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
Explain the law of notice of defaults.
Conveyancing and Feudal Reform (Scotland) Act 1970, s19 - A notice of default is used where the debtor is in default within the meaning of standard condition and have failed to comply with any requirement arising out of the security.
A notice of default gives the debtor one month to comply.
The primary obligation (i.e. the secured debt) is not a “requirement arising out of the security”.
True or False?
True.
Royal Bank of Scotland plc v Wilson - (Arrears and served an invalid notice of default).
A notice of default is to be used only for breach of the conditions in sch. 3 of the 1970 Act.
The obligation to repay the loan does not arise out of the security. The obligations to repay the debt arises from the agreement to borrow the money. The obligation to pay the debt would be there whether the security was there or not.
How does the process of sale work in the enforcement of standard securities?
The main remedy for the creditor is to sell the property.
- Conveyancing and Feudal Reform (Scotland) Act 1970, s25 - Obligation to obtain best price for the property.
- Conveyancing and Feudal Reform (Scotland) Act 1970, s27 - Distribution of proceeds of sale.
- Conveyancing and Feudal Reform (Scotland) Act 1970, s20 and 23 - whether the property is “used to any extent for residential purposes”
How does the enforcement of standard securities opperate for the sale of residential properties?
Conveyancing and Feudal Reform (Scotland) Act 1970, s20 and 23 - “used to any extent for residential purposes” inclusive of mixed use property.
The creditor may only sell if either the property is:
- voluntarily surrendered (s23)
or
- The court grants warrant to sell (s24)
- Before applying for warrant to sell, the creditor must comply with the requirements (s24)
If you are going to court as a creditor, you must communicate with the debtor regarding arrears.
How does the enforcement of standard securities opperate in granting applications of residential properties?
Conveyancing and Feudal Reform (Scotland) Act 1970, s24
The court may only grant the application if it is reasonable in the circumstances having regard to five factors:
- The nature of and reasons for the default
- The debtor’s ability to fulfil within a reasonable period the obligations under the standard security in respect of which the debtor is in default
- Any action taken by the creditor to assist the debtor to fulfil these obligations
… - The ability of the debtor and any other person residing at the security subjects to secure reasonable alternative accommodation
Other factor is not neccessary for module
How are the application factors of standard securities regarding residential properties weighted?
Not all of these factors are of equal weight.
Accord Mortgages Ltd v Cameron - Confirms most important factor is whether the debtor could repay within a reasonable period of time. If not there is no basis to refuse the sale.
This is because the creditor has the right to be paid.
Classify the types of real rights in security.
Pledge - Possessory - Voluntary - Corporeal moveables
Lien - Possessory - Involuntary - Corporeal moveables held by debtor
Hypothec - Non-possessory - Involuntary - Corporeal moveables on leased commercial property
Floating charge - Non-possessory - Voluntary - All company property
Standard security - Non-possessory - Voluntary - Heritible Property
