Secured Transactions

Question 1

What is a Secured Transaction

Answer 1

• Definition: generally, a loan (or credit) whereby the lender acquires a “security” interest in collateral owned by the borrower and is entitled to foreclose on or repossess the collateral in the event of the borrower’s default
• Do not pay the loan, the asset is secured and can be sold by the bank
• Example – mortgage is a secure transaction
• Bank gives you a loan, also required to pay interest, and the principal of the loan, if you fail to pay one month the bank can exercise their security interest, take ownership and sell the house

Question 2

Collateral Secuirty

Answer 2

an interest in property of a debtor that gives a creditor the right to seize and sell it in the event of non-payment of debt

Question 3

Parties:

Answer 3

Creditor: bank
Debitor: person who needs the loan

Question 4

Personal Property

Answer 4

• anything that is not “real property” (i.e land/ homes)
• No land, home, or anything attached to the home
• Ex of personal property – inventory, machinery, furniture

Question 5

Real Property

Answer 5

the land and the home

Question 6

Real Property

Answer 6

the land and the home

Question 7

When does a creditor want to take security interest?

Answer 7

• Whenever it is practical to do so. Some factors to consider:
• It provides an incentive to debtor to pay
• When goods maintain their value, then those goods are good security against a loan
• Better for long term debt since it lowers long-term risk

Question 8

Business Risk Managment:

Answer 8

If credit amounts are small, it may be better to “write off” a small percentage of bad debt than enforce a security

Question 9

General creditor

Answer 9

creditor with no security interest

Question 10

Judgement creditor

Answer 10

can obtain execution order to seize property

Question 11

Secured creditor

Answer 11

does not need a judgement to realize on its security
These all have priority over unsecured creditors

Question 12

Creating a Security Interest

Answer 12

• Created by agreement between the parties, types of security contracts
• Conditional sales contract
• Chattel mortgage
• Floating chargers

Question 13

Conditional Sales Contracts

Answer 13

• Similar to a lease:
• Debtor in possession of the good, but ownership remains with the creditor
  Ex – a car lease, the owner still owns the car, you just possess it, but have the right to purchase it in the end
• Creditor has the right to repossess the goods upon default
• Creditor has the right to sue for balance outstanding after resale of goods

Question 14

Chattel Mortagages

Answer 14

• A mortgage of personal property
• Chattel is another word for personal property (laptop, car, etc.)
• Ex – financing a car, you own the car and possess it
  If you fail to pay – the dealer has security over the car, can take it back, and sell it

Question 15

Chattel Mortagages parties

Answer 15

mortgagor (debtor) and Mortagee (creditor)

Question 16

Chattel Mortagages Arises in 2 ways

Answer 16

• Mortgagor purchases property and vendor “takes back” a mortgage
• Sell you the property (or equipment) and then take back the security interest in the goods
• Mortgagor already owns property and gives mortgagee a mortgage against it to secure a debt

Example: Equipment in buildings
- Mortgagee can hold 2 mortgages:
- Traditional mortgage on the land/ building and its fixtures
- Chattel mortgage on the equipment in the building

Question 17

• After- acquired property:

Answer 17

(i.e. property that is not in existence at the time the mortgage is created)
Often used in inventory in a business (always changing)
- Does not transfer title to specific goods to the creditor, allowing purchasers to obtain good title in ordinary course of business
- Creditor holds a suspended priority over other creditors
- Getting a loan today and then acquiring the property that is being used as secutirty

Question 18

Floating Charges

Answer 18

• A form of mortagage on all of the assets of a corporation other than those already specifically charged
• Security over all the inventory of the business since it is constantly changing so you need to float over the inventory (or assets)
• Items on the balance sheet are constantly changing so no matter what security always covers it

Question 19

Personal Property Security Act (PPSA)

Answer 19

• Each province has its own act since it is the jurisduction of the provinces (not the federal government)
• Registration system, where the security interest gets registered

Question 20

Steps of PPSA

Answer 20

(1) Creation of Security Interest: agreement between the parties
Entering into a contract - the security agreement

(2) Attachment of a Secuirty Interest: the moment in time when a debtor’s property becomes subject to a security interest
Property acquired after, attachment occurs at the time the product is acquired

(3) Perfection of the Security Interest: the moment in time when a creditor’s security interest becomes protected
Perfect a security interest by registering it under PPSA

Question 21

PPSA Perfection in two ways:

Answer 21

(1) where the secured party takes possession of the assets (e.g. bailment; pledge) or conditional sales contract
(2) once registered under the PPSA is complete