Debt Finance - Security Flashcards
(23 cards)
What is security in the context of debt finance?
A proprietary interest or possession in a borrower’s asset given to the lender to ensure repayment of a debt, often enforceable in insolvency situations
What is the main advantage of a lender taking security?A
It improves the lender’s priority in insolvency, and may allow direct enforcement without court proceedings if the borrower defaults
What is a pledge?
A possession-based security where the borrower delivers the asset to the lender until repayment (eg. pawning)
What is a lien?
A legal right to retain possession of goods until a debt is paid (e.g. mechanic lien over a repaired car)
What is a mortgage?
Security where ownership of the asset is transferred to the lender, but the borrower retain possession. It includes a right of redemption when the debt is repaid.
What is a charge?
A contractual equitable interest in the borrower’s asset. It does not transfer ownership, but gives the lender enforcement rights
What is a fixed charge?
A charge over identified assets where the borrower cannot deal with the asset without the lender’s consent? It offers strong control and 1st priority on insolvency
What is a floating charge?
A charge over circulating assets (e.g stock), allowing the borrower to deal with them freely until the charge crystallises.
When does a floating charge crystallise?
On events like default, insolvency, or contractual triggers, it fixes to the assets then held and becomes like a fixed charge
What are 3 key disadvantages of floating charges for lenders?
- No control over assets until crystallisation
- Lower priority than fixed charges and preferential creditors
- Part of the asset proceeds is set aside for unsecured creditors (prescribed part)
Give an example of when a floating charge might be used?
A bank may take a floating charge over all present and future assets of a trading company so it can operate normally until default.
Can a floating charge become a fixed charge?
Yes, through crystallisation, but its priority rank does not improve even after crystallisation.
What is a guarantee?
A contractual promise to pay another person’s debt if they default. It is not security, but provides similar commercial protection
What is a downstream guarantee?
A guarantee given by a parent company for a loan to its subsidiary
What is a cross-stream guarantee?
A guarantee given by 1 subsidiary for a loan made to another subsidiary within the same group
What is an upstream guarantee?
A guarantee given by a subsidiary for a loan made to its parent company
When does a charge need to be registered?
within 21 days beginning the day after creation
Who can register a charge at CH?
Either the company or any interested person
What is the consequence of failing to register a charge?
the charge is void against the liquidator, administrator or creditor and the loan becomes immediately repayable
What form is used to register a charge?
Form MR01 - must be submitted wit ha certified copy of the charge and the registration fee
General order of priority among creditors on winding up?
- Fixed charge holders
- Preferential creditors (e.g. unpaid wages, pensions, HMRC)
- Floating charge holders
- Unsecured creditors
- Shareholders
What is the prescribed part fund?
A portion of the floating charge proceeds set aside for unsecured creditors. Required on charges created on or after 2003
What is a deed of priority or intercreditor agreement?
A contract between creditors agreeing how they will rank in priority, which may override the default statutory order.
