Lecture 12.1 - Equitable Security Interests in Common Law

What is the role of equity in English law?

To provide remedies where none exist at common law or where the common law outcome would be unfair or inequitable.

Why did equity develop alongside the common law?

Because the common law was rigid and could produce harsh or unjust outcomes.

Give an example of equity intervening in property or security law.

The equity of redemption

• Allows a mortgagor to redeem property even after the legal redemption date has passed.

What does the equity of redemption show about mortgages?

That a mortgage is a security for a loan, not an absolute transfer of ownership.

What are the two main instruments used by equity?

1. Injunctions

2. Trusts

What is a trust (in basic terms)?

An agreement where one person holds legal title to property for the benefit of another.

Who is the settlor (or trustor)?

The person who creates the trust by transferring property.

Who holds legal ownership in a trust?

The trustee.

Who holds the equitable or beneficial interest in a trust?

The beneficiary.

What obligation does the trustee have?

To deal with the property in accordance with the terms of the trust for the benefit of the beneficiary.

What happens to trust property in relation to the trustee’s personal estate?

It is separated and does not form part of the trustee’s personal assets.

What is the role of the trustee?

To administer the trust property in accordance with the trust terms for the benefit of the beneficiary.

Why is the trust considered a major achievement of English law (Maitland)?

Because it allows legal ownership and beneficial enjoyment to be separated, enabling fairness and flexibility in the law.

What does Maitland’s quote emphasise in relation to equity?

That the trust is the most distinctive and important contribution of English law to jurisprudence.

Why is the trust “at the root” of equitable security rights?

Because equitable security relies on the separation between legal ownership and equitable interests.

What is an equitable security interest?

An equitable interest in property held to secure the repayment of a debt.

How does an equitable security interest mirror a trust structure?

The legal owner holds the property subject to an equitable obligation in favour of another.

Who typically holds legal title in an equitable security arrangement?

The debtor

Who typically holds the equitable interest in an equitable security arrangement?

The creditor

What is the key similarity between a trust and an equitable security right?

In both, equity recognises and enforces rights despite legal ownership being held by someone else.

Summarise the relationship between equity, trusts, and security rights.

Equity allows legal ownership to be separated from beneficial interests, which is the foundation of both trusts and equitable security rights.

What are the three certainties required for a valid express trust?

1. Certainty of intention

2. Subject matter

3. Objects

What is certainty of intention?

Clear intention by the settlor to create a trust.

What is certainty of subject matter?

The trust property must be clearly identifiable.

What is certainty of objects?

The beneficiaries must be identifiable or ascertainable.

Why is the trust structure important for equitable security rights?

Because it shows how legal ownership can be separated from equitable interests and enforced by equity.

What are the main legal consequences of a trust?

• Separation of legal and equitable title

• Priority of the beneficiary’s right

• Limited droit de suite

• Right of tracing

What does priority of the beneficiaries right mean?

The beneficiary’s right has priority over the trustee’s personal creditors.

• Trustee is holding the product for the beneficiary, not for themselves.

What is droit de suite?

The beneficiary’s limited right to “follow” the trust property if it is transferred to a third party.

• Limited means it may be restricted by bona fide purchase.

What is the right of tracing?

The right of the beneficiary to claim trust property or its value if it has been transformed or mixed.

• Example: If a trust fund is used to buy something else (e.g., shares), the beneficiary can claim that new property or its proceeds.

How do trust remedies relate to equitable security?

They provide the conceptual foundation for protecting creditors’ equitable interests, including priority, tracing, and following assets.

What is the key principle of equity illustrated by droit de suite and tracing?

Equity enforces rights even when legal ownership is transferred or altered.

What is a declaration of trust in the context of security rights?

When a person declares themselves trustee of assets for a beneficiary, creating an equitable interest without transferring legal title.

Who holds legal title under an equitable charge?

The debtor/chargor.

Who holds equitable title under an equitable charge?

The creditor/chargee.

When can a creditor enforce their equitable charge?

Only upon default or another condition specified in the charge agreement.

Do equitable charges require judicial permission for enforcement?

Yes

• Except if the charge was created by deed.

What is a specific (fixed) charge?

A charge on clearly defined assets where the creditor can enforce directly.

What is a floating charge?

A charge over a class of assets (present and future) that “floats” until a crystallising event.

What is a crystallising event?

An event (e.g., default, bankruptcy, threatened property seizure) that turns a floating charge into a fixed charge.

Can a debtor use assets subject to a floating charge before crystallisation?

Yes

• They can freely manage, transfer, or sell assets until crystallisation.

Which has priority: specific/fixed charge or floating charge?

Specific/fixed charge has priority over floating charges.

What is the Roman law concept underlying equitable charges?

Hypotheca

• Debtor retains property while creditor has a conditional security right.

How do equitable charges reflect trust principles?

They separate legal ownership (debtor) from equitable interest (creditor), showing equity protects the rights of beneficiaries/creditors without transferring title.