SGS 9: Security Risks: Issues for lenders
Scenario Problem Debenture Clause Why the clause helps
5 January 2018 1. Clayton’s case
Bank X lends £40m to ABC plc – Payments made by borrower wld go to discharge the ‘Appropriation’ clause Bank is entitled to apply the repayments from the
secured RCF first, secured loan Borrower in satisfaction of whichever outstanding loan
Bank wants to ensure as much of its lending is secured it chooses
6 March 2018 2. Repay/release
Bank X gives ABC plc unsecured When loan is repaid, there is no further some due to ‘Continuing security’ clause Discharge of security will not take place until maturity
overdraft £1m, which ABC bank of loan
immediately utilises in full At this point, the security is discharged and there is no i.e if there’s a new loan -> security to original loan
further liability secured by it applies to the new loan
3. Subsequent overdraft unsecured Definition of ‘Secured Liabilities’
the subsequent overdraft is unsecured ‘All monies’ wording when future loans are made available by the bank to
the Borrower:
-> bank does not need to enter into new debenture
each time to secure them
-> subsequent lending is automatically secured
3 March 2015 Clayton’s case Re insolvency claw-back
Bank X lends ABC Ltd £15m and Repayments will pay off the earlier loan (w/t hardened Allows bank to use repayments to discharge the later
takes security over its head office security) first loan (w/t unhardened security) first
Leaves the later loan (w/o hardened security) at risk of ‘Appropriation’ clause The bank will then discharge the earlier security (w/t
10 January 2019 challenge by liquidator unhardened security) second
Bank X lends ABC Ltd a further Security hardening periods
£5m and takes security over its Bank prefers debt w/t ‘unhardened’ security to be repaid
training centre first
5 February 2018 Rule in Hopkinson v Rolt ‘Ruling-off’ the RCF a/c – opening Bank X can protect its original security
Bank X lends £50m to Borrower by 1. Bank wants first priority for full £50m a new bank account once Bank Y’s charge is notified to Bank X ->
way of secured RCF, w/t no 2. First priority for £25m paid back by borrower lost when payments made by the Borrower to Bank X are
negative pledge re-borrowed under terms of RCF not treated as paying-off the original secured
Bcs bank Y notified Bank X of subsequent security loan.
7 April 2018 General rule: charges rank in order of creation subject to Old a/c will be “rules off” automatically bcs of
Bank Y lends £10m to Borrower by being correctly registered clause (will show as the full amount of debt
way of secured loan and notifies However: H v R: in absence of agreement, all owed to bank X)
Bank X of the same subsequent lending ranks behind that of a later Preserves priority for this full amount
5 May 2018 mortgagee provided the mortgagee gave notice Bank X then opens a new one in the Borrower’s
Borrower repays £25m of the RCF Bank X’s further tranches will either be: name
and shortly afterwards re-borrows 1) unsecured (if ‘continuing’ security); or Bank A takes control of how the amounts
another £25m in accordance w/t 2) secured and rank behind that of Bank Y received are applied
same terms of the RCF
Scenario Problem Debenture Clause Why the clause helps
5 January 2018 1. Clayton’s case
Bank X lends £40m to ABC plc – Payments made by borrower wld go to discharge the ‘Appropriation’ clause Bank is entitled to apply the repayments from the
secured RCF first, secured loan Borrower in satisfaction of whichever outstanding loan
Bank wants to ensure as much of its lending is secured it chooses
6 March 2018 2. Repay/release
Bank X gives ABC plc unsecured When loan is repaid, there is no further some due to ‘Continuing security’ clause Discharge of security will not take place until maturity
overdraft £1m, which ABC bank of loan
immediately utilises in full At this point, the security is discharged and there is no i.e if there’s a new loan -> security to original loan
further liability secured by it applies to the new loan
3. Subsequent overdraft unsecured Definition of ‘Secured Liabilities’
the subsequent overdraft is unsecured ‘All monies’ wording when future loans are made available by the bank to
the Borrower:
-> bank does not need to enter into new debenture
each time to secure them
-> subsequent lending is automatically secured
3 March 2015 Clayton’s case Re insolvency claw-back
Bank X lends ABC Ltd £15m and Repayments will pay off the earlier loan (w/t hardened Allows bank to use repayments to discharge the later
takes security over its head office security) first loan (w/t unhardened security) first
Leaves the later loan (w/o hardened security) at risk of ‘Appropriation’ clause The bank will then discharge the earlier security (w/t
10 January 2019 challenge by liquidator unhardened security) second
Bank X lends ABC Ltd a further Security hardening periods
£5m and takes security over its Bank prefers debt w/t ‘unhardened’ security to be repaid
training centre first
5 February 2018 Rule in Hopkinson v Rolt ‘Ruling-off’ the RCF a/c – opening Bank X can protect its original security
Bank X lends £50m to Borrower by 1. Bank wants first priority for full £50m a new bank account once Bank Y’s charge is notified to Bank X ->
way of secured RCF, w/t no 2. First priority for £25m paid back by borrower lost when payments made by the Borrower to Bank X are
negative pledge re-borrowed under terms of RCF not treated as paying-off the original secured
Bcs bank Y notified Bank X of subsequent security loan.
7 April 2018 General rule: charges rank in order of creation subject to Old a/c will be “rules off” automatically bcs of
Bank Y lends £10m to Borrower by being correctly registered clause (will show as the full amount of debt
way of secured loan and notifies However: H v R: in absence of agreement, all owed to bank X)
Bank X of the same subsequent lending ranks behind that of a later Preserves priority for this full amount
5 May 2018 mortgagee provided the mortgagee gave notice Bank X then opens a new one in the Borrower’s
Borrower repays £25m of the RCF Bank X’s further tranches will either be: name
and shortly afterwards re-borrows 1) unsecured (if ‘continuing’ security); or Bank A takes control of how the amounts
another £25m in accordance w/t 2) secured and rank behind that of Bank Y received are applied
same terms of the RCF
