Overview
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. A wide range of securities given by companies must be registered in the Companies Registration office in order to be valid.
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 Law of Property 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 Irish and UK Consumer Credit Acts, should be considered. If the security is over assets in Ireland and the lending activity takes place in Ireland then, the Irish Consumer Credit Act is likely to be the governing legislation. If the activity takes place in England and Wales, then, the England and Wales Consumer Credit Act may apply. Although there is considerable difference in the scope and extent of each Act, both share some similar key features that are relevant to enforcement of security over non-real property assets.
See our chapter on the Irish Consumer Credit Act in relation to the restrictions on enforcement that apply to non-housing loan consumer credit agreements. Most 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.
There are similar requirements under the UK (not just England and Wales) Consumer Credit Act that apply to certain consumer loans. See our separate chapter on UK regulation. The (UK wide) Consumer Credit Act will only apply where the transaction has certain connections with the UK, for example that the consumer resides there and entered the agreement on foot of marketing directed at the UK.
Under both the Irish (non-housing loan) and UK Consumer Credit Acts, prior notice specifying the breach is required in advance of enforcement action being taken. 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.
The English Consumer Credit Act allows the County Courts to re-open loan agreements that are extortionate so as to do justice between the parties. In so doing, it can rewrite the terms of the contract e.g. regarding interest or vary the security. The powers are wide and apply not only to consumer credit agreements, but also to all credit bargains.
Policies, Debts and Investments
Security over life policies, debts and investments may take place, 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 duty to account to the borrower for surplus proceeds.
In the case of security over debts, 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 is in effect 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 under the general law, provided that 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
Shares
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 in 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.
Pledge
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 other custodian, 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 goods may be sold by the pledgee, even though the title remains with the pledgor (also spelt 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.
No particular method of sale is required. The sale must be at arms length and for a reasonable price. The pledgee must appropriate the proceeds of 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. There are specific requirements in relation to pawnbrokers.
The pledgor may sell without court assistance but the seller must exercise due care to account to the pledgor for surplus monies, stock etc.
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 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 performance of covenants in the bill;
- the borrower has removed the goods or
- 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 on the order of registration. Generally a bill of sale may only be granted over goods in being at that time.
Financial collateral legislation
EU legislation facilitates enforcement of certain types of financial security. The regulations apply to so called “financial collateral” arrangements. The majority of these arrangements are found in the financial services sector. The regulations operate to validate and simplify procedures in respect of certain types of securities, which may be offered as collateral securities 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 many 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.
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 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. Most 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 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 are generally, that the financial collateral arrangement should be in writing, and where applicable, that notice is to be given to the debtor.
Even where the regulations may apply, it may still be prudent to comply with the pre-existing formalities. There may be doubt as to the scope of the regulations and it is often desirable to publicly register the security arrangements.
Certain insolvency rules do not apply under the regulations
- insolvency restriction on enforcement or repossession;
- administrators powers to deal with the assets;
- 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.
