Professor Louise Gullifer - PowerPoint Presentation

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Professor Louise Gullifer

Security interests in cash collateral

Cash = money in an account with Bank A held by borrower

B

Possible ‘security interests’Mortgage in favour of lender CLegal mortgage: money transferred into an account in name of lender C at Bank A OR borrower B makes a statutory assignment of right against Bank A to lender C. Bank A notified of assignment and must be of whole debt. Equitable mortgage: borrower makes an equitable assignment of right against Bank A to lender CCharge in favour of lender CFixed charge: account must be blockedFloating chargeTitle transfer collateral arrangementMoney transferred into account in name of lender C at Bank APersonal obligation to return ‘equivalent collateral’Charge in favour of Bank ACharge-back

Possible security interests

over cash collateral under English law

All ‘charges’ (including mortgages) must be registered in order to avoid sanction of invalidity (s.859A, 859H Companies Act 2006) UNLESS

Exempted by other legislation (here Financial Collateral Arrangements (No 2) Regulations (FCARs)

Not clear on wording of s.859A - H whether charge that falls within FCARs CAN be registered.True title transfer arrangements are not charges and need not be registeredPerfection of security interests in cash collateral

‘

security financial collateral arrangement’

Purpose to secure financial obligations owed to collateral takerObligations secured by a ‘security interest’any legal or equitable interest or any right in security, other than a title transfer financial collateral arrangement, created or otherwise arising by way of security’Expressly includes pledge, lien, mortgage and charge.Limited to where the cash is ‘delivered, transferred, held, registered or otherwise designated so as to be in the possession or under the control of the collateral-taker or a person acting on its behalf’When do cash collateral arrangements fall within the FCARs?

Any right of borrower B to withdraw excess collateral does not prevent collateral being under possession or control of lender C or Bank A

‘possession’ includes where

collateral is credited to an account in the name of the collateral taker, but only where the collateral provider’s rights are limited to the right of substitution or withdrawal of excess collateralThere will be possession if:Legal mortgage where money transferred into an account in name of lender C at Bank A (unless borrower B has more rights than to withdraw excess collateral)What is meant by ‘excess collateral’?Possession or control: possession

Negative control required: positive control not enough

Directive only applies where there is ‘dispossession’ (preamble art 10)

Authority (Gray v GTP Group Limited [2010] EWHC 1772 (Ch), In the Matter of Lehman Brothers International (Europe) [2012] EWHC 2997 (Ch))Negative control = collateral provider cannot withdraw money from account without permission of collateral takerPositive control = collateral taker can take or dispose of the collateral without any further involvement of the collateral providerPractical control not enough; must be legal controlProbably legal control not enough; no dispossession if not practical controlPossession or control: control

Control if:

Legal mortgage by statutory

assignment of right against Bank A to lender C. Practical control as Bank A must be notified of assignmentEquitable mortgage by equitable assignment of right against Bank A to lender C IF bank A notified (would then only be equitable assignment if of part of debt)Fixed charge if account blocked and Bank A notified of thisFloating charge if only right borrower B has is to withdraw excess collateralCharge-back if borrower B not permitted to withdraw money except ‘excess collateral’Possession or control: control

Under UCC/PPSA

Control is positive control

No need to examine rights of borrower BControl whereAccount in name of lender CControl agreement with Bank A (not just notification)Charge-backDifferences from UCC/PPSA

First in time

Exceptions:

Dearle v Hall(Bona fide purchaser of legal interest without notice)Later fixed charge has priority over floating charge unless knows of negative pledge clausePriority

SP1:

is charge over bank account fixed or floating?

If floating, does it contain a negative pledge clause?Presume registered (and negative pledge clause box ticked?)SP2Does SP2 check the register? If so, will have notice of SP1’s charge and will take subject to it UNLESS SP1 charge floating and no registration of negative pledge clauseIf SP2 does not check the register unclear if has constructive notice if SP2’s charge not registrableIf SP2 is Bank A can rely on set-off (as in Canada pre-Drummond) unless SP1 has given Bank A notice of charge before set-off aroseIf charge is floating, both crystallisation of charge happened AND notice of crystallisation given before set-off aroseExample 2

SP’s retention of title interest in inventory will be valid, but SP will have no interest in proceeds as

if the agreement is silent as to proceeds of sale, the court will hold that the sale was on the buyer’s account,

If the agreement gives the seller an interest in the proceeds it will be characterised as a registrable charge and is very unlikely to be registeredIf SP does register charge over proceeds, analysis same as beforeExample 3