Name 3 reasons why a bank would want to take security over an asset owned by its borrower
1. To prevent the borrower from selling the asset until the loan has been repaid
2. To enhance the bank's chances of recovering the debt owed to it
3. To entitle the bank to sell the asset charged and repay itself from the proceeds of sale
Name one method of security which prevents a borrower from making use of an asset even before enforcement? Why is this method used?
Usually to stop the borrower from dissipating the asset
Name a key feature of a fixed charge
The creditor takes rights in the asset
Name a key feature in a mortgage
The creditor takes title to the asset or, alternatively, rights equivalent to those enjoyed by a title holder
Name a key feature of a pledge
The creditor takes possession of the asset
Name a key feature of a common law lien
The creditor retains possession of the asset
A bank that takes a legal mortgage over registered land in accordance with LPA 1925, thereby becomes the registered owner of that property.
True or False?
Normally it is in the nature of a legal mortgage/legal assignment that the bank taking the benefit of such security becomes the legal owner of the asset secured.
However - s87 LPA 1925 says that there is no need for legal title to transfer in order for a bank to acquire the rights of a legal owner. It is sufficient that the "mortgage" is a "charge by deed expressed by way of legal mortgage"
Does a borrower who grants a floating charge retain freedom to deal with the assets? How long for?
Until the charge crystallises
What type of assets are most likely to be subject to a floating, rather than a fixed, charge
Assets that the business acquires and disposes of regularly
Are employees preferential creditors?
Are the tax authorities preferential creditors?
Can assets subject to a floating charge be used to satisfy the liquidators' expenses in priority to the claim of the chargeholder?
Yes (s1282) CA 2006
Can an effective charge be created over book debts?
Yes (Spectrum). However, the incovenience to the borrower of doing so will probably outweigh the benefit to the bank
The company must pay the proceeds of its book debts into a name account with the bank and may deal with these proceeds until the bank serves notice to the contrary.
Is this a fixed charge?
No (Spectrum), this is essentially a floating charge.
Can you take a pledge over patents by taking possession of the patent certificates?
A Pledge is only possible over tangible assets.
The certificates are not assets in themselves, they merely represent intangible assets
Does a charge over shares have to be registered?
No (s860 CA - Shares are not on the list)
However, charges over shares ARE normally registered because there is uncertainty as to whether or not declared dividends in respect of shares are book debts, which are themselves registrable
Does a lien give a right of sale?
No, a lien only gives a right of possession. A pledge gives a right of sale.
It is possibly to contractually give a lienee a right of sale
Once a borrower defaults, can the holder of a fixed charge appoint a receiver? Does s/he have power of sale over the charged asset? Can s/he appoint an administrator?
No - this is only available to the holder of a qualifying floating charge
Under CA 2006, prime responsibility for registering a charge lies with the chargee, as it is the chargee who stands to lose the most by failing to register.
True or False?
s860(1) it is the chargor's duty to register, although the chargee may register as a person interested in the charge (s860(2)) and will usually wish to do so
Give 2 consequences of failing to register a charge when required to do so by s860 CA 2006.
Is the charge no longer enforceable by the chargeholder?
1. Any other creditor who takes valid security over the same charged asset is entitled to ignore the existence of the unregistered charge
2. A subsequent liquidator or administrator of the chargeor company can ignore the existence of the unregistered charge.
If security has to be registered under s860, will it be void if not registered on time?
Does a charge under s860 etc, include a mortgage?
Is a fixed charge over shares registerable under s860?
No - although best to register them anyway in case dividends are a book debt, which is registerable
Note: Floating charges over shares DO have to be registered
Name three consequences of non-registration when it is required by s860
1. Invalidity against administrators and liquidators and loss of priority against other creditors (s871(1)
2. Debt it secures becomes immediately payable (s874(1)
3. Fine on the borrower and any defaulting officer (s860)
What is the meaning of "debenture" in the companies act?
Includes debenture stock, bonds and any other securities of a company, whether or not constituting a charge on the assets of the company (s738 CA 2006)
Does a company have to register the allotment of a debenture?
Yes (s741 CA 2006)
This must be done as soon as possible and, in any event, within 3 months
Not doing so is an offence
Must a register of debenture holders be kept?
The period allowed for registration of a charge created by a company is....?
What are the two charges which have special rules
21 days beginning with the day after the day on which the charge is created (s870)
Property and debentures
What are the consequences of failing to register a charge which is registerable under s860?
The charge is void (so far as any security on the company's property or undertaking is conferred by it) against–a liquidator of the company, an administrator of the company, and a creditor of the company,
Why should a debenture be created as a deed? (4 reasons)
1. Extends the limitation period
2. Avoids doubts about consideration
3. Debentures often create a power of attorney, this MUST be done by deed
4. If the debenture creates/conveys a legal estate in land, this MUST be done by deed
Can future property be secured by a legal mortgage? What can be used instead?
No. Equitable mortgage or fixed charge
Can you take a fixed charge over book debts?
Not really - this would stop the business from functioning as to be fixed charge it would have to control the debt and its proceeds (Spectrum) - a floating charge is more likely