11 - Non-judicial Real Security

Summary

INTRODUCTION

Why grant or seek rights in security?

Personal rights are only as valuable as the person who owes the correlative obligation. If that person is unwilling or unable to pay or perform, the value of the right will be seriously diminished. The expense and hassle of enforcing a small debt may mean that it is not worth pursuing if the debtor resists. Even if a creditor successfully obtains a decree for payment and does diligence, expenses may not cover the full cost of recovery. Further, the debtor may not have sufficient assets to pay the creditor. A right to payment of £500 against a solvent debtor will be worth more than one for £5,000 against an insolvent one, if the so- called dividend which the insolvency official pays out to the insolvent debtor's creditors is less than 10p for every pound owed.

Creditors have a strong interest in protecting themselves against these risks before giving credit to debtors. The mechanisms which allow them to do so are known as rights in security. Rights in security take two forms: personal security (known in Scots law as caution); and real or proprietary security. Personal security gives the creditor a secondary personal right: the basic idea is that, if the debtor does not pay the creditor, another person will (thus the term personal security). In real security, the creditor's secondary right is not against a different person but against a thing, a res (thus the term real security). The thing over which the right is granted is sometimes referred to as the object of the right in security or the security subjects.

As discussed in Chapter Twelve, certain forms of diligence enable a creditor to acquire a real right in the debtor's property, which allows the value of the asset to be realised and applied to payment of the debt. For that reason, diligence is sometimes referred to as judicial security. This chapter is concerned with non-judicial real security. Judicial security is discussed in Chapter Twelve. Rights in security may be granted in respect of obligations other than debts but debts are the most common form of secured obligation and, for the sake of simplicity, the rest of this chapter will proceed on the assumption that the secured obligation is a debt.