Mortgages What assets will the mortgage cover:
A mortgage is likely to be taken over high-quality assets – land, premises, shares the
borrowing company has in other companies, machinery.
What rights does the lender have:
The mortgage gives the lender the immediate right to possession of the property which is
only exercised if the borrowing company defaults in payments.
How it is given & other details:
A separate mortgage is needed over each asset the lender wants a mortgage security on.
A mortgage involves the transfer of legal ownership from the borrowing company to the
lender. The legal title will be transferred back to the company when the loan is paid off by the
borrowing company.
If the mortgage is taken over land this is a ‘charge by deed expressed to be by way of legal
mortgage – LPA s87 - this gives the right to take possession of the land and sell it
Fixed charge What assets does the charge cover:
A fixed charge will be taken over machinery and shares owned by the borrowing company in
other companies,
There must be a separate fixed charge over each asset (but a ‘fixed charge over ‘x’ factory’ is
acceptable too).
It is also possible to create more than one fixed charge over the same asset.
What rights does the lender have:
This type of security:
Does not: transfer legal ownership from the company to the lender and
Does not: give the lender right to immediate possession of the property.
A charge does give certain rights over the asset if the company does not re-pay the loan – see
liquidation and below.
For a fixed charge, the lender has control of the asset - the company cannot sell it without the
lender’s consent & the company must keep t in good condition.
Liquidation:
The charge holder has the right to sell the asset and be paid the proceeds of the sale – it may
not cover the original amount the lender loaned (in which case the charger will fall next to
unsecured creditors for the remaining sum).
The charge holder’s position as a secured creditor also means they will receive distributions
from the proceeds before other creditors, both secured and unsecured.
Floating charges What assets does the charge cover:
Stock. There are three features to a floating charge:
1. An equitable charge over the whole/ a class of the company’s assets (stock)
2. Assets subject to a floating charge are constantly changing (stock)
3. The company retains the freedom to deal with the assets for business purposes –
until the charge ‘crystallises’ – company can no longer deal with the asset…
What rights does the lender have:
This type of security:
Does not: transfer legal ownership from the company to the lender and
Does not: give the lender right to immediate possession of the property.
Does not allow the lender to freely deal with the asset – and the company does not need
prior permission from the lender to deal with the asset.
A charge does give certain rights over the asset if the company does not re-pay the loan.
, There can be more than one floating charge over the same group of assets
Crystallisation:
When a certain event occurs, the floating charge will crystallise and the company will no
longer be able to deal with the asset – in some respect, the floating charge turns into a fixed
charge.
This would occur on events such as:
Company goes into receivership / liquidation / ceases to trade / specified event in
the charging document.
Advantage of a floating charge:
For the company – can deal with the asset freely and allows the company to maximise the
amount they can borrow as floating charges can be attached to assets which a fixed charge
cannot.
Disadvantage of a floating charge:
For the lender – the company can deal with the asset aka sell it and not purchase
replacement stock.
Liquidation (see below)
Liquidation:
There are creditors which will have priority before a floating charge holder: Fixed charge
holders / Preferential creditors / The liquidator.
A floating charge which is not duly registered can be set aside by a liquidator/administrator
meaning the creditor would then rank alongside unsecured creditors.
Book debts What are book debts?
Money which is owed to the company from the company’s own debtors.
As an asset of the company – because the company is owed payment from its own debtors, it
may be charged/ used as a security by a lender
o They can have a floating and a Fixed charge over them
o Fixed: can be secured as a fixed charge when the charge holder had control
over both the debts and the proceeds once they were paid
o Floating: if C could use the proceeds from book debts for its business
purposes.
Guarantees Technically not a form of security but effectively the same thing.
Allow L another source for repayment if the company cannot repay the loan.
Sometimes this takes the form of a director-shareholder giving a personal guarantee to L.
This will make the director-shareholder liable if C does not repay the loan and places them at
risk of losing personal assets. It also would undermine the idea of limited liability.
Pledges Arise when an asset if physically delivered to serve as a security until the loan is paid.
With pledges, L has the right to sell the asset to settle the debt owed so long as they give
sufficient notice to C.
Lien L has the right to physical possession to C’s asset until the debt is paid. However, there is no
right available to L to sell the asset.
A mortgage is likely to be taken over high-quality assets – land, premises, shares the
borrowing company has in other companies, machinery.
What rights does the lender have:
The mortgage gives the lender the immediate right to possession of the property which is
only exercised if the borrowing company defaults in payments.
How it is given & other details:
A separate mortgage is needed over each asset the lender wants a mortgage security on.
A mortgage involves the transfer of legal ownership from the borrowing company to the
lender. The legal title will be transferred back to the company when the loan is paid off by the
borrowing company.
If the mortgage is taken over land this is a ‘charge by deed expressed to be by way of legal
mortgage – LPA s87 - this gives the right to take possession of the land and sell it
Fixed charge What assets does the charge cover:
A fixed charge will be taken over machinery and shares owned by the borrowing company in
other companies,
There must be a separate fixed charge over each asset (but a ‘fixed charge over ‘x’ factory’ is
acceptable too).
It is also possible to create more than one fixed charge over the same asset.
What rights does the lender have:
This type of security:
Does not: transfer legal ownership from the company to the lender and
Does not: give the lender right to immediate possession of the property.
A charge does give certain rights over the asset if the company does not re-pay the loan – see
liquidation and below.
For a fixed charge, the lender has control of the asset - the company cannot sell it without the
lender’s consent & the company must keep t in good condition.
Liquidation:
The charge holder has the right to sell the asset and be paid the proceeds of the sale – it may
not cover the original amount the lender loaned (in which case the charger will fall next to
unsecured creditors for the remaining sum).
The charge holder’s position as a secured creditor also means they will receive distributions
from the proceeds before other creditors, both secured and unsecured.
Floating charges What assets does the charge cover:
Stock. There are three features to a floating charge:
1. An equitable charge over the whole/ a class of the company’s assets (stock)
2. Assets subject to a floating charge are constantly changing (stock)
3. The company retains the freedom to deal with the assets for business purposes –
until the charge ‘crystallises’ – company can no longer deal with the asset…
What rights does the lender have:
This type of security:
Does not: transfer legal ownership from the company to the lender and
Does not: give the lender right to immediate possession of the property.
Does not allow the lender to freely deal with the asset – and the company does not need
prior permission from the lender to deal with the asset.
A charge does give certain rights over the asset if the company does not re-pay the loan.
, There can be more than one floating charge over the same group of assets
Crystallisation:
When a certain event occurs, the floating charge will crystallise and the company will no
longer be able to deal with the asset – in some respect, the floating charge turns into a fixed
charge.
This would occur on events such as:
Company goes into receivership / liquidation / ceases to trade / specified event in
the charging document.
Advantage of a floating charge:
For the company – can deal with the asset freely and allows the company to maximise the
amount they can borrow as floating charges can be attached to assets which a fixed charge
cannot.
Disadvantage of a floating charge:
For the lender – the company can deal with the asset aka sell it and not purchase
replacement stock.
Liquidation (see below)
Liquidation:
There are creditors which will have priority before a floating charge holder: Fixed charge
holders / Preferential creditors / The liquidator.
A floating charge which is not duly registered can be set aside by a liquidator/administrator
meaning the creditor would then rank alongside unsecured creditors.
Book debts What are book debts?
Money which is owed to the company from the company’s own debtors.
As an asset of the company – because the company is owed payment from its own debtors, it
may be charged/ used as a security by a lender
o They can have a floating and a Fixed charge over them
o Fixed: can be secured as a fixed charge when the charge holder had control
over both the debts and the proceeds once they were paid
o Floating: if C could use the proceeds from book debts for its business
purposes.
Guarantees Technically not a form of security but effectively the same thing.
Allow L another source for repayment if the company cannot repay the loan.
Sometimes this takes the form of a director-shareholder giving a personal guarantee to L.
This will make the director-shareholder liable if C does not repay the loan and places them at
risk of losing personal assets. It also would undermine the idea of limited liability.
Pledges Arise when an asset if physically delivered to serve as a security until the loan is paid.
With pledges, L has the right to sell the asset to settle the debt owed so long as they give
sufficient notice to C.
Lien L has the right to physical possession to C’s asset until the debt is paid. However, there is no
right available to L to sell the asset.
