Security Interests

Part A: Pledges, Liens, and Charges

What is a security interest?
 Property rights that exist for the limited purpose of making it more likely that some obligation will
be performed.
For example, a bank takes a security interest in something when it gives out a loan as a form of
collateral to ensure the loan will be repaid, and when the loan is repaid the interest is
discharged.
Debts are the most common form of security interest. A creditor, if they chose to be secured,
has an advantage over an unsecured creditor in the case of insolvency, since their obligation
would be protected as opposed to claiming along will all the other unsecured creditors what is
left of the estate to pay off the debts.
Two common law forms of security interests:
1. Title security where the debtor gives the creditor legal title to the property as security even
though the debtor may continue to possess the property while the security is still in effect.Note
that these security interests must be registered in order to avoid deceit/misconceptions of the
debtor being richer or having title to the secured assets when he really doesn’t.
-Title security
Debtor gets: possession
Creditor gets: legal title
To prevent unjust enrichment or falsifications by the debtor, title security
interests MUST BE REGISTERED
2. Pledges or pawns represent the possession category of security interests where the creditor
holds goods or documents belonging to the debtor until the debt is repaid. This form of security
however is complicated making title security the more convenient option.
-Possession security
-Include pledges and pawns
Debtor gets: retention of legal title
Creditor gets: possession of the property until debt is repaid
Complicated
One equitable form of security interest:
 Encumbrances are equitable charges and liens, where since the debtor still holds legal title to
the property the creditor gets equitable title, and the debtor can still use the assets like security.
As long as the loan isn’t in default the debtor can deal with the assets in the ordinary manner. If
he wants he can sell his goods and transfer legal title to others for example, since all the
creditors have is equitable title.
-Encumbrances
Debtor gets: possession and retention of legal title
Creditor gets: equitable title
As long as the loan or security isn’t in default, the debtor can deal with the
assets in the normal way, transferring legal title or using them as security.
Liens are created by operation of law (Sale of Goods Act ss 38, 39, 41, 43).
Security interests can be created intentionally or by operation of law.
A pledge is created intentionally since the debtor himself delivers possession of the goods to
the creditor to be held as security.
A common law lien, though like a pledge, is created by operation of law since the debtor
delivers the goods to a creditor for some service (so like giving your car into a garage for repair)
and the creditor holds those goods until the cost of the service is paid. This definition is backed
 up by the Sale of Goods Act which defines the rights of an unpaid seller of goods to keep
possession until the purchase price is paid (see sections 38, 39, 41 and 43).

RECAP: A security interest is a property right created to ensure the fulfillment of some sort of obligation.
A debt, such a bank loan, is an example and common form of it where a creditor secures an interest in
some sort of collateral in exchange for giving money to the debtor. There are three main categories of
security interest. The first is title security, where the debtor retains possession of the charged property
but hands over legal title to the creditor until the debt is paid off. To ensure that the debtor can’t show
that he owns more property than he actually does, this kind of security must be registered. Another
form of security interest is possession security by way of a pledge or pawn, where the debtor retains
legal title but hands over possession of the property to the creditor until he pays off the debt. The
complciations that come with this form of security make title security the more preferable option
amongst the two common law forms of security interests. The only equitable form of security interest is
the encumbrance by way of a lien, or an equitable pledge, where the debtor retains legal title and
possession of the property, using it like he normally would as long as the loan isn’t in default, while the
creditor retains an enforceable equitable title. While pledges are created intentionally, liens are created
by operation of law, where an unpaid seller has the right to retain the goods handed over to him by the
debtor for a service until he is paid for his services (see Sale of Goods Act ss 38, 39, 41 and 43).

Tappenden v Artus [1964] deals with equitable liens and the seller’s right to retain goods until paid in
the context of a hire-purchase agreement gone wrong.
 Facts
Plaintiff is a motor dealer who rents out a van to the plaintiff without getting to plaintiff to pay
When the car breaks down Artus leaves it at a garage for repairs (second defendant owns this garage)
Tappenden discovers the whereabouts of the van and demands its return but the second defendants
refused because they wanted to be paid for the repairs first, thus creating two unpaid sellers
 Lord Diplock’s Judgment
 Can the owner of a vehicle, whose bailee has handed it over to an artificier for repairs assert his or
her lien (unapid seller’s right of retention)?
o Could the artificier enforce his lien against the true owner of the van, the bailor?
A lien is not a contracutal right but a remedy given by the common law (right in rem upon possession)
which serves as a defence to a person against someone who would otherwise be entitled to immediate
possession of the goods
Bowmaker Ltd v Wycombe: It can only be asserted if possession was obtained by lawful means of
delivery
Singer Manufacturing v SW&London Railway Company: if no authority is given to bailee to deliver
goods to someone else the it depends on the terms of the contract as to whether or not the second
bailment is lawful or not. In order for the authority to be legitimate, the purpose must be part of making
use of the goods.
Green v All Motors: if a repair is necessary for the hirer to enjoy the use of his hired car then he has the
authority to hand it over, plus using an unroadworthy vehicle is a statutory offence and so giving a
vehicle in for repair is reasonably incidental to the bailee’s use of the vehicle
Lawful delivery, therefore, combined with the repairer’s lien that arises from the work done on the
vehicle, was not expressly excluded and case decided in favour of Artus and the repairer

Charges are another matter altogether, where a company issues a debenture to create an equitable
charge over some or all of its assets. They are either fixed or floating. Floating charges, according to the
Companies Act 2006 ss 754 and 860, can be used to pay a company’s preferential debts as defined by
schedule 6 of the Insolvency Act 1986 (debts, wage expenses, excise duties). Agnew v Commissioner of
Inland Revenue defines the differences between fixed and floating charges.
 Facts
The row was over a set of book debts owed to a company which were to be classified as either fixed or
floating, where the debts are the only assets available to the grantor for distribution.
If the charge is fixed, as contended by the receivers then the debts are payable to the company’s bank
as the holder of the charge, and if floating then it is payable to employers and the Commissioner of
Inland Revenue as preferential creditors.
Agnew v Commissioner of Inland Revenue (fixed vs. floating charges)
Plaintiff: so bankrupt that the only distributable asset he has left is a set of book debts
which he claims to be fixed
Defendant: preferential creditors who claim the book debts are floating
Floating = paid to employees as wages and Commissioner of Inland Revenue
Fixed=proceeds are payable to the company’s bank as the holder of the charge
 Fixed v Floating Charges
Floating charges were first recognized in Re Panama, New Zealand, and Australian Royal Mail Co where
the debenture charged all the assets of the company both present and future including its circulating
assets. The company would be able to carry on business freely until the charge holder intervened as if
the charge didn’t exist (think the company can just “float”). The creditor has an equitable interest on the
undertaking of the business while at the same time leaving the company free to deal with its business.
 Romer LJ in Re Yorkshire Woolcombers Association outlined the requirements for a floating charge:
1. Charge on a class of assets present and future
2. Class is changing from time to time
3. Company may carry on its business in the ordinary way of dealing with this class
Fixed charges on circulating assets however would paralyze operations. They give the holder of the
charge an immediate proprietary interest in the assets subject to the charge, binding everyone into
whose hands those assets come. The company would be unable to deal with its assets without a breach
of that charge, and it would deprive it of access to its cash flow and the ability to give customers good
title to use the goods it buys.
Therefore if you draft it in the debenture to be a fixed charge then you have to follow it like a fixed
charge and not use the proceeds from receivables freely as if the charge doesn’t exist, since if you treat
it that was it’s a floating charge. The company was doing exactly that, and as such it was found to be a
floating charge and the decision went against Agnew in favour of the Commissioner of Inland Revenue.

There exists clauses known as Romalpa clauses to retain title until security is paid, as outlined in the case
of Clough Mill v Martin.
 Facts
Clough Mill was a yarn spinning business who entered into four yarn-supply contracts which contained
Romalpa clauses that dictated the following terms:
 Seller retains ownership until he receives full payment
 If payment is at all overdue, the seller can resell the material
 If the buyer becomes insolvent, payment becomes due immediately
 If the material is used to make something else before paying, seller’s rights of title and reselling
extend to that object
The defendant wasn’t returning unused yarn for which he hadn’t paid and so legal counsel gets involved.
The defendant said that the clause was invalid under section 95 of the Companies Act 1945. It was
decided that though it looks similar, there was no charge to the seller but just allows him to retain title
of material as security.
Seminar 7 short outline.
Security interests are interests in property used to uphold the performance of obligations. There are two
common law categories (title security and possessory security) and one equitable category
(encumbrances in the form of liens and charges). Charges give a chargee a direct equitable interest in
the undertakings of a business, and are either fixed (with the ability to paralyze the operations of a
business) or floating (an underlying charge that allows the business to operate as per normal).
Cases:
A. Tappenden v Artus on liens by secondary bailees, where it was held that a bailee did have the
right to give in a hired piece of property to someone else if that would be in line with his use and
enjoyment of that property, and subsequent liens by that third party for work done on the
property would be lawful and enforceable against the original owner.
B. Agnew v Commissioner of Inland Revenue defined the difference between fixed and floating
charges, and held that if you define a charge as fixed in a debenture you couldn’t continue
business operations as per normal and had to act in accordance with the fixed nature of the
charge.
C. Clough Mill v Martin talks about Romalpa clauses which define unpaid sellers’ rights over mixed
raw materials and the charges that they’d have over them.