The new UK legislation introducing PSC registers has created the potential for a new block on enforcement of share mortgages.

A UK company can now cause mischief by issuing a “restriction notice”. This has the effect of preventing enforcement of a share mortgage. The mortgagee can apply to court to enforce the share mortgage, but the court has the discretion to maintain or lift the restriction on enforcement.

The new legislation dealing with “registers of people with significant control” (PSC registers) came into effect on 6 April 2016.[1]

If a UK company issues a restriction notice under Schedule 1B of the Companies Act 2006, then the mortgagee cannot enforce the share mortgage for the relevant shares, including exercising

  • voting rights on the shares,
  • the power of sale of the shares, and
  • any power of appropriation of the shares.

Paragraph 4 of Schedule 1B gives the mortgagee the right to apply to court to lift the restriction. A court will likely do so, but it has the discretion not to.

A UK company can issue a restriction notice to slow the enforcement of a mortgage over shares, and force a mortgagee to get a court order to enforce a share mortgage, in circumstances where otherwise the mortgagee would not need a court order. The new legislation imposes no penalties on a UK company improperly issuing a restriction notice (other than, perhaps, that the court could impose a costs order against it). A UK company can also easily create the circumstances where it can properly issue a restriction notice.

This ability of a restriction notice to stop (or delay) the enforcement of a share mortgage is likely to mean that English share mortgages (and English legal opinions) need to be different:

  • A share mortgage should have an additional enforcement event if a warning notice or a restriction notice is issued. A warning notice should be delivered more than one month before a restriction notice. The UK company does not need to send a copy of either notice to the mortgagee.
  • Legal opinions on the enforceability of a share mortgage may need a qualification that the share mortgagee cannot be enforced whilst a restriction notice is in effect, without the court's permission.
  • Share mortgages (or loan agreements) should have provisions requiring the mortgagee to comply with notices about the PSC register and should send relevant documents to the mortgagee (and facility agent). If the UK company is an obligor, then similar provisions should apply to it.

However, none of this particularly helps a mortgagee if the mortgagor does not comply with its obligations and the first time that the mortgagee discovers that there is a restriction notice is when a purchaser under the mortgagee's power of sale attempts to register the share transfer.