Security interests with rights of use: an English law and comparative analysis

Abstract

This thesis advances a theory of rights of use in intermediated securities in English private law. The term ‘right of use’ refers to the right of a creditor, usually a financial institution, to dispose of a customer’s securities outright, prior to any default, in exchange for a promise to deliver ‘equivalent’ securities to the customer later. Such rights have been seen as in conflict with a customer’s equity of redemption or as negating the existence of the trust on which a customer’s interest in intermediated securities depends. The UK financial collateral regime provides incomplete protection, yet the common law lacks a coherent account of the nature and effect of rights of use. This thesis addresses this by proposing the first comprehensive theory of rights of use in English law, drawing on comparative analysis of the law in the United States and Australia. This thesis makes four central contentions: first, that a right of use operates with respect to securities as trust assets, distinct from the customer’s entitlements under a trust, or against a trustee, which are the subject-matter of its equity of redemption. Second, a right of use is a power and not a right; an attribute of an equitable power is that it can modify the composition of trust assets. Third, when a right of use is exercised, it operates not as a sale or gift, but as a loan of securities under which title passes and the creditor has a personal obligation to deliver equivalent assets. The corresponding claim, a chose in action, can itself become the subject-matter of the security interest in substitution for the securities transferred. Finally, this power to exchange and substitute trust assets means that the customer’s property is modifiable, a fluctuating fund or set of defeasible assets. Examination of English caselaw will demonstrate that, in such dynamic power-liability arrangements, the true equity of redemption is itself modifiable by the exercise of such a power. This thesis will thus locate a theory of rights of use in existing equitable principle, properly interpreted, and will in turn demonstrate the enduring adaptability of the trust to the needs of modern finance.