Commercial Law - Essay Example

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In the Bank of Credit and Commerce International SA (No. 8) case, the House of Lords upheld the legal effectiveness of charge backs. Their Lordships ruled that a debtor could take a charge over one of its own debts to a creditor, as security for carrying out a mutual obligation…
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Commercial Law
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Download file to see previous pages Consequently, it is not impossible, theoretically, for a bank to have a charge over the cash deposited by one of its customers and which functions as the security with regard to a loan provided to the customer. This effectively discounted the Court of Appeal’s conceptual impossibility contention that had been supported by it (McCormack, 2002, p. 7).
Such reciprocity in indebtedness is common to several commercial transactions and this decision by the House of Lords has provided immense relief to the commercial community. This is due to its capacity to do away with ambiguity and promoting transactions that are of immense benefit. The fact that there are legally valid and effective alternate transactions does not reduce the importance of the aforementioned category of transactions (Re Bank of Credit and Commerce International S.A. (No. 8), 1998).
These alternatives cover the contractual rights of set off and rendering the deposit a flawed asset, which the third party in the position of the depositor or depositor cannot withdraw. The court ruled with great insight that the device of a charge back ensured powerful protection to a bank. This was by means of the flawed asset techniques and the contractual set off, and not due to the charge over the asset (Re Bank of Credit and Commerce International S.A....
187). Commercial transactions are always exposed to the risk of insolvency or default. This is mitigated by employing credit derivatives, which create exposure to or hedge the credit risk inherent in debt instruments, like bonds and loans. There is nothing novel about this function, which had been undertaken by debt syndication, cash securitisations, and loan participations. These initiatives had been utilised to control the credit risk of debt instruments. Such credit risk had been managed by the practice of sell – down of the investor of lender’s risk in the debt instrument (Ali, 2004, p. 326). All the same there is a crucial difference between the previous credit risk management strategies and credit derivatives. The latter separate the credit risk of a debt instrument from itself and this risk is transferred to a third party. In addition, the debt instrument is retained or disposed of to another party. This renders credit derivatives, tools of credit risk management that have much greater precision. Lenders and investors are protected against credit risk, due to credit derivatives; and the economic benefit of the debt instrument is not transferred (Ali, 2004, p. 326). Moreover, insurance and reinsurance companies, banks, bond insurers and hedge funds are the chief sellers of credit protection. Credit risk protection is provided by these financial institutions, first, by the sale of protection under credit default swaps to investors or lenders. Second, by the making investment of funds in securities issued under a programme of synthetic securitisation (Ali, 2004, p. 326). Companies of Scotland were not permitted to create a floating charge with regard to the whole or part of their undertakings and ...Download file to see next pagesRead More
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