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Finance brief - October 2012
- Proposed changes to the registration of charges with Companies House
- Key Issues to be aware of when enforcing against Personal Guarantors
- Non-UK borrowers and issues of security, COMI, administrators and receivers
- Can a private banker witness a customer's deed?
- No faith in the enforceability of agreements to negotiate in good faith
This article looks at some of the issues a lender should consider when a borrower or security provider is incorporated or has substantial assets outside England and Wales. The lender needs to know how this will affect its security and remedies, and the possible impact of insolvency procedures in relevant jurisdictions.
Where a non-UK company intends to borrow or create security here, it is necessary to check its ability to do so. That will usually be governed by the law of its place of incorporation, and a lender is well advised to obtain legal advice from lawyers in that jurisdiction as to the borrower's capacity to enter into the transaction, the corporate authorities required, any local registration or stamp tax requirements, and on matters such as whether a judgment obtained from the English courts will be enforceable, or a receiver or (if applicable) administrator will be recognised, in its local courts. Such an opinion may also be obtained for a foreign individual, although matters such as capacity to borrow and to create security over UK assets will not usually be affected by nationality, domicile or residence.
Wherever a borrower is incorporated or resides, if it has substantial assets outside England and Wales and the lender requires security over them, different questions arise, including what form of security should be taken. Although, in the case of a company, an English law debenture (all-assets fixed and floating security agreement) will usually be worded to catch all the company's assets, wherever they are, it may not create effective security over assets outside England and Wales. In particular, civil law jurisdictions may not recognise the effectiveness of the floating charge in the debenture, or local requirements to register the charge may not have been complied with. If there are valuable assets outside England and Wales, legal advice will be required from lawyers qualified in the relevant jurisdiction on the appropriate form of security, and on matters such as the enforcement procedures that will be available.
In terms of enforcement, some jurisdictions are (as is well known) more "debtor friendly" than others. In broad terms the divide is between common law jurisdictions such as England, which usually leave a creditor relatively free to enforce its security and permit it to exercise "self help" remedies, and civil law jurisdictions, including much of continental Europe, where there are greater restrictions on the lender's rights, and a court order may be required to enforce security.
Within the EU there are also relaxations to some of the general rules concerning security and insolvency by virtue of the Directive on Financial Collateral Arrangements (implemented in the UK by the Financial Collateral Arrangements (No 2) Regulations 2003), which apply to financial collateral arrangements (most forms of security and title transfer arrangements) over cash and certain financial instruments. These disapply various insolvency rules and registration requirements, and allow a power to be taken in the security documents for the lender to "appropriate" financial collateral towards satisfaction of outstanding indebtedness, rather than having to sell it.
Turning to the position if a borrower or security provider becomes insolvent, the EU does not have a single set of insolvency procedures applicable to every Member State. The Insolvency Regulation 2000, however, provides a set of rules to govern in which jurisdictions in the EU "collective" insolvency proceedings should be taken, and to ensure that they are recognised in other Member States. In the UK such proceedings include bankruptcy, winding-up by the court or creditors' voluntary winding-up, voluntary arrangements under insolvency legislation, and administration, but not receivership, which is a remedy for a particular secured creditor rather than a collective insolvency procedure.
The question of where insolvency proceedings can be taken within the EU depends largely on the whereabouts of a debtor's centre of main interests (or "COMI"). Although there is a presumption that the COMI of a company is where it has its registered office, this can be rebutted. The prevailing approach of the European Court of Justice is that a debtor company's COMI should correspond to the place where it conducts the administration of its interests on a regular basis and should be identified by reference to criteria that are both objective and ascertainable to third parties, and to attach importance to the place of the debtor's central administration. There is scope for a company to move its COMI, and a loan agreement will often specify that a borrower must maintain its COMI in a particular jurisdicition, and may require it to have no establishment in any other jurisdiction (to avoid the risk that insolvency proceedings are taken in that jurisdiction). The whereabouts of the COMI and the existence of any establishment are, however, questions of fact, whatever the documents may say. The Regulation does not regulate or interfere with the taking of insolvency proceedings in relation to any debtor whose COMI is outside the EU (e.g. a company incorporated in the US can be wound up in England if it has a sufficient connection here, regardless of the Regulation).
In summary, the Regulation provides that the courts of the Member State within whose territory a debtor's COMI is situated have jurisdiction to open insolvency proceedings (main proceedings). These proceedings have automatic effect throughout the other EU member states, and their governing law provides the framework for the insolvency process, subject to safeguards to preserve certain established rights. Secondary insolvency proceedings (which are limited to winding-up proceedings) can be opened in another Member State if that debtor has an "establishment" there.
If a creditor has a qualifying floating charge (i.e. security that comprises or includes a floating charge over all or substantially all of a company's assets) it can appoint an administrator under the UK Insolvency Act 1986, but only in respect of:
(a) a company registered under the Companies Act 2006 (or its forerunners) in England and Wales or Scotland;
(b) a company incorporated in an EEA state other than the United Kingdom; or
(c) a company not incorporated in an EEA State but having its COMI in an EU member state other than Denmark,
the EEA (or European Economic Area) being the EU member states plus Iceland, Liechtenstein and Norway. The result is that, whatever the security document may say, a lender with a debenture from a borrower incorporated outside the jurisdictions mentioned in (a), (b) or (c) above (for example in the British Virgin Islands and having no COMI in the EEA), cannot appoint an administrator.
If an administrator cannot be appointed, but a security provider nonetheless has substantial assets in the UK, what remedies does that leave to the creditor? Since the Enterprise Act 2002, the holder of a qualifying floating charge has been unable to appoint an administrative receiver unless one of the limited exceptions set out in what are now sections 72B to GA of the Insolvency Act apply, for example because the floating charge forms part of a "capital market arrangement". If they do not, and the security provider is incorporated in England and Wales or Scotland, then appointing a receiver over the whole (or substantially the whole) of its assets under a debenture which, as created, was a floating charge, or under such a debenture and other securities, would amount to the unlawful appointment of an administrative receiver. A receiver may nonetheless still be appointed over particular assets, subject to a fixed charge in such a debenture.
Following a change in the law in October 2009, however, a receiver appointed in respect of a foreign registered company (i.e. outside England and Wales or Scotland) cannot be an administrative receiver under English law for the purposes of the Insolvency Act. This means that a receiver appointed under a debenture given by such a foreign company does not risk being an unlawfully appointed administrative receiver, even if the company is incorporated in another EEA state. But equally, the inability to appoint an administrative receiver under one of the exceptions referred to above in respect of a company incorporated outside England and Wales or Scotland is a significant restriction. It means that the charge holder cannot block the appointment of an administrator (in cases where such an appointment is possible, because the debtor is incorporated in another EEA Member State or has its COMI in an EU Member State other than Denmark), and there have been strong calls for this change to be reversed.
Conclusion
- Unless a company borrower incorporated outside the EEA has its COMI in an EU member state (other than Denmark), then while a lender may be able to take a floating charge, it will not be able to appoint an administrator. It will, however, be able to appoint a receiver over all the company's assets, including an appointment under the floating charge.
- If a company borrower is incorporated in England and Wales or Scotland the lender can only appoint an administrative receiver in limited circumstances. It cannot appoint a receiver under the floating charge in an all-assets debenture, but can appoint a receiver over fixed charge assets.
- There is always a risk, even if the documents prohibit it, that the borrower will change its COMI after creating the debenture, and that this will alter the remedies available to the lender. Doing so in breach of such a prohibition would, of course, usually be an event of default
For further information, please contact Robert Cooke, Partner or Andrew Evans, Partner, in the Finance Group at Field Fisher Waterhouse LLP.