SECURING THE LOAN

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SECURING THE LOAN

• Michael P Willacy

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LIFE POLICIES

• A Life policy is a contract by which an assurance
  company, in consideration of a certain premium
  either in gross sum,or by annual payments,
  undertakes to pay to the person for whose benefit
  the insurance is made, a sum certain in money, or
  an annuity either on the death of the person
  whose life is insured or after a certain number
  of years or on attainment of a certain age.

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ADVANTAGES AS SECURITY

• The method of completing an assignment is simple.
• It is easy to establish the current surrender
  value of the policy,by enquiring upon the issuing
  company.
• If a legal assignment has been taken, it is easy
  to realise the policy.
• As more premiums are paid, so the surrender value
  increases.
• If the assured dies, the policy monies are
  immediately payable.

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DISADVANTAGES AS SECURITY

• A customer may be unwilling or unable to make the
  regular premium payments as and when they fall
  due.
• Contracts of life assurance are uberrimae fidei
  and, so non-disclosure of a material fact will
  render the contract voidable.
• The policy holder may breach the terms of the
  insurance,thus making the policy voidable.
• Bad publicity can occur for a bank,if it is
  obliged to realise a policy, the monies for which
  were intended to provide for dependents.

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TYPES OF POLICY

• Endowment- These provide for the payment of a
  capital sum, with or without profits at a fixed
  future date or upon the assureds earlier death,
  whichever occurs first. This type is the most
  useful form of security.

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Whole life

• These provide for the payment of a capital sum,
  with or without profits, upon the assureds
  death. The premiums payable on such policies are
  less than those for endowment policies having the
  same capital value and, thus, their surrender
  values are lower. Premiums continue until the
  assureds death and, therefore, the policy only
  provide benefit to the assured dependents. Thus,
  they are less useful for short term bank lending,
  but are useful where repayment could only be
  provided from this source on the death of the
  assured.

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GUARANTEES

• A Guarantee may be defined as a written promise
  by one person(guarantor) to be responsible for
  the debt,default or miscarriage of another
  person(principal debtor) incurred to a
  third-party(creditor).
• Guarantees do not have to be in any
  particular form but they are unenforceable in
  law, unless evidenced in writing and signed by
  the quarantor or his agent.

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GTEES INDEMNITY

• There are three parties to a guarantee. The legal
  position is that if the principal debtor, who is
  primarily liable, does not repay the bank debt,
  the quarantor, who is secondarily liable, will
  have to. An Indemnity on the other hand has two
  parties. Here, the person giving the indemnity
  assumes primary liability. Thus the indemnifier
  undertakes to pay the debt himself(rather than
  paying only if the principal debtor cannot or
  will not pay.

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• On occasions, the principal debtor is not legally
  liable for a debt which he has created(e.g. a
  company borrowing ultra vires) and banks have
  been unable to obtain repayment,even though
  guarantee security had been taken. To overcome
  this problem, all bank guarantees today are in
  essence,indemnities(-i.e. they include indemnity
  clause). If a bank lends and finds that it cannot
  recover from the creditor, the banks guarantee
  security is still good because the guarantee is
  effectively an indemnity and, therefore, the
  guarantor, as principal debtor, will have to
  repay, as he has assumed primary liability.

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Parties to a Bank Guarantee

• The person who gives the written
  promise-Guarantor.
• The persons whose liabilities are being
  secured-the Debtor or borrowing customer.
• The third party-Creditor or in actual fact the
  bank.

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Types of Guarantees

• Specific These cover one isolated debt only and
  in the past typically been taken as security for
  personal loan.

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Continuing and Limited in Amount

• In practice, this is the most common type of
  quarantee, for it secures any bank account or
  liability that the principal debtor owes the
  bank. It will be drawn up to cover all monies now
  or hereafter owing by the principal debtor either
  alone or jointly in respect of any account or
  liability subject to a limit on the amount
  recoverable from the guarantor.e.g 500,000

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Supported Guarantee

• A banker today often takes tangible security from
  guarantors which supports their written promises.
  If supporting security has been taken, then the
  amount that the bank can realise should the
  quarantor fail to pay up against the banks
  demand is limited to the amount for which the
  quarantee was taken.

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Continuing unlimited in Amount

• Contains similar clause as those appearing in a
  Continuing and limited amount guarantee. However,
  a horizontal line is drawn through all monies
  clause and the guarantors signature placed by
  the deletion as confirmation. This, in
  effect,means that the bank can recover any
  amounts from the guarantor(s) which the debtor
  owes to the bank.

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JOINT SEVERAL GTEE

• If more than one person is to join in a bank
  guarantee, all will be required to sign it and to
  admit that they hold themselves joinly and
  severally liable to the bank. This means that
  each guarantor is admitting individual liability
  for the full amount of the quarantee.

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ADVANTAGES OF BANK GTEES

• Easy to take for, there is no complicated
  investigation of title, nor registration.
• Standard guarantee clauses are included which
  have been given past favourable legal support and
  these aim to give a bank the maximum protection
  and powers.
• Easy to bring immediate q action should the
  guarantor default.
• Banks often require guarantees from company
  directors. This gives the directors more
  commitment to succeed.

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DISADVANTAGES

• Unless supported by security, which cannot lose
  value, the worth of the quarantee is dependent
  upon the financial stability of the quarantor.
• Although carefully drawn up, a guarantor may try
  to avoid liability on a technicality concerning a
  clause.
• Bad feeling may result if the guarantee is called
  up, especially if the quarantor is a customer.
• Litigation may be necessary to enforce payment.

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Considerations before accepting a Gtee

• Will the guarantor be able to pay up the amount
  which he may in the future be called upon to pay
  and or will any security given by him in support,
  or any mortgage given by a third party provide
  sufficient cover for the amount of the liability
  owing to the bank and

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Cond

• Will the contract of quarantee or third party
  mortgage be enforced in the banks favour by the
  courts, if the person who executed the security
  refutes liability or refuses to pay up?

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How a Guarantor may seek to avoid liability under
a guarantee.

• I did not sign the guarantee-my signature is
  forged.
• I did not know that I was signing a form of
  guarantee(non est factum-it is not my deed)
• The bank misrepresented the position ot me in
  forcing me to execute a guarantee
• I was under a misapprehension when signing the
  guarantee and the bank were aware of this and did
  not advise me against signing.

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PRESUMED UNDUE INFLUENCE

• Doctor /Patient
• Parent/Minor
• Solicitor/client
• Guardian/Ward
• Religious leader/Disciple
• Trustee/Beneficiary
• Within the above framework, the law will presume
  that undue influence has taken place.

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UNPRESUMED UNDUE INFLUENCE

• Parent/Adult son or daughter
• Husband/Wife
• Principal/Agent
• Within the framework, in order to avoid liability
  on a bank guarantee the weaker party would need
  to prove to the courts that, based on the
  prevailing circumstances, undue influence took
  place.

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• As an existing or non customer of the bank, I
  should have had explained fully to me, the nature
  of the guarantee liability before I signed it and
  or I should have had explained
• to me any individual clauses which could have,
  in the future, adversely affected my financial
  position or living standards.
• Before I signed the quarantee or third party
  mortgage, I should have been advised that the
  principal debtor had not, or was not, conducting
  his account(s) or financial affairs properly.
• When I signed the guarantee undue influence was
  present, and it was this that made me enter into
  security.

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LAND

• There are only two types of legal estate in
  land-
• Freehold(legally called-fee simple absolute in
  possession)

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Legal terminology for freehold.

• Fee This relates to the ability to pass the
  title on to the titleholders heir or heirs.
• Simple This denotes that the title may be
  inherited by the general heirs of the
  titleholder.
• Absolute This denotes that the estate is free
  from conditions.
• In possession This has a wider meaning than pure
  physical possession, for it also includes the
  right to receive rent or profits derived
  thereunder.

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Cond

• Leasehold( i.e. legally called-a term of years
  absolute).
• The term lease is used to denote a legal estate
  in leasehold land and it is granted by a
  freeholder(or leaseholder who grants a sub-lease)
  for a limited period. There are two parties to a
  lease-
• the lessor the person granting the lease
• The lessee- the person to whom the lease is
  granted.

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OWNERSHIP OF LAND

• JOINT TENANCY- With regard to co-ownership, a
  legal title can only arise where the joint owners
  own the whole legal and equitable interest in the
  land,but do not have distinct shares in it. Such
  owners are known as joint tenants and the vital
  point about joint tenancy(from a bankers
  viewpoint as mortgagee) is that on the death of
  one joint tenant,his rights in relation to the
  land pass directly to the remaining joint
  tenant(s). Thus,no part of the land devolves to
  the deceaseds estate.

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TENANCY IN COMMON

• With regard to co-ownership a tenancy in common
  arises where each of the tenants in common own a
  share of land,either on a proportionate or
  disproportionate basis, but in an identifiable
  sense. Thus on the death of a tenant in common,
  his share of the land devolves to his survivor.

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ADVANTAGES

• Valuation of domestic properties is simple.
• Land prices tend to increases and, as such,the
  banks security will continually increase.
• Registration fees can be high,especially for a
  full legal mortgage of registered land.
• When realisation is decided upon,the sale may be
  subjected to a lengthy delay due to poor market
  conditions. Additionally,the price realised may
  fall well below the anticipated proceeds and,
  also,the bank could be subject to bad publicity.

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LEGAL MORTGAGE

• Section 85 of the law of property Act of 1925
  states that a legal mortgage has to be created in
  one of two ways
• For freehold land, by granting a long lease of
  land for a term of years subject to the proviso
  that the lease will terminate upon repayment of
  the debt.

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Cond..

• For leasehold land, there must be a sub-lease for
  a term for a term which is at least one day less
  than the unexpired term of original lease.
• For both methods, the legal estate remains with
  mortgagor but, a legal interest is created in
  favour of the mortgagee. The legal interest
  remains until the mortgage is paid off and at
  this the mortgagor may exercise his equity
  redemption.

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REMEDIES OF A LEGAL MORGAGEE

• There are five remedies available to a legal
  mortgagee.
• Sue for the debt on the mortgagors personal
  covenant to repay.
• Appoint a Receiver
• Forclose
• Enter into possession
• Sell the property
• Of these alternatives,banks usually either sell
  the property or appoint a Receiver to collect the
  rent.

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• Sue- It avoids the need to realise any security,
  but is a process rarely taken by banks, as the
  mortgagors unwillingness to pay is invariably due
  to him having insufficient funds.
• Appoint a Receiver- This remedy is appropriate
  to a property which is let and when property
  markets are depressed and an immediate sale would
  not clear a mortgagees outstanding debt plus
  accrued interest.

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Cond..

• The receiver, who must be appointed in writing,
  collects rents from the mortgaged property and
  applies them in the following order
• In payment of outstanding amounts to any prior
  mortgagee
• In payment of rates,taxes and other outgoings
• In payment of his own commission
• In payment of insurance and repairs as covenanted
  in the mortgagee deed
• In reduction of the principal amount due, when
  directed by the mortgagee.

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• Foreclose A foreclosure order deprives the
  mortgagor of his equity of redemption and thus
  the property becomes vested in the name of the
  mortgagee. Thereafter, the mortgagee could sell
  the property when he wanted to and he would have
  the right to retain all the sale proceeds.
  Consent of the court is needed for this action,
  which is rarely granted these days, as sale is
  usually ordered. Initially, an order nisi is
  granted and then, if repayment has not been
  effected within usually six months the order
  becomes absolute.
• On granting an absolute order, the rights of
  subsequent morgagees become extinguished.

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• Equity of redemption is a mortgagors right to
  redeem his property by paying off the principal
  sum, plus interest, irrespective of whether a
  contractual date for redemption is stated in the
  mortgage deed and that date has passed.

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• Enter into possession This remedy is rarely
  pursued by the banks, because the same effect is
  achieved more cheaply and without onerous
  responsibilities by appointing a receiver.
• However, in theory banks have this right. When
  they take it, though, they become accountable not
  only for profits which are received, but also for
  those which might have been received, had they as
  mortgagees not been neglectful.

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• Sell the property This remedy is the one most
  often carried out by the banks and is provided
  for in s101 Law of property Act 1925,by section
  103(power to sell) and 109 ( power to appoint a
  receiver), these rights can only be exercised
  after one of the following has occurred
• Repayment having been demanded, the mortgagor has
  defaulted in whole or in part, for a period of
  three months or
• Some interest under the mortgage is two months in
  arrears or
• There has been some breach of the mortgage deed,
  other than the covenant to repay.

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DEBENTURE

• A debenture is an acknowledgement that a debt is
  owed by a company and that a certificate,
  representing that debt, will be issued to the
  holder, usually under the companys seal. Issues
  of debenture stock may be secured and this would
  be by way of a fixed and/or a floating charge, or
  unsecured.

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• Holding a debenture as security improves a
  lenders position in a winding up in relation to
  the other creditors. In a company winding up,
  the priority of payments from asset sales is as
  follows-
• The expenses of winding up
• Holders of a fixed charge over those assets
• Preferential creditors
• Holders of a floating charge
• Unsecured creditors
• Shareholders

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Valuing the debenture

• The security value of a debenture is the amount
  which would be realized on receivership or
  winding up less any priority claims. The three
  principal claims that have priority over a
  debenture holder are
• Receivership cost
• Preferential creditors-e.g Gct. Paye, wages,
• Retention of title. Romalpa clause. Page 165