Debt merger
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The Law and Lore of Repackaging
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Merger of debt
/ˈmɜːʤər ɒv dɛt/ (n.)
The notion that, when the acceptor of a bill is or becomes the holder of it at or after its maturity, in his own right, the bill is discharged
What if the issuer holds its own note for a bit?
Issuing a debt security is largely a question of herding a lot of bureaucratic, pedantic and yet strangely wilful cats.
Many things need to be done: agency appointments made, instruments set up in the clearing systems, instructions matched, hedges struck, collateral acquired, global securities authenticated, and many, many documents need to be approved and then signed by many many people.
There is something to be said for breaking the process down, perhaps parking a newly-minted instrument, for the time being, somewhere safe, while you track down extant cats and tie up loose ends. If the instrument is issued but, yet, out of harm’s way: in the fridge, so to speak — one can sort out remaining formalities in relative tranquility before settling the instrument into the market once all cats are at peace and the trade is finally, irrevocably, on.
Who would the best person be to hold the instrument in that case? You might think its own issuer. After all: what mischief can befall a fellow’s IOUs when they are safe and sound in his own pocket?
Yet his counsel may instinctively cavil against the idea.
Your lawyer: You want to hold your own securities?
You: Yes, that’s the general idea—
Your lawyer: But that, ah, is problematic. In, er, theory. So to speak. As it were.
You: Oh?
Your lawyer: Well, there’s the debt. It might, um, merge.
You: Merge?
Your lawyer may 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.[1] She may seem embarrassed. It is as if there is some deep magic in play here — the Bills of Exchange Act 1882, which is still on the books, has something to say — but it has become somehow stale.
A quick side bar: bills of exchange
The doctrine of merger arises from the Bills of Exchange Act 1882 an elderly but still in force statute that sets out the intellectual framework for the elderly but still in existence concept of a cheque.
For younger subscribers, a cheque was somewhat like a debt instrument, but it involves a third party, usually a bank of some kind, and is what you used before there was such a thing as Google Pay.
Say you were in an upscale boutique and wished to purchase a sparkling chiffon evening gown. You would take out a “chequebook” provided by your bank for this purpose and write in it:
To: The Midland Bank
I hereby instruct you to pay to the order of [Upscale Couturier] the sum of £599.99.
Signed: Antagonista Contrariana
You would then sign it, theatrically tear the cheque from the book and present it to the merchant, who would present you with your frock and off you would go.
The theory of “merger”
The theory is this: you cannot have a contract with yourself. If, therefore, you hold your own promissory note — however you come by it — then at the point where you become its bearer, there is no longer a debt. Halsbury tells us:
“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 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.”
The “reason being” is that this is what the Section 61 of the Bills of Exchange Act 1882 specifically provides:
61. Acceptor the holder at maturity. When the acceptor of a bill is or becomes the holder of it at or after its maturity, in his own right, the bill is discharged.
Not just legally, but logically, this must be true. This is a matter not just of the law of contract, but common sense. Even if the Chancery Division contrived to allow it, a basic grip on reality would not. You cannot owe yourself money.
This is indeed true at any time, before or after maturity, though by the plain words of Section 61, the merger only takes effect after the maturity date. So our learned friend’s first concern is discharged: a note held on issue by its issuer does not merge. And note, too “in his own right”: this leaves the door open for a drawee to take possession of a bill as custodian or trustee — in which circumstance it would not act as principal in its own right, but as bailee for some other beneficiary, and in that case would not be expected to pay out on the bill.
The idea of disappearance on presentation at maturity, we think, reflects the practical realities of a bill of exchange as a bearer instrument: having intrinsic value, its bearer would not give it up, on its due date, to its drawee, except against full payment in final discharge of the debt it represents. If the payment is not made, the bearer will not surrender the bill. It is a delivery versus payment scenario.
Presuming that payment to have been made, the law says the drawee is therefore released from further obligation under the matured, surrendered bill. This gives the drawee some protection from outright later fraud: if some scallywag lifts the tendered bill from his pocketbook before he has a chance to cancel it, say, he has an argument he cannot be held to it.
But even so, this “merger” notion seems skewiff, and a soft intellectual response to a hard problem.
The practical reality is this: a drawee who accepts and honours a bill — before or after its stated maturity — ipso facto holds it and is therefore uniquely placed to cancel it. Scrawl a couple of lines across it, cut it in half, put it in the shredder: whatever. The merger doctrine does not require this — the most fleeting possessory fumble does the trick, in crystalline theory — but in the pragmatic world, a need for reasonable evidence would, we think, here intrude. Unless caught on date-stamped closed-circuit camera, a court is not likely to believe the drawee of an honoured bill would be so incautious as to let it back out of his sight unendorsed. The more likely story is that the bill was not honoured, and found its way back into circulation.
An otherwise prudent merchant preyed upon by some jammy dodger has, at some point, himself to blame: a sufficiently removed holder for value without notice of that lifted bill should expect the court to enforce her claim. While, undoubtedly, the doctrine of merger represents the technical face of the law, we doubt, these days, it would readily show itself in public. The dictates of common sense, evidence and principles of equity would contrive in most cases to produce a different result.
There is another way to rationalise this too:
There is the 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,[2] but on closer inspection, they are not. They cannot be.
Being a matter of logic and not law, the proposition that, as long as you are holding your own paper, no-one owes anyone anything is a matter of basic ontology. It 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.
But where does the debt go?
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See also
References
- ↑ The virgin birth, for example, or the existence of God. “Let us not quible about details, molesworth,” sa rev plum the skool chaplane, “it is beter to see this as metaphorical”.
- ↑ Especially the Americans, as we shall see.