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LPC Law Notes Debt Finance Notes

Security And Credit Support Notes

Updated Security And Credit Support 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 ...

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 and Credit Support

Security

  • Fixed charges: creditor controlled what the borrower does with the assets. But borrower can still use the asset in the course of business.

  • Floating charges: ‘floats’ over the whole of a class of circulating assets, borrower free to dispose of assets until the charge crystallises. Disadvantages:

    1. Borrower free to dispose so creditor cannot be sure of value of security.

    2. Floating charge ranks below fixed charges in priority

    3. Subject to prescribed part fund for secured creditors

    4. Capable of being avoided under s.245 IA 1986

    5. Administrator can pay his remuneration and expenses from secured assets

  • Guarantees: downstream (parent for sub) or upstream (sub for parent)

  • Debenture: "document creating the security" separate from the loan agreement.

Priority:

  1. Creditors with fixed charges

    • If more than one creditor has a fixed charge over the same assets, the first fixed charge created has priority (provided it was properly registered in accordance with s. 860 or s. 859A CA 2006)

      • Order can be varied by agreement between the creditors through a document known as a Deed of Priority, an Intercreditor Agreement or a Subordination Agreement.

  2. Liquidator’s fees and expenses

  3. Preferential creditors (wages up to 800 per employee & occupational pensions)

  4. Creditors with floating charges

    • For floating charges created on or after 15 September 2003, a proportion of the proceeds of the floating charge assets will be set aside for payment to unsecured creditors —> ’prescribed part fund’.

    • If more than one creditor has a floating charge over the same assets, the first floating charge created has priority (provided it was properly registered).

      • Order can be varied by agreement between the creditors through a document known as a Deed of Priority, an Intercreditor Agreement or a Subordination Agreement.

  5. Unsecured creditors, to the extent not paid off from the prescribed part fund.

  6. Shareholders (according to the rights attaching to their shares).

    • Shareholders and unsecured and preferential creditors rank equally among themselves (subject to any preferential rights attached to certain classes of share).

  • Regulation: Financial Services and Markets Act 2000

    • Private companies can only issue bonds to targeted investors and not to the public indiscriminately - s. 755 CA 2006.

    • If a private company makes an ‘offer to the public’ of bonds within the meaning of s. 85 FSMA and is not exempt, it will be required to produce a prospectus.

Why take security? Why give security?
  • Direct recourse

  • Avoid litigation

  • Obtain better priority

  • Increased likelihood of recovery

  • Cheaper borrowing (lower interest)

  • Needed where weak credit status

  • NB. Negative pledges in other loans & ss.677-683 CA 2006 financial assistance prohibition.

Security

  • Fixed charge: lender must show sufficient level of control over asset (registration = s. 859A-Q CA 2006).

  • Floating charge: borrower able to deal with assets until charge crystallises.

    • Re Yorkshire Woolcombers: floating if;

      1. Over a class of assets present and future

      2. Class would be changing in the ordinary course of business from time to time

      3. Contemplated that until some future step is taken the company will carry on its business in the ordinary way.

    • National Westminster v Spectrum: essential characteristic = "asset subject to the charge is not finally appropriated as security for payment of the debt until the occurrence of some future event. In the meantime, the borrower is left free to use the charged asset and to remove it from the security."

Weaknesses Advantages
  • Vulnerable to subsequent fixed charges (unless negative pledge)

  • Preferential creditors and ring-fenced fund rank ahead on insolvency

  • Administrator's costs paid out of floating charge assets

  • Can be set aside under stringent anti-avoidance rules

  • May not be recognised in other jurisdictions

  • Lender obtains security but borrower is free to deal with assets in ordinary course of trading

  • Pre 15 Sept 2003 floating charge over all/substantially all assets ('grandfathered floating charge') = can block appointment of administrator by appointing administrative receiver (owes duty to specific lender) & not subject to ring-fenced fund

  • Qualifying floating charge (para 14, Sch B1 IA 1986) = can appoint choice of administrator through out of court procedure.

  • Mortgages

    • Legal mortgage: involves a transfer of ownership - create by deed --> lender has power of sale under s.101 LPA 1925.

    • Charge by way of legal mortgage: no transfer of ownership, lender gets proprietary rights - used to secure land (s.87 LPA 1925) - register at Companies House & Land Registry.

  • Grants the lender the same powers, protection and remedies as if the mortgage had been created by way of a lease for a term of 3,000 years

  • Not possible to secure land to be acquired in future (take fixed charge to be later upgraded - backed by power of attorney in lender's favour)

  • Equitable mortgage: transfer of beneficial interest only (create by: written agreement, mortgage over equitable interest, property not yet owned by borrower, invalid agreement for legal mortgage)

    • Weakness: equity's darling takes free (important to register at CH)

  • Pledge: lender takes actual/constructive delivery of asset until payment of debt (letter of pledge/memorandum of deposit usually provided for certainty) - must give lender control.

    • Lender liable as a bailee - must keep asset safe & insure it.

    • Borrower loses possession of asset for income-generating purposes.

  • Lien: automatic right to retain another’s property until that person meets an obligation.

    • Except for a banker's lien - there is no automatic power of sale.

  • Assignment by way of security

    • Security over contractual rights (chose in action)

      • Legal assignment = s.136 LPA...

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