What form of security might my company be asked to grant a lender?
This article was originally published by Pitmans LLP in 2015.
Depending on the business of the company in question, a lender may ask for a range of differing security. In England, a typical place to start is to seek a debenture and potentially additional security depending on the nature of the deal, the nature of the company granting the security, the size of the loan, etc. We provide below a brief synopsis of the common forms of security taken by a lender from an English company:
- Debenture – a debenture typically creates a series of fixed and floating charges over the assets of a company. The fixed charges attach to assets which are not disposed in the ordinary course of business. A floating charge is taken over the remainder of the company’s undertaking. It is also pretty standard for a debenture to take a mortgage over specific property and an assignment by way of security over the benefit of certain contractual rights such as insurance policies and other contracts.
- Legal charge / legal mortgage – a legal mortgage over land. Whilst a debenture usually creates a legal mortgage, a legal charge is often taken in addition where a company has an interest in property.
- Charge over deposit – where a company has cash held by a lender or it is a requirement of a loan that a borrower deposits cash with the lender, the lender may take a fixed charge over the cash and the account in which it is held will become a blocked account (ie a borrower would not be able to access these funds).
- Security assignment – a lender may take an assignment by way of security over a number of different assets of a company, such as property rental streams, intellectual property rights.
- Construction security – where a lender is providing a property development facility it will seek to take an assignment of the building contract and any supporting performance bond along with collateral warranties from professionals and key consultants involved with the development. If a lender is refinancing a business where the underlying property collateral has been previously developed, the lender will seek to take an assignment of the collateral warranties granted to the previous lender.
Although they are not security documents, the following documents are often entered into alongside security documents in order to regulate the priority between different lenders and ensure that the senior lenders are repaid before other creditors:
- Deed of priority – where more than one lender is taking security over a company, their priority will need to be recorded by a deed of priority. For example, where a lender has provided an invoice discounting facility which is secured against the receivables of a company by an all monies, all assets debenture a subsequent lender wishing to provide a term loan may also take an all assets debenture. The invoice discounter would want first priority in respect of the receivables and the term loan lender would want priority in respect of all other assets. This arrangement would be recorded in a deed of priority.
- Deed of subordination – where a director has made a loan to or received a loan from a company, it is likely that a lender would want the repayment of such director loans to be subordinated to the repayment of monies owed to the lender. This will be recorded in a deed of subordination. A director will need to understand that this would mean any loans made to the company would potentially not be repaid until the lender is completely repaid at some time in the future.
Seek legal advice in order to:
- understand the proposed security structure;
- make sure that the proposed documents are standard and reasonable; and
- ensure that the company will be able to comply with the underlying covenants and obligations and that the restrictions contained within the security documents will not impede the company’s current business or future development and expansion.
What to do now?
There are a number of questions to be answered before agreeing to grant any security over the company:
Can the security be granted? Is an existing lender’s consent required? Are the security documents reasonable? Will an existing lender want to have first ranking security over all assets? What is the company’s strategic plan for the following years – can agreement be reached at the time security is granted which contemplates and agrees to further security being granted to another lender at a later date?
BDB Pitmans Banking and Finance Team have a diverse range of experience structuring security packages for banking clients and corporate borrower clients. From a director’s perspective it is essential to understand the controls, undertakings and covenants which a security document is imposing on the company in order to ensure that the company can continue to trade in the ordinary course of business. If the restraints a lender is trying to impose will not work in practice then the documents will need to be amended. Likewise, if certain assets are not meant to be covered by a security document or perhaps not meant to be subject to the fixed charge contained in the debenture then these need to be specifically carved out.
A standard security document is exactly that and therefore it is unlikely to work for all businesses.
Our Insolvency and Restructuring team are well versed in enforcement of debentures and other security.