Potential reforms could remove unnecessary restrictions on lending to unincorporated businesses, according to a leading corporate lawyer.

“Sole traders and unlimited partnerships can only grant security over chattels – tangible, moveable assets such as vehicles or artwork – through creating a bill of sale, the formalities for which are governed by outdated, Victorian legislation,” says Philip Round the corporate and banking partner based at George Green’s Wolverhampton office. “Whilst bills of sale are commonly utilised in the context of log book loans, whereby borrowers use their car or vehicle as security for a loan, the complex regulatory regime has prevented the more widespread grant of security over chattels.”

Mr Round continues, “this position may well change if the Government adopts the Law Commission’s recommendations following its recent consultation.  The Law Commission has noted that the prescribed form of bill of sale uses arcane language, is difficult to understand and unduly restrictive; for example, chattels can only be used to secure a loan of a fixed amount, as opposed to revolving or overdraft facilities.  The requirement to register bills of sale with the High Court is costly and unfit for purpose, particularly as most log book loans are also registered on asset finance registers which are easier to search on-line.  Finally, unlike hire purchase agreements to finance the acquisition of new assets, bills of sale can significantly prejudice defaulting borrowers, as their assets can be repossessed immediately following a payment default even if they have already repaid the bulk of their loan.  Innocent third party purchasers of assets subject to a bill of sale are also vulnerable to repossession even if they have no knowledge of the security.” 

According to Mr Round, the Law Commission has recommended that the existing legislation be repealed in its entirety. “The Law Commission proposes a new Goods Mortgages Act, with a significantly simplified bill of sale, to be known as a “goods mortgage”.  There will be no requirement to register vehicle mortgages with the High Court, but mortgages over other chattels will be subject to a more streamlined on-line registration procedure.  Lenders will be requested in certain circumstances to obtain a court order to enforce a goods mortgage where a defaulting borrower has repaid at least one third of the loan, and innocent third party purchasers will acquire title to assets subject to a goods mortgage of which they are unaware.”

Mr Round concludes, “the reforms are overdue and should increase access to finance by enabling lender clients to take security more easily over a wider range of assets where proposed security over land and buildings is inadequate.”