Archive for the ‘security documents’ Category

Banks and small businesses

September 7, 2015

Banks traditionally lent to UK small/medium sized companies against security which included a debenture charging all their assets.

The security afforded by such a debenture is far less today than it used to be. If a business failed, all recoveries (less fees) would usually have gone to the bank holding a debenture, often leaving nothing for ordinary creditors. In that scenario, banks more readily lent to small businesses than now – thereby stimulating the economy. Why do small companies now find it more difficult to obtain bank facilities?

Bankers (incorrectly) believed a debenture gave them a fixed charge over the company’s debts – now they have only a floating charge ranking behind employees and other preferential creditors. Charges over stock increasingly suffer from retention of title claims. Legislation has reinstated the priority of liquidation expenses and a pool of funds for unsecured creditors has to be set aside from floating charge assets.

The proposed new s 176ZB of the Insolvency Act 1986 will mean that recoveries from fraudulent trading, wrongful trading, transactions at an undervalue, voidable preferences and extortionate credit transactions will not be caught by a floating charge but pass to creditors generally.

Again, debenture holders (with some exceptions) no longer have the ability to appoint an administrative receiver of their choosing nor to prevent the making of an administration order. They will normally have the right to appoint an administrator, but he (unlike a receiver) will owe duties to all creditors (albeit aware of who chose him).

Has UK insolvency law swung too far against the banks which it used to protect?

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Bank Reform

January 1, 2012

Bank Reform

The Preface to the first edition of Lingard’s Bank Security Documents published in March 1985 contains the following:-

‘Unfortunately, the evolution of security documents is under pressure as banks from overseas – – – flood into London. Such banks often lend at highly competitive rates to strong customers. The result has been to increase the competitive pressures on banks to a point where they are sometimes denied the detailed financial information needed to make a proper assessment of the prospects of a company, and are forced to keep expenses to a minimum – – -. Unless these pressures abate, the authorities may well find they have to mount some bank rescues.’

The pressures increased and were compounded by credit default swaps under which gullible banks participated in bad loans in return for fees which enhanced the bonuses of the ‘bankers’ responsible. Grossly inadequate provisions for the bad debts were made in the audited accounts and regulatory returns.

The Preface to the fourth edition published in August 2006 – before the crash – again warned of “the distinct possibility of forthcoming troubled economic times”. Senior bankers gave priority to selling the bank’s products in a highly competitive market and failed to invest adequate resources in risk assessment. Only now is interest being shown by banks in risk assessing software available from major actuaries such as Towers Watson.

The fifth edition of Lingard’s Bank Security Documents as at 31st August 2011 has now been published to assist bankers and their advisers to structure sound security and sound lending and insolvency practitioners to identify defective security.

The regulatory failures of the recent past have now been admitted and the Bank of England will again take charge. However, competitive pressures remain and the policy of the EEC and British Government is to increase competition by splitting some of the larger banks. The question is: how will the regulators ensure that banks do impose appropriate financial covenants in their lending and follow correct procedure in creating security? Will overseas banks continue to take big risks to grab the business? And how will credit default swaps and other derivatives be policed?

Lingard’s Bank Security Documents

November 27, 2011

The 5th edition of my book on bank security documents (ISBN 9781405737265 in hardback or ISBN 9781405764322 e-book) has now been published, establishing its lead in the subject. It will be of interest not only to bankers and their lawyers but to insolvency practitioners and others who seek to enforce or challenge such security.


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