Secured Transactions Flashcards
What is a Secured Transaction
- Definition: generally, a loan (or credit) whereby the lender acquires a “security” interest in collateral owned by the borrower and is entitled to foreclose on or repossess the collateral in the event of the borrower’s default
- Do not pay the loan, the asset is secured and can be sold by the bank
- Example – mortgage is a secure transaction
- Bank gives you a loan, also required to pay interest, and the principal of the loan, if you fail to pay one month the bank can exercise their security interest, take ownership and sell the house
Collateral Secuirty
an interest in property of a debtor that gives a creditor the right to seize and sell it in the event of non-payment of debt
Parties:
Creditor: bank
Debitor: person who needs the loan
Personal Property
- anything that is not “real property” (i.e land/ homes)
- No land, home, or anything attached to the home
- Ex of personal property – inventory, machinery, furniture
Real Property
the land and the home
Real Property
the land and the home
When does a creditor want to take security interest?
- Whenever it is practical to do so. Some factors to consider:
- It provides an incentive to debtor to pay
- When goods maintain their value, then those goods are good security against a loan
- Better for long term debt since it lowers long-term risk
Business Risk Managment:
If credit amounts are small, it may be better to “write off” a small percentage of bad debt than enforce a security
General creditor
creditor with no security interest
Judgement creditor
can obtain execution order to seize property
Secured creditor
does not need a judgement to realize on its security
These all have priority over unsecured creditors
Creating a Security Interest
- Created by agreement between the parties, types of security contracts
- Conditional sales contract
- Chattel mortgage
- Floating chargers
Conditional Sales Contracts
- Similar to a lease:
- Debtor in possession of the good, but ownership remains with the creditor
Ex – a car lease, the owner still owns the car, you just possess it, but have the right to purchase it in the end - Creditor has the right to repossess the goods upon default
- Creditor has the right to sue for balance outstanding after resale of goods
Chattel Mortagages
- A mortgage of personal property
- Chattel is another word for personal property (laptop, car, etc.)
- Ex – financing a car, you own the car and possess it
If you fail to pay – the dealer has security over the car, can take it back, and sell it
Chattel Mortagages parties
mortgagor (debtor) and Mortagee (creditor)
Chattel Mortagages Arises in 2 ways
- Mortgagor purchases property and vendor “takes back” a mortgage
- Sell you the property (or equipment) and then take back the security interest in the goods
- Mortgagor already owns property and gives mortgagee a mortgage against it to secure a debt
Example: Equipment in buildings
- Mortgagee can hold 2 mortgages:
- Traditional mortgage on the land/ building and its fixtures
- Chattel mortgage on the equipment in the building
- After- acquired property:
(i.e. property that is not in existence at the time the mortgage is created)
Often used in inventory in a business (always changing)
- Does not transfer title to specific goods to the creditor, allowing purchasers to obtain good title in ordinary course of business
- Creditor holds a suspended priority over other creditors
- Getting a loan today and then acquiring the property that is being used as secutirty
Floating Charges
- A form of mortagage on all of the assets of a corporation other than those already specifically charged
- Security over all the inventory of the business since it is constantly changing so you need to float over the inventory (or assets)
- Items on the balance sheet are constantly changing so no matter what security always covers it
Personal Property Security Act (PPSA)
- Each province has its own act since it is the jurisduction of the provinces (not the federal government)
- Registration system, where the security interest gets registered
Steps of PPSA
(1) Creation of Security Interest: agreement between the parties
Entering into a contract - the security agreement
(2) Attachment of a Secuirty Interest: the moment in time when a debtor’s property becomes subject to a security interest
Property acquired after, attachment occurs at the time the product is acquired
(3) Perfection of the Security Interest: the moment in time when a creditor’s security interest becomes protected
Perfect a security interest by registering it under PPSA
PPSA Perfection in two ways:
(1) where the secured party takes possession of the assets (e.g. bailment; pledge) or conditional sales contract
(2) once registered under the PPSA is complete
