Security review

Security reviews—when and why?

Often the first step in a restructuring is for the lender to ask its legal advisors to conduct a full review of the loan and security documents relating to a particular borrower. This review is likely to be triggered by:

  1. signs of distress by the borrowing group, for example actual or anticipated financial covenant or payment defaults under the finance documents, or

  2. internal transfer of a distressed borrowing relationship into a special situations, restructuring or business support group within a financial institution. In such a situation, internal process may require that a security review is carried out as the first step after transfer so that the new relationship managers can familiarise themselves with the asset and determine a strategy for dealing with it through any periods of financial difficulty

The purpose of a security review is to enable a lender to:

  1. gain an understanding of the borrower's security and guarantee structure

  2. ensure that the security has been properly drafted and perfected, and is valid and enforceable

  3. understand its enforcement options, and

  4. find out whether there is anything that

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Insolvency–fraudulent trading and dishonest assistance (Bilta and others v Tradition Financial Services)

Restructuring & Insolvency analysis: The Supreme Court held that liability for fraudulent trading under section 213 of the Insolvency Act 1986 (IA 1986) is not limited to directors or other persons exercising management or control over the company in question. Rather, liability can attach (as the natural meaning of section 213 admits) to any person who is knowingly party to the carrying on of the company's business in a fraudulent manner. The Supreme Court further restated that an isolated act of fraud in an otherwise legitimate business would not amount to fraudulent trading. The Supreme Court was also asked to determine whether claims in dishonest assistance, parasitic on the directors' breaches of their fiduciary duties, were statute barred under the Limitation Act 1980 (LA 1980). The claims were issued more than six years from the dates of those breaches. The claimants sought to postpone the accrual of the limitation period under the LA 1980, s 32, ie until the time the claimants either discovered the fraud or could with reasonable diligence have discovered it. On the assumed facts, and notwithstanding the intermediate dissolution and restoration of the companies, the claimants could not rely on LA 1980, s 32 and were consequently stature barred. Written by Sam Fenwick, partner, Suleika Horrocks, trainee solicitor, and Isabelle Burnett, solicitor apprentice at Wedlake Bell LLP.

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