-
Do foreign lenders or non-bank lenders require a licence/regulatory approval to lend into your jurisdiction or take the benefit of security over assets located in your jurisdiction?
Generally, banking licenses and regulatory approvals are not required to lend to businesses that are incorporated or tax-resident in the UK, nor are they required for a lender to benefit from guarantees from a UK business or security over assets situated in the UK (whether held by a UK or foreign entity). Exceptions apply for certain banking activities, particularly where individual consumers are involved (e.g. regulated mortgages and consumer credit).
-
Are there any laws or regulations limiting the amount of interest that can be charged by lenders?
Generally, economic terms are freely agreeable between lender and borrower. However, default interest and similar charges, including prepayment fees or makewholes, cannot be set so high as to amount to a penalty under applicable UK law. What constitutes a penalty is determined on a case-by-case basis and does not prevent default interest, prepayment fees, makewholes, etc. being charged (these are common in the UK market).
-
Are there any laws or regulations relating to the disbursement of foreign currency loan proceeds into, or the repayment of principal, interest or fees in foreign currency from, your jurisdiction?
No.
-
Can security be taken over the following types of asset: i. real property (land), plant and machinery; ii. equipment; iii. inventory; iv. receivables; and v. shares in companies incorporated in your jurisdiction. If so, what is the procedure – and can such security be created under a foreign law governed document?
Security can be taken over each of the asset classes listed above.
Several forms of security are available in the UK, the appropriateness of which for a particular situation depends on the asset class and commercial agreement between the parties. The different forms of security are explained in detail below.
Mortgages
With the exception of a legal mortgage over land (see below), a legal mortgage transfers legal title to an asset to the secured party by way of security. This means that a legal mortgage cannot be granted over future assets. A legal mortgage is granted on the condition that title to the relevant asset will be re-transferred to the security provider once all of the secured obligations have been discharged.
As a result of the Law of Property Act 1925, a legal mortgage over land is created by a “charge by deed expressed to be by way of legal mortgage” and therefore does not involve a transfer of legal title to the land (unlike legal mortgages over other assets). Notwithstanding that legal title to the land is not transferred, the secured party has equivalent rights as under a legal mortgage over other types of assets.
An equitable mortgage transfers only the beneficial title to an asset to the secured party by way of security and may arise where security is required to be taken over future assets or in circumstances where the formalities necessary to create a legal mortgage have not been complied with.
Charges
For obvious reasons, a lender will not want to take physical possession of a debtor’s assets (or, generally, take legal title to those assets) and a debtor will not want to lose control of them. Accordingly, the most common form of security is a “charge” which creates a security interest in favour of the secured parties over assets without any transfer of ownership or possession. There are two types of charges: fixed and floating, each of which allows the lender to sell or (in some cases) appropriate the secured asset in satisfaction of the secured debt following the occurrence of a contractually agreed trigger event.
Fixed Charges: A fixed charge can only be taken over specific assets and must provide the secured party with sufficient control over the chargor’s ability to deal with the relevant asset, otherwise it will be deemed to be a floating charge until the requisite level of control is obtained. It is important that lenders give due consideration to whether it intends to benefit from a fixed or floating charge, as in most respects fixed charges put lenders in a better position on insolvency than floating charges (see further below).
A fixed charge will typically include a restriction on the chargor’s ability to dispose of the asset secured without first obtaining the secured party’s consent.
Floating Charges: A floating charge can be taken over specific assets or a pool of fluctuating assets. As its name suggests, this type of charge “floats” above the assets which it is expressed to secure prior to crystallisation (see below, typically enforcement or an agreed pre-enforcement trigger). The assets subject to a floating charge are expected to change from time to time, in the ordinary course of the chargor’s business. This type of charge is a popular method of taking security over all assets of a UK company given its relative simplicity to put in place, and its ability to effectively secure a fluctuating pool of assets without operationally impacting the underlying business.
Following the occurrence of an agreed trigger (e.g. an event of default which is continuing or acceleration) a floating charge may be converted, or “crystallised”, into a fixed charge. A floating charge will also (subject to the terms of the relevant security documents) automatically crystallise as a if a winding-up order is made in relation to the chargor, the chargor ceases to carry on business or the lender appoints a receiver or administrator. As a result of crystallisation, the chargor’s ability to deal with the affected assets becomes restricted as it would under a fixed charge.
Floating charges have some disadvantages when compared to fixed charges. A floating charge (including a fixed charge which is deemed to be a floating charge) will rank behind fixed security and statutorily preferred creditors (including the UK tax authorities, employee entitlements, and an approx. £800,000 pot set aside for ordinary creditors) on insolvency (see response to question 25). This is the case notwithstanding that following crystallisation a floating charge will operate for many other legal purposes as a fixed charge.
The holder of a qualifying floating charge (a floating charge which is stated to be a qualifying floating charge and secures all or substantially all of the assets of the relevant entity) has the ability to appoint an administrator without a court order (see response to question 21). Whether a floating charge does secure all or substantially all of the assets of a particular entity is a matter of fact, and in leveraged finance transactions (particularly in sponsor backed deals) this standard may not be met, in which case an administrator can be appointed by court order.
Assignments
An assignment (legal or equitable) is typically taken by a lender taken over rights under contracts (choses in action).
A legal assignment involves the transfer of the assignor’s legal title to an asset to the secured party. Under applicable UK law, an assignment will be legal if it is an absolute assignment, in writing and executed by the assignor. Express notice of the assignment is also required to be delivered to the person against whom the assignor can enforce those assigned rights, for example the respective debtor of the receivable assigned. Any such absolute assignment will usually be subject to a proviso of re-assignment upon discharge of the secured obligations.
Pledges
A pledge is created by the delivery of a particular asset into the (actual or constructive) possession of a secured party to secure repayment of a debt (with the pledgor retaining ownership). In practice, this type of security is rarely used in secured lending transactions in the UK, but it may have an important role in sector specific/specialist financings (e.g. those secured on assets in a warehouse). A charge will be preferred in most circumstances.
As a matter of common law, the secured party can sell the pledged asset if the pledgor defaults on payment, provided the secured party gives due notice to the pledgor. The amount of the notice to be given will depend on the circumstances, particularly where the goods are perishable.
Liens
Liens tend to be less important in UK finance transactions because they are generally security interests arising by operation of law rather than being expressly granted by a security provider. Lenders do however need to be aware of liens affecting assets they take security over as, in some circumstances, liens may rank ahead of other forms of security.
Granting security over UK assets or companies under foreign Law
Subject to certain exceptions, a company incorporated in the UK may choose foreign law to govern security granted over assets located in the UK or overseas. However, this is not generally recommended in typical lending transactions as it is relatively straightforward to take security in the UK, and care must be taken to ensure that foreign law charges achieve the desired aims of the parties on insolvency.
Perfection
The applicable perfection method is dependent on the asset secured and the type of security granted. In practice this typically means notice to the appropriate third party and/or registration at Companies House or the appropriate specialist asset register.
Northern Ireland & Scotland
The UK is comprised of four nations (England, Scotland, Wales and Northern Ireland). England and Wales share the same legal system. Scotland and Northern Ireland each have their own legal systems, including their own respective courts and laws. Readers should therefore be aware that there are differences where Scottish or Northern Irish companies or assets located in Scotland or Northern Ireland are involved. These differences are most pronounced in Scotland, where the legal framework for taking security and transferring ownership has more in common with European (civil law) jurisdictions than the other (common law) jurisdictions within the UK.
The responses above and below are generally applicable throughout the UK, but specialist Scottish or Northern Irish advice should be sought where there is a Scottish or Northern Irish element to a transaction, with references above and below to the UK being read as “England and Wales” for these purposes.
-
Can a company that is incorporated in your jurisdiction grant security over its future assets or for future obligations?
Future assets
Security can be granted over future assets of a UK company. The principal forms of security which can be used to secure future assets are fixed charges, floating charges and equitable securities. Other forms of security (pledges, legal mortgages and legal assignments) cannot be used to secure future assets. However, security agreements often require equitable securities to be converted into legal mortgages or assignments once the security provider acquires the relevant asset.
Future obligations
While it is possible for future obligations to be secured under UK law, there are limitations (and mitigants to these limitations) which should be borne in mind.
English courts may narrowly interpret security and guarantee documentation and in doing so limit the obligations secured to those obligations contemplated at the time of the original transaction (i.e. the obligations initially incurred plus future obligations contemplated by the parties at the time and sufficiently expressly set out in documentation). Determining the obligations initially incurred is usually straightforward. Determining the future obligations which the courts are likely to agree are captured by security and guarantee documentation is significantly more difficult, as this is a matter of fact. In practice, this determination typically comes down to the judgement of experienced finance lawyers (acting for the borrower and lenders) who will give their views prior to incurrence of those future obligations. There are no fixed rules here, though a guiding principle is that the greater the proposed increase in obligations, the greater the need to scrutinise whether the proposed future obligations will be captured by existing guarantee and security documents.
There are a number of potential mitigants here:
- the finance documents can be drafted so that certain future obligations (e.g. incrementals/accordions, mezzanine/2nd lien debt, revolving credit facility, etc) which may form part of the capital structure in future fall within the scope of the guarantees and security (this approach is very common in leveraged finance deals);
- when substantial additional obligations are incurred, guarantors and security providers typically provide confirmations (via standalone documentation or as part of an amendment and restatement relating to the additional incurrence) that the existing guarantees and security extend to the additional obligations; and
- where the obligations incurred are so material that, in the opinion of the lawyers familiar with the transaction, the existing documentation may not extend to the additional obligations, supplementary (i.e. new) guarantees and security documents can be entered into.
-
Can a single security agreement be used to take security over all of a company’s assets or are separate agreements required in relation to each type of asset?
A single security agreement can be used to take security over almost all asset classes. Typically, this single security agreement, known as a “debenture” will include a floating charge over all assets of a UK company as well as fixed security (mortgages, charges, and assignments) over a wide range of more specifically described asset classes.
-
Are there any notarisation or legalisation requirements in your jurisdiction? If so, what is the process for execution?
Notarisation and/or legalisation are not required in order for English law finance documentation to be enforceable. Certain documents are customarily executed as English law deeds as this has certain legal advantages. Documents being executed as deeds must comply with more prescriptive execution formalities than simple agreements (though this does not typically involve a third party such as a notary).
-
Are there any security registration requirements in your jurisdiction?
Security registrations in the UK fall into two broad categories (i) registrations at the UK company registry, Companies House, and (ii) registrations at specialist asset registers.
- Registrations at Companies HouseThe Companies Act 2006 requires that security created by a UK company (or UK limited liability partnership) on or after 6 April 2013 are registered with Companies House within 21 days of their creation, subject to very limited exceptions (e.g. certain security over financial collateral under the Financial Collateral (No. 2) Regulations 2003). The 21 day period can be extended in certain circumstances, but in practice an extension is almost unheard of. The registration requirement applies regardless of the location of the assets secured or the governing law of the instrument securing them, i.e. both English law and foreign law security documents require to be registered.Failure to register within the 21 day period results in the security being void against administrators and liquidators and other creditors of the company (or limited liability partnership) (i.e. rendering the security functionally unenforceable) and acceleration of the underlying debt.Given the severe consequences of a failure to register, a cautious approach is typically adopted by market participants, meaning that in practice almost all forms of security entered into by a UK company (or UK limited liability partnership) are registered.
- Registrations at specialist asset registers
Where a UK corporate entity, or a foreign corporate entity, grants security over certain types of asset located in the UK, registration may be required at a specialist asset register. This is in addition to the any requirement to register security at Companies House set out in (i) above.
Certain assets located in the UK or governed by UK law have specialist asset registers on which the security may need to be registered. The requirement to register at a specialist asset register applies regardless of whether the entity granting security is UK based or foreign.
The most commonly encountered asset classes which require registration at specialist asset registries are real estate, ships, aircraft and intellectual property.
-
Are there any material costs that lenders should be aware of when structuring deals (for example, stamp duty on security, notarial fees, registration costs or any other charges or duties), either at the outset or upon enforcement? If so, what are the costs and what are the approaches lenders typically take in respect of such costs (e.g. upstamping)?
There are no material costs for taking or perfecting security in the UK. Security registration fees are de minimis.
Stamp duty can apply in enforcement scenarios (see response to question 16).
-
Can a company guarantee or secure the obligations of another group company; are there limitations in this regard, including for example corporate benefit concerns?
A UK company can guarantee or secure the obligations of another member of its group, including a parent, holding or sister company. Corporate benefit considerations apply, with directors required to act in a manner which is most likely to promote the success of the company for the benefit of its members as a whole. However, these considerations do not generally restrict a company’s ability to provide credit support.
-
Are there any restrictions against providing guarantees and/or security to support borrowings incurred for the purposes of acquiring directly or indirectly: (i) shares of the company; (ii) shares of any company which directly or indirectly owns shares in the company; or (iii) shares in a related company?
UK public companies (and UK private companies that are subsidiaries of UK public companies) are not permitted to provide credit support (or any other form of financial assistance) for a financing related to the acquisition of a UK public company’s shares, subject to certain limited exceptions.
Other than as set out above, UK private companies are not restricted from providing credit support in these circumstances.
-
Can lenders in a syndicate appoint a trustee or agent to (i) hold security on the syndicate’s behalf, (ii) enforce the syndicate’s rights under the loan documentation and (iii) apply any enforcement proceeds to the claims of all lenders in the syndicate?
Lenders and other secured creditors typically appoint an agent and security agent or trustee to act on their behalf for each of the purposes listed. Lenders will always do so when in a syndicate or club at the outset and may do so on bilateral deals to preserve the ability to more easily bring in additional lenders in future.
-
If your jurisdiction does not recognise the role of an agent or trustee, are there any other ways to achieve the same effect and avoid individual lenders having to enforce their security separately?
Not applicable.
-
Do the courts in your jurisdiction generally give effect to the choice of other laws (in particular, English law) to govern the terms of any agreement entered into by a company incorporated in your jurisdiction?
For contracts concluded before 31 December 2020 (the end of the Brexit transition period), the Rome regulation on the Law Applicable to Contractual Obligations No. 593/2008 (“Rome I”) applies by virtue of the Agreement on the Withdrawal of the United Kingdom of Great Britain and Northern Ireland from the European Union. For contracts concluded on or after 1 January 2021, Rome I, as retained and incorporated into English law by virtue of the Law Applicable to Contractual Obligations and Non-Contractual Obligations (Amendments etc.) (EU Exit) Regulations 2019 (the “2019 Regulations”), will apply. In general, and subject to certain exceptions, English courts will continue to respect a contractual choice of law clause.
-
Do the courts in your jurisdiction generally enforce the judgments of courts in other jurisdictions (in particular, English and US courts) and is your country a member of The Convention on the Recognition and Enforcement of Foreign Arbitral Awards (i.e. the New York Arbitration Convention)?
The ability to enforce a judgment of a non-UK jurisdiction in England and Wales will depend on whether a bi-lateral or multi-lateral convention is in place or otherwise whether the common law rules will instead apply.
Countries with whom the UK has a bi-lateral or multi-lateral agreement
The UK has bi-lateral or multi-lateral agreements with many countries that govern the recognition and enforcement of foreign judgments. Where an agreement or convention exists (and has application to the foreign judgment in question), recognition and enforcement of the foreign judgment will be subject to the terms of that particular agreement or convention.
In respect of EU member states, as of 1 January 2021, Regulation (EU) 1215/2012 (the “Recast Regulation”) and the 2007 Lugano Convention no longer apply in England and Wales except in relation to judgments obtained in certain proceedings instituted before 1 January 2021. The UK’s application to accede to the 2007 Lugano Convention as a non-member state has been opposed by the European Commission.
The Hague Convention on Choice of Court Agreements 2005 (“Hague Convention”) currently governs the UK’s approach to enforcing judgments obtained in the domestic courts of EU member states (as well as the courts of Mexico, Montenegro and Singapore). However, the Hague Convention only applies to proceedings issued pursuant to an exclusive jurisdiction clause entered into after 1 October 2015. The Hague Convention does not apply to contracts that adopt non-exclusive jurisdiction clauses and may not apply to contracts that include asymmetric jurisdiction clauses.
Judgments arising from certain Commonwealth jurisdictions may be enforceable in the UK pursuant to the Administration of Justice Act 1920 or the Foreign Judgments (Reciprocal Enforcement) Act 1933. Those statutes prescribe their own conditions and requirements for the recognition and enforcement of judgments from those jurisdictions in England and Wales. It is unclear if those statutes can be revived to apply to judgments now arising from certain EU member states which were historically subject to them.
Countries with whom the UK does not have a bi-lateral or multi-lateral agreement
Where no bi-lateral or multi-lateral agreement exists regulating the enforcement of judgments, English common law will govern the recognition and enforcement of foreign judgments.
In order to follow the common law route, the beneficiary of the judgment must issue new proceedings in the UK courts for payment of a debt. Where it is necessary to serve these UK proceedings on the debtor outside of the UK, the UK court’s permission may first need to be obtained. In general, to be enforceable under common law the foreign judgment must be final and conclusive, for a definite sum of money and have been given by a court of competent jurisdiction. UK courts will only refuse to recognise and enforce foreign judgments in limited circumstances. These include where the judgment was: (1) obtained by fraud, (2) contrary to public policy or (3) handed down in proceedings conducted in a manner contrary to principles of natural justice.
Most notably, the UK does not have a reciprocal arrangement with the US (including the state of New York) so US judgments must meet the common law requirements to be enforceable in the UK.
New York Arbitration Convention
The UK is a signatory to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards.
-
What (briefly) is the insolvency process in your jurisdiction?
A range of corporate insolvency and restructuring processes are available in England and Wales and may be used separately or in conjunction depending on the circumstances of the company, the stakeholders driving the process and the intended outcome. Liquidation, administration, and the company voluntary arrangement (“CVA”) are processes under the Insolvency Act 1986, and the Scheme of Arrangement and Part 26A Restructuring Plan are governed by the Companies Act 2006. In addition, various forms of receivership are available, with administrative receivership under the Insolvency Act 1986 being available in limited cases involving structured finance and capital markets contexts. In addition, various special administration regimes exist for certain regulated industries, for example banks and investment firms.
Liquidation (winding up)
Insolvent liquidation is a collective insolvency proceeding that always ends with the dissolution of the corporate entity. Liquidation involves the appointment of one or more insolvency practitioners who act as liquidators, realize the assets of the company and distribute the available proceeds to creditors in a prescribed order. With some exceptions, a company that goes into liquidation usually ceases trading almost immediately. Liquidation may be compulsory, commenced by the court on the petition of a creditor, or voluntary, in which case the procedure is commenced by corporate resolution and not the court.
Administration
Administration is also a collective insolvency proceeding which may be used as a rescue or restructuring proceeding, but is more typically used as a better means of realizing assets than a winding up/liquidation proceeding. It can also be used by secured creditors as an effective and efficient enforcement procedure.
Administration can be commenced voluntarily by the company or its directors filing papers with the court. It may also be commenced involuntarily by application to court by one or more creditors, or out of court by creditors who hold a security package over substantially all of the company’s assets that includes a qualifying floating charge.
On commencement, one or more insolvency practitioners are appointed as administrators of the company. The administrators displace the directors and may manage the business during the administration process. A statutory moratorium applies during the process, and in some cases prior to its commencement (see response to question 22). If reasonably possible, the administrators must attempt to rescue the company as a going concern. If (as is usually the case) this cannot be achieved, the administrators must attempt to achieve a better result for the creditors of the company as a whole than the result that would likely be achieved in a liquidation. If that cannot be achieved, the third objective is to realise the company’s property for distribution to the company’s secured and preferential creditors.
Administrators often sell the business of the company as a going concern, thereby realizing more value than would be the case in a liquidation. In some cases, this can be achieved on an accelerated timeframe, which in appropriate cases may be the same day as the administrators are appointed (a so called “pre-packaged” sale). A public auction is not typically necessary or conducted.
The administration ends when the company is either returned to solvency following some sort of restructuring, or when the assets have been realized and either (i) the administrators make a distribution to creditors or (ii) place the company into liquidation in order that the liquidators can make a distribution to creditors, in either case before the company is dissolved.
Company voluntary arrangement
The CVA is a statutory process by which a company may bind all of its unsecured creditors into a compromise or arrangement provided that it is approved by 75 per cent. of creditors in value voting on the proposal as a single class, and no more than 50% of unconnected creditors vote against it. The CVA may be used to implement arrangements with any unsecured creditors, but has been most frequently (and effectively) used in recent years to restructure real estate leases. It may not affect the rights of secured creditors without their consent.
Unlike liquidation or administration, the directors of the company remain in place and the business will typically continue to operate relatively normally while the CVA is proposed. Unlike the Scheme of Arrangement or Part 26A Restructuring Plan, there is no court hearing to approve the CVA. The court will only become involved if one or more creditors seek to challenge the CVA.
The CVA process may be combined with administration or the standalone moratorium (see response to question 22).Scheme of Arrangement
The Scheme of Arrangement is also a statutory process by which a company may bind a minority of its creditors into a compromise or arrangement approved by a larger majority, but unlike the CVA, it involves at least two court hearings and may affect the rights of secured creditors.
A Scheme is not exclusively used in restructuring situations, but due to its flexibility and reputation for legal certainty, has become the primary restructuring process for companies with medium to large balance sheets involving secured debt. This flexibility is partly derived from the ability to divide creditors into separate classes for the purpose of voting. Only those classes of creditors whose rights are affected by the Scheme are required to be consulted. The composition of classes is considered by the court at the first of two hearings, known as the “convening” hearing, at which the court will direct meetings be convened to approve the Scheme. Following the hearing, the company must circulate an explanatory document to its creditors, explaining the proposed Scheme and providing sufficient information to enable the creditors to consider it.
The class meetings are then held and in order to proceed further the Scheme must be approved by 75 % in value and a majority in number of those voting at each class meeting. Once approved by each of the meetings, the Scheme returns to court for a further hearing, at which the court considers whether or not to sanction the Scheme. If the court does sanction the Scheme, the compromise or arrangement will become binding on all affected creditors.
The Scheme of Arrangement does not benefit from its own moratorium but may be combined with administration or the standalone moratorium (see response to question 22).
The Scheme of Arrangement is available to non-UK companies if they have a sufficient connection with the UK. A sufficient connection might exist if, for example, the company has significant assets within the jurisdiction, or debts governed by English law.
Part 26A Restructuring Plan
The Restructuring Plan was introduced in June 2020 and is similar to a Scheme of Arrangement in both form and procedure, but there are also important differences. The Restructuring Plan:
- is only available to companies facing (or who are likely to face) financial difficulties; and
- need only be approved by 75% in value of one class that has a genuine economic interest in the company in the “relevant alternative” (being whatever the court considers most likely to occur if the Plan were not sanctioned), provided that any dissenting classes are no worse off than under the Plan they would be in the relevant alternative. This is known as “cross-class cram-down”.
Like a Scheme there must be an initial court hearing, an explanatory statement, a set of class meetings to vote on the Plan, and a final court hearing to sanction the Plan.
Restructuring Plans have been used effectively in a number of significant restructurings since 2020 across a range of sectors. The new cross-class cram-down feature has enabled the Restructuring Plan to be used to implement restructurings in cases where a Scheme of Arrangement or CVA would not have been possible. To cram-down one or more entire classes, the proponents of the Plan must establish the relevant alternative, which will require valuation and other evidence to convince the court that it is the most likely consequence if the Plan is not approved, and also that the dissenting classes would be no worse off than they would be in that alternative. In many cases, the relevant alternative would be a liquidation or administration of the company, but at least one Plan has failed because the court was not satisfied that the company would be most likely to go into liquidation or administration absent a successful Plan.
Like a Scheme, the Restructuring Plan does not benefit from its own moratorium but may be combined with administration or the standalone moratorium (see response to question 22).
The Restructuring Plan is also available to non-UK companies if they have a sufficient connection with the UK.
Standalone Moratorium
Also introduced in June 2020, a company may apply for a ‘standalone’ moratorium to provide it with time to implement a rescue, including, but not necessarily, through the use of another restructuring procedure such as the Restructuring Plan, Scheme of Arrangement or CVA.
This is available where (i) a company is, or is likely to become, unable to pay its debts; and (ii) it is likely that the moratorium would result in the rescue of the company as a going concern. However, the moratorium is limited by not being available to certain companies, including insurers, banks, investment firms, parties to ‘capital markets arrangements’ and certain other financial services entities not eligible for moratorium. The capital market exception will exclude many companies that have issued bonds in excess of £10 million in value.
If the company is eligible, in most cases the moratorium can be commenced by the directors filing certain documents with the court. A licensed insolvency practitioner is appointed as “monitor”, who supervises the moratorium, but unlike an administrator does not displace the directors. The directors remain in control but must seek the consent of the monitor before causing the company to enter into certain transactions.
The moratorium restricts the enforcement of ‘pre-moratorium debts’ (indebtedness incurred by the company prior to moratorium) and ‘moratorium debts’ (indebtedness incurred by the company during the moratorium).
Pre-moratorium debts are subject to a payment holiday, other than certain significant exceptions, namely capital markets arrangements, bank debt and certain other financial obligations, contracts secured by a financial collateral arrangement, rent, goods and services, salary payments, and expenses of the monitor.
Unpaid moratorium debts and, with certain exceptions and exclusions, ‘priority pre-moratorium debts’ are granted super-priority status or protection from being compromised in subsequent insolvency or restructuring proceedings commenced within 12 weeks of the end of the moratorium.
The moratorium prohibits:
- Involuntary commencement of administration or winding up/liquidation
- Forfeiture or re-entry of leaseholds
- Commencement or continuation of legal process
- Enforcement of most security interests (including the crystallization of floating charges)
A moratorium initially lasts 20 business days but may be extended by the directors by another 20 business days provided that certain conditions are satisfied (including paying the debts that the company is required to pay during the moratorium). If a further extension is required, the directors must obtain the consent of the pre-moratorium creditors or the court.
The maximum duration of a moratorium is one year but it may be terminated early by the monitor for various reasons including where the monitor forms the view that it either has succeeded in rescuing the company or that is no longer likely to succeed.
Receivership and administrative receivership
Receivership is not an insolvency proceeding in itself but is frequently used as an enforcement process, in particular where a secured creditor holds a mortgage over real estate assets. A receiver can sometimes be appointed by a secured creditor over a single asset as an alternative to commencing administration, and in many cases will be more efficient. There are various types of receivers, including statutory, contractual, and those appointed by the court. The process of “administrative receivership” now has a very limited role, but remains available in some circumstances, for example to certain secured parties in structured finance transactions. Where it is available, the administrative receiver displaces the corporate directors, has additional statutory powers to a typical receiver, and can block the appointment of an administrator.
-
What impact does the insolvency process have on the ability of a lender to enforce its rights as a secured party over the security?
Liquidation
In a compulsory winding up or liquidation, creditors may not commence or continue legal action against the company but may enforce security interests. In voluntary winding up or liquidation, there is no automatic restriction on enforcement action, but the court may grant a stay on the application of the liquidator in appropriate cases.
Administration
Creditors are prohibited from enforcing most types of security against a company in administration, except with the consent of the administrator or the permission of the court. In addition, legal actions may not be commenced or continued against the company while it is in administration. An interim moratorium may also begin prior to the commencement of administration proceedings if a “notice of intention to appoint administrators” is filed with the Court or an application presented. Certain security interests over financial collateral may be enforced during an administration moratorium (including where neither party to the transaction is a bank).
An administrator may deal with floating charge assets during the administration and may apply to the court to deal with fixed charge assets. An administrator may also require a receiver appointed by secured creditors prior to the commencement of administration to vacate office, although this right is often not exercised if the receiver’s role is consistent with the purpose of the administration.
Standalone Moratorium
A standalone moratorium also prohibits the enforcement of most security interests for the duration of the moratorium, except where the court grants permission to do so. Certain security interests over financial collateral may be enforced during the standalone moratorium (including where neither party to the transaction is a bank).
CVA
A CVA may be combined with a stand-alone moratorium (see above) or proposed as an exit to an administration proceeding.
Schemes of arrangement and Restructuring Plans
Neither the Scheme of Arrangement nor Restructuring Plan has the benefit of an automatic moratorium but may be combined with a stand-alone moratorium or proposed as an exit to an administration proceeding.
In some cases, a Scheme may by its terms impose an effective moratorium on creditors, for example while a restructuring to be implemented, but requires more time to be negotiated. In such cases, the Scheme imposing the moratorium would itself need to be approved through the normal Scheme process and the company proposing the Scheme would be vulnerable to enforcement action until the Scheme is sanctioned and becomes effective.
A company proposing a Scheme of Arrangement (and by extension a Restructuring Plan) can also apply to the court on a case-by-case basis to have individual legal actions by creditors stayed, in circumstances where a proposed restructuring has received widespread approval (for example through a restructuring support agreement or lock-up agreement) but has not yet progressed through the Scheme or Plan process.
The lack of any automatic moratorium has not prevented the Scheme and Plan being very extensively used. One of the reasons is that Schemes and Plans tend to affect groups of creditors that are governed by contractual intercreditor, loan or bond provisions, such as contractual majority-rule provisions and contractual standstills. These provisions tend to limit the ability of minority creditors within such groups to take action that would circumvent the proposed Scheme or Plan.
Receivership
The appointment of a receiver in relation to one or more assets of a company does not prevent another creditor with security over other assets of the company from enforcing that security. However, the appointment of an administrative receiver, in the limited circumstances where that is possible, would affect the enforcement of security by other creditors.
-
Please comment on transactions voidable upon insolvency.
There are a number of provisions under English law by which a transaction could be set aside in insolvency proceedings. The most relevant to creditors taking security are the provisions of the Insolvency Act 1986 that concern “late” floating charges, transactions at an undervalue and preferences.
Voidable or “late” floating charges
If a company creates a floating charge within a specified period ending with the “onset of insolvency”, it will be invalid except to the extent that new money or other value is provided. The relevant period is one year for charges granted to persons who are not connected with the company, and two years for connected persons. The “onset of insolvency” refers to the commencement of insolvency proceedings being, in broad terms, the earliest of: the date of initiation of proceedings for administration, liquidation or winding-up, or the date of the company entering administration.
A floating charge granted to an unconnected person will not be invalid under this provision unless the company created it at a time when it was unable to pay its debts (on a cash-flow or balance sheet basis) or if it became unable to pay its debts in consequence of the transaction.
Transactions at an undervalue
A liquidator or administrator may apply to set aside as a “transaction at an undervalue” any transaction entered into by a company within a two year period ending with the onset of insolvency, on terms that provide for the company to receive either no consideration, or a consideration the value of which, in money or money’s worth, is significantly less than the value, in money or money’s worth, of the consideration provided by it. A transaction cannot be set aside under this provision unless at the time the transaction is entered into that company was unable to pay its debts or became unable to pay its debts (on a cash-flow or balance sheet basis) in consequence of the transaction. A Court would not set aside such a transaction if it were satisfied that the company entered into the transaction in good faith and for the purpose of carrying on its business and that at the time it did so there were reasonable grounds for the belief that it would benefit the company.
Preferences
A liquidator or administrator may also apply to set aside as a preference anything done or suffered to be done by a company within a specified period ending with the onset of insolvency, that has the effect of putting any creditor or guarantor in a better position, in the event of that company going into insolvent liquidation, than that person would have been in if the transaction had not occurred. The relevant period is six months in the case of a person who is not connected with the company, and two years where the person is connected. The transaction may not be set aside unless the company was unable to pay its debts or became unable to pay its debts (on a cash-flow or balance sheet basis) in consequence of the transaction. However, the Court would not make such an order if it was satisfied that the company which gave the preference was not influenced to give it by a desire to put that person in such better position. Such an influence is presumed to be present if the relevant person is connected with the company (but this presumption may be rebutted with evidence).
-
Is set off recognised on insolvency?
In a liquidation and some “liquidating” administration proceedings, set off is automatic and self-executing as at the commencement of the liquidation or, in administration, the date declared by the administrator. At such date, a mandatory account is taken of mutual dealings between the company and its creditors, which, with some exceptions, are automatically reduced to net claims against either the company or the relevant creditor. If the resulting net balance is against the company, the creditor will typically have a claim in the insolvency for the net amount. If the net balance is owed by the creditor, the insolvency will not, of itself, accelerate payment of the net balance.
To the extent that contractual set off and netting provisions operate and are complete before the mandatory account is taken, or are consistent with the outcome of mandatory set off, they will generally be recognized and respected by the liquidator or administrator. An example of where contractual set off provisions might not be consistent with mandatory insolvency set off is where the contractual provision requires multi-party or cross-affiliate set off. This could produce a result that is inconsistent with the entity-by-entity account taken by the liquidator or administrator, and in such a case the mandatory insolvency set off would prevail.
-
Are there any statutory or third party interests (such as retention of title) that may take priority over a secured lender’s security in the event of an insolvency?
Goods that are subject to effective retention of title are unlikely to be assets of the company and, if so, would not fall within the scope of a lender’s floating charge when it crystallises on insolvency. The party with retention of title would therefore take priority.
A creditor holding a first-ranking fixed charge security interest would generally rank ahead of any claims having statutory priority. A creditor holding only a floating charge is however subject to a number of claims having statutory priority, and would also rank after the holders of fixed charge security or prior floating charges. A floating charge ranks after, among other claims:
- statutory preferential debts, including certain tax (e.g. VAT, PAYE and National Insurance) and employee liabilities (up to £800 per employee plus holiday pay), contribution to occupational and state pension schemes, certain depositors and deposit compensation schemes in bank insolvencies and, Brexit notwithstanding, EU levies or surcharges for coal or steel production;
- a “prescribed part” of the company’s assets set aside for unsecured creditors, currently a maximum of £800,000; and
- the costs and expenses of the administration or liquidation, including the remuneration of the office holders.
Applicable UK law also generally respects the freedom of creditors to voluntarily, by agreement, subordinate their claims to the claims of other creditors. Intercreditor or subordination agreements are not considered to be contrary to public policy and are generally upheld and respected by liquidators.
-
Are there any impending reforms in your jurisdiction which will make lending into your jurisdiction easier or harder for foreign lenders?
No.
-
What proportion of the lending provided to companies consists of traditional bank debt versus alternative credit providers (including credit funds) and/or capital markets, and do you see any trends emerging in your jurisdiction?
The UK remains one of the world’s leading financial centers, and this is reflected in the sophistication and breadth of its debt market. Market participants of all shapes and sizes operate in the UK, from global investment banks to local and foreign direct lenders, and the full range of financial products is on offer to borrowers (senior and junior debt, unitranche debt, secured and unsecured bonds, PIK debt, debt-like preferred equity, etc).
While traditional bank lenders retain an important place in the market, direct lenders are playing an ever-larger role across a range of financing types (though alternative credit deals make up a smaller portion of the European debt market than the more mature US debt market). This is leading to a blurring of the lines (to some extent) between alternative credit and traditional bank lending, with alternative credit providers able to write increasingly large tickets and more frequently partnering up to form clubs (acting in some respects like arrangers). Direct lenders are particularly prominent in the leveraged/acquisition finance space, with private equity firms increasingly likely to partner up with direct lenders to obtain greater certainty of execution, higher leverage and/or more flexible terms.
-
Please comment on external factors causing changes to the drafting of secured lending documentation and the structuring of such deals such as new law, regulation or other political factors
During 2022 the National Security & Investment Act (NSIA) introduced a system through which UK governmental authorities can screen acquisitions of and investments in businesses carrying on business in the UK in 17 ‘sensitive’ sectors and, following that screening, in certain circumstances, intervene in those transactions. That intervention could be to place conditions on the transaction or to prevent it entirely. The primary consequences for debt deals are (a) the need to ensure (typically via DD / advice to the buyer), that an acquisition being financed does not fall within the ambit of the NSIA, or if it does, to ensure that its requirements have been complied with and (b) to exercise care when enforcing or considering enforcement of security, where certain buyers (who may previously have been acceptable) may be excluded. UK security documents which include security over shares now often include provisions which restrict the ability of the security holder to sell in circumstances where the provisions of the NSIA would be triggered. The NSIA regime is similar to the US CFIUS and EU FDI screening regimes.
United Kingdom: Lending & Secured Finance
This country-specific Q&A provides an overview of Lending & Secured Finance laws and regulations applicable in United Kingdom.
-
Do foreign lenders or non-bank lenders require a licence/regulatory approval to lend into your jurisdiction or take the benefit of security over assets located in your jurisdiction?
-
Are there any laws or regulations limiting the amount of interest that can be charged by lenders?
-
Are there any laws or regulations relating to the disbursement of foreign currency loan proceeds into, or the repayment of principal, interest or fees in foreign currency from, your jurisdiction?
-
Can security be taken over the following types of asset: i. real property (land), plant and machinery; ii. equipment; iii. inventory; iv. receivables; and v. shares in companies incorporated in your jurisdiction. If so, what is the procedure – and can such security be created under a foreign law governed document?
-
Can a company that is incorporated in your jurisdiction grant security over its future assets or for future obligations?
-
Can a single security agreement be used to take security over all of a company’s assets or are separate agreements required in relation to each type of asset?
-
Are there any notarisation or legalisation requirements in your jurisdiction? If so, what is the process for execution?
-
Are there any security registration requirements in your jurisdiction?
-
Are there any material costs that lenders should be aware of when structuring deals (for example, stamp duty on security, notarial fees, registration costs or any other charges or duties), either at the outset or upon enforcement? If so, what are the costs and what are the approaches lenders typically take in respect of such costs (e.g. upstamping)?
-
Can a company guarantee or secure the obligations of another group company; are there limitations in this regard, including for example corporate benefit concerns?
-
Are there any restrictions against providing guarantees and/or security to support borrowings incurred for the purposes of acquiring directly or indirectly: (i) shares of the company; (ii) shares of any company which directly or indirectly owns shares in the company; or (iii) shares in a related company?
-
Can lenders in a syndicate appoint a trustee or agent to (i) hold security on the syndicate’s behalf, (ii) enforce the syndicate’s rights under the loan documentation and (iii) apply any enforcement proceeds to the claims of all lenders in the syndicate?
-
If your jurisdiction does not recognise the role of an agent or trustee, are there any other ways to achieve the same effect and avoid individual lenders having to enforce their security separately?
-
Do the courts in your jurisdiction generally give effect to the choice of other laws (in particular, English law) to govern the terms of any agreement entered into by a company incorporated in your jurisdiction?
-
Do the courts in your jurisdiction generally enforce the judgments of courts in other jurisdictions (in particular, English and US courts) and is your country a member of The Convention on the Recognition and Enforcement of Foreign Arbitral Awards (i.e. the New York Arbitration Convention)?
-
What (briefly) is the insolvency process in your jurisdiction?
-
What impact does the insolvency process have on the ability of a lender to enforce its rights as a secured party over the security?
-
Please comment on transactions voidable upon insolvency.
-
Is set off recognised on insolvency?
-
Are there any statutory or third party interests (such as retention of title) that may take priority over a secured lender’s security in the event of an insolvency?
-
Are there any impending reforms in your jurisdiction which will make lending into your jurisdiction easier or harder for foreign lenders?
-
What proportion of the lending provided to companies consists of traditional bank debt versus alternative credit providers (including credit funds) and/or capital markets, and do you see any trends emerging in your jurisdiction?
-
Please comment on external factors causing changes to the drafting of secured lending documentation and the structuring of such deals such as new law, regulation or other political factors