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Security Notes

LPC Law Notes > Finance and Capital Markets Notes

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Banking Workshop 5

Which security should the lender opt for and how should they perfect it?
Take a Floating Charge over all the Undertaking to mop up anything that you may have missed. It will also secure all moneys outstanding to the Bank in situations where the bank failed to properly register any past security. There are 3 ways to perfect security Registration (e.g. Charges), Possession (Lien + Pledge) & Notice (Assignment)

Asset

Security Needed?

UnMortgaged freehold property Factory/plots of freehold property/buildi ng

Charge over land by way of legal mortgage (LPA s.87). Include details of the land in a schedule to avoid confusion.

Mortgaged freehold property Factory/plots of freehold property/buildi ng

Mortgage needs to be removed in order to enter new mortgage. Get an undertaking &
make it a condition. Charge over land by way of legal mortgage (LPA s.87). Include details of the land in a schedule to avoid confusion.

Future Acquired Land (freehold property)

Leasehold Property (Depends on the Facts)

Future acquired land cannot be secured by legal mortgage, and is therefore secured by an equitable mortgage (s.53(1)(c) LPA 1925) over the property once acquired. (The borrower may then be required to give a legal mortgage) Include a further assurance clause i.e. an undertaking by the borrower to do anything necessary in order to perfect the mortgage i.e. the conversion of equitable mortgage to legal mortgage.
Is there value in the lease?
Do the terms of the Lease allow assignment?
If answer yes to both questions then, it might be worth taking security over them in the form of legal mortgage for the remainder of the term (LPA s.87). Include details of the land in a schedule to avoid confusion. Commercial Property Usually for a 15 year period where a small premium (if any at all) is payable at the start and thus the rent is set at market value (i.e. high rent) and likely subject to rent review (i.e. again, a high rental value). These elements are likely to make the lease very unattractive and hold a small commercial value, unless it is actually a very favorable lease.

Registration requirements
- Register at LR under s.27 LRA 2002. MR01 Voluntary Registration Companies House within 21 days from date of creation of charge & comply with ss 859A & 859D CA 2006.
- Register at LR under s.27 LRA 2002. MR01 Voluntary Registration Companies House within 21 days from date of creation of charge & comply with ss 859A & 859D CA 2006.
- Register at LR under s.27 LRA 2002. MR01 Voluntary Registration at Companies House within 21 days from date of creation of charge and complying with ss 859A and 859D CA 2006.
- Register at LR under s.27 LRA 2002. MR01 Voluntary Registration at Companies House within 21 days from date of creation of charge and complying with ss 859A and 859D CA 2006.

Banking Workshop 5

Residential Property Usually for a very long year periods where a high premium is payable at the start and thus the rent may not reflect a "real" market value (i.e. rent is likely to be very low) and likely NOT subject to rent review. These elements are likely to make the lease very attractive and hold a high commercial value

Hire purchase goods

Under 100 %
of Registered shares P.186 +
Note P. 14 WS(5)

100 % of Registered shares In Co X Ltd P.186 +
Note P. 14 WS(5)

No security possible - such goods are not actually owned by the company. Legal Mortgage Transfer share into Bank's name, have new share certificates issued. This is onerous and there are liability issues (i.e. taking liability for the Co.'s employment contracts or pensions) if the % is substantial. Risk being considered a subsidiary of the Bank if % is substantial. Must Ensure that shares are fully paid, stamp duty paid for and no preemption rights. Equitable Mortgage (will enjoy powers of L Mortgage s.101 LPA) Take custody of Share Certificate and a Share Transfer Form executed by borrower - make sure security documents gives right to execute power of sale of shares on default by the Co. Advantages: the bank doesn't have to vote for borrower or pass on dividends to them. Bank doesn't have to worry about the company whose shares are owned becoming a subsidiary of the Bank Enviroco Ltd v Fastad Supply. Equitable Mortgage An equitable mortgage is preferred here as this does not require registering the shares under the Bank's name (like in a legal mortgage). With a Legal Mortgage the bank becomes the owner of X Co. Ltd and therefore any parent-subsidiary relationship will be destroyed. See above. Check per-emption rights in articles and ability to register security trustee as Shareholder should there be transfer of ownership.

N/A Charges over shares are NOT registrable under the Financial Collateral Arrangements (No.2) Reg. 2003. But good practice to register them: MR01 Voluntary Registration at Companies House within 21 days from date of creation of charge and complying with ss 859A and 859D CA 2006. if doing Equitable Mortgage: Hand over the Blank STF
+
Share Certificate SC (the Bank must have a power of attorney allowing the Bank to complete the STF
+ SC and register a new owner) MR01 Voluntary Registration at Companies House within 21 days from date of creation of charge and complying with ss 859A and 859D CA 2006.
- Hand over the Blank Share Transfer Form STF
+ Share Certificate SC (the Bank must have a power of attorney allowing the it to complete the STF & SC &

Banking Workshop 5

register a new owner)

Insurance Policy
+ other choses in action such leasing rights, debts,, property rights, investments

Legal Assignment Formalities under s.136 LPA 1925 In writing and signed by Legal Assignment P.125 assignor Ian insurance is a Chose in Action. If it is a very valuable policy contract it is worth the ii. Absolute (i.e. effort of taking the assignment. However, unconditional, transfer check the terms of the policy contract for the whole of the debts) any restrictions on assignment. On receiving iii. Notify in writing the notice of the assignment the Insurance will insurer (Dearle v pay to the Bank any moneys due under the Hall) insurance policy. MR01 Voluntary Equitable Assignment P.127 Registration at Not as advantageous because the insurer Companies House within could just pay the Company and the bank 21 days from date of wouldn't have primary access to the money. creation of charge and Thus, the Co can give a legal assignment to complying with ss 859A a subsequent assignee who, by giving and 859D. notice, will take priority over the equitable assignee even if his interest predates it. Equitable Assignment It is equitable if failed to comply with any of the above.

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