BLP WS11 READING NOTES
TAKING SECURITY
Why and how a company creates security over its assets.
The different types of security
The process of registering security
The problems that result from the failure to register security.
WHY GRANT SECURITY: ADVANTAGEOUS FOR THE LENDER
A lender will require security over the company’s assets in return for making the loan to ensure the lender’s
chances of being repaid if the company should get into financial difficulties.
So, if the company fails to repay the loan, then the lender can seize the secured assets and sell them and pay
themselves out of the proceeds of the sale.
This can be done in priority to other claims on outstanding sums made by unsecured creditors of the company.
COMPANY CAN BENEFIT FROM GRANTING SECURITY:
Lender will usually allow the company to borrow money at a lower rate than usual.
The company can secure a loan.
INITIAL CONSIDERATIONS:
SOURCES OF LAW:
The creation of security by a company is predominantly a matter of contract law, thus the type and extent of
security and the terms on which it is granted are generally determined by agreement between the parties after
negotiations.
Also: Insolvency Act 1986 and the LPA 1925 [when land is involved]
TERMINOLOGY: DEPENDS ON THE LEGISLATION YOU ARE WOKING WITH
The CA 2006 uses ‘charge’ as an umbrella term for most types of security, and in s 859A(7) specifically
states that ‘“charge” includes mortgage’.
In contrast, the LPA 1925 uses the term ‘mortgage’ as the umbrella term for security in that Act, defining
this (s 205(1)(xvi)) to ‘include any charge or lien on any property’.
The Insolvency Act 1986 defines ‘security’ as ‘any mortgage, charge, lien or other security’.
Therefore, it is important to check which legislation you are working with.
Furthermore, when considering a contractual document granting security, it is essential to read the agreement
carefully and not just to rely on its name, to ensure that you have correctly identified the type of security it
covers.
INITIAL CONSIDERATIONS FOR THE COMPANY:
Directors must ensure the company has the power to grant security over its assets before entering into security
contracts. They must check the company’s articles of association. If not, they will be acting outside of their
authority and in breach of their duty.
The model articles for private companies (formed under CA2006) do not place any restriction on
granting security, as they have unrestricted objects, unless specifically restricted by the company’s
AOA (S30(1)CA)
Therefore, must check if the company has amended model articles or bespoke articles. For companies formed
before 1st October 2009, look at objects clause in the old memorandum of association on any restrictions on the
company to grant security.
If there are restrictions, the company’s shareholders must first pass a special resolution under s 21 of
the CA 2006 to amend the company’s articles.
, BLP WS11 READING NOTES
INITIAL CONSIDERAITONS FOR THE LENDER:
The company’s AOA must not restrict the company from granting security.
Ensure directors granting security have authority to act on behalf of the company. Do this by inspecting
the articles of the company, searching the company’s records at Companies House, and requesting copies of
relevant board resolutions.
Check the company’s records at the Company’s House to see if any charges have been registered
against the company’s property and ensure that there is sufficent value in the property to provide
adequate security for the loan.
S859(i) CA the registrar of companies must include a certified copy of the instrument creating the charge in the
register, which is open to inspection by any person.
From the register, the lender will be able to discover: (a) the date of creation of any existing charge (b)
the amount secured (c) which property is the subject of the charge (d) who holds and can enforce the
charge.
The lender must search the land registry for any pre-existing charges that have been registered.
Lender should conduct winding up search by telephone at the Companies Court, to check that no insolvency
proceedings have been commenced against the company.
WHAT ASSETS MAY BE SECURED?
all assets that a company might own may be offered as security for its borrowings.
its land, whether freehold or leasehold, and over its fixtures and fittings;
its tangible property, such as machinery, computers and stock;
its intangible property, such as money in a bank account, debts owed to it, any shares it owns in other
companies and intellectual property rights.
TYPES OF SECURITY: THAT A COMPANY CAN PROVIDE IN RETURN FOR A LOAN:
MORTGAGE: A SEPARATE MORTGAGE MUST BE CREATED OVER EACH ASSET
A lender would seek to take a mortgage over high-quality assets owned by the borrowing company, such
as land, buildings, machinery, aircraft and ships, and even shares it owns in other companies.
When concerning land, the mortgage gives the lender the right to immediate possession of the property,
this is held in reserve and exercised only if the borrowed money is not repaid (where the company
defaults. The title is transferred back to the company when the borrowing has been repaid.
S87 LPA 1925 a mortgage taken over land is actually, ‘a charge by deed expressed to be by way of legal
mortgage”, this means, there are key rights to take possession of the land and to sell it.
CHARGES:
There is no transfer of legal ownership between the chargor (the company) to the chargee (the lender,
and does not give the chargee immediate possession of the property
There are 2 types of charges a company can grant:
(1) FIXED CHARGE:
Company must create a separate fixed charge over each asset. It is possible to create more than one fixed
charge over the same asset.
A fixed charge may be taken over property such as machinery and shares owned by the company in
other companies.
If fixed, lender has control of the asset and the company cannot dispose of it e.g sell, without the charge holders
consent. Note the lender will also expect the asset to be kept in good condition
If the company gets into financial difficulties and goes into receivership or liquidation, the fixed charge holder
will have the right to sell the asset and be paid out of the proceeds of the sale (to repay the outstanding amount
of any borrowings) before any other claimant (first claim over proceeds is good security)
TAKING SECURITY
Why and how a company creates security over its assets.
The different types of security
The process of registering security
The problems that result from the failure to register security.
WHY GRANT SECURITY: ADVANTAGEOUS FOR THE LENDER
A lender will require security over the company’s assets in return for making the loan to ensure the lender’s
chances of being repaid if the company should get into financial difficulties.
So, if the company fails to repay the loan, then the lender can seize the secured assets and sell them and pay
themselves out of the proceeds of the sale.
This can be done in priority to other claims on outstanding sums made by unsecured creditors of the company.
COMPANY CAN BENEFIT FROM GRANTING SECURITY:
Lender will usually allow the company to borrow money at a lower rate than usual.
The company can secure a loan.
INITIAL CONSIDERATIONS:
SOURCES OF LAW:
The creation of security by a company is predominantly a matter of contract law, thus the type and extent of
security and the terms on which it is granted are generally determined by agreement between the parties after
negotiations.
Also: Insolvency Act 1986 and the LPA 1925 [when land is involved]
TERMINOLOGY: DEPENDS ON THE LEGISLATION YOU ARE WOKING WITH
The CA 2006 uses ‘charge’ as an umbrella term for most types of security, and in s 859A(7) specifically
states that ‘“charge” includes mortgage’.
In contrast, the LPA 1925 uses the term ‘mortgage’ as the umbrella term for security in that Act, defining
this (s 205(1)(xvi)) to ‘include any charge or lien on any property’.
The Insolvency Act 1986 defines ‘security’ as ‘any mortgage, charge, lien or other security’.
Therefore, it is important to check which legislation you are working with.
Furthermore, when considering a contractual document granting security, it is essential to read the agreement
carefully and not just to rely on its name, to ensure that you have correctly identified the type of security it
covers.
INITIAL CONSIDERATIONS FOR THE COMPANY:
Directors must ensure the company has the power to grant security over its assets before entering into security
contracts. They must check the company’s articles of association. If not, they will be acting outside of their
authority and in breach of their duty.
The model articles for private companies (formed under CA2006) do not place any restriction on
granting security, as they have unrestricted objects, unless specifically restricted by the company’s
AOA (S30(1)CA)
Therefore, must check if the company has amended model articles or bespoke articles. For companies formed
before 1st October 2009, look at objects clause in the old memorandum of association on any restrictions on the
company to grant security.
If there are restrictions, the company’s shareholders must first pass a special resolution under s 21 of
the CA 2006 to amend the company’s articles.
, BLP WS11 READING NOTES
INITIAL CONSIDERAITONS FOR THE LENDER:
The company’s AOA must not restrict the company from granting security.
Ensure directors granting security have authority to act on behalf of the company. Do this by inspecting
the articles of the company, searching the company’s records at Companies House, and requesting copies of
relevant board resolutions.
Check the company’s records at the Company’s House to see if any charges have been registered
against the company’s property and ensure that there is sufficent value in the property to provide
adequate security for the loan.
S859(i) CA the registrar of companies must include a certified copy of the instrument creating the charge in the
register, which is open to inspection by any person.
From the register, the lender will be able to discover: (a) the date of creation of any existing charge (b)
the amount secured (c) which property is the subject of the charge (d) who holds and can enforce the
charge.
The lender must search the land registry for any pre-existing charges that have been registered.
Lender should conduct winding up search by telephone at the Companies Court, to check that no insolvency
proceedings have been commenced against the company.
WHAT ASSETS MAY BE SECURED?
all assets that a company might own may be offered as security for its borrowings.
its land, whether freehold or leasehold, and over its fixtures and fittings;
its tangible property, such as machinery, computers and stock;
its intangible property, such as money in a bank account, debts owed to it, any shares it owns in other
companies and intellectual property rights.
TYPES OF SECURITY: THAT A COMPANY CAN PROVIDE IN RETURN FOR A LOAN:
MORTGAGE: A SEPARATE MORTGAGE MUST BE CREATED OVER EACH ASSET
A lender would seek to take a mortgage over high-quality assets owned by the borrowing company, such
as land, buildings, machinery, aircraft and ships, and even shares it owns in other companies.
When concerning land, the mortgage gives the lender the right to immediate possession of the property,
this is held in reserve and exercised only if the borrowed money is not repaid (where the company
defaults. The title is transferred back to the company when the borrowing has been repaid.
S87 LPA 1925 a mortgage taken over land is actually, ‘a charge by deed expressed to be by way of legal
mortgage”, this means, there are key rights to take possession of the land and to sell it.
CHARGES:
There is no transfer of legal ownership between the chargor (the company) to the chargee (the lender,
and does not give the chargee immediate possession of the property
There are 2 types of charges a company can grant:
(1) FIXED CHARGE:
Company must create a separate fixed charge over each asset. It is possible to create more than one fixed
charge over the same asset.
A fixed charge may be taken over property such as machinery and shares owned by the company in
other companies.
If fixed, lender has control of the asset and the company cannot dispose of it e.g sell, without the charge holders
consent. Note the lender will also expect the asset to be kept in good condition
If the company gets into financial difficulties and goes into receivership or liquidation, the fixed charge holder
will have the right to sell the asset and be paid out of the proceeds of the sale (to repay the outstanding amount
of any borrowings) before any other claimant (first claim over proceeds is good security)
