Chattel mortgages

Chattel mortgages over which security is taken can, and often, include assets such as plant, equipment and machinery, trading stock, large items (cranes, aircraft and ships), works of art and precious metals.

Who can take out a chattel mortgage?

Chattels owned by companies and limited partnerships may be used as security, as may certain chattels owned by an individual or non-LLP partnerships. The Agricultural Credits Act 1928 also permits partnership or sole trader farming businesses to grant security over farming stock or other agricultural assets.

What is a Chattel mortgage?

Chattels cover a diverse range of assets over which security can be taken. They are both tangible and movable, and are defined as “goods, furniture, and other articles capable of complete transfer by delivery” under S4 of the Bills of Sale Act 1878. Assets including financial instruments, cash and goods attached to real property such as fixtures are not encompassed by the definition.

Key considerations

Chattel mortgages over plant, machinery and equipment, precious metals or artwork will be relatively similar in form. Chattel mortgages over ships or aircraft require bespoke terms dealing with the assets’ specific characteristics and registration requirements and are therefore more specialist security instruments.

A key factor to consider is title and ownership. It is vital that the chattels subject to the security are clearly identifiable; title and ownership must be ascertainable. Upon taking security, title to the asset will be transferred as occurs in all valid legal mortgages. For vehicles, precious metals and artwork, it is particularly important to determine the property and identify ownership. Vehicles should be free from hire purchase agreements and other outstanding finance obligations, and valuable items may require certification of authenticity and supporting documents.

Although it is usual to permit the mortgagor of a chattel to remain in possession of it for obvious commercial reasons, it’s important that the steps are taken to put third parties on notice of the mortgagee’s interest. This would include recording the mortgage in any asset register, affixing prominent signs to items such as vehicles and plant, and notifying insurers of the interest of the mortgagee, or indeed requiring that the mortgagee be a co insured under any insurance

Another important issue is maintenance, replacement and asset value. A chattel mortgage will typically include a requirement to repair, as occurs in a fixed charge. Other key factors to consider are mobility, the risk of the asset becoming fixed, and the governing law and jurisdiction.

Registration and perfection

• Companies – register at Companies House to ensure that in the case of insolvency, the charge is not void against company creditors, liquidators or administrators (part 25 Companies Act 2006).
• Individuals/personal chattels – must comply with the requirements of the Bills of Sale Act (BAS) 1878 and the Bills of Sale Act (1878) Amendment Act 1882. This includes a  requirement for registration in the courts within seven days of the date of the mortgage by way of an affidavit that has to be sworn, so I tis important to have this procedure in hand before the mortgage is signed.
• Mortgages over ships – register at the ship’s port of registration (pursuant to Schedule 1 of the Merchant Shipping Act 1995).
• Mortgages over aircraft – register with the UK Aircraft Mortgage Register maintained by the Civil Aviation Authority (pursuant to s86 of the Civil Aviation Act 1982 and the Mortgaging of Aircraft Order 1972 (SI 1972/1268)). International security interests can be registered at the International Registry of International Interests in Aircraft Equipment.
• Charges over farming stock/agricultural assets – must comply with the Agricultural Credits Act 1928 and register as a (security) bill of sale under the BSA 1878.