Entering into a security document after advance?
What are the implications of entering into a new security document after the loan which it secures has been advanced, in circumstances where the original security document has not been registered at Companies House? In particular, when registering a charge outside of the 21 day limit, should an application to the court be made to allow the late registration of the ‘old security’, and would this be necessary if a new security form is signed?
The response: It is unlikely that a late registration order would be granted unless there is a good reason for the delay. There are however issues to consider when a security document is entered into after the loan which it secures has been advanced:
- Preference (s239 Insolvency Act 1986) – the late security could be challenged as a preference because it prefers the Chargee by making the unsecured debt secured. This problem is usually overcome because we rely on the contractual “further assurance” provision in the unregistered security. We can rely on this because, although the security it creates is void against a liquidator, it remains contractually binding as between the Lender and Borrower. Additionally a defect in security is often an event of default which means that the Borrower would give new security so as to avoid the loan being called in, rather than to prefer the chargee.
- Floating Charge Hardening Periods (s245 Insolvency Act 1986) – a Floating Charge is not effective to secure liabilities advanced before it was created if, where the charge is granted to someone not connected with the Chargor.
The Chargor:
- Is insolvent when it grants the charge, or
- Becomes insolvent in consequence of the transaction under which the charge is created AND
- Enters into insolvency within 12 months of the grant.
Ideally one would regard the date of creation of the floating charge as the date of a validly registered charge, however, there is some commentary that suggests that it may be possible either to disregard a short interval between the advance of the loan and the creation of the charge (see 1 below) or that the agreement to create a floating charge in the unregistered document might itself be effective as an equitable charge – although this presents more difficulties (see 2).
- The floating charge may nevertheless not be found to be invalid in respect of that loan if the interval between payment and execution of the charge is “so short that it can be regarded as minimal and payment and execution can be regarded as contemporaneous” (Re Shoe Lace Ltd [1993] BCC 609).
- In some circumstances, where for example the loan was advanced after an agreement to lend and create security was concluded but before (and before to such an extent that Re Shoe Lace principles will not assist) a formal charge is executed, it may be necessary to analyse whether the agreement to create the security can be construed as itself creating an equitable charge. However, other issues, such as Companies House registration requirements, may complicate any such construction.
The bottom line: If you are really concerned about the risk then the only thing you can do is call in the loan under the defective security default and re advance it contemporaneously with the new security document.
Tags: finance
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