Security Interests

These are property rights that exist to make it more likely some obligation will be performed.

They fall into 3 main groups depending on what being held as security.

i) Pawn or pledge

Possession as security. Where the debtor transfers goods to creditor until debt is repaid. Issues = debtor has no use of assets and only tangible assets can be security.

ii) Title security

Title as security. Intangible assets can be used and debtor still has use of assets. Potential adverse consequence for third parties though.

iii) Encumberance

These confer on the creditor neither possession nor title but a right of recourse to the secured asset in event of a default. A form of this, equitable charges and liens, were developed by the court of chancery.

Tappenden v Artus – Artus hires van from Tappenden, breaks it, sends for repairs at Rayleigh Garage but doesn’t pay for repairs. Artus wants the van back and Rayleigh want payment for the repairs. Rayleigh entitled to payment as it’s held that the artificer was entitled to a common lien upon the van in respect of the repairs and he is entitled to enforce that lien against the bailor because of the authority he bestowed on the bailee.

Fixed charge... A fixed charge is defined in Agnew v Commissioner of Inland Revenue (where uncollected book debts were decided to be a fixed charge) as giving “the holder of the charge an immediate proprietary interest in the assets subject to the charge which binds all those into whose hands the assets may come with notice of the charge.

Floating charge... Re Yorkshire Woolcombers finds the distinctive feature to be “if you find that by the charge it is contemplated that, until some future step is taken by or on behalf of those interested in the charge, the company may carry on its business in the ordinary way as far as concerns the particular class of assets” – i.e. in a floating charge, business is not paralysed by debts.

Section 14 of the Companies act requires floating charges to be registered to protect vulnerable trade creditors

N.B. Strictly speaking, it is not possible to enforce a floating charge at all - the charge must first crystallise into a fixed charge. In the absence of any special provisions, a floating charge crystallises either upon the appointment of a receiver or upon the commencement of liquidation. It has also been suggested in obiter in Government Stocks and Securities Investments Co Ltd v Manila Rly Co

that a charge should also crystallise upon the company ceasing to trade as a going concern. However, this view is not yet supported by judicial authority.[

Clough Mill Ltd v Martin – Concerns a ‘retention of title’ or ‘romalpa’ clause – a way of securing a manufacturers debts to the supplier where raw materials are supplied to a manufacturer on credit. Lord Goff acknowledges that this field is heavily dependent on “the facts and issues before the court in question” meaning “we have to be careful in reading each decision”.

Mortgages

A debtor or mortgagor is the owner of the property who grants a mortgage to the bank

A debtee or mortgagee is the bank who receives.

The common law mortgage pertains to fee simple estates. The borrower has an equity of redemption, which is an interest in the land even though the mortgage is still being paid off. The right to redeem is the right to pay ff and regain full title o land, the right to redeem in equity is the same thing but even if the mortgage hasn’t been paid off, it can still be paid off with penalty fees and interest later. Equity of redemption is now the totality of the mortgagor’s beneficial ownership of land in equity. Equity in land is the economic value of beneficial ownership of the land which can be calculated by subtracting the mortgage debt from the value of the land.

In registered land the debtor retains the title in the land, the mortgage is registered as a legal charge against that title.

Nolan v MBF Investments

Australian case. Establishes that the mortgagor can’t prevent the mortgagee from exercising their right of sale, unless the mortgagor redeems (i.e. pays back the debt). The mortgagee has the first legal charge if the mortgagor is in default. If the mortgagee wants to exercise their right of sale they take possession, sell title to the buyer (as the mortgagee, who now no longer has the title, has power to cause the mortgagor’s title to move to the buyer). Until foreclosure, title remains with the mortgagor and if there is a surplus after the mortgagee pays himself out of the money given by the buyer it goes to the mortgagor. The equity of redemption of the mortgagor transfers from land to sale proceeds.

Four Maids v Dudley Marshall

The mortgagee wants to obtain payment, the mortgagor is disgruntled as he is not in default (missed a payment but made it up). Justice Harman’s decision, “mortgagee may go into possession before the ink is dry on the mortgage unless there is something in the contract, express or implied, whereby he has contracted himself out of that right” ie, the mortgagee has a legal term of years in the property or its statutory equivalent.

Roppaigealach v Barclays Bank

This case concerned the effect of s 36 of the Administration of Justice Act 1970 in a case where a mortgagee has taken possession of the mortgaged property by peaceable entry and without first obtaining an order of the court. It is found that Parliament cannot have intended that the mortgagees common law right to take possession by virtue of his estate should only be exercisable with the assistance of the court and what parliament was concerned with was restoring the position to what it had been thought to be before the decision of Birmingham Citizens Permanent Building Society v Caunt that which had put an end to a practice under which mortgage possession summonses were adjourned to give the mortgagor an opportunity to pay by instalments. It had intended to restore the position to what it had previously been thought to be; it had not addressed its mind to the question whether the mortgagor required protection against the mortgagee who took possession without the assistance of the court.

Palk v Mortgage Services Funding

Mortgagee wants to lease property, mortgagor wants to sell property. In the judgement a sale was ordered, the mortgagees could make an offer at the market price. The mortgagee has a duty to be fair and act in good faith and not to use its right to possession to speculate at the expense of a mortgagor. A mortgagee can’t buy property from itself unless the sale is authorised by a court.

Silven Properties v RBS

The mortgagee may also have a power to appoint a receiver to take over the mortgagor’s property in the event of default. The receiver conceived as mortgagor’s agent. The receiver will act as the mortgagor’s agent and the mortgagor can complain that the receiver did not act in his best interest. The mortgagor complains that the house was ‘undervalued’ even though the house was sold at market value, the receivers didn’t proceed with plans for development (due to planning approval). Held that the mortgagee has a power of sale, has to get a reasonable price, but doesn’t have to do anything to improve the property. The receiver has to take an active interest, though an active step does not include the active improvement of the property.