Bills of sale: past, present and future
The Bills of Sale Act (the “Act”) was introduced in 1878 and still governs how individuals, partnerships and unincorporated bodies can use goods that they own as security for loans, while retaining possession of those goods. Since 1882 the legislation has hardly changed and as such the Act is seen as somewhat outdated. According to the Law Commission, however, despite the legislation’s origins in the Victorian era, the use of bills of sale has increased rather dramatically in recent years: a report from this year cites growth of 3,000 bills of sale registered with the High Court in 2001 to over 30,000 in 2016.
How does a bill of sale work?
Also known as a ‘logbook loan’, a bill of sale operates whereby the borrower gives the lender a bill of sale on their goods or vehicle. The borrower is able to continue their use of the goods or vehicle so long as repayments are kept up, but, as with other security arrangements, risks the vehicle being seized on default.
What are the problems with the Act?
Criticisms of the Act in its current form include its complexity and ability to create unnecessary costs, for both borrowers and lenders. Additional issues include, amongst others, the following:
- Unlike with hire purchase agreements, a lender can seize the goods or vehicle without a court order, even in circumstances where the logbook loan has largely been repaid and there is little risk of the borrower being unable to repay the full amount;
- Innocent buyers of the goods do not acquire ownership if it subject to a logbook loan. Their options in such circumstances are to pay off someone else’s logbook loan or surrender the vehicle to the lender; and
- Lenders are required to register logbook loans with the High Court. The current registration requirements are cumbersome which results in additional costs for all parties – the Law Commission estimates around £2 million a year. Additionally lenders face disproportionately harsh sanctions for non-compliance with the Act – including losing its right to the vehicle and right to repayment if the documentation and registration requirements are not met.
What is in store for logbook loans and the Act?
The Law Commission has spent a great deal of time and effort consulting with different parties to update the legislation so it is fit for purpose in the modern day. Its report recommended that the Act should be replaced by a new Goods Mortgages Act (it is understood that ultimately the term ‘goods mortgage’ will replace ‘bill of sale’), which will aim to give increased protection to borrowers and reduce the currently cumbersome burdens that a lender faces. As a summary, some of the Law Commission’s recommendations include:
- Avoiding situations where goods or vehicles are easily seized and providing better and more appropriate protection to borrowers. An example would be to prevent the borrower from moving the goods or vehicle, without the consent of the lender, to a place that is not provided for or allowed in the mortgage document.
- Providing adequate protection to an innocent buyer who unwittingly buys goods or vehicles without knowing that they are subject to a logbook loan. Such protection may include criminal sanctions for those who do not disclose a goods mortgage to a prospective buyer.
- Reducing the costs spent on registering documents and/or charges by cutting down the currently complicated and lengthy registration procedure. Initially the Law Commission had proposed establishing two different registers for vehicle mortgages and general goods mortgages, with the former being registered with existing asset finance registers and the latter continuing to be registered at the High Court, but under a simplified procedure. However, it has been noted that the government’s response to consultations over the last year indicates a preference in establishing a single register for all goods and vehicle mortgages at the High Court, albeit subject to a more simple, more cost effective registration regime.
It will be interesting to see if this particular point develops over the coming weeks and months.
This guide is for general information and interest only and should not be relied upon as providing specific legal advice. If you require any further information about the issues raised in this article please contact the author or call 0207 404 0606 and ask to speak to your usual Goodman Derrick contact.