Security

Ensuring that you get paid can be a lengthy and costly process for any business, especially in the current economic climate. If you have agreed to provide goods or services to a customer on a credit basis then it may be sensible to secure that debt. This gives you priority over other creditors in an insolvent situation. If other debt collection processes have failed then you may be faced with having to enforce action to obtain payment. This article discusses some of the ways you may obtain security and some of the enforcement options available.

Valid and Binding Security

To ensure that your security is valid and binding it is necessary to consider the following:-

  • Undertake a search of the Charges Register at Companies House and at the Land Registry to see what, if any, existing security is registered.
  • Ensure your security is registered within the requisite time period – charges 21 days.
  • Ensure that your security is in order namely that it has been executed by the right people with the requisite authority.  Documents executed by companies can now be executed by a signature of the director of the Company witnessed by a third party in accordance with Section 44 of the Companies Act 2006.
  • Consider what your security is intended to secure and whether the Company’s Memorandum and Articles of Association give the Company the requisite powers to borrow, guarantee and raise money. You should also consider the articles of association to see whether there is any restriction on the powers of the director.  You should also make sure that the business of the Company is one of the stated objects in its Articles of Association.
  • When taking a debenture ensure that it is a “qualifying floating charge” for the purposes of appointing an administrator. It is useful to have within the body of the debenture a clause which states that it “is a qualifying floating charge for the purposes of paragraph 14.2(a) Schedule B (1) to the Insolvency Act” and that “Paragraphs 14 and Schedule B (1) to the Insolvency Act 1986 (as amended) shall apply”.  With this clause in the debenture you have the power to appoint any one or more persons to be an administrator of the Company pursuant to paragraph 14 of Schedule B (1) to the Insolvency Act 1986 should the debenture become enforceable.
  • Consider when the debenture becomes enforceable. Generally speaking a debenture will have enforcement events set out in the debenture which could include non-payment of monies by the Company on demand; non-remedy or a breach of the debenture obligations by the Company; the Company being unable to pay debts as they fall due and the passing of any resolution or the taking of any action for the administration of a Company or appointment of administrator.

Demand

When making a demand you should ensure that it is prepared in accordance with the security. The security will also specify how the demand is to be served. In the case of making a demand and before the appointment of administrators the security holder should ensure that a reasonable period of time has expired. In the case of Cripps (Pharmaceuticals) Limited – v- Wickenden & another; R A Cripps Limited – v- Wickenden & another [1973] 2 ALL ER 606 where money was repayable on demand, all the creditor had to do was to give the company time to get the money from some convenient place; he was not obliged to give the debtor time to negotiate a deal which might produce the money. In this case it was clear that the debtor had neither the money nor a convenient place to which they might go to get it and so could not object on the grounds that they were not given time to find the money or that the 1 hour interval between making the demand and when the receiver was appointed was too short.

In the case of Sheppard & Cooper Limited – v- TSB Bank plc & Others [1996] 2 ALL ER 654 where money was repayable on demand the debtor was entitled to a reasonable opportunity of implementing other reasonable mechanics of payment he might need to employ to discharge the debt. The requirement that sufficient time be permitted to elapse to enable the debtor to make the necessary arrangement of payments, assumed that was the period needed if the debtor had the funds available. If the debtor had made it clear to the creditors that the required funds were not available, there was no need for the creditor to allow any time to elapse before treating the debtor as in default.

Underlying Debt

It is also important to note that all of the documentation relating to the underlying debt should be in order as a creditor will only be entitled to recover (as secured creditor) monies which have been validly lent to the Company. You also need to check there is no binding agreement between the Company and the creditor restricting the creditor’s ability to exercise powers under the debenture or legal mortgage.

Insolvency

In the case of insolvency you need to consider those circumstances which may give rise to the avoidance of the debenture or legal mortgage or the variation of any obligations secured in the circumstances which are set out in Sections 238, 239, 245 and 423 of the Insolvency Act 1986; undervalue, preference and transaction to defraud creditors. Before taking security ensure that sufficient due diligence is undertaken and that the requisite board minutes etc are in place to justify the commercial benefit to the debtor to minimise the security being challenged at a later point.

Legal Charge

A legal charge can be either fixed or floating. The lender has a right to resort to the asset to realise it towards the payment of the debt.

Typically, a document under which a lender takes a fixed charge will give the lender the right to:

  • Prevent the charger from disposing of the asset without the lender’s consent
  • Sell the asset if the charger defaults under the loan
  • Require the charger to maintain the asset
  • Claim the proceeds of sale of the charged asset in priority to other creditors and thereby satisfy the purpose of taking security
  • Take possession of the secured assets
  • Seek a court order appointing an Administrator
  • Appoint a Law of Property Act receiver over land

Guarantees

If you have a personal guarantee from a director of a company it is important to ensure that the guarantee is enforceable and that it complies with the Statutes of Fraud. Again, you should ensure that the letter of demand is in accordance with the terms of the personal guarantee. If the guarantor is unable to make payment proceedings may have to be issued. Once judgment is obtained there are various ways in which a creditor could look to enforce judgment.

A guarantee is a promise to ensure that a third party fulfils its obligations and/or promise to fulfil those obligations if that third party fails to do so.  It is a contractual agreement that creates a secondary obligation to support a primary obligation of one party to another. The primary obligation may be, for instance, to repay a loan made by a lender to a borrower. If the lender has doubts about the borrower’s ability to perform its primary obligations, it might seek a guarantee. The guarantor promises the lender that the borrower will perform its obligations and, if he does not do so for any reason, the guarantor will perform them on its behalf. The guarantor’s obligation is contingent on the borrower’s primary obligation. It will therefore never be greater than that of the borrower under the primary agreement. The obligation is usually a payment obligation, but it can also be a performance obligation (such as a guarantee to take over building works under a construction contract).

Judgments made against the guaranteed or indemnified party are not always enforceable against the guarantor or indemnifier.  For example, the High Court refused to enforce an adjudicator’s decision against the guarantor of one of the parties to the adjudication, where the guarantor was not itself a party to the adjudication.

Law of Property Act Receiver

Often within security documents there will also be the ability to appoint a law or Property Act Receiver which may be relevant when the assets of the Company are property related. A Law of Property Act Receiver will be brought in to realise the assets for the benefit of the creditors.

Enforcement

There are many different enforcement options including:

  • By Bailiff or High Court Enforcement Officer The bailiff/officer visits the premises of the Debtor to levy execution on any assets at the premises to sell to repay the debt.
  • Order for questioning The court will produce an Order for the debtor/company director or shareholders or any of them to attend court to disclose the financial affairs of the Company. The first order to attend for questioning will contain a penal notice and must be served personally.
  • Charging Order If the Company is the owner of freehold or leasehold property a charge could be placed against the property. However, you will only receive your money if the property is sold with sufficient equity available to settle the debt. The effect of a final charging order is to convert you from an unsecured creditor to a secured creditor. Provided the final order is made before any insolvency proceedings are commenced you will be unaffected by any subsequent insolvency.
  • Third Party Debt Order If you have reason to believe the Company has a Bank or Building Society account which is in credit or you know or reasonably believe that a sum is to be credited in such account(s) and you have the details, you can apply to the court for monies to be deducted from these accounts to settle the debt due.
  • Statutory Demand If you are owed more than £750 you may serve a Statutory Demand. The Company or debtor has 21 days from the date of personal service to settle the total amount due. If the Company or debtor fails to respond you will then be in a position to proceed with a bankruptcy or Winding Up Petition. The Statutory Demand is valid for only 4 months and can only be issued on undisputed debts.
  • Winding Up and Bankruptcy Petitions If you have served a Statutory Demand or have a judgment you can petition to wind the company up or make the individual bankrupt. This may put pressure on the Company or individual to pay its debts but should not be used as “an abuse of process”. If the debt is to be paid it should be settled from third party funds otherwise the repayment may be a preferred payment. In addition, it is possible that the petition could be supported by other creditors or that the debtor does not dispute the petition and merely succumbs to it and consequently a creditor will have incurred further costs but will rank alongside all other unsecured creditors.
  • Attachment of Earnings The court will produce an order for the employer of the debtor individual to pay a percentage of their wages into court. This will depend on their income and expenditure and will be reviewed by the court. The court will then decide the amount of money paid into court.
  • Mortgage in Possession Where a mortgage or charge is by deed the mortgagee will have a power of sale. A mortgagee lawfully in possession has, generally speaking, the rights of any owner of land for the purposes of the management and preservation of the property.
  • Injunctions In some cases a judgment creditor may be concerned that the judgment debtor is likely to dissipate its assets within the jurisdiction or remove assets from the jurisdiction, so as to defeat the judgment of the court and leave no assets within the jurisdiction for the creditor to satisfy the judgment debt. In cases such as these, the Court has the power to make a freezing order over the assets of the judgment debtor on the application of the judgment creditor. The applicant for this form of interim relief must show that there is a real risk that a judgment or award in favour of the claimants would go unsatisfied.

Before certain enforcement methods can be used the judgment debtor must have been given an opportunity to pay the judgment debt. He must have failed to pay the judgment debt when due, or failed to pay an instalment due under the terms of the judgment. You should therefore consider carefully whether payment is overdue before you start to enforce.