Security interest

In law and finance, a security interest is a legal right that a secured party has over secured assets. Security interests most often arise where a debtor grants an interest over collateral to a creditor to secure the loan, such that the creditor will have enforceable rights in the event of the debtor's default or non-performance. In the event that the debtor is unable to perform their contractual obligations, the secured creditor may not only sue the debtor for contractual damages or recovery of debt, but may also enforce their proprietary rights over the assets (e.g. by seizure and sale) and obtain priority over unsecured and subordinate creditors in the event of insolvency. The most common security interest is the mortgage, which often involves a creditor bank securing an interest in a debtor homeowner's land for the payment of a loan used to finance the purchase of the home. Although most security interests are created by agreement between the parties, it is also possible for a security interest to arise automatically by operation of law.

In law and finance, a security interest is a legal right that a secured party has over secured assets. Security interests most often arise where a debtor grants an interest over collateral to a creditor to secure the loan, such that the creditor will have enforceable rights in the event of the debtor's default or non-performance. In the event that the debtor is unable to perform their contractual obligations, the secured creditor may not only sue the debtor for contractual damages or recovery of debt, but may also enforce their proprietary rights over the assets (e.g. by seizure and sale) and obtain priority over unsecured and subordinate creditors in the event of insolvency. The most common security interest is the mortgage, which often involves a creditor bank securing an interest in a debtor homeowner's land for the payment of a loan used to finance the purchase of the home. Although most security interests are created by agreement between the parties, it is also possible for a security interest to arise automatically by operation of law.

Reception in the United States

In the late 1940s, the United States legal community arrived at a consensus that the traditional common law distinctions were obsolete and served no useful purpose. They tended to generate too much unnecessary litigation about whether the creditor had selected the correct type of security interest. There was a growing recognition that the different types of security interests had developed only because of case-specific historical reasons. The result was Article 9 of the Uniform Commercial Code (UCC), which regulates security interests in personal property (as opposed to real property) and establishes a unified concept of a security interest as a right in a debtor's property that secures payment or performance of an obligation. Article 9 was subsequently enacted, although not entirely without variations, by the 50 states, District of Columbia, and most territories. If the debtor defaults (and does not file for bankruptcy), the UCC offers the creditor the choice of either suing the debtor in court or conducting a disposition by either public or private sale. UCC dispositions are designed to be held by private parties without any judicial involvement, although the debtor and other secured creditors of the debtor have the right to sue the creditor conducting the disposition if it is not conducted in a "commercially reasonable" fashion to maximize proceeds from the sale of the collateral. Article 9 is limited in scope to personal property and fixtures (i.e., personal property attached to real property). Security interests in real property continue to be governed by non-uniform laws (in the form of statutory law or case law or both) which vary dramatically from state to state. In a slight majority of states, the deed of trust is the primary instrument for taking a security interest in real property, while the mortgage is used in the remainder. The Uniform Law Commission's attempt during the 1970s to encourage the enactment of uniform land transaction laws was a catastrophic failure.

Influence of the UCC internationally

The UCC Article 9 inspired the enactment of the Personal Property Security Acts throughout Canada during the 1990s. After, international development experts recognized in the mid-1990s that reform of the law of security interests contributed to the economic prosperity of both Canada and United States in enabling businesses to finance growth through forms of secured lending which simply did not exist elsewhere. The International Monetary Fund, the World Bank, and other international lenders began to encourage other countries to follow Canada's example as part of the structural adjustment process (a consultation process often required as a condition of their loans). Over the next three decades, the Canadian PPSAs inspired developments in Australia, New Zealand, Vanuatu, Papua New Guinea, the Jersey, the Samoa, and the Jamaica. In 2002, the Organization of American States promulgated the Model Inter-American Law on Secured Transactions, in response to a rapidly growing body of empirical evidence that the chronic failure of Latin America's legal systems to support modern asset-based financing is a primary reason for the region's economic instability. The OAS Model Law attempted to import many of the best parts of UCC Article 9 into the Latin American civil law sphere, but with extensive revisions for that region's unique problems. The OAS Model Law has been enacted to some extent in several countries, including Mexico (2000, 2003, and 2010), Peru (2006), Guatemala (2007), and Honduras (2009). To date, only Honduras has been able to fully enact and actually implement the OAS Model Law in the sense of unifying security interests and making them easily visible on a public registry.

Notes

References

Further reading

External links

Department of Business Small Firm Loan Guarantee scheme in the UK

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