Ch.29 Security for Debt Flashcards
Secured creditor
creditor that may look to particular assets of debtor to ensure payment of debt
Unsecured creditor
creditor who does not take a security interest in the assets of the debtor
the debtor
Security interest
taking an interest in the personal property of the debtor to secure the debtor’s obligation to pay
Chattels
moveable property, personal property as opposed to real property (land)
Forms of Security for Debt
Most common forms with respect to chattels:
- Chattel mortgage
- Conditional-sale agreement
- Bill of sale
Other special forms of security available:
Assignment of book debts
Bank Act security
Bonds and debentures
Chattel Mortgage
Historically
creditor took physical possession of goods until payment
- Transfer of possession but not title
- Creditor keeps goods or disposes of them if the debtor fails to pay
- Problem - debtor deprived of the use of the goods and creditor has to take care of the goods
Chattel mortgage
- mortgage in which title to the chattel owned by the debtor is transferred to the creditor as security for the payment of a debt
Chattel Mortgage
Operation:
Like real-property mortgage except for personal property (chattels)
Debtor transfers entire interest in property to the creditor, subject to the right of possession while not in default, and the right to redeem
Title transferred to creditor (chattel mortgagee) and debtor (mortgagor) retains possession
Agreement (mortgage) sets forth conditions
If debtor fails to pay, creditor takes possession of goods
Chattel Mortgage
Redeem
right to take the goods back if debtor pays all amounts owing
- Including reasonable expenses of creditor
Chattel Mortgage
Reinstatement
- having credit reinstated by paying outstanding amounts
- Including reasonable expenses of creditor
- Remaining balance is paid
Chattel Mortgage
Creditor’s rights:
Upon default an sell goods to realize on security
Must pay any surplus to debtor but can sue for deficiency
Debtor needs creditor’s consent before selling the goods
Third parties should ensure goods are free from encumbrances and that seller is rightful owner
Chattel Mortgage
Registration:
Method of providing third parties with notice of Creditor’s interest in the property
Public registration system
- Gives public notice of the creditor’s security interest
Failure to register may void the chattel mortgage
Conditional Sale Agreement
- agreement for the sale of a chattel in which the seller grants possession of the goods, but withholds title until payment for the goods is made in full
Security interest arises out of a sale instead of a debt transaction
Early beginnings in English hire-purchase agreement (Example: Singer manufacturing company)
- Think of this like ‘rent-to-own’ except buyer has to ultimately own
Conditional Sale Agreement Registration:
Falls under Personal Property
Security Acts (PPSA)
- Must be in writing and signed
- Must set out conditions and description of property
- Disclose true cost of sale, including interest
Registered to give notice to the public of the security interest in the goods
- Failure to register may render the transaction void against bona fide buyers
Conditional Sale Agreement Assignment:
Conditional seller may assign title to a third party
Normal rules of assignments apply
Often sellers sell the financing to a finance institution
Assignee still takes subject to the equities (defenses)
Conditional Sale Agreement Buyer’s Relief:
Common law and legislative relief
Avoid seller repossessing goods when substantial portion of price has been paid
- Consumer protection legislation
- Requirement of “notice of intent to repossess”
Once repossessed by seller goods may be sold according to legislative procedures
Buyer may have right of redemption
Bill of Sale
Contract in which title to goods passes to the buyer
- Certain formalities must be followed when goods purchased, and possession remains with the seller
-Must register bill of sale with provincial registries within certain period of time
-Must be a bona fide sale and not one for the purposes of defeating creditors
Bill of Sale Purpose of registration:
- Protects the interest or title of the buyer in the goods in the event the seller should attempt to sell the goods
- Notice to third parties that title has passed to buyer
Failure to register would give innocent third parties better rights to goods
Assignment of Book Debts
Creditor’s take an assignment in book debts (receivables) of the debtor
Collects what is owed to the debtor from customers
Rules of assignment apply
Registration:
- Can be registered under provincial laws
- Gives priority over trustees in bankruptcy
Personal Property Security Acts (PPSA)
Applies within all provinces
Overhauls the older system and eliminates conflicting rules with respect to creditor’s rights
New legislation:
- Simplifies transactions associated with securing debts
- Provide simple system of registration for security
- Provide creditor with security interest in personal property
- Determines priorities between creditors
PPSA Perfection:
Perfects - act of registration of a security interest under personal property security legislation
- Registration of the security interest
- Called a “financing statement”
- Establishes creditor’s priority right to the security interest in the property
“After-Acquired” Property and Purchase Money Security Interests
“After-acquired” property - term in a security agreement that permits the security interest to attach to goods acquired later by the debtor
- Concern for priorities when firm borrows money or buys equipment
- Priority of first creditor prevents second creditor from providing credit
PMSI
rules related to purchase money security interests
Later supplier has priority over earlier interest if:
- It is supplying credit for the purchase of this after-acquired property
- It perfects its interest through registration within set time limits (i.e. according to the legislation)
- Uses fund to pay for particular equipment
PPSA Default:
Rights of secured party set forth in security agreement
Usually can seize collateral
Dispose of collateral by public or private sale
Surplus must go to the debtor
Right of redemption by debtor unless stated otherwise
Credit cards:
Issues by chartered banks and financial institutions
Type of payment instrument commonly used in consumer purchases of chattels and services
Not security instruments
Credit card transaction is supported by two separate agreements
1. Between bank and merchant
2. Between bank and cardholder
Bond
debt security issued by a corporation in which asset of corporation are usually pledged as security for payment
Debenture
debt security issue by a corporation that may or may not have specific assets of the corporation pledged as security for payment
- Two terms used interchangeably since no precise legal definition exists
Statutory protection:
Exists in certain provinces in addition to other secured rights a Creditor can take
- Bulk Sales Act
- Protected creditors when debtor business sold all its inventory to a third party - eliminated in 2017 - Mechanics’ liens or construction liens
- Protect rights of creditors in transactions where creditor may not be a party
Mechanics’ or Construction Liens
Statutory right of a worker to claim a security interest in property to ensure payment for labor or material applied to land or to a chattel
Rights are set out by a statute and only available to those so listed
Two forms of liens:
- Lien against real property (construction/builders’ lien)
- Lien against chattels (mechanics’ lien)
Each distinct in manner claimed and enforcement
Some provinces have separate legislation for each
Mechanics’ or Construction Liens Right to Lien:
Mechanics’ liens - allows person who repairs a chattel to lawfully retain possession of good until payment is made
- If not paid within a period of time, lien holder may sell goods by public auction
- Provide notice
- Debtor liable for deficiency or shortfall in amount payable for repairs
Construction liens Right to Lien
“Owner” defined in legislation to include fee simple owner and persons with lesser interests in property
People entitled to claim lien is broad - includes wage earners, subcontractors, material suppliers, suppliers of rental equipment used for construction, principal or prime contractor, architect
Provides simplified procedure for enforcement
Must be filed within period of time from date work last performed and a claim initiated a certain number of days in order to perfect
Lien Holdbacks:
Avoids disputes between contractors and subcontractors
Replaces the land for lien purposes
Some provinces require money paid to general contractor from owner be held by general contractor in trust for subcontractors
Hold-back
retention of a part of the contract price by the owner as required under construction lien legislation to ensure payment of subcontractors and suppliers of material (usually 10%)
