Security Agreement

Written by CS Shirsh Bhootra

Ramesh, the owner of Ramesh, an industry, needs funds. He approached his friend Suresh for the same. The amount required was outside the limit of Suresh’s financial position, so he suggested him another friend of Mahesh. Mahesh is financially sound and is capable of providing financial assistance to Ramesh. But he fears Ramesh might fail to repay the amount in time or that something might happen the consequences which could lead to a delay in payment.

So, he thought that there must be some legal document binding all the transactions related to the lending of money, which covers aspects like money lending, its tenure, and remedies available in case of delay or failure in payment lent to Ramesh.

He consulted the issue with Rakesh, his business partner, who suggested executing Security Agreement to mitigate all risks associated with transactions related to money lending.

Security Agreement: Meaning

A Security Agreement is a legal document that facilitates a lender with a security interest in the property or an asset that is promised as collateral. It also provides the legal claim to the collateral to the creditor in case the borrower defaults.

A transaction in which a security agreement is used is also known as a ‘secured transaction’ where the grantor assigns the grantee (typically a lender) a secured interest in the collateral.

Security Agreement: Contents

Security agreements should contain details of the parties involved, the collateral, the statement of intention of providing security interest, and the signatures of parties to an agreement. Further various other terms also form part of the agreement, which are mentioned below:

• Warranties: Warranties or covenants comprise conditions agreed upon by both parties. For example, common warranties include that a change in property’s value must be notified to the secured party by the debtor. The debtor should maintain the collateral in good condition, and the property’s use should not violate federal, state, or local laws.

• Collateral Description: The security agreement should contain details regarding the asset or property being held as collateral under the agreement. This comprises specific listings, collateral quantity, collateral categories, and type details.

• Types of collateral: Collateral variants are many such as inventory, farm products, accounts, stocks, or bonds, and there must be specific disclosure regarding this in the security agreement.

• Security interest: To have effective and complete security agreements, a security interest attachment must be used. For this, an exchange of value must occur, the debtor should enjoy rights to the collateral, and the debtor must possess the capacity to authenticate the security agreement through a signature. The security interest should be perfected, meaning thereby that the secured party can claim promised collateral even in the event of the debtor’s bankruptcy, which is possible through filing financing statements.

• Priority: Priority should be disclosed in case multiple parties are involved in the security agreement through filing financial statements before other parties' priority can be achieved.

• Default: The security agreement must highlight the situation that would be considered a default. Instances like theft or improper use of collateral, failure to abide by other obligations or evidence that provided collateral was false.

• Remedies: Disclosure regarding remedies that highlight remedies for creditors to recover losses in case of default from the borrower.

Security Agreements: Variants

Security agreements can be used to specify collateral that is presently under the debtor’s possession, intangible collateral, or after-acquired property.

• Collateral: Collateral has many variants, as mentioned above. A security agreement can be oral if the collateral is presently under the possession of the secured party or the lender.

• Intangible Goods: Collateral can be tangible as well as intangible. For example, software rights or intellectual property. The description of intangible collateral in writing is very crucial.

• Floating Liens: Floating liens can also form part of security agreements that may not be in possession of the debtor at the time of agreement execution. It comprises acquired property, collateral disposition proceeds, and future advances.

• After-acquired property: New property, if any, acquired or bought after the agreement is signed, forms part of the after-acquired property specification. Like if the security agreement comprises after-acquired property and the debtor promises all automobiles owned by the borrower, then even if the borrower purchases new automobiles post signing the agreement, the new automobiles will be collateral.

Security Agreements: Their relevance

Businesses’ growth is correlated with secured transactions. Getting creditors to provide loans can be tough for individuals. Security interest provides reassurance to creditors that they will not suffer losses. The debtor, in the presence of collateral, also benefits from a low-interest rate.

Conclusion:

A security agreement is a legal document and thus binding on all, outlining all terms under which debt can be secured and remedies if the debtor defaults. To minimize the sufferance of losses, businesses use this tool.

References:

• ContractsCounsel, Security Agreement (contractscounsel)

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