Rights in Security

Question 1

5 rules of accessoriness principle in Scots law

Answer 1

1. Existence of security requires existence of a debt.
2. The debt must be specific.
3. If the debt is transferred the security follows it.
4. If the debt is extinguished, so is the security.
5. The security can only be enforced if there’s actual indebtedness

Question 2

Who does accessoriness protect?

Answer 2

Accessoriness protects debtors, by extinguishing securities when the debts are repaid. We see this in Scots law extinguishing a restricted security on payment, even without registration, while assignation requires registration

Question 3

Advantages and disadvantages of accessoriness?

Answer 3

Accessoriness allows for legal simplicity as the fate of the security matches the fate of the debt.
Pure accessoriness is unworkable as it doesn’t allow us to secure future or fluctuating sums.
Accessoriness, unless its flexible, leads to an increase in transaction costs as security must be renegotiated when the amount of the debt changes.
Arguably, accessoriness also has a disadvantage in relation to ranking.

Question 4

What is the principle of accessoriness?

Answer 4

It refers to a connection between the secured claim and the security right - the existence of an accessory security right is dependent on the existence of a valid and enforceable claim

Question 5

Basis for “cautionary wives” cases in England?

Answer 5

English cases have been been based on “constructive notice” which holds creditor to have known and been participant in wrong committed by debtor against surety in certain circumstances. In England, under the doctrine of constructive notice, the wrongful act by the debtor is central. Without the debtor’s wrongful act, there is nothing of which the creditor can be deemed to have notice and nothing to give the surety her release. In Braithwaite, proof by the pursuer of an actionable wrong by the debtor was regarded as a prerequisite of the cautioner’s release.

Question 6

Basis for “cautionary wives” cases in Scotland?

Answer 6

In Scotland, the doctrine of good faith imposes duties towards the cautioner on the creditor. In Scotland, where release of cautioner depends on good faith so it’s not clear why the debtor’s actions should be relevant. Breach of the duty of good faith by the creditor on its own does not release the cautioner: there must also be a lack of consent caused by the wrongful act of another.

Question 7

When is a creditor under a duty of care?

Answer 7

The creditor is under a duty of care when the circumstances would lead a reasonable man to believe that the relationship between the debtor and cautioner means the consent may not be fully informed or freely given.

Question 8

How can a bank meet a duty of care in Scotland?

Answer 8

In Scotland, it appears that the bank’s duty of care will be met by a pre-printed warning to take independent legal advice.
(a lot less onerous than the test in Ettridge)

Question 9

How can a bank meet a duty of care in England?

Answer 9

The lender : (i) ask the surety to nominate a solicitor; (ii) with the consent of the debtor, provide the solicitor with sufficient financial information to enable proper advice to be given; and (iii) receive confirmation from the solicitor that he or she has so advised the surety.
Even these steps will not protect the bank if it knows or has reason to suspect that the solicitor has not given the surety a proper explanation.
(Test is from Ettridge)

Question 10

Are Scots law and English law in agreement on banks duty of care?

Answer 10

No, the Scottish requirement are a lot less onerous than the test in Ettridge. There’s been a divergence of Scot’s law and English law, but Lord Sutherland has stated that harmonisation is only desirable where it involves no departure from Scot’s law.

Question 11

s64 SOGA

Answer 11

Sale of Goods act doesn’t apply when transaction is intended to operate by way of security

Question 12

What is security?

Answer 12

According to Gloag and Irvine its “any right which a credit may hold for ensuring payment or satisfaction of his debt”

Question 13

What does assignation of a security require?

Answer 13

For assignation to be effective, there must be intimation to the debtor- the potential cost of delivering each of the assignations for small loans would make it impractical to use assignation.

Question 14

Bankruptcy and Diligence Act 2007 on floating charge?

Answer 14

This part of the Act hasn’t yet been enacted, and so there’s doubts that if it will ever be enforced. If the legislation is introduced, the new register of floating charges would be created.

Question 15

When does a floating charge become a real right?

Answer 15

The floating charge becomes a real right when a company is liquidated- when company is liquidated, the charge attaches. In some instances, the charge will attach when administrators are appointed- (i) if there’s insufficient assets to pay creditors and the administrator serves notice (ii) if a court condrnts to a distribution by the administrator to a party that isn’t a secured creditor, preferential creditor or towards the prescribed part

Question 16

Sale of Goods act doesn’t apply when transaction is intended to operate by way of security

Answer 16

s64 SOGA

Question 17

What are moveable securities?

Answer 17

Pledge, lien

Question 18

What is a pledge?

Answer 18

Pledge- express security over corporeal moveables. An express security means that it’s a voluntary security and arises through agreement. It’s done by choice. Delivery- actual (giving it over) or constructive (keeper instructed by debtor to hold goods on behalf on creditor- not enough to assign unless it’s intimated to the keeper) or symbolic (giving keys to car).
A consumer pledge is pawn-broking.

Question 19

What is a Lien?

Answer 19

Lien- a tacit security meaning that it arises through the operation of law and no agreement is necessary. Lien can be general or special. It’s a real right to retain the property until the discharge of an obligation. Special liens traditionally arise when a person holds property and has carried out work on it (ie shoe repairmen). A solicitor has a lien over all a client’s papers and funds, even those that don’t concern the issue that they haven’t received payment for. A banker is in the same position. The lawyer and bankers lien is a general lien.

Question 20

Can you sell assets that fall under a floating charge?

Answer 20

Yes, prior to attachment, the corporation is in charge of all assets and can sell them without requiring juridical act by the creditor. A floating charge isn’t a real right before attachment but instead hovers over the assets of the company until it attaches.

Question 21

What can a floating charge be granted over?

Answer 21

A floating charge can be granted of the whole property and undertaking of a company, but can be limited i.e only over heritable property/corporeal moveables. What’s crucial is that it can be granted over all the assets.

Question 22

Why do corporations use floating charges?

Answer 22

It allows them to retain the possession of all goods.

Question 23

Registering floating charges?

Answer 23

A floating charge must be registered within 21 days of creation in the Charges Register to be valid. A floating charge can affect heritable property without the need to register it in the Land Register. A security can be granted over heritable property without requiring registration.

Question 24

What is a hypothec?

Answer 24

A hypothec is a right established by law over a debtor’s property that remains in the debtor’s possession. It can be tacit (ie Landlord’s hypothec) or express (i.e Ship Mortgage)

Question 25

Why are functional securities so popular?

Answer 25

Functional securities are so popular because the rules concerning the creation of proper securities are so burdensome.

Question 26

What are some issues with floating charges?

Answer 26

• it’s based on English law of equity which doesn’t apply in Scotland
• there’s 3 week period before it has to be registered that it could attach, and this goes against the Scots law principle of publicity
• Problem with floating charge is ranking- there’s huge problems with their ranking, especially in competition with diligence.

Question 27

Carse v Coppen

Answer 27

“ a floating charge is utterly repugnant to the principles of Scots law”

Question 28

“ a floating charge is utterly repugnant to the principles of Scots law”

Answer 28

Carse v Coppen

Question 29

Effect of floating charges on ranking

Answer 29

It’s been argued that in insolvency there’s rarely anything left for unsecured creditors as a result of granting a floating charge. Floating charges grant too much power to a bank who decides who is able to get money.

Question 30

Would proposed register of statutory pledges work?

Answer 30

Will make it easier to assign with using a register. Would be easier for businesses to assign claims. It would stop people going to England. Two registers- same type of solution for same problem. Statutory pledge would include incorporeals like IP too.
Legislation would clarify certain aspects.
Nothing can be done w two as floating charge at Uk level and statutory pledge would be in Scotland

Question 31

How does a floating charge attach?

Answer 31

Attachment is by receivership or liquidation or administration if a) insufficient assets to pay all creditors and administrator serves notice or b) if the court consents to the administrator distributing to a party that isn’t a secured creditor, preferential creditor or towards the prescribed part

Question 32

What is the purpose of a security

Answer 32

To minimise risk?
To facilitate enforcement for the recovery of debts?
To give priority against others?

Question 33

What’s an improper security?

Answer 33

Also known as quasi-security
Either involves:
the creditor retaining ownership as a security; or
The debtor transferring ownership to the creditor as a security

Question 34

Examples of improper security?

Answer 34

There are various particular types of improper security:
Hire purchase
Sale and Leaseback
Retention of Title in Sale of Goods
Trusts

Question 35

What’s a cautionary obligation?

Answer 35

“Cautionry is an accessory obligation or engagement as surety for another, that the principal obligant shall pay the debt or perform the act for which he has engaged, otherwise the cautioner shall pay the debt or fulfil the obligation.”

Question 36

What’s the difference between a third-party pledge and a strict cautionary obligation?

Answer 36

A third-party pledge is a security over property to secure an obligation due by another party whereas a strict cautionary obligation is a liability to pay someone else’s debt

Question 37

What’s a third-party pledge?

Answer 37

Where a third party grants a security over their property to secure an obligation due by another party (see Smith v Bank of Scotland 1997 SC (HL) 111)

Question 38

How are cautionary obligations created?

Answer 38

Caution does not need to be in writing unless it is a gratuitous unilateral obligation undertaken outside the ordinary course of business e.g. parent giving caution for their child (s 1(2)(a)(ii))

Question 39

4 part test for a cautioner to succeed?

Answer 39

(a) Can it be shown that the relationship between debtor and cautioner was such that the cautioner’s consent to the grant of security “may not be fully informed or freely given”?
(b) Can the cautioner demonstrate that the debtor had “committed an actionable wrong” against the cautioner; and has the cautioner relied on that wrong when granting the third party security?
(c) Did the cautioner grant the third party security gratuitously (i.e. did the cautioner get nothing in return)?
(d) Did the creditor warn the cautioner of the consequences of granting the third party security and advise the cautioner to take independent legal advice?

Question 40

SLC, Report on Moveable Transactions

Answer 40

SLC, Report on Moveable Transactions (Scot Law Com no 249) December 2017
The SLC recommends the introduction of a new real security right (a so-called “statutory pledge”) that would be available over corporeal moveable property and some incorporeal moveable property (intellectual property and financial instruments).

Question 41

Who can grant a floating charge?

Answer 41

In general, it can only be granted by company or limited liability partnership.