Improving your chances of having your loan repaid
As the economic climate tightens we are seeing increased interest around how to improve your chances of repayment on the loan. Chances are usually much improved if the lender has taken security over some of the borrower’s assets. This is always so much more delicate if friends and family are involved.
We will look to ways of taking security on the loan which can be used if the borrower does not repay on time or the full amount. Lenders with security will also rank higher than other creditors that have not obtained security and therefore have a greater chance of recovery.
Our role is to think about how best to secure your loan. If you didn’t protect your interests fully when the loan was made or need advice on enforcement, we are highly experienced in these areas too.
Checking out the borrower
Due diligence is a critical step before lending. The loan is often only as good as the borrower and his/her/their assets and track record. Due diligence involves making certain enquiries into the borrower and their assets in order to assess risks, understanding what assets may be available as security and whether the borrower already has outstanding borrowings, financial or credibility red flags or existing charges over assets.
Types of security when lending money
A charge is a term used to describe different types of security interest in an asset or class of assets that can be levied to satisfy a debt. Basically a charge means you will get paid before the owner if there is any money available. The choice depends upon the asset and is between:
- Fixed; or
Fixed charges are an identifiable and ascertainable asset. When the borrower becomes insolvent, you can clearly define the security that can be used to satisfy the debt. Typical fixed charges are placed on property which can be sold to pay off the loan.
Floating charges hover above a moving class of assets or future assets, which will not be ascertainable until the event when the borrower becomes insolvent and the floating charge causes the assets to become fixed. A common example will be a floating charge over trading stock in a shop, which is constantly moving and changing.
Lenders can use a combination of both fixed and floating charges known as a debenture to strengthen security for the loan in appropriate cases.
Enforcing a loan after borrower default
There are many varying types of lending arrangements and the Financial Conduct Authority (FCA) governs most lending arrangements, specifically when lending to an individual.
Unless the loan falls within limited exemptions to the Consumer Credit Act (CCA) there are regulations to comply with. If the lender fails to comply they could find themselves facing criminal convictions.
Navigating your way around the exemptions to the Consumer Credit Act isn’t always straightforward. Our experts can advise you on how to structure and balance the loan arrangement to ensure you comply with the rules.
Failure to register the charge
We are often approached by lenders when something has gone wrong with the registration of a charge either at Companies House or the Land Registry.
Generally, the failure to register a charge at the Land Registry carries the consequence of losing priority when ranking against other creditors. This does not mean that the security is no longer enforceable against the borrower.
Whereas if you have failed to register security at Companies House, or the security has been incorrectly registered, unless you act extremely quickly, it is likely that the security will be rendered void. The key is to act quickly.
If the borrower becomes insolvent, there are a number of remedies available to the lender to recover its debt. As we explain lenders will be in a much stronger position if the provisions providing security in the event of non-payment are included in the loan agreement.
Taking possession of borrowers assets
The right to take possession is not always automatic. This right is generally limited by contract or statute and requires the lender to obtain an order from the court to be able to take possession of property.
Order for sale of property
Whilst the power to sell an asset to repay the loan can arise under statue or be implied into the agreement any lender will be in a much stronger position if the power to sell has been written into the loan account.
Going to court
If the lender does not have any right to sell he can apply to court for permission. To be successful in court the lender must show that he:
- Acts in good faith;
- Acts with reasonable case and skill;
- Acts fairly towards the borrower;
- Obtains the best price reasonably obtainable.
Appointing a receiver
The purpose of appointing a receiver is to allow the receiver to take charge over the assets. The receiver will then arrange for the sale of the assets and use the proceeds of sale to repay the monies owed.
A well drafted loan agreements will include this right. But, if the loan agreement is silent the lender could commence insolvency procedures against the borrower. For an individual borrower, the lender could bring a petition to court for a bankruptcy order. Where the borrower is a company, the lender could issue a winding up petition to have the company wound up by court or put into compulsory liquidation. There are restrictions in place so worth checking before jumping in.