The common law has always denied the legality of taking security over future assets (ie assets which do not yet exist). At common law, therefore, security over future property by way of a mortgage or a charge is invalid. However, in Holroyd v Marshall37, the House of Lords held that security over future assets is valid in equity by virtue of the contract of assignment. Hence, while it is not possible to have a legal mortgage over future assets, it is possible to take an equitable mortgage or charge over future assets. Security by way of pledge or lien, however, can never be taken over future assets, because there can be no physical delivery of future assets.

Attachment of security to existing assets takes place, when possession passes (pledges and liens), when legal title is conveyed (legal mortgages) or when the security agreement is made or when money is advanced (equitable mortgages and charges). Before Holroyd, however, it was difficult to conceive of when attachment would take place in the case of a security over future assets. In Holroyd, it was decided that security over future assets attaches automatically once the assets are acquired, with no fresh consideration needed.

Once attachment has taken place, the security still takes effect from the date of creation of the security agreement. This means that even though attachment does not happen until the assets are acquired, once they are acquired priority will be governed by the date of the original security agreement.


Security may be taken over a book debt either by a mortgage or a charge. Strictly speaking, the security will be over either the right to payment of the debt or the proceeds of the debt.

Security by legal mortgage

A legal mortgage over a debt is created by a legal assignment. An assignment must be by writing, must not purport to be by way of charge only and must be of the whole debt. The assignee will take subject to equities such as a prior perfected equitable assignment and accrued rights of set off. The assignee does not therefore have the full rights of a bona fide purchaser for value. He will however, after having given express notice in writing to the debtor, be able to sue for the debt in his own name.

Security by equitable mortgage

An equitable mortgage over a debt is created by equitable assignment. Any other equitable assignment can be created informally subject to an act by the assignor manifesting an intention to make a present assignment. Additionally, if the assignment is over future debts, the assignment will only take effect in equity as an agreement to assign and must be supported by consideration.

There is no requirement that notice need be given to the debtor. However, if an equitable mortgagee wishes to convert its security to a legal mortgage, it can do so by giving notice to the debtor. Often, however, an assignee will not wish to give notice for commercial reasons – such as the assignor not wishing the debtor to know about the assignment or the assignee preferring that the assignor continues to collect payment of the debt.

An equitable mortgagee differs from a legal mortgagee in that he cannot sue the debtor without joining the assignor as a party to the proceedings either as plaintiff or defendant.

Security by charge

A mere chargee in respect of a charge over a debt has no right to sue the underlying debtor. He may require the chargor to sue and he will then be entitled to the proceeds of the debt. A charge over receivables should confer on the chargee power to convert it into a mortgage and should therefore contain a power of attorney to the chargee to execute an assignment in the name of the chargor.


It is possible for a number of people to have taken security over the same debt. The rules as to who takes priority will depend on whether or not the claimants have notice of the security taken before theirs.

1. Claimant has no notice

Between all permutations of legal assignees and equitable assignees, priority is governed by the date notice is given to the debtor, regardless of the time that the assignment was actually made.38 Here, it is only necessary that the second chargee has no notice of the first charge at the time of creation of the second charge. It is irrelevant if he has notice of the first charge at the date he notifies the debtor.39 Where neither party has given notice, the charge created first in time has priority.

The rules as to priority between a legal or equitable assignee and a mere chargee are still unclear. It is possible that it will be governed by the date of notice to the debtor. However, the better view is that priority is governed by the date of creation of the competing interests.

The rules as to priority between two mere chargees are also unclear. It is thought here also that the better view is that the priority will be governed by the date of creation of the charges.

2. Claimant has notice

If a chargee or mortgagee has actual and constructive notice of a prior interest, he will take subject to that prior interest.

3. Freedom of dealing

Where there is a floating charge, priority may be affected by the terms of the charge itself.

If the floating charge permits the debtor to remove debts from the scope of the floating charge, then prior to crystallisation, any assignees of debts will take priority to the chargee.

Often, however, there is a prohibition in the charge on the creation of further charges having priority to a floating charge. Whether a party with a subsequent interest will take subject to this floating charge will then depend on whether they have actual notice.


Book debts

Before Spectrum Plus Limited v National Westminster Bank plc40, it had been judicially accepted that, in the right circumstances, a fixed charge may be created over book debts. This comes from Siebe Gorman & Co v Barclays Bank Ltd41. Similar decisions were reached in Re Keenan Bros Ltd42 and in Oakdale (Richmond) Ltd v National Westminster Bank plc43. Siebe Gorman was approved and followed in the Court of Appeal in National Westminster Bank plc v Spectrum Plus Ltd44. Given the rationale employed by the court in Siebe Gorman, the court categorised a charge as floating if the company could use the proceeds of book debts without the consent of the chargee. This logic was used to reach that very result in Re Brightlife Ltd45.

In Re New Bullas Trading Ltd46 the Court of Appeal recognised a third option open to the court in such cases – that is to find that the charge on book debts is, in fact, a divisible one, which can be both fixed and floating. The Court of Appeal were prepared to see two assets (one a debt; the other its proceeds) and so were able to accept that one could be subject to one type of charge and one another. Nourse LJ said that was how the parties had labelled the charges and that the court's interpretation that there were two assets allowed the court to respect the parties' wishes. The approach has been criticised by academics, for example, Goode, Charges Over Book Debts: a Missed Opportunity47 and Gregory and Walton, Book debt charges-the saga goes on.48 However it should be noted that the Court of Appeal's approach in Re New Bullas49 is not without support. For example, Berg describes it as "correct"50.

However in Re Brumark51 the Privy Council reviewed Re New Bullas52. As a result and following that judgment, it seemed less likely that a court would readily accept that, in the circumstances before the court in Re New Bullas, a charge over book debts could be part fixed and part floating just because the parties had labelled it that way. In that decision, Lord Millett held that the New Bullas decision had been wrong and that the charge over book debts, even in their uncollected form, was only a floating charge. What troubled Lord Millett was the fact that there was no control by the bank over the collection of the proceeds and, accordingly, the bank's security interest was 'defeasoble'. The fundamental issue was whether the company intended to continue to receive book debts and use the proceeds of such debts paid into the company's bank account in an unrestricted manner in the carrying on of its business.

Spectrum Plus Limited v. National Westminster Bank plc53

In a landmark decision, the House of Lords have now rejected in principle the validity of a Siebe Gorman type of fixed charge over a company's present and future book debts as usually contained in the standard bank debenture. The company's ability to draw money from the account into which the proceeds of the book debts are paid is inconsistent with the absolute assignment and control required to create a fixed security. The Siebe Gorman type of charge has now clearly been stated to be an equitable charge with the knock on effect that a company can deal with the asset and dispose of it in the ordinary course of business prior to any event of crystallisation.

This decision has put an end to the debate over the validity of a fixed charge over book debts. It is now clearly set out that in order for a bank to claim such a security interest it must have effective control over the proceeds paid into the company's segregated accounts. Clearly, from a commercial perspective, such an arrangement is impractical in that it would severely hamper a company's cash flow. As such, lenders should undertake a thorough review of debentures that purport to give them a fixed charge over book debts. In all likelihood, the security interests are now equitable and defeasible by the company in the ordinary course of business.


Quasi-security is a generic term for forms of comfort which do not strictly create security interests. The following types are commonly seen:

  1. guarantees;

  2. set-off;

  3. subordination; and

  4. ring-fencing arrangements.


Under a guarantee, the guarantor guarantees the obligations of one party to a contract to another. Should the contracting party fail to meet his obligations, the guarantor will be required to furnish payment in his stead. This example will use the example of a guarantee of the obligations of a borrower to a lender under a loan agreement.

In principle a guarantee is an accessory contract: that is, it depends on the existence of a primary obligation (for example, that of a borrower). In practice, though, many contracts which are given the title of guarantees are in fact free-standing obligations and include wording specifying that the guarantor's obligations are free-standing principal debtor obligations and will not fall away if the underlying contract fails for any reason.

Under a guarantee, the guarantor may guarantee just the borrower's obligation to make his payments under the loan agreement, or he may undertake responsibility not just for the repayment of the debt but also for performance of all other obligations of the debtor. This will cover any additional liability in damages which the debtor may incur.54

It should be stressed that the lender does not obtain any security as a result of the guarantee. All he has is a personal right against the guarantor should the conditions for payments being required to be made under the guarantee be met.

On the bankruptcy of the principal obligor, however, the lender does not have to deduct anything received from the guarantor from the amount of his proof. This gives some comfort and increases his chances of recovery. The guarantor cannot lodge a proof until the creditor has been paid in full (unless the creditor has unwisely accepted a guarantee for less than the full amount and the guarantor has paid his share).

Upon paying the guaranteed debt in full, the guarantor becomes subrogated to the rights of the lender. Should the lender hold any security over the borrower's assets, the guarantor will succeed to this. He will also usually have an indemnity from the borrower for sums paid under the guarantee.


Set-off may broadly be described as the discharge of mutual obligations to the extent of the smaller obligation. The right of set-off falls into a number of classes as set out below. Classes (1) to (3) all apply preinsolvency, and operate in a different fashion from set-off post-insolvency as in class (4). The most relevant of these to a structured finance lawyer are classes (2), (3) and (4).

  1. Legal set-off

    Legal set-off is the set-off of liquidated claims in court proceedings.

  2. Equitable set-off

    Equity extends this right of set-off, most importantly by permitting a claim for unliquidated damages to found a set-off.

  3. Banker's right of set-off

  4. This allows bankers to combine accounts of a single customer so that they can set-off the debt balance on one against the credit balance on another and pay only the difference (unless there is an agreement to keep them separate).

    In order for set-off to operate (and this applies to set-off generally), there must be mutuality between the parties, unless they have made an agreement to the contrary. Essentially, this means that the parties must have contracted with one another (or the bank account must be held) in the same capacities. If, for example, one account is held in a personal capacity, and another is held as trustee for a third party, the bank is not permitted to set one off against the other.

    It was made clear in National Westminster Bank v Halesowen Presswork and Assemblies Ltd55 that there is no requirement on the bank to give notice to or obtain the consent of the other party – where set-off is otherwise permitted – to the set-off.

    In the absence of agreement, a bank is also restricted in that it may not combine a debt presently due to the customer with a debt payable by the customer at a future date. Nor may the bank retain money presently payable to the customer so as to combine accounts at a future date.56

4. Contractual set-off (applicable pre and post insolvency)

a. Generally

Amendments were made to the Companies Law in 1993 so that contractual rights of setoff and netting are given statutory recognition so that lenders are protected in particular in the event of the insolvency or liquidation of a company. Section 112(2) provides that in the course of the winding up of a company:

"the collection in and application of the assets of the company & is without prejudice to and after taking into account and giving effect to the rights of preferred and secured creditors, to any agreement between the company and any creditors that the claims of such creditors shall be subordinated or otherwise deferred to the claims of any other creditors and to any rights of set-off or netting of claims between the company and any persons, whether conferred by agreement or law, and subject to any agreement between the company and any persons to waive or limit the same".

b. Ring fencing arrangement

By using limited recourse wording in contracts, creditors can agree that their recourse is limited to specific pools of assets and will not extend to other pools which may be available to satisfy other creditors or, often in the case of CDOs, to pay amounts owing in respect of preference shares. Segregated portfolio companies can also be used to ringfence separate portfolios of assets to specific creditors.

c. Subordination

Under a subordination agreement, two creditors of the same debtor agree between themselves that the claims of one of them (the "junior creditor") shall rank behind those of the other (the "senior creditor").


Searching at local registries

There is no central public registry in relation to Cayman Islands companies or charges created by such companies. Each company must, however, maintain a Register of Mortgages and Charges at its registered office in the Cayman Islands. Each Cayman Islands company must maintain a registered office in the Cayman Islands.

Court search

A search of the Cause List and the Register of Writs and Originating Process maintained by the Clerk of Courts Office in Grand Cayman will reveal if there are any court actions pending against the company.

Company incorporated under local law and asset within jurisdiction

Where security is created by a company incorporated in the Cayman Islands and the asset is situated within the Cayman Islands, it is necessary under section 54 of the Companies Law to register any charge created by the company in the Register of Mortgages and Charges of the company. This is a register maintained at the registered office of the company in the Cayman Islands and may be inspected by any member or creditor of the company.

Section 54 provides as follows:

"(1) Every limited company shall keep at its registered office in writing on one or more sheets, whether bound or unbound, a register of all mortgages and charges specifically affecting property of the company, and shall enter in such register in respect of each mortgage or charge a short description of the property mortgaged or charged, the amount of the charge created and the names of the mortgages or persons entitled to such charge.

(2) If any such property of the company is mortgaged or charged without such entry as aforesaid being made, every director, manager or other officer of the company who knowingly and wilfully authorises or permits the omission of such entry, shall incur a penalty of one hundred dollars.

(3) The register or mortgages required by subsection (1) shall be open to inspection by any creditor or member of the company at all reasonable times; an if such inspection is refused, any officer of the company refusing the same, and every director and manager of the company authorising or knowingly and wilfully permitting such refusal shall incur a penalty of four dollars every day during which such refusal continues; and in addition to the above penalty, the Judge sitting in chambers may, by order, compel an immediate inspection of the register."

Company incorporated under local law and asset outside jurisdiction

Where security is created by a company incorporated in the Cayman Islands and the asset over which security is taken is situated in the Cayman Islands, it is still necessary to register any security as a charge as described above.


Taking security over ships registered in the Cayman Islands is achieved through the grant of a deed of covenant which is supported by a registered statutory mortgage as required by the Merchant Shipping Laws.


There is no prescribed form to the taking of security over aircraft registered in the Cayman Islands, however, the general law relating to mortgages of chattels applies and it is necessary to register the mortgage in the Register of Aircraft Mortgages.


The equitable mortgage is drafted as a form of freestanding third party security deed to be granted by the company in respect of its subsidiary's obligations under a loan agreement. The drafting contemplates either the chargor being a corporate service provider holding shares on a charitable trust or an operating company owning full legal and beneficial title to the subsidiary's shares. In the case of any execution of the document by a corporate services provider holding shares pursuant to a declaration of trust, care should be taken to ensure that the declaration of trust includes rights for the trustee to charge the beneficial title to those shares pursuant to the terms of the share charge.

Clause 3 chargor covenants

It is important to create this freestanding principal payment obligation in this document and not to merely reference that the chargor is creating security in respect of the secured obligations.57 This wording is of course not required to the extent that the equitable mortgage is in respect of the chargor's own obligation under a loan agreement as opposed to the obligations of its subsidiary.

Clause 4.1

It is not necessary to specify the consideration where the mortgagor is the borrower and the mortgage is a condition precedent to withdrawing. The purpose of describing the security in Clause 4.1 as continuing is to exclude the rule in Clayton's case (1816) and provide that the security is not discharged by a payment which temporarily reduces the secured obligations to zero.

Clause 4.2(d)

This is only required to the extent that the charge is in respect of all of the shares in the company and that on enforcement of the charge, the chargor should be able to appoint new directors and officers.

Clause 4.2(e)

As well as Clause 4.2(e) which provides an undertaking for the company to register transfers of the charged shares to the chargee or its nominee, it is sometimes requested that the memorandum and articles of association of a company be amended to specifically permit any transfers of shares made pursuant to the charge. This is unnecessary and not particularly helpful in our view and, in particular, the chargor would not have any rights in respect of the memorandum and articles of association of the company prior to it becoming a shareholder in the company.

Clause 4.2

Often includes a form of irrevocable proxy to be given by the chargor to the chargee. Again, our view is that this is unnecessary. Any powers that the chargee should reasonably require to act in the name of the chargor are already provided under the irrevocable power of attorney contained at clause 10.1 of the charge.

Clause 4.6

Where the company is a single purpose SPV, the chargor often covenants to procure that the subsidiary's business will be run fully in accordance with the transaction documents and, in particular, that the subsidiary will not incur any material liabilities.

Clause 5.4

This clause is required. For any charge to also constitute an equitable mortgage it must include a provision allowing the mortgagee to convert the same into a legal mortgage at any time.

Clause 10

The equitable mortgage contains a power of attorney and it must be executed by deed on behalf of the chargor in accordance with the Powers of Attorney Law in order that it constitutes an irrevocable power of attorney which will outlast the chargor's insolvency.

Limited Recourse – Clause 12

Please note that in giving opinions that limited recourse clauses generally constitute obligations of non- Cayman entities and not obligations of Cayman obligors or chargors. It is therefore not meaningful to say that the Cayman company's obligations in respect of all such clauses are enforceable.

Schedule 1 – Share Transfer Certificate

Please note that the form of this share transfer certificate is different from the form Walkers has traditionally used and is more appropriate for use in connection with the creation of security over shares.


37 Holroyd v Marshall (1862) 10 HL Cas 191

38The rule from Dearle v Hall (1828) 3 Russ 1

39 Mutual Life Assurance Society v Langley (1886) 32 Ch 460

40 [2005] UKHL 41

41 [1979] 2 Lloyd's Rep 142

42 [1986] BCLC 242

43 [1997] 1 BLCL 63

44 [2004] EWCA Civ 670

45 [1986] 3 All ER 673

46 [1994] 1 BCLC 485

47 [1994] LQR 592

48 [1999] LQR 14

49 [1994] 1 BCLC 485

50 A. Berg Charges Over Book Debts: A Reply [1995] JBL 433-471 at p436

51 [2001] 2 A. 710

52 [1994] 1 BCLC 485

53 Insert details

54 See Moschi v. Lep Air Services Ltd [1973] AC 331

55 [1972] AC 785

56 See Jeffryes v. Agra and Masterman's Bank (1866) LR 2 Eq 674

57 See Lingard on Security pages 119-120

Cayman Islands

Wayne Panton, Partner


David Whittome, Partner


James Gaudin, Partner

British Virgin Islands

Jack Boldarin, Partner

Hong Kong

Hugh O'Loughlin, Partner


Rod Palmer, Partner

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