The following Banking & Finance Q&A provides comprehensive and up to date legal information covering:
This Q&A considers the issues that a lender faces if it requests new security for both new and existing loans as a condition to the advance of further funds to an existing financially distressed borrower.
For information on taking security, see Practice Notes:
Security—an introductory guide
Key features of debentures
Drafting and negotiating security documents in loan transactions
For information on the ability of an administrator or liquidator to challenge transactions entered into before the commencement of insolvency, see Practice Note: Can a liquidator or an administrator challenge or unwind transactions entered into by the company before it was wound up or entered into administration?
It is not uncommon for a lender to be faced with a request for additional funds by a financially troubled borrower. Where the existing loan was made available on an unsecured basis, the lender may not wish to advance any more funds unless security is created to reduce the lender’s risk. If a lender makes it a condition of the new loan that the security must secure both the existing and new loan, the security may be vulnerable to attack by a subsequently appointed administrator or liquidator under a number of provisions of the Insolvency Act 1986 (IA 1986). These provisions are primarily:
IA 1986, s 238 (transactions at an undervalue)
IA 1986, s 239 (preferences)
IA 1986, s 245 (avoidance of
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