Security Flashcards
What assets may be secured?
Virtually all assets a company owns. E.g
1) Land
2) Tangible property
3) Intangible property (money in bank accounts)
Types of security
3 Types:
1) Mortgages
2) Fixed charges
3) Floating charges
Types of security - Mortgages
Highest form of security. Lender would seek to take a mortgage over high-quality assets such as land, buildings, machinery. A mortgage with the exception of land involves the transfer of the legal ownership from company to lender. This title will be transferred back when the money has been repaid
Types of security - Charges - Definition
Does not transfer legal ownership from the borrower to the lender and it does not give the lender the immediate possession of the property. However it gives the lender important rights over the asset if the borrower fails to repay the money borrowed. 2 types:
1) Fixed charge
2) Floating charge
Types of security - Charges - Fixed charge
May be taken over property such as machinery. Must create a separate fixed charge over each asset. The lender has control of the asset. If the borrower gets into financial difficulty the lender will have the right to sell the asset and be paid out of the proceeds of sale before any other claimants. RIGHT OF FIRST CLAIM.
Types of security - Charges - Fixed charge - More than one fixed charge over the same asset
It is possible to create more than one fixed charge over the same asset. The effect is that the holder of the fixed charge which was created first will be able to sell the asset and pay itself out of the proceeds, the second fixed charge holder will then be able to pay itself out of the remainder.
Types of security - Charges - Floating charges - Definition
A floating charge secures a group of assets e.g stock which is constantly changing. They are then identified generically rather than specifying individual items. The company can deal with the assets with freedom.
Types of security - Charges - Floating charges - Basic features
3 basic features:
1) They consist of an equitable charge over the whole or a class of the company’s assets e.g stock
2) The assets subject to the charge are constantly changing
3) The company retains the freedom to deal with the assets in the ordinary course of business until the charge crystallises
Types of security - Charges - Floating charges - Crystallisation Events
On the occurence of certain events the floating charge will automatically crystallise over the assets charged. This will happen if:
1) The borrower goes into receivership
2) The borrower goes into liquidation
3) The borrower ceases to trade
4) Any other even occurs which is specified in the charge document
All of these events prevent the borrower repaying or make it less likely that it will be able to repay the outstanding borrowing
Types of security - Charges - Floating charges - Crystallisation Effects
On crystallisation the borrower can no longer deal with the assets covered by the charge thereby turning into a fixed charge
Types of security - Floating charges - Advantages
Allows the borrower to deal with the assets on a day-to-day basis. Allows them to maximise the amount that they are able to borrow.
Types of security - Floating charges - Disadvantages
As a GENERAL RULE a fixed charge will take priority over a floating charge over the same assets. From the viewpoint of the lender the borrower is allowed to deal with the assets - they might sell their existing stock and not purchase any new stock meaning that the lender doesn’t have a charge over anything. To remedy this they should take a fixed charge over other assets - the more assets they hold a charge over the better chance they have of getting paid. Preferential creditors have a right to claim money over the floating charge before the charge holder.
Priority of charges
1) A fixed charge or mortgage will take priority over a floating charge of the same asset even if the floating charge was created first
2) If there is more than one registered fixed charge or mortgage over the same asset they have priority in order of their date of creation
3) If there is more than on registered floating charge over the same asset they have priority in order of their date of creation
Priority of charges - registration
If its not registered then its not counted or it goes to the bottom of the pile
Priority of charges - Bank
If there’s not enough to pay back the bank then the bank becomes an unsecured creditor for the amount that’s not covered
