420 Chapter 16Credit transactions and intellectual property rights
the house of the sole trader or of one of the partners. If the loan is not repaid, the creditor
will be able to repossess the property (sell it and take the amount still owed). Where an
individual or a partnership gives goods as security for a loan, but retains possession of the
goods, the security interest must be registered under the Bills of Sale Act 1878. If the documents
relating to the security interest are not attested and registered, within seven days, the security
becomes unenforceable. Registration requires a detailed inventory of the goods given as
security. For this reason individuals and partnerships cannot grant the equivalent of a float-
ing charge where a class of assets, both present and future, are given as security for a loan.
Future rights can be given as security. David Bowie famously gave future earnings from
all of his songs as security for a very large loan.
Alternatively, the creditor may be willing to accept a third party guarantee of the loan.
The guarantor would then be liable to repay the loan if the debtor defaulted.
For example, in Lloyds BankvBundy(see p. 132) the father guaranteed the loans made
to his son’s business, promising that he would repay the loans if his son, the debtor, failed
to do so. Such guarantees are effective as long as they are evidenced in writing.
Security for a loan is not always necessary. Sometimes, a bank will allow an overdraft
without requiring security. An overdraft is a form of loan whereby customers can overdraw
their bank accounts (take more money out of the account than has been deposited into it)
on the understanding that money will be deposited later. There will be a limit above which
the customer may not overdraw. The rate of interest on an overdraft is usually higher than
on a bank loan. However, the customer can clear his overdraft as soon as he wishes, and if
the account is overdrawn for only a short time he might not pay much interest. Large over-
drafts are a risky way for a small business to borrow money, as the bank can insist that they
be repaid at any time.
The Consumer Credit Act, which is considered later in this chapter, applies to loans as
long as they fit within the Act’s definition of a regulated agreement.Hire-purchase
Under a hire-purchase agreement a creditor hires goods for a fixed period, and has an
option to buy the goods for a token sum at the end of that period.Example
A butcher is acquiring a van on hire-purchase from a finance company. He agrees to pay 36
monthly instalments of £350 each. For the duration of the agreement, the butcher is paying
the money to hire the van, which remains the finance company’s property. With the 36th
payment, the butcher buys the van, which then becomes his property. At no stage does the
butcher make a commitment to continue with the agreement for the full 36 months.
However, if the agreement is a regulated agreement the Consumer Credit Act 1974 will
require the butcher to pay at least half of the total amount due under all of the instalments.A person who takes goods on hire-purchase has been given credit. The credit consists of the
difference between what the customer would have had to pay to buy the goods, and the
amount he actually paid by way of deposit. For example, John takes a car with a purchase
price of £10,000 on hire-purchase. He pays a £1,000 deposit and agrees to pay £300 a month
for 36 months. John has been given £9,000 credit. The extra amount paid by way of interest
is ignored in calculating the amount of credit.