Borrowing against art

Types of security interest

In your jurisdiction what is the usual type of security interest taken against art, antiques and collectibles?

If the borrower is an individual, the lender will typically require the borrower to pledge the art, antiques or collectibles by actual or constructive delivery of the collateral to the lender. If the borrower is a corporate entity, the lender will typically require the borrower to grant a chattel mortgage over the art, antiques or collectibles.

Consumer loans

If the borrower borrowing against art assets in your jurisdiction qualifies as a consumer, does the loan automatically qualify as a consumer loan, and are there any exemptions allowing the lender to make a non-consumer loan to a private borrower?

Consumer loans are regulated by the Financial Conduct Authority (FCA). The format and content of consumer loan agreements are prescribed in detail by FCA regulations, and mistakes in drafting consumer loan agreements can render them unenforceable. However, a consumer loan may fall within the scope of an exemption from FCA rules. The two exemptions most often relied upon by lenders against art are the exemption for high net worth individuals if the amount of the loan exceeds £60,260, and the exemption where the loan is entered into wholly or predominantly for a business purpose if the amount of the loan exceeds £25,000.

Register of security interests

Is there a public register where security interests over art, antiques or collectibles can be registered? What is the effect of registration? Is the security interest registered against the borrower or the art?

If the loan is made to a company incorporated in England and Wales, the charge should be registered in the register of charges of the company at Companies House. Registration perfects the lender’s security interest and gives the lender priority subject to prior registered charges.

If the loan is made to a private individual by way of a bill of sale, that is, a document creating a charge in the artwork for the benefit of the lender while the borrower retains possession of the artwork, the bill of sale must be registered in the register of bills of sale. If it is not, the charge created by the bill of sale is void against third parties and the borrower. The register of bills of sale is maintained by the High Court. The Bills of Sale Acts (1878 and 1882) are unfit for 21st century lending and a new legislative framework was being considered, unfortunately the reform of bills of sale has been abandoned.

Non-possessory security interests

Can the lender against art collateral perfect its security interest without taking physical possession of the art?

If the loan is to an individual, it is possible to register the charge as a bill of sale. However, given the many pitfalls and restrictions associated with bills of sale, they are rarely used by lenders against art. Depending on the situation, there may be ways to structure the transaction to allow the borrower to keep possession, while at the same time perfecting the lender’s security interest, however this is potentially complex and can give rise to unacceptable tax liability for the borrower. If the loan is to an English company, and the lender’s charge is registered on the company’s register of charges at Companies House, the lender has a perfected security interest through registration and taking possession is not necessary to perfect the security interest.

Sale of collateral on default

If the borrower defaults on the loan, may the lender sell the collateral under the loan agreement, or must the lender seek permission from the courts?

If the loan agreement gives the lender the necessary rights in the event of default, in principle the lender can sell the collateral without permission from the courts. However, situations may arise where the borrower or other creditors object to a sale of the collateral, and they may seek assistance from the court. If an administrator or a liquidator has been appointed, their permission will need to be sought.

Ranking of creditors

Does the lender with a valid and perfected first-priority security interest over the art collateral take precedence over all other creditors?

A creditor that holds a valid fixed charge (provided that it was created as a fixed charge and is not a crystallised floating charge) over a company’s asset is entitled to the proceeds of the realisation of that asset in satisfaction of the liability due to it from the company. The holder of such a valid fixed charge will suffer no deductions in an insolvency process from the realisation of property secured by his or her fixed charge other than where there are prior ranking fixed charges over the same property or he or she agrees that disposal costs incurred by the liquidator or administrator may be taken from them. The insolvency practitioner receives his or her fees and the costs incurred in realising the assets subject to a fixed charge from the sale proceeds of the relevant assets, rather than from the assets available to the creditors of the company as a whole. He or she agrees the amount of his or her fees and costs with the holder of the fixed-charge security.