Consumer loan and a pledge over a viola – what happens when the music stops?
The Wealth Finance Brief - 20 June 2014
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- Consumer loan and a pledge over a viola – what happens when the music stops?
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- Security Over Land
- Margin Lending – A Brief Introduction
- The Cape Town Convention and Aircraft Protocol: ratification by the UK (II)
Kathryn Bassano v Alfred Toft, Peter Biddulph Ltd, Borro Loan Ltd, Borro Loan 2 Ltd is an interesting case as it highlights a number of potential problems for a lender where an individual in financial difficulties took out successive loans on the security of a chattel (in this case a viola) and none of the lenders knew about the other loans.
The first lender was Peter Biddulph. Mrs. Bassano (a professional musician) approached Mr. Biddulph, a dealer in fine musical instruments, for a loan on the security of an antique voila. He lent £50,000 by way of interest free loan to be repaid from the proceeds of sale of the viola. Mr. Biddulph endeavoured to sell the viola and, following a lead provided by Mrs. Bassano, he agreed to the viola being tried out by a professional purchaser in the Far East, but when the purchaser decided not to buy it, it was returned to Mrs. Bassano instead of Mr. Biddulph and Mrs. Bassano refused to return it to him so he was left as an unsecured creditor of Mrs. Bassano.
The second lender was Mr. Toft (also a dealer in fine musical instruments). Mr. Toft agreed to lend Mrs. Bassano a further £100,000 on the security of the viola. The security comprised a chattel mortgage which would been appropriate for a company granting security over the viola, but not an individual. The only way an individual can grant security over a chattel is by way of a bill of sale which has to be in the prescribed form and has to be registered pursuant to the Bills of Sale Act 1882. It was not in prescribed form and was not registered and was therefore void as a matter of law.
The last lender was Borro Loan Limited and Borro Loan 2 Limited ("Borro"). Borro was a pawnbroker and agreed to make two loans totalling over £130,000 on the security of the viola and some jewellery. The loan carried interest. Borro insisted on keeping the viola in their vaults, but Mrs. Bassano wanted it held by a dealer, Bishops Strings, with a view to selling it. Eventually Borro agreed to the viola being transferred into the possession of Bishops Strings against a pledge and security agreement and also a tripartite agreement with Borro, Mrs. Bassano and Bishops Strings providing that Bishops Strings should not release the viola from its custody without Borro's prior authorisation. Borro dealt with all its lending online and Mrs. Bassano accepted the loan online at Borro's premises by clicking "I accept". Borro were unaware of the prior loans from Mr. Biddulph and Mr. Toft and Mr. Biddulph and Mr. Toft had no knowledge of the Borro loan.
Unfortunately Bishops Strings did not comply with the tripartite agreement and allowed another dealer Mr. Dahler, to take the viola for a customer to try out. Mr. Dahler took the viola to Mr. Biddulph's shop and left it there when he went to lunch. Needless to say Mr. Biddulph could not believe his luck and, with Mr. Dahler's agreement, kept the viola which he had been seeking to repossess since 2010.
The parties engaged in correspondence arguing their respective interests in the viola and Mr. Toft applied to the High Court in an attempt to register his chattel mortgage out of time as a bill of sale. Mrs. Bassano claimed she was entitled to the return of the viola herself and started proceedings against Mr. Biddulph in the Sheffield County Court for delivery up of the viola and Borro claimed to be secured on the viola. All the various claims on the viola became consolidated into one High Court action and an order was agreed for the viola to be sold for £230,000 to Mr. Biddulph who dropped his claim for the £50,000.
The High Court found that Mr. Toft's chattel mortgage including the covenant to repay was void as it was not in the prescribed form for a bill of sale and had not been registered at the High Court within the prescribed time period. There was, however, a clear offer of finance made to Mrs. Bassano which had been accepted and acted on by the parties. Mrs. Bassano then argued that the loan was governed by the Consumer Credit Act 1974 ("CCA") and only therefore enforceable if the protections afforded to a borrower under the CCA were complied with.
The Court accepted Mr. Toft's argument that as a dealer in antique instruments the advance to Mrs. Bassano was not a loan "made in the course of a consumer credit business," but a one-off, so Mr. Toft was not therefore required to be licenced pursuant to section 21(1) of the CAA. Accordingly the Court found that Mr. Toft was not bound to have complied with the formalities under the regulations made under Part V of section 74(1) of the CAA. Mr. Toft was therefore entitled to a judgment on the loan with interest. The loan was, however, unsecured.
Mrs. Bassano sought to argue that by clicking "I accept" on a computer terminal at Borro's offices she had not executed a CCA regulated agreement in the prescribed form. This argument was rejected by the Court which held that the electronic signature generated by clicking the appropriate button had the same effect. Borro's claim for the unpaid loan was upheld. The Court then had to decide whether Borro's pledge over the viola (which depended on Borro having actual constructive possession of the viola) had been destroyed as a result of the wrongful transfer of possession by Bishops Strings to Mr. Dahler in breach of the tripartite agreement. The Court analysed the mechanics of the pledge security as follows:
- When Borro delivered the viola to Bishops Strings it was to them as their agent for safe keeping. There was no surrender of possession in the legal sense, but only a surrender of custody. The surrender of custody was not inconsistent the retention by Borro of its "special interest" as pledgee. The bailment to Bishops Strings of the viola was on clear terms which were understood by the parties.
- The delivery of the viola by Bishops Strings to Mr. Dahler was unauthorised by Borro and there was therefore no surrender of possession by Borro at that time.
- When the viola was subsequently delivered to Sotheby's for sale, again there was no surrender of possession by Borro as the delivery was made pursuant to a court order. Borro's surrender of custody did not affect Borro's special interest as pledgee which was again preserved.
Mr. Toft obtained judgment for £100,000 plus interest. Borro obtained judgment for £130,000 plus interest and was a secured creditor.
A number of useful points came out of the case including:
- If you take security over a chattel from an individual you can either do it by pledge (which involves the lender obtaining actual or constructive possession of the chattel) or by way of a bill of sale which has to be in prescribed form and registered pursuant to the Bills of Sale Acts 1878-1882 otherwise it is void.
- If you are lending to an individual it is likely that the consumer credit regime will apply. This means that you will need to be authorised by the FCA and the form of loan agreement will need to be compliant with the consumer credit regime, unless some very specific exemptions apply e.g. the high net worth exemption.
- A consumer credit regulated agreement can be executed online and it will still be regarded as properly executed.
- It is essential that the lender retains actual or constructive possession of a chattel in order to have an effective pledge, but if the lender parts with "custody" of the chattel involuntarily or voluntarily (if consistent with an intention to preserve the lender's special interest) it will not mean that the lender's interest in the chattel is lost.
For further background into taking security over art – a different type of chattel which we come across banks lending against and taking security over - please see our briefing paper "Security over Art: an Introduction".