Third party security
Third party security

The following Banking & Finance practice note provides comprehensive and up to date legal information covering:

  • Third party security
  • Third party security - is it a guarantee?
  • Third party security - what does it secure?
  • Third party security at greater risk of being voidable
  • Transaction at an undervalue
  • Preferences
  • Corporate benefit, directors' duties and unlawful distributions
  • Undue influence

In many commercial finance transactions, lenders expect to be given some form of credit support to increase their confidence in being able to recover their debt if the borrower fails to repay it. Such credit support can take the form of security and/or quasi security from one or more entities involved in the transaction (see Practice Note: Difference between security and quasi security).

For a lender, security is beneficial because:

  1. it gives the lender a proprietary interest in an asset which the lender can look to for satisfaction of its loan if the borrower defaults

  2. it gives the lender priority over unsecured creditors of the borrower

  3. it gives the lender the right to appoint a receiver or administrator if certain conditions are met (see Practice Note: Enforcement—debentures and floating charges)

  4. it is often quicker to recover an unpaid debt by enforcing security than by proving in liquidation alongside other unsecured creditors, and

  5. it can provide a way for the lender to control the borrower's (and any other obligor's) assets

Often, lenders will expect to be given security by the borrower as a condition to making the loan.

In some transactions, lenders also expect additional entities to assume responsibility for the borrower's obligations. For example, in transactions involving a corporate borrower, the lenders might expect to be given security and/or guarantees by:

  1. other companies in the borrower's group,

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