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Security Notes

LPC Law Notes > Debt Finance Notes

Updates Available  

A more recent version of these Security notes – written by Cambridge And Oxilp And College Of Law students – is available here.

The following is a more accessble plain text extract of the PDF sample above, taken from our Debt Finance Notes. Due to the challenges of extracting text from PDFs, it will have odd formatting:

SECURITY
*Memorize this table: often comes up as an exam question!
ASSET

Properties Machinery Shareholdings (subsidiaries)

SECURITY INTEREST

Charge by way of legal mortgage Fixed charge Legal mortgage/equitable mortgage/fixed charge Equitable mortgage is the most likely type of security taken over shares.

Shareholdings (investment portfolio)

Legal mortgage/fixed charge/
equitable mortgage All of the above options assume that the portfolio is not traded frequently. If it was, a floating charge would be more commercially practicable.

Debtors (intragroup loans)

Fixed charge/legal assignment. Likely to be a fixed charge as debts are not constantly changing; bank will be able to demonstrate control required (Spectrum plus).

Book debts

Cash at bank

Need to check if asset/contract in question is assignable - i.e. no prohibitions on assignment. Fixed charge, but likely to be a floating charge due to Spectrum issues. Floating charge

PERFECTION1 All security to be registered at CH under s.859A CA. Registration at the Land Registry. Equitable mortgage/fixed charge:
Share certificates deposited with bank for safekeeping
Undated blank stock transfer form
Power of attorney [in the debenture] so bank can complete the STF Legal mortgage:
Transfer shares into bank's name (completed stock transfer form)
Issue new share certificates to bank
Register the bank as owner in the register of members of the subsidiaries See above. Note that if any of the investments are made in foreign companies, local law advice will be needed for perfection requirements. See below for some commercial points to consider when taking security over such investments. If legal assignment, notice to debtors will be required under s.136 LPA. If fixed charge, notice is a matter of good practice, not a legal requirement.

Notice is a matter of good practice, not a legal requirement.

1 The process of ensuring validity of security against third parties. Registration is the most common form of perfection.

Stock Future property/IP rights (acquired during course of loan)

Fixed charge if deposit account Floating charge Fixed charge/equitable mortgage/equitable assignment, where appropriate (can only grant equitable rights)

Insurance policies

"Further assurances" clause and power of attorney both needed in debenture Legal assignment/fixed charge

Key contracts

Legal assignment/fixed charge Again, check if contracts contain prohibitions on assignment.

Trade marks/patents/registered designs Goodwill Everything else

Assignment/fixed charge

As and when property/IP is acquired; registration at IP office or LR for registered property

Notice to the insurance company. As a minimum, bank's interest to be noted on the policy. Ideally, to be listed as 'coinsured in respect of its separate rights and interests'. Notice to counterparty (required for legal assignment, preferable for fixed charge) Serving notice may be commercially unattractive to the borrower; compromise may be for it to sign notices and deliver to the lender at the time the security is granted but for the lender to agree only to deliver the notices following an EoD. Registration at the IP office - no register for copyright!

Fixed charge Floating charge

Commercial and practical aspects Consider these points at the outset of the deal (i.e. when negotiating the security package):

1. Value of the security (in an enforcement situation)
? Shareholdings - does the value of the security justify the expense of taking security?
Is there a ready market for the shares and can the directors of the various companies refuse to register the transfer of shares [i.e. making it difficult to enforce security]?
Bank will not want to become a shadow director of companies if it enforces security over the shares; also beware of pension fund liability!
? Assignment of contracts - is consent of the counterparty required for the assignment of a key contract?
? Land Risk of environmental liability?
? Will each secured asset retain its value?
? Is there existing security over any assets? Are there negative pledges in existing loans/security documentation? What priority will this security have?
? How does the lender want to enforce its security [asset sale or share sale]? Consider issues of structural subordination if only security over shares taken. ASSET AND SECURITY

SPECIFIC ISSUE

Buy the full version of these notes or essay plans and more in our Debt Finance Notes.