An increasing number of UK banks and other financial institutions are providing, or considering providing, an asset based lending service to their business customers. Many of those customers are UK businesses, but with customers and operations outside the UK. Michael Black explains some of the legal issues that lenders in this market need to be aware of.
Background – what is asset based lending?
An asset based lender provides funding against the value of its customer’s assets. In most cases, the borrower is a trading company or group whose principal assets are receivables and stock. The lender will provide a secured revolving credit facility against the value of those assets. The lender may also provide term loans against real estate and equipment.
Security over receivables – domestic and overseas
In domestic transactions, a UK asset based lender will require a fixed charge or assignment by way of security over its borrower’s receivables. (Some asset based lenders purchase the receivables of their “borrowers” (like an invoice discounter), but even then will also take a fixed charge or assignment over any receivables that remain vested with the borrower.) To ensure that the security is not floating in nature, the borrower must pay the proceeds of its receivables into a blocked account. Only the lender can withdraw funds from that account, which it uses to pay down the loan.
Where the borrower has international customers, often it will have already set up separate bank accounts in the relevant overseas countries, enabling its customers there to settle invoices without making international transfers. If that is the case, the lender may also need to think about the following points.
Should the overseas receivables be “ineligible”?
If the borrower does not need the lender to fund against the value of its receivables from overseas customers, the payment and bank account arrangements can remain unaltered.
But the lender should ensure it receives a separate fixed charge over the “controlled” domestic receivables. Otherwise, the lender could find it has only a floating charge over all the receivables, because of its lack of control over the overseas receivables proceeds.
Is English law security over overseas receivables sufficient?
If the borrower is expecting to receive funding against the value of its receivables from overseas customers, the lender will focus more on how effective its security over those receivables is. It will first need to ensure it has full control over the overseas collection accounts.
If the overseas receivables are owed to a non-English group company, the lender will usually also want to obtain local law security over those receivables. If the relevant group company is an English company, the lender may be able to rely on an English law fixed charge or assignment over the receivables. Before it does so, it will need to analyse the likely insolvency process if the business fails, and whether there are likely to be others with competing interests in those assets. In particular, the lender will want answers to the following questions:
- Is the company’s centre of main interests in England?
- Would an English administrator of the company be automatically recognised in the relevant overseas jurisdiction?
- Does the company have any other creditors in the relevant overseas jurisdiction?
Security over stock – domestic and overseas
In domestic transactions, taking security over the company’s stock (whether raw materials, work in progress or finished goods) is straightforward. The lender can only obtain a floating charge over stock, as it will be sold by the company without the lender’s consent. (The lender will also need to consider retention of title issues and rights of landlords/warehousemen, but these are beyond the scope of this article.)
Can the lender take effective security over stock held overseas?
Many UK manufacturing and distribution groups increasingly hold their stock or manufacturing plants abroad. If that is the case, the lender must also consider how to take valid security over the stock under local laws. Often this is much more involved than under English law. For example, under the laws of several European countries, security over stock will not be effective unless the borrower sends the lender regular, updated lists of the company’s stock. If that is the case, the lender will need to put in place procedures to monitor compliance with this requirement throughout the loan.
Is the lender a bank?
Most UK asset based lenders are not banks, though they are often subsidiaries of banks. Since changes to the UK withholding tax rules in 2001, it has made no material difference whether the lender is a bank or not in purely domestic asset based lending transactions.
In some European jurisdictions, however, lenders which are not banks (which can take advantage of the European “passport”) can be at a disadvantage. For example:
- in France, the ability to make use of a Dailly assignment (a flexible way of taking security over receivables) is only available to banks; and
- in Belgium, a borrower can be required to deduct withholding tax from interest payments made to non-banks.