BDF5
Security and Perfection
Security
ª There are THREE STEPS/REQUIREMENTS to creating a valid security:
1. Creation = an agreement to create a particular security interest between debtor and creditor
2. Attachment = ensuring that the security interest binds on specific assets
3. Perfection = ensuring the security interest is valid against third parties, giving priority – FOCUS HERE
ª There are THREE DIFFERENT TYPES of security:
ü Legal security: liens/pledges/mortgages and charges
ü Commercial security: devices such as retention of title clauses and hire-purchase arrangements
ü Third party security: Guarantees and indemnities
ª Types of loan securities according to their effect:
ü Security which merely gives the bank rights over an asset (fixed or floating charge)
ü Security under which ‘ownership’ (legal/equitable title) in the secured asset is transferred to the
bank (e.g. a mortgage and assignment)
ü Security under which the bank has actual or constructive possession of the secured asset (e.g pledge
or lien)
Why might a lender want security?
Main reasons
v Security is taken in order to increase the likelihood of getting paid. It avoids the need for litigation, ensures priority
over other creditors and speeds up the recovery of debt.
v Lender may prevent other banks from providing finance to the borrower if there is insufficient value in the assets to
support the further security (essentially gives the bank a monopoly over a company’s borrowing)
v Personal guarantees concentrate the directors’ minds as it is their money which is in line. This can ensure more
efficient / effective running of the business.
v It may carry a right to involvement in management decisions, but banks should be careful to avoid shadow directorship;
v Secured loans carry less risk and compliance with regulatory capital requirements sometimes makes secured loans
cheaper for the lender.
v Security helps to ensure that assets are not disposed of in normal circumstances and ensures that the assets upon
which due diligence was based remain in the company, thereby ensuring stability;
v It puts unsecured creditors off winding up the company in pursuance of their debt as they will be wary that there
is little chance of them getting anything
Further Reasons
Asset control and Bank does not want to resort to borrower’s assets for repayment if it can be avoided.
stability Taking a fixed charge over the borrower’s assets will prevent the borrower from disposing of them
in normal circs.
- Will ensure that fixed assets that form the basis of the DD do remain the company and this
maintains stability.
Creates degree of Can prevent other banks from providing finance to the borrower if insufficient value in assets to
control over take further security. SO bank has control over a company’s lending.
management of the Bank will sometimes require directors to provide security via personal guarantee.
company - Helps concentrate the mind of directors if something goes wrong.
1
Security and Perfection
Security
ª There are THREE STEPS/REQUIREMENTS to creating a valid security:
1. Creation = an agreement to create a particular security interest between debtor and creditor
2. Attachment = ensuring that the security interest binds on specific assets
3. Perfection = ensuring the security interest is valid against third parties, giving priority – FOCUS HERE
ª There are THREE DIFFERENT TYPES of security:
ü Legal security: liens/pledges/mortgages and charges
ü Commercial security: devices such as retention of title clauses and hire-purchase arrangements
ü Third party security: Guarantees and indemnities
ª Types of loan securities according to their effect:
ü Security which merely gives the bank rights over an asset (fixed or floating charge)
ü Security under which ‘ownership’ (legal/equitable title) in the secured asset is transferred to the
bank (e.g. a mortgage and assignment)
ü Security under which the bank has actual or constructive possession of the secured asset (e.g pledge
or lien)
Why might a lender want security?
Main reasons
v Security is taken in order to increase the likelihood of getting paid. It avoids the need for litigation, ensures priority
over other creditors and speeds up the recovery of debt.
v Lender may prevent other banks from providing finance to the borrower if there is insufficient value in the assets to
support the further security (essentially gives the bank a monopoly over a company’s borrowing)
v Personal guarantees concentrate the directors’ minds as it is their money which is in line. This can ensure more
efficient / effective running of the business.
v It may carry a right to involvement in management decisions, but banks should be careful to avoid shadow directorship;
v Secured loans carry less risk and compliance with regulatory capital requirements sometimes makes secured loans
cheaper for the lender.
v Security helps to ensure that assets are not disposed of in normal circumstances and ensures that the assets upon
which due diligence was based remain in the company, thereby ensuring stability;
v It puts unsecured creditors off winding up the company in pursuance of their debt as they will be wary that there
is little chance of them getting anything
Further Reasons
Asset control and Bank does not want to resort to borrower’s assets for repayment if it can be avoided.
stability Taking a fixed charge over the borrower’s assets will prevent the borrower from disposing of them
in normal circs.
- Will ensure that fixed assets that form the basis of the DD do remain the company and this
maintains stability.
Creates degree of Can prevent other banks from providing finance to the borrower if insufficient value in assets to
control over take further security. SO bank has control over a company’s lending.
management of the Bank will sometimes require directors to provide security via personal guarantee.
company - Helps concentrate the mind of directors if something goes wrong.
1
