Banking & Finance e-bulletin

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1 Banking & Finance e-bulletin In This Issue LIBOR - the proposed new regime Proposed changes to the registration of security Pledges, hypothecation & trust receipts - what do they mean? Guide to clawback of security in insolvency Loans for specific purposes November 2012 dmhstallard.com

2 Welcome Our last issue came out just before the euphoria of the Olympics and Paralympics, which now seem a long time ago. In the meanwhile there has been a good deal happening in our field. This issue looks at some proposed changes to the way LIBOR is set and to the way security is registered. We also explain some trade finance terminology. Finally we look at some matters which may be particularly relevant when there is an insolvency - clawback of security and trusts which may arise as a result of purpose clauses. I hope that there is something of interest to you in this issue. If you would like us to cover a particular topic in the future, please let me know. Gwen Godfrey Partner and Head of Banking & Finance gwen.godfrey@dmhstallard.com 1

3 LIBOR - the proposed new regime The Basel capital adequacy rules seem to be encouraging the greater use of more capital efficient products, such as trade finance. The provision of overdraft facilities, traditionally the lifeblood of business, has become expensive, compared to trade finance and other products such as invoice finance and leasing for capital equipment. However some of the terminology used in trade finance can seem confusing to those who do not deal in that area on a regular basis. We have produced an overview of three alternative forms of credit support available to lenders offering trade or supply chain finance. Whilst written primarily from the lender s perspective, the briefing may also be informative to companies looking to obtain trade finance who may be asked to grant pledges, letters of hypothecation and/or trust receipts. Gwen Godfrey Head of Banking & Finance gwen.godfrey@dmhstallard.com 2

4 Proposed changes to the registration of security Draft regulations have been published to amend the law regarding the registration of security at Companies House (which is contained in Part 25 of the Companies Act 2006). The changes are set out in the Companies Act 2006 (Amendment of Part 25) Regulations 2012 and the Limited Liability Partnerships (Application of Companies Act 2006) (Amendment) Regulations These regulations seek to modernise and simplify the registration process. They are expected to come into force on 6 April In summary, the main provisions of the regulations are the following: Introducing a single UK-wide system of registration of security. Introducing electronic filing to simplify the security registration process, including allowing for the filing of a certified copy of the security instrument. Removing criminal sanctions for nonregistration of a registrable security. However an unregistered security may still be invalid against a liquidator, administrator or creditor of the security provider. Clarifying the information required when notifying Companies House of matters relating to the enforcement of security. Providing for all charges to be registered, other than those listed in draft regulations. Clarifying when the 21-day registration period starts to run for each type of security. Providing that, even though registration is optional, the fact that a negative pledge has been registered should give rise to constructive notice. Increasing transparency and the quality of information in the public domain by creating a regime in which the full text of the charge instrument or security document is available on the register at Companies House. Clarifying the notification process for the satisfaction and release of security. Marriam Malik Associate, Banking & Finance marriam.malik@dmhstallard.com 3

5 Pledges, hypothecation & trust receipts - what do they mean? The Basel capital adequacy rules seem to be encouraging the greater use of more capital efficient products, such as trade finance. The provision of overdraft facilities, traditionally the lifeblood of business, has become expensive, compared to trade finance and other products such as invoice finance and leasing for capital equipment. informative to companies looking to obtain trade finance who may be asked to grant pledges, letters of hypothecation and/or trust receipts. To receive a copy, please Emma Day. However some of the terminology used in trade finance can seem confusing to those who do not deal in that area on a regular basis. We have produced an overview of three alternative forms of credit support available to lenders offering trade or supply chain finance. Whilst written primarily from the lender s perspective, the briefing may also be Emma Day Solicitor, Banking & Finance emma.day@dmhstallard.com Guide to clawback of security in insolvency We have contributed the English chapter to a guide which has been produced by the Banking Law Committee of the International Bar Association on the clawback of security in insolvency. The guide deals with the topic in 30 countries. It describes the main types of security interest, the basic features of insolvency procedures and how clawback works in the various jurisdictions. The guide can be found at Section/Banking_Law/Projects.aspx. Paul Goss Associate, Dispute Resolution paul.goss@dmhstallard.com 4

6 Loans for specific purposes Facility letters often contain a clause stating that the facility is to be used for a specific purpose or project, in order to avoid a claim by the borrower or any guarantor that the lender has consented to any misuse of loan funds or has a duty to ensure the money is properly applied. If the clause specifies that the loan is for a specific and exclusive purpose, a trust known as a Quistclose trust may arise. If it does, the loan remains the property of the lender unless the borrower applies it for the specified purpose. If the borrower becomes insolvent, any loan funds that remain in its hands cannot be used to satisfy its creditors. In trust law, there is a resulting trust for the lender and the borrower merely has a power to apply the funds for the specified purpose. In Gabriel v Little and others [2012] EWHC 1193 (Ch) the court considered whether the borrower had received loan monies as a trustee under a Quistclose trust. In this case, clause 1.5 of the facility letter stated: Loan: The sum of 200, which will be made available as a contribution to the costs of development of the Property, such sum to be advanced on the Drawdown Date. The purpose clause also stated that the loan s purpose was: To assist with the costs of development of the Property. Although a document creating a Quistclose trust does not have to use words such as sole or exclusive to describe the purpose or require that the loan monies be placed in a segregated bank account, the absence of both these factors was material in determining that no such trust was created in this case. Additionally, a wide range of matters could constitute development so that it would be difficult to determine what use of the loan monies was in accordance with the trust, if one had been found to exist. As a result no trust had been created. This case highlights the fact that, while requiring segregation of loan monies and using words such as sole or exclusive in the purpose clause of a facility agreement are not absolute requirements, a lender will find it easier to establish that loan monies are subject to a Quistclose trust if those factors are present. Emma Day Solicitor, Banking & Finance emma.day@dmhstallard.com 5

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