It is possible to use a chose in action as security for a
loan and lenders frequently take life assurance policies
as security. A bank would do this in the case of an over-
draft. However, shares in companies are perhaps the
commonest chose in action to be used as security.
Shares can be made subject to a legal mortgage but the
shares must actually be transferred to the lender and his
name is in fact entered on the company’s share register.
An agreement is made out in which the lender agrees to
retransfer the shares to the borrower when the loan is
repaid.
You can also have an equitable mortgage of company
shares and this is in fact often the method used. The
share certificate is deposited with the lender, together
with a blank transfer. This means that it is signed by
the registered holder, i.e. the borrower, but the name of
the person to whom the shares are to be transferred is
left blank. The shares are not actually transferred, but
the agreement which accompanies the loan allows the
lender to sell the shares by completing the form of trans-
fer and registering himself or someone else as the legal
owner if the borrower fails to repay the loan. The shares
can then be sold and transferred as required.
Liability of the proprietors
Sole traders
A sole trader is liable for the debts of the business to the
extent of everything he owns. Even his private posses-
sions may be ordered to be sold to pay the debts of the
business. There is no such thing as limited liability. A
sole trader can make a free transfer of personal assets
to a husband or wife (spouse) or other relative, but the
transfer can be set aside and the assets returned to the
sole trader and then used to pay the business creditors
if the court is satisfied the transfer was made to defeat
creditors. Also, if property is transferred to a spouse, it is
lost to the sole trader if the marriage ends in divorce and
the spouse refuses to give it up.
Partnerships
In the case of a partnership governed by the Partnership
Act 1890, partners are jointly and severally liable for the
debts and other liabilities of the firm, such as negligence
liability, even though the negligence results from the
work of one only of the partners. The problem is made
more acute for these firms and the partners because
there is unlikely to be full insurance cover on offer for
professional liability claims.
They can be sued together by a creditor who has not
been paid. They can also be sued individually (or sever-
ally). Thus, if A, B and C are partners and the firm owes
X £3,000 but this cannot be paid from the partnership
funds, then, for example, X may sue A for the whole
£3,000 and A may then try to get a contribution of £1,000
from B and £1,000 from C. If they are insolvent, he will
not get the contribution, or at least not all of it.
The liability extends to the private assets of the part-
ners. Even the estate of a deceased partner is liable for
the debts of the firm incurred while he was a partner if
there is anything left in his estate after paying his private
debts.
There is also liability for the debts of the firm incurred
after retirement unless the firm’s existing customers are
informed of the retirement and public notice of retire-
ment is given in The London Gazette, which is a daily
publication obtainable from the Stationery Office.
There may be a limited partnership and those who
want to put a limit on their liability for the debts of a
partnership firm may become limited partners. This is
provided for by the Limited Partnerships Act 1907.
However, at least one partner must have unlimited
liability for all the debts of the firm. A limited partner is
not liable for the debts of the firm, though, if the firm
fails and is dissolved, his capital may be used to pay its
debts as far as required before any of it is returned to
him.
A limited partnership is, however, unsatisfactory be-
cause the limited partner has no right to take part in
the management of the firm. If he does, he becomes
liable with the other partners for the debts and liabilities
of the firm during the period for which he was involved
in management.Limited liability partnerships (LLPs)
These can be registered under the Limited Liability
Partnerships Act 2000. The provisions of this legislation
are considered more fully in Chapter 5. However, on
the matter of liability the Act goes some way to meeting
the concerns of partners regarding unlimited liability. The
LLP is a separate person like a company. The LLP and
not its members is liable to third parties. However, a
negligent member’s personal assets are at risk since in
the case of professional negligence the assets of the LLPPart 2Business organisations