Security Assets And Priorities Notes

Corporate Finance: SGS 10: Security: Assets & Priorities

INDEX OF ABBREVIATIONS

- RIE – Recognised Investment Exchange

- IPO – Initial Public Offering

- PR – Prospectus Rules

- LR – Listing Rules

- DTR – Disclosure Guidance and Transparency Rules

- LP – Listing Principles

- PLP – Premium Listing Principles

- FSMA 2000 – Financial Services and Markets Act 2000

- RAO – Financial Services and Markets Act 2000 Regulated Activities Order 2001

- FPO – Financial Services and Markets Act 2000 Financial Promotions Order 2005

- MAR – Market Abuse Regulations

- CJA – Criminal Justice Act 2002

- FSA – Financial Services Act 2012

- UK CGC – UK Corporate Governance Code

- RCF – Revolving Credit Facility

- LSE – London Stock Exchange

- AIM – Alternative Investment Market

- FCA – Financial Conduct Authority

- MAC - Material Adverse Change

- EoD – Event of Default

SECURITY: OVERVIEW

- Security – Protects lender against insolvency of borrower by enabling lender to sell assets over which it has been granted security (subject to prior competing securities over those assets) and use sale proceeds to repay the amount outstanding under the loan in the event of borrower’s default under terms of that loan.

- Exercising security rights usually quicker/easier means of recovery for the lender than bringing debt action against borrower in the courts.

- Proceeds of Sale – Proceeds of sale of a secured asset can ONLY be used to repay the secured debt + any amount obtained in excess of value of outstanding secured debt must be returned to borrower.

- Extent of Security – Lender may take security over specified assets held by the borrower (e.g. security over borrower’s property where loan used to finance acquisition of property) OR may take security over all the borrower’s assets (e.g. bank lending to new business venture may take security over all the business’ assets).

- Effect of Security for Lender – Security increases lender’s protection against borrower’s default/insolvency because:

(a) lender has direct recourse to asset over which security granted;

(b) lender can avoid costs/delays/administrative burden of litigation by simply enforcing security rather than bringing a debt claim against the borrower;

(c) lender obtains priority over unsecured creditors in relation to priority of distribution of borrower’s assets on liquidation; and

(d) lender’s recourse to specified assets and priority over unsecured creditors in event of borrower’s insolvency means that the secured lender is more likely to be able to wholly/partially recover the debt owed to them.

- Reasons for Providing Security – Borrowers provide security to lenders for 2 main reasons:

(1) Obtain Loan – Borrowers with weak credit status often unable to obtain loan finance unless they are willing to offer security due to lender’s need to obtain greater protection offered by secured lending in light of greater risk of borrower’s default.

(2) Decrease Cost of Borrowing – Borrower who is able/willing to offer security provides greater protection to lender + reduces credit risk for lender – lower the risk for the lender, the lower the interest rate payable.

- Negative Pledge Clause - Clause in loan agreements which forbids the creation of any future security over the assets over which lender granted security in relation to that loan agreement.

- Companies Act 2006 ss.677-683: Unlawful Financial Assistance – Borrowing company and its subsidiaries will not be able to provide security where this amounts to unlawful financial assistance – covers:

(a) security provided by public company to secure loan made to purchaser of shares in that company where the loan is used to fund the share purchase;

(b) security provided by private company to secure loan made to purchaser of shares in the private company’s public holding company, where the loan is used to fund the share purchase; and

(c) security provided by public company to secure loan made to purchase of shares in the public company’s public/private parent company, where the loan is used to fund the share purchase.

MAIN TYPES OF SECURITY

(1) Fixed Charge

- Charge – Equitable/statutory right over an asset which gives the charge-holder the right to appropriate that asset, sell it and use proceeds of sale to discharge debts due to the charge-holder.

- Fixed Charge – Equitable proprietary right over a particular specified asset which attaches to that asset as soon as charge created and provides charge-holder with right to appropriate that asset, sell it and used proceeds of sale to discharge outstanding debt owed to the charge-holder.

- ‘Control- Valid/effective fixed charge requires the charge-holder to show a sufficient degree of CONTROL over the charged asset – usually done by use of clause in security document preventing borrower dealing with charged asset without prior consent of charge-holder

- Control clause allows borrower granting security to possess/use charged asset throughout term of loan BUT prohibits the borrower from disposing of/granting further securities over the charged asset without first obtaining the consent of the charge-holder in the prescribed form.

- Sale of Asset Subject to a Fixed Charge – Purchaser of asset subject to a fixed charge will take that asset SUBJECT TO that fixed charge PROVIDED that purchaser has NOTICE of that charge – notice usually given by registration of the charge at Companies House.

(2) Floating Charge

- Floating Charge – Charge which ‘floats’ over a defined class of charged assets until occurrence of specified event (i.e. event of default) at which time the charge will crystallise into fixed charge over whatever assets are within the class of assets over which the floating charge granted.

- Crystallisation results in floating charge becoming a fixed charge over the assets within the class of assets over which the floating charge granted at the time when the event triggering crystallisation occurs BUT still treated as a floating charge for insolvency purposes and...

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