Security over Goods

General

It is possible to mortgage or charge movable goods. However, the Bill of Sales Acts impose severe practical restrictions on the grant of security by an individual over goods.  A written mortgage or charge of goods must be registered within strict time limits. The requirement for registration is designed to protect against the risk that a person with apparent possession and ownership of goods, may give a false impression of his wealth and solvency.

The Bill of Sales legislation applies when security is created by an individual over moveable items where the individual granting the security retains possession of them. The security is void unless the Act is complied with. The security document must be executed, verified by an affidavit and the contract must be registered in the High Court within seven days. It must be renewed every five year.  Details of each item must be set out.

The Bill of Sales legislation has a profound effect on the manner in which security is created over goods. There are considerable challenges in complying with the relevant legislation in the case of charges over goods by individuals. The particulars of the charge must be registered in detail, within 7 days in the High Court Offices. In practice, this is usually unduly onerous.


Security Avoiding Bill of Sales Acts

The Bill of Sales legislation  does not apply to security created by operation of law or created without a written document.Several forms of security over goods have evolved so as to avoid the complexities rigidities and impracticalities of the Bill of Sales legislation. They include credit sale agreements with the seller “retaining” title, leasing and hire purchase arrangements.

Retention of title is not strictly a security, but an arrangement under which title does not pass until payment is made. These arrangements are not subject to the Bill of Sales Acts because the borrower does not become owner, at least until after the completion of the finance agreement.

The Bill of Sales legislation does not apply security where the creditor retains possession of the goods such as pledges, pawns and certain liens. A pledge gives a creditor the right to retain possession of the secured asset until the debt had been paid.

A lien is a right to retain property until a debt is paid. An example is a mechanic’s lien over a vehicle that has been repaired.


Mortgage of Movables

A mortgage of movables is subject to the same principles as that of real property. The Conveyancing and Law of Property Act provisions regarding implied powers of sale in the case of an instrument executed as a deed, apply.

Where the transaction is subject to the Bill of Sales Act, as in the case of most written mortgages of goods by individuals, the terms of the Act will govern the position. A mortgage of movables may be made verbally, and be therefore outside of the Act.

A mortgage of a chose in action may be by deposit of title documents, such as shares with a blank transfer. The mortgagee has the powers of a mortgagee of land in the case of an instrument by deed.

A pledge is distinct from a mortgage as there is transfer of possession without title to the mortgagee.


Manufacturing and Retention of Title

Difficult questions may arise in relation to retention of title and manufacturing. If goods change their nature or identity, then an agreement for the grant of security in the substituted goods may require to be registered as a bill of sale or in the Companies Registration Office.  It would be void for failure to register against a liquidator and creditors if the arrangement is interpreted to constitute a charge over the new asset.

A person who creates goods by a civil wrong will usually be precluded from acquiring title to them. The predominant view is that where the underlying materials are owned by a single person, that person will retain ownership.  An alternative view is that the manufacturer owns the goods, but that he is liable in trespass or conversion for the wrongful use of the raw material.

If goods change their nature or identity, then an agreement for the grant of security in the substituted goods may require to be registered as a bill of sale or in the Companies Registration Office.  It would be void for failure to register against a liquidator and creditors if the arrangement is interpreted to constitute a charge over the new asset.


Non-Possessory Security in Goods

A mortgage of goods involves the vesting of title to the goods in the mortgagee, subject to a right of redemption. A legal mortgage over an asset is created by the transfer of the asset concerned to the mortgagee in accordance with a particular mode of transfer applicable to the type of property involved.

In the case of land, the transfer of title requires a conveyance or transfer, which is executed as a deed and (in the case of registered title) perfected by registration.  A mortgage may not be granted in respect of land after 1st December 2009. It must be created by way of legal charge.

In the case of goods, a transfer of title takes place when it is intended by the parties. It may pass under the express or implied terms of a contract or on the delivery of the goods with the requisite intention. It need not be by way of a document.


Enforcement of Charge

A charge creates a security interest in the goods in favour of the chargee. It grants the chargee, the right to have the charged asset sold in order to satisfy an obligation in money or monies’ worth. A charge creates a right of recourse to the secured asset, which may be realised as security for a sum of money or monies worth.

A charge can be enforced by way of an application to the court for an order for sale or the appointment of a receiver.  If the mortgage or charge is by deed, there may be a statutory power of sale and power to appoint a receiver. Commonly, the mortgage or charge deed itself will make provision for such powers.


Equitable Mortgages / Security

An equitable mortgage arises where a beneficiary under a trust or a person having an equitable interest in property assigns his equitable interest in the assets by way of security.  In the case of land / premises, an assignment or other disposition of an equitable interest must be in writing.  In the case of goods, a verbal mortgage can (in principle) take place, in the same informal way that title (ownership) to goods may pass.

An equitable mortgage may also be created where there is a contract to create a mortgage which is not completed by transfer of the legal interest.  This may occur where monies are advanced under a loan agreement, which provides for security.  The borrower has agreed to provide the security, and therefore equity regards that which “should be done as done”.

Equitable mortgages may arise where the title documents to property are deposited with the secured party, with the intention of creating security.  Title documents do not generally exist in relation to goods.  A security interest can be created in respect of goods, by a pledge of a bill of lading relating to the goods.


Registration

In the case of an individual, the creation of a security interest in goods is regulated and effectively restricted by the Bill of Sales Act.  The Bill of Sales act applies only to movables, or more correctly, personal chattels.  The legislation does not apply to mortgages over certain farm equipment and stock. They are subject to separate registration requirements under the Agricultural Credit Act.  It does not apply to mortgages over ships and aeroplanes, which are also subject to other legislation dealing with registration.

The Act applies both to the creation of security interests and to transfers of goods without the transfer of possession.  If a bill of sale is not registered, the security is unenforceable.  The debt remains valid against the individual concerned, but not against the security and third parties. Registration must be undertaken within seven days.  It must be renewed every five years if required.

In the case of a company, a document which would have to be registered as a bill of sale if granted by an individual must be registered in the Companies Registration Office within 21 days.  See the sections on company security.  The bills of sales legislation do not apply to security granted by a company.


Bills of Sale

A bill of sale is a written instrument by which movable goods or items are transferred.  The bill of sales legislation applies to two different types of transactions.  The first type is a transfer of ownership without a transfer of possession.  The second type comprises the grant of security.

The Bill of Sales legislation applies to individuals and does not apply to companies. It applies to tangible movable items.  Transfers in the ordinary course of business are not covered by the legislation. The legislation applies to documents.  Purely verbal transactions are not caught.

Where an arrangement is in substance a security transaction, then it can be characterised as such and must, therefore, be registered irrespective of how it is described.  For example, a purported sale with a right of re-conveyance upon payment may be interpreted as a security arrangement.  This may, therefore, be void unless registered in accordance with the legislation.


Form and Content of Bill of Sale

The form of bill of sale by way of security is prescribed. The format must be followed in full.  This includes the name, the description of the parties, the consideration, the repayment details, the obligations in relation to maintenance and the terms of enforcement.  The failure to use a statutory form or to validly complete it invalidates the security.

A schedule of the secured assets concerned must be attached to the prescribed form, and each must be described specifically.  If a good or chattel is not properly described, the security will be ineffective in relation to it.  A proper description must be given.  The bill must be attested by a witness.

A power to seize chattels (goods) may be exercised in limited circumstances only.

  • if the debtor is in default;
  • if that debtor becomes bankrupt or his goods are distrained;
  • if he fraudulently removes goods from an agreed premise;
  • if he fails to comply with a written request for the last receipt for rent, rates and taxes;
  • if execution is levied against his goods;

Goods must not be removed for five days, during which time, the debtor may apply to the court for relief.  This may be granted if the debtor is capable of rectifying the above.


Registration of Bill of Sale

A bill of sale given by an individual must be registered within seven days.  Registration must be renewed every five years. The authenticity of the bill must be attested by a witness. If it is not registered, the security is unenforceable. The other terms of the agreement remain. The legislation prescribes a particular format.  It provides in a schedule to the Act, the form of words to be used and particulars to be inserted. The legislation limits the circumstances in which personal chattels may be seized.

The information required to be completed includes the names and addresses of the debtor and creditor, the consideration, details of interest, the time and manner of payment, various obligations and the terms of enforcement. The creditor can recover principal money lent together with interest at 5%.

A schedule of chattels must be annexed to the registered form, describing each specifically. The failure to describe the items renders the bill void in relation to third parties.   Apart from the practical difficulties of compliance with the Bill of Sales Act, a charge over future goods, which a person does not yet own, is ineffective against creditors in the event of later bankruptcy

The legislation need not be 100% complied with; small variations are permissible. However, any substantial difference may make registration void. If the legislation is not complied with, both the security and loan are void against all persons.


Companies

The Bill of Sales Acts do not apply to companies. Company charges must be registered in the Companies Registration Office within 21 days. The legislation in relation to company security is much more facilitative than the Bill of Sales Act, in relation to the creation of security over goods.

Companies may create fixed or floating charges over their present and future goods. A floating charge by a company is a charge over a circulating category of assets, usually the company’s working capital. The purpose of a floating charge is to allow the borrower to continue to deal with the assets in the course of its trade. The assets within the scope of the charge may include stock, debts, movables and other circulating assets.

A floating charge takes effect on a future event.  It crystallises on things within its scope at the relevant date.  Pending “crystallisation”, the chargor is free to dispose of the property. In contrast, a chargor is not free to dispose of goods subject which are subject to a fixed charge, without the chargee’s consent.  The floating charge no longer applies once the property is sold, unless the charge has first crystallised.


References and Sources

Irish Texts
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
UK Texts
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 BridgeCases