BASICS OF CHATTEL SECURITY

A chattel can be defined as any item of tangible movable property. It is a personal possession which does not include real estate. The Black’s Law Dictionary defines a chattel as an article of personal property; any species of property not amounting to a freehold or fee in land. Chattels are into categories, chattels real which include leaseholds and chattels personal.

Section 2 of the Chattel Transfer Act defines a chattel as any movable property that can be completely transferred by delivery, and includes machinery, stock and the natural increase of stock as hereinafter mentioned, crops and wool, but does not include—

a)      title deeds, choses in action or negotiable instruments;

b)      shares and interests in the stock, funds or securities of any government or local authority;

c)      shares and interests in the capital or property of any company or other corporate body; or 

d)     debentures and interest coupons issued by any government, or local authority, or company, or other corporate body;

Chattel security denotes the security that one may use to secure payment of money. The most common one is chattel mortgage which financial institutions use to secure payment of money used to purchase chattels such as motor vehicles. In a chattel mortgage, a financier agrees to finance purchase of a chattel, in exchange; the financier holds title to the chattel until full payment of the amount loaned is paid. In case of failure by grantor to settle the purchase price, the financier has the right to sell the chattel and satisfy the unpaid amounts.

Whether a chattel security is arising from a purchase or a chattel the grantor already owns, it is a condition of chattel transfer that the grantee must have the right and full power to transfer the chattel. The chattel should not be subject to any encumbrance that may interfere with the grantee’s interest of the chattel. Until the grantor makes default in payment of any money secured, the grantee has the right to retain the chattel and use it, but in such a manner that may not affect the interest that the grantee has over the chattel.

In addition, the grantor should at all times, while any moneys remain owing on the chattel security, keep and maintain all and singular the chattels assigned in the same good order and condition in which they are at the date of assignment; and, if any of them are damaged or destroyed, or cease to exist, he should repair the damage, or replace the chattels so destroyed or ceasing to exist, with other chattels of the same nature; and further should, if required so to do by the grantee, execute any instrument that may be necessary to give to the grantee security over chattels replacing the chattels which have been destroyed or have ceased to exist.

Where legal process issues against the chattels of a judgment-debtor for the execution of a judgment of any court, and those chattels, or any of them, are comprised in a chattel security instrument, the officer charged with the execution of the process may, in lieu of seizing and selling the chattels so comprised, sell the right, title and interest of the judgment-debtor therein. The grantee of the instrument (financier) may however take possession of the chattel but he shall be deemed to hold it in trust for the purchaser until the amount secured by the chattel instrument is settled by the judgment debtor (grantor/borrower).

If the grantor of the instrument fails to settle the secured amount and the grantee sells the chattel as per the chattel instrument. He holds any excess proceeds of sale in trust for the purchaser. This therefore means that where a chattel is sold to settle a judgment debt against a judgment debtor, the purchaser only purchases the interest not covered by the grantee until such time as the judgment debtor may settle the amount secured and the purchaser will hold the full interest over the chattel. This follows from the fact that a grantor’s interest in a chattel is limited by the interest held by the grantee over the chattel.