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LPC Law Notes Debt Finance Notes

Security Notes

Updated Security Notes

Debt Finance Notes

Debt Finance

Approximately 80 pages

A collection of the best LPC Debt Finance notes the director of Oxbridge Notes (an Oxford law graduate) could find after combing through dozens of LPC samples from outstanding students with the highest results in England and carefully evaluating each on accuracy, formatting, logical structure, spelling/grammar, conciseness and "wow-factor". In short these are what we believe to be the strongest set of Debt Finance notes available in the UK this year. This collection of notes is fully updated for ...

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The following is a more accessible 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 SECURITY INTEREST

PERFECTION1

All security to be registered at CH under s.859A CA.
Properties Charge by way of legal mortgage Registration at the Land Registry.
Machinery Fixed charge
Shareholdings (subsidiaries)

Legal mortgage/equitable mortgage/fixed charge

Equitable mortgage is the most likely type of security taken over shares.

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
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.

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.
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).

Need to check if asset/contract in question is assignable – i.e. no prohibitions on assignment.

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.
Book debts Fixed charge, but likely to be a floating charge due to Spectrum issues. Notice is a matter of good practice, not a legal requirement.
Cash at bank

Floating charge

Fixed charge if deposit account
Stock Floating charge
Future property/IP rights (acquired during course of loan)

Fixed charge/equitable mortgage/equitable assignment, where appropriate (can only grant equitable rights)

“Further assurances” clause and power of attorney both needed in debenture

 As and when property/IP is acquired; registration at IP office or LR for registered property
Insurance policies Legal assignment/fixed charge Notice to the insurance company. As a minimum, bank’s interest to be noted on the policy. Ideally, to be listed as ‘co-insured in respect of its separate rights and interests’.
Key contracts

Legal assignment/fixed charge

Again, check if contracts contain prohibitions on assignment.

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.
Trade marks/patents/registered designs Assignment/fixed charge Registration at the IP office – no register for copyright!
Goodwill Fixed charge
Everything else 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 INTEREST SPECIFIC ISSUE
Fixed charges over book debts

Spectrum Plus (case) requires that to create a fixed charge over a book debt, the lender must demonstrate sufficient control over both the debt and its proceeds.

Showing control over the debts themselves is easy; showing sufficient control over the proceeds is difficult [must be a genuine blocked account] – and commercially unacceptable to both parties.
Mortgages over shares

Check that the directors do not have the right to refuse to register a transfer and that pre-emption rights do not apply to a transfer of the shares on enforcement. [May require amended AoA before security is granted]

Are the shares in an unlimited liability company or does the company operate a defined benefit pension scheme? Potential liabilities for the bank.

Shareholders rank below secured and unsecured creditors; not ideal to rely only on this security.

Shares in private companies not easily marketable.

Legal mortgages: Although this is the strongest type of security interest, the lender will also inherit administrative duties and runs the risk of the liabilities mentioned above. It may also become an ‘associate’ of a company if it has control (1/3 or more of the voting rights) for the purposes of the IA 1986 – not ideal.

Hence, taking an equitable mortgage will be preferable.
Assignment by way of security/fixed charge over contractual rights

Check that there are no provisions prohibiting charging or assigning the contract. If there are, borrower must obtain express written consent of counterparty before the security is granted.

Always ensure that assignment is notified; commercial consequences are very disadvantageous for a lender!
Assignment by...

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