Case and 3 principles for identifying a floating charge?
Re Yorkshire Woolcomber’s Association
- Charge on a class of assets of a company present and future;
- the class is one which changes from time to time in in the ordinary course of business; and
- Until some future step is taken (crytsallisation), the company may deal in the assets in the course of its business.
Later case emphasising floating charge requirement?
Spectrum Plus
- Key issue is the level of control. The freedom of the borrower to utilize the assets in the ordinary course of business.
- Courts will look to the substance of the provision granting security rather than the label.
Book debts - Spectrum principle?
Must show sufficient control over both the Debt and its Proceeds,
It will be a floating charge unless a locked account is used which the Borrower is not allowed to make withdrawals.
When do assignments rank from?
Dearle v Hall
From the date of notice to the contractual counter-party.
Repayment of debt - principle and case
Clayton’s Case
Money paid in by the Debtor will satisfy the oldest debt first subject to any agreement to the contrary
Loss of priority - case and principle.
Hopkinson v Rolt
Where there are two secured Lenders, the earlier Lender will lose its first priority regarding any new advances once it it has notice of the new mortgagee’s security.
Solution to a Secured Loan followed by an unsecured loan?
- Provision allowing Lender to allocate sums of money received as it chooses.
- Ensure security is “all monies” owed by the borrower are secured, not just under OLA.
- Ensure security is “continuing”.
Solution to consecutive secured loans?
- Provision allowing Lender to allocate sums of money received as it chooses.
Solution to losing priority to subsequent secured Lenders?
- Once notified of new mortagee, Rule Off borrower’s account and opens new repayment account for repayments.
- Ensure security “is continuing”.
For registered land, alternatively:
3. Tacking - obligation for further advances (RCF) noted on Charges Register - retains priority..
What is structural subordination?
- Where Bank A has secured loan to Holdco
- Where Bank B has loan with Sub
- Holdco as shareholder is last in priority to Sub’s assets
- Bank A is structurally subordinated to Bank B regardless of whether B’s loan is secured or unsecured.
- Issue only on insolvency
Cross default vs Cross Acceleration?
CD is triggered if the borrower defaults under an another agreement irrespective of whether the other creditor takes action.
CA requires a further step, the other creditor has to take steps to exercise its remedies under the acceleration provision.
ie. Lender prefers cross-default, borrower prefers CA.
What is a mandatory prepayment event + two common types?
Events outside the borrower’s control therefore should not be treated as EODs which could trigger cross-defaults.
Lender will still want ability to cancel commitment + require prepayment.
- Illegality (for Lender to continue lending)
- Change of control
What are undertakings, consequences of breach and 3 main types?
Undertakings are promises by the borrower to the lender to do or not to do something (ie. covenants).
If breached allows Lender to call EOD.
- Information Undertakings
- Financial Undertakings
- General Undertakings
3 actions Lender can take if financial covenant is breached?
- Call EOD
- If at a utilisation date and rep is repeated, breach of no EOD rep or exercise drawstop
- Cross-default.
Default vs Event of Default
- LMA definition covers both actual and potential EODs.
- A potential EOD is one which would be an EOD but for being with a grace period OR requires notice/ determination from the Lender.
- Must not agree to repeating a rep of no default:
- This will catch a potential EOD
- Triggered breach of repeated rep,
- Creating an actual EOD despite the potential EOD not progressing.
3 considerations ( and solutions) when subsidiary is granting upstream security?
BPP
1) Corporate Power
As CPs: Copy of Articles for restrictions, SR to remove and copy of Minutes approving execution of security doc)
2) Corporate Benefit
- Copy of BM of directors complying with s.172)
- Minority Shareholders
- Puts at disadvantage.
- Unanimous SH approval
(Also consider FA and Maintenance of Share Capital)
How to perfect a legal mortgage over shares?
- Transfer shares into banks name via STF
- Issue share certificate to bank
- Register bank in register of members (and in subs’ registers)
4 requirements for a legal assignment under s136 LPA?
- In Writing
- Absolute
- Signed by Assignor
- Original debtor notified.
Action to take for all security and why?
- Register at CH under s.859A.
- One security doc creates ALL security
- Doubt over Financial Collateral Regulations 2005 over cash, shares and bonds - register as a precaution uncertainty over floating charges and control.
Consequences of not registering security?
- Void against liquidator
- Debt becomes immediately repayable
- Potential negligence claim against solicitor
When do Charges By Way of Legal Mortgage Rank from?
Date of registration in the Charges Register of the Property’s Official Copies.
Tacking with security over registered land?
- Lender ‘tacks’ where it is obliged to make further advances
- Noted on the Charges Register
- Secures new advances under existing security (provided it was for ALL loans and not for first loan)
Why would Lender prefer equitable over legal mortgage?
Avoid:
1) Adminsitrative burden of being a member
2) Being liable for unpaid amount on shares
3) Company becoming a subsidiary over associated company under CA and IA.
4) Falling under PSC regime,
Bonds vs Loans? RRIIIPPUL
> Regulation > Repayment period Investment Base Lower Interest Fixed Interest > Publicity > Prospectus Undertakings Longer to setup
