Rights in security Flashcards
What is the fundamental idea of rights in security?
Creditor with a personal right, who has additionally a real right in an item of the debtor’s property giving preference to them in the debtor’s insolvency.
What express agreement is necessary under common law for agreements under rights in security?
A power of sale.
Express agreement to a power of sale of an item of value is necessary under the common law governing this kind of arrangement (Stair & Bell) but in modern law is implied in most cases (Consumer Credit Act 1974, s114-122).
What are the two kinds of creditors?
- A creditor with a right in security is called a secured creditor
- Other creditors are known as unsecured creditors
What are the benefits of being a secured creditor?
- They have a real right within the property exchanged meaning it is enforceable against everyone, but especially the other creditors.
- They have a preference above other creditors.
- Secured credit is cheaper; interest is significantly lower.
What two rights do secured creditors have?
- A personal right to payment of the debt; and
- A real right in some item of the debtor’s property
Discuss security rights as accessories to debts.
The security right is ‘accessory’ to the debt, which means it is extinguished if the debt is extinguished because its purpose is to protect the creditor and to make it easier for debtors to get credit.
As the right in security is a real right, it continues to be effectively enforceable even if the debtor is insolvent.
The real right will follow the property if it is transferred.
True or False?
True.
There is nothing preventing the secured creditor from selling the item to another but because they have a real right they do not have to hand the item over and the security will survive even if ownership of the property changes.
How are rights classified?
Rights in security are either possessory or non-possessory:
- Possessory securities involve the creditor having possession of the property being entitled to retain possession until the debt is paid
- Non-possessory securities involve the debtor retaining possession, though the creditor may be entitled to take possession if the debtor defaults
Rights in security are either voluntary or involuntary:
- voluntary securities are created with the agreement of creditor and debtor
- involuntary securities are created automatically by the law
What are the names used for the individual to whom the debt is owed and the individual who owes the debt?
The creditor and the debtor
What is the law governing standard security?
Conveyancing and Feudal Reform (Scotland) Act 1970 s9.
This creates a single, standardised form of security over all heritable property.
Third party securities are common and competent.
Discuss.
It is common and competent to grant a standard security over your own property for someone else’s debt.
If you do this, you are in effect acting as a cautioner for the debtor. However, you do not have personal liability.
The standard security will be voidable if the creditor is in bad faith as to fraud or misrepresentation by debtor to cautioner.
True or False?
True.
Smith v Bank of Scotland plc - Wife mislead. Imposed on the bank a duty of good faith to ensure the risk of third parties being mislead is minimised.
However, Smith has been repeatedly distinguished and not followed due to negative reaction of academics and legal professionals.
Ahmed v Clydesdale Bank plc - Wife argued that she didn’t know what she was signing when signing security for husband. However, bank included that she should seek independent legal advise. This was held to be enough for the bank to discharge their duty.
What are standard conditions of the Conveyancing and Feudal Reform (Scotland) Act 1970?
Sch 3;
- Calling-up notices
- Default
- Rights of creditors on default, including power of sale
What are the are two routes to enforcement?
- Calling up notice
- financial defaults
- Notice of default
- other breaches of obligation by the debtor
Explain the law of calling up notices.
Conveyancing and Feudal Reform (Scotland) Act 1970, s19 - A calling-up notice is used where the creditor intends to require discharge of the debt
Conveyancing and Feudal Reform (Scotland) Act 1970, Sch. 6 Form A - The calling-up notice gives the debtor two months to pay
