[b] More sophisticated criticisms of security point out that although unsecured creditors will receive less on insolvency, they should be able to compensate by charging a higher interest rate.
In some countries, "involuntary" creditors (such as tort victims) also have preferential status, and in others environmental claims have special preferred rights for cleanup costs.
[d] "There are only four kinds of consensual security known to English law: (i) pledge; (ii) contractual lien; (iii) equitable charge and (iv) mortgage.
The law has historically taken a dim view of provisions which might impede this right to have the assets reconveyed (referred to as being a "clog" on the equity of redemption); although the position has become more relaxed in recent years in relation to sophisticated financial transactions.
To execute foreclosure, the secured party needs to petition the court,[g] and the order is made in two stages (nisi and absolute), making the process slow and cumbersome.
The secured party has a duty to get the best price reasonably obtainable, however, this does not require the sale to be conducted in any particular fashion (i.e. by auction or sealed bids).
If the mortgagee takes possession then under the common law they owe strict duties to the mortgagor to safeguard the value of the property (although the terms of the mortgage instrument will usually limit this obligation).
However, the common law rules relate principally to physical property, and there is a shortage of authority as to how they might apply to taking "possession" of rights, such as shares.
Nonetheless, a mortgagee is well advised to remain respectful of their duty to preserve the value of the mortgaged property both for their own interests and under their potential liability to the mortgagor.
Secondly, because the legal title to the mortgaged property is not actually vested in the secured party, it means that a necessary additional step is imposed in relation to the exercise of remedies such as foreclosure.
A fixed equitable charge confers a right on the secured party to look to (or appropriate) a particular asset in the event of the debtor's default, which is enforceable by either power of sale or appointment of a receiver.
Difficulties with the Bills of Sale Acts in Ireland, England and Wales have made it virtually impossible for individuals to create floating charges.
A legal lien, in many common law systems, includes a right to retain physical possession of tangible assets as security for the underlying obligations.
[30] Thus, the buyer's breach of a material condition, in turn, made it possible for the seller to declare the contract had ended, that the status quo ante should be restored, and to repossess the goods accordingly.
[30] Since the buyer had breached, he had forfeited his right to reimbursement of any portion of the price already paid, or in the alternative, those payments could be regarded as a crude form of rent for the use of the goods.
[30] As conditional sales became popular for financing industrial equipment and consumer goods, U.S. state legislatures began to regulate them as well during the early 20th century, with the result that they soon became almost as complex as the older forms of security interests which they had been used to evade.
For example, it is possible to grant a power of attorney or conditional option in favour of the secured party relating to the subject matter, or to utilise a retention of title arrangement, or execute undated transfer instruments.
Whilst these techniques may provide protection for the secured party, they do not confer a proprietary interest in the assets which the arrangements relate to, and their effectiveness may be limited if the debtor goes into bankruptcy.
Appropriation is a means whereby the mortgagee can take title to the assets, but must account to the mortgagor for their fair market value (which must be specified in the mortgage instrument), but without the need to obtain any court order.
In the late 1940s, the United States (U.S.) legal community arrived at a consensus that the traditional common law distinctions were obsolete and served no useful purpose.
[40] There was also the problem of the above-mentioned early English cases that regarded such security interests as fraudulent conveyances and failed to recognize that they had legitimate uses in a modern industrial economy.
A security interest grants the holder a right to take a remedial action with respect to the property, upon occurrence of certain events, such as the non-payment of a loan.
Perfection is typically achieved by filing a financing statement with government, often the secretary of state located at a jurisdiction where a corporate debtor is incorporated.
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.
[44][45][46] As noted above, UCC Article 9's core insight was that the traditional distinctions were hopelessly obsolete, which was highly influential elsewhere and inspired the enactment of the Personal Property Security Acts throughout Canada during the 1990s.
The Canadian, New Zealand and Australian acts all followed the UCC's pragmatic "function over form" approach and borrowed extensive portions of Article 9's terminology and framework.
However, New Zealand, as a unitary state, only needed to enact one act for the whole country and was able to create a single nationwide "register" for security interests.
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.
To date, only Honduras has been able to fully enact and actually implement the OAS Model Law in a manner faithful to the spirit of UCC Article 9, in the sense of unifying security interests and making them easily visible on a public registry.
At the launch of the Pathways to Prosperity in the Americas initiative in San Jose, Costa Rica on March 4, 2010, then-U.S. Secretary of State Hillary Clinton stressed that "the United States is committed to working with our Pathways partners to modernize laws that govern lending so that small and medium size businesses can use assets other than real estate as collateral for loans", and generously praised Honduras for its aggressive reform efforts.