Property as Security for a Loan

If a creditor lends funds to a debtor, as well as the reimbursement of the original amount of the loan plus interest and any other charges and expenditures provided for, the credit facility may request the debtor to meet certain commitments.

Your obligation to make and fulfill certain payments may be secure or not. In the case of collateral, the creditor provides'security' or'an interest' in favor of the creditor for all or part of his property. Collateral provided to the creditor is interest on the specified asset values of the debtor to enable the creditor to meet a claim on the debtor.

Should the Mortgagor breach any of his liabilities to the Creditor, the Creditor shall have the right to enforce a number of laws and appeals in respect of such property. Although the interests and redress mechanisms to which reference is made differ according to the nature of the security interest, in general the primary objective of collateralisation is to enable the creditor to take ownership of the property and resell or rent it to settle the debts and liabilities guaranteed.

There are many kinds of assets that can be security assets, to include airplanes, automobiles, computers und stationery. It is not specifically for a particular type of assets. The purpose is merely to give a general outline of the procedure by which a creditor can obtain an asset back if the debtor defaults.

Irrespective of the value of the property, however, it must be precisely described in the security documentation. In general, the security voucher explicitly regulates the creditor's power of execution. Mortgage, callable security, debt security, contract bonds and furniture mortgage are just some example of commonly used security documentation. They describe the conditions under which the creditor may use its power to take over and dispose of or rent the property.

Also other documents between the contracting partners, such as a credit or loan contract, give information about the scope of the lender's authority. In the ideal case, a well prepared credit and collateral document should make the item clear. Thus, for example, when securing an aeroplane, it will be necessary to examine the loan contract and the aeroplane mortgages in order to verify what the cases of delay are and how they are caused.

For the avoidance of doubt, it is important that the "default events" indicated in the relevant loan and collateral documents are the same. Under certain conditions, the creditor may also be able to count on tacit execution rights resulting from the application of the Act and laid down in the relevant legal provisions.

In general, these power is only available when the collateralised liability becomes due to the creditor. However, when choosing to accept collateral, the creditor should also be mindful of any other issue that may impair his capacity to assert the collateral in due course. Examples include whether there are other kinds of collateral pending that take precedence over the lender's interests, or whether there are specific regulative or compliant obligations with respect to the assets or securities.

Once a "case of default" has been identified which is sufficiently large to enable the creditor to execute its power of execution, the creditor must establish whether the guaranteed debt is to be paid by the debtor in an automatic manner or whether it is necessary for the creditor to require it before the amount is actually due.

In addition, will the creditor have to determine whether the assertion of a claim itself guarantees the enforceability of the collateral or whether the claim does not have to be met for this purpose? Specifically, a creditor who wants to impose the collateral will want to make a payment request formally to make sure that the debtor knows exactly what is going on.

While some security papers do not include a letter of formal notice, others can set a clear deadline - the papers should always be reviewed before taking measures and requiring that the amount of cancellation be paid. When the creditor formally gives notification of defaults, it is indispensable that he presents the particular defaults on which the creditor relies to cancel the loan.

It must be duly notified to the debtor, and often the contracting partners have indicated in a loan contract or similar documents the particulars of the contract and the manner in which a letter of formal notice is mailed. Generally, it is important to allow the borrowers enough idle period to pay the liabilities before the lenders enforce their security interest in the asset.

The determination of whether enough elapsed lead times are available will depend on the particular nature of the transactions. Among the topics examined in earlier cases were: - what was said in the documentary about the matter; to whom the claim was addressed; how particular and precise the claim was; what talks had taken place between the involved in advance; and the borrowers' situation.

A creditor may not need judicial authorisation to enforce his security. If, for example, the creditor has a'legal mortgage', he may come into ownership of the respective assets under a claim under the credit arrangement only because he is the rightful owner because of the assignment of the right under the credit arrangement.

In the case of other kinds of collateral, it may be advantageous for the creditor to obtain a judicial order. For example, in the case of unlawful taking over by the creditor, the damage can be very high, especially in comparison with third party losses resulting from such taking over.

In the absence of a judicial power of attorney to take ownership, a personal purchase may also be contested by the creditor for various reasons, such as the creditor's power of attorney to transfer good property, the right to purchase, the absence of a best value purchase and the violation of the other party's right to security or other interests in the airplane or the debtor and/or a claim against the airplane or the debtor.

Under certain conditions a creditor may not wish to take ownership himself and under the Law of Property Act 1925 in England he may designate a borrower to do so on his name. Often the first obstacle can be to find the object yourself. It can be particularly tricky if the object is easily movable, such as an airplane, boat or automobile.

The security document usually contains an explicit authorisation to sell the assets. If this is not the case, however, the creditor in England may invoke the legal authority to sell provided for in Section 101 and 103 of the Law of Property Act 1925. Those paragraphs give the creditor a mandate to sell the assets in the event of a mortage or encumbrance by way of document.

This authority allows the creditor to dispose of the property either by private sale or by sale by sale at auctions when the collateralised debt matures. Nevertheless, the conditions under which such a right may be exercised are limited by Section 103 of the 1925 Act, which provides for a period of cancellation of three or five month in the event of infringement of the hypothec.

Often, however, these clauses are precluded in the security arrangement. Once a creditor has concluded a sale and purchase arrangement, the borrower's right to return the property expires. As an alternative, the creditor may rent the assets to pay back the debts. Leases are available for a large number of different equipment models, among them computer, vehicle, machinery and equipment, industry and trade real estate.

Often, it can be much simpler for the creditor to rent the property, especially with regard to devices where it is often a more profitable financial option for a business to use an asset. However, the property may not be available for use by the creditor. Please be aware that in situations where the debtor is formally bankrupt at the moment of execution and the relevant exposure always needs to be reviewed, other consideration would prevail.

If, for example, the debtor is under administration, no action, including security recovery, can be initiated without the approval of the administrator or the courts.