Guarantees and collateral for acquisition financings in United Kingdom - England & Wales (England & Wales)

Guarantees and collateral

Are there restrictions on the provision of related company guarantees? Are there any limitations on the ability of foreign-registered related companies to provide guarantees?

Guarantees must be documented in writing and are executed as deeds in certain circumstances. The availability of guarantees is, in the case of UK companies, restricted by financial assistance rules (see question 15), other capital maintenance rules and directors’ duties. Directors of an English company are under a duty to promote the success of the company for the benefit of its members. If the directors misuse their powers in entering into a transaction, and the lenders are aware of this, the lenders may in certain circumstances be liable to having to disgorge guarantee payments.

It is more difficult to establish that the directors are promoting the success of their company where the company provides an upstream or cross-stream guarantee or third party security. As a result, lenders usually require that the giving of the guarantee is authorised by an appropriate shareholders’ resolution, to avoid the possibility of the transaction being challenged by a shareholder on the basis that the directors have breached their duties. However, this will not cure a lack of corporate benefit if the company is in the zone of insolvency when the directors’ primary duty is deemed to be owed to the company’s creditors.

An upstream guarantee may result in an unlawful reduction of capital if the company does not have sufficient distributable reserves to cover any diminution in net assets. As a result, lenders may wish to see board minutes and representations that address the issue of net assets or, where the company is in financial distress, a net assets letter from the company’s auditors. Usually, the diminution in net assets has been determined in accordance with normal accounting principles by considering whether any provision is required for the guarantee in the company’s balance sheet. In April 2017, the Institute of Chartered Accounts in England and Wales and the Institute for Certified Accountants published technical guidance (Tech 02/17BL) on distributions under the Companies Act 2006, with particular reference to intra-group movements of assets that might affect the profits flow to the top parent company. The guidance suggested that guaranteeing the debt of a parent or fellow subsidiary without receiving an appropriate fee would, as a matter of law, be a distribution and was at odds with general market understanding and application of the law of distributions.

The ensuing debate led, in June 2018, to the Law Society and the City of London Law Society publishing a joint paper, in which they opined that a guarantee given in relation to a ‘normal financing transaction’ does not constitute a distribution, whether or not a fee is payable. The note viewed a normal financing transaction as a transaction in which, at the time the guarantee is given, the board of directors of the guarantor company properly considers the financial position of the member of the group to whom credit is provided and concludes, in good faith and on reasonable grounds, that it is likely to be able to repay or refinance the credit when due, and therefore, that a claim is unlikely to be called under the guarantee. In other words, the grant of an upstream or cross-stream guarantee may only amount to a distribution if the guarantee is likely to be called and the guarantor does not receive appropriate value for assuming that contingent liability, at the point the guarantee is granted.

Guarantees are also vulnerable to challenge when the guaranteed debt is amended, rescheduled or otherwise extended without the consent of the guarantor. Savings provisions are usually inserted into guarantees to provide advance consent to such amendments, but the effect of such provisions is limited and a prudent approach is to obtain guarantee confirmations whenever material amendments are made to the underlying guaranteed debt.

There are no particular English law limitations on the ability of foreign-registered related companies to provide guarantees in an English law agreement.

See also question 31 as to situations where guaranteed claims would be voidable.

Are there specific restrictions on the target’s provision of guarantees or collateral or financial assistance in an acquisition of its shares? What steps may be taken to permit such actions?

The Companies Act 2006 prohibits:

• financial assistance given by a public company (or any of its UK subsidiaries, whether public or private) directly or indirectly for the purpose of the acquisition of shares in that company (or of reducing or discharging a liability incurred for such purpose); or
• financial assistance given by a public company subsidiary of a private company, directly or indirectly for the purposes of the acquisition of shares in that private company (or reducing or discharging a liability incurred for such purpose).

Outside the above scenarios, there is no statutory prohibition on a private company giving financial assistance. Nevertheless, the provision of guarantees and security raises related issues (see question 14).

What kinds of security are available? Are floating and fixed charges permitted? Can a blanket lien be granted on all assets of a company? What are the typical exceptions to an all-assets grant?

A debenture is often used to create various security interests covering all of the assets of a company. Lenders will usually take fixed security over assets that do not fluctuate in the business (such as shares, real estate, intellectual property and certain key receivables and contracts), with the remainder of the assets, which do fluctuate, being subject to a floating charge. The position of a fixed-charge holder is stronger in an insolvency (see question 34). If a fixed charge is taken over assets but the chargor is, nevertheless, permitted to deal with those assets in the ordinary course of its business (such as book debts or inventory), the charge may be recharacterised by a court in an enforcement situation as a floating charge. To be a fixed charge, a charge must be characterised as fixed in the documentation and the chargee must have control over the charged asset.

Fixed security may take the form of a mortgage, an assignment, a charge or a pledge. A pledge requires delivery of possession of an asset to the creditor by way of security and is rare in commercial lending, where a charge is more common.

Security over real estate assets is usually granted by way of a legal mortgage. Security over registered securities (eg, shares) is usually taken by way of a charge. Security over monetary claims and contractual rights can be secured by way of charge or security assignment.

Are there specific bodies of law governing the perfection of certain types of collateral? What kinds of notification or other steps must be taken to perfect a security interest against collateral?

Pursuant to Part 25 of the Companies Act 2006, almost all mortgages and charges created by companies incorporated in the UK must be registered with Companies House within 21 days of creation. The most significant exception is for security financial collateral arrangements in relation to cash, credit claims, shares, bonds and other securities. Registration at Companies House is necessary even where the assets charged are located outside the UK or where the security is governed by foreign law. Failure to register a registrable charge at Companies House will render the security void against a liquidator, administrator or other creditor of the company. Once registered (subject to limited permitted redactions), the charging instrument becomes a public document, accessible through the online register. An equivalent registration requirement exists for UK limited liability partnerships. Mortgages and charges created by overseas companies (even those that have registered an establishment in the UK) are not registrable at Companies House.

There are further rules for the perfection of security over land, intellectual property, ships and aircraft registered in the UK that have separate asset-specific registries with their own registration requirements. These apply to security created by both UK and overseas companies.

To perfect security over receivables and contractual rights, notice should be served on the contract counterparty, as priority of security over such rights is generally determined by the timing of the giving of such notice.

Security created by individuals or other non-corporate security providers needs to be registered with the High Court pursuant to the Bills of Sale Acts, which govern the ability of an individual or non-corporate debtor to leverage property (typically, personal chattels) as security.

In July 2018, the UK government published the draft Registration of Overseas Entities Bill which sets out proposals for the introduction of a register of beneficial owners of overseas legal entities that own land in the UK. The Bill aims to help combat money laundering and achieve greater transparency in the UK property market. Although registration is prima facie voluntary, the consequences of non-registration include an overseas entity being unable to register as proprietor of real property in the UK (necessary for obtaining full legal title) and consequently, difficulties in selling, leasing or creating security over the property. At the time of writing, feedback on the draft Bill was still being analysed.

Once a security interest is perfected, are there renewal procedures to keep the lien valid and recorded?

Once security created by a UK-registered company or LLP has been registered at Companies House, there is no need to renew the registration in order to preserve the validity of the security. Certain events arising post registration will require further actions to be taken. For instance, the charging company is required to keep certain related documents (including instruments amending the charge) available for inspection. Amendments to existing charging instruments that effectively create a new charge would be registrable. It is also possible to register at Companies House security existing on property acquired. Lastly, when a receiver or manager of the charging company is appointed, the appointee must notify Companies House within seven days of the appointment.

Bills of Sale Act registrations (see question 17) are renewable every five years.

Are there ‘works council’ or other similar consents required to approve the provision of guarantees or security by a company?

In the absence of any express agreements with unions or other employee representative bodies that may oblige the employer to obtain consent or consult on this subject (which in practice are likely to be rare), there is no obligation to obtain consents from, or consult with, a works council, trade union or other employee representative body for the provision of guarantees or security by an English company. However, the Transfer of Undertakings (Protection of Employment) Regulations 2006 (SI 2006/246) and the Trade Union and Labour Relations (Consolidation) Act 1992 (both as amended by the Collective Redundancies and Transfer of Undertakings (Protection of Employment) (Amendment) Regulations 2014 (SI 2014/16)) contain information and consultation obligations that are likely to be triggered by the sale of the underlying business or any associated collective redundancies (respectively).

If the company has a defined benefit pension scheme, it may be necessary to obtain the consent of pension trustees or consult with the Pensions Regulator before encumbering assets if this weakens the company’s ability to meet its pension obligations.

The directors would approve the provision of guarantees or security, and in the case of upstream or cross-stream guarantees or security it is also advisable to seek approvals from the shareholders.

Can security be granted to an agent for the benefit of all lenders or must collateral be granted to lenders individually and then amendments executed upon any assignment?

Where there are several lenders, security is granted to a security trustee who holds the security on trust for the secured creditors from time to time. As a result, assignments and transfers can be effected by lenders under a facility agreement without the need for any steps to be taken in relation to the underlying English law security documents for new lenders to benefit.

What protection is typically afforded to creditors before collateral can be released? Are there ways to structure around such protection?

Typically, release of security requires a deed of release unless assets are being sold by an administrator or liquidator or on enforcement.

There are few specific legal protections for creditors in relation to the release of security. However, the security trustee (or receiver) will owe a number of common law duties to secured creditors in the context of the sale of a secured asset under a charge or mortgage (eg, to act in good faith, to take reasonable steps to obtain a proper price for the asset, to obtain the best price reasonably obtainable and to act with reasonable care and skill). In addition, the intercreditor agreement may include further conditions for any release of security. Further protections apply in the case of asset-specific registers. For instance, in the case of registered land, the Land Registry would require a signed deed (in a paper form prescribed by the Land Registry) from the mortgagee authorising the release or an electronic form sent by the lender through the Land Registry’s portal.

Describe the fraudulent transfer laws in your jurisdiction.

See question 33 regarding voidable transactions.