Debts, Accounts and Policies
Certain types of assets are effectively legal claims, which can only be enforced by Court Action. A debt, insurance policy or bank account can be mortgaged by being assigned to the mortgagee as security. In order to complete the security, notice should be given to the debtor or the party who has the obligation to pay, who should in turn confirm and acknowledge such assignment.
Security over life policies, debts and investments may be taken, by way of an outright assignment to the mortgagee, 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 borrower’s right to redeem and to the duty to account to the borrower for surplus proceeds
An assignment and notice in writing is essential to give the assignee the right to sue and enforce the obligation in its own name. Failure to give notice does not render the assignment void. Instead, it means that it can only be enforced indirectly. The priority of assignments is determined by the date of notice to the debtor/covenanting party. Therefore, failure to give notice may cause priority to be lost, if a later assignment is notified first.
It is possible to create a fixed charge over monies due, such as accounts receivable (e.g. unpaid invoices). It is necessary that the borrower does not control the account and only makes withdrawals with the lender’s specific consent. It is often desirable for a lender to create a fixed charge over a borrower’s debtors as these may constitute a significant asset.
Many attempts to create a fixed charge over a receivable, leave the borrower with too much control, so that the such charges take effect if at all, as floating charges, with the consequent weaknesses and vulnerability. Certain Irish Revenue debts have priority over fixed charges over book debts.
A security assignment may be taken over rents receivable, in the same manner as over any debt or third party liability. A formal security assignment is the best way to procure effective security. The tenant should be notified to pay the rent to a nominated account. This can be a very effective security, in the case of an investment property.
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 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.
This is sometimes referred to as a flawed asset arrangement as it is not a true proprietary security. The account and a charge back over to the lender represent mutual contractual obligations.
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, when required.
Shares Legal Charge
A “legal” mortgage may be taken over shares by making a transfer of them to the mortgagee, subject to an agreement to re-transfer. The mortgagee will be registered as shareholder. It is not possible to note a mortgage on the register of shares of a company.
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.
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 Central Bank has granted certain exemptions in relation to acquisition by way of security in the normal course of its business.
Shares; Equitable Security
An “equitable” mortgage of shares can be taken by way of a transfer executed by the mortgagor, leaving the name of the transferee blank. The share certificate should also be delivered.
It is possible to give a company a stop notice that entitles the mortgagee to notice of an application to transfer and gives the mortgagee the opportunity to obtain a restraining order.
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 in secured by giving a “stop notice” to the company secretary. This prevents registration of transfers so as to secure the lender’s position.
There are very little limitations on what might be contained in a contract. Usually there are rights and obligations on the respective parties. One person’s rights are equivalent to the other person’s obligation. The obligations or rights “receivable” are often capable of assignment. This might comprise a right to payment or the right to require performance
The developer’s rights under a building contract and various associated contracts may be assigned by way of security to a bank. More commonly, the lender acquires direct rights that allow the lender or its nominee the option of assuming the rights and obligations of the borrower under the contracts.
Many contracts are not capable of assignment. There is a presumption that a contract may be assigned, unless it is expressed or implied otherwise. An assignment involves an outright transfer of the benefit of the contract. It is not possible to transfer the burdens or obligations under a contract. It is possible to subcontract their performance to a third party. However it is a fundamental principle that a person who has undertaken obligations cannot get rid of his obligations by transferring or assigning them.
A bank account is a debt owed by the bank to the customer. The customer does not “own” the deposit as such and it is not property. Rather it is a claim against the bank.
A debt, asset or receivable is mortgaged by assignment in writing followed by notice to the debtor. Certain difficulties arise with a charge over a deposit with the lender itself.
Generally, it is not possible to take a security charge over the mortgagee’s own debt (which is what the deposit is). There is a mechanism to avoid this difficulty and EU regulations have assisted and simplified this type of security.
The Policy of Insurance Act provides that an assignment of an insurance policy must be in writing, either by endorsing the policy or by a separate instrument. Written notice of the assignment must be given to the insurance company at their principal place of business. The company should acknowledge receipt of a notice.
A mortgage of an insurance policy takes the form of an assignment with a provision for re-assignment. The assignments take effect in order of notice.
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 of entity 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 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 capital markets 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 which are 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.
Financial collateral legislation III
Even where the regulations may apply, it may still be prudent to comply with the pre-existing formalities in case there may be doubt as to the scope of the regulations. It may also be desirable to publicly register the security arrangements from a practical notification perspective.
Certain insolvency rules do not apply under the regulations:
- insolvency restriction on enforcement or repossession;
- certain powers to deal;
- restriction on enforcement while insolvency 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 with the remedy to appropriate the financial collateral, without any order from the courts.
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 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. This may not always be the position in the case of security over non-property assets. See the conditions on 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 court for an order for 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 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, 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.
References and Sources
Modern law of personal property in England and Ireland 1989 Bell
Consumer Law Rights & Regulation 014 Donnelly & White
Commercial Law White 2012 2nd ed
Commercial & Economic Law in Ireland 2011 White
Commercial Law 2015 Forde 3rd ed
Irish Commercial Precedents (Looseleaf)
Commercial & Consumer Law: Annotated Statutes 2000 O’Reilly
Personal Property Law: Text and Materials 2000 Sarah Worthington
Personal Property Law (Clarendon Law Series) 2015 Michael Bridge
The Law of Personal Property 2017 Professor Michael Bridge and Prof. Louise Gullifer
The Principles of Personal Property Law 2017 Duncan Sheehan
Crossley Vaines on Personal Property 1967 by J C Vaines
The Law of Bills of Sale 2017 James Weir
Palmer on Bailment 2009 Norman Palmer
The Reform of UK Personal Property Security Law: Comparative Perspectives 2012 John de Lacy
The Law of Personal Property Security 2007 Hugh Beale and Michael Bridge