Criteria for enforcement
What are the common enforcement triggers for loans, guarantees and security documents?
A lender will typically be entitled (but not obliged) to cancel loan commitments and/or accelerate loan repayments on the occurrence of one or more events of default as set out in the facility document. Typical events of default include non-payment of principal or interest, as well as breach of any representation or undertaking under the facility document. In line with Loan Market Association standard documentation, guarantee obligations are most commonly included in the facility documentation itself (rather than requiring a standalone guarantee) and arise whenever a borrower does not pay any amount when due. Enforcement of security documents will typically be triggered by the occurrence of an event of default or acceleration under the facility document.
Process for enforcement
What are the most common procedures for enforcement? Are there any specific requirements with which lenders must comply?
A secured lender will typically have a range of enforcement options available to it, depending on the nature of its security and the scope of its rights under the relevant security documentation. For example, it may appoint a receiver to take control of or sell secured assets (this is a common method of enforcement of fixed-charge security, such as over real estate or shares) or, if the secured lender has security over all or substantially all of the company's assets (ie, a ‘qualifying floating charge’, such as pursuant to a debenture (ie, a universal security document)), it may appoint an administrator (or, in limited circumstances, an administrative receiver) through an in-court or out-of-court procedure to take control of the company.
A secured lender may also exercise its powers as mortgagee – for example, to take possession of or sell secured assets (although this is not common, due to various risks involved) – and its rights of appropriation in respect of financial collateral (eg, cash and shares, in limited prescribed circumstances). A secured lender may also exercise its contractual or (if applicable) banker's rights of set-off, although it should be noted that, once the company has entered insolvency, certain sums due from the company (in particular, those incurred at a time at which the secured lender had notice that the company was likely to enter insolvency) are not permitted to be taken into account for the purpose of set-off in insolvency.
The procedures and requirements applicable to each enforcement option will be prescribed by statute and/or the terms of the relevant security documentation. In particular, there are specific procedures and requirements for administration set out in insolvency legislation which must be followed carefully.
Ranking in insolvency
In what order do creditors rank in case of the insolvency of a borrower?
The statutory order of priority of creditors on insolvency is broadly as follows:
- Realisations from the disposal of assets subject to fixed-charge security are applied to discharge the claims of the holders of such security (subject to the deduction of the costs of realisation, provided that this has been agreed with such holders); and
- Realisations from the disposal of floating-charge assets are applied:
- first, to discharge general costs of the insolvency procedure (ie, administration or liquidation expenses), including the remuneration of the insolvency officer;
- second, to discharge any preferential claims under English law (primarily occupational pension scheme contributions and specified employee claims, subject to certain maximum amounts and other limitations as set out in the insolvency legislation);
- third, towards an amount referred to as the ‘prescribed part’ (being a proportion of the realisations from the disposal of floating-charge assets determined pursuant to a formula set out in the insolvency legislation and currently capped at £600,000 per company), which is required to be set aside and made available to unsecured creditors;
- fourth, to discharge the claims of the holders of floating-charge security; and
- fifth, to discharge the claims of secured creditors (to the extent not fully satisfied out of the proceeds of realisation of their fixed and floating security) and unsecured creditors (for the balance of their claims following application of the prescribed part).
Click here to view the full article.