COLLATERAL SECURITY. Literally a security which runs parallel or side by side with another security.
The word " collateral " is sometimes used when speaking of a secondary security, to distinguish it from the principal or primary security. It is also used with the meaning, as in the Stamp Act, 1891, of additional security. It is commonly used when refer ring to a security lodged by some person other than the debtor, to distinguish it from the debtor's own security. It does not necessarily mean that the banker must resort to the one security before the other. In the event of a debtor's bankruptcy, any security deposited by him must be realised, or the value estimated, and the amount deducted from the debt. A claim can then be made upon the debtor's estate for the difference. Before dealing with the bank rupt's security, the banker should communi cate with the trustee. If, however, the banker holds security from some person other than the debtor, he can claim upon the estate for the full amount owing by the debtor, and, after receiving his dividend from the estate, can fall back upon the collateral security for the deficiency. Where
collateral security is realised before the bankrupt's estate is settled, the amount should be kept in a separate account, dis tinct from the debtor's account.
If a partner deposits his own private se ' curities as cover for the partnership account, they are collateral, and the banker can, in the event of the failure of the firm, prove for the full amount owing, obtain the divi dend and then resort to the private partner's security. There is a danger, however, that the private security- may prove to be partnership property.
A guarantee is a collateral security. (See GUARANTEE.) Upon receipt of notice of the death of the person who has given security for another, a banker should at once stop the debtor's account and arrange for a fresh one to be opened for all further transactions. This prevents payments to credit of the account going in reduction of the liability of the person who gave the security. The new account should, of course, be kept in credit pending a fresh arrangement. (See TITLE DEEDS.)