Securities Part B
Meaning of personal property
Any property interest other than land. Almost anything else that may be owned or
otherwise treated as property is included unless it is expressly excluded from the personal
property securities Act 2009.
Excludes
✓ Land
✓ Fixtures
✓ A right, entitlement, or authority
Two- broad sub-categories of personal property under Act
Consumer property – property predominant for personal, domestic, household purposes
Commercial property – in construction context the personal property will be commercial
property
Security interest
section 12(1). Here, a security interest is
A transaction that provides an interest in personal property and, in substance, secures
payment or a performance of an obligation regardless of the form of the transaction.
Examples for security interests
✓ Mortgages
✓ Charges
✓ Leases
✓ Retention of title arrangements
✓ Consignments
✓ Pledges
✓ Hire-purchase agreements
What are deemed security interests
An interest where the transaction concerned does not, in substance, secure payment or
performance of an obligation.
three types of deemed security interests under the PPSA:
✓ the interest of a transferee under a transfer of an account or chattel paper;
✓ the interest of a consignor who delivers goods to a consignee under a
commercial consignment.
✓ the interest of a lessor or bailor of goods under a PPS Lease.
Consensual Interests known by law
The pledge – actual or constructive delivery of possession of an asset, made with the
intention that the creditor retain possession until discharge of the obligation
The mortgage – transfer of ownership of the asset upon the express or implied condition
that the debtor regains ownership upon discharge of the obligation.
The charge – known only to equity, a charge transfers neither ownership nor possession
but on default allows the creditor to satisfy the obligations out of the proceeds of the
property.
1. Guarantees
• ‘A guarantee is a promise by which one person, called the guarantor, or surety,
undertakes to answer for the present or future obligation of another, called the principal
debtor’.
• A guarantee may be required by a lender before it is prepared to lend or extend credit to
a debtor
✓ A guarantee is a purely contractual promise given by a third party that makes that
party liable in the event of a default by the debtor.
Who is a guarantor?
In a consumer loan guarantor usually acts as a favor to the borrower and derives no direct
benefit from the arrangement
• Essence of a guarantee:
• ‘If you lend $1,000 to D and if D does not pay you, then I shall’.
Therefore it is a
secondary liability, the debtor having primary liability.
Guarantor promise to pay if debtor doesn’t
Lender 3rd party Debtor
• A guarantee consists of a personal promise from a guarantor and is not a ‘security’ ( as
discussed in Part A, ‘Securities’).
Why its not a security?
• Sometimes a lender may also require the guarantor to provide security, such as a
mortgage over property if the debtor is unable to provide it ( see Part A, ‘Securities’)
2. Bank's standard guarantee forms
• Trend towards ‘plain English’ forms for consumer use
• Banks adhere strictly to their own standard form guarantees.
2. Guarantees may be used to secure overdrafts.
Overdrafts
Most common methods of bank lending
To meet short term business credit needs,
• frequently used to secure overdrafts from business customers including companies a
credit facility provided by a bank to a business customer
• when an overdraft is given to a company, it is common practice for the director(s) of the
company to guarantee the company’s debt, if required. This arrangement occurs because
the company, as debtor, is a separate legal entity (see Topic 3, company accounts).
Features of overdrafts
✓ fluctuate from day to day
✓ Debt is repayable on demand ( how much notice to be given to the borrower?)
✓ Failure by borrower to meet demand constitutes default
3. Types of guarantees
(A) Type #1: specific or fixed ( for specific fixed term loan e.g $50,000 five
year loan)
guarantor has no right to revoke guarantee once credit has been extended to
debtor
(A) Type #2: continuing ( used commonly in relation to overdrafts)
Features of continuing guarantees relating to overdrafts
✓ Guarantee is ‘continuing’ or ongoing so long as the overdraft remains Right of
guarantor to revoke the guarantee can occur in relation to
stopping future advances of credit.
✓ This has implications for both borrower and guarantor
May or may not be limited
'All moneys owing' clause means that guarantor may be liable for other
accounts held by debtor
Joint and several liability if more than one guarantor
Usually operate additionally as an indemnity ( see below)
5. INDEMNITY
IMG
6. Obligation of disclosure to guarantor/surety?
Disclosure to guarantor
• A guarantee or indemnity is not a contract of utmost good faith (compare
with a contract of insurance), so generally, there is no obligation on the
part of the bank to inform or instruct the prospective guarantor/surety
about the nature and effect of the document
• A bank is only required to reply to questions asked by the guarantor:
Hamilton v Watson (1845) 8 ER 1339; but because of confidentiality
obligations, it should have customer's (debtor’s) consent to do so.
• Only unusual or unexpected features of debtor's account need be
disclosed: Hamilton v Watson (above)
7. Implied rights of guarantors (under the common law)
These 3 sets of rights are implied by the courts and operate as implied terms of the
guarantee contract. They are designed
to protect the guarantor who has had to pay out under a guarantee.
However, banks may include express terms that modify or remove these implied terms in
order to gain advantage in relation to
the guarantor e.g an express term might state that the bank does not need to transfer any
securities to guarantor, thereby
cancelling the guarantor’s ‘right’ of subrogation. This is legal although disadvantageous to
the guarantor.
Therefore, any assessment of a guarantor's legal position should begin with an examination
of the terms of the guarantee
document. If the guarantee does not exclude these implied rights then the implied terms
continue to apply.
8. Regulation of guarantees
• A. Industry Code:
• Code of Banking Practice ('CBP'); section 28
• • Revision: CBP applies to banking services provided to
individuals and small businesses. It also extends some provisions to
the guarantors of such persons: see section 40 definition of ‘you’.
Section 28 extends important protections to certain guarantors,
including a cap on the guarantor’s liability
vu.edu.au
Victoria University CRICOS Provider No: 00124K (Melbourne), 02475D (Sydney)
• Legislation
•
• Privacy Act 1988 (Cth) (as amended)
•
• Under s 18N credit references or opinions about individual customers may not be
given to other credit providers or to guarantors without the customer's written
consent.
•
• In addition, prospective guarantor must give consent to credit check on itself.
•
• ASIC Act 2001: note issues of misleading and deceptive conduct ( Crisp v ANZ
Bank (1994) ATPR 41- 294), and unconscionable behaviour in relation to
guarantees
•
National Consumer Credit Code
•
• Revision: the NCCC applies to consumer ( not commercial) credit contracts
• If a guarantee is given in relation to the credit contract, it is described as a 'related
guarantee', and the guarantor has right to
• a copy of the related guarantee which must be must be in writing and signed
• a copy of the credit contract that the debtor has entered into
• limited liability: cannot be liable for more than the amount of the credit contract,
plus reasonable enforcement expenses
• to re-open the transaction on the grounds it is unjust
• details of current balance of account; amounts credited or debited during a
specific period; any overdue payments and the due date; any amount payable
and the date it became due
9. Acts by the creditor that may terminate a guarantee
Banker’s Lien and Freezing orders
• Introduction
• Discuss ttwo distinct topics next
• The banker’s lien
• Freezing orders
• (see chs 15-16)
• Definition
• The banker’s lien is the right of a banker to retain certain documents
as security for debts owed by the customer
• The lien arises as a matter of law and can be expressly excluded by
agreement:
Brandao v Barnett (1846)
• General lien
• A banker’s lien is a ‘general lien’ which means that documents under
the lien are held as security for all debts owed to the banker: Duke
Finance Ltd v CBA (1990)
• This 9is in contrast to most liens which are particular liens, giving a
creditor the right to retain goods as security for the particular debts relating to the goods
themselves
• Power of sale
• The banker’s lien carries with it a power of sale and recoupment from
the proceeds
• The power of sale can be exercised on default of payment of the debt
(if a fixed period of time), or after request for payment has been made
and reasonable notice is given: ANZ Group Ltd v Curlett et al (1992)
• Distinguish the right to combination
• A lien does not attach to the credit balance in a current account
because that sum is a debt owed by the banker to the customer.
• The bank may, however, combine customer accounts so that a lien
can be attached to the customer’s debt:
• National Westminster Bank Ltd v Halsowen Presswork and
Assemblies Ltd (1972)
• Documents attached by lien
• The lien extends only to securities that belong to the customer: Cuthbert v
Roberts et al (1909)
• Securities that do not belong to the customer and are deposited with the
banker, may not be retained by the banker
• The most important application of the lien is in the case of negotiable
instruments, the most common being the lien over cheques
• Note that the banker’s lien only attaches to documents deposited with the
banker in their capacity qua banker
• So documents deposited with the banker for safekeeping (not dealt with in
the course of business) are not subject to the banker’s lien
• Excluded by express agreement
• The lien can be excluded by express or implied agreement, or by
circumstances that are inconsistent with the lien
• For example, money paid to the banker for the express purpose of bill
payment is not subject to the lien
• Surplus proceeds of realised securities are also subject to the
banker’s lien
• Creation and termination of lien
• The lien is created when the document comes into the banker’s
hands, for example, a cheque that has been paid in to a customer
account that is overdrawn: NAB Ltd v KDS Construction Pty Ltd
(1987)
• The rights of the creditor end when they part with possession of the
document
• Freezing orders
• A freezing order is a court order that restrains certain assets from
being removed from the jurisdiction, disposed of, or dealt with
• It freezes the assets of the defendant pending the outcome of
litigation
• Purpose of freezing order
• The operation of a freezing order is illustrated by the Mareva case
• (see p.499)
• Requirements to grant order
• A freezing order can be granted when:
• Likely the plaintiff will receive judgment for a certain sum and there is
reason to believe the defendant may move assets from the
jurisdiction to defeat the judgment:
• Z Ltd v A (1982)
• The courts have power to issue freeing orders in relation to
judgments of foreign courts
• Not a proprietary interest
• The granting of a freezing order does not give the creditor a lien over
the assets in question:
• PT Bayan Resources TBK v BCBC Singapore Pty Ltd (2015)
• Therefore a defendant can use assets to pay legitimate debts such
as meeting legal costs:
• Riley McKay v McKay (1982)
Effects on third parties
• a freezing order affects all who know of it. So it would be contempt of
court for banks for example to deal with frozen assets in a way that is
inconsistent with the court order
• Obligations on a bank once it has received notice of freezing order on
a customer are as follows:
• (p.505)
Define the following terms
• Guarantee
• Indemnity
• Principle debtor
• Lien
• Right of combination
• Freezing orders
Review critizes
Adressesd
Researcher
Enumerates – list/ set out
On demand – available at any time that you want to use it
