17. The functions of negotiable instruments.

Negotiable instruments are documents which represent an intangible right of payment. Examples include promissory notes, certificates of deposit and cheques. When drafted using the correct and very particular language prescribed by common law or statute, a document becomes negotiable, which means that it can be freely transferred by endorsement (usually by signature) or delivery, One of the most important features of negotiable instruments is that they are generally not subject to the nemo dat rule. This general principle of law states that 'he who hath not cannot give', Le. a transferor who does not hold title cannot transfer title to a transferee. In the realm of negotiable instruments, that rule is sacrificed in order to facilitate the free alienability of negotiable instruments, which aids commerce in general.

Negotiable instruments serve two different functions in commercial transactions: a credit function and a payment function. The credit function allows negotiable instruments to be used to obtain credit now, to be repaid out of future income. Common examples include promissory notes, certificates of deposit and debentures.

A certificate of deposit is a bank's written acknowledgment of a deposit and a promise to pay the depositor to his order, or to some other person or that person's order. A debenture is the most common form of long-term loan used by companies in the UK. It is usually repayable at a determined date in the future and secured by the assets of the company, although sometimes it is unsecured and referred to as a naked debenture.

The payment function allows negotiable instruments to be used in lieu of cash payments which may be inconvenient (or risky) to transfer directly, Common examples are cheques and bills of exchange. A bill of exchange is a three-party instrument written and signed by the first party (the drawer), ordering the second party (the drawee) to pay a third party (the payee) a sum of money on demand or at a fixed or determinable future time. A cheque is a more specific term for a bill of exchange, usually on a printed form. drawn on a bank and payable on demand.

Another example of a negotiable instrument which should be mentioned here is the letter of credit, A letter of credit is a document issued by a bank (the issuer) to a third party (the beneficiary) at the request of an applicant, instructing the bank to pay a certain specified amount of money to the beneficiary once certain conditions that are stated on the document are met. Letters of credit are often used in the international import and export business, as they provide good documentary evidence of financing for the transaction,

18. The two types of security interests.

Security (in the context of the law of secured transactions) differs from other arrangements securing payment or performance because it gives the lender a right in rem which binds third parties, so that anyone interested in buying the security from the borrower cannot freely do so. These other types of arrangements are sometimes referred to as quasi-security. (It should be noted that mortgages are a form of security in land and are usually addressed within the scope of real-property law.)

There are two types of security interests, possessory and non-possessory. With a possessory interest, the creditor takes possession of the property which is the security interest (the pledge). The debtor (pledgor) transfers personal property to the creditor (pledgee} in order to secure payment or performance of the underlying obligation. An example of this would be pawning personal property to raise money. The most commonly encountered non-possessory security interests are the fixed charge and the floating charge. A fixed charge creates a security interest in specific property and affords the creditor control over its alienation. This means that the debtor cannot deal in the property without first satisfying the indebtedness secured by the property or receiving the creditor's consent. A floating charge creates a security interest in the assets of the debtor at any given time, which means that the debtor may freely deal with them in the ordinary course of business. It is only when there is a default or a similar event that the charge 'crystallizes' and becomes fixed.

All the security interests mentioned above are consensual, since they are created through a security agreement whereby the debtor grants to the creditor an interest in debtor property (collateral) in order to enforce the performance of the debtor's obligations to the creditor. There also exist non-consensual security interests, such as those created by operation of law, e.g. unpaid sellers' liens. where a seller has a lien over goods in his possession for which he has not received payment. In order to invoke consensual security interests against third parties, perfection of the security interest must take place. Perfection is the action which gives the creditor priority over certain other creditors in the enforcement of the security interest. Perfection can take place in three ways: by registration of the security agreement, by possession of the collateral, and by attachment of the security interest. The underlying purpose of perfection is to put third-party creditors on notice of the security interest and so avoid any hidden interests in property. Attachment refers to the time at which the creditor's interest fastens to the property offered as security, giving the creditor a vested interest. In certain cases, attachment also constitutes perfection. Perfection upon attachment is sanctioned by statute, generally for purposes of commercial convenience and availability of other methods of protecting creditors.