Security Crib Sheet Notes

Security

1. Types of Security

   1. Pledge

      1. Possession is the strongest form of security

         1. Way of creating security by the actual delivery of a tangible movable asset to a creditor to be held until the performance of an obligation

         2. Confers certain implied rights, such as the right to sell the pledged assets to meet a defaulted debt

   2. Lien

      1. Right to retain possession of another person’s property until he settles an obligation

         1. Legal lien requires actual possession of the property but does not confer any right to sell it

         2. Equitable line does not require possession and will give a right of sale through application to the court

   3. Mortgage

      1. Confers ownership to a bank along with a right to sell on default and an obligation to re-transfer title on satisfaction of the debt

         1. Can have a legal mortgage 101 LPA 1925

         2. Can have an equitable mortgage resulting from

            1. A written agreement by a borrower that the property is to be secured by way of equitable mortgage

            2. An agreement to provide a legal mortgage

            3. A mortgage over an equitable interest

            4. A mortgage over property not yet owned by the borrower

            5. A purported legal mortgage that does not comply with all the necessary formalities

               1. Equitable mortgages can be ignored by a bona fide purchaser for the value of the legal title to an asset without notice of the equitable security

   4. Assignment

      1. It will in effect create a legal mortgage if it complies with 136 LPA 1925

         1. In writing and signed by the assignor

         2. Absolute

            1. Walter v Sullivan the whole of the debt/contract needs to be assigned

         3. Notified in writing to any person against whom the assignor could enforce the assigned rights

      2. If it is not a legal assignment, it will be an equitable one

         1. Ranks above a floating charge in an insolvency proceeding

      3. An assignment cannot transfer the assignor’s obligations

         1. There is a danger that any indemnity provisions for increased costs might be unassignable without consent because they are personal

   5. Charge by deed expressed to be by way of legal mortgage

      1. Legal mortgage over land

         1. No transfer of ownership

            1. Freehold property – 3000 year lease

            2. Leasehold property – 1 day less than the length of the lease

   6. Fixed Charge

      1. Gives lender rights over the asset which

         1. Prohibit the borrower from disposing of the asset without permission

         2. Attempt to maintain the asset’s value whilst it is in the borrower’s hands

         3. Allows the bank recourse to the asset in the event of the borrower’s default under the loan

         4. Allows a borrower to use the charged assets unless and until any ‘enforcement event’ occurs as specified in the charge document

   7. Floating Charge

      1. Secures a group of assets which may fluctuate from time to time

      2. Specifically allows the borrower to deal with the charged assets in the ordinary course of business, allowing a borrower to sell its stock and dispose of its other current assets so that it may continue trading and make money which it will eventually use to repay the secured loan

         1. Companies need to be able to utilise the raw materials and sell its products in the daily course of business. A fixed charge over these assets would prevent the company from dealing with or disposing of them without the lender’s consent in its capacity as security trustee under the Security Agreement. This would clearly be impractical given the sheer number and frequency of the transactions involved.

            1. Banks will want some form of security over these assets though

         2. Will allow companies to deal freely with the assets until such time as there is an event of default under the finance documents or if the company become subject to insolvency proceedings

      3. On the occurrence of certain events the floating charge will crystallise and effectively become a fixed charge with respect to any of the assets of which it had previously ‘floated’ and which remain in the borrower’s ownership

         1. Preferential creditors have first call on the proceeds of sale of the companies’ assets and a proportion of the value would be set aside to pay unsecured creditors (ring-fenced fund), the banks’ claim still ranks ahead of that of most of the unsecured creditors

      4. Holder of a floating charge has the right under Para 14, Sch B1 IA 1986 to appoint an administrator over the company if it gets into financial difficulty

2. Priority of security

   1. Fixed charges and mortgages that are properly registered under the CA 2006 rank in order of creation

      1. A fixed charge created prior to a legal mortgage will rank ahead of the legal mortgage, provided that it has been registered within 21 days of its creation

      2. Registration of an equitable fixed charge will constitute notice or constructive notice to anyone who has searched the register or ought to have done so, including another lender wishing to take security over the asset

   2. Priority of assignments is determined by the first assignee to give notice to the third party irrespective of the date of creation, under a common law rule in Dearle v Hall

      1. Assignments registered under 860(7) CA 2006 will constitute constructive notice

      2. If a borrower assigns a contract to a lender and the lender then fails to give notice to the third party, and the borrower later assigns the contract to another assignee, that later assignee will gain priority over the original lender if the subsequence assignee notifies the third party

   3. Floating charge over an asset which is made subject to a fixed charge will rank behind the fixed charge even if the floating charge has been created and properly registered

      1. Here priority is not determined by the date of creation of the charge
         

3. Negative Pledge

   1. Prevents companies being able to give a mortgage or a fixed charge over certain of their assets that would then rank ahead of the floating charge in favour of the syndicate

   2. It is essential that companies do not grant subsequent charges in contravention to the negative pledges in the Security Agreement

      1. Almost certainly trigger an event of default under the Credit Agreement

   3. If a second charge...

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