Secured Transactions

Question 1

What is Security?

Answer 1

The transference of a proprietary right or interest in an asset by one party (the ‘Giver’) to another (the ‘Taker’) to collateralize its obligations thereto.

P. 815.

Proprietary Rights are otherwise known as rights in rem.

Note that this Deck will not concern itself with Real Property, i.e. land, but rather only tangible and intangible Personal Property, i.e. goods.

Question 2

What are the Commercial Purposes of Security?

Answer 2

• Risk Mitigation: It affords the Taker recourse, through the asset, outside of insolvency should the Giver default on its obligations.
• Risk Deterrence: It discourages the Giver from taking unnecessary risks or acting recklessly.
• Priority in Insolvency: It may afford the Taker a claim that supersedes others Creditors’, perhaps even in the same asset.
• Price Negotiation: Givers may offer security to secure lower prices from Takers.

P. 816.

Question 3

What is an All Monies Clause?

Answer 3

A provision stating that a Security’s scope extends to all the Giver’s obligations to the Taker.

P. 822.

This Includes present, future, actual, contingent, and prospective obligations.

Question 4

What is the Commercial Purpose of an All Monies Clause?

Answer 4

• Decrease credit risk by expanding the Security’s scope.
• Increase flexibility by allowing the Taker to advance further funds without regularly needing to create Security.

Lecture Notes.

Question 5

What are the Types and Sub-Types of Security under English law?

Answer 5

Possessory:
* Pledge.
* Contractual Lien.

Non-Possessory:
* Debenture.
* Legal Mortgage.
* Equitable Lien.
* Equitable Charge.
* Equitable Mortgage.

P. 816; Re Cosslett [1998] Ch 495, at [45].

Question 6

What are the Prerequisites for Security to Attach to an Asset?

Attachment being the instant the Taker gains a proprietary interest.

Answer 6

• Identification: The asset must be sufficiently identified.°
• Ownership: The asset must be in the Giver’s ownership.°°
• Intention: The Parties must intend for the asset to collateralize an obligation.°°°
• Value Given: The Giver must receive value from the Taker in exchange for the Security.°°°°
• Documentation: There must be a valid Security Agreement (SA), signed and in writing, outlining the Parties’ rights and obligations.°°°°°

Value Given is effectively whatever the broader transaction concerns.

° Cresswell v Potter [1979] 1 WLR 43.
°° National Westminster v RBS Securities [1998] 2 All ER 609.
°°° Palmer v Carey [1926] AC 703.
°°°° Re Pavlou [1993] BCLC 292
°°°°° Neste Oy v Lloyds Bank [1983] 2 Lloyd’s Rep 658.

Question 7

What are the Essential Characteristics of Security?

Answer 7

The proprietary interest must:
* Transference: Transfer from the Giver to the Taker.
* Priority: Have priority over inferior interests in the asset in insolvency.
* Perfection: Be perfected under the laws of the relevant jurisdiction(s).
* Equitable Right to Redeem: Be redeemable by the Giver once its obligation(s) are discharged.
* Enforceability: Be enforceable under the laws of the relevant jurisdiction(s) and the Parties’ agreement.

Spectrum Plus [2005] UKHL 41.

Question 8

What is the Equitable Right to Redeem?

Answer 8

The Giver’s right to regain its whole Security° upon the unconditional discharge of its obligations.°°

P. 817.
° Law Debenture v Concord Trust [2007] EWHC 1380, at [53].
°° Çukurova Finanace v Alfa Telecom (No. 3 & 5) [2013] UKPC 25, at [17].

Question 9

May the Equitable Right to Redeem be Qualified?

Answer 9

• Yes, by way of contractual agreement between the Parties; however,
• Provisions preventing its exercise will be void.

Perpetual Debentures under §739 CA 2006 notwithstanding.

P. 817; Noakes v Rice [1902] AC 24.

Such provisions are called ‘Clogs’. Precisely when a provision is a Clog is unclear. For instance, a provision postpoing the Right is not a Clog,° but only insofar as the postponement is reasonable in duration.°°

° Teevan v Smith (1882) 20 ChD 724.
°° Morgan v Jeffreys [1910] 1 Ch 620.

Question 10

What is the Order of Claims in an English Liquidation?

Answer 10

1. Ownership of Assets, Fixed Security over Assets, and Liquidation Set-Off Rights.
2. Expenses of the Insolvency Proceedings.
3. Preferential Creditors.
4. Floating Charges.
5. Unsecured Creditors.
6. Shareholders.

This list is not comprehensive, but suitable for my purposes..

P. 819-820.

Question 11

What types of Assets does Possessory Security concern?

Answer 11

• Tangible personal property.
• Documentary intangible personal property, e.g. a Bond.

P. 847.

Question 12

What is a Pledge?

Answer 12

An arrangement wherein the Giver (Pledgor) transfers possession of an asset, actual or constructive, to the Taker (Pledgee) as collateral.

P. 847.

Question 13

How may a Pledge be enforced?

Answer 13

Through an inherent power of sale in the Security.

P. 847; Ponthonier v Dawson (1816) Holt 383.

Question 14

What are the Two Types of Possession that may constitute a Pledge?

Answer 14

• Actual Possession, wherein the Taker gains physical control of the asset or its Bill of Lading;° and
• Constructive Possession, wherein the Giver holds the asset for the Taker on attornment or as a Trustee.°°

P. 847.
° Wrightson v McArthur [1921] 2 KB 207.
°° Dublin City Distillery v Doherty [1914] AC 823.

Here, attornment means an official acknowledgement of the Taker’s proprietary interest in the pledged asset.

Question 15

What is a Bill of Lading?

Answer 15

A document of title to the asset, the only one accepted under English law.

P. 848; Impala Warehousing v Wanxiang Resources [2015] EWHC 811.

Question 16

What is a Contractual Lien?

Answer 16

An arrangement wherein the Giver (Lienor) transfers the right of possession in an asset to the Taker (Lienee) as collateral.

P. 848.

The right of possession is otherwise known as the right of detention.

Question 17

Do Contractual Liens possess an Inherent Power of Sale?

Answer 17

No, although one may be included through contract.

P. 848.

Question 18

What is a Legal Mortgage?

Answer 18

An arrangement wherein the Giver’s (Mortgagor) title in an asset is transferred in law to the Taker (Mortgagee) as collateral.

P. 849.

Question 19

By what Mechanisms may the Legal Mortgage of a Chose in Action be effected?

Answer 19

• Novation; or
• Legal Assignment.

Additional steps may be necessary depending on the chose in action.

P. 850.

Question 20

What are the Necessary Formalities for creating a Legal Mortgage?

Answer 20

1. The Deed: A document outlining the agreement’s terms and conditions must be created.
2. Signature: The Deed must be signed by both parties.
3. Transfer: Legal title in the Security must be transferred to the Taker, usually by way of a conveyance.
4. Perfection (Registration): The agreement must be registered with the Land Registry or Companies House, as the case may be.

To one extent or another, this applies to all forms of Security.

Lecture Notes.

Registration with Companies House is governed by §859 CA.

Question 21

How does an Assigned Legal Mortgage affect the Enforceability of the underlying Chose in Action?

Answer 21

It has no effect. If the Mortgagor is wronged thereunder, its losses will be recoverable.

For instance, it may enforce and recover against a breach of contract.

P. 851; Bovis International v Circle [1995] 49 Conv LR 12.

Question 22

Do Legal Mortgages require Valuable Consideration?

Answer 22

No.

However, this may leave it vulnerable to claims under §238-§239 IA 1986.

P. 851; Nanney v Morgan (1887) 37 ChD 346.

Question 23

What is an Equitable Mortgage?

Answer 23

An arrangement wherein the Giver’s (Mortgagor) title in an asset is transferred in equity to the Taker (Mortgagee) as collateral.

Lecture Notes.

In other words, the benefit of the Giver’s title is held in favor the Taker.

Question 24

Why may an Equitable Mortgage arise instead of a Legal Mortgage?

Answer 24

• Transferability: The Security is not transferrable at law.
• Subject Matter: The Security is a type of equitable property, such as a beneficial interest.
• Formalities: The requisite steps for a Legal Mortgage cannot be or were not fulfilled.

P. 853.

Question 25

What are the Necessary Formalities for creating an Equitable Mortgage?

Answer 25

In all cases:
* Intention: The Parties must have clearly intended to create the arrangement.

In cases of equitable interests in property:
* The Deed: A document outlining the agreement’s terms and conditions must be created.
* Signature: The Deed must be signed by both parties.
* Valuable Consideration: The transaction must be supported by consideration.

P. 853-854.

Practically, all Mortgages or other Security Agreements will be: (a) in writing for clarity’s sake; and (b) supported by consideration to avoid issues under §239 IA.

Question 26

What is an Equitable Lien?

Answer 26

An arrangement to secure payment of the property’s purchase price, affording the Giver a right to have the property held as security until the price is paid.

P. 855.

In High Finance, this is a rather unusual form of security.

Question 27

How does an Equitable Lien arise?

Answer 27

By operation of law unless the Giver takes security for the relevant obligation.°

P. 855.

° Capital Finance v Stokes [1969] 1 Ch 261.

Question 28

What is a Debenture?

Answer 28

An arrangement wherein all, or substantively all, of the Giver’s assets are transferred in equity to the Taker as collateral.

P. 857.

Question 29

What is a Charge?

Answer 29

An arrangement wherein the Giver’s (Chargor) beneficial interest in an asset is transferred in law or equity to the Taker (Chargee) as collateral.

P. 855.

Hereafter, only Equitable Charges are analysed since the earlier discussion on Legal Mortgages would make analysing Legal Charges largely redundant.

Question 30

What are the Two Types Equitable of
Charge?

Answer 30

Fixed and Floating.

P. 856.

Again, these may also be Legal Charges.

Question 31

What is a Fixed Charge?

Answer 31

An Equitable Charge that attaches to a specific asset or group of assets.

P. 856.

Question 32

What is a Floating Charge?

Answer 32

An Equitable Charge that pertains to a specific asset or group of assets, which may vary, but only attaches thereto after a Specified Event occurs.

Attachment is otherwise called ‘crystallization’.

P. 856; Re Yorkshire [1903] 2 Ch 284.

Specified Events are always outlined in the terms and conditions.

Question 33

What are the Differences between Fixed and Floating Charges?

Answer 33

1. Subject Matter: The assets of Floating Charges may change with time, unlike Fixed Charges.
2. Legal Status: Fixed Charges are crystallized from execution, unlike Floating Charges that only crystallize after a specified event.
3. Enforceability: Once executed, Fixed Charges are enforceable whenever, whereas Floating Charges are only enforceable once crystallized.
4. Commercial Flexibility: Floating Charges allow the Giver to unilaterally use varying assets in the ordinary course of business until crystallization, unlike Fixed Charges.
5. Registration: Fixed Charges are registered once, namely at execution, whereas Floating Charges are registered twice, namely at execution and crystallization.
6. Priority: Fixed Charges take priority over Floating Charges in the same asset(s), and Floating Chargees’ priority may be defeated by or subordinated to a Third Party dealing in the asset.

Lecture Notes.

Question 34

What is the Main Distinguishing Factor between Fixed and Floating Charges?

Answer 34

• A Charge is Floating if the Giver can freely deal with the assets without the Taker’s consent.
• A Charge is Fixed if the Taker is personally° in full control of the assets and the Giver is unable to deal with them unilaterally.

P. 864-865; Agnew v Commissioner [2001] UKPC 28.

° Re ASRS Establishment [2000] 2 BCLC 631.

Even a partial deprivation of the ability to freely deal would be insufficient. See In Re Brightlife [1987] Ch 2000, at [209]. Also, consent must not be unreasonably withheld. See Commercial First v Atkins [2012] EWHC 4388.

Question 35

Regarding Equitable Charges and Control, what constitutes being In Control of an Asset?

Answer 35

Having say over whether and how the asset is dealt with.

P. 868; Gray v GTP Group [2010] EWHC 1772 (Ch).

Question 36

Regarding Fixed Charges and Control, must the Taker be in Full Control of all Elements of an Asset?

Answer 36

Not necessarily. What precisely the Taker must control depends on:
1. How the asset generates income;
2. Whether income generation is the asset’s sole source of value; and
3. Whether the asset is destroyed by income generation.

P. 873; Spectrum [2005] UKHL 41.

Question 37

In Practice, how does a Court determine whether a Charge is Fixed or Floating?

Answer 37

By observing the Parties’ rights and obligations and their conduct vis-à-vis the Security.

P. 865; Agnew v Commissioner [2001] UKPC 28.

Question 38

What constitutes Freely Dealing with an Asset?

Answer 38

The general concept of carrying on business, which extends to:°
* Exceptional transactions;°°
* Abuses of power by Directors;°° and
* Bona fide major asset disposals.°°°

P. 866.
° Driver v Board [1893] QBD 744, at [748]-[749].
°° Willmot v London Celluloid (1886) 34 ChD 147.
°°° Re Florence Land (1878) 10 ChD 530.

Question 39

Regarding Fixed Charges over Receivables, is there a Distinction between Collected and Uncollected Debts?

Answer 39

No, meaning that the Giver must be initially deprived of the ability to dispose of both.

P. 869; Spectrum [2005] UKHL 41.

Note that creating a Fixed Charge over the contract generating receivables may severely restrict the ability to vary that contract.

Question 40

Regarding Fixed Charges over Receivables, what sort of Account must be used?

Answer 40

A Blocked Account, namely one that denies access to the Giver and thereby facilitates the Taker’s control.

P. 870; Spectrum [2005] UKHL 41.

Alternatives include Equitable Assignment and Assignment by way of Mortgage.

A Block Account may still be accessed by the Giver, but only upon request and at the Taker’s discretion, as evidenced by written consent. See Keenan Bros [1986] BCLC 242.

Question 41

Regarding Fixed Charges over Plant and Equipment, what is the Taker’s Chief Concern?

Answer 41

The Giver’s ability to dispose of the asset, such as by way of replacement, bailment, sale-and-leaseback, etc.

P. 872-873.

Question 42

Regarding Crystallization, does the Law imply Specific Events?

Answer 42

Yes, including:
* Winding up;°
* Appointment of a Receiver;°°
* Permanent cessation of business;°°°

Naturally, this does not apply if the agreement says otherwise.

P. 879.

° Re Panama (1870) LR 5 Ch App 318.
°° Evans v Rival Granite [1910] 2 KB 979.
°°° Re Woodroffes [1986] Ch 366.

Question 43

Regarding Floating Charges, what is the Taker’s Priority vis-à-vis the Giver’s Counterparties, i.e. Third Parties?

Assuming the Third Parties’ Security is at least as strong.

Answer 43

Before Crystallization:
* The Third Party prevails, unless it had notice of a negative pledge.°

After Crystallization:
* The general priority and insolvency rules apply.

P. 880-886.

° English & Scottish v Brunton [1892] 2 QB 700.

Question 44

Regarding Equitable Charges over Financial Instruments, what are the Taker’s Chief Concerns?

Answer 44

Whether the Giver is authorized to collateralize them and whether the enforcement of such Security is fettered.

This is particularly important for shares.

P. 887.

Question 45

Regarding Equitable Charges over Financial Instruments, may Equitable Interests in Shares subsist?

Answer 45

No.

P. 888; §126 CA 2006.

Consequently, a Legal Mortgage is the best way to collateralize shares, unless the shares are intermediated, in which case, an Equitable Charge or Mortgage over the interest in the shares is the go-to. See P. 892-894.

Question 46

What is a Charge-Back?

Answer 46

The collateralizing of an obligation owed by the Taker to the Giver in the Taker’s favor, usually by way of a charge.

P. 909; Re Bank of Credit [1998] AC 214.

In other words, the Taker seeks to take security over its own liability.

Question 47

Why may a Charge-Back be preferrable to Set-Off?

Answer 47

It provides the Taker with greater certainty, as set-off rights vis-à-vis the given liability may not exist or otherwise obtain.

P. 910.

That said, it is yet unclear how or whether a charge-back is subject to insolvency set-off. See P. 912-915.

Question 48

What is a Flawed Asset Provision?

Answer 48

A provision stating that:
* A liability from A to B may be withheld and will not fall due for payment or discharge; while
* Any liability remains outstanding from B to A.

P. 915.

Question 49

What is the Commercial Purpose a Flawed Asset Provision?

Answer 49

Decrease credit risk by providing the Taker with set-off rights and ensuring it is not left with unpaid liabilities.

Lecture Notes.

Question 50

What is the Legal Right of Set-Off?

Answer 50

• The netting of a pre-existing, separate, unconnected, precisely calculable, and currently due claim;
• Owed by the Taker to the Giver;
• Against the Giver’s current debt to the Taker.

It arises only in litigation to avoid a multiplicity of suits.

P. 731, P. 918; Christie v Taunton [1893] 2 CH 175.

Question 51

What is the Equitable Right of Set-Off?

Answer 51

The netting of cross-claims recognized in equity but not in law.

Lecture Notes.

Question 52

What are the Three Types of Equitable Set-Off?

Answer 52

• Beneficial Set-Off.
• Transaction Set-Off.
• Transferred Set-Off.

P. 919.

Question 53

What is Transaction Set-Off?

Answer 53

The netting of a cross-claim so closely connected with the Transferee’s claim against the Borrower that it would be manifestly unjust to enforce without accounting for this claim.

P. 919; Bim Kemi v Blackburn Chemicals [2001] EWCA Civ 457.

Question 54

Regarding Transaction Set-off, how is a Cross-Claim’s proximity to the Original Claim determined?

Answer 54

By observing whether the claims:
* Pertain to the same subject matter;°
* Bear a functional resemblence to one another;°° or
* Arise from the same arrangement or series of arrangements.°°

P. 919.

° Newfoundland v Newfoundland Ry Co. (1888) 13 App Cas 199.
°° Geldof v Simon Craves [2010] EWCA Civ 667.

Question 55

What is Beneficial Set-Off?

Answer 55

The netting of claims that are legally between different parties, but at the beneficial level, actually between the Giver and Taker.

P. 921; Cochrane v Green (1860) CB (NS) 448.

Question 56

What is Transferred Set-Off?

Answer 56

The netting of claims assigned in equity, namely between the Giver and Assignee.

P. 921.

Question 57

What is the Contractual Right of Set-Off?

Answer 57

The use of contract to net claims under circumstances that would not arise in law or equity.

The Unfair Contract Terms Act 1977 applying.

P. 922.

Given its customizability and greater degree of certainty, this type of Set-Off is the most valuable, but in an insolvency, it is subservient to Insolvency Set-Off.

Also, the Banker’s Right of Set-Off, which allows a Bank to net a Customer’s balances to satisfy a debt, is a variant of the general Contractual Right of Set-off. See P. 924-925.

Question 58

What is Insolvency Set-Off?

Answer 58

The mandatory and self-executing netting of an insolvent party’s liabilities pursuant to §323 IA and Rule 4.90 IR.

P. 931.

Notably, the labilities must be due at insolvency, arise from mutual dealings, and exhibit mutuality at the legal and beneficial levels. See P. 931-933.

Question 59

By when must a Security be Registered with Companies House?

Answer 59

21 days from the Day after Creation.

Failure to register before then voids the Security and renders the Debt immediately payable.

Form MR01.

P. 947-948; §859 CA.

Under §859, the appointment of a receiver must also be notified, but within only seven days.

In practice it will usually be the lender’s solicitors who will complete the registration formalities, as it is the lender who has most to lose in the event of non-registration.

Under s 859P CA 2006, a company must keep available for inspection a copy of every charge and a copy of every instrument that amends or varies any charge. Such copies may be certified copies rather than originals.

These documents must be kept at either the company’s registered office or such other location as is permitted under the Companies (Company Records) Regulations 2008 (s 859Q(2) CA 2006).

A company must inform Companies House of the place where such documents are available for inspection and of any changes to that place (s 859Q(3) CA 2006). These documents must be available for inspection by any creditor or member of the company free of charge and by any other person on payment of a prescribed fee (s 859Q(4) CA 2006). If a company refuses such inspection, then the court may order that the company allows an immediate inspection.

Under s 859Q(5) CA 2006, failure to comply with any of the above requirements will be an offence and the company (and every officer of the company who is in default) will be liable to a fine.

Question 60

Regarding Priority, what are the General Principles for sorting rank?

Answer 60

• One cannot confer a better estate than one possesses.
• Competing Equitable Interests where the equities are equal are ranked by timing.°
• A Later Interest will be subordinate to an Earlier Interest if the former’s holder is notified of the latter (Dearle v Hall notwithstanding).
• Bona fide purchasers for value ignorant of an Earlier Equitable Interest will nevertheless acquire a prevailing legal interest,°° unless the subject is a chose in action.°

P. 957.

° E Pfeiffer v Arbuthnot [1988] 1 WLR 150, at [161]-[163].
°° Pilcher v Rawlins (1872) LR 7 Ch App 259.

Question 61

Regarding Further Advances, how can an Earlier Interest Holder maintain its Priority over a Later Interest Holder?

Answer 61

By demonstrating that:
* It was unaware of the Later Interest.
* It is so entitled under an Inter-Creditor Agreement.
* It was obliged to make further advances under its security agreemnt.

P. 962; §94(3) Law of Property Act 1925.

Question 62

How may the Taker enforce its Security?

Answer 62

• Foreclosure.
• The power of sale.
• The right to take possession.
• Application of cash balances.
• Appropriation of financial collateral.

Question 63

What is Foreclosure?

Answer 63

A court-ordered extinguishment of the Giver’s equity of redemption, rendering the Taker:
* The unencumbered owner thereof; and
* Unable to further pursue the Giver for the secured debt.

P. 993; Silbeschildt v Schiott (1814) 3 Ves & B 45.

Foreclosure is only available for Legal Mortgages or Equitable Mortgages that may yet be perfected.

Question 64

What is the Commercial Utility of Foreclosure?

Answer 64

It provides certainty and finality.

Lecture Notes.

Question 65

For which Types of Security is Foreclosure available?

Answer 65

• Legal mortgages;° and
• Equitable mortgages that may yet be perfected.°°

P. 993.

° General Credit v Glegg (1883) 22 Ch D 549.
°°Perry v Partridge (1836) 6 LJ Ch 67.

Question 66

What is the Power of Sale?

Answer 66

The right to sell the asset to recover the debt, the nature of which differs for posessory and non-possessory security.

P. 995.

Question 67

How does the Power of Sale differ for Possessory and Non-Possessory Security?

Answer 67

• For Possessory Security, the right is inherent to the arrangement;° whereas
• For Non-Possessory Security, an express inclusion is advisable because no such right is necessarily implied.°°

P. 995-996.

° Pothonier v Dawson (1816) Holt 383.
°° Re Morritt (1886) 18 QBD 222.

Only Mortgages and Charges made by deed will include an implied Power of Sale. See §101(1)(i) – LPA 1925.

Question 68

What is the Commercial Utility of the Power of Sale?

Answer 68

It is timely, cost-effective, and provides greater control over the sale process relative to foreclosure.

Lecture Notes.

Question 69

What Duties does the Power of Sale beget?

Answer 69

The obligation to:
* Act in good faith;°
* Not sell to itself;°° and
* Obtain a proper price according to the asset’s true market value.°°°

P. 996-997.

° Downsview Nominees v First City [1993] AC 295.
°° Martinson v Clowes (1882) 21 ChD 857.
°°° Cuckmere Brick v Mutual Finance [1971] Ch 949.

Question 70

What is the Right to Take Possession?

Answer 70

The right to take unencumbered legal, and if possible physical, possession of the Security, pursuant to certain duties.

Lecture Notes.

Question 71

What Duties does the Right to Take Possession beget?

Answer 71

The obligation to:
* Protect and take reasonable care of the asset; while
* Maximally exploiting it without taking undue risk.

P. 995; Silven Properties v RBS [2003] EWCA 1409.

Question 72

For which Types of Security is the Right to Take Possession available?

Answer 72

All types, but only if express reference is made.

P. 995.

This is because the right is implied only for legal mortgages. See Western Bank v Schindler [1977] Ch 1.

Question 73

How is the Right to Take Possession distinct from Foreclosure?

Answer 73

The Right may be:
* Applied to all types of Security;
* Used for means other than a sale; and
* Exercised without court involvement;

Lecture Notes.

Question 74

What is the Commercial Utility of the Right to Take Possession?

Answer 74

It provides control over what is to be done with the asset.

Lecture Notes.

Question 75

What is the Application of Cash Balances?

Answer 75

If the asset is a bank account or a beneficial interest therein, it is the appropriation thereof.

P. 994; Re Bank of Credit [1998] AC 214.