4.2): Security Flashcards
Why will security be granted over the borrower’s assets in return for the loan?
if business fails to repay the loan:
lender can seize secured assets, sell them and pay themselves out of proceeds of sale
security lowers the risk of not being repaid
What is an advantage for a business providing security over its assets?
lender will usually allow the business to borrow money at a rate that is lower than usual
Who can grant fixed and floating charges?
Companies and LLPs
sole traders and partnerships can only grant fixed charges and these must be registered at HM Land Registry if they are over land.
What initial considerations does a company need to make when borrowing money?
Check borrowing is permitted under company’s constitution.
CA 2006 Companies: Unrestricted objects unless restricted by articles
if they have Model Articles: No restrictions on granting security
Amended/Bespoke Articles: Check for restrictions.
Pre-1 October 2009 Companies:
if articles not updated, check memorandum for restrictions on granting security
If restrictions exist, shareholders must pass a special resolution to amend the articles.
What must a company check before entering into a security contract on the company’s behalf?
Ensure directors have authority to grant security.
Companies with Model Articles: Authority provided by MA 3.
Amended/Bespoke Articles: Check for restrictions on directors’ authority
What are the initial considerations for a lender to a company?
Confirm the company’s power to grant security and the directors’ authority to act.
Steps:
Inspect the company’s articles.
Check company records at Companies House.
Request board resolutions authorizing the security.
What can a lender discover from the register?
Conduct a search at Companies House to check for registered charges.
the register will show:
Date of creation of any charge.
Amount secured.
Property subject to the charge.
Chargeholder details (who can enforce the charge).
Which other specific searches can a lender make?
Land: Conduct a search at the Land Registry to confirm ownership and check for existing charges.
Intellectual Property: Search at the Intellectual Property Office for ownership and existing charges.
How would a lender go about conducting a winding-up search?
Contact the Companies Court to check for any ongoing insolvency proceedings.
What types of assets may be secured from a company or LLP?
Land (freehold, leasehold) and fixtures.
Tangible property (e.g., machinery, computers, stock).
Intangible property (e.g., bank account balances, debts, shares, intellectual property rights).
What are the main types of security for a company or LLP?
mortgages
fixed charges
floating charges
What are the elements of a mortgage?
Highest form of security, typically taken over valuable assets (e.g., land, buildings, machinery, shares).
Legal ownership transfers to the lender but is returned once the loan is repaid.
For land, a charge by deed expressed as a legal mortgage is created.
Rights of the lender include possession and sale if the borrower defaults.
What is a charge?
does not transfer ownership but grants the lender rights over the asset if the borrower defaults.
What are the elements of a fixed charge?
Assets: Applied to specific assets (e.g., machinery, shares).
Creation: Requires separate fixed charge for each asset.
Effect:
Lender has control; borrower needs lender’s consent to dispose of the asset.
Borrower must maintain the asset.
Priority:
Lender has first claim on sale proceeds if borrower enters receivership/liquidation.
Multiple fixed charges: Earlier charges have priority in repayment.
Advantage: Strong security due to priority over unsecured creditors.
What are the elements of a floating charge?
Secures changing assets (e.g., stock) that cannot be subject to a fixed charge due to regular business use.
Key Features:
Equitable charge over a class of assets (e.g., stock, book debts).
Assets change regularly.
Borrower can deal with assets freely until crystallisation.
Crystallisation Triggers:
Receivership
Liquidation
Cessation of trade
Other events specified in the charge agreement
Effect of Crystallisation:
Floating charge becomes a fixed charge; borrower loses freedom to deal with assets.
What are the advantages and disadvantages of floating charges?
Advantages:
Allows borrower to use and manage assets (e.g., stock).
Can secure all business assets, maximising borrowing potential.
Disadvantages:
Lower priority than fixed charges on the same assets.
Preferential creditors may claim proceeds before floating charge holders.
Risk of being set aside by liquidators/administrators.
What other forms of security/security-like agreements can a company/LLP enter into?
personal guarantees
a pledge
a lien
retention of title
