6

Question 1

In the event of a company being unable to pay debts, in which order can creditors claim assets?

Answer 1

1 - Holders of security (legal mortgage)
2 - preferential creditors (wages)
3 - bonds and floating charges
4 - unsecured creditors
5 - shareholders

Question 2

What is a disadvantage of land security?

Answer 2

May take longer to release, complex legal process and costs higher

Question 3

What is a definition of a guarantee?

Answer 3

A promise by a third party to repay the lender if the borrower fails to do so.

Question 4

What are the three principles of good security

Answer 4

Simplicity, stability in value and realisability

Question 5

When will banks request term assurance as security?

Answer 5

Sole traders where the business is very much in their hands.

Question 6

Who can only have floating charges?

Answer 6

Limited companies

Question 7

What is a floating charge known as in England?

Answer 7

Debentures

Question 8

What are the percentages of ring fencing by administrators?

Answer 8

50% of first 10k

20% of floating charge maximum ring fence fund of £600k

Question 9

What are advantages of floating charges?

Answer 9

Lender can take the charge over difficult assets I.e stock.

• straightforward
• will enable lender to appoint an administrator

Question 10

If bank holds a fixed charge what do they do to ensure they have the opportunity to appoint an administrator?

Answer 10

Takes a floating charge also

Question 11

What is retention of title?

Answer 11

Seller retains title to goods until paid in full. Therefore may be removed from premises if not paid.

Question 12

What types of security does registration of the charges apply to?

Answer 12

Floating charges
Land and building
Assignation of debt
Mortgage of ship

Question 13

What are disadvantages to floating charges?

Answer 13

• valuing assets is difficult
• certain assets may disappear
• administrators cost money
• not valid if business is insolvent when granted

Question 14

What margins are applied to government and speculative securities?

Answer 14

• government - 85-90%

- speculative - 33-66%

Question 15

How many years does it take for a life policy to acquire a surrender value?

Answer 15

After 2 or 3 annual payments

Question 16

What are the parties to a guarantee?

Answer 16

Lender, guarantor and borrower

Question 17

What are the advantages of guarantees?

Answer 17

Easy, quick and cheap
Easy to value
Security is strong

Question 18

What are disadvantages of guarantees?

Answer 18

• May deteriorate during period
• don’t want to upset valued customer
• rarely want to pay up
• try and avoid liability

Question 19

What is good attribute of good security

Answer 19

Capable of being completed easily and at a reasonable cost

Question 20

Mock

With a floating charge, which of the undernoted is correct?

a) The security is easy to value
b) It crystallises when a company is thought to be in financial difficulties
c) Included in the charge is a fixed security over property
d) The procedure for taking the charge is straightforward

Answer 20

d) The procedure for taking the charge is straightforward

Question 21

Mock

If the bank accepts a deposit of title deeds to a property as security it will do so on the basis that:

a) it is an informal security.
b) it is easily converted into a standard security over the land and the buildings on it.
c) it is a good security because it is simple and easily valued.
d) property values are usually stable or rising over the long term.

Answer 21

a) it is an informal security.

Question 22

Mock

How many parties are there to a guarantee?

Answer 22

3

Question 23

Mock

Which of the following is an advantage of stock exchange securities as a form of security?

a) Values can fluctuate quite widely
b) The security can be realised quickly and easily
c) It is registered in the Register of Charges at Companies House
d) Third party consent to sell the security is easily obtained

Answer 23

b) The security can be realised quickly and easily