This website uses cookies to ensure you get the best experience on our website. Learn more

Law Notes Personal Property Law Notes

Security Rights Notes

Updated Security Rights Notes

Personal Property Law Notes

Personal Property Law

Approximately 153 pages

A collection of the best Personal Property Law notes the director of Oxbridge Notes (an Oxford law graduate) could find after combing through forty-eight LLB samples from outstanding law students with the highest results in England and carefully evaluating each on accuracy, formatting, logical structure, spelling/grammar, conciseness and "wow-factor". This set of notes earned its author a prize in exams. Although this set of notes did not earn its author a 1st in exams, the notes are at a high st...

The following is a more accessible plain text extract of the PDF sample above, taken from our Personal Property Law Notes. Due to the challenges of extracting text from PDFs, it will have odd formatting:

Introduction/Definitions

What is a security right?

Security, in the paradigm case, is an interest in land or chattels which secures payment for performance of an obligation.

  • Security rights (proprietary) can be compared with purely personal rights to recover debt

It is possible to distinguish between true security rights and those that have the same function but are not true security rights.

  • True security rights arise where the creditor acquires a property right that he/she did not have before. They acquire a new property right in order to secure the performance of the obligation.

Policy Objectives

A number of important concerns affect the way in which the basic structure applies to security rights:

  1. Weighing the interests of different types of financiers/creditors

  2. Notice to the world (registration)

    • Preventing unfair surprise

  3. Preventing sham transactions from taking effect

  4. Commercial certainty

    • Channelling function: making sure that following certain steps will lead to a legal transaction form being in existence

  5. Bargaining flexibility

  6. There is a need to protect A (the person giving the security to B). In situations where B is extending credit to A, there is a risk that B will exploit A’s need for the money by imposing harsh terms on A.

  • Thus, statutory rules applying to consumer credit agreements extend to the context of securities.

  1. There is a need to protect B. If the property law system makes it difficult for B to acquire security there is a risk that the flow of credit will be impacted. Credit is important in our society.

  2. There is the need to protect C (the 3rd party). B’s right he acquires as security may be hard to discover.

We need to be aware of the basic tension between the needs of A, B and C as the above policy considerations can often conflict.

Functional/Formal Debate

In assessing the formal vs functional debate, we can’t take that inquiry in a vacuum: we have to look at the extent to which each approach achieves the underlying policy objectives of secured transactions law discussed above.

The Formal Approach

Under a formal approach, the law follows the requirements of the legal form. All the legal effects of that form will follow. Therefore, if something is not a true security interest it will not be treated as such.

  • Note that the formal approach imposes objective requirements for a particular form. Labelling something is a security interest will not suffice if it does not follow the prescribed form of that interest (Re Spectrum)

It is arguable that if the forms of the security interests are good, we don’t need functionalism.

Strengths of formalism:

  • Greatest advantage is legal certainty

    • Very clear boundaries between concepts

    • Channelling function: knowing that you can achieve certain legal effects if the form is satisfied

  • Formalism does not mean limited options in English Law: there are many legal forms of security

    • Sophisticated commercial parties have a very specific idea of where they want risks to lie, and the better (and the greater the number of) legal forms, the greater the bargaining flexibility to achieve that precise risk allocation

    • Ask whether this is facilitated by what English law offers today?

  • Reduces the risk of ‘unfair surprise’ under the functional approach where a party may not realise that a transaction is registrable and incurs loss as a result of non-registration

Weaknesses of formal approach:

  • Might not give effect to the necessary policy objectives

  • But, do we need the functional approach to cure the weakness of the formal approach?

    • Judges shouldn’t recharacterize transactions easily because certainty in commercial transactions is paramount and certainty is what is achieved by the formal approach

    • Better approach may be to use legislative carveouts for specific areas worthy of intervention: e.g. Hire-purchase of cars

    • A more targeted anti-abuse regime may well be better (can be a mixture of statute and existing doctrine):

      • Sham doctrine (trusts)

      • Requiring certain forms of ‘subsequent conduct’ before a charge can be characterised as fixed

      • The ‘cloak’ doctrine

      • Hire-purchase Act for cars (to mitigate the ‘apparent ownership’ problem)

The Functional Approach

By contrast, a functional approach treats all devices intended to provide a security as true security interests. It looks at the economic substance of a transaction as opposed to the form.

  • So long as the security device denotes some interest in the item of personal property it may amount to a security interest regardless of its form

  • There is a focus on what the transaction seeks to accomplish (secure payment for performance of an obligation) rather than legal form

Another view of the functional approach is that it denotes all devices intended to secure payment for goods.

  • Under this definition, the legal forms of pledge, lien, mortgage and charge are not just formally but also functionally security interests

  • So under this approach the law does take a functional approach to a large extent (but not completely, as it excludes things like retention of title and hire purchase)

Strengths of functionalism

  • Does not look at metaphysical property constructs but is concerned with the interests of the parties

  • Cures unfairness to debtor that can be caused by formalism

Weaknesses:

  • Moves the definitional question: instead of having to ask whether a transaction prescribes to a particular legal form, we have to ask whether it is a ‘security interest’ in the functional sense

    • Security interest is not always easy to define and has fuzzy edges. We will still have to determine the boundaries of that concept

    • E.g. the Quistclose trust is difficult to characterise with certainty. It functions as a security interest is the purpose is not satisfied but is no longer a security if the purpose is satisfied.

    • Sometimes a transaction will have multiple purposes- one security and another. What do we do in these circumstances?

  • If it goes too far it can blur the distinction between ownership...

Buy the full version of these notes or essay plans and more in our Personal Property Law Notes.