Under modern economic conditions it is rarely feasible to deprive the borrower of charged goods, as the rise of no-pledge security interests demonstrates. But the goods frequently do not even rest in the borrower’s hands. This is especially likely to be the case if the borrower is a trader; he will probably want to sell the goods that he has charged. A manufacturer may similarly wish to replace charged machinery. In these instances the need arises to allow the borrower the desired disposition of the goods and at the same time to maintain the lender’s security interest. A number of legal systems, however, do not yet recognize the legitimate interests of both parties in this situation. They prohibit any disposition by the borrower and may not admit a security interest in goods that remain in the borrower’s hands for purposes of resale. This problem has been solved in the United States and Great Britain, although on slightly different lines in the two countries. In the United States the original registration may provide that the security interest is to extend to the proceeds from the disposition of the goods or to products of the charged goods. In Great Britain the right to a “floating charge,” granted against its assets by a borrowing company to a lender, has the same effect.
A security interest proves its legal value when under attack by third parties. If it is to fulfill its function of guaranteeing to the lender preferential satisfaction of his claim, the charged goods must be immunized as much as possible against the rights of other persons. The third party is frequently a person who has unknowingly purchased charged goods: borrowers in financial straits may be unable to resist the temptation of selling charged goods left in their hands to a third person without the consent of the lender and without making the proceeds of the sale available to him. Most countries tend to protect the buyer, provided he neither knew nor ought to have known of the existing security interest. If the charged goods are marked, the buyer can hardly claim to have purchased in good faith. But mere registration does not usually give the buyer sufficient notice, since sales transactions cannot be burdened by requiring the buyer to search a register in a distant place.
The borrower’s other creditors are also likely to have an interest in charged goods. But creditors, as distinct from buyers, are usually expected to search existing registers of charged goods.
Failure of repayment
If the borrower does not make payment after the secured loan has fallen due, the lender may pursue two different courses. He may enforce his claim for repayment before the courts just as any other creditor or he may enforce his preferred position as a secured lender. The rules to be followed in enforcing a security interest differ considerably from country to country and even within a country according to the type of security interest involved. Very often the lender must sell the charged goods by public sale; occasionally he is permitted to acquire the charged goods himself. If the proceeds of a sale exceed the amount of the secured loan, the surplus must be paid to the borrower, whereas the borrower remains liable for any deficit. All legal systems frown upon clauses that permit a lender to acquire the charged goods automatically on the borrower’s failure to pay.
After repayment of the secured loan the borrower reacquires title from the lender
The rules on security interests are still strongly national in character. The need for unification has, except in a few specialized areas, not been very urgent. This is largely because, in the great bulk of international sales transactions, the paydayloansohio.net/cities/zanesville/ seller, wherever necessary, may secure himself by insisting on payment by letter of credit. But of some international concern was the question of the protection of security interests in those means of transportation that move constantly from one country to another. Two international conventions on security interests in ships and aircraft have, therefore, been concluded. They do not provide uniform rules on security interests but merely guarantee that an interest validly created in one contracting state will be recognized in any other contracting state. The number of countries that have adopted these conventions is, however, limited.
In the case of lenders who are not at the same time sellers it has been more difficult to find adequate security devices. One of the most successful methods has been developed in close analogy to hire-purchase sales transactions. The borrower transfers ownership in the goods financed by the loan to the lender but retains them in his possession by means of a lease agreement between him and the lender.