SECURED TRANSACTIONS Flashcards
Secured transaction
when a borrower gives the lender a right to take specific property (called collateral) if the borrower doesn’t repay the loan
Collateral security
if the borrower doesn’t repay, the lender can take and sell that item to get their money back
Secured vs Judgement vs Unsecured creditor
Secured creditor – has the right to take possession of and sell specified assets in satisfaction of a debt
Judgement creditor – has obtained a judgement and may obtain an execution order or writ authorizing seizure and sale of certain assets
Unsecured or general creditor – has no security, or right to seize, any of the debtor’s assets
Real Property vs Personal Property
Real Property – land and anything permanently affixed to it (fixtures)
Personal Property - anything that is not “real property”
Why Should a Creditor Take a Security Interest?
Encourages Repayment
Expands Lending Opportunities: It enables sales or loans to higher-risk borrowers
Protects Against Depreciation Risks: If the collateral maintains its value over time
Ideal for Long-Term Debts
When Should a Creditor not Take a Security Interest?
When the administrative and legal costs of enforcing security interests may outweigh the benefits for small or low-value transactions. In such cases, creditors might prefer unsecured credit with efficient risk management strategies.
Types of Security Interests
- Conditional Sales Contracts
- Chattel Mortgages
- Pledges
- Assignment of book Debts
- Floating Charges
Conditional Sales Contracts
Debtor in Possession, Creditor Retains Ownership
Repossession Upon Default: If the debtor stops paying, the creditor can repossess the goods.
Suing for Balance After Resale:
If the repossessed goods sell for less than what’s owed, the creditor can sue the debtor for the remaining balance.
Contracts Can Be Assigned:
Creditors often sell or transfer the contract to a third party, like a financing company, which then collects the payments.
Example: A customer purchases furniture on a “pay over time” plan. The seller can reclaim the furniture if payments are not made.
Chattel Mortgages
A mortgage on personal property (not land or real estate).
The borrower retains possession of the property but grants the creditor a legal interest in it.
If the borrower defaults, the creditor can seize and sell the property to recover the loan.
Example: A business owner uses their equipment as collateral for a loan.
After-acquired property
assets that the debtor does not yet own at the time of creating the security interest (e.g., a mortgage or loan agreement) but will acquire later.
Pledges
The debtor transfers possession of an asset to the creditor as security for the loan.
The creditor holds the pledged asset until the debt is repaid.
If the debtor defaults, the creditor can sell the asset.
Example: A pawn shop loan where jewelry is pledged as security.
Assignment of book Debts
A security interest in accounts receivable (money owed to the debtor by customers).
The debtor (e.g., a business) assigns its right to collect customer payments to the creditor.
The creditor uses the accounts receivable as collateral for the loan.
Example: A business borrows money and uses its outstanding invoices as security.
Floating Charges
A mortgage or security interest over all of a corporation’s current and future assets that are not already pledged to another creditor.
Unlike fixed charges, a floating charge allows the company to continue using the assets (e.g., inventory, equipment) in its operations until default occurs.
Upon default, the charge “crystallizes,” and the creditor gains the right to seize the assets.
Personal Property Security Act (PPSA)
- provincial, database
- a law in Ontario (and other provinces) that governs how security interests in personal property (movable goods, not land) are created, perfected, and enforced
Fundamentals of PPSA
- Define and standardize the remedies a secured party has against a defaulting debtor
- Create a system of registration records and give notice of all secured interests, and
- Set priorities between secured parties and general creditors
Steps of PPSA
(1) Creation of security Interest: Agreement between the parties;
(2) Attachment of a Security Interest: The moment in time when a debtor’s property becomes subject to a security interest;
(3) Perfection of the security interest: The moment in time when a creditor’s security interest becomes protected.
PPSA – Perfection 2 ways
(1) Where the secured party takes possession of the assets (e.g. bailment; pledge); or
(2) Once registration under the PPSA is complete.
Who registers a PPSA in Practice?
Manufacturers or wholesalers to other businesses: likely to register since high-risk business and likely to be other creditors with priority;
- Must maintain perfection if there are any changes / it expires.
Intangible property
- Personal Items of value that cannot be touched or physically held.
- Can be owned by either an individual or a corporation
- Examples: book debts, copyright, digital assets
What if two people have security over the same assets?
The law determines the priority (who gets paid first) based on specific rules under the Personal Property Security Act (PPSA) - Timing of Perfection
Timing of Perfection
The general rule is “first in time, first in right.”
Priority depends on when a security interest is perfected (usually by registration)
Special Priority for Purchase Money Security Interest (PMSI)
- gives a creditor priority for specific assets purchased with their loan, even if another creditor already has a general security interest.
A PMSI arises when a loan is used specifically to buy an asset (e.g., a car or equipment), and that asset becomes collateral for the loan.
The creditor providing the PMSI must register it within strict timelines (e.g., 15 days after the debtor receives possession of the asset).
Investment Property
- stocks/bonds, securities accounts, futures contracts or futures accounts.
- creditor can perfect by having “control” of the investment property, does not need to have physical possession (since they are often held in banks)
Bailment
refers to a legal relationship where the owner of personal property (the bailor) delivers it to another party (the bailee) without transferring ownership, with the understanding that the property will be returned or otherwise dealt with according to the owner’s instructions.
