Types of security Flashcards
What is a Pledge?
Possession of asset given to creditor
A pledge secures a debt by transferring possession of an asset to the creditor.
What is a Lien?
Possession retained by creditor (e.g. mechanic of a car)
A lien allows the creditor to retain possession of an asset until the debt is paid.
What is a Mortgage?
Possession of asset retained by borrower but ownership transferred to creditor
A mortgage secures a loan by transferring ownership of the property to the lender.
What is a Charge?
Security provider retains possession of the asset, creating an equitable proprietary interest in favor of the creditor
A charge does not transfer ownership but allows the creditor a claim on the asset.
What is a Fixed Charge?
Prevents the borrower from dealing with the assets subject to the charge and is the strongest form of security
What is a Floating Charge?
Floats over a class of assets; does not prevent borrower from dealing with these assets until it crystallises
Crystallisation occurs when the borrower defaults or at specified events in the loan agreement.
When does the floating charge crystallise?
Occurs at times set out in common law or at a specified event in the loan agreement
What type of charge are book debts (unpaid invoices) classified as?
Generally floating charges; can be fixed if paid into a blocked account
What are the disadvantages of Floating Charges?
- Creditor will not be sure of the value of the secured assets
- Floating charges are below fixed charges on statutory order
What happens if a floating charge document contains a negative pledge clause?
The floating charge will have priority if a later fixed charge is created with notice of the restriction
What is the significance of Floating Charges created on or after 15 Sep 2003?
Subject to part of the prescribed part fund
What is the role of an administrator regarding floating charge assets?
Free to deal with floating charge assets without reference to the charge holder or the court
What is a Guarantee?
Not a security as they do not give rights in assets; guarantor pays the borrower’s debt if they fail
When must a charge be registered?
A charge must be registered within 21 days beginning with the day after the date of creation of the charge or the debt becomes immediately payable and void against the administrator.
What form is used to register a charge?
Form MR01 is used to register a charge, detailing:
- the creator company
- date of creation
- persons entitled to the charge
- a short description of the asset.
Can the court extend the registration deadline for a charge?
Yes, the court can extend the period if it is an accident or just and equitable to do so.
Who can deliver the Statement of Particulars?
The Statement of Particulars may be delivered by the company that created the charge or any person interested in the charge.
What must companies keep regarding charges?
Companies must keep a copy of every charge and a copy of any amendments.
What is the order of priority on winding up?
- liquidator’s fees and expenses in realising assets subject to fixed charge
- Amount due to fixed charge creditors out of the above funds
- Other costs and expenses of liquidation
- Preferential creditors (first tier - employees, second tier - HMRC)
- Creation of prescribed part fund
- Creditors with floaitng charges
- PPF added back - unsecured creditors
- Interest to unsecured creditors
- Shareholders
What is the priority among creditors with fixed charges over the same asset?
If more than one creditor has a fixed charge over the same asset, the first fixed charge has priority.
What is the priority among creditors with floating charges over the same asset?
If more than one creditor has a floating charge over the same assets, the first floating charge created has priority, provided it was properly registered.
What can alter creditor priority?
A deed of variation.
How do shareholders, unsecured, and preferential creditors rank?
Shareholders, unsecured, and preferential creditors rank equally amongst themselves within their category, subject to any preferential rights attached to certain classes of share.
