Security Flashcards
What are the types of security?
- Pledge
- Lien
- Mortgage
- Charge
What is a pledge?
Security provider gives lender possession of asset until debt is paid back
What is lien?
Creditor retains possession of asset until debt is paid back
What is a mortgage?
Security provider retains possession of asset but transfers ownership to creditor. Transfer subject to:
1) Creditor right to take possession if default
2) Borrower’s right to require creditor to transfer asset back to it when debt repaid
What are two types of charges?
- Fixed charge
- Floating charge
What is a fixed charge?
A security taken over specific assets like machinery or vehicles
What is a key feature of fixed charge against an asset?
Creditor controls what the borrow can do with the asset
What is borrower limited on when they have a fixed charge against something?
They cannot sell the asset or use it as security for another loan without consent
If loan is not repaid on fixed charge, what can creditor do?
- Appoint receiver to take control of it
- Sell the asset to recover the unpaid debt
What is a floating charge?
Applies to class of changing assets, like stock or inventory
What is the difference between floating and fixed charge?
Borrower can still freely buy / sell and use the assets
When does a floating charge become fixed?
When it crystallises
What is crystallisation?
When a floating charge converts into a fixed charge and locks onto assets the borrower owns at that moment
When does a floating charge crystallise?
When borrower defaults on loan and becomes insolvent
What are disadvantages of floating charges for creditors?
- Borrower can freely sell assets
- Floating charge ranks below fixed charge and preferential creditors in order of repayment
- Prescribed part fund is implemented
- Administrator can distribute proceeds of floating charge assets without charge holder’s consent
What is a prescribed part fund?
A portion of proceeds from floating charge is set aside for unsecured creditors (lol)
Do charges need to be registered with Companies House?
Yes
When does a charge need to be registered with Companies House?
Within 21 days of its creation
What documents are required for registration of a charge to Companies House?
1) Form MR01 which includes:
- Company creating charge
- Date charge created
- Persons entitled to charge
- Description of assets
2) Certified copy of charge
3) The relevant fee
What happens once a charge is registered?
Registrar assigns unique reference code. Certificate of registration is issued.
Who registers a charge?
- Company that created charge
- Any interested party
What is the effect of failing to register within 21 days?
- Charge is void against liquidator, administrator, other creditors
- Debt becomes immediately payable
- Unregistered charge is effectively worthless
What records must be kept by a company?
- Every charge created
- Any instrument that amends or varies a charge
Can a company store certified copies rather than originals?
Yes
Where must documents be stored by Company?
Registered office
What are penalties for non-compliance with storage?
- An offence
- Company and officers in default may be fined
What is the order of priority between creditors?
1) Creditors with fixed charges
2) Preferential creditors
3) Creditors with floating charge
4) Unsecured creditors
5) Shareholders
Who are preferential creditors?
1) Employee wages (up to £800 per employee)
2) Occupational pensions
3) Certain debts owed to HMRC
What happens if multiple creditors hold fixed charge over same asset?
The first charge created takes priority if properly registered
The first charge created takes priority if properly registered
Again, first charge takes priority
How can priority be altered by agreement?
- Deed of priority
- Intercreditor agreement
- Subordination agreement
What is the priority of rankings within preferential creditors, unsecured creditors and shareholders?
Within their own class, they all rank equally, regardless of timing
