Law of Financial Institutions and Securities BLO3405: Vu - Edu.au

LAW OF FINANCIAL
INSTITUTIONS AND
SECURITIES
BLO3405
vu.edu.au
Victoria University CRICOS Provider No: 00124K (Melbourne), 02475D (Sydney)
Securities - Part A
Secured Lending
Week 5
Lending: General principles
• 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
vu.edu.au
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
vu.edu.au
General principles
• 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
vu.edu.au
• 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)
vu.edu.au
General principles
• Term loans
• 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
vu.edu.au
General principles
• 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
vu.edu.au
General principles
• 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
vu.edu.au
General principles
• Types of borrowers
• There are four main types of borrower 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
vu.edu.au
2. Unincorporated borrowers
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)
vu.edu.au
General principles
3. Companies
•There may be problems in identifying which agents have authority to act
for companies. It may be prudent for banks to obtain guarantees from a
companies putative agent
•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
vu.edu.au
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 realised if there is default in repayment
vu.edu.au
• 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)
vu.edu.au
• Securities over real property
• 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
vu.edu.au
• 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)
vu.edu.au
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))
vu.edu.au
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)
vu.edu.au
• 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)
vu.edu.au
• 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..’
vu.edu.au
• 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
vu.edu.au
• Perfection
• The concept of perfection in property law has two purposes:

• To protect the interest against third party purchasers by publicising the interest
• To establish priorities amongst competing security interests
• A security interest can be perfected by:

• Registration
• Possession
• Control of certain types of chattel
• ‘temporary perfection
(s 21 PPS Act)
vu.edu.au
• Note that perfection through control is the analogue of possession

because certain types of property for example bank accounts or
shares or negotiable instruments are intangible and therefore cannot
be physically possessed
• Temporary perfection refers to situations where the secured party
cannot act immediately to perfect the interest. Usually lasts for 5
business days (s 22(4) PPS Act)
vu.edu.au
• Priority rules
• What if there are two or more security interests that attach to

personal property and the security interests need to be realised by
selling the collateral? How should the proceeds of selling the
collateral be divided?
• Pt 2.6 PPS Act deals with priorities between security interests
(default and special rules which are complex)
vu.edu.au

Law of Financial Institutions and Securities BLO3405: Vu - Edu.au

Uploaded by

Copyright:

Available Formats

You might also like

Law of Financial Institutions and Securities BLO3405: Vu - Edu.au

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Law of Financial Institutions and Securities BLO3405: Vu - Edu.au

Uploaded by

Copyright:

Available Formats

LAW OF FINANCIAL

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

• So what types of lending can a bank engage in?

• An overdraft facility is a current account that allows the customer to

• Bills of exchange allow banks to lend their credit instead of advancing

• Standby letters of credit or performance bonds are discussed in the

• A letter of comfort is an assurance to a lender that the parent

It is prudent for banks to provide liability provisions when making loans

• Priority rules wrt to security interests are discussed at p421

• Securities over real property

• The Torrens system of land registration provides indefeasibility of title

•Under the Torrens system, priority of interest is determined by the time

• Modern commercial borrowers can offer substantial security over

• Meaning of personal property

• Essentially refers to any property other than land (s 10 Personal

• Examples of personal property security interests include:

• Certain interests are excluded, for example, licences and agreements

• The concept of perfection in property law has two purposes:

• A security interest can be perfected by:

• Note that perfection through control is the analogue of possession

• What if there are two or more security interests that attach to

You might also like