It is a question which lenders and their lawyers have to consider every time the terms of a secured transaction change. Will the existing security remain effective following the amendment? Demanding new security routinely, without proper analysis, is rarely a viable approach. Taking new security need not be complicated, but it will cost money, usually the borrower's money. It will involve new documents, satisfaction of any registration and other perfection requirements, and sometimes new legal opinions.
Even if a lender takes all these steps, new security may not put it in as strong a position as the original security. For example, a new floating charge may be subject to new hardening periods. On the other hand, if a lender assumes it can rely on its existing security without proper thought, it may find itself unsecured.
So, before agreeing amendments, a lender needs to understand whether there is a genuine risk that its existing security will no longer work. Adam Pierce and Charlotte Drake explain the key points to consider.
The scope of the liabilities secured under a security document is set at the point the security is created. That does not mean that obligations under documents amended later or even under agreements entered into later cannot be within that scope. But if the original scope of the existing security is not wide enough to cover those obligations, then the lender will need new security. Our view is therefore that "security confirmations" are of limited effect, unless a lender uses them to create new security.
Applying this principle should on the face of it be straightforward: look at the definition of the secured liabilities in the security document and consider whether the amended obligations fall inside that definition. If so, no new security is needed. In practice, it can be helpful to tackle the issue by answering a series of questions.
Applying the basic principle: key questions
Is the security all moneys or transaction specific?
Where a lender has the benefit of true "all moneys" security, there are usually no problems. Without circumstances supporting any implied limit on its scope, all moneys security should work to secure amended or new liabilities without a lender needing to do anything further.
However, often security is only expressed to secure liabilities under a particular set of finance documents. In those circumstances, a lender needs to consider the definition of those finance documents more closely.
Do the secured liabilities expressly envisage amendments to the "Finance Documents"?
Usually transaction specific security is expressed to secure obligations under the relevant finance documents as those documents may be amended from time to time. Without this language, it may be difficult to be reassured that the obligations under an amended facility will remain secured by the existing security. If this amendment language is included, a lender next needs to consider how to interpret it.
Is the security first party or third party?
Is the security provider granting security for its own obligations (first party security) or those of someone else (third party security)? A third party security provider is a surety provider, like a guarantor. A whole body of law has developed to protect surety providers, and to ensure that they are not prejudiced by what happens between the "principals" after the surety has been provided. As a result, the scope of the obligations secured by third party security may be narrower than equivalent first party security even when the same words describe that scope.
Where a guarantor gives a guarantee of obligations under specific agreements, it will often agree that the guarantee will not be affected by amendments or variations of those agreements. Despite this, the guarantor will still be discharged if those agreements are amended in a way that was outside the “general purview” of the original guarantee (Triodos v. Dobbs). This principle applies equally to third party security. Vague, general wording about "amendments and variations" will not always be enough.
In contrast, if the security is first party, it will not usually be necessary to adopt such a narrow interpretation of these references to future amendments. The precise drafting and circumstances are always key. However, usually a lender will simply need to consider whether the new terms are a genuine amendment to the existing agreement, or are so far-reaching that they are in reality a completely new agreement. If the latter, a lender is likely to need new security. A refinancing disguised as an amendment to avoid taking new security will rarely work.
Do the "Finance Documents" include future documents designated by the parties?
It may be possible for lenders to structure a deal to avoid relying on third party security at the outset. The lenders could instead take guarantees (limited in recourse to the security assets if necessary) from the relevant security provider. The security provider can then give security for its own obligations under the "Finance Documents" (which would include its guarantee) rather than those of the debtors whose obligations it is guaranteeing. On an amendment, the lender will still need the guarantor to provide a "guarantor confirmation".
This structure will only help lower the risk of needing new security on an amendment if the guarantor confirmation is a "Finance Document". This will ensure that the guarantor's obligations under it (as well as under the original guarantee) are secured. Usually "Finance Documents" includes any documents designated as such by the borrower and the lender (or agent on a syndicated deal), and so this is not a problem.
Law stated as at 22 April 2014.