugh. “We’re beginnin’ in the mornin’. See that ye’re here at seven sharp. An’ mind ye, no worryin’ or lookin’ around. We’ve a safe way now. It’s different. There’s no danger.”

McGlathery gratefully eyed his old superior, then departed, only to return the next morning a little dubious but willing. St. Columba had certainly indicated that all would be well with him—but still— A man is entitled to a few doubts even when under the protection of the best of saints. He went down with the rest of the men and began cleaning out that nearest section of the tunnel where first water and then earth had finally oozed and caked. That done he helped install the new pilot tunnel which was obviously a great improvement over the old system. It seemed decidedly safe. McGlathery attempted to explain its merits to his wife, who was greatly concerned for him, and incidentally each morning and evening on his way to and from his task he dropped in at St. Columba’s to offer up a short silent prayer. In spite of his novena and understanding with the saint he was still suspicious of this dread river above him, and of what might happen

to him in spite of St. Columba The good saint, due to some error on the part of McGlathery, might change his mind.

Nothing happened, of course, for days and weeks and months. Under Cavanaugh’s direction the work progressed swiftly, and McGlathery and he, in due time, became once more good friends, and the former an expert bracer or timberer, one of the best, and worth seven a day really, which he did not get. Incidentally, they were all shifted from day to night work, which somehow was considered more important. There were long conversations now and again between Cavanaugh and Henderson, and Cavanaugh and other officials of the company who came down to see, which enlightened McGlathery considerably as to the nature and danger of the work. Just the same, overhead was still the heavy river—he could feel it pushing at him at times, pushing at the thick layer of mud and silt above him and below which with the aid of this new pilot shield they were burrowing.

Yet nothing happened for months and months. They cleared a thousand feet without a hitch. McGlathery began to feel rather comfortable about it all. It certainly seemed reasonably safe under the new system. Every night he went down and every morning came up, as hale and healthy as ever, and every second week, on a Tuesday, a pay envelope containing the handsome sum of seventytwo dollars was handed him. Think of it! Seventy-two dollars! Naturally, as a token of gratitude to St. Columba, he contributed liberally to his Orphans’ Home, a dollar a month, say, lit a fresh candle before his shrine every Sunday morning after high mass, and bought two lots out on the Goose Creek waterfront—on time—on which some day, God willing, he proposed to build a model summer and winter cottage. And then—! Well, perhaps, as he thought afterward, it might have been due to the fact that his prosperity had made him a little more lax than he should have been, or proud, or not quite as thoughtful of the saint as was his due. At any rate, one night, in spite of St. Columba—or could it have been with his aid and consent in order to show McGlathery his power?—the wretched sneaky river did him another bad turn, a terrible turn, really.

It was this way While they were working at midnight under the new form of bracing, based on the pilot tunnel, and with an air pressure of two thousand pounds to the square inch which had so far sufficed to support the iron roof plates which were being put in place behind the pilot tunnel day after day, as fast as space permitted, and with the concrete men following to put in a form of arch which no river weight could break, the very worst happened. For it was just at this point where the iron roof and the mud of the river bottom came in contact behind the pilot tunnel that there was a danger spot ever since the new work began. Cavanaugh had always been hovering about that, watching it, urging others to be careful —“taking no chances with it,” as he said.

“Don’t be long, men!” was his constant urge. “Up with it now! Up with it! In with the bolts! Quick, now, with yer riveter—quick! quick!”

And the men! How they worked there under the river whenever there was sufficient space to allow a new steel band to be segmentally set! For at that point it was, of course, that the river might break through. How they tugged, sweated, grunted, cursed, in this dark muddy hole, lit by a few glittering electric arcs—the latest thing in tunnel work! Stripped to the waist, in mud-soaked trousers and boots, their arms and backs and breasts mud-smeared and wet, their hair tousled, their eyes bleary—an artist’s dream of bedlam, a heavenly inferno of toil—so they labored. And overhead was the great river, Atlantic liners resting upon it, thirty or fifteen or ten feet of soil only, sometimes, between them and this thin strip of mud sustained, supposedly, by two thousand pounds of air pressure to the square inch—all they had to keep the river from bleeding water down on them and drowning them like rats!

“Up with it! Up with it! Up with it! Now the bolts! Now the riveter! That’s it! In with it, Johnny! Once more now!”

Cavanaugh’s voice urging them so was like music to them, their gift of energy, their labor song, their power to do, their Ei Uchnam.

But there were times also, hours really, when the slow forward movement of the pilot tunnel, encountering difficult earth before it, left this small danger section unduly exposed to the rotary action of

What was that? A sound like the blowing off of steam. All at once Cavanaugh, who was just outside the pilot tunnel indicating to McGlathery and another just where certain braces were to be put, in order that the pilot tunnel might be pushed forward a few inches for the purpose of inserting a new ring of plates, heard it. At a bound he was back through the pilot hub, his face aflame with fear and rage. Who had neglected the narrow breach?

“Come now! What the hell is this?” he was about to exclaim, but seeing a wide breach suddenly open and water pour down in a swift volume, his spirit sank and fear overcame him.

“Back, men! Stop the leak!”

It was the cry of a frightened and yet courageous man at bay. There was not only fear, but disappointment, in it. He had certainly hoped to obviate anything like this this time. But where a moment before had been a hole that might have been stopped with a bag of sawdust (and Patrick Murtha was there attempting to do it) was now a rapidly widening gap through which was pouring a small niagara of foul river water, ooze and slime. As Cavanaugh reached it and seized a bag to stay it, another mass of muddy earth fell, striking both him and Murtha, and half blinding them both. Murtha scrambled away for his life. McGlathery, who had been out in the front of the fatal tunnel with others, now came staggering back horribly frightened, scarcely knowing what to do.

“Quick, Dennis! Into the lock!” Cavanaugh called to him, while he himself held his ground. “Hurry!” and realizing the hopelessness of it and his own danger, Dennis thought to run past, but was stopped by the downpour of water and mud.

“Quick! Quick! Into the lock! For Christ’s sake, can’t ye see what’s happenin’? Through with ye!”

McGlathery, hesitating by his chief’s side, fearful to move lest he be killed, uncertain this time whether to leave his chief or not, was seized by Cavanaugh and literally thrown through, as were others after him, the blinding ooze and water choking them, but placing them within range of safety. When the last man was through

Cavanaugh himself plunged after, wading knee-deep in mud and water.

“Quick! Quick! Into the lock!” he called, and then seeing McGlathery, who was now near it but waiting for him, added, “In, in!” There was a mad scramble about the door, floating timbers and bags interfering with many, and then, just as it seemed as if all would reach safety, an iron roof plate overhead, loosened by the breaking of plates beyond, gave way, felling one man in the half-open doorway of the lock and blocking and pinning it in such a way that it could be neither opened nor closed. Cavanaugh and others who came up after were shut out. McGlathery, who had just entered and saw it, could do nothing. But in this emergency, and unlike his previous attitude, he and several others on the inside seized upon the dead man and tried to draw him in, at the same time calling to Cavanaugh to know what to do. The latter, dumbfounded, was helpless. He saw very clearly and sadly that very little if anything could be done. The plate across the dead man was too heavy, and besides, the ooze was already pouring over him into the lock. At the same time the men in the lock, conscious that although they were partially on the road to safety they were still in danger of losing their lives, were frantic with fear.

Actually there were animal roars of terror. At the same time McGlathery, once more realizing that his Nemesis, water, had overtaken him and was likely to slay him at last, was completely paralyzed with fear. St. Columba had promised him, to be sure, but was not this that same vision that he had had in his dreams, that awful sense of encroaching ooze and mud? Was he not now to die this way, after all? Was not his patron saint truly deserting him? It certainly appeared so.

“Holy Mary! Holy St. Columba!” he began to pray, “what shall I do now? Mother of God! Our Father, who art in Heaven! Bejasus, it’s a tight place I’m in now! I’ll never get out of this! Tower of Ivory! House of Gold! Can’t we git him in, boys? Ark of the Covenant! Gate of Heaven!”

As he gibbered and chattered, the others screaming about him, some pulling at the dead man, others pulling at the other door, the still eye of Cavanaugh outside the lock waist-deep in mud and water was surveying it all.

“Listen to me, men!” came his voice in rich, heavy, guttural tones. “You, McGlathery! Dennis!! Arr ye all crazy! Take aaf yer clothes and stop up the doorway! It’s yer only chance! Aaf with yer clothes, quick! And those planks there—stand them up! Never mind us. Save yerselves first. Maybe ye can do something for us afterwards.”

As he argued, if only the gap in the door could be closed and the compressed air pushing from the tunnel outward toward the river allowed to fill the chamber, it would be possible to open the other door which gave into the next section shoreward, and so they could all run to safety.

His voice, commanding, never quavering, even in the face of death, subsided. About and behind him were a dozen men huddled like sheep, waist-deep in mud and water, praying and crying. They had got as close to him as might be, still trying to draw upon the sustaining force of his courage, but moaning and praying just the same and looking at the lock.

“Yis! Yis!” exclaimed McGlathery of a sudden, awakening at last to a sense of duty and that something better in conduct and thought which he had repeatedly promised himself and his saint that he would achieve. He had been forgetting. But now it seemed to him once more that he had been guilty of that same great wrong to his foreman which had marked his attitude on the previous occasion— that is, he had not helped him or any one but himself. He was a horrible coward. But what could he do? he asked himself. What could he do? Tearing off his coat and vest and shirt as commanded, he began pushing them into the opening, calling to the others to do the same. In a twinkling, bundles were made of all as well as of the sticks and beams afloat in the lock, and with these the gap in the door was stuffed, sufficiently to prevent the air from escaping, but shutting out the foreman and his men completely.

“It’s awful. I don’t like to do it,” McGlathery kept crying to his foreman but the latter was not so easily shaken.

“It’s all right, boys,” he kept saying. “Have ye no courage at aal?” And then to the others outside with him, “Can’t ye stand still and wait? They may be comin’ back in time. Kape still. Say yer prayers if ye know any, and don’t be afraid.”

But, although the air pressing outward toward Cavanaugh held the bundles in place, still this was not sufficient to keep all the air in or all the water out. It poured about the dead man and between the chinks, rising inside to their waists also. Once more it threatened their lives and now their one hope was to pull open the shoreward door and so release themselves into the chamber beyond, but this was not to be done unless the escaping air was completely blocked or some other method devised.

Cavanaugh, on the outside, his whole mind still riveted on the men whom he was thus aiding to escape, was the only one who realized what was to be done. In the panel of the door which confronted him, and the other, which they were trying to break open, were thick glass plates, or what were known as bull’s eyes, through which one could see, and it was through the one at his end that Cavanaugh was peering. When it became apparent to him that the men were not going to be able to open the farthest door, a new thought occurred to him. Then it was that his voice was heard above the tumult, shouting:

“Break open the outside bull’s eye! Listen to me, Dennis! Listen to me! Break open the outside bull’s eye!”

Why did he call to Dennis, the latter often asked himself afterwards. And why did Dennis hear him so clearly? Through a bedlam of cries within, he heard, but also realized that if he or they knocked out the bull’s eye in the other door, and the air escaped through it inward, the chances of their opening it would be improved, but the life of Cavanaugh and his helpless companions would certainly be destroyed. The water would rush inward from the river, filling up this chamber and the space in which stood Cavanaugh. Should he? So he hesitated.

“Knock it out!” came the muffled voice of his foreman from within where he was eyeing him calmly. “Knock it out, Dennis! It’s yer only chance! Knock it out!” And then, for the first time in all the years he had been working for him, McGlathery heard the voice of his superior waver slightly: “If ye’re saved,” it said, “try and do what ye can fer the rest av us.”

In that moment McGlathery was reborn spiritually. Although he could have wept, something broke in him—fear. He was not afraid now for himself. He ceased to tremble, almost to hurry and awoke to a new idea, one of undying, unfaltering courage. What! There was Cavanaugh outside there, unafraid, and here was he, Dennis McGlathery, scrambling about like a hare for his life! He wanted to go back, to do something, but what could he? It was useless. Instead, he assumed partial command in here. The spirit of Cavanaugh seemed to come over to him and possess him. He looked about, saw a great stave, and seized it.

“Here, men!” he called with an air of command. “Help knock it out!” and with a will born of terror and death a dozen brawny hands were laid on it. With a mighty burst of energy they assaulted the thick plate and burst it through. Air rushed in, and at the same time the door gave way before them, causing them to be swept outward by the accumulated water like straws. Then, scrambling to their feet, they tumbled into the next lock, closing the door behind them. Once in, they heaved a tremendous sigh of relief, for here they were safe enough—for the time being anyhow. McGlathery, the new spirit of Cavanaugh in him, even turned and looked back through the bull’s eye into the chamber they had just left. Even as they waited for the pressure here to lower sufficiently to permit them to open the inner door he saw this last chamber they had left his foreman and a dozen fellow workers buried beyond. But what could he do? Only God, only St. Columba, could tell him, perhaps, and St. Columba had saved him—or had he?—him and fifteen other men, the while he had chosen to allow Cavanaugh and twelve men to perish! Had St. Columba done that—or God—or who?

“’Tis the will av God,” he murmured humbly—but why had God done that?

But somehow, the river was not done with him yet, and that, seemingly, in spite of himself. Although he prayed constantly for the repose of the soul of Thomas Cavanaugh and his men, and avoided the water, until five years later, still there was a sequel. By now McGlathery was the father of eight children and as poor as any average laborer. With the death of Cavanaugh and this accident, as has been said, he had forsworn the sea—or water—and all its works. Ordinary house shoring and timbering were good enough for him, only—only—it was so hard to get enough of this at good pay. He was never faring as well as he should. And then one day when he was about as hard up as ever and as earnest, from somewhere was wafted a new scheme in connection with this same old tunnel.

A celebrated engineer of another country—England, no less—had appeared on the scene with a new device, according to the papers. Greathead was his name, and he had invented what was known as “The Greathead Shield,” which finally, with a few changes and adaptations, was to rid tunnel work of all its dangers. McGlathery, sitting outside the door of his cottage overlooking Bergen Bay, read it all in the Evening Clarion, and wondered whether it could be true. He did not understand very much about this new shield idea even now, but even so, and in spite of himself, some of the old zest for tunneling came back to him. What times he had had, to be sure! What a life it had been, if a dog’s one—and Cavanaugh—what a foreman! And his body was still down there entombed—erect, no doubt, as he was left. He wondered. It would be only fair to dig him out and honor his memory with a decent grave if it could be done. His wife and children were still living in Flatbush. It stirred up all the memories, old fears, old enthusiasms, but no particular desire to return. Still, here he was now, a man with a wife and eight children, earning three a day, or less—mostly less—whereas tunneling paid seven and eight to such as himself, and he kept thinking that if this should start up again and men were advertised for, why shouldn’t he go? His life had been almost miraculously saved these two times— but would it be again?—that was the great question. Almost unceasingly he referred the matter to his saint on Sundays in his

church, but receiving no definite advice as yet and there being no work doing on the tunnel, he did nothing.

But then one day the following spring the papers were full of the fact that work would soon actually be resumed, and shortly thereafter, to his utter amazement, McGlathery received a note from that same Mr. Henderson under whom Cavanaugh had worked, asking him to call and see him. Feeling sure that it was the river that was calling him, he went over to St. Columba’s and prayed before his saint, putting a dollar in his Orphans’ box and a candle on his shrine, and then arising greatly refreshed and reassured, and after consulting with his wife, journeyed over to the river, where he found the old supervisor as before in a shed outside, considering one important matter and another.

What he wanted to know was this—did McGlathery want to take an assistant-foremanship under a new foreman who was going to be in charge of the day work here, one Michael Laverty by name, an excellent man, at seven dollars a day, seeing that he had worked here before and understood the difficulties, etc.? McGlathery stared in amazement. He an assistant-foreman in charge of timbering! And at seven dollars a day! He!

Mr Henderson neglected to say that because there had been so much trouble with the tunnel and the difficulties so widely advertised, it was rather difficult to get just the right sort of men at first, although McGlathery was good enough any time. But the new shield made everything safe, he said. There could be no calamity this time. The work would be pushed right through. Mr. Henderson even went so far as to explain the new shield to him, its excellent points.

But McGlathery, listening, was dubious, and yet he was not thinking of the shield exactly now, nor of the extra pay he would receive, although that played a big enough part in his calculations, but of one Thomas Cavanaugh, mason foreman, and his twelve men, buried down below there in the ooze, and how he had left him, and how it would only be fair to take his bones out, his and the others’, if they could be found, and give them a decent Christian burial. For by now he was a better Catholic than ever, and he owed

that much to Cavanaugh, for certainly Cavanaugh had been very good to him—and anyhow, had not St. Columba protected him so far? And might he not in the future, seeing the position he was in? Wasn’t this a call, really? He felt that it was.

Just the same, he was nervous and troubled, and went home and consulted with his wife again, and thought of the river and went over and prayed in front of the shrine of St. Columba. Then, once more spiritualized and strengthened, he returned and told Mr. Henderson that he would come back. Yes, he would come.

He felt actually free of fear, as though he had a mission, and the next day began by assisting Michael Laverty to get out the solid mass of earth which filled the tunnel from the second lock outward. It was slow work, well into the middle of the summer before the old or completed portion was cleared and the bones of Cavanaugh and his men reached. That was a great if solemn occasion—the finding of Cavanaugh and his men. They could recognize him by his big boots, his revolver, his watch, and a bunch of keys, all in position near his bones. These same bones and boots were then reverently lifted and transferred to a cemetery in Brooklyn, McGlathery and a dozen workers accompanying them, after which everything went smoothly. The new shield worked like a charm. It made eight feet a day in soft mud, and although McGlathery, despite his revived courage, was intensely suspicious of the river, he was really no longer afraid of it in the old way. Something kept telling him that from now on he would be all right—not to fear. The river could never hurt him any more, really.

But just the same, a few months later—eight, to be exact—the river did take one last slap at him, but not so fatally as might have appeared on the surface, although in a very peculiar way, and whether with or without St. Columba’s aid or consent, he never could make out. The circumstances were so very odd. This new cutting shield, as it turned out, was a cylinder thirteen feet long, twenty feet in diameter, and with a hardened steel cutting edge out on front, an apron, fifteen inches in length and three inches thick at the cutting edge. Behind this came what was known as an “outside diaphragm,”

which had several openings to let in the mud displaced by the shield’s advance.

Back of these openings were chambers four feet in length, one chamber for each opening, through which the mud was passed. These chambers in turn had hinged doors, which regulated the quantity of mud admitted, and were water tight and easily closed. It was all very shipshape.

Behind these little chambers, again, were many steel jacks, fifteen to thirty, according to the size of the shield, driven by an air pressure of five thousand pounds to the square inch, which were used to push the shield forward. Back of them came what was known as the tail end of the shield, which reached back into the completed tunnel and was designed to protect the men who were at work putting in the new plates (at that danger point which had killed Cavanaugh) whenever the shield had been driven sufficiently forward to permit of a new ring of them.

The only danger involved in this part of the work lay in the fact that between this lining and the tail end of the shield was always a space of an inch to an inch and a half which was left unprotected. This small opening would, under ordinary circumstances, be insignificant, but in some instances where the mud covering at the top was very soft and not very thick, there was danger of the compressed air from within, pushing at the rate of several thousand pounds to the square inch, blowing it away and leaving the aperture open to the direct action of the water above. This was not anticipated, of course, not even thought of. The shield was going rapidly forward and it was predicted by Henderson and Laverty at intervals that the tunnel would surely go through within the year.

Some time the following winter, however, when the shield was doing such excellent work, it encountered a rock which turned its cutting edge and, in addition, necessitated the drilling out of the rock in front. A bulkhead had to be built, once sufficient stone had been cut away, to permit the repairing of the edge. This took exactly fifteen days. In the meantime, at the back of the shield, at the little crevice described, compressed air, two thousand pounds to the square inch,

was pushing away at the mud outside, gradually hollowing out a cuplike depression eighty-five feet long (Mr. Henderson had soundings taken afterwards), which extended backward along the top of the completed tunnel toward the shore. There was then nothing but water overhead.

It was at this time that the engineers, listening to the river, which, raked by the outpouring of air from below, was rolling gravel and stones above the tunnel top and pounding on it like a drum, learned that such was the case. It was easy enough to fix it temporarily by stuffing the crevice with bags, but one of these days when the shield was repaired it would have to be moved forward to permit the insertion of a new ring of plates, and then, what?

At once McGlathery scented trouble. It was the wretched river again (water), up to its old tricks with him. He was seriously disturbed, and went to pray before St. Columba, but incidentally, when he was on duty, he hovered about this particular opening like a wasp. He wanted to know what was doing there every three minutes in the day, and he talked to the night foreman about it, as well as Laverty and Mr Henderson. Mr Henderson, at Laverty’s and McGlathery’s request, came down and surveyed it and meditated upon it.

“When the time comes to move the shield,” he said, “you’ll just have to keep plenty of bags stuffed around that opening, everywhere, except where the men are putting in the plates. We’ll have extra air pressure that day, all we can stand, and I think that’ll fix everything all right. Have plenty of men here to keep those bags in position, but don’t let ’em know there’s anything wrong, and we’ll be all right. Let me know when you’re ready to start, and I’ll come down.”

When the shield was eventually repaired and the order given to drive it just twenty-five inches ahead in order to permit the insertion of a new ring of plates, Mr Henderson was there, as well as Laverty and McGlathery. Indeed, McGlathery was in charge of the men who were to stuff the bags and keep out the water. If you have ever seen a medium-sized red-headed Irishman when he is excited and

determined, you have a good picture of McGlathery He was seemingly in fifteen places at once, commanding, exhorting, persuading, rarely ever soothing—and worried. Yes, he was worried, in spite of St. Columba.

The shield started. The extra air pressure was put on, the water began to pour through the crevice, and then the bags were put in place and stopped most of it, only where the ironworkers were riveting on the plates it poured, poured so heavily at times that the workers became frightened.

“Come now! What’s the matter wid ye! What arr ye standin’ there fer? What arr ye afraid av? Give me that bag! Up with it! That’s the idea! Do ye think ye’re goin’ to be runnin’ away now?”

It was McGlathery’s voice, if you please, commanding!— McGlathery, after his two previous experiences! Yet in his vitals he was really afraid of the river at this very moment.

What was it that happened? For weeks after, he himself, writhing with “bends” in a hospital, was unable to get it straight. For four of the bags of sawdust burst and blew through, he remembered that—it was a mistake to have sawdust bags at all. And then (he remembered that well enough), in stuffing others in, they found that they were a bag short, and until something was secured to put in its place, for the water was streaming in like a waterfall and causing a flood about their ankles, he, McGlathery, defiant to the core, not to be outdone by the river this time, commanded the great thing to be done.

“Here!” he shouted, “the three av ye,” to three gaping men near at hand, “up with me! Put me there! I’m as good as a bag of sawdust any day. Up with me!”

Astonished, admiring, heartened, the three of them jumped forward and lifted him. Against the small breach, through which the water was pouring, they held him, while others ran off for more bags. Henderson and Laverty and the ironworkers, amazed and amused and made braver themselves because of this very thing—filled with admiration, indeed, by the sheer resourcefulness of it, stood by to

help. But then, if you will believe it, while they were holding him there, and because now there was nothing but water above it, one end of the shield itself—yes, that great iron invention—was lifted by the tremendous air pressure below—eleven or thirteen or fourteen inches, whatever space you can imagine a medium sized man being forced through—and out he went, McGlathery, and all the bags, up into the river above, the while the water poured down, and the men fled for their lives.

A terrific moment, as you can well imagine, not long in duration, but just long enough to swallow up McGlathery, and then the shield, having responded at first to too much air pressure, now responding to too little (the air pressure having been lessened by the escape), shut down like a safety valve, shutting off most of the water and leaving the tunnel as it was before.

But McGlathery!

Yes, what of him?

Reader—a miracle!

A passing tug captain, steaming down the Hudson at three one bright December afternoon was suddenly astonished to see a small geyser of water lift its head some thirty feet from his boat, and at the top of it, as it were lying on it, a black object which at first he took to be a bag or a log. Later he made it out well enough, for it plunged and bellowed.

“Fer the love av God! Will no one take me out av this? Git me out av this! Oh! Oh! Oh!”

It was McGlathery right enough, alive and howling lustily and no worse for his blow-out save that he was suffering from a fair case of the “bends” and suffering mightily. He was able to scream, though, and was trying to swim. That old haunting sensation!—he had had it this time, sure enough. For some thirty or forty seconds or more he had been eddied swiftly along the top of the tunnel at the bottom of the river, and then coming to where the air richocheted upward had been hustled upward like a cork and literally blown through the air at the top of the great volume of water, out into space. The sudden shift

from two thousand pounds of air pressure to none at all, or nearly none, had brought him down again, and in addition induced the severe case of “bends” from which he was now suffering. But St. Columba had not forgotten him entirely. Although he was suffering horribly, and was convinced that he was a dead man, still the good saint must have placed the tug conveniently near, and into this he was now speedily lifted.

“Well, of all things!” exclaimed Captain Hiram Knox, seeing him thoroughly alive, if not well, and eyeing him in astonishment. “Where do you come from?”

“Oh! Oh! Oh!” bawled McGlathery. “Me arms! Me ribs! Oh! Oh! Oh! The tunnel! The tunnel below, av course! Quick! Quick! It’s dyin’ av the bends I am! Git me to a hospital, quick!”

The captain, truly moved and frightened by his groans, did as requested. He made for the nearest dock. It took him but a few moments to call an ambulance, and but a few more before McGlathery was carried into the nearest hospital.

The house physician, having seen a case of this same disease two years before, and having meditated on it, had decided that the hair of the dog must be good for the bite. In consequence of this McGlathery was once more speedily carted off to one of the locks of this very tunnel, to the amazement of all who had known of him (his disappearance having aroused general excitement), and he was stared at as one who had risen from the grave. But, what was better yet, under the pressure of two thousand pounds now applied he recovered himself sufficiently to be host here and tell his story— another trick of his guardian saint, no doubt—and one rather flattering to his vanity, for he was now in no least danger of dying.

The whole city, if not the whole country, indeed, was astounded by the accident, and he was a true nine days’ wonder, for the papers were full of the strange adventure. And with large pictures of McGlathery ascending heavenward, at the top of a geyser of water. And long and intelligent explanations as to the way and the why of it all.

Full download The law of security and title-based financing hugh beale pdf docx

The Law of Security and Title-Based Financing Hugh Beale

Preface to the Third Edition

Part I Introduction, 1 Introduction

(p. 3) 1 Introduction

A. Scope of book

Parties and debt obligations

‘Proprietary’ as opposed to ‘personal’ security

Security over personal property

(p. 6) B. Reasons for security

Theory and practice

Practical matters

Security and insolvency

Enforcement despite insolvency

Protection by other devices

C. The contribution of equity

Future assets and assignment

Floating charges and unincorporated debtors

D. Categories of security interests in English law

Pledges

Mortgages and charges

E. Quasi-security: reservation of title

Conditional sales

Other conditional sales

Finance leases and hire purchase

Discounting

Sales of receivables

F. Form and substance and recharacterization risk

Meaning of the substance test

Sham transactions

Fixed and floating charges

G. Statutory interventions on behalf of unsecured creditors

Preferential and similar rights

floating charges

Registration

Publicizing charges

H. Creditors’ preferences

Banks and their subsidiaries

Securitization

Trade suppliers

Conclusion

A. Introduction

Differenttypes ofbusinesses

B. General map ofdebt financing

Mid-sizedcompanies

Large companies

C. Use ofsecurity and quasi-security ingeneral debt financing

Asset-basedlending

Private equity

D. Specialized financing

Acquisitionfinance

Ship finance