Credit and Security

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  • Created by: Nikki
  • Created on: 16-04-16 16:27

Security, title reservation and insolvency

  • Why security --> for a preferential position in insolvency 
  • What happens in insolvency?
    • secured items taken out of estate
    • thereafter distributed amongst unsecured creditors on pari passu basis
    • administrators can manage estate in way that they can get max fund from leftover company
    • almost all companies in administration go into liquidation
    • administrator can force secured creditor to wait out to increase value of business

Cardinal principles of insolvency

(1) Pre-liquidation rights are respected
(2) Only assets in which debtor has an interest are available for its creditors
(3) Personal rights are converted into rights of proof
(4) Unsecured creditors rank pari passu 
(5) Winding up accelerates personal rights

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Freedom of contract

Debtor and creditor are free to arrive at their security bargain without considering the effect of this bargain on third parties

But, bargain may be recharacterised against their wishes:
- attempts to avoid creation of security in formal legal sense
- difference between fixed and floating charges 

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Reservation of title (1)

  • to portect supplier of goods from risk of non-payment by the buyer 
  • title reserving creditor can step in and recover assets for which payment has not been made
  • strong priority advantage
    • usually first in line
    • exception conerning equitable interest --> bona fide purchaser 
  • only good so long as good remains with buyer
  • express clauses
    • Romalpa clause
    • until proeprty passes, no ownership rights vest in buyer and therefore goods cannot fall within a security granted by buyer, before or after the contract of sale is conclude, to one or more creditors, or vest in the liquidator or trsutee
    • need not be registered
  • simple reservation
    • where contract good remains in buyer's possession in an unaltered state, the courts have given effect to a simple reservation clause, even if the buyer is given liberty to transform or consume the goods before payment is made
    • provided seller's intention is clear, doesn't matter if other parts of clause expressing intention operate as a charge on buyer's assets
    • no particular words need to be used
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Reservation of title (2)

  • Failed attempts to reserve property rights in money proceeds and newly manufactured goods 
  • All moneys clauses -->
    • seller reserves general property until all buyer's indebtedness to the seller is paid off --> effective
  • Altered goods 
    • attachment --> for reservation clause to remain effective, goods ahve to retain their identity
    • accessio --> irrevocable attachment
    • specificatio --> goods altered and lose identity 
  • Requirements for successful money proceeds clause
    • (1) seller must require proceeds to be kept segregated from other assets of buyer
    • (2) to extent that seller's interest in proceeds is defeasible upon payment of the contract price, that interest will be regarded as a charge
    • (3) any requirement that buyer shall account only for such proceeds as equal price due under the sale contract will be regarded as inconsistent with the beneficial interest in the proceeds vesting first in seller
    • (4) language in sale contrat requiring seller to trasnfer or pass on claims to sub-buyers is not consistent with seller's claim that those rights were vested in him fromt eh date of their creation
    • (5) a fixed period of credit that does not match the cycle in which the buyer receives the proceeds of a resale will tend towards the conclusion that a proceeds clause amoutn to a charge
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Types of consensual security

4 types of consensual security
- pledge (possessory)
- contractual lien (possessory)
- mortgage (non-possessory)
- equitable charge (non-possessory)


  • trasnfer of ownership to creditory by way of security, upon express or implied condition that the asset shall be reconveyed to debtor when sum has been paid
  • legal --> full plenary trasnfer of a legal interest from mortgagor to mortgagee
  • equitable --> recognised that mortgagor despite transfer of legal interest retains equity of redemption
  • broader range of remedies than for charge


  • mere encumbrance --> doesn't involve actual transfer of a property interest --> right to resort to a particular asset in the event of default 
  • right is satisfied out of proceeds of sale of the asset 
  • can only exist in equity or statute
  • fixed or floating 
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Characterisation: sale or security?

  • Characterisation may affec tthe registrability of the interest and the extent of its validity adn priority in the event of the debtor's insolvency
  • An agreement which is in substance a loan on security may readily be disguised as a purchase
  • Where allegation made that apparent purchase it in reality a loan on secuity, the court has to inquire into the facts, where necessary looking behind the label which the parties have given the transaction
  • Question is not about the effect --> it is about the legal nature
  • 2 distinct routes by which a transaction relied on as a sale may be struck down as a security for a loan
    • external route --> show that document does not record real agreement between teh parties --> document is a sham and is designed to conceal the trust nature of the transaction
    • internal route --> where a document is a true record of parties' agreement, court may conclude from examination of its terms that its legal character is that of a security, not a sale
  • Nature of right intened by parties is tob e ascertained form the terms of their agreement, while the characterisation of such rights is a matter of law and is to be determined by the court
  • Legal substance to which court has regard, not the economic effect of transaction
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Fixed and floating charges (1)

Fixed -->

  • attaches as soon as the charge has been created or the debtor has acquired rights in the asset to be charged, whichever is later
  • effect that debtor cannot dispose of asset free from the charge without chargee's consent except by satisfying the indebtedness secured by the charge
  • tends to be taken over fixed assets

Floating -->

  • hovers over a designated class of assets in which dbtor has or will in the future acquire an interest
  • debtor free to deal with any of the assets free from the charge so long as it remains floating --> can even dispose of them
  • occurrence of an event causes the charge to 'crystallise' --> until this the security interest does nto attach and the chargee has no rights in specie merely an interest in a fluid fund of assets
  • upon crystallisation the fund of assets comprisedint eh cahrge solidifies, terminating the debtor company's power to manage the assets and converting the creditor's ecurity interest into a fixed asset 
  • tends to be taken over circulating assets
  • relegated to extent of fund in respect of general unsecured creditors --> below expenses of liquidation and adminstration purposes
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Fixed and floating charges (2)

Creation of a charge

  • no particular form of words is necessary -->
  • floating charge --> suffices that the agreement manifests an intention to charge the company's present and future asets or a designated class of assets with freedom to deal them in ordinary cours eof business so long as company is a going conern and the creditor does nto exercise any contractual right to intervene
  • fixed charge -->
  • label doesn't mater --> it is what the court deems it to be on the facts
  • charge when not registered cannot be enforced except against the chargor
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  •  Companies Act scheme
  • registration of company charges introduced in England in 1900
  • designed for protection of those doing business with company so that they might see how much of a company's assets would be available for distribution in an insolvent liquidation
    • clarify rights o secured creditors if company debtor went into liquidation
    • clarify the rights of those purchasing company's property
    • useful to those interested in the affairs of the company
  • 2013 changes moved from requiring identified types of charge that had to be registered to requiring all charges, with minor exceptions, to be registered
  • exceptions
    • landlord charge over tenants deposit
    • charges in insurance market 
  • if charge is not registered it is void as against a liquidator of an adminstrator or a creditor of the company --> apart from these three cateogries the charge still remains perfectly valid between cargor and chargee and can be enforced 
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Creation of security rights


  • 6 conditions:
    • (a) must be an agreement for security conformign to statutory formalities if any
    • (b) the asset to be given in security must be identifiable as falling within scope of the agreement
    • (c) the debtor must have power to give the asset in security
    • (d) there must be some current oblgiation fo the debtor to the creditor which the asset is designed to secure
    • (e) any contract conditions for the attachment must have been fulfilled
    • (f) in teh case of a pledge, actual or constructive possession must be given to creditor 
  • attacment takes effect form date of security agreement
  • should any condition fo attachment cease to be satisfied, attachmetn ceases and the security interest again becomes inchoate, reviving ab initio as soon as missing element is once again supplied
  • attachment gives creditor real rights over the asset vis-a-vis the debtor 
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Creation of security rights (2)

Perfection and priorities

  • perfection to make it effective against TP
  • reservation fo title is immune
  • notice to the world can be given in 2 ways
    • by taking actual or constructive possession
    • by reegistration or filing
  • either of these forms of notice perfects the security interest as against TP geenrally withotu proof of sepcific notice to any particular TP or any actual knowledge on his part of the prior interest 
  • registration/filing rules are unsatisfactory 
  • in fact general rules on perfection and priorities under English law are seriously defective --> most fundamental weakness if lack of any uniform policy or set of rules 
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Enforcement of security

  • defining feature of Englishlaw of secutiy is the way that it permtis secured creditors to enforce their security wihtout goign to court an dwithout having to await the outcome of insolvency proceedings
  • various remedies associated with charges and mortgages
  • essentially a mortgagee can move in and take possession --> can occasionally foreclose
  • chargee not able to do this --> woul dhave to apply to court (mortgagee can do this too)
  • chargee has 2 residual remedies, mortgagee has 4
  • methods of enforcement
    • possession
    • sale
    • appointment of receiver 
      • administrative receivership abandoned in 2002 and replaced with power to appoint an adminsitrator 
      • power of diminished value, may not perform his functions with view to realising assets for benefit of his debenture holder until --> chekcs an balance sint eh cause of modern goals, transparency and accountability 
        • he thinks may not be reasonably practicable to fulfil objective having priority (rescue of the debtor company or achieivng a better result for creditors than would be achieved on a winding p without administration)
        • he does not unnecessarily harm the interests of the creditors as a whole
    • foreclosure
    • appropriation of financial collateral
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The future

Numerous calls over last 30-40 years for thorough reform of English law of security

Question whether English law should adopt approach of Art 9 of American Uniform Commercial Code 

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