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Flashcards in Asset Security Deck (90)
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1
Q

What are securities for?

A

To give you protection agains the risk of non-payment and insolvency by providing that if the debtor goes bust you are more likely to get paid. As well, they give you protection from the risk that the debtor will not pay.

2
Q

What categories do rights in security fall into?

A

Rights in security fall into (1) personal securities (where the creditor ends up with two personal rights (against the debtor, and agains the gaurantor) (2) asset and property based securities where creditor gets a right in a particular piece of property.
-(2) fall into one of two broad categories — either (1) asset based security where creditor gets ownership of the asset or (2) where creditor gets a right in security in the strict sense in an asset owned by someone else. This is what will be concentrated on below. This is where there is an owner in the asset and the creditor has right in their property.

3
Q

What is a right of retention?

A

Where the creditor gets ownership in the asset this is called a right of retention (see right of retention cases).

4
Q

What is a right of security in the strict sense?

A

A right in security in the strict sense is a “real right in property of another person which secures the performance of an obligation”.

Mere obligation to grant security is not security. Must be constituted as a real right. This usually means possession or registration. See eg Bank of Scotland v Hutchison Main & Co 1914 SC (HL) 1.

5
Q

How can you distinguish (1) proper from (2) improper assets?

A

Distinguish (1) proper from (2) improper asset security (sometimes referred to as quasi-securities). In (1) there are two real rights in the thing: the real right of ownership, which the debtor has, and the (subordinate) real right of security, which the creditor has (jus in re aliena). In (2) there is only one real right, ownership, which is vested in the creditor. The debtor has no real right, but has personal right to be made owner when debt is paid. Debtor may be regarded is owner in functional sense, but in law creditor is owner. Ownership is being used as security.

6
Q

What are the key characteristics of a right in security?

A

So the key characteristics are:
⁃ It is a right in the property of another
- A right in security (in strict sense) is over property belonging to someone other than the creditor Must it be owned by the debtor?
⁃ There is a real liability in the asset which is distinct from the personal liability owed by the debtor to the creditor
⁃ The security is accessory (parasitic)
⁃ The security secures “obligations”
⁃ It is a real right

7
Q

Must the asset be owned by the debtor?

A

The owner of the asset that is secured need not be the debtor; it is possible to grant a security over an asset for a debt owed by somebody else.

It must be property belonging to someone other than the creditor. The person who grants the right in security must be the owner of the property, but the owner need not be the debtor (that the creditor has the personal right against). e.g. Third party pledge cases (Smith v Bos).

The owner of the property need not be the debtor common exam mistake.

8
Q

Why must personal liability be distinct from the (real) liability of the asset?

A

The debtor’s liability is quite separate from the liability of the asset. So the debtor is personally liable. The owner of the asset is not personally liable for the payment of the debt. This means if the debtor dies, it is the debtor’s estate that assumes this liability. This is because the real liability lies with the property, not a particular person. So if somebody transfers the property with a security over it they transferee acquires with a security over the property. The owner of the asset will always be subject to the real right until the debt is discharged or until the security is extinguished. And transferring the asset which is secured has no impact on either the personal or real liability.

NB Real right is enforceable against the world.

9
Q

What happens to personal liability if debtor dies?

A

??

10
Q

What happens if the asset is transferred?

A

Example: S owes money to bank and is personally liable for this. They have a right in security over S’s house, if he sells house to X, and X buys house. Nothing happens to the personal liability, it stays as it is and S still owes money to bank. They can only sue S and his executor even where he absconds.
The right in security is also not affected by the transfer. This means that if the personal liability is not fulfilled, the property is at risk against whoever is owner of the property at that time.
The liability of the asset to which the real right attaches remains constant.

***Transferring asset has no impact on real liability or personal liability.

11
Q

What does it mean when we say that rights in security are parasitic?

A

Rights in security are parastitic. Securities existence is dependent on the personal right secured. Securities have no existence if there is no debt. So on the extinction of the personal right the real right in security is also extinguished.

One difficulty is where you have a security over a fluctuating account (e.g. a security over an overdraft) it is thought that the security will not need to be reconstituted every time the debt is reincurred (so the debt is not immediately extinguished when this account goes into credit - the security does not need to be regretted every time).
⁃ (NB only one academic (Andrew Steven) has ever written about this)

See Albatown case and the two year missives.

12
Q

What obligations can be secured?

A

It is very difficult to find a statement on this in the common law. It is clear under common law that debts can be secured.
Under the Conveyancing and Feudal Reform 1970 Act provides that in addition to debts being capable of being secured, you can also grant a security over an obligation ad factum praestandum - this is an obligation to do something. But there cannot be a security over a negative obligation.

13
Q

Why does granting securities over an obligation create conceptual problems?

A

Granting securities over an obligation to do something[ An obligation ad factum praestandum.] causes some conceptual problems
⁃ This is because a security empowers the creditor in the event of the underlying debt not being complied with to sell the asset. What does the creditor get in the event of sale? NOBODY KNOWS. It is thought that the debt which is due is perhaps the damages for non performance.

14
Q

What kind of real right is a security?

A

The real right is not just a right to sell or to extract cash - it encompasses both. It empowers the creditor to sell. The right is effective against anyone.
⁃ E.g. If you have a standard security over land and the debtor grants a least in favour of a third party after a standard security has been granted, the secured creditor can kick the tenant out - their right is reducible at the instance of the secured creditor.

15
Q

How do you determine whether a security is effective?

A

The acid test is to determine whether the security is effective in insolvency. If the right is not effective in insolvency you do not have a real right.

16
Q

How do you validly create a security?

A

So this concerns how you make sure you validly create an effective real right.
What do you need to do?
⁃ Since it concerns a real right the publicity principle applies. There are two principle ways of publicising real rights:
⁃ 1) Registration
⁃ For securities over land and floating charges.
⁃ 2) Possession
⁃ If the creditor takes possession of the asset, their having physical control of the asset is a way of notifying that they have an interest in the asset. To have possession the general requirement of the law of possession are required (animus + corpus).
⁃ Possession is the standard mode under Scots law of creating a security over corporeal moveable property.

Must be granted by the owner of the asset (otherwise nemo dat applies (see eg Bankruptcy and Diligence etc (Scotland) Act 2007, s 208 (7)) – any exceptions?)

Different types of property have different securities

17
Q

In addition to the publicity principle, what other principles from property law are applicable to securities?

A

In addition to the publicity principle, two other fundamental principles from property law are applicable to securities:
⁃ 1) Nemo dat quod non habet
⁃ If a non owner tries to grant a security then this principle applies and the transaction is absolutely void - it is of no effect.
⁃ 2) Prior tempore potior iure
⁃ This means where there are competing securities it is the one that is created first which wins.

18
Q

What are the various ways to divide securities?

A

There are various ways to divide securities and different types of property have different securities which are applicable to them.

19
Q

What are the ways you can divide moveable securities?

A

Corporeal moveables are either secured by

1) Pledge
⁃ Where the debtor hand’s over the possession of the asset to the creditor voluntarily. The creditor can retain possession until such time as the debt is paid.

2) Lien
⁃ This is a security which arises by implication - it arises as a result of certain facts happening. The typical situation is e.g you go to get your watch fixed, the repairer does so and it costs £100 - the repairer is entitled to retain possession of the watch until such time as the debt is paid.

3) Landlord’s hypothec
⁃ This is a specific type of hypothec[ The generic term for non-possessory securities: see below.]. It is unusual because it arises by implication but without publicity (all other rights in security fit with the publicity principle but the landlord’s hypothec does not.) It arises by implication as a result of rent not being paid (if the tenant doesn’t pay rent then the landlord is entitled to a security over the assets that are within those premises.

20
Q

What are the ways you can divide heritable securities?

A

1) Standard securities
⁃ This is the only competent form of security over heritable property. (s 9 Conveyancing and Feudal Reform Act 1970)
⁃ This is a written document signed by the owner of the property and registered against the title of that property (so publicised by registration).

2) Incorporeal property [no right in security as assignation required (transfers right).]
⁃ There is no valid subordinate real right in security over corporeal property under common law in Scotland. The only way in which you can create a security over incorporeal property is to transfer ownership of it to the creditor. This covers not just rights to payment but also various forms of intellectual property. This means the creditor receives a right of retention rather than a right in security in the strict sense. The debtor receives a person right to get the asset back when the debt is paid. So the debtor is potentially at risk if the creditor becomes insolvent.

21
Q

What are possessory and non-possessory securities?

A

⁃ Possessory securities are those where the creditor has possession of the asset.
⁃ The two examples of possessory securities are pledge and lien.
⁃ Non-possessory securities are those where the creditor does not have possession of the asset.
⁃ The generic term is the ‘hypothec’. These include standard securities etc.

22
Q

What are express, voluntary and judicial securities?

A

⁃ An express (voluntary, consensual, conventional ex voluntate) security is created by the volition of the owner
⁃ There are two express securities in Scots law:
⁃ 1) standard security
⁃ 2) pledge
⁃ An implied security arises by operation of law - as a result of certain circumstances occurring.
⁃ The two implied securities are the:
⁃ 1) Lien[ Implied, possessory, moveable security.]
⁃ 2) Landlord’s hypothec[ Implied, non-possessory, moveable security.].

Tacit (legal, arising by operation of law, ex lege) or
Judicial = diligence.
23
Q

What are judicial securities?

A

⁃ These securities are created by the courts where the court gives a creditor a right over certain assets of the debtor. The judicial securities in Scots law are generally referred to as diligences.
⁃ The diligences that apply to land are referred to as adjudications[ This gives the creditor a right in a particular asset which gives them a real right in security from the point of registration.

This is a judicial, heritable, non-possessory security.] or inhibitions[ NB this is not a security - it simply stops the debtor from transacting with the property .].
⁃ The diligences over moveable property vary depending on whether the property is corporeal or incorporeal.
⁃ If the property is corporeal the diligence is referred to as attachment[ Look up if this isn’t covered in the later lectures…].
⁃ If the property is incorporeal the diligence is referred to as arrestment[ Two types of arrestment. Look up if not covered in the later lectures.].

24
Q

What is a floating charge security?

A

⁃ This is a security which can be granted by a company or by an LLP. It is created voluntarily. It does not give possession to the creditor - it is created by registration. It covers the totality of the assets of the debtor (the whole of the ‘property and undertaking’ of the debtor). This means that it covers the corporeal and incorporeal property, the heritable and the moveable property. But unlike the other rights in security which become a real right at an early stage, the floating charge floats and is not a real right at that time. This means the company can buy and sell assets. If the company sells and asset then this is removed from the scope of the floating charge. If the company buys an asset then it is brought within the scope of the floating charge. The floating charge becomes a real right on a process called attachment - at this point the floating charge becomes a real right. The floating charge can attach on liquidation of the company, receivership of the company or the company going into administration and the administrator telling the court / register of companies that there isn’t enough money to pay the debts.

25
Q

Sharp v Thomson

A

⁃ Albion Construction sell property to Steven and Carol Thomson. Albion had a floating charge over their assets. They sold the property to the Thomson’s. The Thomson’s move in (but hadn’t registered) and the company goes into receivership so the floating charge attaches to Albion’s assets. Was the house caught by the floating charge or not?
Explained later

26
Q

Can a creditor use the asset secured?

A

⁃ No - the creditor is not entitled to use your asset.
⁃ But they are obliged to make sure it is not damaged if they have possession.
⁃ The debtor is still entitled to use the asset (but obviously in possessory securities the debtor cannot use it because the creditor has possession.)
⁃ But the debtor must ensure that they don’t do anything which prejudices the value of the security.

27
Q

Can there be multiple securities over an asset?

A

There can be more than one security over same asset (nb this is probably only possible in relation to non-possessory securities)
⁃ e.g. 2 standard securities

Ranking concerns who gets paid first and how much do they get paid.
28
Q

What are the two types of ranking a multiple security asset?

A

There are two types of ranking:
⁃ 1. Postponed ranking
⁃ This means that one person gets paid first and the other(s) have to wait and obtain what is left.
⁃ 2. Pari passu ranking
⁃ The securities rank equally (where the securities are registered on the same day). NB if the value of the securities is different then the amount that each creditor can claim is proportionate amount based on the value that their debt bears to the total debt over the asset (see example 2 below).

⁃ Examples:
⁃ 1) A owns house. Security in favour of B for £100,000 and in favour of C for £100,000. House sold for £150,000.
⁃ If B and C rank pari passu because they registered on the same day then B and C will both receive £75k
⁃ If B ranks first (prior tempore potior jure) because B registered first, then B receives £100k and C receives £50k.
⁃ 2) A owns house. Security in favour of B for £200,000 and in favour of C for £100,000. House sold for £150,000.
⁃ If B and C rank pari passu because they registered on the same day then B and C will both receive a proportionate amount based on the value that their debt bears to the total debt over the asset. Thus B will receive £100k and C will receive £50k.
⁃ If B ranks first (prior tempore potior jure) because B registered first, then B receives £150k.

⁃ In both cases there is a shortfall. Does this mean the debt is extinguished? No - selling the asset does not extinguish the personal right unless it is fully discharged. This means that A’s other assets become potentially at risk because the creditor could apply to court to do diligence against them to seize the assets.

29
Q

What are catholic and secondary securities?

A

There is not a huge amount written on this. The following text is from a piece by Scott Wortley on rights in security.

The special rules for catholic and secondary creditors serve to mitigate the effect of the general rules of ranking.  With no special rules the following would apply. If X has a security over plots A and B and Y has a postponed security over plot B, in the event of default X would have the power to realise either plot A or plot B. If X realised plot A and X's debt was paid in full Y would be free to realise plot B and could be paid. However, if X instead decided that the outstanding debt would be satisfied by the sale of plot B then the proceeds of sale of plot B would go to X initially, and Y would only receive a payment in the event that X's debt was not fully paid. If X was not fully paid from the proceeds of sale Y could end up with only a personal right against the debtor. This is not in the interests of the debtor. The interest of the debtor is to ensure that debts should be paid as fully as possible.  An equitable adjustment is made to the default position. In the example given X is known as a catholic creditor, and Y is known as a secondary creditor and a series of rules apply to protect the secondary creditor's interests. The underlying principle is summarised by Professor Wilson, ⁃	"Where there is one secondary creditor, the catholic creditor is not entitled to proceed so as to injure the secondary creditor while not obtaining any benefit himself." 
In effect this means that the catholic creditor should act in such a way as to leave the largest possible sum for the secondary creditor. ⁃	If the catholic creditor has securities over plots A and B, both owned by the same party,  and the secondary creditor has a postponed security over plot B the catholic creditor should act in such a way as to maximise his or her payment from plot A.  However, this does not prevent the catholic creditor from realising plot B.  Plot B may be more marketable. If the catholic creditor realises plot A and the debt due is satisfied the catholic creditor's security over plot B will be discharged and the secondary creditor will be able to realise plot B and obtain payment. However, if the catholic creditor realises plot B the catholic creditor must assign his security over plot A to the secondary creditor.  The protection for the secondary creditor also applies where the debtor becomes insolvent through liquidation or sequestration. If in such insolvencies plots A and B are realised, the secondary creditor will be secured and paid from the proceeds of sale of plots A and B once the catholic creditor has been paid in full. 
The position may be complicated where both plots have a secondary creditor with a postponed security.  The catholic creditor cannot unilaterally prefer one of the secondary creditors. In such a case either secondary creditor can insist that the burden of the catholic security should be apportioned rateably between the two plots – based on their respective values, and irrespective of the dates of ranking of the secondary creditors.  Alternatively, if the catholic creditor realises the full amount of indebtedness due from one plot only the secondary creditor is entitled to an assignation of the catholic creditor's first ranking security over the other plot to the value the catholic creditor would have been entitled to claim from that plot.  An example makes this clearer.  Assume that X is the catholic creditor with first ranking securities over plots A and B. Plot A is worth £100,000 and plot B is worth £200,000. Each plot is also encumbered by a postponed security. If X's security is for £150,000 as a catholic creditor X should draw payment proportionately from the two plots. X will be entitled to £50,000 from plot A, and £100,000 from plot B. However, if X chooses to recover the full payment from plot B this would (without application of the special rules) prejudice the secondary creditor in plot B, while benefiting the secondary creditor in plot A. The secondary creditor in plot B – to maintain an equitable position – is entitled to an assignation of X's first ranking security over plot A to the extent of £50,000. This will have a neutral effect on the secondary creditor in plot A. 

The rules of catholic and secondary creditors are equitable and do not prevent catholic creditors acting in a way that is in their legitimate interests.  For example where the catholic creditor has a security over plots A and B, and  also has a second security for a different debt over only plot A, the catholic creditor is entitled to realise the catholic security wholly from plot B in order to avoid detrimentally affecting his or her own interests by diminishing the value of the security over plot B. 
The principles applicable to catholic and secondary creditors apply whether the securities are voluntary or involuntary.  However, it appears that the rules do not apply where the catholic creditor has a floating charge.
30
Q

What are general securities?

A

Some securities are general/unrestricted (“all sums due and to become due”) ie creditor can charge asset with any debt due to him by that debtor.

31
Q

What are special securities?

A

Others special[ For a specific sum of money]/restricted ie creditor can charge only certain debts to that asset.
⁃ So if you have a pledge and the pawnbroker gives you money in return, the pawnbroker can only keep your watch if you fail to pay back that particular debt - they cannot keep your watch for subsequent borrowings unless you specifically agree to the retention of the watch.

The general position is that securities are thought to be special unless there is an exception. ⁃	NB for standard securities there is a statutory exception that you can expressly provide that the security is for all sums due and to become due - this means that any subsequent borrowing that you make is already covered by the security.
32
Q

What is the general principle in relation to the transfer of rights in security?

A

The general principle in relation to transfer of rights in security is accessorium sequitur principale (the accessory follows the principal — it is dependent on the existence of a principal debt).

⁃ Thus in theory if the personal right is assigned then the security will follow with it. [NB there is no case law on it. But there are two conflicting academic views. Ross Anderson argues that transfer of the personal right will automatically transfer the right in security. Andrew Steven argues that the right in security must also be transferred (so the creditor in the security must transfer the right in security to the third party). Scott Wortley thinks that Andrew Steven is right.]

⁃ One area it is clearer is if there is assignation in relation to the assignation of a standard security.
⁃ If there is a creditor who has a personal right to a loan and has a right in security over an asset, an assignation of the right in security has to be registered in order to transfer the right to the third party. (The standard security will not pass until registration takes place).

LOOK THIS SECTION UP - PERHAPS NEED A BIT OF CLARIFICATION

33
Q

What rights does the creditor holding a right in security have?

A

The creditor holding a right in security has two rights:

(a) the personal right against the debtor for fulfilment of the personal obligation (typically the loan); and
(b) the real right in the encumbered subjects. Entitlement to the personal right and entitlement to the real right lie vested in one person, and the rights cannot be separated, but what happens where (i) there is an attempt to assign the claim to payment? (ii) there is an attempt to assign the right in security? Does it matter if the right in security is created by registration?

34
Q

What happens to the doctrine of transfer if you have a non-possessory security?

A

If you have a non-possessory security the doctrine of transfer will typically embody both an assignation of the right and the right to security in the same document. This makes it more straight forward. If you are assigning a personal right however, you have to intimate this to the debtor (so two means of transferring = intimation + registration in land register or in companies register.).

35
Q

UK Acorn Finance Ltd v Smith 2014

A

issues are not focused here but may be relevant so look up*. This case in essence confirms…

36
Q

How do you enforce a right in security?

A

In most other countries the enforcement of a security is a very formal process. If the debtor defaults and the creditor wants to enforce the security, in most other countris you have to go to court to enforce the security. The general position in Scots law is that the creditor has to apply to the court to sell the asset. But express provision in the grant of the security can provide otherwise (e.g. so you could expressly provide in a pledge that the creditor can simply realise the asset).

Security can generally be enforced by sale. (Exception to the principle of nemo plus juris ad alium transferre potest quam ipse habet?) Obligation to get best price. Balance returned to debtor, or to other secured creditors.

For standard securities the default position was (until 2010) that the creditor could sell without going anywhere near the court. The creditor could simply serve a calling up notice or a notice of default which triggers breach of a particular condition which entitles the creditor to enforce the asset.  ⁃	For residential properties this rule has changed from 2010 - the creditor must apply to court to get the authorisation to sell the asset. ⁃	For commercial and agricultural properties this rule remains that the security can be enforced without a court order (includes farm land and factories). 

The creditor has a general duty to obtain the best price for the property. ⁃	This means they must market the property (but they can recover the costs of marketing from the proceeds of sale of the property)

Once the asset is sold the proceeds go to pay: ⁃	the secured creditor for the outstanding amount of the loan (including interest on the debt due). ⁃	expenses incurred within the sale process

Anything left over will either go to a second ranking creditor, or if there is none, back to the debtor (owner of property). ⁃	If the debtor is bankrupt / company in liquidation then the proceeds left over will go to the trustee in sequestration or the liquidator to distribute to the general body of unsecured creditors.
37
Q

What happens if there is a shortfall?

A

If there is a shortfall (not enough money when the asset is realised) the creditor still has a personal right against the debtor for the outstanding amount. So they can still sue the debtor for what is left.

38
Q

How can rights in security be extinguished?

A

Rights in security can be extinguished in various ways including:
⁃ (a) following the accessory principle extinction of the obligation (see the earlier lectures on payment and commercial paper for discussion of extinction of debts)
⁃ Remember Albatown
- It is parasitic on the obligation.
⁃ (b) discharge of the security by the creditor; (typically occurs in conjunction with the extinction of the obligation)
⁃ (c) the destruction of the encumbered property; (uncommon in relation to land however see tenements destroyed, your security would be over an airspace).
⁃ (d) voluntary renunciation (in whole or in part) of the security by the creditor;
⁃ e.g. If a housing developer has a security over a large building development and wants to sell of particular houses (multiple assets), then the creditor will renounce the standard security and instead grant a new one over the remaining development. So they can have a partial renunciation/deed of release.
⁃ (e) confusio – where the holder of the security is also owner of the encumbered subjects;
⁃ (f) compulsory acquisition (purchase) of the property;
⁃ (g) being struck down by the court under
⁃ (i) vices of consent[ Ie force and fear, undue influence, misrepresentation.];
⁃ (ii) the offside goals rule (see your lectures on property law – but note the special rule for offside goals where the competing real right is another right in security — if you have A granting a standard security to B then A to C then A to D and D knows about the security in favour of C but not B, if D registers first, then B, then C, the usual rule of ranking would be prior tempore potori, apply Lesley v Macindros Trs’s 1824 3 Shaw p 28, Blackwood 1749 Mor 4898, if you applied the offside goals rule here, C could rank above D (C could say D knew about security in favour of me and I should get paid before D, then B would say I registered before C so I am entitled to payment before C as first to the register, then D would say…); the purpose of the rule is to rebalance fairness.
⁃ (iii) the rules striking down unfair preferences (see the insolvency lectures later); and
⁃ (h) enforcement[ E.g. if the first ranking creditor sells the asset and there is a second security, the sale of the asset extinguishes not just the first security but also the second security.] of the security.

39
Q

What is a pledge?

A

Express security over corporeal moveables. Requires Delivery actual or constructive or symbolic from the owner to the creditor. Delivery can take place in one of three ways — actual, constructive or symbolic.

Pledge involves the owner of the asset handing over possession of the asset to the creditor. It only applies to corporeal moveable property.

It is a special security for a specific debt.

40
Q

*Inglis v Robertson & Baxter (1897) 24 R 758 and (1898) 25 R (HL) 70. North Western Bank v POynter {1895] AC 56

A

Look this up**
Whiskey warehouse. the possession in this case is handed over by constructive delivery. In this type of delivery you have a transfer of civil possession. (e.g. in natural possession you have physical control of the asset and the requisite possession). In civil you are possessing in the body of another. In this case the warehouse keeper physically controls the whiskey, he received a letter which said you are now to hold for the benefit of this person. this constitutes a transfer of civil possession. Constructive delivery is sufficient for a pledge to be constituted.

41
Q

What are the three types of delivery of a pledge?

A

The bulk of the case law concerns delivery of the property. There are three types of delivery:

⁃ 1) Actual
⁃ Handing over natural possession of the corporeal moveable to the creditor. [NB for possession you need corpus and animus]. The physical asset is handed over to the creditor and the debtor intends to hand it over to the creditor.

⁃ 2) Constructive
⁃ Where the owner of the asset has civil possession of the asset.
⁃ E.g. where the asset is in the physical control of someone else - the typical case concerns stuff that is housed in a warehouse - the warehouse owner has custody of the whisky since they aren’t holding the whisky for himself (thus don’t have the requisite animus). If you wish to hand over possession of something which is in the physical control of another then you must notify the person who has physical control that they are now holding the asset on behalf of someone else - this is constructive delivery. (*Inglis v Robertson & Baxter (1897)

In Scots law it is clear that you can create a pledge either by actual or constructive delivery. But there is a case (Hamilton v Western Bank) which says that you cannot create a pledge by the following form of delivery (but see also North Western Bank v Poynter which suggests that you can):

3) Symbolic
⁃ This is where the owner of the asset has a document which symbolises possession of the asset. Symbolic delivery involves handing over this document (a bill of lading) to a third party. However the case of Hamilton v Western Bank held that you cannot have a pledge created by anything other than actual or constructive delivery.
⁃ However, there is a HL case[ which all the textbooks ignore…] (North Western Bank v Poynter [1895]) which held that if you hand over a bill of lading [ A written document which confirms certain things are on a ship and the name of a ship. This is treated by law as a document of possession. Holding the bill of lading is the equivalent to possessing the goods that the bill of lading identifies. So when the goods arrived in the UK the creditor had the bill of lading and was thus entitled to the property. ]to a creditor for pledge then a pledge is created. THIS IS THE DECISION THAT SCOTT WORTLEY FAVOURS

42
Q

How is a pledge enforced[ I.e. how can you sell the asset?]?

A

The default position is that to enforce a pledge you must apply to the court (but this can be contracted out of, i.e. unless you have agreed to the contrary).

43
Q

Can the creditor assign the right of pledge?

A

Yes. But in order to do so the creditor must hand over physical control of the asset as well as assigning the right to payment.

44
Q

What is the possession requirement for pledges?

A

In order to retain a valid pledge it is necessary for the creditor to retain possession of it.
However, pledgee may return the property to the pledgor to sell on his or her behalf

45
Q

How is a valid pledge maintained?

A

⁃ In order to maintain a valid pledge you must retain possession of the asset. If you give up possession of the asset then you lost the pledge.
⁃ Single exception: there is only one situation where you can lose possession of the pledged asset and keep the pledge:
⁃ In North Western Bank v Poynter (HL decision) provides that the creditor gave the asset back to the debtor for the debtor to sell and the debtor wrote an agreement undertaking that they would hold any proceeds of sale in trust for the creditor and the creditor was treated as still having the pledge. [The reason for this exception is based on the fact that the debtor is more likely to know the market and thus know how to obtain the best price.]
- This is because if you have a particular market then you know where to sell it. It is thus in the interests of the creditor to try and get the best price.

46
Q

What is a Lien?

A

“A lien is a real right to retain property from its owner until that owner discharges an obligation or obligations owed to the party retaining the property, the property not having come into the retaining party’s hands for the purpose of security.”

The fundamental idea is that the property didn't come into the retaining party's hands for the purpose of security - a lien is implied as a result of a particular factual situation occurring. A lien cannot be created voluntarily.

So a lien is an implied possessory security (generally of corporal moveable property)

Can be general or special (Although categorised for each type)
47
Q

What is a general lien?

A

⁃ A general lien is one which covers all sums due to that debtor

48
Q

What is a special lien?

A

A special lien is one which only covers that particular debt.

49
Q

How can a lien be compared with a right of retention?

A

⁃ But a right of retention is simply withholding performance under a contract whereas a right of lien is giving a real right in an asset which belongs to someone else and means that if the other contracting party goes insolvent then you have priority in the insolvency.

50
Q

What is the possession requirement for a lien?

A

The creditor must have possession[ And thus require corpus and animus.] (although arguably in certain circumstances custody is sufficient[ So in the case where e.g a workman has custody over your car (he does not have possession because he doesn’t have the requisite animus to hold for his own benefit) but the assertion of the lien converts this custody into possession since the workman now holds it for his own benefit as a security for the unpaid debt due.])
⁃ Loss of possession means loss of real right - the lien’s existence is dependent on the creditor having possession.

51
Q

How is a lien enforced?

A

Enforcement is by court application to sell
⁃ Contrast with pledge where you can contract to sell without any court involvement - the reason this can’t be done here is that the lien doesn’t arise as a result of express voluntary creation (rather by implication).
⁃ Alternatively if the debtor goes involvement then the lien holder will have priority in the insolvency.

52
Q

What are the two types of lien?

A

Liens are divided into two types:

a) Special liens
b) General liens

53
Q

What are the factual situations where a special lien is implied?

A

There are a variety of factual situations where a special lien is implied.[ Meaning you do not agree to its creation in the first place. So sale is by court authorisation.] The three most common are:
⁃ 1) Repairers lien (entitled to retain the asset until the debt is paid e.g. If you do not pay the bill the garage is no longer intending to hold the asset for you, but as an asset right in security). [NB lien is a possessory security so if you lose possession you lose the security].
⁃ 2) Carrier’s lien
⁃ Agreement of carriage by sea or air or land - the carrier of the goods is entitled to retain possession of the goods until paid for the carriage costs.
⁃ 3) Hotelier’s lien (aka innkeepers lien) [read Andrew Stephen’s Thesis!!]
⁃ If you stay somewhere and don’t pay the bill then they are entitled to keep hold of your luggage/goods you’ve left for safe-keeping until you’ve paid the bill.
- [Little case law on this as you hand over card details when you check in.]

54
Q

What is the general lien?

A

A general security for the general debts and cover all the debts owed by the debtor to the creditor. These apply in limited circumstances. Every example arises as a result of agency.
⁃ The agent (unpaid seller) is entitled to retain possession of all the goods that the principle has given them until every debt that is due to the agent is paid.

This tends to be based around agency relationships, so it covers: bankers, solicitors, factors, brokers who are acting as agents for the principle.

55
Q

What is the solicitor’s lien?

A

The lien that there is the most case law in is the solicitor’s lien. This is when the solicitor is appointed agent/principal agent of the client and has papers for the client. The client wants to go to another solicitor, and the solicitor says “You can’t get the documents until you pay my fees”.

56
Q

What is the banker’s lien?

A

One interesting consequence is that the banker’s lien allows the banker to exercise a lien over bills of exchange. If this is a bearer bill then the bank becomes the bearer of the bill which means that technically they are not a secured creditor because they’ve become owner (I think). The bankers lien covers securities/negotiable instruments. There is a conceptual problem here in relation to having a lien over negotiable instruments. If the bill of exchange is a bearer bill which is payable to the possessor, if the bank takes possession of the bill, under the bills of exchange act they become the holder.

57
Q

What is a hypothec?

A

Hypothec is the generic term for a non-possessory security. However, Scots law broadly does not recognise them.

58
Q

When does Scots law recognise hypothecs?

A

Scots law recognises hypothecs over land but in relation to corporeal moveable assets the broad principle is that you require possession, unless it falls within various defined exceptions: The exceptions include some express and some implied hypothecs:

59
Q

Why do we need hypothecs for corporeal moveables?

A

⁃ Advantages?
[If you are the owner of an asset and it is an asset which you use to make money, handing over possession of the asset to a creditor so that you can no longer use the asset, is not something you would want to do. You want to keep the physical control so that you can use it. You ideally want possession plus cash. If you are a creditor, and you are dependent on having a right which is not based on physical control, what happens if the debtor sells to someone else; a third party will be expecting to get possession encumbered. There are disadvantages from the perspective of third parties but there are real advantages to people wanting to borrow money (businesses).

⁃ Disadvantages?[ NOT LECTURED ON?]

60
Q

What are some express hypothecs?

A

Express hypothecs:
⁃ 1) Ship mortgage: Merchant Shipping Act 1995.
⁃ This is a right in security over a ship and possession does not need to be passed to the creditor. The security must be registered in the Shipping Register. This is an example of a statutory regime which provides for aircraft and ship mortgages.

⁃ 2) Aircraft mortgage: Civil Aviation Act 1982; Mortgaging of Aircraft Order 1972.
⁃ This is a right in security over an aircraft and extra engines. Again, the possession of the ship does not need to be passed to the creditor. It is registered in a Civil Aviation Register.

⁃ 3) Bonds of bottomry and bonds of respondentia. (obsolete)[ Never be asked a question on this.]

⁃ 4) Floating Charges (on which see later)

61
Q

What are Tacit (implied) hypothecs?

A

1) Various maritime hypothecs (aka maritime “liens”[ Despite the fact that they are non-possessory.]) eg for salvage and wages. Included:
⁃ The right of the crew for unpaid wages
⁃ The right of salvage costs to those who have carried out salvage costs
⁃ The right for repair costs if you’ve repaired a ship.[ Don’t worry too much about the detail here - only briefly mentioned.]

2) Solicitor’s hypothec - For unpaid expenses incurred during an action

3) **Landlord’s hypothec[ Considered in more detail - so study this in detail. SW says it is the most important in practice. Look up Angus MacAllister chapter 6 “Landlord and Leases”. — up to date. ]:
⁃ This is an implied hypothec (security) over moveable assets which are located in tenanted premises - it is a security which arises in relation to unpaid rent. The rule is partly based on common law but is now also based on s 208 Bankruptcy and Diligence etc (S) Act (2007).

62
Q

What does the landlord hypothec cover?

A

⁃ This only applies now to commercial leases, it does not apply to residential leases.

  • See s208(2) and s208(4)
  • Under s 208(8) the security is only for rent due and unpaid only and subsists for as long as that rent remains unpaid.
  • See Marr v Dundee Corp — where there was an entertainment supplier who had provided a jukebox to a cafeteria which was set from the council. The jukebox was not owned by the tenant or the entertainment company. Held: when the council sought to enforce the hypothec because the rent had not been paid, the jukebox could be sold by the council. The rationale for this was that the entertainment company should have known about the landlord hypothec.
63
Q

Which leases are covered?

A

⁃ Historically it applied to every type of lease but now it only applies to commercial leases.
⁃ It does not apply to agricultural leases (Hypothec Abolition (Scotland) Act 1880 and BAD Act 2007, s 208 (3)(b) and (c))
⁃ It also does not apply to residential leases see the effect of Debt Arrangement and Attachment (Scotland) Act 2002 s 60 (and Sch 2) and BAD Act s 208 (3)(a)

64
Q

What does the hypothec cover?

A

It covers corporeal moveables (at common law invecta et illata – things brought in and carried in and included property of third parties). However, now [s 208 (2)] corporeal moveables kept in or on subjects let, but not [s 208(4)] property owned by third parties.

65
Q

What protection is there for third parties?

A

See s 208 (5) of the BAD Act [Not lectured on - look up.]

66
Q

How do you enforce the hypothec?

A

Until the BAD Act a procedure called sequestration for rent was required. This was abolished by BAD Act 2007, s 208 but it was not replaced. So now, the creditor must use normal debt enforcement mechanisms to seize and sell the assets. The normal method will be using a form of diligence called attachment. [There are problems with this which will be considered in the lectures on diligence and insolvency[ Look this up - don’t really understand the problems…

“There are problems with the new approach though. Consider the impact of the rules on equalisation of diligence (see later lectures) and how it interacts with s 208 (2) of the BAD Act. Which takes priority?”]] Consider the impact of the rules on equalisation of diligence (see later lectures) and how it interacts with s 208 (2) of the BAD Act.

67
Q

Which takes priority?

A

The landlord will get first cut in relation to the assets where they have the hypothec/relation to security. They now have to carry out the judicial right in security which is called attachment, which allows the …so although they already have a real right under the hypothec they have to go through this process of attaching the goods before they can then sell them.
- Example: if you carry out a diligence, in the 60 days immediately before the insolvency of the debtor, the diligence is ineffective (struck down). If you carry out a diligence in a period dog 60 days preceding (see s7 of BAD Act) then all the diligences that are carried out in the 60 days before apparent insolvency and after are equalised.

68
Q

Do we need more securities over corporeal moveables?

A

Yes but it has partly not happened because the approaches that have been suggested have not been straight forward enough.

69
Q

What about reform of law of incorporeal moveable property?

A

The Scottish Law Commission project — see discussion paper published in 2011. The LC is due to report by the end of the year, the bill is making good progress and the working group is looking at the proposals. The bill is becoming more substantial. It is likely that this time next year we will have a public bill that the Scottish Government will be consulting with.

The law of real rights in security over moveable property has for some time been thought to be inadequate. The is being looked at by the Scottish law in its discussion paper on Moveable Transactions (DP no 151). They are considering the possible introduction of a model based on personal property security Acts from around the Commonwealth).

For some background see Hamilton, Coulson and Wortley, “business finance and security over moveable property” (2002, Scottish Executive, Central Research Unit)

70
Q

What are standard securities over land [VERY IMPORTANT!}?

A

Very quick overview of relevant material here (see property law lectures.)

Standard securities are express, heritable, non-possessory securities. It is an express hypothec over land. The creditor must register the standard security in the land register. The rules in relation to standard securities are found in: Conveyancing & Feudal Reform (S) Act 1970. It is provided in this Act that a standard security over land is now the ONLY competent security over land.

71
Q

What are the two forms of standard security and what do they do?

A

Forms of standard security[ Look up statutory provisions. I think it is schedule 2. S 13 might be relevant.] — They take two forms (s11 to do with registration)

⁃ There are Form A and Form B securities.
⁃ Form A - the debt is embodied the loan within the security document. These tend to be all sum securities and tend to be used in relation to residential property.
⁃ Form B - the debt/loan is in a separate contract and the security refers to this. “All sums due and to become due.” *s 13. This tends to get used in a commercial transaction (where businesses are not wanting competitors to know how much they are making).

NB you must comply with the statutory style or the security will not be effective.

72
Q

What are the standard conditions which a standard security is subject to?

A

⁃ Every standard security is subject to a set of standard conditions - these can be varied by the parties but there are various provisions that you will always see. These are obligations imposed on the owner of the property as to how they can use the property (e.g. they can’t lease the property under standard condition 6 etc). These are listed in (I think) schedule 3 of the Conveyancing & Feudal Reform (S) Act 1970. *Sch 3 paras 1,2,5 and 6. Trade Development Bank v Warriner & Mason 1980 SC 74.

Examples: owner of property is under duty to notify creditor if you get any notifications for planning, there is an obligation to maintain it. You are not allowed to lease without the permission of the creditor (See Sch. 6 and case above). 

They also contain various rules in relation to enforcement. With enforcement, there are three routes to enforcement (see below). 

Standard security is now the only competent form of security over land - s 9 Conveyancing & Feudal Reform (S) Act 1970. It is made a real right by registration in the Land Register or the Register of Sasines.
73
Q

What are the three routes of enforcement/sale?

A

It was thought that there were three routes to sale:

(A) Calling up notice: s 19(1) and (2), s 20(1) and (2), sch 6 Form A.
⁃ If you want to enforce a security for non-payment of debt then you must ‘call up’ the standard security (this is a result of the RBS v Wilson [2010] case based on interpretation of the above statutory provisions. It held that if you are enforcing a security for a monetary obligation, a calling up notice is mandatory. So the creditor has to serve a calling up notice in order to get the debtor to pay (this is mandatory).
- Where the creditor, because the debtor has not paid, will serve a notice on the debtor, requiring them, if they have not paid to pay the sum due. This is largely due to an acceleration due (where you miss one payment the other payments are due quicker).
- This gives the debtor two months to pay.

(B) Notice of Default: s 21(1) and (2). e.g. Where you’ve not maintained the property. This gives the debtor one month to fix the breach.
- If this notice expires without the breach having been remedied, the creditor can then sell the asset (e.g. The house). However this is subject to a caveat, which is where the property is a residential one (if commercial they can sell it right away). Where it is a residential property the creditor has to apply to court and get court authorisation to allow the sale (which may only be allowed after creditor has gone through a number of steps to notify them).

(C) Order under s 24 (residential application but this is also used where the debtor is insolvent since it is a waste of time serving a calling up notice).

74
Q

What does the Home Owner and Debtor Protection (Scotland) Act 2010 revise?

A

The Home Owner and Debtor Protection (Scotland) Act 2010 substantially revises enforcement procedures
⁃ This introduced the requirement that if the property is residential then you must apply to the court to enforce the security.

Home Owner and Debtor Protection (Scotland) Act 2010 substantially revises enforcement procedures (expanding the earlier Mortgage Rights (Scotland) Act 2001)

75
Q

What is the obligation on the creditor upon sale?

A

If the security that the court enforces allows the property to be sold then the creditor is under a statutory obligation to obtain the best price: s 25. Proceeds of sale: *s 27. (Both common law.).

The way they get the best price is by marketing it (advertising it on the internet may be sufficient).

Obligation to obtain best price: * s 25. Proceeds of sale: *s 27 (to any second ranking creditor or to the owner of the property). (Both common law.)

76
Q

Royal Bank of Scotland v Wilson [2010] UKSC 50

A

But the Supreme Court decision in Royal Bank of Scotland v Wilson [2010] UKSC 50 suggests that calling up notices must be used if sale is the desired remedy (based on interpretation of s 19 of the 1970 Act – but is this really a case where shall means shall? Or is it a case where shall means may?.

77
Q

What are quasi-securities?

A

Either (a) reservatio dominii or (b) fiducia cum creditore.

78
Q

What are the rules on hire purchase?

A

Consumer Credit Act 1974.

⁃ The supplier of the goods provides them to the hirer - the here makes monthly payments and does not have ownership of the goods. They have no real right in the goods at all. The one person that has a real right is the supplier.

  • The final payment which is to be made, at that point the hirer has an option and has the power to decide that they do not want to make a final payment and give the goods back. This is like a loan agreement with the creditor having security in the asset.
  • But because the creditor still has ownership they can get the ownership back. But he hirer knows that come the end of the final payments they can have ownership of the goods.
  • It is a right of rendition with a view to ownership.
  • This is a ‘quasi-security’ in one sense because the owner provides the asset that is used by the debtor but they keep ownership of it while the person using it (the debtor) has possession. If the debtor defaults then the asset can then be sold to someone else. There is only one real right - ownership by the supplier.
79
Q

What are the rules for sale and leaseback?

A

⁃ You have a party who wants to raise money. You have an investor who wants to provide money. The party wanting to borrow the money knows that they cannot give a security over the assets without handing over possession. The financier and owner of the assets will sell the assets to the financier and then hire them back to the original owner so the financier then gets a real right in ownership. The hire payments will be like repayments on a loan, so the sale price will reflect “borrowing plus interest”.
- Under a sale and leaseback arrangement the asset is sold to a financier and then hired back to the debtor. The debtor is then under an obligation to make regular hire payments to the financier. The Scottish courts have looked upon such arrangements with contempt since it is a means of circumventing the general rules.
⁃ As a result, the SOGA 1979 s 62(4) states that the SOGA does not apply to arrangements like this (sham sales). This means that if you have a transaction which looks like a sale but it really a ‘quasi security’ device then the common law rules apply and the SOGA does not apply (does not mean that the sale is not void). This means that s18 and s14 do not apply either and you have to rely on the common law.
⁃ Under the common law rules, ownership is only transferred on delivery. If there is no delivery there is no transfer of ownership at common law.
⁃ This means that for a sale and leaseback to work, A will have to actually transfer possession to B, even if just for a very short time. This means ownership passes and then A can take possession again.[ Remember the bus example where the financier hired a warehouse, put the buses there and sent a representative down to be photographed with the buses. This proved that delivery had taken place and thus ownership had passed at common law. Then the next day the buses were driven back to the bus company.

As SW notes it is utterly ridiculous that Scots law does not allow sale and leaseback without transferring possession. The Scottish Law Commission is looking at reform proposals that will allow the grant of non possessory securities over corporeal moveable assets.]

80
Q

*Ladbroke Leasing v Reekie Plant 1983

A

[ Not lectured on but could be useful because starred???]

81
Q

What are the two types of retention of title clauses?

A

There are two types of retention of title clauses:
⁃ 1) Price only
⁃ 2) All sums (held valid under Armour v Thyssen[ Held: sale of goods on all retention of title clauses were valid. ])

82
Q

SOGA *s 17

A

ownership may pass with, before, or after delivery, and with, before or after payment. If ownership passes before delivery and before payment, seller has statutory lien: SOGA s 39 & 41. But no lien after delivery. Clause providing that, notwithstanding delivery, ownership not to pass till payment. Distinguish price only and all sums retention of title *Armour v Thyssen 1990 SLT 891.

ownership may pass with, before, or after delivery, and with, before or after payment. If ownership passes before delivery and before payment, seller has statutory lien: SOGA s 39 & 41. But no lien after delivery. Clause providing that, notwithstanding delivery, ownership not to pass till payment. [ This bit wasn’t lectured on.]

83
Q

*Armour v Thyssen 1990 SLT 891.

A

?

84
Q

What are the risks to the creditor?

A

Such clause may be defeated by (i) SOGA *s 25; (ii) accessio (iii) specificatio. To guard against this we must hault the risk to the creditor:

⁃ 1) One risk to the creditor is that if you are a buyer in possession of goods you can give good title to them by selling to a good faith purchaser under SOGA (is this s 25??). If this happens all the creditor has is a personal right against the original buyer.

⁃ 2) Another risk to the creditor is that the property rules of accession and specification operate to defeat the retention of title clause:

85
Q

Clark Taylor v Quality Site Development 1981

A

⁃ Involved retention of title of bricks. Bricks were sold subject to a retention of title clause by the brick manufacturer to a brick holder. The builder used the bricks to build houses. When bricks are build to build houses they cease to exist as bricks and they accede to the land. Thus the application of accession transferred ownership to the owner of the principal.

  • So the moment the bricks were used to build, ownership passed to the buyer.
  • There is also a risk of specification which extinguishes right of ownership to the seller.
  • Here the seller provided when they supplied the bricks (aware they may lose ownership) that the buyer is to hold the goods in trust for the seller. In doing that, if you have a trust, you have a beneficial interest which gives priority in the bankruptcy of the trustee.
  • Held: (1) This case was not actual declaration of a trust - only an obligation to create a trust, it is for the buyer to declare a trust existed (2) they said this is ineffective on public policy grounds - the trust in this situation is an attempt to circumvent the restrictions on granting a right in security of an asset??

If the seller is aware that there is a risk of buyer and succession will try to put in a second part — the first is an “agency agreement”: the effect of this circumvents the retention of title clause as it provides express authority to sell the goods to the buyer, but it also gives a degree of protection to the seller. Also if there is an agency relationship, they (the buyer) are bound to account to the principal for the sale proceeds. (This is fiduciary obligations). If the buyer (agent) does not pay the money over to the seller, the buyer is deemed to hold the proceeds of the seller in a constructive trust applies where there is an agent relationship…

86
Q

How can trusts protect against risk?

A

⁃ One way of guarding against the above risk is to use trusts. The creditor will state that in the event that the buyer sells the property on to a third party or if the buyer uses the property to manufacture new goods or there is accession which takes place, the proceeds of sale are to be held in trust for the creditor. In Scots law the Clark Taylor case indicated that such a trust would be unlikely to be effective because it is just an attempt to circumvent the rules on securities.
⁃ However in the case of Tay Valley Joinery v C F Financial Services Ltd 1987 there was an invoice discounting agreement[ This is where debts are assigned to a financier and instead of intimating this to all the debtors they instead create a trust.]. The company became the truster and trustee for the benefit of the finance as the beneficiary. This was held to be valid. Used for example in debt factoring and dispositions of land.

Thus:
⁃ Trusts for retention of title - ineffective
⁃ Trusts for invoice discounting agreement - effective.

87
Q

Tay Valley Joinery v C F Financial Services Ltd 1987

A

In this case it was a financing relationship. you had a creditor who had lots of rights against debtors and they were selling them to an invoice discounting. when you sell to an invoice discounter, they pay the money to you and you transfer the assets to them. the only way that you can transfer rights of payment is if there is an assignation (from the point of voice of the invoice discounter this costs too much money).

So the ID says: you can declare that you hold all these rights to payment in trust for the discounter. this means that the creditor becomes the trustee, and the invoice discounter becomes the beneficiary and it is a truster-trustee-trust.

This case held that this was perfectly fine. however Clark Taylor argument was not applied. So (1) it is a pecuriam decision and (2) it is an inner house decision.

So here we have two competing inner house authorities.

NB in the area of retention of title Clarke Taylor is directly applicable and other are for this case.

88
Q

(5) Assignation in security

A

Transfer of incorporeal moveable in security of debt. Retrocession on repayment.

89
Q

(6) Pledge of bills of lading

A

see Rodger 1971 JR 193 and Gretton 1990 JR 23

90
Q

(7) Ex facie absolute disposition. Abolished by 1970 Act.

A

[ Not lectured on - look up. Importnat - this was covered in the lecture.]