© Rix & Kay Solicitors LLP 2012 Warranties and Guarantees in English Law Presented by Francis Wallace Rix & Kay Solicitors LLP October 2012

© Rix & Kay Solicitors LLP 2012 Types of Warranties and Guarantees Mortgage (or charge) over land Mortgage of movable property (chattels) Charge or assignment of choses in action, E.g. Book debts, life policies, company shares Fixed charges and floating charges Charges created by court orders Personal Guarantees

© Rix & Kay Solicitors LLP 2012 Legal Formalities for all Charges / Mortgages Contracts creating a security must comply with requirements common to other contracts: There must be monetary consideration for the security, or the security document must be by deed. That is, in a document stated to be a deed: formerly, the seals of the parties had to be attached to the deed

© Rix & Kay Solicitors LLP 2012 Personal Guarantees A common form of security Often required by banks, from company Directors, in respect of loans to the company The Guarantor assumes the same responsibility for payment of the debt as the Debtor himself, and can be sued by the Creditor as well as, or instead of, the Debtor Guarantee should be in writing and Guarantor should take independent legal advice, particularly if lender is a bank No requirement for registration

© Rix & Kay Solicitors LLP 2012 Mortgages of Land Mortgages or charges of land must be in writing Mortgage must be registered against the land at H M Land Registry Mortgage gives Creditor the right to sell the land and to use the proceeds towards payment of the debt If Debtor refuses to give up possession of the land, the Creditor is entitled to seek a possession order from the court

© Rix & Kay Solicitors LLP 2012 Order of registration decides priority of mortgages So check before accepting security, what prior mortgages are registered? Land Register is open to public inspection Note: Prior mortgages often contain restrictions prohibiting registration of later mortgages without prior lenders consent. Banks often refuse consent Mortgages of Land

© Rix & Kay Solicitors LLP 2012 Charging Orders Creditor who has a judgment can apply to court to register a charge against land: Charging Orders Act 1979 A charging order under 1979 Act does not require consent of prior lenders Charging orders should be protected by registering a notice at the Land Registry Charging Orders have priority according to date of registration of notice. No priority over earlier mortgages on the land

© Rix & Kay Solicitors LLP 2012 Charging Orders The Debtor is notified of the interim charging order as soon as this has been made by the court. He can then raise objections to the order being made final Prior mortgage holders must be notified of the application for the final charging order. However it is unlikely that the court will refuse registration if they object Charging orders can also be made against personal property, E.g. Bank accounts, life assurance policies and company shares The bank / life company / company itself must be notified of the application for the final order

© Rix & Kay Solicitors LLP 2012 Mortgages of Movable Property (Chattels) Archaic and technical branch of English Law If security is given over personal chattels for payment of a debt, and that security is contained in a document, it must be in the proper form. It must contain an Affidavit sworn before a solicitor and must be registered at the High Court: Bills of Sale Act (1878) Amendment Act 1882 This applies where the goods will remain in the Debtors possession Chattel mortgages are rarely used due to these technicalities 1882 Act does not apply to mortgage created by companies

© Rix & Kay Solicitors LLP 2012 Hire Purchase Agreements In order to avoid technicalities of the Bills of Sale Acts, security for loans made for purchase of many types of movable property, E.g. Vehicles, office equipment, furniture is granted via a hire purchase agreement between Debtor and Creditor Creditor remains the owner and Debtor is the hirer, typically until all the instalments are paid Consumer HP transactions are heavily regulated by the Consumer Credit Act 1975

© Rix & Kay Solicitors LLP 2012 Hire Purchase Agreements When buying a used vehicle, or being offered it as security, it is important to carry out a search with a credit reference agency to check whether the vehicle is subject to a hire purchase agreement. If so it does not belong to the Debtor and cannot validly be sold or charged

© Rix & Kay Solicitors LLP 2012 Ships and Aircraft These have their own specialised schemes requiring registration of mortgages granted over ships or aircraft: Merchant Shipping Act 1995 Civil Aviation Act 1982

© Rix & Kay Solicitors LLP 2012 Charge Over Choses in Action These are common forms of security, and are easy to create Examples: Assignment of life policy, charge over book debts, charge over company shares Notice of the charge must be given to the life company, Debtor who owes the book debt, or the company which issued the shares. They then hold the asset for the benefit of the Creditor

© Rix & Kay Solicitors LLP 2012 Assignment of Choses in Action Factoring is a common situation in which businesses raise finance by assigning book debts to banks Notice must be given to the customers of the business, generally on each invoice raised by the business: this states that the debt created by the invoice has been assigned to the bank The customer must then make the payment to the bank direct

© Rix & Kay Solicitors LLP 2012 Floating charges A fixed charge may be taken over land or over movable property which is static or fixed in nature. E.g. Land or plant & machinery A floating charge may be taken over property which is not fixed and which changes and fluctuates over time: E.g. Stock in trade, book debts Debtor remains free to deal with the property subject to the floating charge, until the charge crystallises

© Rix & Kay Solicitors LLP 2012 Floating Charges Crystallisation: the floating charge document will state that the charge crystallises, that is, becomes fixed, when certain events happen Examples: Debtor stops trading or suspends payment of debts, other Creditors execute against Debtors goods, Debtor enters an insolvency procedure Floating charges apply almost exclusively to company Debtors, not individuals

© Rix & Kay Solicitors LLP 2012 Mortgages by Companies Company mortgages or debentures must be registered by the company in its records. They must also be registered with the Registrar of Companies within 21 days of creation Failure to register within 21 days normally means the mortgage is void against a Liquidator of the company

© Rix & Kay Solicitors LLP 2012 Impact of Insolvency Legislation Creditor should not assume Debtor can give valid security over his assets if he is approaching insolvency Creditor can search to enquire whether there is a pending bankruptcy petition against an individual, or a pending winding-up petition against a company This is not a complete answer as securities given a considerable time before formal insolvency may be invalid

© Rix & Kay Solicitors LLP 2012 Impact of Insolvency Legislation Insolvency Act 1986, S.340, 240 allow insolvency office holders (Trustee in bankruptcy for individuals, Liquidator for companies) to apply to court to set aside preferences given to Creditors by the insolvent person or company A preference is something which puts the Creditor in a better position than he would otherwise have been in, in the event of the insolvency of the individual or company

© Rix & Kay Solicitors LLP 2012 Insolvency Legislation Time limits: Office holder can apply if the preference was given within 6 months of the onset of the insolvency procedure Within 2 years if the preference was given to a connected person, E.g. Director or Associate of a Director If preference is also a transaction at an undervalue (no monetary consideration for it, or inadequate consideration): 5 year time limit applies

© Rix & Kay Solicitors LLP 2012 Conclusions & Suggestions Effective and simple forms of guarantee / security available to Creditors, who are already owed money, include: Mortgage over land: but only effective if there are no prior mortgages or these do not prohibit creation of subsequent mortgages Mortgage or assignment of life assurance policy Personal Guarantee given by a third party who is known to have assets Debenture (mortgage) over companys assets

© Rix & Kay Solicitors LLP 2012 Conclusions & Suggestions Undertakings by solicitors: The Debtor may be in a position to deposit money with his solicitor, or the solicitor may be selling an asset for him. It is common in those situations for the solicitor to be asked to give an undertaking to pay the Creditor a certain sum of money at a specified future time Solicitors are careful to ensure that the undertaking only becomes effective when the property is sold or when certain conditions are met

© Rix & Kay Solicitors LLP 2012 Solicitors Undertakings A solicitors undertaking is a formal promise to pay the funds concerned to the Creditor. It is quite commonly used in debt litigation where the Debtor has an asset and is in the process of liquidating or disposing of it Breach of an undertaking by a solicitor is regarded as a serious disciplinary offence by the Solicitors Regulation Authority

© Rix & Kay Solicitors LLP 2012 Any questions? Contact: Telephone: (+ 44) Rix & Kay Solicitors LLP Further information available on our Website

© Rix & Kay Solicitors LLP 2012 Important Notice These notes are a brief introduction to a complex and wide subject. They should not be used as the basis for giving legal advice. Whilst they are believed to be correct, neither the author nor Rix & Kay Solicitors LLP can accept responsibility for any accidental errors Francis Wallace October 2012