The Private Initiative and Security for Payment under English Law - article ; n°1 ; vol.54, pg 41-53

Roy Goode

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Revue internationale de droit comparé - Année 2002 - Volume 54 - Numéro 1 - Pages 41-53
13 pages
Source : Persée ; Ministère de la jeunesse, de l’éducation nationale et de la recherche, Direction de l’enseignement supérieur, Sous-direction des bibliothèques et de la documentation.

Sujets

• Droit et juridique

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• Publié par: Revue-internationale-de-droit-compare
• Publié le: 01 janvier 2002
• Nombre de lectures: 15
• Langue: English
• Poids de l'ouvrage: 1 Mo

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Sir Roy Goode
The Private Initiative and Security for Payment under English
Law
In: Revue internationale de droit comparé. Vol. 54 N°1, Janvier-mars 2002. pp. 41-53.
Citer ce document / Cite this document :
Goode Roy. The Private Initiative and Security for Payment under English Law. In: Revue internationale de droit comparé. Vol.
54 N°1, Janvier-mars 2002. pp. 41-53.
doi : 10.3406/ridc.2002.17844
http://www.persee.fr/web/revues/home/prescript/article/ridc_0035-3337_2002_num_54_1_17844R.I.D.C. 1-2002
THE PRIVATE FINANCE INITIATIVE AND
SECURITY FOR PAYMENT UNDER ENGLISH LAW
Sir Roy GOODE
I. INTRODUCTION
The PFI
The private finance initiative (PFI) is in concept a form of partnership
between the public and private sectors in which a government department
or other public sector body requiring buildings, bridges, roads, management
services, and other public services and facilities, does not itself provide
them but grants a concession to a private sector project company or
consortium to procure or provide what is required, payment being made
by the public body or other user to the project company according to the
use, volume and quality of such provision. In other words, the private
sector is the provider, and is responsible for raising the necessary funds,
while the public body is the user. Underlying the PFI are three fundamental
concepts : value for money (the PFI being measured against a public
sector comparator) ; the transfer of risk from the public body to the private
party, wholly or in part ; and a high degree of flexibility in the structuring
of contractual relationships, which vary greatly from one project to another.
"Deals, not rules" is the PFI slogan. The project company/consortium
procures the necessary funds from the private sector. Commonly such
funds are a mixture of internal funding in the form of equity or subordinated
debt by the project sponsors and external funding from banks or from
the market through the issue of bonds.
Security in PFI projects
Security techniques used in PFI project funding are not in principle
different from those used in ordinary commercial transactions. Funding
* Professeur Emeritus à l'Université d'Oxford. 42 REVUE INTERNATIONALE DE DROIT COMPARE 1-2002
for PFI projects, as for other types of project finance, is typically on a non-
recourse basis. That is to say, the borrower incurs no personal obligation to
the funders, who simply take security over the prospective income stream
and other assets. But the public sector factor does introduce some distinc
tive considerations, in particular, the question of vires, that is, the legal
power of the public body to enter into the transaction ; the distribution
of risk ; and the imposition of certain constraints on the realisation of
assets that would ordinarily be available to the secured creditor as a default
remedy. The use of security in PFI projects is considered in Part VIII of
this paper. Funders will usually seek to buttress their security by a direct
tripartite agreement with the public body awarding the concession and
the project company by which the awarding authority undertakes to give
prior notice to the funders of its intention to terminate the project agreement
and to allow the to give notice that they intend to step into the
project and take it over or arrange for it to be taken over by some entity
which the funders control. Such step-in clauses enable the funders to keep
the project on foot and under their control during the step-in period, with
a view to getting the project back on track, after which the funders step
out and the project company resumes control, or alternatively the funders
exercise a right to step out anyway because they regard the project as
no longer viable.
II. SECURITY RIGHTS IN ENGLISH LAW
The importance of security
Security for payment or other performance is crucially important in
modern financing. Even the soundest and most well-run company is not
immune from the impact of competition, loss of markets or a recession
or from the domino effect of the collapse of its major customers. The
significance of security rights has increased with privatisation and
government- sponsored private finance initiatives to support public projects,
with the consequent shift of risk from government to the private sector.
The development of the multinational enterprise and of global trading has
also made it more difficult to ensure the effectiveness of security, since
rights which are recognised by the law of the state where the security is
created will not necessarily be accepted in another state where the
interest comes to be enforced. Indeed, it is often far from clear what law
governs the security interest.
Real and personal security
Security may be either real or personal. Real security is security in
or over an asset ("collateral") so as to entitle the creditor to have recourse
to the asset for payment in priority to the claims of general creditors.
Personal security is security given by way of a payment undertaking by
the debtor or a third party to reinforce the debtor's primary payment
undertaking. For example, a debtor may give a bill of exchange as collateral R. GOODE : PFI UNDER ENGLISH LAW 43
security for a payment obligation under a contract of sale of goods ; the
bill renders the debt more liquid but otherwise adds little to the strength
of the primary obligation. Much more effective is personal secu
rity given by a third party, for example, by way of a bond, guarantee or
letter of credit. Personal security of this kind is given not only for ordinary
commercial transactions but also by way of credit enhancement of a public
offering of securities for the purpose of improving the credit rating of
the offered debt or equity. The rest of this paper is confined to real
security.
Legal and equitable interests
The English law of security interests cannot properly be understood
without some reference to the role of equity, which is distinctive in systems
based on the common law. The mediaeval common law strictly confined
legal rights and remedies. Nowhere was this more true than in relation
to the transfer of property. In order for ownership to pass the transfer
had to relate to existing property of the transferor and to comply with
strict legal formalities. Further, the common law did not recognize the
trust, by which property was transferred to A to hold for the benefit of
B. The common law treated this as a transfer of full ownership to A and
ignored the trust in favour of B.
To mitigate the rigours of the common law recourse might be had
to the King by petition to his Chancellor, who would intervene on equitable
grounds to give remedies denied by the common law and to restrain the
exercise of common law remedies where their exercise was considered
to be against conscience. Over time these equitable remedies developed
into a distinct set of rules administered by separate courts of equity. The
rules of equity in many respects remain distinct from those of the common
law to this very day, though all courts now administer both law and
equity, the rules of the latter prevailing in case of conflict.
Courts of equity were willing to enforce the trust, initially by acting
in personam to compel performance by the trustee but later extending
the ambit of control to compel observance of the trust by donees and by
those acquiring the trust property with notice of the trust. Eventually the
position was reached where the rights of the beneficiary under a trust
became converted from a purely personal right into a full-blooded property
right (equitable interest) which had priority over all subsequent interests
in the property other than the interest of a bona fide purchaser of the
legal title for value and without notice of the trust. Equity also acted on
the conscience of a party who had contracted to transfer property by
treating as done that which ought to be done, and thus regarded an
agreement for a transfer as if it were a transfer. Finally, whereas the
common law insisted that an agreement to transfer future property was
a mere contract and did not operate to transfer a property interest, even
upon the grantor's acquisition of the new property, without a new post-
acquisition act of transfer, equity — again treating as done that which
ought to be done — was prepared to recognize the grantee as obtaining
an interest in the new asset automatically upon the grantor acquiring the 44 REVUE INTERNATIONALE DE DROIT COMPARE 1-2002
asset so long as it was identifiable as falling within the scope of the
agreement.
These three developments — the trust, the treatment of an agreement
for transfer as if the transfer had been carried out and the recognition of
interests in future property — enormously expanded the range of real
rights in English law and correspondingly reduced the assets available to
unsecured creditors in the grantor's bankruptcy. Almost the sole exception
is the contract of sale of goods, where the Sale of Goods Act 1979 is
considered to lay down a complete code for the transfer of title, so that
unless otherwise agreed between the partie