Securities Part A

What are securities

A security is simply a financial term that refers to any financial asset, instrument that you
can trade in market.

Types of securities
Equity- provides ownership rights to holders
Debt – Loans rapid with periodic time
Hybrid – Combine aspects of debt and equity

Lending contract
The borrower promises to repay the amount loaned, together with any interest agreed
upon.

Introduction

• Lending by the banker to the customer is usual subject to a written

contract
• The RBA can make policy statements wrt lending practices however
it is rarely used
• There are different types of lending practice, and different types of
borrower

General principles

• Types of Lending
• So what types of lending can a bank engage in?
• Traditionally, most lending by banks was in the form of an overdraft

1) Overdrafts
• An overdraft facility is a current account that allows the customer to
overdraw the account
• Overdraft generally payable on demand
• May be a penalty interest rate if overdraft limit is exceeded

• Repayment on demand means that the customer must be given a

reasonable period of notice to repay the loan
• The banker has a right to charge interest on overdrafts, and this
interest can be compounded (National Bank of Greece SA v Pinos
Shipping Co (1990)
• Note that there is no presumption that non bank lenders have a right
to compound interest (Stein v Torella Holdings Pty Ltd (2009)

• Term loans
A loan from bank for a specific amount that has a specific repayment schedule and a fixed
or floating interest rate.
Not repayable upon demand
Bank has no right to combine loan account with any account

• Commercial Bills
Bills of exchange allow banks to lend their credit instead of advancing funds directly to the
customer
Commercial bills are usually for a period of 90 or 180 days and the bills may be rolled over
to extend the credit period
A bill which bears the acceptance or the indorsement of a bank is known as a bank bill.
Its valuable on bill market.

Standby credits

• Standby letters of credit or performance bonds are discussed in the final lecture, but the
basic idea is that the banker promises to some third party that payment will be made under
certain circumstances
• For example, a foreign purchaser of Australian goods who may be
issued a performance bond by an Australian bank to pay a sum in the
case of loss
Ex: Edward Owen Engineering Ltd V Barclays Bank International Ltd ( 1978) QB 159

• Letters of comfort
• A letter of comfort is an assurance to a lender that the parent
company is aware of the loan. There are 3 types of letters of comfort
(p408)
• Although not a guarantee, letters of comfort can have legal effect

Types of borrowers
• There are four main types of borrowers and each can pose different
legal problems for the lender

1.Minors
• The common law position is that contracts with minors are voidable at the option of the
minor, except for contracts for necessaries
Case- Steinberg V Scala ( Leeds) Ltd (1923)2 Ch 452
2. Unincorporated borrowers/ Business borrower

It is prudent for banks to provide liability provisions when making loans to partnerships
and unincorporated associations (by making each partner or individual jointly and severally
liable and taking guarantees from each partner)

Different forms of business borrowers

✓ Sole trader
No special legal problems
May meet some problems regarding obtaining proper security over stock

✓ Partnership
It is prudent for banks to provide liability provisions when making loans to
partnerships (by making each partner or individual jointly and severally liable and
taking guarantees from each partner)
Death, bankruptcy or insanity of a partner will dissolve the partnership
If any change in the partnership occurs the banker should rile off any overdraft
account to prevent the operation of the rule – case – Clayton’s case

✓ Limited partnership
2 versions of limited ❖ Limited partnership
partnership ❖ Incorporated limited partnership

2 kinds of partners in limited partnership

Limited partners – liability is limited to the amount listed in the register

General partners- liability is similar to that of a partner

Partnership Act 1892 ( NSW) : Each limited partnership must have atleast one
general partner and one limited partner.
Partnership Act 1892 ( NSW ), s 52: Each kind of limited partnership may have
unlimited number of general partners but no more than 20.
When dealing with a company, prudent banker must be aware of any untrue
statement under s 73D

✓ Unincorporate association
Due to no legal identity
Problems of lending due to the lack of single identity obligations
Special care must be taken by individuals to understand the scope of liability.

3. Companies

Separate legal entities

❖ All dealings are done necessarily through agents of the company.
❖ Which cause problems for authority for lending banker
❖ Agents have authority to act for companies.
❖ It may be prudent for banks to obtain guarantees from a companies putative agent

Statutory prohibition
Banker should be certain there are no statutory restrictions on the company’s borrowing
power.
Ch 2J of Corporations Act 2001; permits a corporation to reduce its share capital under
certain conditions.

4. Consumers
•The National Consumer Credit Protection Act (2009) governs bank lending to consumers
•Under the code, the credit provider must provide a pre contractual statement to the
consumer setting out the nature of the loan agreement
• NCC – no general exemptions
• But excludes certain types of traditionally made bank loans like cheque account
becoming overdrawn where there is no agreement for overdraft facilities.

Application of National Credit Code (NCC)

✓ For personal, domestic or household purposes
✓ To purchase, renovate, or improve residential property for investment purposes
✓ To refinance credit that has been provided for the above purposes; s 5(1)

❖ Real property includes land plus the buildings and fixtures permanently attached to it.
Real property taxes are assessed on agricultural, commercial, industrial, residential
and utility property.
❖ Personal property is property that is not permanently affixed to land: e.g., equipment,
furniture, tools, and computers.

Secured lending: Real Property

•Securities
•Credit providers (banks) often take a security from the debtor along with the contractual
promise to repay
•Security for our purposes means a lender’s interest in property that may be realized if
there is default in repayment

• Priority rules wrt to security interests are discussed at p421

• These are general rules subject to exceptions contained in real and
personal property legislation
• Securities created by agreement are called ‘consensual securities’ of
which there are 3 types (p423)
• But some securities arise by operation of law (e.g. banker’s lien)

• The Torrens system of land registration provides indefeasibility of title

which prevents disputes over ownership
• Each parcel of land is issued with an (electronic) certificate of title
and interests in land are registered at the titles office including
mortgage interests in land

Mortgages

Mortgage means real property mortgages by each Australian Subsidiary in favor of the
Australian Collateral Trustee on all Real Property of such Australian Company (unless
otherwise agreed by the Administrative Agent), each in form and substance reasonably
satisfactory to the Administrative Agent (together with any similar document as may be
delivered by Persons organized and existing under the laws of Australia pursuant to Section
7.11 (Additional Collateral and Guaranties)). Sample 1 Sample 2 Based on 2 documents
A mortgagee has two rights that arise upon default on the mortgage:
✓ The mortgagee may enter into possession of the property
✓ The mortgagee may sell the property (consistent with the Real property Acts)

Priorities:
•Under the Torrens system, priority of interest is determined by the time
of registration
•The rule in Hopkinson v Rolt (1861) states that once a security interest
is registered, additional advances cannot be added to that security
interest
•But see exceptions (Matzner v Clyde Securities Ltd (1975))

Secured lending: Personal property

• Introduction
• Modern commercial borrowers can offer substantial security over
chattels and over choses in action. These things are described as
‘personal property’
• See Personal Property Securities Act 2009 (Cth)

• Meaning of personal property

• Essentially refers to any property other than land (s 10 Personal
Property Securities Act)
• There are then several exclusions to personal property for the
purposes of the Act (see s 8 PPS Act)

• Security interest
• For definition of security interest, see s 12(1) PPS Act:
• ‘..an interest in relation to personal property provided by a transaction
that, in substance, secures payment or performance of an
obligation..’

Examples of personal property security interests include:

• Charges
• Mortgages
• Pledges
• Conditional sales
• Certain interests are excluded, for example, licences and agreements
to postpone a debt

Vocabulary

Repudiate – refuse to accept/ reject