SGS 10 (Guarantees and Debentures) Flashcards
What is the Lender’s position as respects clauses in a debenture?
Less likely to compromise as last point of defence to recover monies when things go wrong
What is the purpose of ‘Permitted Security’ and what is a common amendment?
Carve out for negative pledge clause.
Amend clause to extend carve out so that if Borrower acquires a Target with existing security it will not breach the pledge.
Time limit of 2-3 months to discharge (risk of structural subordination).
what is the effect of crystallisation of a floating charge?
Does not make it into a fixed one, merely prevents company disposing of assets subject to a floating charge.
Why would a bank want representations and warranties within the debenture?
The Charger may be a different entity to the Borrower and therefore not party to the loan agreement, Bank wants a direct contractual link with Chargor.
Differ to those in loan agreement as are specific to charged assets.
Why are negative pledges in the debenture?
Notice to other lenders of existing NP when register security doc (as loan agreement itself is confidential)
Charger may be a different entity to Borrower so bank wants direct contractual relationship with them.
What is the purpose of a non-disposals clause?
Why do they appear in the debenture?
Prevent borrower disposing of secured assets
Bank prefers to have direct contractual relationship with Chargor (if different entity to Borrower)
Bank needs to show CONTROL over fixed charge assets otherwise they will be deemed floating.
What is a ‘Further Assurances’ clause used for?
Allows Bank to require Charger to upgrade any forms of security e.g. a fixed charge to CBWLM.
undertaking obliging the Chargor to do what they need to do to perfect or enhance the security.
Procedure for upgrading to a CBWLM?
Chargor enters into a Supplemental Debenture
Power of Attorney enables L to perfect or enhance to complete documentation in place of Chargor.
If an Event of Default arises, what is the Lender’s position as regards enforcement?
Entitled to enforce whole of the security package, not just those over specific assets relevant to the EoD.
What could be an example of Spectrum problem?
If L has drafted it as a blocked account, but the Chargor has used money from the account for cashflow purposes (how the parties DEAL with it that determines whether fixed)
This indicates that bank more likely to have a floating charge.
Define a guarantee
Secondary CONTRACT dependent on validity of underlying loan agreement
What is the effect of including ‘on demand’ wording in a guarantee?
Once Borrower fails to pay, Bank can immediately demand Guarantor performs obligations withOUT having to PROVE the DEFAULT.
Indemnity rather than guarantee wording.
Why should you amend a guarantee to include an indemnity?
Guarantee is a secondary obligation and depends on validity of underlying loan agreement
Indemnity wording makes it a stand-alone primary obligation, protecting against situation in which loan becomes void for illegality .
Why should you make the guarantee continuing?
Common law rule states that when borrower repays money, guarantor’s liability under original debt is reduced by this amount.
What is the common law position as regards any amendment to the loan agreement?
any loan agreement varied without guarantor’s consent releases the guarantor as exact obligation they were guaranteeing no longer exists.
