Financial Collateral Regulations: Difference between revisions
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{{anat|security}} | {{anat|security|}}''Not to be confused with Ireland’s [[Financial Collateral Arrangement Regulations]].''<br> | ||
The United Kingdom [[Financial Collateral Arrangement (No.2) Regulations 2003]] are the UK's implementation of the [[Financial Collateral Directive]], and were the subject of a long disquisition in the [[extended liens]] case. | The United Kingdom [[Financial Collateral Arrangement (No.2) Regulations 2003]] are the UK's implementation of the [[Financial Collateral Directive]], and were the subject of a long disquisition in the [[extended liens]] case. | ||
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While a [[floating charge]] still offers less practical protection than a [[fixed charge]], where it qualifies as an [[security financial collateral arrangement]], the [[FCRs]] strengthen the lender’s position in certain respects. | While a [[floating charge]] still offers less practical protection than a [[fixed charge]], where it qualifies as an [[security financial collateral arrangement]], the [[FCRs]] strengthen the lender’s position in certain respects. | ||
*'''Exemption from registration''': An SFCA is exempt from registration under the [[Companies Act 2006 (UK)|Companies Act 2006]]: Therefore, failure to register a an SFCA will not result in the [[floating charge]] being [[voidable preference|void]] against the borrower’s creditors<ref>Reg 4(4) FCRs.</ref>. | *'''Exemption from registration''': An SFCA is exempt from registration under the [[Companies Act 2006 (UK)|Companies Act 2006]]: Therefore, failure to register a an SFCA will not result in the [[floating charge]] being [[voidable preference|void]] against the borrower’s creditors<ref>Reg 4(4) FCRs.</ref>. | ||
*'''Exemption from moratorium''': Generally, [[security interest|security interests]] cannot be enforced against an insolvent debtor without the consent of the administrator or the court. However, an SFCA is | *'''Exemption from moratorium''': Generally, [[security interest|security interests]] cannot be enforced against an insolvent debtor without the consent of the administrator or the court. However, an SFCA is exempt from this prohibition and can be enforced without delay<ref>Reg 8(1) FCRs.</ref>. | ||
*'''Better insolvency ranking''': Generally, a creditor’s claim on a secured asset will rank behind preferential creditors and the administrator’s costs and expenses. However, if it is an SFCA, the Lender’s claim will only rank behind prior fixed chargeholders’ claims<ref>Reg 8(1) and 10 FCRs.</ref>. | *'''Better insolvency ranking''': Generally, a creditor’s claim on a secured asset will rank behind preferential creditors and the administrator’s costs and expenses. However, if it is an SFCA, the Lender’s claim will only rank behind prior fixed chargeholders’ claims<ref>Reg 8(1) and 10 FCRs.</ref>. | ||
*'''Exemption from disposal of secured assets''': Generally, an administrator could deal with assets subject to a [[floating charge]] as if the charge did not apply (though the secured party would maintain priority over the proceeds of the disposal). This does not apply for an SFCA<ref>Reg 8(1) FCRs.</ref> | *'''Exemption from disposal of secured assets''': Generally, an administrator could deal with assets subject to a [[floating charge]] as if the charge did not apply (though the secured party would maintain priority over the proceeds of the disposal). This does not apply for an SFCA<ref>Reg 8(1) FCRs.</ref> | ||
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*'''[[Appropriation]]''': Outside the FCRs, a Lender can only “foreclose” on secured assets (i.e. become their absolute owner in discharge of the secured liabilities) with the court’s permission. However, under the FCRs, the holder of an SFCA may “appropriate” secured assets (i.e. become their absolute owner in discharge of the secured liabilities subject to accounting for any excess over the secured liabilities) without specific court approval<ref>FCRs Reg 17.</ref>. | *'''[[Appropriation]]''': Outside the FCRs, a Lender can only “foreclose” on secured assets (i.e. become their absolute owner in discharge of the secured liabilities) with the court’s permission. However, under the FCRs, the holder of an SFCA may “appropriate” secured assets (i.e. become their absolute owner in discharge of the secured liabilities subject to accounting for any excess over the secured liabilities) without specific court approval<ref>FCRs Reg 17.</ref>. | ||
===Floating charges - priority=== | ===Floating charges - priority=== | ||
Generally [[floating charge|floating charges]] rank behind [[fixed charge]]s created before they crystallise. The FCRs do not change this. But conflicts of priority between fixed and floating charges are only likely to arise where the Borrower continues to hold and deal with the charged assets. It it does not, it can’t grant anyone else a fuixed charge either. therefore the presence of a third party custodian holding the assets in question (like, you know, a [[Triparty agent|tri-party agent]]) makes a big practical difference. | Generally [[floating charge|floating charges]] rank behind [[fixed charge]]s created before they [[crystallise]]. The FCRs do not change this. But conflicts of priority between fixed and floating charges are only likely to arise where the Borrower continues to hold and deal with the charged assets. It it does not, it can’t grant anyone else a fuixed charge either. therefore the presence of a third party custodian holding the assets in question (like, you know, a [[Triparty agent|tri-party agent]]) makes a big practical difference. | ||
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*[[Fixed charge]] | *[[Fixed charge]] | ||
*[[Floating charge]] | *[[Floating charge]] | ||
Latest revision as of 22:00, 1 June 2022
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A word about credit risk mitigation
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Not to be confused with Ireland’s Financial Collateral Arrangement Regulations.
The United Kingdom Financial Collateral Arrangement (No.2) Regulations 2003 are the UK's implementation of the Financial Collateral Directive, and were the subject of a long disquisition in the extended liens case.
This will cue a leap in the pulse-rate of a certain kind of finance lawyer, and if you’re one of those, you should pop along to our article on the financial collateral directive, which will attempt an unreliable overview.
Floating charges and the FCRs
While a floating charge still offers less practical protection than a fixed charge, where it qualifies as an security financial collateral arrangement, the FCRs strengthen the lender’s position in certain respects.
- Exemption from registration: An SFCA is exempt from registration under the Companies Act 2006: Therefore, failure to register a an SFCA will not result in the floating charge being void against the borrower’s creditors[1].
- Exemption from moratorium: Generally, security interests cannot be enforced against an insolvent debtor without the consent of the administrator or the court. However, an SFCA is exempt from this prohibition and can be enforced without delay[2].
- Better insolvency ranking: Generally, a creditor’s claim on a secured asset will rank behind preferential creditors and the administrator’s costs and expenses. However, if it is an SFCA, the Lender’s claim will only rank behind prior fixed chargeholders’ claims[3].
- Exemption from disposal of secured assets: Generally, an administrator could deal with assets subject to a floating charge as if the charge did not apply (though the secured party would maintain priority over the proceeds of the disposal). This does not apply for an SFCA[4]
- Disapplication of avoidance provisions: An SFCA can’t be challenged as a voidable preference under section 245 of the Insolvency Act[5].
- Appropriation: Outside the FCRs, a Lender can only “foreclose” on secured assets (i.e. become their absolute owner in discharge of the secured liabilities) with the court’s permission. However, under the FCRs, the holder of an SFCA may “appropriate” secured assets (i.e. become their absolute owner in discharge of the secured liabilities subject to accounting for any excess over the secured liabilities) without specific court approval[6].
Floating charges - priority
Generally floating charges rank behind fixed charges created before they crystallise. The FCRs do not change this. But conflicts of priority between fixed and floating charges are only likely to arise where the Borrower continues to hold and deal with the charged assets. It it does not, it can’t grant anyone else a fuixed charge either. therefore the presence of a third party custodian holding the assets in question (like, you know, a tri-party agent) makes a big practical difference.