Case 11: Bank loan for a wholesaler

(Security right in revolving stock-in-trade -- security ownership -- enterprise charge -- actio Pauliana)

A, a financial institution, intends to make a loan to B, who is starting a business as a wholesaler of motorcar accessories. To avoid personal liability, B sets up a private limited company (C). A wishes to take a security right over the stock that will be present on C’s premises. The nature of the business is such that the stock will continuously be sold and replaced. A does not, therefore, wish its security right to be confined to present stock; rather it wishes it to include the stock that will be purchased by C in the future.

Questions

(a)Is such an arrangement possible? Describe its main features and prerequisites, including any requirements that may exist as to form, registration, separate storage, etc.

(b)What rights would such an arrangement confer on the secured party

(A) in the event of C’s insolvency? Or if another (unsecured) creditor tried to execute against the stock?

(c)How common are arrangements of this kind in business practice?

(d)Are there any limits in respect of the value the collateral may have in relation to the amount of the secured loan?

Variation

The position is as described above, except that the security right was created many months after the loan was made, at a time when C was already beginning to be in financial difficulties.

Does this affect A’s legal position? If so, in what way?

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