LPQE – COMMERCIAL TRANSACTIONS
COMMERCIAL CREDIT
Credit plays an important role in the world of commerce
e.g. Sale of goods
Seller may borrow money from his bank to finance
expansion of his business so that he can obtain the buyer’s
order and supply the goods (bank loan is form of credit)
Buyer may be unwilling or unable to pay for the goods in
advance or on delivery and require a period of credit from the
Seller (Seller may provide credit himself by deferring
payment or accept payment by means of a bill of exchange
payable at a future date).
No matter who provides credit or how it is provided the creditor will
usually require some form of security.
e.g. – Seller may reserve title in goods
- Seller may demand that payment be by irrevocable
documentary credit
- Bank may require security over other property belonging to
the borrower
- Finance house may ask for a third party guarantee
Creditor wishes to ensure he is not left high and dry should debtor fail.
CREDIT
- Form of financial accommodation
- The provision of a benefit (cash, land, goods, services or
facilities) for which payment is to be made by the recipient in
money at a later date.
FORMS OF CREDIT
Loan Credit
Granted where money is lent to the debtor on terms that it
must be repaid to the creditor together with interest in due
course
e.g. bank loan or overdraft
Sale Credit
granted where the debtor is allowed to defer payment of the
price of goods and services supplied.
e.g. conditional sale, hire purchase, and credit sale agreements.
Fixed-Sum Credit
Granted where the debtor receives a fixed amount of credit
which must be repaid in a lump sum or by instalments over a
period of time.
Revolving Credit
Granted where the debtor is allowed a credit facility which he
may draw on as and when he pleases, up to an overall credit
limit.
NATURE OF SECURITY
(a) Personal Security
Where a person who is not otherwise liable under a contract between
the debtor and the creditor enters into a separate contract with the
creditor under which he assumes some form of liability to ensure that
the creditor does not lose if the debtor fails to perform his contractual
obligations.
2
Debtor’s contractual obligations may involve payment of money or
require performance of some act
e.g. guarantee, caution, indemnity or performance bond
(b) Security over Property
This is a right relating to property, the purpose of which is to
improve the creditor’s chance of getting paid or of receiving
whatever the debtor is required to do by way of performance of the
contract
possessory
non-possessory
land
LIENS
A lien is the right to hold the property of another as security for the
performance of an obligation.
A common law lien lasts only so long as possession is retained, but while
it lasts can be asserted against the whole world.
An equitable lien exists independently of possession; i.e. it may bind
property not in possession at the time the obligation is incurred, but it
cannot avail against the purchaser of a legal estate for value without
notice of the lien.
A possessory lien is the right of the creditor to retain possession of his
debtor’s property until his debt has been satisfied.
A charging lien is the right to charge property in another’s possession
with the payment of a debt or the performance of a duty.
A vendor’s lien is the right of a seller to retain the property till payment of
the purchase price, e.g. under the Sale of Goods Act, 1893 Section 39, an
unpaid seller of goods who is in possession of the goods may retain
possession until payment or tender of the price.
3
GENERAL LIENS
General liens cover all the liabilities of the owner of the item to the
person keeping possession of it.
For example, an Advocate has a lien over all the papers of his client
which are in his possession, even though his client may have paid him
for working on some of them but not on others.
PARTICULAR LIENS
They give a right to retain an item until all liabilities of the owner in
regard to that item only have been settled.
Accountants have at least a particular lien for unpaid fees over any
books, files and papers delivered to them by clients and also over other
documents which come into their possession while acting for clients
(WOODWORTH V CONROY 1976)
It is useful for a professional person to have this lien because if a client
wants to go, say to another accountant without paying his bill to a
previous one, this will be made more difficult if the first accountant is
exercising his rights to retain the client’s books and papers.
General and particular liens can be created by the judiciary applying
common law.
They do not allow those who exercise the lien to sell the property retained
and they cease when the item to which the lien relates leaves the
possession of the creditor and also when the debt or liability is paid or
met.
PLEDGE/PAWN
The transfer of the possession (but not ownership) of a Chattel as
security for the payment of a debt or performance of an obligation. On
default being made the Chattel may be sold.
The pawnee’s rights over an article taken in pawn.
Pawn – To pledge a chattel as security for debt, i.e. to part with its
possession to the lender. A special property is conferred on
4
the pawnee, who has the power of sale in default of
redemption.
A pledge differs from a lien because the items to be used as security are
handed to the lender with the idea that they are used as security for a
loan.
The items over which a lien is exercised are handed to a person, for
example with the idea that he will do work on them.
It is only later when the work is done and the debt is not paid that the
person who has done the work may keep the item if it is still in his
possession and, in effect, use it as security until payment is made.
RIGHT TO SALE
A lien does not give the right to sell the item(s) on which the lien is being
exercised.
A pledge usually gives the lender a right to sell the items pledged. This
will be given by the contract of pledge which the lender and borrower
make.
