Template:M intro repack merger of debt: Difference between revisions

===“What if the issuer holds its own note for a bit?”===

Creating a structured product is largely a question of herding a lot of bureaucratic, pedantic and yet strangely wilful cats.  

Some of its many inconveniences could be addressed by parking a newly-minted instrument, for the time being, somewhere safe while you hunt down and immobilise extant felines. If the instrument is ''issued'' but yet ''out of harm’s way'': in the fridge, so to speak — one can sort out oneself and one’s remaining cats in tranquillity before putting the instrument back out to the market when the cats are at peace and it is prudent to do so.  

Who would the best person be to hold the instrument in such a case, to keep it on ice?

Its own issuer.

Yet your [[Private practice lawyer|counsel]] may instinctively cavil against the idea.  

“This, ah, is problematic. In, er, theory. So to speak. As it were.”

She will be a bit shoe-shuffly about this, the same way Anglicans are shoe-shuffly about the more mystical bits of orthodoxy they are meant to subscribe to, but in practice don’t.<ref>The virgin birth, for example, or the existence of God. “Let us not quible about details, [[Nigel molesworth|molesworth]],” sa rev plum, “i preffer to think of this as [[Metaphor|metaphorical]]”.</ref> It is as if there is some [[deep magic]] in play here, but it has somehow become stale, or inert.

The theory is this: ''you cannot have a contract with yourself''. You cannot owe yourself money. If, therefore, you acquire your own [[promissory note]] — however you come by it, if you do — then at the point where you become its [[Bearer security|bearer]], ''there is no longer a [[debt]]''.<ref>Halsbury tells us, at 418, “In some circumstances a contract is discharged by merger when the rights and liabilities under the contract come together in the same person, the reason being that a person cannot maintain an action against {{sex|himself}}. Thus when the acceptor of a bill of exchange is or becomes the holder of it in his own right, at or after its maturity, the bill is discharged.” Hmmm. In fact the “reason being” is that this is what the [https://www.legislation.gov.uk/ukpga/Vict/45-46/61/part/II/crossheading/discharge-of-bill# Bills of Exchange Act 1882] specifically provided. And note: “''at or after maturity''”. </ref> It might somehow ''vanish''.

Logically, this is true. Except for the vanishing bit. This is a matter not just of the [[contract|law of contract]], but of common sense. Even if the [[common law|Chancery Division]] contrived to allow it, a basic grip on reality would not. ''You cannot owe yourself [[money]]''.

There is [[debt]] — the ''[[res legis]]'', to use our own coinage — and there is the ''[[substrate]]'': the paper it is written on, by which our learned friends recognise the debt’s existence in our messy physical realm. We like to think of debt and instrument as coterminous,<ref>Especially the Americans, as we shall see.</ref> but on closer inspection, they are not. They cannot be.

This statement of basic [[ontology]] — that, as long as you are holding your own paper, you do not owe anyone anything — being a matter of logic and not law, has no bearing on the physical universe. It does not make your own [[IOU]] spontaneously burst into flames when you touch it. The ink with which your promise to pay is inscribed will not fade upon its contact with your own pocket. It simply means that, for as long as you hold the note, there is nothing to pay to anyone.

So, where does the [[debt]] go?  

This is a question that only arises — that only ''matters'' — if one imputes some kind of legally material ''continuity'' to the [[debt]]. Does an instrument represent just ''one'' debt? Must it maintain continuous existence until its final discharge? If that continuity is denied somehow, is the debt irrevocably undone?  

A [[debt]] is a contract between two parties; issuer and holder. It has no independent existence of them. It has no [[legal personality]]. If a holder transfers the note constituting its debt to another, the existing debt is not “transferred” with the note, as such: rather, ''one'' contract of indebtedness is extinguished and ''another'' is made. The same applies for [[novation|novations]]. That the creation and extinction process is beyond the debtor’s influence is neither here nor there. It was the debtor’s idea: it threw open its doors to the world — one at a time, to be sure — and may not complain now if, until the time for redemption arrives, its debts serially wink and sparkle in and out of existence amongst that unknown horde.  

Now there is this American doctrine of “merger”: that an intangible contract of indebtedness that logically precedes the issuance of a deed “merges” the obligations into the instrument’s physical form, somehow animating and giving the debt continuity independent of its holder — but that seems like a classic piece of [[nonsense on stilts|stiltery]] from our American cousins, and in any case we are not clear that it necessarily changes anything.

Nor does its present holder know. How would it? There is no register of transfers. Title passes by delivery. A ''bona fide'' transferee without notice takes the instrument as it finds it, and that is without context. If a chance encounter with its maker somewhere in its history were to invalidate an instrument, such a holder would be at great peril. How would it know? If this were the deal, we submit, the bond market would not have developed.

An issuer may not, [[for the time being]], ''know'' to whom it is indebted: that being so, it must carry the debt on its books anonymously, as against the world. As long as it does not control it, the instrument is as good as live, since anyone who comes across it may pick it up and present it for repayment. But because the issuer ''may as well'' treat the debt as continuous, that is not to say that it ''is''.

That being the case, and mindful of the non-evaporating nature of physical bearer instruments in the possession of their issuer, an issuer who does repossess his note may reconstitute it ''by giving it to someone else''. This sacred paper is not besmirched, nor compromised, by its passage through the issuer’s hands. ''How would anyone even know it has been there''?  

There is another logical challenge here: there must be a point in the life of every negotiable instrument ''after'' its creation but ''before'' it is issued to anyone, where the Issuer ''must'' hold it. It has to sign it, after all. If the “evaporation” theory were to hold water, a [[Bearer security|bearer]] [[Debt security|debt instrument]] would vanish the moment it was created. Its first breath would be choked out of it before it had a chance to escape its surly bonds into a life of disembodied indebtedness amongst the society of random strangers.

In any case the intervention of the [[clearing system]]s and otherwise the endemic [[Agent|agency]] that suffuses all goings on in the financial market, ensure that these [[Ontology|ontological]] foibles need never see the light of day.  

Firstly, the indebtedness is held by [[common depositary]] on behalf of [[clearing system]]s, as principal, in favour of those systems’ account holders, which will usually not include the issuer itself. There are at least two principal intermediations between Issuer ''qua'' issuer and issuer ''qua'' holder there.