UK: Secured Lending Comparative Guide

1 Legal framework

1.1 Beyond general commercial and contract laws, what other specific laws and regulations govern secured finance in your jurisdiction?

The main legislation regulating the financial services industry in England and Wales is the Financial Services and Markets Act 2000 (FSMA), together with its applicable subordinate legislation. Section 19 of the FSMA provides that no person may conduct a 'regulated activity' in the United Kingdom unless it is authorised or exempt. Breach of this general prohibition is a criminal offence and may result in agreements that are entered into in breach of the general prohibition being unenforceable.

Activities which are regulated require authorisation and specific permissions from the Prudential Regulation Authority (PRA) and/or the Financial Conduct Authority (FCA), and include:

• providing investment advice;
• dealing (which is widely defined to include buying, selling, issuing etc) as a principal;
• dealing as an agent;
• arranging deals for clients; and
• managing investments.

These activities are regulated when conducted in relation to a wide range of financial instruments including:

• securities;
• debentures;
• exchange-traded and over-the-counter derivatives (irrespective of the underlying assets);
• insurance contracts; and
• deposits.

Where an entity is PRA and/or FCA authorised, it must:

• comply with detailed rules, including in relation to the conduct of its business and the maintenance of regulatory capital; and
• have detailed systems and controls and compliance procedures.

If a lender is not PRA and/or FCA authorised, it may be able to rely on an exclusion. Each particular FSMA regulated activity has its own unique set of exclusions (eg, the issue by a company of its own shares is specifically excluded from the activity of dealing as a principal but not from the activity of dealing as an agent); and there are also a number of general exclusions (eg, an exclusion for all activities that take place between group companies).

Commercial loans: Loans to a corporate entity for commercial purposes are not regulated in England and Wales and do not require authorisation by the PRA or FCA. However, some of the roles associated with bilateral and syndicated corporate lending will require authorisation, such as the account bank which holds deposits in the name of transaction parties.

Residential mortgages: Originators and administrators of certain types of mortgage contracts must be authorised by the PRA and/or the FCA. The types of mortgage or similar loan arrangements that require authorisation currently include:

• first charge mortgages over residential property (but not certain buy-to-let properties which are excluded);
• home reversion plans; and
• home purchase plans.

It does not, therefore, generally cover mortgages or similar charges over commercial property or non-residential land, subject to meeting certain specified criteria.

Consumer credit: Consumer credit is regulated in England and Wales by the FCA. The definition of 'credit' is set out in the FSMA (Regulated Activities) Order 2001 (as amended). It provides that credit includes a cash loan or any other form of financial accommodation. A regulated credit agreement is essentially any credit agreement of any value that is not an exempt agreement, entered into with any of the following:

• individuals;
• partnerships of two or three partners (unless all of the partners are bodies corporate); and
• other unincorporated bodies, such as clubs (unless they consist entirely of bodies corporate).

Credit agreements with companies or other bodies corporate will therefore not be regulated agreements under the FCA's consumer credit regime.

1.2 Do any bilateral and/or multilateral treaties or trade agreements have particular relevance for secured finance in your jurisdiction?

There are no specific bilateral and/or multilateral treaties or trade agreements with particular relevance for secured finance.

However, when it comes to cross-border lending, the United Kingdom is party to the Hague Convention and has applied to join the Lugano Convention, both of which deal with cross-border recognition of judgments.

The United Kingdom has also incorporated the terms of EU Regulation 593/2008 on the law relating to contractual obligations (the Rome I Regulation) into domestic law pursuant to the European Union (Withdrawal) Act 2018 and the European Union (Withdrawal Agreement) Act 2020.

In addition, the United Kingdom has entered into double taxation treaties with more than 140 countries (see question 9).

1.3 Beyond normal governmental institutions, are there regulatory or tax bodies that play a particular role in secured finance your jurisdiction? What powers do they have?

Subject to regulated activities in relation to consumers under various consumer credit acts and residential lending (see question 1.1), there is very little regulatory or other oversight from governmental or tax authorities in relation to secured finance in the United Kingdom. Lending is primarily governed and regulated by case law and statute; but even then, there are comparatively few restrictions outside the aforementioned area of consumer credit.

1.4 What is the government's general approach to secured finance in your jurisdiction? Are there government guarantee/support schemes available to lenders, and if so what are the qualifications to that support?

The general approach (again excluding specific areas relating to lending to individuals or residential mortgage lending), is very hands-off. During the COVID-19 epidemic, the government did step in to assist lending to small businesses with the Coronavirus Business Interruption Loan Scheme and the Coronavirus Large Business Interruption Loan Scheme, but these were extraordinary measures in extraordinary times and such assistance is no longer available for new loans.

2 Secured finance market

2.1 How mature is the secured finance market in your jurisdiction? Are the majority of the transactions purely bilateral and domestic, or is there an international syndicated market for secured financing under your domestic law?

The secured finance market in England and Wales is very mature, going back centuries, and English law is used as the basis for most domestic financing transactions. English law is also a common choice for multi-jurisdictional syndicated and bilateral loans – even ones not necessarily involving English companies, given market participants' familiarity and comfort with the law and court processes involved (including in relation to insolvency). As such, English law tends to be used as the basis of transactions globally, with a particular strength in emerging market transactions (in particular in the Middle East and Africa).

2.2 Are there any bodies in your jurisdiction/region that promote the use of standard documentation and best practices in secured finance transactions? If so, are these widely used and followed?

In the syndicated lending market, the Loan Market Association (LMA) documentation and guidance is widely followed and utilised. The LMA generally takes the lead in shaping the market on key issues such as Brexit and, more recently, London Interbank Offered Rate transition, with guidance and precedent documentation/language.

While lender friendly, the LMA precedent documents are widely used either, in whole or for particular drafting points and issues, by a wide range of market participants.

2.3 What significant secured finance transactions have taken place in your jurisdiction in recent times?

There are so many deals being done under English law that it becomes difficult to point to one or even a few as significant examples. The flexibility of English law in a lending context tends towards structures that can be tailored to non-standard situations, so many deals tend to have significant or unique elements.

3 Secured finance providers

3.1 Who are the key providers of secured finance in your jurisdiction? Is there a thriving alternative credit market (beyond bank lenders)?

The market is still dominated by bank lenders, although the last decade has seen the emergence of the alternative/direct lenders such as credit funds and investment managers, which have taken a significant share of the market. It is anticipated that this trend will continue, as has been the case in the US market.

3.2 What requirements and restrictions apply to secured finance providers in your jurisdiction? Do these vary depending on (a) the type of entity; (b) whether the lender is domestic or foreign?

No particular requirements or restrictions apply to secured lenders, provided that the lender is not also:

• a deposit-taking entity (which is a regulated activity); or
• engaged in certain types of activities relating to individuals (eg, providing consumer credit or residential mortgages), which requires the lenders involved to follow specific criteria in relation to their lending activities and, in many cases, to be regulated.

No distinction is made between different types of lenders, or between local and overseas lenders, with the same requirements applying to all lenders (although note the comments in question 9 in relation to withholding tax issues, which would apply to non-resident lenders without a permanent establishment in the United Kingdom).

4 Secured finance structures

4.1 What secured finance structures are most commonly used in your jurisdiction?

The most common structures still involve bilateral or syndicated financings made to an individual borrower or a number of group companies. These financings tend to be secured over shares or other assets, with an all-asset security package (through an all-asset fixed and floating charge debenture) being a common form of security to ensure full asset coverage.

One or more group companies may act as guarantors of such facilities (and such guarantees may be secured or unsecured).

Within the scope of such financings, the market supports a wide variety of structures and transaction types, usually dependent on the purpose (eg, real estate financing, acquisition financing) or asset class (again, real estate financing, asset-based lending, commodity lending).

4.2 What are the advantages and disadvantages of these different types of structures?

Each type of structure will be tailored to the particular purpose of the financing and so will aim to maximise the structural advantages.

4.3 What other factors should parties bear in mind when deciding on a secured finance structure?

On the part of a lender, consideration must be given to the type and scope of the assets available to ensure that there is sufficient security coverage to support the transaction from a risk perspective.

As a borrower/chargor, consideration should be given to whether there are specific limitations on its ability to create security over the required assets that would need to be dealt with in order to provide the lender with the requested security package. Assets such as receivables or inventory are often contractually restricted from having security granted over them by either a ban on assignment/ban on the creation of security in favour of a debtor or retention of title rights in favour of the supplier, both of which would limit the scope for the borrower/chargor to be able to establish a clear or unrestricted security interest in favour of the lender.

Equally, the nature of the entity may influence or dictate the type and scope of the security package, with investment-grade borrowers often being able to secure financing with less security than non-investment grade entities (or indeed none at all).

5 Security

5.1 What types of security interests are available in your jurisdiction? Which are most commonly used and which are recommended (if different)?

There are five types of security which may be taken in England and Wales:

• pledges;
• liens;
• charges;
• assignments by way of security; and
• mortgages.

These may be divided into two broad categories: possessory and non-possessory security.

Possessory security – pledges and liens: These types of security are rarely used in practice these days outside certain types of specialised financing because they require possession of the secured asset in order to be effective.

Non-possessory security – charges (fixed and floating): Charges are classified as either fixed or floating.

In order for a charge to be a fixed charge, the lender must have control over the asset (eg, the chargor should not be permitted to dispose of the asset without the lender's consent). The charge will attach immediately to that asset, enabling a sale or other disposal of such asset by the lender on enforcement.

Floating charges attach to a pool of assets that the chargor is free to deal with in the ordinary course of its business. Such assets often comprise a shifting pool, which may be turned over on a regular basis in the ordinary course of the chargor's business. Floating charges 'crystallise' and attach to the specific assets in the pool at that time:

• on the occurrence of certain events – normally:
• • an event of default;
  • an insolvency event; and/or
  • breach of a negative pledge covenant;
• either:
• • automatically (in the case of triggers including those relating to insolvency and the creation of security in breach of a negative pledge); or
  • following notice by the lender to the chargor (in relation to the occurrence of other events of default).

The key factor in determining whether a charge will be deemed by a court to be fixed or floating is the level of control that the lender has and exercises in respect of the asset in question. The court will look beyond whether a charge is labelled 'fixed' or 'floating'.

A lender's priority of payment on insolvency differs depending on whether that lender holds a fixed or floating charge. In summary, fixed charge holders rank ahead of all other creditors, whereas floating charge holders rank behind certain preferential creditors (but not unsecured creditors, save to the extent of the 'prescribed part' or shareholders), as well as behind any fixed charge holder's claims over the same assets.

While fixed charges are preferred for priority purposes, a lender will, under English law, still commonly seek to obtain a floating charge in addition to any other fixed security it may hold. This is because a holder of a 'qualifying floating charge' (ie, security, including a floating charge, over the whole or substantially the whole of the chargor's business, provided that the security document specifies that it is to be a qualifying floating charge) is entitled to appoint an administrator in an enforcement scenario (see question 11.1).

Non-possessory security – mortgages: In practice, this term is used to refer to charges by way of legal mortgage, commonly the form of security taken over real property. This is a unique form of security whereby the lender is deemed to have equivalent rights to a 3,000-year lease over the property.

Non-possessory security – assignment: An assignment by way of security is technically an assignment by way of mortgage (ie, a transfer of the legal title under the proviso that it will be retransferred upon satisfaction of certain conditions, such as payment).

Contractual rights may be assigned either:

• by way of a legal (statutory) assignment under Section 136 of the Law of Property Act 1925; or
• if the requirements set out in the Law of Property Act 1925 are not complied with, as an equitable assignment.

An assignment by way of security will be a legal assignment if it meets the following criteria set out under Section 136 of the Law of Property Act 1925:

• The assignment is in writing and signed under hand by the assignor;
• The assignment is absolute;
• The rights to be assigned are wholly ascertainable and do not relate to only part of a debt; and
• The assignment is notified in writing to the person against which the assignor could enforce the assigned rights (ie, the person that owes the obligation, often a debtor).

In practice, however, the distinction between a legal assignment and an equitable assignment is technical and has little bearing in the real world. In essence, the primary difference between a legal assignment and an equitable assignment is that the assignee under an equitable assignment cannot bring an action solely in its own name and will need to join the assignor into any enforcement action (which is a procedural step).

In addition to being one of the elements distinguishing between a legal and equitable assignment, service of notice on the counterparty will:

• prevent the debtor from getting good discharge by paying the amount owed to the assignor (instead, it can only get good discharge by paying to the assignee or as the assignee instructs); and
• serve to fix the rights of the parties against each other (preventing further set-off rights from arising).

5.2 What are the formal, documentary and procedural requirements for perfecting these different types of security interests (ensuring that they are enforceable against debtors and third parties)?

Security interests must be granted in writing and, in relation to interests in land, by way of deed; although common practice is for all security interests to be granted in a document which is then executed as a deed to avoid questions of the sufficiency of consideration.

Where security is granted by a company or limited liability partnership (LLP) incorporated in England and Wales, Part 25 of the Companies Act 2006 provides for registration with the registrar of companies of certain types of security interests created by companies registered in England and Wales. Failure to register within the appropriate timeframe will render that security interest void (insofar as the creation of security over the company's property is concerned) against any liquidator, administrator or creditor of the company.

Depending on the types of asset, other registrations may be required or at least advisable. For example, mortgages or legal charges over real estate located in England and Wales will not operate at law until registered at Her Majesty's Land Registry. Failure to effect that registration within any applicable priority period may affect the priority of the relevant security interests. In addition, there are applicable registers for certain IP rights and specialist registers for security over ships and aircraft.

Notice will often need to be served directly on third parties in relation to assets such as bank accounts, receivables and insurance policies in order to protect priorities and also manage certain issues such as rights of set-off.

See question 5.10 for more information on registration and perfection requirements.

5.3 What are the main types of collateral used as security in your jurisdiction and what specific points should be borne in mind regarding each?

English law permits security to be taken over multiple types of assets, either as part of a single composite security document or, where security is targeted at a single asset class, in a separate document. The most common asset classes seen in financing transactions governed by English law include:

• receivables;
• inventory;
• machinery and equipment;
• property/real estate;
• shares;
• bank accounts and cash;
• financial instruments;
• intellectual property; and
• goodwill.

In addition, as noted in question 5.1, a floating charge can be taken, which can create security over all assets owned and rights held by the chargor, regardless of whether the relevant assets or asset classes are identified in the document creating the security interests.

Specific requirements for certain of the asset classes above are considered further in questions 5.4 to 5.7.

5.4 Can security be taken over property, plant and equipment in your jurisdiction? If so, how?

Property: A charge by way of legal mortgage can be taken over both freehold and leasehold land. However, a mortgage can only be taken over real property owned/leased by the chargor at the time of entering into the security. Future interests in real property will be secured by way of fixed charge.

The charge must expressly state that it is to be by way of legal mortgage. A legal mortgage can only be created by deed. The document creating the mortgage must therefore:

• be dated and signed;
• state that it is a deed; and
• be witnessed where applicable.

It will not be sufficient merely to agree in the contract to create a legal mortgage.

If the mortgage is created over registered land, the security only takes effect as a legal mortgage once it has been registered at the Land Registry. The lender is then entered as proprietor of the land on the title. This binds all third parties, ensuring that they cannot take a transfer of the land free of the registered mortgage.

If the mortgage is created over unregistered land and is a first mortgage over a 'qualifying estate' (ie, freehold or leasehold with more than seven years to run), a registration requirement will be triggered in respect of the land. In such scenario, an application must be made to the Land Registry within two months of creation of the charge to register the land. Pending registration, the lender can take a deposit of the title deeds to protect the mortgage.

Plant and equipment: Security may be taken by way of fixed charge (provided that the lender exerts sufficient control over the secured asset) and/or a floating charge.

The ability to take effective control will depend, to an extent, on the size, type and location of the assets; and in practice, the security is often a floating charge, save over very large/fixed pieces of equipment. In order to successfully establish control, it may be wise to:

• affix notification plaques clearly to such assets over a certain value; and
• notify third parties that such assets have been charged.

5.5 Can security be taken over cash (including bank accounts generally) and receivables in your jurisdiction? If so, how?

Bank accounts and cash: Security can be taken by fixed charge (provided that the lender exerts sufficient control over the secured asset) and/or floating charge.

Given the requirement for control (see question 5.1), fixed charges over bank accounts are less commonly sought, but may be taken in certain types of deal (eg, asset-based lenders often look to take a fixed charge over collection accounts), and may be easier to obtain a fixed charge where no (or few) movements are anticipated (eg, cash collateral accounts).

For an account to be deemed to be subject to a fixed charge:

• written restrictions must be imposed on the company dealing with the balances; and
• such restrictions should state that the lender has control over the account from the date on which the security was created.

Any weakness in control in law or in practice may prejudice the fixed nature of any security.

Security may also be taken under the Financial Collateral Arrangements (No 2) Regulations 2003 ('Financial Collateral Regulations'). The Financial Collateral Regulations apply where ownership is transferred on the understanding that it will be transferred back on repayment of the debt. In order to fall within the scope of the Financial Collateral Regulations, collateral must be in the possession or control of the lender. If the transaction falls within the scope of the Financial Collateral Regulations, the lender will be entitled to enforce its security without the consent of any administrator, court or liquidator, even if a moratorium is in place.

Receivables: Receivables are typically secured in favour of a lender by way of charge or, where no restrictions exist in the documentation creating them, assignment.

A fixed charge may be obtained over receivables and the proceeds of those receivables paid into a bank account only if the secured party has sufficient control over those proceeds. The 'sufficiency' of control will be determined by the courts on a case-by-case basis, but the current view is that sufficient control will be obtained over receivables by exerting control over the bank account into which the proceeds of such receivables are paid. This is usually evidenced by creating a block over the collection account from day one so that the chargor will not have the authority to withdraw funds from that account without first obtaining the lender's consent for withdrawal (and in most cases, the lender will, in practice, be the one operating the collection account).

Unless the requirements for a legal assignment have been fulfilled (see question 5.1), an assignment by way of security will only take effect as an equitable assignment.

Provided that the receivables are sufficiently identifiable at the time the security is entered into, there is no need to enter into updated security or submit lists of receivables on an ongoing basis prior to enforcement.

Absent notification of either an assignment or charge, an underlying debtor may discharge its debt by payment to the assignor/chargor rather than to the secured party.

5.6 Can security be taken over company shares in your jurisdiction? If so, how?

Security can be taken by way of fixed charge (provided that the lender exerts sufficient control over the secured asset) and/or floating charge. Mortgages over shares may also be taken; but due to certain problems linked with the mortgagee becoming the owner of such shares, this form of security is less commonly used.

In practice, lenders perfect their share charge by:

• holding the original share certificates;
• obtaining a pre-executed blank stock transfer form from the shareholder; and
• amending the constitutional documents (if required) of the company whose shares are being charged to:
• • remove any right that the directors of the relevant company have to refuse to register a transfer in an enforcement scenario;
  • remove any rights of pre-emption on a sale/transfer of the shares; and
  • disapply any liens over fully paid shares.

The pre-executed blank stock transfer form and original share certificate(s) will be retained by the lender which could, on enforcement, complete the transferee section of the stock transfer form and deliver it to the company for registration.

Alternatively, security may also be taken under the Financial Collateral Arrangements (No 2) Regulations 2003 (see question 5.5).

5.7 Can security be taken over inventory/moveables in your jurisdiction? If so, how?

Security can be taken by way of a floating charge or a fixed charge (provided that the lender exerts sufficient control over the secured asset (which rarely happens in practice)).

Security over inventory poses certain practical issues. Control is often difficult to effect if the assets are required in the chargor's day-to-day business and accordingly, security over such assets is usually floating security.

In addition, there are concerns surrounding mixing inventory subject to a charge with unsecured inventory. There are also other issues – for example, where goods are stored on leased premises, consent from the landlord to access the premises may be required and/or a reserve taken in order to pay arrears of rent to enable access on enforcement.

Additionally, goods in transit – particularly if shipped internationally – can be difficult to enforce a charge upon.

5.8 What charges, fees and taxes (including notary and similar fees) arise from the perfection of a security interest? Do these vary depending on the type of assets used as collateral?

As of the time of writing, there is a fee of £23 (or £15 if filed online) per security document registered at Companies House for each English company or LLP granting security.

Other fees are payable when registering a charge against land at the Land Registry (fees are dependent on the type and value of the assets secured), and may also be applicable when registering security over intellectual property.

5.9 What are the respective obligations and liabilities of the parties under the security documents?

The principal obligation of the chargor(s) is to discharge the secured obligations upon the security becoming enforceable. This will often be expressed in a covenant to pay the relevant secured obligations as they become due. Security over the relevant asset classes will support that undertaking.

Security documents will often include representations relating to the status of the chargor(s) (particularly if it is third-party security and the chargor has not given the equivalent representations in the credit agreement) and the assets, as well as covenants relating to the assets. Common covenants may include:

• restrictions on the use and disposal of the assets;
• covenants relating to maintenance and repair;
• provisions relating to access and information; and
• where applicable, insurance requirements.

Such representations and warranties are not required in order to create the security interests, but will prescribe the actions of the chargor(s) in relation to the assets so as to protect the value of the assets and therefore the value of the security interest (and, in the case of a negative pledge, will ensure that no other competing security interests are created over the same assets).

To the extent that any or all of these representations and covenants are included with respect to the relevant chargor(s) and their assets in another transaction document (eg, the credit agreement), they need not also be set out in the security documents (and indeed, it is preferable not to duplicate the provisions and risk imposing slightly different and potentially competing requirements).

There are few, if any, obligations imposed on the lender in the security documents.

5.10 What other considerations should be borne in mind by all counterparties when perfecting a security interest in your jurisdiction?

Although there are no ongoing requirements in England to maintain the validity of security, most types of security granted by an English company or an LLP must be registered at Companies House for it to be valid against third parties (including in insolvency). It is market practice to register all security interests created by an English company or LLP. Depending on the asset class, certain other registrations may be required (eg, ships and aircraft have their own registers).

Registration at Companies House: Section 859A of the Companies Act 2006 stipulates that companies and LLPs must register security at Companies House within 21 days of its creation.

If the security is not registered within 21 days:

• the security will be void against third parties (including a liquidator/administrator);
• creditors that register subsequent security will have priority over the unregistered security;
• the debt secured by the charge becomes immediately payable; and
• if the company sells the charged asset, a purchaser could acquire the asset free from the security as "a purchaser for value without notice of the Security Interest" (since registration is deemed notice to all, it prevents this).

Although the Companies Act imposes this obligation on companies and LLPs, due to the fact that a lender's security could be void against third parties if not registered within the 21-day period, the lender's counsel usually undertakes to register the security at Companies House. By way of confirmation, this is not an 'ongoing' requirement, as security only needs to be registered at Companies House once; although there may need to be further registrations if additional security is created (eg, by way of an amendment or supplement). This needs to be considered on a case-by-case basis.

Registration in other registries: Depending on the type of asset secured, it may be necessary or advisable to register the security on other registers. Mortgages over registered real estate should be registered at the Land Registry and security over ships and aircraft must be registered at their port of registration and in the England and Wales Aircraft Mortgages Register, respectively. Certain security over IP rights may also be registered on the appropriate register. Such registration requirements are one-off events.

Notice to third parties: Notice will often need to be served directly on third parties in relation to assets such as bank accounts, receivables and insurance policies.

In the case of security by way of an assignment over receivables, unless and until notice of the assignment is served on the underlying debtors, such assignment will only take effect as an 'equitable assignment' (see question 5.1). From a practical perspective, this means that to enforce the receivables directly against underlying debtors without the involvement of the assignor, the lender will need to notify each third-party debtor prior to enforcement.

Service of notice on the counterparty will also prevent the debtor from getting good discharge by paying the amount owed to the assignor (instead, it can only get good discharge by paying to the assignee or as the assignee instructs).

Where a charge, rather than an assignment, is being taken, notice of the charge should also be served on the third party.

Notices (whether of assignment or charge) can be sent to third-party debtors on day one, informing such third parties that they may, should the borrower default, be required to pay their debt directly to the lender. However, commercial considerations often lead to an agreement that this notification is given only on the occurrence of a certain trigger event. Since the sending of these notices may be more complicated (or even impossible) if the company is in administration, notices to the debtor of the assignment or charge are usually served prior to an insolvency event (or on some other availability/default/event of default trigger).

It is market practice to inform the chargor's account bank of the existence of the charge on day one and to use the notice and (if a fixed charge is being sought) acknowledgment to set up account control/blocking mechanisms so that credit balances and proceeds of receivables, once paid into the chargor's account, are under the control of the lender.

Express notice of new security should also be given to the holders of any prior charges, particularly if these secure all moneys and liabilities. Registration at Companies House will not constitute constructive notice to a bank with a running account. Therefore, the bank will have priority for all advances it makes until it receives actual notice of the second charge. This is another reason for priority arrangements to be entered into where there is competing security.

6 Guarantees

6.1 What types of guarantees are available in your jurisdiction? Which are most commonly used and which are recommended (if different)?

Guarantees under English law will often comprise three elements:

• a guarantee of payment;
• a guarantee of performance; and
• an indemnity

An indemnity, like a guarantee, is a promise to be responsible for another's loss. Most standard form guarantees will include an indemnity to give the lender the advantage of both (in case the guarantee is not valid for some reason).

A guarantee is a secondary obligation to support the primary obligation of the guaranteed parties to the lender. By contrast, an indemnity is a primary obligation. This means that if, for any reason, the obligation between any guaranteed party and a beneficiary ceases to exist, the guarantee falls away and the beneficiary cannot rely on it; whereas the beneficiary can still rely on an indemnity in those circumstances. In practice, however, guarantees are drafted in a way which is intended to make it less likely that the guarantee would fall away as a result of changes to the underlying obligations and/or events affecting the guaranteed parties.

6.2 What are the formal, documentary and procedural requirements to perfect a guarantee?

There is no formal requirement for the creation of guarantees other that they:

• be in writing;
• are signed; and
• are supported by consideration.

While not legally necessary, it is common for standalone guarantees to be executed as a deed to ensure there are no concerns in relation to lack of consideration.

From the perspective of the guarantor, the directors of the entity will need to consider corporate benefit issues in granting the guarantee (and also the directors' own duties). As part of the corporate benefit consideration, the lender may often require that the shareholders of the guarantor approve the entry into the guarantee. This could be used to overcome challenges from the shareholders in the future and support the commercial benefit argument.

6.3 What charges, fees and taxes (including notary and similar fees) arise from the perfection of a guarantee?

There are no charges, fees or taxes which arise from the grant or perfection of a guarantee.

6.4 What are the respective obligations and liabilities of the parties under the guarantee?

An English law guarantee creates a secondary contractual obligation pursuant to which the guarantor guarantees the payment of the specified obligations or the performance of the specified obligations. Guarantees are normally 'on demand' and there is often a provision which states that it is not a requirement for the beneficiary of the guarantee to make a demand or claim on any other person before making a claim against the guarantor. Furthermore, the guarantee document will also often require the guarantor performs its obligations without being able to raise any defences that may have been available to the third party whose obligations had been guaranteed.

A standalone guarantee may also contain relevant representations in relation to the status of the guarantor.

6.5 What other considerations should be borne in mind by all counterparties when taking the benefit of a guarantee in your jurisdiction?

As noted in question 6.2, consideration will need to be given to the corporate benefit that would accrue to the guarantor in entering into the guarantee.

Guarantees may also be limited by financial assistance issues (see question 7) and limitations set out in the constitutional documentation of the guarantor on their ability to provide guarantees (although that is relatively rare).

7 Financial assistance

7.1 What requirements and restrictions apply with regard to the provision of financial assistance in your jurisdiction? What specific implications do these have for secured finance transactions?

Financial assistance is the giving of assistance (including by way of loans, guarantees, indemnities or the granting of security) by one company (the 'target') in connection with the purchase of shares in the target or the target's parent company (or another subsidiary of the target's parent company).

A private company may give financial assistance for the purchase of shares in itself or another private company, but a private company may not give financial assistance in connection with the acquisition of shares in a public company which is its parent (direct or indirect).

It is also prohibited for a public company to provide financial assistance, whether for the purchase of shares in itself or in a public or private company which is its parent (direct or indirect).

In practice, on an acquisition, public companies within the target group will be required to re-register as private companies.

8 Syndicated lending

8.1 Is the concept of an agent or trustee recognised in your jurisdiction? If not, how is security taken for multiple lenders?

Both concepts are recognised; however, security is generally shared by structuring the security so that it is held on trust by a trustee (normally a bank or third-party corporate trustee firm) on behalf of any number of lenders. There are no regulatory restrictions on lending entities taking the benefit of security against assets or a particular class of assets.

Such a security trustee relationship will be governed by security trust provisions, which may be contained in a standalone deed or, more commonly, incorporated into the facility agreement, security document or, if there is one, intercreditor agreement.

8.2 What requirements and restrictions apply with regard to syndicated lending in your jurisdiction?

Outside certain specific regimes (including those relating to consumer lending and real estate lending), there are very few requirements and restrictions. English law provides for significant flexibility in relation to the implementation of lending and security structures. The main provision to note in relation to the creation of a syndicated lending structure is the need to hold security under a trust structure referred to in question 8.1.

8.3 What other considerations should be borne in mind by all counterparties when engaging in syndicated lending in your jurisdiction?

A number of issues apply to funding and security matters generally that must be taken account of, including the following.

Corporate authority: Companies must act in accordance with their constitutional documents (articles of association). Generally, the constitutional documents of most companies (other than special purpose vehicles created for structured finance transactions) provide that they may take any action, often by including a statement that the company is a 'general commercial company', thereby empowering the company to do anything that its directors deem acceptable while considering their obligations. Where a lender benefits from a company acting beyond the scope of its authority (ultra vires), it should account to the company for this benefit. Therefore, due diligence should be performed/opinions obtained to verify that the company will not be acting ultra vires.

The Companies Act 2006 ('2006 act') abolished the objects clause in the memorandum of association of English companies. For a company incorporated under the 2006 act, the objects are unrestricted, unless restrictions are specifically set out in its articles of association. Existing companies incorporated prior to the entry into force of the 2006 act do not have to change their objects, but will be treated as if the existing objects clauses in the memorandum form part of its articles of association.

Corporate benefit and directors' duties: The 2006 act expressly sets out directors' duties that were previously found only in case law and supplements the existing common law duties. Under the 2006 act directors must have regard to a list of factors in exercising their duty to promote (in good faith) the success of the company.

Each transaction that a company enters into will need to be considered by the company's directors; and the company should enter into a transaction only if it will promote the success of the company for the benefit of its members as a whole.

Generally, it is not difficult to show that a transaction will promote the success of the company for the benefit of its members as a whole; although special consideration may be required where, for example, a subsidiary is providing a guarantee for a parent company's obligations as part of a lender's security package. However, if the group as a whole will benefit (eg, by obtaining greater or cheaper funding), it is still generally possible to show corporate benefit.

In order to negate potential shareholder claims that there was no corporate benefit, it is common (particularly where a guarantee is being granted) to require the company to pass a shareholder resolution confirming that:

• the shareholders have approved the transaction; and
• the transaction promoted the success of the company for the benefit of its members as a whole.

Negative pledges: It is common in England for lenders to obtain an undertaking from a borrower, guarantor or chargor not to grant security over its assets to someone else. These negative pledges are used to protect a lender's position, particularly if such lender is unsecured or only has floating charge security (since a fixed charge granted after the creation of the floating charge would otherwise rank ahead of a floating charge on insolvency).

Contractual restrictions: Customer contracts may commonly contain a ban on assignment (which would have the effect of preventing the creation of an assignment, either by way of transfer or by way of security) and, less commonly, a ban on the creation of security. Such a restriction may be absolute or may require consent (or, in some cases, only notification).

Subject to the application of the Business Contract Terms (Assignment of Receivables) Regulations 2018 (SI 2018/1254) ('Contract Terms Regulations'), any such restriction will be valid and enforceable, so if security is being taken over such contracts, they should be subject to diligence in order to determine the position. That is still the case in relation to contracts that fall outside the scope of the Contract Terms Regulations, but not to contracts which fall within their scope.

The Contract Terms Regulations have applied to all business-to-business contracts for the supply of goods, or intangible services that are entered into on or after 31 December 2018 and which are within the Contract Terms Regulations' territorial scope and are not excluded contracts. The Contract Terms Regulations apply to most contracts governed by the law of England and Wales or the law of Northern Ireland; there are exceptions for certain types of contract (eg, contracts creating interests in land, national security contracts, derivatives contracts, projects agreements or a Consumer Credit Act-regulated contract). Most relevantly, the Contract Terms Regulations do not apply to contracts with suppliers which are 'large enterprises' or 'special purpose vehicles'. A 'large enterprise' is defined to mean an enterprise which is not a sole trader, partnership, unincorporated association or which is a company or limited liability partnership that qualifies as a small or medium-sized company under relevant legislation. This reflects the government's intent for this legislation to help small and medium-sized enterprises access finance.

If the Contract Terms Regulations apply, any term in that contract will have no effect to the extent that it prohibits or imposes a condition or other restriction on the assignment of a receivable arising under that contract.

9 Taxes, charges and fees

9.1 What taxes and similar charges are levied in the secured finance context in your jurisdiction? Do these vary depending on whether the lender is a domestic or foreign entity?

There are generally no UK taxes which are unique to a secured lending context when compared to other forms of lending in the United Kingdom. However, lenders should be aware of certain key taxes which might apply and take any administrative steps in the United Kingdom where necessary.

UK lenders and non-resident lenders that have a permanent establishment in the United Kingdom will be liable for UK corporation tax on their returns from secured lending transactions, in the ordinary course. Non-resident lenders without a permanent establishment in the United Kingdom will not usually be subject to corporation tax in the United Kingdom solely as a result of lending into the United Kingdom; however, they will need to consider the UK withholding tax rules.

The United Kingdom levies withholding taxes on 'yearly interest' on UK source interest at a rate of 20%. 'Yearly interest' broadly means interest under a loan with a term of a year or more (or which may continue for a year or more). Determining UK source is a multifactorial process, but will typically occur, for example, when there are UK borrowers or another significant connection to the United Kingdom, such as security over real estate located in the United Kingdom. See question 9.2 for comments on exemptions to the UK withholding tax rules.

The United Kingdom levies stamp taxes on the transfer of certain stock, marketable instruments and chargeable securities. No UK stamp taxes are payable on the grant of ordinary loans, guarantees or security interests. UK stamp duty is generally payable by the transferee on a transfer of shares in a UK company at a rate of 0.5%. However, a transfer of UK shares to a lender (or its nominee) for no consideration as part of the enforcement of security over shares will not be subject to stamp duty, and thus stamp duties are not typically relevant for vanilla secured loan arrangements.

9.2 Are any exemptions or incentives available?

Exemptions from (and reductions to the rate of) withholding tax are available in the United Kingdom, but depend on the attributes of the lender involved. Lenders will ordinarily qualify for exemptions where they are UK banks or are non-UK tax resident, but have a permanent establishment in the United Kingdom that is subject to UK corporation tax. Non-UK tax resident lenders may qualify for relief where the lender is tax resident in a jurisdiction that has a treaty with the United Kingdom. However, in the United Kingdom, such reductions or exemptions for non-resident lenders are not automatic and require procedural formalities to be followed before the reduction or exemption is effective (see also question 9.4).

9.3 What other significant costs will be incurred by the counterparties in entering into a secured finance transaction? Do these vary depending on whether the lender is a domestic or foreign entity?

Other than in relation to the taking of security over real estate, there are no significant costs for the counterparties in entering into a secured finance transaction in England and Wales.

When registering the security over real estate at Her Majesty's Land Registry, there will be fees which are linked to the value of the assets being secured.

9.4 What strategies might the counterparties consider to mitigate their tax and other liabilities in the secured finance context?

Withholding taxes are generally the key consideration when lending in the United Kingdom. Where a lender is expecting to make multiple loans into the United Kingdom, it will usually be advised to register under Her Majesty's Revenue & Customs Double Taxation Treaty Passport Scheme, which is a form of pre-approval for that lender. This pre-approval simplifies the administrative procedure the borrower must undertake to receive approval from the UK tax authorities to pay interest without withholding tax. However, that approval is still necessary for each and every loan made into the United Kingdom by the lender.

Otherwise, as taxes are not particularly burdensome in the United Kingdom in relation to secured lending, strategies to minimise the cost of taxes and fees are uncommon and loan documents typically seek to protect the lenders and their margin from unexpected taxes.

10 Judicial enforcement

10.1 In the event of default, what options are available to enforce a security interest or guarantee? Is self-help available in your jurisdiction in connection with the enforcement of security (if so, in what circumstances) or must enforcement action be pursued through the courts?

The usual steps that are taken to enforce security over particular types of assets before insolvency are set out below. Once a company has gone into administration, there is a moratorium on taking steps to enforce security without the consent of the administrator or the court. That moratorium can apply to restrict the service of notices and other steps of the type outlined below.

Receivables: The lender will usually be able to exercise a power of sale over receivables.

Prior to enforcement, lenders should ensure that all of the chargor's customers have been notified of the assignment or charge (instructing (among other things) that payment must be to the lender instead of the chargor) as soon as possible, to the extent that such notice has not already been given. Lenders should also take any other practical steps necessary to ensure that the receivables can continue to be collected following default (eg, establishing a new bank account into which proceeds of receivables are to be paid – although this should not be necessary where fixed security/cash dominion arrangements are already in place), and appointing a new servicer (if there is one).

Inventory/stock: The lender will usually be able to exercise a power of sale over inventory.

After giving notice of the event of default and crystallising the floating charge, lenders should also consider taking steps to secure the inventory currently in the chargor's possession subject to the floating charge. These may include:

• physically securing the goods;
• placing stickers on goods; and/or
• notifying the chargor's customers, trading partners and warehouse owners/managers of the security.

If inventory is subject to retention of title (ROT) claims by suppliers, this can complicate the process, although the ROT issues (where inventory forms part of the borrowing base) should have been considered and dealt with at the structuring stage of an asset-based lending deal.

Plant and machinery: The lender will usually be able to exercise a power of sale over inventory.

Care will need to be taken from the outset to ensure that items of high value are specifically identified in the fixed charge definition and are separated out from other items of plant and machinery which are of a more transitory nature (eg, vehicles and office furniture). The lender will need to ensure that it has the power to control the items of plant and machinery purported to be covered by the fixed charge (eg, restricting the chargor's ability to dispose of the asset) and it is advisable a plaque or label should be affixed, stating the lender's interest.

Real estate: In order to enforce security over real estate prior to insolvency, a lender will often look to sell the property pursuant to the power of sale or appoint a fixed charge receiver to sell and manage the property.

A lender may also take physical possession of the property either peacefully (if this is possible) or, more usually, by bringing a court action for possession. Possession is generally required in advance of a proposed sale with vacant possession; or the lender may simply want to hold the property for a period prior to sale. It typically takes about eight weeks between the filing of a claim for possession and the first hearing, although the possession order may not be made at the first hearing. The existence of a tenancy binding on the lender, any defences available to the chargor or land which contains a dwelling house can further complicate and delay the process.

Where a property is occupied, it is not possible to take possession of the property; but a lender can take legal possession by requiring the tenant(s) to pay rent to the lender instead of to the chargor. Where the property is let, a lender will normally wish to avoid possession and will instead appoint a receiver.

Lenders should be aware that entering into possession (as a mortgagee in possession) comes with certain responsibilities and liabilities (eg, to take reasonable care of the property and to maximise rental income; and it is possible that the lender will have to assume liability for environmental contamination). For this reason, many lenders choose to appoint a receiver to sell the property.

Once a lender or a receiver is in possession of the property, it is under a duty to obtain the best price reasonably obtainable for the property. There is a prohibition against self-dealing, meaning that the lender cannot sell the property to itself. The time taken to complete the sale will depend on, among other things, the state of the market at the time. The lender or receiver must account to the chargor for any surplus proceeds following a full repayment of the amounts owed to the lenders.

Floating charges

Even pre-insolvency, where possession is taken by (or on behalf of) the holder of a floating charge of assets subject to the charge, priority must be given to preferential creditors.

The holder of a qualifying floating charge over all or substantially all of the company's assets may also wish to consider the appointment of an administrator (see question 11.1).

10.2 How long does the enforcement process generally take and what steps does this typically involve? Do these vary depending on any applicable requirements or restrictions (eg, requirement for public auction or regulatory consents)? Do these vary depending on whether the lender is a domestic or foreign entity?

The timeframe for completing the enforcement process will depend on the type of enforcement route taken and the relative complexity involved in realising the assets in question (eg, depending on the size and complexity of the company in question). As a result, it is difficult to estimate how long any particular enforcement procedure will take.

Generally speaking, however, assets that involve self-help remedies (eg, receivables, shares, contracts) rather than court processes or third parties (eg, land) can be enforced quite expediently.

10.3 What other considerations should be borne in mind when enforcing a security interest or guarantee in your jurisdiction?

Retention of title: ROT is a contractual clause stipulating that, although goods are delivered into the custody or control of the buyer, title will not pass to the buyer until some condition (usually payment) is fulfilled.

Where there is a charge (usually a floating charge) over the company's inventory, goods that are subject to a valid ROT clause may fall outside of the charged assets.

The validity of a ROT clause depends on various factors, including whether the goods are:

• mixed;
• processed;
• affixed to other assets (in a way which makes it impossible to remove them);
• made into a new product; and/or
• sold on to a third party.

A simple ROT clause is likely to succeed if specific goods which have not been paid for can be identified.

When goods are mixed up with other goods or changed in any way (eg, if they are used to manufacture a different product), it becomes more difficult for the supplier to trace its title in those goods or claim an interest in the finished product. Whether the ROT claim is still valid depends on:

• the extent of the alteration to the original product; and
• whether the supplier knew that the alteration would occur.

Extended retention of title (EROT): Where a lender is taking security over receivables, any valid retention of title claim (on the underlying asset which is the subject of the receivable) which extends by contract to the proceeds of sale of the goods will rank ahead of that lender's security interest in the proceeds.

In order to get a valid EROT interest in receivables, the EROT provision must be very carefully drafted, meeting the following requirements:

• There is agreement between the parties that the company is acting as bailee for the supplier and that a fiduciary relationship exists (ie, the company is effectively trustee for the supplier's goods);
• The company is stated as being the supplier's agent if the company sells the goods; and
• There is a contractual requirement that the proceeds of the sale of goods be held separately from the other income/moneys of the company.

In addition, if the supply contract incorporates a credit period, there is an inference that, within the time period, the company is free to use the sale proceeds and this may defeat the supplier's EROT claim in the proceeds. Finally, there is a view that any EROT claim will be a registrable security interest which, if not registered when entered into by an English company, will be void.

Such extensive arrangements are not common in England.

Set-off: Mutual debts owed between a company and a third party may, in certain circumstances, be set off against each other by way of:

• a contractual set-off provision;
• equitable set-off (debts arising from the same or a closely related transaction);
• legal set-off (debts arising from two liquidated certain claims due at the commencement of legal proceedings and where the parties have not contracted out of legal set-off); or
• insolvency set-off. Insolvency set-off is mandatory and applies automatically if:
• • a company is in liquidation; or
  • the company is in administration and the administrator has given notice of its intention to make a distribution.
• Insolvency set-off:
• • does not require any contractual provision;
  • cannot be excluded; and
  • applies to any mutual credits, debts or dealings between the company and the third party that pre-date the insolvency.
• If set-off applies, this may have the effect of reducing the amount of a debt owed to an insolvent company by a third party. This could result in the value of a lender's claim against the insolvent company being reduced if the lender owes money to the insolvent company.

Leases and hire-purchase agreements: Assets which are subject to leases or hire-purchase agreements will not be owned by the company and will fall outside of the scope of the lender's security.

10.4 Are direct agreements with contractual counterparties well understood in your jurisdiction?

Such arrangements are understood, but generally have a limited usage in most transactions; they are primarily found in project finance transactions where there is an ability to step into the shoes of the parties in order to ensure the continuity of the performance of the underlying obligations.

10.5 What other avenues are available to a lender to safeguard its position in connection with security or guarantees?

Most of the common protections have been mentioned elsewhere, including:

• the service of notices on counterparties to perfect the security (see question 5.10);
• the use of negative pledges (see question 8.3); and
• the registration of security at Companies House (see question 5.10).

Other practical steps to take include ensuring that there is sufficient information flow in order to be able to monitor compliance with the terms of the security and covenants (if any), to ensure that issues are addressed at an early stage.

11 Bankruptcy

11.1 How (if at all) do bankruptcy proceedings impact on the enforcement of security by a creditor?

The main types of insolvency proceedings to which a company may become subject under English law are administration, receivership and liquidation. Established restructuring tools –such as company voluntary arrangements, schemes of arrangement, restructuring plans and standalone moratoria – also exist. In particular, lenders may consider the appointment of an administrator or receiver (where available) as an option for enforcing their security.

An English registered limited liability partnership (LLP) may also enter administration, liquidation and administrative receivership in a similar way to a company, albeit with certain modifications. Similarly, schemes of arrangement, restructuring plans, partnership voluntary arrangements (ie, a modified version of a company voluntary arrangement) and standalone moratoria are also available to LLPs.

Administration: An administrator (being a licensed insolvency practitioner) can be appointed out of court with respect to:

• a company incorporated in England and Wales or Scotland;
• a company:
• • with its 'centre of main interests' (COMI) in the United Kingdom;
  • incorporated in a European Economic Area (EEA) state; or
  • not incorporated in an EEA state but with its COMI in an EU member state other than Denmark); or
• an 'establishment' in the United Kingdom.

The administrator can be appointed by the company, its directors or the holder of a qualifying floating charge. Alternatively, an administrator can be appointed by the court upon the application of the company or its directors or one or more of the borrower's creditors. The holders of qualifying floating charges must be given prior notice of the intention to appoint an administrator.

The administrator has the power to dispose of assets (including assets subject to a floating charge), and must perform its functions in the interests of the company's creditors as a whole (regardless of the wishes of the secured lenders that made the appointment) with the aim of achieving one of the following objectives:

• rescuing the company as a going concern; or
• if that is not practicable, achieving a better result for the company's creditors as a whole than would be likely if the company were wound up; or
• if that is not practicable, realising property to make a distribution to secured or preferential creditors, as long as that will not unnecessarily harm the interests of the creditors as a whole.

A pre-pack administration sale is often used to sell the assets of an insolvent company. A pre-pack operates whereby marketing and negotiations for a sale of the company's business and assets take place before administration, with the sale occurring shortly after the administrator is appointed. This often enables the value of assets – in particular, brands – to be preserved.

It is a statutory requirement for an administrator to report to creditors on a regular basis and in practice, the administrator will also regularly engage with the secured lenders. Lenders should be aware of the following effects of administration:

• Upon administration, the company becomes subject to a statutory moratorium that prevents creditors enforcing their claims against the company without the prior consent of the administrator or the court, including with respect to the enforcement of security. The moratorium does not apply to any security arising under a financial collateral arrangement within the meaning of Financial Collateral Arrangements (No 2) Regulations 2003.
• If a company is subject to an outstanding winding-up petition (see "Liquidation" below), neither the company nor its directors can use the out-of-court route to appoint an administrator. A court application can be used in this circumstance and a qualifying floating charge holder can still use the out-of-court route.
• A company can enter administration despite a secured creditor having appointed a receiver to certain of the company's assets, but any so appointed receiver must vacate fixed charge office if the administrator requires it to do so.
• Any standalone moratorium (see "Standalone moratorium" below) will automatically come to an end on the company going into administration.

The distribution of realisations of a company's assets will be subject to the statutory waterfall.

Receivership: Where a lender holds a fixed charge over certain assets (including real estate), the lender may be able to appoint a fixed charge receiver (or a Law of Property Act 1925 (LPA) receiver) over those assets. Usually, a receiver will be appointed pursuant to the terms of the relevant security document. In such a case the terms of the receivership (including the powers of the receiver) are governed by the terms of the security document. Additionally, the LPA provides a charge holder with a statutory right to appoint an LPA receiver.

Broadly, the receiver's role is to take custody of the charged assets and manage them. Ordinarily, a receiver will also be given the power to realise the assets that are the subject of the fixed charge in order to discharge the relevant company's indebtedness to the relevant creditor.

Although the receiver owes a residual duty to the borrower as a result of the borrower's interest in the equity of redemption in the charged assets, its duty is primarily owed to the appointing creditor. Accordingly, lenders generally have a degree of input over the receivership process and sale strategy to be adopted with respect to the charged assets, and the receiver will consult with the lenders regularly. However, care must be taken by a lender not to inadvertently become a mortgagee in possession.

Administrative receivership: An administrative receiver can be appointed by creditors which have security over the whole or substantially the whole of the company's property.

Since the entry into force of the Enterprise Act 2002, the concept of administrative receivership has been effectively abolished as a remedy for the holders of floating charges created after 15 September 2003, subject to some important but limited exceptions (primarily relating to capital markets transactions); and as a result, administrative receiverships are now rare in practice in financing transactions.

Liquidation: Compulsory liquidation (or winding-up) involves the appointment by the court of a licensed insolvency practitioner as liquidator, typically upon the application of a creditor, to wind up the company. Compulsory liquidation is a terminal process whereby the liquidator's role is to collect in, realise and distribute the assets of the company to its creditors according to their ranking; there is no rescue element. As such, compulsory liquidation is not usually a remedy favoured by secured lenders if other more convenient, and potentially less value-destructive, enforcement options are available.

Voluntary liquidations are out-of-court processes for placing a company into liquidation and are instigated by a resolution of a company's members. A creditors' voluntary liquidation is used for an insolvent entity and a members' voluntary liquidation is used to liquidate solvent entities, requiring the directors of the company to swear a statutory declaration of solvency. Written notice is to be given to the holder of a qualifying floating charge prior to the company passing the resolution for voluntary liquidation, at which point the qualifying floating charge holder has the option to appoint an administrator. In a creditors' voluntary winding-up, the directors of the company must seek a nomination from creditors as to the individual to be appointed as liquidator. The members may nominate an insolvency practitioner to be the liquidator, but the creditors can override this choice and elect a different liquidator.

Once a liquidator is appointed:

• the powers of the directors of the company cease;
• the conduct of the liquidation is in the hands of the liquidator; and
• the secured creditors have no control rights with respect to the liquidation.

The company usually ceases to trade and the liquidator has the power to do all things necessary to realise the assets and distribute the proceeds to creditors according to the priority of claims.

Secured lenders can enforce their security while the company is in liquidation, although they cannot usually appoint an administrator. With respect to a compulsory liquidation only, there is an automatic statutory moratorium (ie, a stay on commencing or continuing legal proceedings against the company without the leave of the court).

Company voluntary arrangement (CVA): A CVA is a compromise or other arrangement agreed by a company with its creditors, which may involve:

• a delayed or reduced payment of debt;
• capital restructuring; or
• an orderly disposal of assets.

A CVA is a legally binding agreement which, subject to achieving the necessary thresholds, enables all unsecured creditors (even those that did not vote in favour of the arrangement) to be bound by the arrangement from the date it is approved. Secured lenders are not bound without their consent, but will usually be consulted about the process because their consent and cooperation are often required for a viable CVA. A CVA does not result in an automatic statutory moratorium; however, a company can use the standalone moratorium (see "Standalone moratorium" below) while a CVA proposal is being considered. A creditor is unable to take steps against the company that are prohibited under the terms of an approved CVA.

A proposal for a CVA should nominate a qualified insolvency practitioner to supervise the CVA; and once the CVA is approved, the supervisor will monitor its implementation.

Scheme of arrangement/restructuring plan: A scheme of arrangement is similar to a CVA in that it binds the creditors should the requisite voting threshold be met. However, the court plays a greater role:

• approving the relevant meeting of creditors to vote on the scheme; and
• if the creditors approve of the proposed scheme, sanctioning it only if the court is satisfied that the proposed scheme is fair and reasonable, and represents a genuine compromise or arrangement between a company and its creditors and/or members.

Secured creditors may enforce their security prior to the scheme becoming effective; but once the scheme of arrangement has been sanctioned by its members, creditors and the court, it will bind all creditors and may, depending on its terms, restrict the rights of secured creditors.

A restructuring plan is similar to a scheme of arrangement, with the main differences as follows:

• A restructuring plan is available only where a company has encountered or is likely to encounter 'financial difficulties' that are affecting or may affect its ability to carry on business as a going concern. A scheme of arrangement is also available for solvent companies.
• The required majority is 75% or more by value of creditors present and voting at the meeting(s) of each class of creditors, there being no additional requirement for that majority to be in number.
• A restructuring plan benefits from a cross-class cramdown provision which allows the court to sanction the plan at a hearing even if a dissenting group in a class of creditors or members results in the plan not being agreed by 75% in value of that class. However, this applies only where:
• • those creditors would be no worse off under the plan than they would be in the event of the 'relevant alternative', which is whatever the court considers would be most likely to occur if the plan were not sanctioned; and
  • another class of creditors would receive payment or have a genuine economic interest in the event of the relevant alternative.
• This is subject to the court's overarching discretion not to confirm the plan if it is not considered to be just and equitable (even where these conditions are met).

Standalone moratorium: The standalone moratorium is available to provide eligible companies with a short breathing space from enforcement action by certain creditors while they organise their business affairs in order to achieve a rescue. The eligibility of a company is assessed by considering the type of entity and its regulatory and economic status. An eligible company may obtain a moratorium by either filing certain documents with the court or making an application to the court. During the period of moratorium, the directors remain in control of the business (unlike administration) and a monitor (being a licensed insolvency practitioner) is appointed to ensure compliance with the statutory terms of the moratorium. The moratorium initially lasts for 20 business days but can be extended if certain conditions – including payment of certain debts – are satisfied. The moratorium is largely similar to that which applies in an administration; in particular, no steps may be taken to enforce any security over the company's property except with the permission of the court unless, among other things, the security is created or otherwise arising under a financial collateral arrangement (as defined in the Financial Collateral Arrangements (No 2) Regulations 2003).

The standalone moratorium (provided that the statutory criteria are met) can be used in combination with a CVA, scheme of arrangement or restructuring plan such that proposals are made while the company is subject to a moratorium; however, once approval/sanction of any of these arrangements is granted, the standalone moratorium will terminate.

11.2 In what circumstances can antecedent transactions be unwound for preference? What other similar measures apply in this regard?

Transactions at undervalue (Sections 238 and 423 of the Insolvency Act 1986): A liquidator or administrator has the power to challenge a transaction entered into by a company prior to the entry into liquidation/administration on the basis that it was at an undervalue.

The requirements for a liquidator or administrator seeking to set aside any transaction at an undervalue are as follows:

• The company made a gift or otherwise entered into a transaction on terms that provided for the company to receive no consideration, or for a consideration the value of which, in money or money's worth, was significantly less than the value, in money or money's worth, of the consideration provided by the company;
• The transaction was entered into in the two years ending with the onset of the insolvency of the company; and
• At the time the transaction was entered into, the company was unable to pay its debts, or became unable to pay its debt in consequence of the transaction. There is a presumption of insolvency if the creditor is 'connected with the company'.

It is a defence to a claim that there has been a transaction at an undervalue if it can be shown that:

• the company entered into the transaction in good faith and for the purpose of carrying on its business; and
• at the time it did so, there were reasonable grounds for believing that the transaction would benefit the company.

There is some case authority to suggest that the creation of security over a company's assets cannot be a transaction at an undervalue because the mere creation of security over assets does not deplete them or diminish their value; although some subsequent cases have questioned this reasoning and the specifics of a particular transaction will need to be considered in order to identify any risk of future challenge on this basis.

If the court finds that a transaction at an undervalue has taken place, it may make any order it thinks fit to restore the position to what it would have been if the company had not entered into the transaction, including the release or discharge of any security given by the company. Equally, the court has discretion to refuse to make an order if it considers it is just to do so.

Preferences (Section 239 of the Insolvency Act 1986): A liquidator or administrator has the power to challenge anything which the insolvent company has done or suffered to be done as a preference where the liquidator or administrator can satisfy the following conditions:

• The challenged action has the effect of putting one of the company's creditors (or a surety or guarantor for any of the company's debts or liabilities) into a position which, in the event of the company going into insolvent liquidation, will be better than the position they would have been in had that action not been taken;
• The preference was given within six-month period ending with the onset of insolvency of the company or, if the preference is given to a person who is 'connected with the company', within the two-year period ending with the onset of insolvency;
• The company which gave the preference was influenced in deciding to give it by a desire to produce the preferential effect in relation to the person in question. There is a presumption of the existence of such a 'desire to prefer' if the creditor is 'connected with the company'; and
• At the time the preference was given, the company was unable to pay its debts or became unable to pay its debts in consequence of the preference.

The granting of security to a creditor which was previously unsecured may be a preference if the requisite desire to prefer exists. The court may make a similar order to that referred to above with respect to transactions at an undervalue if it finds a preference has taken place.

Transactions defrauding creditors (Section 423 of the Insolvency Act 1986): Unlike other antecedent transactions, this provision has broad reach, as there is no requirement for the company to be insolvent and challenges can be made by any victim prejudiced by the transaction, as well as an administrator or liquidator.

A transaction can be challenged as defrauding creditors if:

• the transaction is entered into at an undervalue (ie, it satisfies the conditions for a transaction at an undervalue as set out above); and
• the purpose of the transaction was to put assets beyond the reach of the person who is making or may make a claim against the company or otherwise prejudices a person's interests in relation to such claim.

Unlike other antecedent transactions, there are no time limitations with respect to when the transaction took place.

Avoidance of floating charges (Section 245 of the Insolvency Act 1986): A liquidator or administrator may seek to avoid a floating charge entered into by the insolvent company, on the basis that it did not secure fresh consideration.

A floating charge created by the company within the 12-months period ending with the onset of insolvency – or, if the charge was created in favour of a person who is 'connected with the company', within the two-year period ending with the onset of insolvency – is invalid, except to the extent that consideration for the creation of the charge is given at the same time or after creation. Consideration may consist of:

• money paid to the company;
• goods or services supplied to the company; or
• the discharge or reduction of any debt of the company at the same time as, or after, the creation of the charge.

That is, the floating charge must secure fresh consideration in order to avoid being invalid.

A floating charge created in favour of a person not connected with the company will be invalid only if the company was, at the time the charge was created, unable to pay its debts, or became unable to pay its debts in consequence of the transaction under which the charge was created. There is no such requirement in cases where the charge-holder is a connected person.

Extortionate credit transactions (Section 244 of the Insolvency Act 1986): A liquidator or administrator may challenge a transaction where credit was provided to the insolvent company on the grounds that it was extortionate. The liquidator or administrator will need to satisfy the following conditions:

• The transaction was entered into in the three-year period ending on the date on which the company went into administration or liquidation; and
• Having regard to the risk accepted by the credit provider:
• • the terms of the transaction were such as to require grossly exorbitant payments to be made in respect of the provision of the credit; or
  • it otherwise contravened ordinary principles of fair dealing.
• There is a presumption that the transaction was extortionate unless the defending credit provider proves the contrary.

11.3 Are any types of entities excluded from the bankruptcy regime in your jurisdiction? If so, what alternative regimes apply?

The United Kingdom has a number of special insolvency regimes which apply to certain financial service firms and companies in other industries – in particular, those which are central to UK infrastructure and consumers.

In terms of financial institutions, it is likely that the insolvency of banks (deposit-taking and investment banks) or building societies would be managed by special banking insolvency procedures under the Banking Act 2009 rather than the Insolvency Act 1986, including 'stabilisation options' to avoid the insolvency of a failing bank.

Other entities also have industry-specific special administration regimes (in certain cases, in addition to insolvency processes already available under the Insolvency Act 1986) available in case of insolvency, including:

• the UK National Health Service;
• energy companies;
• water and sewage companies;
• the UK National Air Traffic Services;
• railway operators;
• a universal postal service provider (currently Royal Mail);
• education bodies;
• private registered providers of social housing;
• payment institutions and electronic money institutions; and
• operators of inter-bank payment and securities settlement systems.

12 Governing law and jurisdiction

12.1 What law typically governs secured finance agreements in your jurisdiction? Do any specific requirements apply in this regard?

The law governing the main finance documents is usually that of England and Wales, which is a common choice of governing law for local and international financing transactions. Security in relation to assets located in England and Wales will be governed by English law and, as a result, all-asset security interests that an English entity signs up to will be governed by English law. However, where the English entity owns significant assets overseas, it is not uncommon (and may indeed be necessary) for security over such assets to be governed by the laws of the jurisdiction in which such assets are located (and in separate local law documents).

12.2 Is a choice of foreign law or jurisdiction valid and enforceable? In the case of a choice of foreign law of jurisdiction, will any provisions of local law have mandatory application? Are submission to jurisdiction provisions that operate in favour of one party only enforceable?

English courts will (almost) always recognise the chosen law of a document as the governing law for contractual obligations under that document. The court's view will be determined by the Rome I Regulation as it has been incorporated into English law. Notwithstanding the above, not all issues relating to a document fall to be determined by its governing law and in relation to any issue which would otherwise fall to be so determined, the applicable rules of the governing law:

• may not be applied if that would be incompatible with the public policy of the forum;
• may be overridden by overriding mandatory laws of the forum or (where they would render performance of the documents unlawful) of the country where the relevant obligation is to be performed; and
• may, where all other elements relevant to the situation at the time of the choice of governing law are located in a country ('first country') other than the country whose law has been chosen (or in one or more EU countries when the law of a country other than the United Kingdom or an EU member state has been chosen), be overridden by provisions of the laws of the first country (or, as applicable, retained EU law) which cannot be derogated from by agreement.

When considered by the English courts, the submission by a party to the jurisdiction set out in a document to settle any disputes arising out of that document will, to the extent relevant in determining questions of jurisdiction, be recognised by the English courts as a valid submission. English courts have upheld one-way exclusive jurisdiction clauses and these types of clause are still relatively common in documents governed by English law; although perhaps less so than before Brexit, given uncertainties as to whether such clauses would be recognised overseas, particularly in EU courts.

12.3 Are waivers of immunity enforceable in your jurisdiction?

Generally, waivers of immunity are not enforceable in England and Wales.

12.4 Will foreign judgments or arbitral awards be enforced in your jurisdiction? If so, how?

The question of whether (and how) foreign judgments will be enforced in England and Wales will depend to a large degree on the jurisdiction in question and what legal relationships there are between England and Wales and that jurisdiction.

For example:

• judgments in many Commonwealth countries may be enforced pursuant to the Administration of Justice Act 1920 or the Foreign Judgments (Reciprocal Enforcement) Act 1933 (as applicable, depending on the relevant jurisdiction);
• judgments in EU and European Free Trade Association countries may be enforced pursuant to either the Hague Convention on Choice of Court Agreements 2005 or relevant bilateral treaties in place with the United Kingdom (depending on the jurisdiction in question); and
• judgments in the United States and other countries not caught within the above bullets will be subject to common law rules.

Arbitral awards fall under a different regime and may, depending on the jurisdiction, be easier to enforce.

13 Trends and predictions

13.1 How would you describe the current secured finance landscape and prevailing trends in your jurisdiction? Are any new developments anticipated in the next 12 months, including any proposed legislative reforms?

The secured finance landscape in England and Wales is very robust and – notwithstanding the impact of Brexit on certain aspects of financial transactions (eg, recognition of judgments across the European Union) – English law remains a go-to choice for domestic and international transactions, given market participants' familiarity with, and confidence in, English law as a basis of transactions (as well as their confidence in the jurisdiction of the English court system).

There are no significant legislative reforms on the horizon, although the impact of two recent statutory changes – the implementation of the UK National Security and Investment Act 2021 (which entered into force on 4 January 2022 and enabled the UK government to screen, block and potentially unwind transactions giving rise to national security concerns) and the changes to the insolvency process introduced by the Corporate Governance and Insolvency Act 2020 (which entered into force on 26 June 2020 and which made a number of changes to the insolvency processes) – have yet to fully work their way through the market.

14 Tips and traps

14.1 What are your top tips for the smooth conclusion of a secured finance transaction in your jurisdiction and what potential sticking points would you highlight?

While not specific to English law transactions, the following aspects will smooth the path to a resolution of any financing transaction:

• a clear closing process with documentary closing conditions agreed at an early stage;
• a realistic closing timeframe (to the extent possible in light of any external timing requirements, such as an acquisition or competition clearance);
• the commencement of requirements from external parties (eg, agreements with account banks or requirements with insurers) early in the process; and
• most importantly, the engagement of a competent law firm which is proficient and experienced in the relevant type(s) of financing.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.