5. Introduction to Securities Flashcards
When do debtors not pay?
Ordinarily when there is a debt the debt will be paid. However in some cases debtors don’t pay, for two principle reasons:
⁃ 1) Because they can’t pay
⁃ Because they don’t have enough assets in order to pay the debt. Such a person will often end up in insolvency.
⁃ 2) Because they won’t pay
If you are a creditor, how do you deal with debtors who don’t pay?
There are a number of ‘spurs’ to payment (things that ought to trigger payment). The list can be followed in order:
⁃ The (moral) obligation to pay itself
⁃ The request (for debtor to pay)
⁃ The lawyers [E.g. a letter from your lawyers.] - (usually a letter)
⁃ The court [E.g. the initiation of legal action. Sometimes this in itself is enough to trigger payment.] (this very act is sometimes sufficient to make a debtor pay)
⁃ The decree[ If the action is successful then the court will pronounce a decree.
But having decree is not of itself sufficient to guarantee payment because the debtor who refuses to pay may not in itself act as an incentive to pay.] (this is the result of court action)
- You have two options of decree: (1) diligence - seize assets to satisfy debt that is due (2) communal process (insolvency is a communitarian process where all creditors act together and share in the totality of assets of the debtor).
Then what…?
- The incurring of costs means that the amount you ultimately get back might reflect the debt that’s due but you might not incur all the expenses back in recovering the payment. You want to minimise the transaction costs you incur.
How can you enforce decrees?
There are two broad approaches that one may take:
⁃ 1) Diligence
⁃ This is the procedure to enforce or execute a judgement. It involves applying to the court to say that this debtor still hasn’t paid and thus you want to seize some of their assets. This is either attachment, arrestment or diligence against land (adjudication and …?)
⁃ 2) Bankruptcy
⁃ You can apply to the court to have the debtor made involvement. If it is an individual you can apply to have them sequestrated[ Involves a third party (trustee in sequestration) being appointed who administers all the assets of the debtor and sells them in order to pay off the creditors who are due money.], or if it is a company to have the company liquidated[ All the assets go into the control of the liquidator who sells all the assets off and pays the sums due, and at the end of the process the company is extinguished.] or put into administration.
From the perspective of the creditor what are the risks in debt?
⁃ However there are risks in these processes. The risk in insolvency is that if you have lots of creditors then typically the total liabilities of the debtor will vastly exceed the total assets and thus the creditors will not receive much (this is a result of the paritas creditoerm principle which means that all creditors are treated equally).
The risks are Non-payment and Insufficient assets. Therefore, a right in security may be used to strengthen your position as a creditor.
What is security?
A definition of rights in security: “Any right which a creditor may hold for ensuring payment or satisfaction of his debt, distinct from and in addition to his right of action and execution against the debtor under the latter’s personal obligation.” W M Gloag & J W Irvine Rights in Security (1897) p 2.
There is an element of circularity in definitions.
What are the key principles of a right in security?
So the key principles are that the right in security is distinct to the underlying personal right and it is a right to ensure payment. The creditor will either get a personal right or a real right. This ensures payment.
What is the accessory nature of security?
Accessory nature of security: parasitic upon the obligation secured. Debt can exist without security, not security without debt. “The note is the cow and the mortgage the tail. The cow can survive without the tail, but the tail cannot survive without the cow.” Best Fertilizers of Arizona Inc. v. Burns, 117 Ariz 178, 571 P 2d 675 (App 1977).
Albatown Ltd v Credential Group Ltd 2001 GWD 27-1102
??
What sort of right is a right in security?
Either:
1) Personal securities (cautionary obligations)
⁃ This is where the second right that a creditor holds is against an individual who is guaranteeing the payment of the underlying debt.
⁃ E.g.[ Parents buy a flat for their child who is going to university. The property may be bought in the child’s name but the parent’s will guarantee the debt.]
2) Asset / real securities
⁃ This is where the creditor obtains a real right to obtain[ Is obtain the right word here?] the asset in the event of non payment. This is enforceable against the world.
⁃ Furthermore the asset security also gives priority to the debtor in the even of insolvency of the debtor.
⁃ Main example of asset securities is a standard security (mortgage). In the event that a person defaults on mortgage payments the creditor can sell the property in order to obtain the payments that are due. Since it is a right in the asset, the creditors can enforce against subsequent owners too.
3) Proper/Improper (Quasi-securities)
What are the two types of real security?
There are two particular types of real securities:
⁃ 1) Rights of retention
⁃ This is where the creditor has ownership of the asset (there is only one real right in the asset) [This is where a retention of title clause is used.]
- The seller is selling the goods and saying “I will retain ownership of these until you can pay”. There is only one real right protecting the seller in this circumstances (ownership). This means that if the buyer does not pay, the seller being an owner can come in and get the title back. They are entitled to vindicate their ownership.
⁃ 2) Subordinate real rights in security (jus in re aliena)
⁃ The subordinate real right holder’s do not own it. However they have a subordinate real right in the asset.
- There are two real rights: ownership (typically held by the debtor). and creditor has a right in security in this particular asset.
- A real right in security gives you two things: (1) a right of sale (in the event that the debtor does not pay, and they can apply the proceeds of the sale of the asset (2) gives you priority in insolvency.
- The key thing is the acid test of real rights: this is determined by whether they give you protection in the insolvency of the individual.
3) Other form of security mentioned: pawnbroking (pledge - like pignus) where a corporeal moveable is handed over from the debtor to the creditor. The debtor is still the owner but the creditor takes possession and has a real right in security under which they can sell the asset to satisfy the outstanding debt in the event of non-payment.[ Not sure exactly where this fits in…]
What does a real security provide the holder with?
A real security gives the security holder:
A power of sale,[ To buy a house in Scotland:
(1) Missives
(2) Followed by Conveyance which implements the missives then registers them] or a preference if someone else sells
⁃ Priority over unsecured creditors in insolvency
What is a personal security?
Personal securities are where the creditor gets a second personal right against an individual. This is called caution (pronounced Cai-tionary Obligation). In English Law this is known as surity or “guarantee”.
What are the characteristic shared by personal and real securities?
1) Securities are parasitic
⁃ It is an accessory right which is dependent on there being an underlying debt which is being secured. If there is no underlying debt which is being secured, the security ceases to exist.[ Thus when a debt is paid the the security ceases to exist. Or if the underlying obligation is extinguished by negative prescription the security ceases to exist.]
- The moment the last payment is made, the standard security catches nothing.
2) Fluctuating Account: If it a fixed obligation which is extinguished, any security based on it will be extinguished too. Read Albatown***.
Albatown
Really good case. Must read
⁃ Contained a supersession clause. The buyer did not pay the price. They said you can sell us the house, we will register, and we will grant you a standard security securing you the obligation. They didn’t pay, after two years they put in an application to the court to get the standard security struck down under the missives lasting for 2 years. Argued their obligation to pay the price comes to an end and any securities come to an end, the court upheld this. This was upheld because the seller had never requested the money. The moment the missives are discharged the security is over???
- Involved sale of land. The land was sold and the buyer couldn’t pay the price. The buyer said to the seller ‘I am under an obligation to pay you the price under the missives, what I will do is grant you a standard security over this land I am buying, securing the price due under the missives.’ The seller agrees and this standard security is registered in favour of the seller. The buyer becomes the owner and the seller holds a standard security for the sum due under the missives.
⁃ In most contracts for the sale of land in Scotland the missives will only last for a finite time (usually 2 years) - this is usually provided for by a supersession clause. There was such a clause in this case. The buyer doesn’t pay the price so the seller attempts to enforce the standard security. However by this point >2 years had passed so the missives were no longer enforceable - since the standard security depends on the underlying obligation it also was no longer enforceable.
How does negative prescription apply to securities?
When it is a normal loan which is secured the normal loan is subject to the usual rules on negative prescription under s 6 and schedule 1 of the Prescription and Limitation (S) Act 1973 - if it is not a particular obligation relating to land then the usual prescriptive period will be 5 years. However the right in security itself is subject to a negative prescription of 20 years. However, because a right in security is an accessory right it is dependent on their being an underlying debt so if the underlying debt has been extinguished after 5 years then the right in security will case to exist also after 5 years.
