Secured lending United Kingdom insolvency law

1 secured lending

1.1 debentures
1.2 registration
1.3 fixed , floating charges
1.4 equivalents security

secured lending


the bank of england (est 1694) lender other banks, @ interest rate set monetary policy committee under bank of england act 1998. when lending on money businesses @ higher interest rate, banks contract fixed , floating charges decrease risk , stabilise profits.

while uk insolvency law fixes priority regime, , within each class of creditor distribution of assets proportional or pari passu, creditors can jump priority ladder through contracts. contract security interest, traditionally conceptualised creating proprietary right enforceable against third parties, allow secured creditor take assets away, free competing claims of other creditors if company cannot service debts. first , foremost function of security interest: elevate creditor s place in insolvency queue. second function of security allow creditor trace value in asset through different people, should property wrongfully disposed of. third, security assists independent, out-of-court enforcement debt repayment (subject statutory moratorium on insolvency), , provides lever against secured lender can push control s on company s management. however, given adverse distributional impact between creditors, economic effect of secured lending negative externality against non-adjusting creditors. ostensibly private contract between secured lender , company, assets available other creditors diminished without consent , without them being privy bargain. nevertheless, security interests commonly argued facilitate raising of capital , hence economic development, argued indirectly benefits creditors. uk law has, far, struck compromise approach of enforcing fixed or specific security interests, partially enforcing floating charges cover range of assets company trades with. holders of floating charge take subject preferential creditors , ring fenced fund maximum of £600,000 reserved paying unsecured creditors. law requires details of kinds of security interests filed on register of charges kept companies house. not include transactions same effect of elevating creditors in priority queue, such retention of title clause or quistclose trust.

debentures

in commercial practice term debenture typically refers document evidences secured debt, although in law definition may cover unsecured debts (like iou ). legal definition relevant tax statutes, instance in british india steam navigation co v irc lindley j held simple acknowledgement of indebtedness debenture, meant paper on directors promised pay holder £100 in 1882 , 5% interest each half year enough, , result subject pay duty under stamp act 1870. definition depends on purpose of statutory provision used. matters because debenture holders have right company accounts , director s report, because debenture holders must recorded on company register other debenture holders may inspect, , when issued company, debentures not subject rule against clogs on equity of redemption . old equitable rule form of common law consumer protection, held if person contracted mortgage, must have right pay off debt , full title property back. mortgage agreement not turned sale lender, , 1 not contract perpetual period interest repayments. however, because rule limited on contractual freedom protect borrowers weaker bargaining power, thought inappropriate companies. in kreglinger v new patagonia meat , cold storage co ltd house of lords held agreement new patagonia sell sheepskins exclusively kreglinger in return £10,000 loan secured floating charge persist 5 years after principal sum repaid. contract keep buying exclusively construed not clog on redeeming autonomy loan because rule s purpose preclude unconscionable bargains. subsequently, clog on equity of redemption rule whole abolished section 739 of companies act 2006. in knightsbridge estates trust ltd v byrne house of lords applied when knightsbridge took secured loan of £310,000 mr byrne , contracted repay interest on 40 years, knightsbridge not argue contract should void. deal created debenture under act, , rule of equity not applied.

registration


in london main office of companies house, charges against company need registered, on bloomsbury street, near british museum.

while records of company s debentures need kept company, debentures secured charge must additionally registered under companies act 2006 section 860 companies house, along charge on land, negotiable instruments, uncalled shares, book debts , floating charges, among other things. purpose of registration chiefly publicise creditors take priority, creditors can assess company s risk profile when making lending decisions. sanction failure register charge becomes void, , unenforceable. not extinguish debt itself, advantage priority lost , lender unsecured creditor. in national provincial bank v charnley there had been dispute creditor should have priority after mr charnley s assets had been seized, bank claiming charge first , registered. giving judgment bank atkin lj held charge, confer priority, arises through contract, in transaction value both parties evince intention property, existing or future, shall made available security payment of debt, , creditor shall have present right have made available, there charge . means charge arises virtue of contractual freedom. legal , equitable charges 2 of 4 kinds of security created through consent recognised in english law. legal charge, more called mortgage, transfer of legal title property on condition when debt repaid title reconveyed. equitable charge used distinct in not protected against bona fide purchasers without notice of interest, registration has removed distinction. in addition law recognises pledge, person hands on property in return loan, , possessory lien, lender retains property in possession other reason until debt discharged, these not require registration.

fixed , floating charges

while both need registered, distinction between fixed , floating charge matters because floating charges subordinated insolvency act 1986 insolvency practitioners expenses under section 176za, preferential creditors (employees wages £800 per person, pension contributions , eu coal , steel levies) under section 175 , schedule 6 , unsecured creditors claims maximum of £600,000 under section 176a. floating charge invented form of security in late nineteenth century, concept apply whole of assets of undertaking. leading company law case, salomon v salomon & co ltd, exemplified floating charge holder (even if director , sole shareholder of company) enforce priority ahead of other persons. lord macnaghten said, knows when there winding-up debenture-holders step in , sweep off everything; , great scandal is. parliament responded preferential payments in bankruptcy amendment act 1897, created new category of preferential creditors - @ time, employees , tax authorities - able collect debts after fixed charge holders, before floating charge holders. in interpreting scope of floating charge leading case re yorkshire woolcombers association ltd receiver contended instrument void because had not been registered. romer lj agreed, , held hallmarks of floating charge (1) assets charged present , future , (2) change in ordinary course of business, , importantly (3) until step taken charge holder company may carry on business in ordinary way . floating charge not, technically speaking, true security until date of crystallisation , when metaphorically descends , fixes onto assets in business possession @ time.

businesses, , banks had enjoyed uncompromised priority security, increasingly looked ways circumvent effect of insolvency legislation s scheme of priorities. floating charge, in order value ascertained, must have crystallised fixed charge on particular date, set agreement. before date of crystallisation (given charge merely floats on no particular property) there possibility company both charge out property creditors priority, or other creditors set-off claims against property subject (uncrystallised) floating charge. furthermore, other security interests (such contractual lien) take priority crystallised floating charge if arises before in time. after crystallisation, assets received company can caught charge. 1 way companies gain priority floating charges stipulate in charge agreement charge convert floating fixed automatically on event before date of insolvency. according default rules @ common law, floating charges impliedly crystallise when receiver appointed, if business ceases or sold, if company up, or if under terms of debenture provision made crystallisation on reasonable notice charge holder. automatic crystallisation clause mean @ time of insolvency - when preferential creditors claims determined - there no floating charge above preferential creditors elevated. courts held legitimate security agreements have effect. in re brightlife ltd brightlife ltd had contracted bank, norandex, allow floating charge converted fixed charge on notice, , done 1 week before voluntary winding resolution. against argument public policy should restrict events allowing crystallisation, hoffmann j held in view not open courts restrict contractual freedom of parties floating charge on such grounds. parliament, however, intervened state in insolvency act 1986 section 251 if charge created floating charge, deem remain floating charge @ point of insolvency, regardless of whether had crystallised.

minority of loreburn committee, report of company law amendment committee (1906) cd 3052, 28

especially automatic crystallisation ceased make floating charges effective form of priority, next step businesses contract fixed charges on every available specific asset, , take floating charge on remainder. attempted on book debts company collect , trade with. in 2 cases courts approved practice. in siebe gorman & co ltd v barclays bank ltd said done stipulation charge fixed , requirement proceeds paid account held lending bank. in re new bullas trading ltd court of appeal said charge purport fixed on uncollected debts, floating on proceeds collected bank s designated account. courts overturned these decisions in 2 leading cases. in re brumark investments ltd privy council advised charge in favour of westpac bank purported separate uncollected debts (where charge said fixed) , proceeds (where charge said floating) not deemed separable: distinction made no commercial sense because value in uncollected debts proceeds, , charge have same on both. in re spectrum plus ltd, house of lords decided because hallmark of floating charge company free deal charged assets in ordinary course of business, charge purported fixed on book debts kept in account except 1 bank restricts use of, must in substance floating charge. lord scott emphasised definition reflects mischief statutory intervention... intended meet , should ensure preferential creditors continue enjoy priority section 175 of 1986 act , statutory predecessors intended them have. decision in re spectrum plus ltd created new debate. on 1 hand, john armour argued in response categories of preferential better off abolished, because in view businesses merely able contract around law (even after re spectrum plus ltd) arranging loan agreements have same effect security not in form caught law (giving examples of invoice discounting or factoring). on other hand, roy goode , riz mokal have called floating charge abandoned altogether, in same way recommended minority of loreburn report in 1906.

equivalents security

aside contract creates security interest repayment of debt, creditors company, , particularly trade creditors may deploy 2 main equivalents security. effect produce proprietary rights place them ahead of general body of creditors. first, trade creditor sells goods company (which may go insolvency) can contract retention of title clause. means though seller of goods may have passed possession buyer, until price of sale paid, seller has never passed property. company , creditor agree title property retained seller until date of payment. in leading case, aluminium industrie vaassen bv v romalpa aluminium ltd dutch company making aluminium foil stipulated in contract romalpa aluminium ltd when supplied foil, ownership passed once price had been paid, , products made romalpa held them bailees. when romalpa went insolvent, creditor claimed floating charge covered foil , products. court of appeal held, however, property in foil had never become part of romalpa s estate, , not covered charge. furthermore, clause not void want registration because assets belonging company , charged needed registered. in later cases, courts have held if property mixed during manufacturing process no longer identifiable, or if sold onto buyer, retention of title clause ceases have effect. if property can mixed (such oil) , clause prohibits this, seller may retain percentage share of mixture tenant in common. if clause purports retain title on no more part of property, re bond worth ltd held clause must take effect in equity, , requires registration. present requirements in companies act 2006 section 860 continue not explicitly cover retention of title clauses, in contrast registration requirements in uniform commercial code article 9. requires same effect security interest requires registration, , covers retention of title provision.

a second main equivalent security interest quistclose trust named after case barclays bank ltd v quistclose investments ltd. here company named rolls razor ltd had promised pay dividend shareholders, had financial difficulty. in debt bank, barclays, £484,000 agreed take loan quistclose investments ltd £209,719. money deposited in separate barclays account, purpose of being paid out shareholders. unfortunately, rolls razor ltd entered insolvency before payment made. barclays claimed had right set off quistclose money against debts due it, while quistclose contended money belonged entirely it, , not used satisfaction of other creditors. house of lords unanimously held trust had been created in favour of quistclose, , if purpose of payment (i.e. pay shareholders) failed, money revert quistclose s ownership. while quistclose trust cases rare, , theoretical basis has remained controversial (particularly because trust purpose , sits uncomfortably rule against perpetuities), trusts have been acknowledged exist when company keeps payments consumers in separate fund. in re kayford ltd mail order business, fearing bankruptcy , not wanting pre-payments customers taken other creditors, acted on solicitors advice , placed money in separate bank account. megarry j held ensured other creditors not have access cash. since insolvency act 1986 reforms, probable section 239, prohibits transactions desire give preference 1 creditor on others, argued avoid such arrangement (if ever company in fact seek prefer customers in way). position, then, while banks , trade creditors may protect themselves, consumers, employees , others in weaker bargaining position have few legal resources same.