Why the HPI scheme can get around limitations in the law of
conversion.
With the continuation of the Global EPP administration – which is
affecting over 51 asset finance houses – and large write-offs being
faced, it seems an appropriate time to examine the legal framework
for conversion claims.
Global EPP entered administration in late 2007 (see Leasing
Life April 2008). The key issue faced by many creditors is
that Global EPP’s assets are allegedly subject to multiple
financing. As a consequence it is not clear who owns – or who is
owed – what.
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The allegations raised are that Global EPP financed its assets
with more than one finance company, and therefore there are more
finance agreements in existence than assets.
With the Global EPP case coming in a long line of high-profile
frauds, the key question facing finance houses is how to avoid the
same situation arising again.
The starting point from a legal perspective is the legal
principle of conversion. This usually arises when the customer
deals with its financed goods in a way which is inconsistent with
the finance house’s rights. A prime example of this can be seen in
the allegations of repeated sale and leasebacks in Global EPP’s
finances.
The key principle is that a seller cannot pass on a better title
to goods than he himself has, so a customer cannot pass title which
he himself does not have.
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By GlobalDataHowever, there are, of course, exceptions to this rule, the most
usual of which in cases such as Global EPP is that of ‘seller in
possession’, under the Sale of Goods Act 1979.
Effectively, this rule provides that where the true owner sells
goods, but retains possession (i.e. the initial
sale-and-leaseback), if the seller then also wrongly sells the same
goods to an innocent third party buyer, and gives possession to
that buyer, then the buyer will obtain title.
In such cases it is possible for the customer to pass on title
to the goods to an innocent third party regardless of the existence
of the finance house’s finance agreement and prior interest.
So how can finance houses protect themselves? The most obvious
starting point is to check the HPI (and related) Registers.
However, there is no legal duty on finance companies to register
their interests (and no legal consequences if the interest is not
registered). It must therefore not be presumed that a clear result
will mean there are no prior interests.
Until such time as finance houses are legally required to
register their interests, other protective measures should also be
considered.
Physically checking the asset should be considered. For larger
deals, the cost of a physical inspection is likely to be
worthwhile. A physical check will confirm whether the asset in fact
exists (or is with the customer in question); whether it is what is
claimed; and whether its registration or identification numbers
match up (and if not, whether further searches need to be
made).
There is unfortunately no magic answer to protecting a finance
company’s position. However, information is the key, and the more
that can be discovered about each deal, and its origin, the better
in terms of long-term protection.
Jo Davis, a partner at the law firm
Shoosmiths
