Mukul
in Contracts Law
Asked February 27, 2014

Debtor's Owner

  • 1 Answer
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who are debtor's owners and senior lenders?

Answer 1

Debtor’s Owner:

In the Roman Law there were two sorts of transfers of property, as security for debts, namely, hypotheca and pignus. The hypotheca was when the thing pledged was not delivered to the creditor, but remained in the possession of the debtor. The pignus or pledge was when anything was pledged as a security for money lent and the possession thereof was passed to the creditor upon condition of returning it to the owner when the debt was paid. In the Roman Law it appears that the word pignus was often used indiscriminately to describe both species of securities, whether applied to movables or immovable.

It will thus be seen that although the Indian law recognised only pledge, and mortgage of immovable properly statutorily nevertheless, the other forms once in vogue with various changes continued to remain in operation and hypothecation and mortgage of movables are, the two forms which can be said to be the direct descendants of the earlier forms of hypothecation as mentioned above. In England under the Civil law although the debt for which mortgage or pledge was given was not paid at the stipulated time, it did not amount to a forfeiture of the right of property of the debtor therein it simply clothed the creditor with an authority to sell the pledge and reimburse himself for his debt, interest and expenses and the residue of the proceeds of the sale then belonged to the debtor. But the creditor might not in ordinary cases without any judicial sanction or giving proper notice of the intended sale, sell the goods, and this authority to make a sale might be exercised not only when it was expressly so agreed between the parties but also when the agreement between them was silent on the subject.

The Court of equity soon arrived at the just conclusion that mortgages are to be treated, as the Roman Law had treated them as a mere security for the debt due to the mortgagee, that the mortgagee held the estate as a trust of a peculiar nature, by which under certain conditions, the mortgagee could become, the purchaser of a security and pledge to hold for his own use and benefit; he had a distinct and independent beneficial interest in the estate and he was entitled to enforce his rights by an adverse suit against the mortgagor; and that the mortgagor had, what was significantly called as an equity of redemption, which he might enforce against the mortgagee if he applied within a reasonable time to redeem and offered a full payment of the debt and of all equitable charges.

Hence, to conclude it would mean that the property so given to the creditor remains as a means of security and once the debtor pays off his debts with interests, he gains the possession or deeds of the said property. This is what is meant by the concept of “debtor’s owner”.

Senior Lenders:

Senior debt is debt that is first to be repaid, ahead of all other lenders or creditors, in the event of a borrower’s bankruptcy and such lenders so to be repaid are called as senior lenders.

For example, if Company XYZ issues bonds, the bondholders are creditors who are senior to Company XYZ's shareholders, for example. This means that should Company XYZ go bankrupt, the bondholders are entitled to repayment before the shareholders are.

Let’s say that Company XYZ needs more capital now, and so it borrows money from Bank ABC. Who gets paid first now? The bondholders or Company XYZ? It depends on what Company XYZ negotiates with Bank ABC, but it is likely that Bank ABC is subordinate to the bondholders, meaning that if Company XYZ goes belly up, the bondholders get paid first, then Bank ABC, then the shareholders (if there’s anything left).

Senior lenders get their hands on leftover cash first in the event of bankruptcy. Accordingly, subordinated lenders (those lenders further down in the pecking order) are more likely to get stiffed. This is why some lenders might require senior status in order to make a loan (meaning that they must be first in line). In our example, Bank ABC may charge a higher interest rate on the loan because of its subordinated status and thus added risk of not being able to get its hands on any of the scraps if Company XYZ goes bankrupt.

 

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