International Secured Transactions Law

Facilitation of Credit and International Conventions and Instruments

Orkun Akseli

• Publisher: Routledge
• Year: 2011
• Print ISBN: 9780415813525
• eBook ISBN: 9781136830556
• Edition: 1
• Topic: Economics
• Subtopic: International Economics
• Index: Economics

This book focuses on international harmonisation and the law of secured transactions by distilling and analysing the unifying principles of various significant international conventions and instruments such as the UN Convention on the Assignment of Receivables, the Unidroit Convention on International Factoring, the EBRD Model Law on Secured Transactions, the Unidroit Convention on the International Interests in Mobile Equipment and the UNCITRAL Legislative Guide on Secured Transactions.

International secured transactions conventions and instruments facilitate credit and promote economic activity through the creation of harmonised rules. Therefore, given the increasing globalisation of markets, international reform efforts for the harmonised modernisation of secured transactions law have gained pace over recent years. International Secured Transactions Law draws on experiences in both English and US laws in order to identify and illustrate the existing problems that need to be addressed, as well as identify potential solutions.

International Secured Transactions Law will be of interest to scholars, students interested in international commercial law, corporate law or comparative secured transactions, and practitioners involved in international commercial transactions.

1 Secured credit and fundamental principles of international instruments

1.1 Introduction

Taking security is critical and international formulating agencies, as well as multilateral financial organisations, have expressed interest in the topic in the last four decades by taking active part in the preparation and promotion of instruments to harmonise and modernise the law in that area. Taking security is crucial for banks and financiers that prefer to lend with a minimal risk. Security is also important for businesses to expand their investments and economic growth. Fundamental principles of international instruments illustrate the significance of secured credit and access to credit. Certainty and predictability in secured transactions law are two key words (although often used interchangeably) that underlie the fundamental principles.

This chapter will first, define and describe practices covered by international instruments. Second, the significance and rationale of secured lending will be discussed. Third, fundamental principles of international instruments will be examined. Fundamental principles provide an optimal lens through which to examine how law should support access to credit and lower the cost of credit. It is a known fact that security plays a significant role in lending decisions. The recurrent theme is that taking security is important and the law should have means to support taking security for the facilitation of credit and sustainable investment.

1.2 Defining secured transactions, security interests and assignment of receivables

1.2.1 Secured transactions

The term ‘secured transactions’ can be defined as transactions that create security interests, or it refers to security over property as opposed to a personal security.¹ Although the Guide indicates that ‘there is no universally accepted definition of secured transactions law’,² it defines ‘secured transaction’ as a transaction that creates a security right. This term under the Guide also covers outright transfers of a receivable subject to enforcement exception, although outright transfers do not secure the performance of an obligation.³ Dahan defines secured transactions as follows:

an agreement – usually accessory to a credit agreement, present or past – which grants the creditor a right relating to property, the purpose of which is to improve the creditor’s chance of getting paid or of receiving whatever else the debtor is required to do by way of performance of the contract … Such security may be possessory, where the creditor takes the possession of the subject matter of the security, or non-possessory.⁴

In Canada it is more common to address this area of law as ‘personal property security’ and in England it is more common to refer to ‘the law of credit and security’. ‘Security over personal property’ is the proper basis in this study and it can be defined as a ‘property right granted … by the principal debtor itself in its own assets; [and] its peculiar feature is the fact that it conveys with respect to the charged assets, a privileged position to the secured creditor’.⁵

A real security can be granted by both the debtor of the secured obligation and a third party who is not personally obliged to the creditor. There can be security over tangibles and intangibles such as book debts.⁶ The former can be constituted as a pledge where the creditor holds possession of the tangible collateral,⁷ or by the debtor where the collateral is registered in a specialised registry such as a motor vehicles registry and the debtor continues to enjoy possession while granting security, and the latter can be in certain historical forms such as pledge, charge and mortgage or as an assignment. ‘Secured credit’ can be defined as a type of credit that is granted with security, which may be personal or proprietary.⁸ The creditor takes security to reduce the risk of not being paid, and the cost of utilisation of his money is lower for a secured than for an unsecured credit.⁹ It is arguable that secured credit increases the opportunities for lending.

1.2.2 Security interest

A ‘security interest’ is defined in the UCC terminology as ‘an interest in personal property or fixtures which secures payment or performance of an obligation’.¹⁰ Under the UCC Article 9 there is unification for all security interests. The so-called ‘substance over form’ approach provides that the substance of the transaction has more importance than the form, and thus all transactions that serve security functions are classed as security interests notwithstanding their forms.¹¹ This is clearly echoed in the Comment to the UCC §9–109: ‘when a security interest is created, this Article applies regardless of the form of transaction or the name that parties have given to it’.¹² UCC §9–109 expands the scope of coverage of UCC Article 9 to include not only sales of accounts and chattel paper, but also sales of payment intangibles and promissory notes.¹³ Under UCC Article 9, transfers of an interest in accounts and chattel paper (whether or not a transfer for security or sale) must be perfected by filing. UCC Article 9 extends to cover sales of accounts only in order to apply notice filing; however, this does not convert the transaction into a security transaction. UCC Article 9 treats assignments by way of security and by way of sale more or less the same for purposes of perfection (that is, filing or registration) and priorities, but differently for enforcement purposes (generally speaking the buyer has no responsibility to return surplus to the seller).

In English legal terminology it is more common to refer to ‘charge’.¹⁴ However, due to fragmentation (traditional/quasi-security distinction), there is no general concept of security interest as it is understood under UCC Article 9, and it is more appropriate to distinguish as possessory and non-possessory security.¹⁵ Further classification of rights may be made as legal and equitable, possessory and non-possessory, and consensual and non-consensual security.¹⁶ A charge can be used in different ways where it can be a fixed or floating charge if it is used to refer to a specific legal instrument, or it is used to refer to all types of security interests. Under English law, a charge is a right of recourse against property to guarantee the payment of money due or the performance of some other obligation, and is a consensual security right according to which the chargor (debtor) retains possession of the asset used as collateral and established by agreement concluded between the chargor and chargee.¹⁷ A floating charge does not attach to a specific asset, and permits the debtor to continue his ordinary business without the approval of the creditor and collect the debts for his own exclusive use until the occurrence of a future event, which limits the debtor’s power to freely dispose of the charged property.¹⁸ Upon occurrence of a future event, the floating charge will be crystallised and converted into a fixed charge. A fixed charge attaches to a specific asset upon either creation of a charge or acquisition of the asset by the company.¹⁹

English law does not provide a statutory definition of security. In Re Paramount Airways Ltd.²⁰ security was defined as follows: ‘security is created where a person (the creditor) obtains rights exercisable against some property in which the debtor has an interest in order to enforce the discharge of the debtor’s obligation to the creditor.’²¹ However, this definition is not comprehensive as it does not recognise the fact that security can be granted by a third party. A far-reaching definition is provided by Professor Goode: ‘a security interest is a right given to one party in the asset of another party to secure payment or performance by that other party or by a third party.’²² A security interest is a right in rem that can be granted, by the debtor who owns the property, to the creditor who grants credit on a secured basis. Thus, in order to create a security interest, ownership of the property that serves as collateral is crucial and must be acquired either before the creation or the attachment of security interest.²³ In that context, it is not possible to create a security interest by retention-of-title.²⁴ Under English law there is ‘fragmentation’,²⁵ and there are different rules for hire purchase or conditional sale, mortgage, charge and pledge. Mortgage, charge and pledge are traditional forms of security,²⁶ whereas transactions such as hire purchase and conditional sales are not as a matter of law considered within the categories of security, but they have a similar economic function. Hire-purchase agreements and conditional sales are known as ‘quasi-security’ or ‘title finance’ because the debtor does not have the ownership of the property. The Law Commission observed that as the law classified quasi-security interests according to their form and not to their substance and thus, they are not registrable under the Companies Act 2006, unlike a charge, this may cause problems to potential lenders in ascertaining as to whether credit should be given.²⁷ In practices such as retention of title, the financier retains full title to the assets rather than being granted a charge over the assets, and if the debtor fails to pay for the assets they can be retained or sold. Although, in theory, law does not consider them as creating a security, in practice they perform security functions and are used by businesses and banks routinely.²⁸ Earlier law reform efforts observed that a functional approach should be introduced, and that the definition of security interest should include not only traditional security interests but also the quasi-security interests.²⁹ Specific recommendations made by the Law Commission in relation to registration of security interests have not been included in the Company Law Reform. Arguably the recommendations of the Law Commission were pragmatic, and were aimed at transactional certainty along the UCC Article 9 lines where a particular form of transaction is irrelevant in the resolution of priority conflicts between secured creditors and third parties. These recommendations include replacing the registration system contained in the companies legislation with a more comprehensive system, setting clear and rational rules for priority by determining priority from the date of registration, a new online system of registry for security interests, possibility to register in advance of the transactions and removal of a 21-day time limit for registration, and removing the distinction between fixed and floating charges while retaining the advantages of floating charges. The Law Commission’s scheme was also recommended to be extended to quasi-securities where the scheme should provide for filing of sales of receivables and cover title-based devices.³⁰ One can argue that banks could have benefited highly from the Law Commission’s proposals for reform.

The Guide³¹ and the Model Law³² abandon the dis...

Table of contents

• Cover
• Half title
• Title Page
• Copyright
• Contents
• Preface
• Foreword
• Acknowledgements
• Table of cases
• Table of conventions, instruments and statutes
• List of abbreviations
• 0. Introduction
• 1. Secured credit and fundamental principles of international instruments
• 2. Harmonisation of secured transactions law in context
• 3. Scope of applicability and party autonomy
• 4. Creation of security rights
• 5. Effectiveness of security interests against third parties
• 6. Priority of security interests
• 7. Acquisition financing devices
• 8. Choice-of-law issues
• Conclusion
• Bibliography
• Index