Bank Lending
Overdrafts:
- Widespread use over the past 30 years.
- The student overdraft has become very common.
- Banks tried to attract young customers going into higher education, as they would get an account when they were 18 and would stick with that bank when they came out of university and got a job.
- There was a market for banks to use students.
- Students got accounts, benefits with their accounts, and overdrafts.
- This is to get the student to use the bank's services for the rest of their life.
- Overdrafts are a short-term form of finance.
- If an overdraft is secured, the bank charges a lower rate of interest.
- The bank is likely to want security for larger overdrafts (e.g. in companies).
- Rouse v Bradford Banking Co 1894: the overdraft is repayable on demand.
- Crips & Son Ltd v Wickenden 1973: an overdraft is repayable on demand but the customer has to be given reasonable notice before the facility is withdrawn.
- Usually, one month is considered reasonable.
- A bank rarely demands instant repayment.
- The most likely situations are where either a customer does not abide by the agreement or where banks run out of money.
- Williams & Glyns Bank v Barnes: If there is an agreement to suggest that banks won't demand immediate repayment, the agreement will override (there was none in this case).
- The implied agreement in a student overdraft is that the bank will not demand repayment until you are no longer a student.
- Titford Property v Cannon Street Acceptances Ltd 1975: despite its clause, the agreement in the letter overrode it.
- Term loans: used for the purchase of specific assets or for funding longer-term projects
- It can be secured or unsecured
- It will only become repayable early if there is a breach of the contract which allows it (e.g. failure to make payments on time)
- Syndicated loans
- Consumer credit provides a level of protection for us
- Mortgages: these are most often used to finance the purchase of real property, e.g. residential property or, for businesses, office premises or factories, etc. The property will be used as security. Interest only mortgages are only to pay the interest of the mortgage.
- Inflation can destroy the value of debts
- Government wants to increase inflation by a small amount, so that over time the debts will lose value by about half
- Letters of credit, bills of exchange, etc.
- Security (collateral): Debtor gives something he owns (under English law this can be pretty much anything!) to the creditor in exchange for a loan in order to protect the creditor. The objective is to minimise risk to the creditor.
- The significant benefit to the debtor is that there is a lower rate of interest
- You may be able to borrow over a longer period of time if you have provided security (although this may mean it costs more overall).
- The disadvantages are: the property will be at risk if it becomes difficult to repay the loan; the debtor isn't free to deal with the property that has been given as security; and in some cases the creditor may even insist on possession of the security (e.g. paper bonds)
- English law is seen as being very 'pro-creditor'
- Creditors can give a floating charge over the business, allowing the business to carry on as it wanted until it breached, then the creditor would appoint an administrator who has to act not only for the creditor but also for everyone with interests in the business
- Guarantees: a promise by one person to be responsible for the debts of another (secondary liability)
- Security over goods: not widely used in the UK (is in Canada)
- Security over real property: mortgages
- Bank balances, life assurance policies, stocks and shares can also be used
- Money: ROY GOODE, "Money and payment play a central role in commercial and financial transactions. Every working day millions of transactions are concluded involving the sale and purchase of land, goods and services, the lending and borrowing of money, the issue and transfer of financial instruments. Every working day funds are transferred and payments made in discharge of money obligations, and proceedings are instituted for the recovery of unpaid debts."
- The English pound is legal tender: if you offer payment in the proper way and it's not accepted, the item you're paying for is still yours!!
- "That which passes freely from hand to hand throughout the community in final discharge of debts and full payment for commodities, being accepted equally without reference to the character or credit of the person who offers it and without the intention of the person who receives it to consume it or apply it to any other use than in turn to tender it to others in discharge of debts or payment for commodities." Moss v Hancock 1899
- "Only those chattels are money to which such character has been attributed by law, i.e. by or with the authority of the state." Dr F.A. Mann
- Used to barter in olden days
- In modern times, in some counties, people still barter things such as cigarettes
- Development of coins and paper money
- Now we have electronic money
- It is easier to spend money than it has been in history (even 3o years ago, people hadn't heard of the internet: now we can transfer money over the globe just sitting at home!)
- Money can be used as a medium of exchange ("It provides the owner with generalised purchasing power," Philip Molyneux), or a unit of account
- Money has to be acceptable as a form of payment
- 'Fungibility': one note of the same denomination must be as good as another
- Must be divisible into smaller units
- Must be stable
- Must be recognised for what it is
- Must be portable
- Roy Goode: The meaning of the term money will depend on the context in which it is used - lawyers will use a narrower definition than economists
- You can use gold coins for payment of any amount under the Coinage Act 1971 s 2(1)
- Denominations of more than 10p are legal tender for payment of any amount not exceeding £10; 5p coins up to £5; bronze coins up to 20p.
- Bank notes
- Negotiability: you get good title if you accept money that has been stolen in good faith (as long as you give something for you), but not stolen goods
- Where a person has received money from another and that person has taken it honestly and for value, the nemo dat rule (no one gives what he doesn't have) will not apply
- Wookey v Pole 1820: "Good faith and for valuable consideration."
- There are many types of payment available: the law needs to keep up with this
- In most countries the law recognises payment by other methods than physical money
- This is the case where there is a sophisticated banking system
- The Scottish bank note is interesting in this context: it is not legal tender but it is accepted
- AmEx is not accepted everywhere but Visas usually are
- In the commercial context, what is accepted as money is money
- If a contract specifies payment in cash, the word cash will not be held to mean physical money (Brimnes 1973 and Chikuma 1981)
- Goode: "The crucial question is not what constitutes money but what constitutes payment."
- S38(1) of the SGA 1979: a seller is not unpaid if the whole of the price is paid or tendered.
- Methods of payment:
- Delivery of physical money
- Acceptance of goods either as part exchange or in full
- Transfer of funds to the transferee's bank account
- Novation: the concept of replacing an existing obligation or contract with a new one (a new book entry)
- Set-off: If I owe you £35 and you owe me £30, I just pay you £5
- Netting: Barclays have millions of transactions and are due to send thousands of individual payments to NatWest, who also need to send thousands to Barclays, so they send the net balance of those payments, in order to reduce the number of payments to be made
- 1990: BCCI collapsed. The bank was based in Luxembourg but were really run out of London. In the UK, we allow set-off. If a customer has a loan but also a deposit, you simply set off one against the other. In Luxembourg you have to repay the loan rather than have it set off.
- English common law wants to use new techniques: the reason London has become one of 3 top financial centres (but Hong Kong and Singapore are now rising, as well as Shanghai, Mumbai and Dubai)
- Shanghai will probably follow what is done in London and New York
- Payment is effective if it is either paid by the person who owes the money, or by someone with the apparent or actual authority
- If a third party who is an 'officious intervener' pays, it will not be payment unless it is accepted by the creditor
- The creditor must have immediate and unconditional use of the money
- A cheque is defined in s73 of the Bills of Exchange Act 1882 as 'a bill of exchange drawn on a banker payable on demand.'
- The Cheques Act 1992 introduced a new section (81A) into the Bills of Exchange Act 1882 which requires that cheques need to pay into an account in the name of the payee
- Banks used to offer customer cards to use with their cheques
- If you had a card and cheque then a supplier of goods would accept them
- It's now not possible to use cheques to pay for goods
- If a cheque is refused because of a lack of funds, they'd don't say this as a reason
- If you give a cheque you can stop payment if instructed by a customer
- The drawer of the cheque can be sued (only if there is a total failure of consideration can you stop it)
Debit/Credit Cards
- A debit card is an 'electronic form of a cheque'
- Credit cards: Visa and Mastercard are widely accepted. With a credit card, you are not paying for what you're buying: the card company is lending you money. You pay it back when the company asks for it.