The method of enforcement of security will depend on the type of asset and on whether there is a written document setting out the terms of the security and dealing with enforcement. A court order may be required to sell and realise certain types of asset and in certain circumstances where the security has not been completed.
Some types of security assignment involve an outright transfer of ownership of the secured asset, subject to the borrower’s right to redeem. This transfer of ownership means that mortgagee already has title and ownership. It is possible to apply to the court for a declaration that the borrower’s right to redeem has terminated. This is a so-called “foreclosure action”. This is rarely necessary or undertaken as there are usually other powers of sale available which effectively extinguish the borrower’s right to redeem by converting it to an entitlement to surplus proceeds of sale (if any).
The statutory power of sale and power to appoint a receiver in the Conveyancing Act which applies to security over land and buildings may equally apply to other assets. The original security document must have been executed as a deed, which may not always be the position in relation to security over non-property assets. See the conditions on the exercise of these powers in our chapters on receivers and the statutory power of sale.
A chargor has a right of recourse to the charged property. He can enforce this right by applying to the court for an order of sale or appointment of a receiver. The document creating the charge may expressly or by implication, provide for a power of sale and power to appoint a receiver, in which case a court application will not generally be required. A charge by way of a mortgage created by deed over assets allows for the statutory power of sale and power to appoint a receiver. See our separate chapters on these topics.
Consumer Credit Act Issues
In the case of security over non-real property (i.e. other than buildings and land) the and Consumer Credit Acts should be considered. See our chapter on the Consumer Credit Act in relation to the restrictions on enforcement that apply to non-housing loan consumer credit agreements. Many of the more restrictive provisions of the Act do not apply to housing loans to consumers. The Act may apply where there is a loan agreement with a consumer which is not a housing loan.
Under the Consumer Credit Act, a prior notice specifying the breach is required in advance of enforcement action being taken in relation to a non-housing consumer loan. The nature of the breach must be specified. It must be specified what action the debtor should take to remedy the breach and give a date and time by which remedial action is to be carried out. If the breach is remedied and the lender is compensated, then the breach is treated as never having occurred. Court Action is required for enforcement.
Policies, Debts, and Investments
Security over life policies, debts and investments may take place, by way of an outright assignment subject to the right of the borrower to redeem. The lender will take title to the asset provided the required notice is given and acknowledged. The lender is entitled to the asset in default, subject to the duty to account to the borrower for surplus proceeds.
In the case of security over debt, insurance policies and equivalent “receivables”, priority is determined by the order in which the debtor/insurance company/bank receives notice of the security assignment.
If the security was created by a deed, the statutory power of sale will generally be available. If this is not the case, there will usually be an implied right to sell when shares and investments are transferred by way of security.
A second charge over a life policy, shares or investment is an equitable charge over the net surplus proceeds of realisation. This may require legal action to enforce.
In the case of certain types of asset, the appointment of a receiver either under an express or implied power may be the most appropriate means to enforce. For example, security of over an interest in a business or partnership is best is usually best effected by the appointment of a receiver.
Debt with Lender
A security over an account (in effect a debt to the borrower) with the lender usually operates as an agreement for set off of the mutual sums owed by the borrower and lender to each other. There is an entitlement to set off provided certain conditions are met.
The conditions may not be met in the case of certain accounts such as a term deposit (because it is not immediately due). A letter of set off modifies the terms so that the set off automatically arises
A legal mortgage of shares where the transfer is reflected in the company register of members gives the lender ownership of the shares, subject to the mortgagee’s right to redeem. In this case, there is usually an express or implied power of sale.
It is more common for the lender to take an equitable charge over shares. The lender is not written up in the company’s books as owner. Instead, the borrower signs a share transfer form in blank and gives the lender a power of attorney to allow a sale. This position is secured by giving a “stop notice” to the company secretary. This prevents registration of transfers so as to secure the lender’s position.
Where shares are transferred by way of security and the transferee’s name is registered, there is an implied power of sale in default of payment. If no time is fixed for payment, reasonable notice must be given before the power is exercised. The same principle applies to a transfer in blank, together with delivery of the share certificates.
There may be issues for regulated institutions in acquiring voting rights and shares. The Financial Regulator has granted certain exemptions in relation to acquisition by way of security in the normal course of its business.
In the case of pledged goods, possession and control of the goods must be taken by the security holder. This may be done by taking actual custody of the goods or by a warehouse keeper or an equivalent custodian of the goods, giving a receipt or trust to the effect that he holds the goods for the security holder.
The holder of a pledge (a pledgee) has an implied power of sale, this good may be sold by the pledgee, even though the title remains with the pledgor (also spelled pledgeor). The right to sell may only be exercised after the pledgee’s failure to satisfy the secured debt. A pledgor has right to sell goods if payment is not forthcoming on the stated day. If there is no stated day, payment must be made within a reasonable time.
The pledgor may sell without court assistance but the seller must exercise due care to account to the pledgor for surplus monies, stock etc.
No particular method of sale is required. The sale must be at arm’s length and for a reasonable price. The pledgee must appropriate the proceeds of the sale to the debt and must account to the pledgor for the surplus proceeds. If the sale fails to realise the amount of the debt, the pledgor may sue to recover the balance of the underlying debt.
A pawn is a pledge of goods with a pawnbroker. Pawnbrokers must be licensed. It is an offence to carry on a pawn business without a licence. The business is subject to certain regulatory requirements. An opportunity must be given to redeem the pawn before resort may be had to enforcement.
There are requirements in relation to pawnbroker’s sales. Certain records must be kept, prior notices must be published and certain procedures must be followed. Every auction of pawnbrokers’ pledges shall be conducted by an auctioneer approved under the legislation and must be conducted in the premises of the auctioneer conducting the auction. The auction of pawnbrokers’ pledges shall be conducted in accordance with certain regulations in the legislation.
The auctioneer must insert in a public newspaper circulating in the area in which the pawnbroker’s premises are situated an advertisement giving notice of the sale and stating certain details. The auctioneer must cause all pledges to be exposed to public view.
The auctioneer must, within fourteen days after the sale, deliver to the pawnbroker a copy of the catalogue, or of so much thereof as relates to the pledges of that pawnbroker, filled up with the amounts for which the pledges of that pawnbroker were sold, and the copy shall be authenticated by the signature of the auctioneer. The pawnbroker shall preserve the catalogue for at least twelve months after the auction.
Bill of Sale
A bill of sale, which is a mortgage of goods, where the borrower retains possession is rarely given in practice, because of the difficulties of compliance with the Bill of Sale legislation. Most security over goods involves an exception to the bill of sales legislation. This includes leasing and hire purchase arrangements, retention of title by a seller (where the borrower never becomes an owner in the first place) and a pledge, which involves custody of the security being retained by the lender. Companies are not subject to the Bill of Sales legislation.
Where a bill of sale is taken, enforcement is only permitted in limited circumstances. These include where the borrower has defaulted
- on repayment of monies due;
- on the performance of covenants in the bill;
- the borrower has removed the gods are allowed them to be removed;
The lender may take possession of the goods, if the borrower has become bankrupt or if there has been enforcement against the goods.
Questions of priority of the bill of sale depends and the order of registration. Generally, a bill of sale may only be granted over goods in being at that time.
Financial Collateral Legislation I
EU legislation facilitates enforcement of certain types of financial security. The regulations apply to so-called “financial collateral” arrangements. The vast majority of these arrangements are found in the financial services sector, at which the legislation is primarily aimed. The regulations may also operate to validate and simplify procedures in respect of certain types of securities, which may be offered as collateral security in mortgage lending.
The arrangement must be in writing. Neither the collateral provider or taker may be an individual person. The collateral taker must fall within certain categories which includes certain financial institutions.
A financial collateral arrangement is one in which the security interest is given over financial collateral, where the financial collateral is in the possession or under the control of the collateral taker (mortgagee). A security interest under the regulations may be a charge, pledge or mortgage. It also includes a title transfer where the ownership of the collateral is transferred on the basis that the collateral or its equivalent will be returned on the discharge of the obligation.
Financial Collateral Legislation II
The regulations apply only to certain types of secured assets. The security may include cash, money credited to an account, equities, debt instruments that are negotiable on the capital market and various other types of securities. Ireland has exercised an option under EU law to exclude shares in a company the purpose of which is to own either the means of production or which are essential for the collateral provider’s business or real property. Many other shares and marketable securities qualify.
Where the regulations apply, various legal formalities normally required in creating the security and that otherwise would apply, are dispensed with. The purpose is to facilitate security taking. The formalities dispensed with include the following requirements;
- that the creation or transferor must be in writing;
- any requirement for companies office registration.
As a result of the modifications, the only requirements usually are that the financial collateral arrangement should be in writing, and where applicable, that notice is to be given to the third party with the obligation representing the asset.
Even where the regulations may apply, it may still be prudent to comply with the pre-existing formalities that there may be doubt as to the scope of their regulations. It may also be desirable to publicly register the security arrangements.
Financial Collateral Legislation II
Certain insolvency rules do not apply under the regulations
- insolvency restriction on enforcement or repossession;
- administrator’s powers to deal;
- restriction on enforcement while administration pending or in being.
The rules on set off in winding up are eased.
The holder of financial collateral is given the right to use and dispose of the current financial collateral, under certain circumstances. The financial collateral must be replaced with equivalent collateral.
Where a financial collateral arrangement is a legal or equitable mortgage, the Regulations provide the collateral-taker under the arrangement with the remedy to appropriate the financial collateral without any order from the courts.
References and Sources
Breslin Banking law + Supplement 3rd Ed 2013
Mortgages Law & Practice Maddox 2nd Ed 2017
NAMA Act 2009: A Reference Guide Raghallaigh, Kennedy, Whelan
Money Laundering & Anti-Terrorist Financing Act 2010
Financial & Emergency Provision Legislation Annotated 2011
Shelley & McGrath National Asset Management Agency Act Annotated 2011
Dodd & Carroll Law Relating to NAMA 2012 0
Ashe & Reid Anti-Money Laundering: Risks, Governance & Compliance 2013
Johnston & Ors Arthur Cox Banking Law Handbook 2007
Dr Mary Donnelly The Law of Credit and Security, 2nd Ed, 2015
A Hudson The Law of Finance 2nd Ed (Sweet and Maxwell 2013)
Veil (Ed) European capital markets law (Hart Publishing 2013)
IG MacNeil An Introduction to the Law on Financial Investment 2nd Ed ( Hart Publishing 2012)
E Ferran Principles of Corporate Finance 2nd Ed ( OUP 2014)
Gullifer (ed) Goode and Gullifer on legal problems of credit and security (6th edn Sweet and Maxwell London 2017).
MA Clarke et al (eds) Commercial Law: Text, Cases and Materials (5th edn OUP Oxford 2017)
McKendrick (ed) Goode on commercial law (5th edn Penguin London 2017)
G McCormack Secured credit under English and American law (CUP Cambridge 2004)
L Gullifer and J Payne Corporate Finance (2nd edn Hart Oxford 2015)
D Sheehan The Principles of Personal Property Law (2nd edn Hart Oxford 2017)
Ross Cranston, Emilios Avgouleas, Kristin van Zwieten, Christopher Hare, and Theodor van Sante Principles of Banking Law 3rd Ed 2018
E.P. Ellinger, E. Lomnicka, and C. Hare Ellinger’s Modern Banking Law 5th Ed 2011
Andrew Haynes The Law Relating to International Banking Bloomsbury Professional 2009
Charles Proctor Mann on the Legal Aspect of Money 7th Ed 2012
Charles Proctor The Law and Practice of International Banking 2nd Ed 2015
Sheelagh McCracken The Banker’s Remedy of Set-Off 2010 Bloomsbury Professional
Louise Gullifer, Jennifer Payne Banking & Financial Law 2018
Hubert Picarda QC The Law Relating to Receivers, Managers and Administrators 4th Ed 2006 5th Ed 2019
Lightman & Moss on the Law of Administrators and Receivers of Companies 6th Ed Sweet & Maxwell 2017
Timothy N Parsons Lingard’s Bank Security Documents 6th Ed 2015