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LPC Law Notes Business Law and Practice Notes

Secured Loans Notes

Updated Secured Loans Notes

Business Law and Practice Notes

Business Law and Practice

Approximately 649 pages

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Company Law – Private Limited Companies

Debt Finance – Entering into a Secured Loan Arrangement

Company checks before entering into a secured loan arrangement:

1. QUESTION: Are there any relevant restrictions under Company’s constitution?

  1. Does the company have capacity to enter into the secured loan?

Unrestricted objects (s31 CA 2006)

Implied power to pursue its objects

  1. Who can exercise the power on behalf of the company?

Model Articles, art. 3

Special Article? Are there any restrictions on the exercise of the power – consider any Special Articles

  1. Can it meet its obligations under the loan?

  • Representations and warranties – are they factually correct?

  • Consider further facts – is there a breach of the undertakings – causing an “event of default” in facility letter.

Procedure steps to enter into a secured loan arrangement and borrow the money:

  1. Directors to approve the terms of the loan and security in a board meeting.

  2. Shareholder approval of the loan required [pursuant to any special articles] by special resolution

  3. Directors to authorise persons to execute the Facility Letter and the Debenture on behalf of the company.

  4. Debenture to be executed as a Deed.

  5. Registration of security at Companies House

Forms of Security

4 different forms of security
  1. Pledge

Requires actual or constructive delivery of possession of the secured asset, by way of security.

Therefore, assets must e capable of being delivered [wither the goods itself or the relevant title document [e.g. a bearer share – NOT a registered share]

If pledgor defaults – the pledgee has the right to retain and sell the asset.

  1. Contractual Lien

Possession of the secured asset

  1. Mortgage

Non possessory Security

Transfer of ownership (legal or equitable) over the secured asset. Ownership transferred to Mortgagee.

Ownership is transferred subject to the equity of redemption [i.e. the right of the asset to be returned to the mortgagor once the debt is satisfied].

How does the mortgage take effect = a “assignment by way of security”.

  1. Charge

A creature of equity [charge is always equitable – apart from charge over land by way of legal mortgage].

Non possessory Security

Creates an encumbrance over an asset. [i.e. chargee gets a right in respect of the asset. Upon chargor’s default, the chargee is entitled to look to the asset and the proceeds of sale to discharge the indebtedness].

No delivery or transfer of ownership of required.

Types of charges
  1. Fixed Charge

  1. Over specific property

  2. Chargor can use the asset [subject to any conditions stated in security document]

  3. When charge becomes enforceable chargor can sell asset [encumbrance stays with the asset]; or chargee can take possession of the asset and sell it; or chargee can appoint a receiver to sell the asset. [Receiver is preferred option – chargor does not incur any potential liability].

  4. Possible to have an EQUITABLE fixed charge over FUTURE property [Holroyd v Marshall]. The security interest will attach to the property when the property is acquired.

  1. Floating charge

  • Secures a “pool / group” of assets – the composition of which may fluctuate from time to time

  • So can include a charge over FUTURE assets of the company

  • Charge hovers over the group of assets until crystallization [up until this point the chargor can deal with assets in ordinary course of business – can sell assets unencumbered].

  • Upon crystallization floating charge attaches to the assets over which it floated and then becomes a FIXED charge by either 2 methods:

  1. Under common law: automatic

Cessation of business by chargor

Commencement of winding up of chargor

Appointment of receiver / administrator

  1. Under the terms of the document creating the charge [i.e. the security document]:

Right of chargee to crystalise the floating charge...

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