The Goods Mortgages Bill – A Major Reform of the Bills of Sale Acts

In February 2020, Lord Stevenson of Balmacara sponsored the Goods Mortgages Bill as a Private Member’s Bill starting in the House of Lords. This followed the Government’s announcement in May 2018 that it would not bring forward the Law Commission’s Goods Mortgages Bill. The Bill had been announced in the 2017 Queen’s Speech and would have replaced the Victorian Bills of Sale Acts. Following a consultation (to which this Firm contributed), the Law Commission produced a Bill that was later shelved because Parliament was too preoccupied with Brexit. This was a wasted opportunity to introduce a non-possessory form of security interest for art, antiques and collectibles fit for 21^st century lending. Such lending constitutes an important part of the art market in major centres such as New York where an effective system of security for art-secured lending is in place. The UK art market requires a reliable and useable system for securing loans against works of art to support the development of the UK art market post Brexit, which should be a Government priority.

There is general consensus that the Bills of Sale Acts are archaic and no longer fit for purpose. Bills of sale are a way for people to use their goods as security for loans while retaining possession of those goods. They are mostly used for logbook loans (loans against cars). Research shows that bills of sale are used to secure amounts typically between £100 to £3,500, for a term of between six months and three years. Bills of sale have grown from 3,000 in 2001 to about 37,000 in 2015 and 2016, with a peak of 52,000 in 2014. The vast majority are taken out by borrowers who have difficulty accessing other forms of credit. Bills of sale are fraught with problems, legally and practically:

The Acts are complex and their language somewhat impenetrable;
The Acts require that a bill of sale document complies with a long list of prescribed provisions, with severe consequences for the lender if they fail to do so;
The Acts are inflexible and stifle commercial transactions;
The High Court registration regime for individual bills of sale is seriously out-of-date. It is still paper-based, reliant on manual processes, and not independently searchable.

The Goods Mortgages Bill aims to facilitate lending against movable property in England and Wales and to improve protection for lenders, borrowers and the public at large. In this analysis, we consider the Bill primarily from the perspective of private banks, auction houses and specialist lenders lending against high end fine art, antiques and collectible items located in England and Wales. References to sections are references to sections of the Bill unless otherwise noted. In the second part of this blog, we consider the Moveable Transactions (Scotland) Bill. The Scottish Bill also aims to facilitate the creation of non-possessory charges over chattels and we explain why it does not suffer from the flaws of the English Bill. At present, if the borrower is a natural person (as opposed to a legal person, see below), the lender has no choice but to take a pledge of the art located in England and Wales (not in Scotland) given by the borrower as collateral for the loan. A pledge is perfected by delivery of the art to the lender or its representatives. In other words, the borrower has no choice but to give up possession of the art. Lenders against art would rarely contemplate relying on a bill of sale, for the reasons highlighted above. There are potentially other structures allowing natural persons to retain possession of the art whilst the loan is outstanding, however, they are complex to implement and not risk-free for the lender. By contrast, if the borrower is an English company, for example a dealer trading as a limited company, the company can retain possession of the art during the loan because the lender can register the charge in the company’s register held at Companies’ House. Registration of the charge at Companies’ House perfects the lender’s security interest and gives notice to the public at large that the art is subject to a charge. A buyer buying an artwork from the company whilst it is subject to the charge will be deemed on notice of the charge and buy the artwork subject to the charge, even if the buyer failed to check the register of the company at Companies House.

Art market participants have for long been calling on the Government to create a public register of charges over movable property owned by natural persons. Such register can be found in other countries, notably the USA, where Uniform Commercial Code (UCC) filings allow creditors to notify other creditors about a debtor’s assets used as collateral for a secured transaction. UCC liens filed with Secretary of State offices act as a public notice by the creditor of the creditor’s interest in the property. Well-advised buyers of art in the US will check the UCC register before buying an artwork to verify that it is not encumbered. The existence of a public register of charges over movable assets goes some way towards explaining why the art-secured market is primarily based in the USA. According to ArtTactic, the art market research firm who contributed to reports published by the art fair TEFAF in 2018 and by Deloitte in 2019, based on qualitative interviews with the major art lenders, 90% of the art-secured lending business to ‘art dealers/ art trade’ is taking place in the US and others have quoted that about 80% of the overall art-secured lending business (private clients and trade) is carried out in the US – with the remaining is in Asia, Latin America and Europe.

The Bill aims to repeal the Bills of Sale Acts. It applies to property located in England and Wales when the charge is created. It has several advantages for borrowers:

It gives protection to borrowers by introducing a requirement that lenders must obtain a court order before seizing the collateral. This is discussed further below.
It allows individuals borrowing under regulated credit agreements to end their goods mortgages by handing the collateral to the lender – instead of paying the rest of the loan.
It increases the access to finance for unincorporated businesses, in particular sole traders and general partnerships.
It enables unincorporated businesses and directors to use goods mortgages to secure overdrafts, revolving credit facilities and guarantees, where the amount of the loan and the date of repayment cannot be specified in advance (this is not possible under the Bills of Sale Acts).

However, from the perspective of a lender against art, the Bill suffers from serious flaws.

Prescribed Provisions

Like the Bills of Sale Acts, the Bill provides that the ‘instrument creating a goods mortgage’ must contain ‘prescribed provisions’ (Section 5(1)(a) and Section 33), or the Courts will not enforce it (Section 5(4)). Prescribed provisions in Bills of Sale are a significant obstacle to their use and it is regrettable that the Bill should introduce ‘prescribed provisions’ in goods mortgages. The Bill further provides that ‘the Treasury must by regulations require the inclusion in the instrument of statements in such form as the Treasury consider appropriate for the purpose of warning the mortgagor that the mortgagor risks losing the goods if the obligation secured by the goods mortgage is not discharged, and that the mortgagor may commit an offence under the Fraud Act 2006 if, while the goods remain subject to the goods mortgage, the mortgagor makes a disposition of the goods without previously disclosing to the purchaser the existence of the goods mortgage’ (Section 5(2)). If these were the only two prescribed provisions, all would be well on that front. The risk that the Treasury will add further ‘prescribed provisions’ is unattractive and if further prescribed provisions were introduced, they should not apply to goods mortgages given as security for (i) business loans of more than £25,000; and (ii) loans to high net worth individuals of more than £60,260 (‘Exempt Goods Mortgages’, Sections 7 and 26(3)). It would be helpful if the Bill made that clear. Our reading of Section 5(3) is that the two prescribed provisions set out in Section 5(2) do not apply to Exempt Goods Mortgages, but that other prescribed provisions introduced by the Treasury would apply, because Section 5(3) only exempts Exempt Goods Mortgages from Section 5(2), not from Section 5(1)(a). Exempt Goods Mortgages should be exempt from both Section 5(1)(a) and Section 5(2).

Signature attested by a witness

Section 5(1)(b) provides that ‘the instrument creating a goods mortgage must be signed or otherwise authenticated by the prescribed persons and in the prescribed manner’. The Law Commission argued that a goods mortgage is an important transaction and it should be treated with some formality. The Commission explained that the requirement that borrowers should sign in the presence of a witness would prevent the most serious excesses, such as where borrowers may be tempted to take out a loan online while alone and drunk. However, the Law Commission added it would be overly prescriptive to attempt to specify what type of signature is required. Some e-signatures can be witnessed and may be suitable for business loans. The Law Commission concluded that the legislation should specify that the borrower signs the document in the presence of a witness. It should not specify the type of signature or who that witness should be. We think that whilst signing the document in the presence of a witness may well be a suitable protection for consumers and borrowers of smaller loans, this requirement should not apply to Exempt Goods Mortgages, for the same reason that it is not mandatory to include the prescribed statements at Section 5(2) in Exempt Goods Mortgages instruments (see above).

Goods mortgages over goods not yet owned by the mortgagor

Section 2(2)(a) provides that in relation to the goods subject to the mortgage, the first condition to be met is that ‘the goods exist, and are owned by the individual concerned, at the time when the charge is created’. This suggests that the buyer of artworks could not rely on a goods mortgage of those artworks to raise funds in order to buy them. Most contracts for the sale and purchase of artworks include a retention of title clause. In order to use a loan secured by a goods mortgage over the artworks the buyer has purchased but not yet paid for, the buyer must persuade the seller of the artworks to allow him, the buyer, to take title to the artworks before or at the time the loan proceeds secured against the artworks are paid over to the seller of those artworks. This is not always practical or indeed possible.

The Law Commission explains this section in a rather cryptic fashion: ‘one of the purposes of the bills of sale legislation was to prevent individuals from borrowing money against goods which they did not own, but which they might own in the future (sometimes referred to as “after-acquired property”). The draft Bill preserves this prohibition on borrowing money against future goods. [….]. Clause 2(2)(a) therefore states that the goods must exist and be owned by the individual concerned at the time the charge is created. This is not intended to prevent individuals from using goods mortgages to secure a loan to buy the goods. This would be permitted, provided that title to the goods passes to the buyer before the buyer charges those goods under a goods mortgage’. The Law Commission seems to support individuals using goods mortgages to secure a loan to buy the goods, at the same time, given that the goods must be owned by the individual concerned at the time when the charge is created (Section 2.2(a)) and the charge is created by the written instrument recording the terms of the goods mortgage (Section 2.2(b)), it is difficult to see how the buyer of artworks could use a loan secured by a goods mortgage on those artworks in order to buy them, unless the two transactions occur simultaneously.

We think that this is unfortunate, and that buyers should be able to create a mortgage over property they have bought but do not yet own, provided that the mortgage only comes into effect once the mortgagor has acquired title to the property. As we shall see, this is permitted by the Scottish Bill.

Court order to repossess the collateral

Section 16(1) provides that: ‘Except under an order of the court, the mortgagee under a goods mortgage is not entitled to enter any premises to take possession of the goods without the consent of the person entitled to authorise entry on the premises.’ There are no exceptions, not even for Exempt Goods Mortgages. This will prove a major obstacle to art-secured lending. The need to go to court to take possession will encourage lenders to prefer a pledge because with a pledge, the lender already has possession of the collateral and does not need to go to court.

As the Law Commission pointed out, if the lender must go to court to get access to the goods, there are serious disadvantages:

a. The lender must pay the court fee. There are further costs, such as legal fees. If the lender succeeds in court, some of these fees will need to be refunded by the borrower.
b. There is no prescribed time limit in which the court must hear the matter. Typically, the court process takes six weeks to two months, but it can be longer in busy county courts. During this time, arrears tend to mount, adding to any shortfall.

The Law Commission recommended that the requirement for a court order before repossession should apply only to regulated credit agreements secured by a goods mortgage.

We think that whilst the protection of the Court’s oversight might be useful to consumers and borrowers of smaller loans, this protection is unnecessarily cumbersome and expensive for Exempt Goods Mortgages. No court order should be necessary in the case of Exempt Goods Mortgages, whether the goods are in a public or private place. This would be subject to English law on the right to enter private property without consent.

If the Bill did not make a court order mandatory for Exempt Goods Mortgages, it would still be open to the borrower to seek the assistance of the court on an urgent basis if the lender has repossessed, or threatens to repossess, the goods in a manner or circumstances unacceptable to the borrower.

The Law Commission, with good reason, linked (i) access to the court prior to repossession and (ii) voluntary termination of the goods mortgage by handing the goods to the lender without further liability. The court order aims to protect a borrower who can pay but who has encountered temporary financial difficulties and needs additional time to pay. By contrast, a borrower with no realistic prospect of paying off the loan would benefit from the right of voluntary termination. The Bill provides that the right of voluntary termination does not apply to Exempt Goods Mortgages. It follows that compulsory court proceedings should the lender seek repossession of the goods should, equally, be disapplied for Exempt Goods Mortgages.

The Register of Goods Mortgages

The Bill provides that ‘a register of goods mortgages is to be kept by the Secretary of State in accordance with regulations made by the Treasury or the Secretary of State
under this section (referred to in this section as “Registration Regulations”)’ (Section 9). Given the importance of the register, the Bill ought to specify at the very least that:

There shall be one central register.
The register shall be digital and accessible online.
The process of registering a goods mortgage, and removing the goods mortgage from the register, shall be made online. It shall be possible to amend or renew a registration online.
The register shall be searchable on any technology support (PC, tablet, mobile phone) on a 24/7 basis.
Registration shall attract a fee that does not exceed the fee payable to register a charge online at Companies House (currently £15). The cost of searching the register shall be nominal.

Section 9(3) provides that ‘registration regulations may (but need not) provide for the register to be kept in the High Court’. We question whether this is the rightful place for the register. A governmental department equipped for, and used to, running online registers such as HM Land Registry would seem a more appropriate choice. The Law Commission suggested Companies’ House ‘[which] already operates an electronic registration regime for companies and limited liability partnerships. It would be well placed to register goods mortgages […]’.

By way of example, in the US, UCC filings are made online. The UCC Register is searchable online. It is maintained by a State Department, not the courts. As we shall see, the proposal in Scotland is that the register equivalent of the Register of Goods Mortgages is kept by a non-ministerial department of the Scottish government, not the courts.

The alternative to a government-run registry is to adopt the solution proposed by the Law Commission for vehicle mortgages, namely that mortgages are registered with designated asset finance registries such as Experian or HPI. The Law Commission recommended that asset finance registries should meet four criteria:

adequate data-sharing;
a suitable cost structure;
robust technology (coupled with indemnities); and
a complaints system.

Protection of buyers of artworks subject to a goods mortgage

Section 12(3) is a major issue. It provides that ‘if ownership is transferred by a disposition to a purchaser who (i) is a private purchaser as defined by section 13 (a purchaser who does not carry on the business of selling the goods being purchased or procuring finance against the goods being purchased), (ii) is a purchaser of the goods in good faith, and (iii) at the time of the disposition made to the purchaser, has no actual notice that the goods are subject to a goods mortgage, the goods cease to be subject to the goods mortgage’. In other words, the lender is at the mercy of the borrower not giving notice to a buyer that the artworks are subject to a goods mortgage. If the borrower does not notify the buyer, the lender loses its security interest and his only recourse is against the defaulting borrower. This defeats the purpose of a public register and compels the lender to fall back on possession and pledge.

The Law Commission identified three reasons for registration of mortgages over goods other than vehicles:

notice to third parties;
where a lender is providing substantial sums to an individual with apparently valuable assets, it might have more incentive to search the register; and
to determine priority issues between competing lenders.

It is not understood why third parties cannot be deemed to have notice of registered goods mortgages. If the register is available on-line and it is easily searchable at a reasonable cost, there is no reason why a prospective buyer of movable goods cannot search the register as part of their due diligence.

If one buys a house in England and Wales that is subject to a charge without checking the land registry, one buys the house subject to the charge (s198(1) Law of Property Act 1925). If one buys a charged asset owned by a company without checking the register of the company at Companies’ House, one buys the asset subject to the charge (see above). The law assumes that the buyer has notice of the charge (deemed notice) whether or not they have, in fact, checked the register.

It is difficult to conceive a situation where a lender taking security against art and leaving the art in the borrower’s possession (this is, after all, what the Bill is meant to facilitate) will take the risk that the borrower sells the art to a buyer without notifying the buyer that there is a mortgage on the art, thereby extinguishing the lender’s security interest. If this section remains as is, we take the view that the Bill is pointless, at least insofar as art-secured lending is concerned. This would be a significant missed opportunity.

In parallel, a similar legislative initiative has been underway in Scotland (where the Bill, if it becomes law, would not apply). In December 2017, the Scottish Law Commission published a report and a draft bill called the Moveable Transactions (Scotland) Bill. The main contribution sought by the Scottish proposal is the creation of a “statutory pledge” and, like in England, a register where lenders would be able to register such a pledge to protect their financial interest in the charged asset. In his response, Minister for Community Safety said that the Government would need to consult on the cost of the new register and on whether they would be used by stakeholders. The Scottish Parliament was also seeking views on the proposed bill earlier this year.

The Scottish Bill refers to ‘statutory pledge’, instead of ‘goods mortgage’. The instrument is the same, namely a non-possessory charge over moveable property.

The Scottish Bill contains none of the flaws of the Goods Mortgages Bill except for the need for a court order in order to take possession of the collateral or to enforce the pledge in certain circumstances. We stand by our view stated above that no court order should be necessary to take possession of the collateral and to enforce it when the goods mortgage qualifies as an Exempt Goods Mortgage, subject to existing laws on the right to enter private property without consent.

Prescribed provisions

The Scottish Bill does not impose any ‘prescribed provisions’ in statutory pledge instruments other than it must identify the property that is to be the encumbered property, and identify the secured obligation (Scottish Bill, Section 46(2)). That is stating the obvious.

Execution of the statutory pledges

Section 46(1) of the Scottish Bill provides that ‘a statutory pledge requires a constitutive document. Section 46(2) continues: ‘The constitutive document must:

(a) be executed or authenticated by the provider,

(b) identify the property which is to be the encumbered property, and

Subsection (2) requires that the constitutive document is subscribed by the provider using a physical signature (“executed”) or signed electronically (“authenticated”). There is no need for a witness as provided by the English Bill. The Scottish Bill is more practical and, we would suggest, sufficient to protect mortgagor and mortgagee. The mortgagor should be able to sign physically or electronically, as they would sign any other contract.

A goods mortgage can secure a loan against goods not yet owned by the mortgagor

Section 46(3) of the Scottish Bill provides that ‘for the purposes of subsection (2)(b) [see above, the property to be incumbered must be identified], the property identified may either be property of, or property to be acquired by, the provider’. Thus, according to subsection (3), a statutory pledge may be granted over property not yet owned by the provider at the time the property is identified in the document. This subsection should be read with section 48 of the Scottish Bill which has the effect that the pledge is not created until (and if) the property is owned by the provider. Section 48 provides that ‘a statutory pledge is created over property on the requirements mentioned in subsection (2) all being met’. Subsection 2 provides that ‘those requirements are that:

(a) the property is the provider’s,

(b) the statutory pledge is registered, and

The Scottish Law Commission explains this section as follows: ‘in addition, as set out in subsection (2) [of Section 48], the property must be the provider’s property, and it must be identifiable as property subject to the pledge. The pledge is only created when each of the requirements in that subsection is met, regardless of which occurs first [our emphasis]’. It follows for example that a pledge is not created at the time of registration if the ownership of the property is not with the pledgor at that time.

The Scottish Law Commission gives the following example: ‘Adam grants a pledge in June to the Haddington Bank over motor vehicles he has recently acquired, to be listed in a schedule to be given to the Bank. The Bank registers the pledge in the RSP in July. Adam sends the schedule to the Bank in August. The statutory pledge is created in August when all three conditions in subsection (2) are met’.

Contrary to the position adopted in England, in Scotland it is possible to grant a goods mortgage over property the mortgagor has bought but does not yet own. The goods mortgage can be signed and registered but it will only be created when the goods have become the property of the mortgagor. This is a pragmatic and sensible solution that we recommend be adopted in England.

Section 48 of the Scottish Bill is subject to Section 51 of the same Bill, with the effect that a pledge over property yet to be acquired may be ineffective if the property is acquired after the provider becomes insolvent.

For the sake of clarity, we would suggest distinguishing between creation and perfection. The mortgage is created when the instrument recording the mortgage is signed, in the same way as a written contract is concluded when it is signed. The mortgage is perfected when the last of the 3 conditions set out in Section 48(2) of the Scottish Bill is fulfilled. Typically, this will be the case when the mortgage is registered. If by the time the mortgage is registered, the buyer/mortgagor does not yet have title to the artworks he has bought, perfection will occur only when the buyer/mortgagor acquires title. If the mortgagor never acquires title or becomes insolvent before title passes to him, the mortgage will be ineffective, and either mortgagor or mortgagee should be responsible (and able) to remove the registration of the mortgage from the register.

The register of goods mortgages

Section 87(1) of the Scottish Bill provides that ‘there is to be a public register known as the Register of Statutory Pledges’.

Section 87(2) of the same Bill provides that ‘the Register of Statutory Pledges (in this Part referred to as “the register”) is to be under the management and control of the Keeper’. The Keeper is the Keeper of the Registers of Scotland, responsible for keeping public registers of land, property, and other legal documents in Scotland. It is a non-ministerial department of the Scottish government and the Keeper is directly accountable to the Scottish Parliament. The Scottish courts are not involved.

Section 87(3) of the Scottish Bill states that, subject to the requirements laid down by the Bill, the Keeper has discretion as to the form in which the RSP is kept. That would include keeping the RSP in electronic form. The Bill does not mandate that the register be kept in electronic form. Given that several registers maintained by the Keeper are online registers including, for example, the Land Register and the Register of Sites of Special Scientific Interest, it is more likely than not the Register of Statutory Pledges will be an online register. Any other solution would seem rather primitive in the 21^st century.

The Bill does not set the registration fee or the search fee. Searching the Land Registry online is free. The fee is £3 to obtain copy of the title deeds of an immoveable property. You may pay for it online and it is emailed to you. We expect that the Register of Statutory Pledges will operate in a similar way but we do not know yet.

The protection of buyers in good faith

Section 53(1) of the Scottish Bill deals with the restriction on freedom to deal with property encumbered by a statutory pledge. It provides that ‘if the provider of a statutory pledge transfers the encumbered property (or any part of that property) to a third party other than with the consent mentioned in subsection (2), the transferred property remains encumbered by the pledge’.

Subsection 2 provides that ‘the consent:

(a) is the written consent of the secured creditor (i) to the particular transfer, and (ii) to the property in question being transferred unencumbered by the pledge, and

(b) does not include consent granted more than 14 days before the particular transfer.’

Unlike the English Bill, the lender is not at the mercy of the borrower selling the collateral to a buyer without notice, leaving the lender without a security interest. The principle in Scotland is that the buyer of an artwork encumbered by a registered statutory pledge is deemed on notice of the pledge even if he failed to check the register (constructive notice), and he takes the artwork subject to the pledge.

There are exceptions to that principle.

The first exception relevant to art is where the buyer acquires the property in good faith from a seller selling in the ordinary course of business. Section 54(1) of the Scottish Bill provides that ‘the purchaser of corporeal (moveable) property which is encumbered property acquires it unencumbered by the statutory pledge, despite the consent mentioned in section 53(2) not having been obtained, if:

(a) the person from whom the property is acquired is acting in the ordinary course of that person’s business, and

(b) at the time of acquisition, the purchaser is in good faith.

(2) For the purposes of subsection (1)(b), a purchaser is not to be taken to be other than in good faith by reason only of the statutory pledge having been registered’.

In other words, the proposal in Scotland is that if the mortgagor is a private individual, e.g. a collector, and he sells the art subject to a goods mortgage without the mortgagee’s consent, the buyer takes the art subject to the mortgage. However, if the mortgagor is a business (e.g. an art dealer) and the mortgagor sells the art in the course of its business to a buyer in good faith, the buyer buys the art free from the goods mortgage. It should be noted that in Scotland, it is proposed that a statutory pledge (goods mortgage) can be granted by a legal person, as well as a natural person. That is not the case in England and Wales where a goods mortgage can only be granted by an individual. Accordingly, this provision would only bite in England if the mortgagor were an unincorporated business, e.g. a sole trader. We think that this exception undermines the market for art-secured loans, and if it were introduced in England, it would close the door to loans against art to sole traders secured by goods mortgages. The English Law Commission indicated that one of the advantages of the Bill was to facilitate loans secured by movable property to unincorporated associations. In order to achieve this, buyers of movable property that is subject to a goods mortgage should be deemed to have notice of the mortgage if it has been properly registered before the date of the sale, even if the seller/mortgagor sells the goods in the ordinary course of business. Checking the register of goods mortgages should be part of the buyer’s due diligence enquiries, in the same way as buyers of fine art search the Art Loss Register to verify that the art they propose to buy has not been registered as looted or stolen. This is especially the case if a search of the goods mortgage register can be performed on a mobile phone, as we advocate it should be. In the interim, a compromise might be to provide that for purchases at a price of less than, say, £10,000, the buyer would not be deemed to have constructive notice, whereas if the price exceeds £10,000, the buyer would be deemed to have constructive notice. A low value threshold could be justified in the name of consumer protection whilst not impacting private banks, auction houses and specialist lenders because they typically lend against artworks worth significant amounts of money.

The second exception is found at Section 55 of the Scottish Bill that deals with the acquisition of goods in good faith for personal, domestic or household purposes. It provides that ‘an individual who acquires corporeal (moveable) property which is encumbered property acquires it unencumbered by the statutory pledge, despite the consent mentioned in section 53(2) not having been obtained, if:

(a) the value of all that is so acquired does not, as at the time of acquisition, exceed such amount (if any) as may be prescribed for the purposes of this subsection,

(b) at the time of acquisition, the acquirer is in good faith,

(d) the property is wholly or mainly acquired for personal, domestic or household purposes’.

Subsection 3 of Section 53 provides that ‘an acquirer is not to be taken to be other than in good faith by reason only of the statutory pledge having been registered’.

This section protects an individual who acquires moveable property of limited value for private or related purposes. If the maximum amount is set low, say £5,000, it will not affect the higher end of the art-secured lending business but may apply to the lower end (pawnbroking). We do not think that if a similar provision were introduced in the English Goods Mortgages Bill, it would undermine the English market for art-secured lending services offered by the private banks, the specialist lenders and the auction houses. This exception could be a useful compromise to protect consumers when buying household goods of smaller value.

Another exception applies to motor vehicles. The private buyer of an encumbered vehicle acquires it unencumbered if he acquires it in good faith (Scottish Bill, Section 56). The final exception relates to the acquisition of certain financial instruments in ordinary course of trading (Scottish Bill, Section 57).

To conclude, we would encourage Parliament to reconsider certain aspects of the English Bill by reference to the Scottish Bill. The most significant issue is the fact that if a mortgagor in possession sells the collateral to a buyer without notice, the mortgagee loses its security interest. The fact that the mortgage is registered on a public register is not sufficient to give notice to the buyer. Wisely, in Scotland, the buyer is deemed to have constructive notice of the security interest if it was validly registered, subject to limited exceptions. The second most significant issue is the register of goods mortgages. The register must be fit for the 21^st century and forward looking so that it does not become obsolete by the time it is available for registration and consultation. It must be online, searchable on line 24/7, it must be up to date, registration of goods mortgages must be straightforward and reasonably priced, and so should consultation of the register.

Constantine Cannon LLP
August 2020