Key ways to protect yourself when lending money

As economic conditions tighten, lenders are increasingly focused on improving the prospects of loan repayment. Taking security over a borrower’s assets can provide greater protection if the borrower defaults. Matters can be particularly sensitive where loans involve friends or family, making it important to balance legal protection with personal relationships.

Why security is important with loans

We help lenders identify appropriate ways to secure a loan, providing potential routes to recover the debt if the borrower fails to repay on time or in full. Depending on the type and priority of the security, a secured lender may have a better prospect of recovery than an unsecured creditor.

Our role is to consider how best to protect your position. If you did not obtain adequate security when the loan was made, or need advice on enforcement, we can help assess the available options.

Checking out the borrower

Due diligence is an important step before lending. The prospects of repayment depend partly on the borrower’s financial position, assets and track record. Enquiries can help identify assets that may be available as security, existing borrowings, charges over assets and other financial or credibility concerns.

Types of security when lending money

A charge gives a lender security over an asset or class of assets to help secure repayment of a debt. The type of charge and the rights it provides depend on the asset, the documentation and the applicable law. The main types are:

• Fixed charges; or
• Floating charges.

Fixed charge

A fixed charge attaches to specific, identifiable assets and generally restricts the borrower’s ability to deal with them without the lender’s consent. Property is a common example. If the borrower defaults or becomes insolvent, the lender may be able to enforce the charge against the relevant asset, subject to the terms of the security and applicable legal requirements.

Floating charge

A floating charge covers a changing class of assets, such as stock or certain other circulating business assets. The borrower can generally continue dealing with those assets in the ordinary course of business until the charge crystallises or becomes enforceable under the relevant terms and law.

A lender may take a combination of fixed and floating charges under a debenture, where appropriate, to secure a loan against different categories of assets.

Importance of registering any charge as part of loan

We are often approached by lenders where a charge has not been registered correctly at Companies House or the Land Registry.

The consequences of failing to register security depend on the type of charge and the relevant registration requirements. For example, failure to register a registrable company charge at Companies House within the statutory period can make the charge void against a liquidator, administrator and creditor, although the underlying debt may remain payable. Errors or omissions should be addressed urgently, as available remedies may be time-sensitive.

Land Registry requirements and the consequences of non-registration differ according to the type of interest and transaction. A failure to register may affect the lender’s priority or the protection of its interest, but the precise effect depends on the circumstances.

If a borrower defaults or becomes insolvent, the lender’s options will depend on the loan agreement, the security documents and the applicable insolvency and enforcement rules. Including appropriate security and enforcement provisions from the outset can help clarify the lender’s rights and available remedies.

Taking possession of borrowers assets

The right to take possession is not always automatic. It depends on the type of security, the contractual terms and any applicable statutory restrictions. Court proceedings may be required in some circumstances, particularly where possession is disputed or specific legal protections apply.

Order for sale of property

A lender may have a contractual or statutory power to sell secured property, depending on the circumstances. Clear drafting of the relevant powers and enforcement procedures can help reduce uncertainty if repayment fails.

Going to court

Where the lender cannot exercise a power of sale directly, court proceedings may be necessary to obtain the appropriate relief. The requirements depend on the type of security and the remedy sought. The lender may need to demonstrate compliance with its contractual and legal obligations, including any applicable duties when exercising a power of sale.

Appointing a receiver

A receiver may be appointed where the security documents or applicable law provide for this. The receiver’s role is to take control of the relevant assets or income and apply the proceeds in accordance with the appointment and the lender’s rights.

A well-drafted loan and security agreement can set out when a receiver may be appointed and the scope of their powers. If no such power is available, other options may need to be considered. Depending on the circumstances, these could include insolvency proceedings against an individual borrower or a company, subject to the relevant legal requirements.

Recovering loans made to companies or individuals requires careful consideration of the available security, contractual rights and enforcement options. Although appropriate documentation can improve a lender’s position, we also advise where existing paperwork is incomplete, defective or unclear.

We can help you assess your position and identify practical options for protecting your interests. Call us on 020 7438 1060 to discuss your circumstances.