Types of security Flashcards
(12 cards)
explain the effect of secured and unsecured loans on liquidation
Loan could be on a secured or unsecured basis. If the borrower becomes insolvent:
o Secured = lender protected to extent of the value of the asset (so long as the security was registered and isn’t set aside)
o Unsecured = unsecured creditors rank & abate equally
what is the position on giving security under the MAs?
No restriction on giving security under MAAs (if AAs inc. restrictions the company would need to pass an SR to amend the AAs)
explain the operation of a mortgage over assets and land
Highest form of security.
- Mortgage over assets = legal ownership is transferred to the mortgagee (the lender) giving them an immediate right to possession. Title is transferred back once the money is repaid. The mortgagee only exercises this right if the mortgagor defaults.
- Mortgage over land = charge by deed expressed by way of legal mortgage. Gives the mortgagee the right to take possession of the land and sell it.
- Separate mortgage for each asset/piece of land is required.
what is a charge? what are the types?
a charge gives the lender a right to appropriate and sell the charged property to pay the debt (i.e. an equitable proprietary right)
the charged can be fixed or floating
what are the key contractual terms in a charging document?
- Type of security
- Representations + warranties i.e. statements about the asset. Failure to disclose will be a breach of contract
- Covenants i.e. to maintain the value of the asset
- Enforcement + powers i.e. when the security becomes enforceable
what is a negative pledge?
a covenant in the charging document that the company will not create any other security without the lender’s permission (particularly desirable for floating charge holders as they could refuse to agree to a later fixed charge)
what is meant by ‘perfecting security’?
taking steps to ensure the security is enforceable (i.e. registration)
why should a charge/mortgage be registered?
There is no legal requirement for companies/LLPs to register charges and mortgages, but if they don’t (or it is inaccurate) it will be void
void charges are not enforceable against 3rd parties (i.e. it is not enforceable against liquidators, administrators or creditors of the borrower in insolvency and the lender becomes an unsecured creditor)
what is the time frame for registering the charge? when does the charge take effect from?
The chargor or chargee must register the charge within 21 days (inc. weekends + bank holidays), starting from the day after the charge was created
The charge takes effect from the date of registration
what is a void charge?
a charge which is registered out of time or is inaccurate
when will the court permit an extension of time to register the charge or allow amendments?
The court has power to extend the deadline / allow amendments if:
o The failure was accidental;
o It won’t prejudice other creditors/SHs; or
o There are other grounds meaning it is just and equitable
what are the administrative requirements once the charge is registered with CH?
- Certified copy of any charging document must be kept at the registered office or SAIL
- Charges over land must also be registered at HMLR
