Legal Practice Notes

This Practice Note outlines the key categories of security a lender may seek in a ship finance transaction. The principal security is a first‑priority mortgage over the vessel; however, subject to the circumstances of the specific financing, the lender might also require some or all of the following: assignment of insurances, income and any requisition compensation guarantee from the parent company charge on shares charge on a bank account This Practice Note applies to all vessel types commonly seen in ship finance. For more on superyachts specifically, see Practice Note: Superyacht finance—taking security over superyachts. Ship mortgage The lender’s core protection is security over the ship itself; a legal mortgage enables the lender, on default, to take possession and sell the vessel. The governing law of the mortgage will be that of the state or jurisdiction of the ship’s...

Shari’ah compliant, or Islamic, finance is a method of funding grounded in the principles and prohibitions of Shari’ah ( Islamic law). These rules stem from a range of sources, with further detail provided in Practice Note: Sources of Shari'ah. That Practice Note sets out the fundamental principles and prohibitions that underpin the structuring of Islamic finance transactions, and explains how arrangements are shaped to reflect them. In practice, the question of whether a given Islamic finance transaction satisfies these standards—and so can be treated as Shari’ah compliant—rests with the Shari’ah board of the institution offering or arranging the finance and, less commonly, with the Shari’ah board of a corporate making use of the facility. As a general rule, the default assumption is that a transaction presented as Shari’ah compliant or Islamic will be acceptable unless it breaches core principles or passes...

Introduction Shari’ah—also rendered as Sharia, Shariah, or Shari’a—literally means, in Arabic, ‘the path towards the watering place’. As Islamic law, it is the religious legal framework of Islam, laying down duties and a code of conduct for people to observe so that they can lead their lives in a rewarding and worthwhile way. According to Potter LJ, much of the classical Islamic law governing financial dealings is not set out as formal ‘rules’ or ‘law’ in the Qur'an and Sunnah; instead, it rests on the often differing opinions of established schools of law that took shape roughly between 700 and 850 CE......

This note aims to: offer clear, practical guidance to shareholders of a distressed or insolvent company set out the position of shareholders across most types of corporate insolvency or restructuring scenarios suggest steps a shareholder can take to maximise their position if the company becomes distressed This note is specifically designed to help shareholders secure the strongest possible footing as the company enters the ‘zone of insolvency’. During ordinary trading, the interests of creditors and shareholders typically run in parallel. Yet, once the business moves into that ‘zone of insolvency’, then directors’ duties realign and are owed to creditors instead (see Practice Note: Directors’ duties: companies in financial difficulties). The point at which that shift occurs will be determined on the specific facts in each individual instance (see News Analysis: Directors' duties and assessing...

There are five main types of set-off: independent set-off (sometimes known as legal set-off or statutory set-off) transaction set-off (also known as equitable set-off) contractual set-off insolvency set-off banker’s set-off (sometimes known as current account set-off) This Practice Note looks at the characteristics of these five types of set-off. For information on set-off in general, see Practice Note: What is set-off and when is it available? Independent set-off Independent set-off operates as a procedural defence available for use in court proceedings. It permits mutual, reciprocal claims to be set off against each other where they are separate and not connected, in contrast to transaction set-off. Independent set-off is also described as legal set-off or statutory set-off......

ARCHIVED: This Practice Note was archived and is not maintained. It outlines two categories of clauses that are frequently encountered in intercreditor agreements involving both senior and mezzanine financiers: restrictions on the capacity of senior and mezzanine creditors to alter finance terms without consent from the other creditor class; and senior creditor control over payments made to mezzanine lenders by the borrower group The note summarises these clauses and identifies matters that are routinely negotiated. For an explanation of the range of provisions found in intercreditor agreements, see Practice Note: Intercreditor agreement—key provisions; and for an introduction to senior/mezzanine intercreditor agreements in particular, see Practice Note: Senior/mezzanine creditor intercreditor issues—introduction [ Archived]. For a straightforward intercreditor agreement with accompanying drafting notes, see Precedent: Intercreditor deed—single company borrower—single secured senior lender—single secured junior lender—single unsecured subordinated lender. More detailed guidance on...

This Practice Note highlights principal authorities and accompanying materials concerning the validity of security The matters are organised by topic and cover: Voidable transactions Undue influence Execution issues Capacity of the borrower Further advances Contractual restrictions Voidable transactions Names of parties: Re MC Bacon Ltd [1990] BCLC 324 Judgment date: 30 November 1989 Case summary: Where an entity grants security for its own borrowing, the value of the chargor’s assets is not reduced; by creating security it simply accords priority to some obligations over others. To establish a voidable preference within section 239 of the Insolvency Act 1986 ( IA 1986), it was necessary to demonstrate that the company was motivated by a desire to bring about the effect described in IA 1986, s 239(4)(b). Relevant content: See Articles: Transactions at an...

Scope of this Practice Note This Practice Note offers an overview of security reviews and outlines: when and for what reasons a lender may instruct its lawyers to undertake a security review preparatory steps before commencing a security review the approach to presenting the outcome of the security review to the lender It forms part of a trio of documents addressing how to conduct and present a security review, intended to be used together. The accompanying documents are: a Security review checklist, which details the searches and verifications to be performed during the security review a Precedent: Security review report, to be used for delivering the findings of the security review to the lender Security reviews—when and why? Frequently, the initial step in a restructuring is the lender asking its legal advisers to carry out a...

A structure chart depicting the corporate structure of a borrower, together with the security provided in favour of the lender (or another entity), is a useful method to illustrate visually to a......

The purpose of security in securitisations In a classic (non-synthetic) securitisation, security is broad in scope: the issuer charges all of its rights in favour of a security trustee for the benefit of all secured creditors, commonly under a single security deed. For guidance on synthetic securitisations, see Practice Note: Synthetic securitisations. Creating effective security interests over the issuer’s underlying assets (the ‘security package’) therefore supports both the credit and the legal assessment of a securitisation: Credit analysis— A key strand of the credit review assumes value will be realised via enforcement rather than scheduled repayment. In the same way, a mortgage lender primarily prices and approves a loan by reference to the mortgage collateral—the asset to be enforced on default—rather than the borrower’s income capacity. Legal analysis— Transaction counsel focus closely on ensuring each issuer asset is properly charged and that the...

Scope of this note When security is properly created, it is binding as between the security provider and the secured party. However, it is not necessarily binding on every third party, such as a liquidator or administrator of the security provider. In numerous cases, further steps are required to ‘perfect’ the security interest. Perfection is the process by which the security is made enforceable against certain third parties (though not necessarily all third parties). For details about the third parties who may not be bound even after perfection, see: The difference between perfection and priority below. Perfection can be achieved in a number of ways, and the correct method for perfecting a particular security interest depends on: the nature of the security interest granted the nature of the entity granting the security, and the nature of the asset which is secured by the...

In commercial finance, shares are often pledged as security for a loan. Practice Note: Taking security over shares sets out the general approach to securing interests over shares. This Practice Note concentrates on issues specific to security over shares held in CREST, the UK’s clearing and settlement system. It explains: the characteristics of registered shares and the distinction between certificated and uncertificated shares what CREST is and the ways shares can be held within CREST methods of taking security over shares held in CREST specific issues arising when securing shares in CREST and key points for documenting that security perfection and priority considerations for CREST share security how to enforce security over CREST-held shares Where a settlement bank takes security over CREST-held shares, different considerations apply; these fall outside the scope of this Practice Note. For more...

In many lending arrangements, financiers commonly obtain security to back a borrower's duties under a loan agreement. By taking security, they secure defined rights over the charged assets if the borrower fails to make repayment when due. This Practice Note outlines the core features and key characteristics of the four categories of security recognised under English law. It also clarifies what is meant by the distinction between legal and equitable security interests, and explains the differences between them. Practice Note: Introductory guide to security in a lending transaction offers a broader primer on security in lending and serves as a helpful starting point for those new to the subject or unfamiliar with it. Practice Note: Security—frequently asked questions provides links to answers for many of the most common security questions and issues. What is security? A security interest grants the secured party rights in the security...

The characteristics of social housing bodies and the regulatory frameworks governing them create extra considerations when taking security from, or enforcing security granted by, such organisations. This Practice Note sets out the principal points to assess when taking or enforcing security from social housing entities within a social housing finance setting. It concentrates solely on private not-for-profit providers of social housing registered in England, called ‘ RPs’ in this Practice Note, as they represent the overwhelming share of private debt finance raised by housing associations to date. It does not address providers registered in Wales... For further reading on social housing finance deals, see the following Practice Notes: Social housing entities entering into finance transactions Key deal structures in social housing finance The key financing terms in social housing finance For general guidance on taking and enforcing security, see: Taking...

This Practice Note signposts answers to many frequently asked questions on security matters and is chiefly aimed at readers new to security. For the complete catalogue of our materials, including Practice Notes and security precedents, visit the security topic under the Topics & Tasks tab on the Banking & Finance homepage, or see the following Overviews: Types of security—overview Taking security—overview Perfecting and registering security—overview Priority of security—overview Enforcing security—overview Releasing security—overview For the full set of Q& As in the Banking & Finance Q& A bank—many of which tackle more complex issues relating to security—refer to Banking & Finance Q& As—overview. Note that some of the content linked from this Practice Note is not maintained. Taking security This section highlights materials that may help with common queries on taking security and the different forms of security...

Cash-generating asset types Overview In essence, any asset that produces cash can be turned into a securitisation. Even an art collection could be used on the premise it can be sold for proceeds (the city of Detroit, for example, weighed this option for the Detroit Institute of Arts’ holdings). In practice, securitisations usually reference pools of more standardised assets that carry repayment obligations (for instance, loans) and/or deliver steady, predictable cash flows (such as a mature, stable enterprise). Put differently, securitisations are commonly supported by financial assets... Residential mortgage loans Commercial mortgage loans Credit cards and other unsecured consumer loans Auto loans Trade receivables Illustrative “esoteric” securitisations have included: F1 ( Formula One) rights Cinema revenue Royalty payments Weather risk EU and UK Securitisation Regulations EU Securitisation Regulation In September 2015, the European Commission released the Action Plan on...

Timeline This timeline monitors the principal developments and news items connected to securities lending transactions and repos. For details on the rules on reporting and transparency for securities financing transactions ( Regulation ( EU) 2015/2365), see: Securities Financing Transactions Regulation ( SFTR)—essentials......

This Practice Note outlines the principal features of the EU Regulation on reporting and transparency of securities financing transactions ( Regulation ( EU) 2015/2365) ( EU SFTR), together with the Assimilated Regulation ( EU) 2015/2365 ( UK SFTR). What is the purpose of the EU SFTR and UK SFTR? As at IP completion day (31 December 2020), the onshored UK SFTR (and the corresponding onshored technical standards) applies in the United Kingdom. The EU SFTR and UK SFTR frameworks are designed to bolster transparency in securities financing transactions ( SFTs) and their reuse. They place duties on counterparties to report SFTs to trade repositories. They also require advance risk disclosures and written consent before assets are reused under a collateral arrangement. Any divergences between the EU and UK regimes are identified in the relevant sections of this Practice Note. Key requirements of the EU SFTR and the UK...

Introduction Recording interests can significantly affect the priority ranking of competing security interests. This Practice Note summarises the effect on priority of making registrations at the relevant IP registry for: a UK patent a UK registered trade mark, or a UK registered design For information on how registration against other classes of asset influences the priority of security interests, see the following Practice Notes: Effect of registering security at the HM Land Registry/ Land Charges Department on priority of security interests Effect of registering security on the UK Ship Register on priority of security interests Effect of registering security on the UK Register of Aircraft Mortgages on priority of security interests In addition, most security interests created by a company formed and registered under the Companies Act 2006 must be registered at Companies House to be effective. For more detail on the...

Section 423 of the Insolvency Act 1986 ( IA 1986) Section 423 provides a route to set aside dealings engineered to prejudice creditors. The regime is aimed at stopping parties from shifting assets in a manner that thwarts creditor claims. Put shortly, it targets arrangements by which assets are moved so creditors are kept at bay. A claimant may proceed under IA 1986, s 423 against a company or an individual following a transaction at an undervalue ( TUV) executed with the intention of placing assets out of creditors’ reach. Though there are parallels with a TUV under IA 1986, s 238 (for corporate insolvency) and IA 1986, s 339 (for personal insolvency), the following distinctions are central: Relief under IA 1986, s 423 does not necessarily have to be connected to any formal insolvency...