Secured Financing Intro

The idea of modernizing finance law has spread around the world. Secured financing is a way to stimulate economic growth and modernize an economy. In theory, capital is not used to develop the community because of the lack of legal infrastructure by which banks can lend capital and can hold an expectation to get it back. Many developing countries adopt systems patterned on the Canadian system.

In Canadian law, the core of the system is the security interest. What is a security interest? A secured interest is Propriety interest in the debtors property. This allows assertion of the nemo dat principle. The secured creditor defeats anyone who thereafter who takes an interest in the property.

What kind of interest is it? Prior to 1980 (PPA Act), the interest was a chattel mortgage. The debtor transferred legal title to the creditor. For example, the bank took legal ownership of your car/house, etc. if you took a loan against it. It was a transfer of equitable title. A seller agreed to allow buyer to use chattel, but legal title remained with seller.

With the PPA, the Act vaguely refers to a security interest as merely an “interest”. We know the interest is propriety but the Act does not provide us with any kind of info vis a vis the kind of the interest. The analogy that law students learn is in Roman Law; Romans recognized a type of transaction called a hypothec. A hypothec is an agreement between creditor and debtor that creditor should have interest in assets of debtor. There is no transfer of title but merely a recognition that the interest exists. The hypothec was recognized by Common Law as an “equitable charge”. In other words we can say the vaguely defined “interest” in the Act is merely a recognition of an interest, but the interest itself is not and does not have to be defined.