Finance and security II

Question 1

What is the definition of security interests?

Answer 1

Definition: a person with absolute proprietary rights (debtor/borrower) grants another person
(creditor/lender) limited proprietary rights
(Such proprietary rights are security interests).

Question 2

How is ‘Security’ is very different legally from ‘quasi-security’?

Answer 2

• Quasi-security: creditor has proprietary title over the relevant asset. e.g: Retention of title clause: creditor (seller) retains title to property to the goods until the buyer (debtor) has paid for them.
Quasi security => creditor has absolute proprietary rights but has parted with possession to the debtor.

Question 3

Summarise the difference b/w security and quasi-security.

Answer 3

• Security: Ownership title is on debtor (but creditor is given the right to realise the debtor’s assets if the debtor fails to repay the loan)
• Quasi-security (e.g. ROT): Ownership title over the property is on the creditor (the seller) until the debtor (buyer) has paid for it

Question 4

What are the are 4 types of security interests?

Answer 4

① Pledges
② Liens
These are Possessory: creditor is required to take possession

③ Mortgages
④ Charges
Non-possessory: creditor is not required to take possession

Question 5

Regarding Bringing security interests into life what is attachment?

Answer 5

Refers to the creation of a security interest over the debtor’s assets => the process of “attaching” the security interest to the property to which it relates.

Question 6

What are the requirements for attachment in regards to bringing security interests to life?

Answer 6

Requirements:

• agreement
• must identify the property
• present or future property
• debtor must have title to property

Question 7

Regarding Bringing security interests into life what is Perfection?

Answer 7

Perfection refers to the process of making the security interests effective towards third parties => so that it binds third parties.
• Pledges and liens (possessory security interests): all that it is required is that the creditor takes possession of the property
• Mortgages and charges (non-possessory security interests): If created by companies, must be registered, otherwise void towards third parties: Companies Act 2006, s 859 H(3)

Question 8

What does Non-possessory security interests mean?

Answer 8

• ‘Non-possessory’ means that the creditor is not
required to take possession for the security to
exist

Question 9

What is the ownership in regards to mortgages?

Answer 9

• Ownership

i. A mortgage transfers ownership of the property to creditor (mortgagee) by the debtor (mortgagor) for the purpose of providing security for an underlying obligation
ii. Once debtor has repaid the debt (redemption), the creditor will retransfer ownership of the asset back to the debtor

Question 10

What is the breakdown regarding the transfer of title to the creditor for mortgages?

Answer 10

Key point: there is a transfer of title to the creditor, which can be either legal or
beneficial
• Legal (over existing assets), or
• Beneficial (over future assets)

Question 11

What is possession regarding mortgages?

Answer 11

• Possession: The debtor will typically remain in possession

Question 12

What is termination regarding mortgages?

Answer 12

• Termination:
– Debt is paid: ownership of asset is retransferred to the debtor.
– Debtor defaults: creditor can take ownership (foreclosure) or sell the asset.

Question 13

What is perfection regarding mortgages?

Answer 13

• Perfection: mortgages created by companies are void unless registered (Companies
Act 2006, s 859).

Question 14

Regarding mortgages, in the scenario where the debtor defaults, what are the rights of the creditor (Mortgagee):

Answer 14

Rights of the creditor (mortgagee):
• Foreclosure: creditor takes the property in satisfaction of the debt, which extinguishes debtor (mortgagor)’s right to recover title to the property upon payment –requires a court order
– Here the creditor becomes the absolute owner (i.e. if the creditor sells the property and there is a surplus in sale, this will be for the benefit of creditor)
• Taking possession: the creditor will take possession of the asset (if he had contracted himself out, which is often the case) – this is the usual step before selling
the asset
• Power of sale: express or implied, once debtor has defaulted.
–Here the creditor (mortgagee) will decide when to sell based on own interests (if surplus in sale, this will be the benefit of the debtor)
• A receiver is appointed: who receives the income from the asset and ensures that the debt is paid. Although presenting as agent for the debtor (mortgagor), the receiver’s main interest is that the debt is paid.

Question 15

Does a mortgage of goods have to be in writing?

Answer 15

No. Can be, but doesn’t have to be.

In relation to personal property there is no general requirement as to the form of a mortgage, since it
involves transfer of ownership, so that if the parties intend to create a mortgage, any transfer appropriate for the type of property mortgaged is sufficient. Thus an oral mortgage of goods is possible, though if it is made in writing it will be a security bill of sale and have to meet the requirements of the Bills of Sale (1878)
Amendment Act 1882.

Question 16

Does a mortgage of goods have to be in writing?

Answer 16

No. Can be, but doesn’t have to be.

In relation to personal property there is no general requirement as to the form of a mortgage, since it
involves transfer of ownership, so that if the parties intend to create a mortgage, any transfer appropriate for the type of property mortgaged is sufficient. Thus an oral mortgage of goods is possible, though if it is made in writing it will be a security bill of sale and have to meet the requirements of the Bills of Sale (1878)
Amendment Act 1882.

But exceptions exist where it must be in writing.

Question 17

What are the exceptions of when a mortgage of goods has to be in writing?

Answer 17

There are exceptions. In each of the examples that follow, the mortgage must be in
writing:
● a mortgage of an equitable interest in whatever type of property;
86
● mortgages of intellectual property;
● mortgages of British registered ships,
88
but not aircraft;
89
● a legal mortgage of a thing in action.

Question 18

Why are the overwhelming majority of ‘mortgages’ over land ‘charges by way of legal mortgage’ under s87 of Law of Property Act 1925.

Answer 18

As a point of clarification, mortgages of land can now only be effected where title to the land is not registered, and even then will take effect not as a conveyance of the fee simple, but as a grant of a 3,000-year lease.

Consequently, the overwhelming majority of ‘mortgages’ over land are ‘charges by way of legal mortgage’ under s 87 of the Law of
Property Act 1925.

Question 19

What is ownership in relation to charges?

Answer 19

•Ownership: charges do NOT effect transfer of title of the charged asset to the creditor (neither legal/nor beneficial)
=> Key point: there is no transfer of title to the creditor, neither legal nor beneficial

Question 20

Do the creditor (chargee’s) rights derive from the title?

Answer 20

NO
•A creditors (chargee) rights do not derive from title: charges create an equitable proprietary interest
=> Creditor is granted equitable remedies (if debtor defaults, express power of sale, or can apply for a court order to sell).

Question 21

What charges are fixed charges over?

Answer 21

• Charges over specific, existing assets,
usually permanent (plants and machinery,
vehicles, computers)

Question 22

Once a fixed charge is created, who keeps control of an asset?

Answer 22

• Once a fixed charge is created: the debtor
cannot dispose of the asset (i.e. cannot sell
it) but can use it => i.e. the creditor keeps
control of the asset

Question 23

What happens in the case of termination regarding charges?

Answer 23

• Termination
– Debtor pays: charge terminates
– Debtor defaults: creditor can sell the asset

Question 24

What are floating charges?

Answer 24

• Charges over a class of items (goods, small items of 
equipment, raw materials) that fluctuate

Question 25

Are floating charges created?

Answer 25

• The charge is created but does not attach to the relevant asset until a later event (e.g. that the debtors fails 2 payments/that the debtor defaults)
=> the charge is then said to crystallise.

Question 26

What happens until crystallisation for floating charges?

Answer 26

• Until crystallisation, the debtor is free to dispose of the assets in the ordinary course of business (i.e. can sell them) => i.e. the creditor is not in control of the assets until crystallisation (Agnew case; Spectrum case)

Question 27

What happens to floating charges from crystallisation onwards?

Answer 27

• From crystallization onwards: it becomes a fixed charge

Question 28

What is the termination regarding floating charges?

Answer 28

• Termination
– Debtor pays: charge terminates
– Debtor defaults: creditor can sell the asset

Question 29

What happens on insolvency for both fixed and floating charges?

Answer 29

On insolvency:
• Creditors holding fixed and floating charges are both
secured

However,
• Creditors holding a fixed charge: asset sold and creditor is satisfied first
• Creditors holding a floating charge are less protected:
–Creditors with fixed charges satisfied first
–Preferential creditors (employees)
–Ring-fencing, i.e. a proportion may be taken to pay
unsecured creditors

Question 30

How is a charge identified as existing?

Answer 30

• Ownership is with the debtor (borrower), Company A
• Possession: is with the debtor
• Creditor is given equitable proprietary interests: can sell the assets if the debtor defaults

Question 31

Whats the main difference b/w a fixed and floating charge?

Answer 31

Fixed- debtor can use but not sell in course of business

Floating - debtor can use and can sell in course of business

Question 32

What are 2 the ways in which debts can be assigned ?

Answer 32

1) Receivables (debts) can be assigned by way of sale =>
the creditor buys the debt, i.e. acquires ownership

2)Debts can also be assigned by way of security: typically, book debts can be charged. Here, the creditor lends money to the debtor but charges the debtor’s book debts as security => here, the creditor does not own the debt

Question 33

Why is it important to distinguish these two types of assignments?

Answer 33

because they have different requirements.

• A charge over book debts created by a company must be registered, otherwise is void
• Charges over book debts can be either fixed or floating (see Re Spectrum case)

Question 34

What are book debts?

Answer 34

Debts owe to a company by its customers.

Question 35

Give an example of a fixed charge regarding Assignment of receivables (i.e. assignment of book debts) and explain it

Answer 35

Example 6
• Company A has borrowed money from Bank A and has charged its book debts (i.e. the debts owed by its customers) as security. If Company A, which owns the debts, fails to repay the loan, the bank will keep the money collected from the debts.
• Every month, Company A’s debtors pay the debts into a bank account that Company A has with the bank. Company A has collected £5,000.
• Under the agreement, Company A is not free to utilise the £5,000 but has to keep the money for the benefit of the bank

1. Is this an assignment by way of sale or security? By way of security (because the parties are not trying to buy/sell the debts (George Inglefield)
2. Does Company A have to register this arrangement? Yes, otherwise void,
   Companies Act 2006, s 859 H(3).
3. Does Company A own the debt charged? Yes, it does, as debtor (chargor);
   => This is a feature of charges (i.e. the creditor does not own the secured asset but is given the right to realize its value if the debtor defaults)
4. Is Company A in possession of the debt? Yes it is.
   => this is another feature of charges, i.e. the debtor (chargor) is in possession
5. Is this a charge? Yes, it is
6. Is this a fixed charge? Yes, it is, because the debtor is not allowed to
   dispose of the money collected from the customers in the course of
   business.

Question 36

Give an example of and explain a floating charge regarding Assignment of receivables (i.e. assignment of book debts)

Answer 36

• Company A has borrowed money from Bank A and has charged its book debts as security.
• Every month, the debtors pay the debts into a bank account that Company A has with the Bank. Company A has collected £5,000.
• Under the agreement, Company A is free to utilise the money collected in the course of business. At the moment, it has already used £2,000 (i.e. there is only £3,000 left).

1. Is this an assignment by way of sale or security? By way of security (parties are not using a buy/sell language (George Inglefield)
2. Does Company A have to register this arrangement? Yes, otherwise void, Companies Act 2006, s 859 H(3).
3. Does Company A own the debt charged? Yes, it does as debtor/chargor;
   => this is a feature of charges (i.e. creditor does not own the secured asset but is given the right to realize its value if the debtor defaults)
4. Is Company A in possession of the debt? Yes, it is
   => this is another feature of charges, i.e. the debtor (chargor) is in possession
5. Is this a charge? Yes, it is
6. Is this a floating charge? Yes, it is, because the debtor is allowed to dispose of the money collected from the customers in the course of business, even if the value of the secured asset itself decreases.