First steps to enforcing security: restrictions, crystallisation and notices

Being alive to recent developments is fundamental to successfully enforcing security and protecting your commercial interests as a creditor. In this regard, missed steps can prove costly. Following a recent note with key points to remember when enforcing security against real estate, below are a few further questions to ask before commencing enforcement action in connection with any security.

1. Are there restrictions in any intercreditor arrangements?

More often than not, where there are multiple creditors lending into a borrower or borrower group, they will enter into an intercreditor agreement in order to rank the priority of the debt and security (if applicable) between them (also referred to as subordination agreements in respect of debt and deeds of priority in respect of security). Under the terms of these intercreditor arrangements, certain lenders may have restricted their ability to take enforcement action and it is therefore key to check the terms of any such intercreditor arrangements before taking any enforcement steps.

The importance of this was recently highlighted in a High Court case (Re ARL O09 Ltd (Co No 11113979) and others), where a junior creditor was prohibited under the terms of an intercreditor agreement from taking any step to enforce its security interests without first receiving the written consent of the senior creditors. Notwithstanding the prohibition, the junior creditor purported to appoint an administrator (in connection with the floating charge created in its favour by the borrower) without the prior written consent of the senior creditor. As a result, the court determined that the appointment of the administrator was invalid as the junior creditor’s enforcement rights never arose; the junior creditor’s floating charge would only become enforceable once the requirements of the intercreditor agreement have been satisfied (e.g. once the prior written consent of the senior creditor had been provided).

Although the High Court in the case above was tasked with considering the enforceability of a qualifying floating charge by way of the appointment of an administrator, the judgment is a good reminder that your intercreditor arrangements should be reviewed for anything which may restrict enforcement in any scenario.

2. Have your floating charges crystallised? 

Perhaps unsurprisingly, the floating charge provisions of security agreements are becoming increasingly negotiated in recent months. In particular, it is important to pay attention to when a floating charge will crystallise (i.e. into a fixed charge over the relevant assets), either automatically upon the occurrence of certain specified events or upon the lender issuing a notice of crystallisation to the chargor. 

In negotiating these provisions, a chargor will be mindful that crystallisation should not be too easily triggered, given that a fixed charge over the assets of a chargor is likely to stop it trading until (i) it is discharged or (ii) the lender provides consent to deal with the relevant assets. Lenders, on the other hand, want to ensure that they have control over all the assets of the chargor as soon as it appears that there might be difficulties in servicing the underlying liabilities.

The Loan Market Association’s starting point in real estate finance transactions is that floating charges will crystallise automatically if an administrator is appointed in respect of the chargor (or it receives notice of an intention to do so). However, the exact terms of each security agreement should be reviewed. In the event that a floating charge has not automatically crystallised, there is usually a provision that permits lenders to crystallise a floating charge by serving notice on the chargor where, for example, the assets subject to the floating charge are in jeopardy or an event of default is continuing.

3. Have you served notice?

Most enforcement action is dependent on notices being served on relevant parties and, at the most basic level, a key issue that is often over-looked is how to validly serve any such notice. The starting point should always be to review the terms of any facility agreement and/or security agreement in order that notice is correctly served, in particular the notice provisions which may confirm whether notices can be served by email, fax and/or post, the addresses to be used and when such notice is deemed to be received. 

It is important to note that notices delivered by email are not always valid. As we approach Christmas and the New Year, it is also worth bearing in mind the deemed delivery provisions – if your hard copy notice is deemed to be received five business days after posting, a notice sent on 24 December this year will not be deemed to be received until 4 January 2021!

This note only highlights a few items to consider when planning an enforcement strategy from recent lessons learned and you should seek legal advice if you require further assistance.

Additional reporting for this article was provided by trainee finance lawyer Joe Gaffney.