Advise debt that they owe to EKB. A

Advise EKB of the options available to them

 

Fixed Charge on office building

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In regard to INXS Ltd not being able to pay the loan of £3m
back to EKB, EKB must seek to the security that have been attached when forming
this agreement. A security as part of the loan was a fixed charged on the
office building owned by INXS Ltd. A fixed charge is when the assets are tied
down immediately giving the lender security for when the loan is distributed.
This can also be applied to future assets where as soon as the debtor acquires
that asset, a fixed charge will automatically be attached to it. Once the fix
charge has been created between the debtor and the creditor, the chargor will need
to inform the bank to be able to deal with the asset that has been charged.
Furthermore, if a charge has been created by a company in favour of the bank,
it must be registered with The Company House, due to the provisions laid out in
the ss 859A – 859O Companies Act 20061
(CA 2006). In order for the charge to be effective, it must be registered
within 21 days of creation. Under s.859H CA 20062 If
not, the charge would be void against the administrator, liquidator and the
creditor of the company. Charges relating to land must also be registered. S.27
LRA 20023
states that charges created on registered land must be registered for it to be
effective, where comparing to unregistered land, charges can be created but
must ensure that there is a good title, which normally involves tracing the
history that leads back to the roots of the title, previous deeds that have
been made and the checking of the registers, which includes local land charges
register. This is under the LCA 19724.  When a company is creating a charge on a piece
of land, it must ensure that it is in writing and is signed by the parties
involved, as stated in s.2 LPMA 19895.
If the chargor is a company, the charge must be registered with The Land
Registry as well as The Company House. The CA 20066,
highlights all charges that fall within the exception for it to have priority
for the bank.

 

In applying this to the scenario, EKB can rely on the fixed
charge attached on the office building owned by INXS Ltd to fund the proceeds
to repay the £3m debt that they owe to EKB. A fixed charge attached on land can
be seen as a mortgage, where the remedies that EKB can apply in the situation
of the debtor’s default are the power of sale, the power to appoint a receiver,
a right to take possession of the property or a right to foreclosure. With the
office building being worth half of the debt, EKB may seek to initiate the
power of sale under the provision of s.101 and 103 of the LPA 19257.
With this provision, EKB will not need to acquire a court order for to exercise
the power of sale, but instead, there are certain requirements that needs to be
met for it to be initiated. These can be found under s.103(i)-(iii) of the LPA
1925 where the one of the requirements is that ‘some interest under the
mortgage is in arrear and unpaid for two months after becoming due’8, the
notice of demand is served on the debtor and the debtor defaults the payment
for 3 months after the service of the notice and or the debtor is in breach of
some covenant or provision in the mortgage deed other than the covenant for
payment. The debtor does not need to meet all the requirements but has to
satisfy one for the bank to exercise the power of sale. With regard to the
scenario, it can be said that with the loan repayments being in arrears by 4
months, it satisfies one of the requirements as one of the requirements asks
for the debtor to be in arrear of loan repayment for 3 months. This means that
once the power of sale has been exercised, the proceeds from the sale of the
office building must be paid to any prior encumbrances first. The remaining
money left over will cover for the cost of sale and any surplus of this money will
go to the creditor under the charge. If there is still money left over,
subsequent chargees will then be entitled to the remainder of the sum and if
there is still a surplus of money, this then will go to the debtor. EKB must
keep in mind that they have a duty to follow, where the sale of the property
must be conducted properly, such as selling it at a fair value price and that
they themselves cannot buy the office or anyone of their nominees or someone
holding a trust for EKB. The case of Cuckmere
Brick9
highlighted that the chargee should follow professional advice in accordance to
the sale of the office building. Furthermore, in the case of Downsview Nominees,10
EKB must take reasonable steps to receive the best price where the chargor’s
interest are protected.

 

Floating Charge on the book debts

 

The second way EKB can seek to repay the debt is by looking
at the floating charge that was attached to the book debts when drawing up of
the contract. A floating charge is a charge that attaches to an asset where
upon crystallization becomes a fixed charge. This means that until the company
experiences crystallization, the debtor will be free to use and operate the
asset as if it was just an ordinary course of business. This was highlighted in
the case of Re Spectrum Plus Ltd11
where the House of Lords held that the proceeds arising from the book debts
will still be available to use by the chargor in their standard course of
dealings as the judges highlighted the fact that it should not be the matter of
whether it is a fixed or a floating charge stated in the contract but on the
rights and obligations set out by the parties. In relation to ‘book debts’,
they are money that is due to be paid to the company or to an unincorporated
firm to in order to proceed with their ordinary course of business dealings.

 

In applying this to the scenario, with INXS Ltd not being
able to keep up with the payment, it will mean that the floating charge over
the book debts become a fixed charge due to the crystallization of the company.
This means that they will be able to acquire the £400k of debt owed to INXS
Ltd.

 

Personal guarantee from Brian, Alan and Mark

 

The final security that EKB has on INXS Ltd is the personal
guarantee that they have on the three brothers. A personal guarantee is when
the guarantor agrees to meet the obligation of the debtor where under the
guarantee, the guarantor’s liability is secondary and dependent to the debtor’s
liability. This means that the bank will not be able to pre-empt demanding
repayment first from the burrower in order for the debt to materialize. The
bank can only look to the personal guarantees only upon the default of the
burrower to repay the debt. Furthermore, according to the old legislation of
Statute of Frauds 1677,12
the guarantee must be in writing. However, some elements have been retained,
but when looking at the Consumer Credit Act (CCA),13
if a party engages in a consumer credit business and if that party was to lend
money to an individual and that agreement is governed by the CCA,14
which states that any security taken, including the guarantee, must be in
writing and have the prescribed term provided for in the CCA15.
In addition, the document must be given to the security provider, in order to
look through the term before they sign it. The creditor must also make a signed
copy of the agreement available to the guarantor.

 

In accordance with the scenario, EKB needs to establish
whether the guarantors are still obliged to form part of the security of the
loan as with Mark asking to be released of his guarantee, due to him resigning,
and with Mark renegotiating with EKB on the restructure of the loan by changing
the interest rate to a fixed rate of 3.5% per annum. In regard to the variation
of the agreement made between Mark and EKB, if any changes were made without
the consent of the guarantor, the guarantor will be discharged from their
obligations unless the variation is deemed to be trivial, such as very minor
amendments to the contract which don’t go to the roots of the agreement. The
courts will tend to find trivial variations to be not disruptive of the
obligations of the parties. Furthermore, if a clause within the contract states
that indulgence clauses are permitted, no substantial change are allowed
without the guarantor’s consent. A case that illustrates this is the case of Burns v Trade Credit,16 where the bank and the burrower agreed
on two variations that altered the contract. They were to increase the loan
term and to increase the interest rate, meaning the cost to the burrower will
go up. The courts held that those changes were not binding on the guarantor as
by not consenting with the alterations, the guarantor will ultimately be
discharged from their obligations, meaning the bank cannot look to the
guarantor but to the burrower. In addition to this, if the alteration was not
consented, beneficial to the guarantor, the guarantor will not be discharged.
This was established in the case of Lombard
Finances v Bookplain Trading,17
where it was held that the change was trivial, even though the amendments were
unauthorised, as the only change to the agreement was the correction of the
name of the borrower, the guarantor still has to fulfil his obligation as a
guarantor. In applying this to the scenario, the alteration of the contract made
by Mark, consists of a 0.5% increase of the interest rate, where it is now
fixed meaning the amount payable would be reduce thereafter. However, the
amendments made was not authorised by the other two guarantors, which in turn
means that both Alan and Brian will be discharged from their obligations as
guarantors. However, in applying Lombard
Finances v Bookplain Trading,18 with the reduced amount of the monthly
instalments payable thereafter, this can be seen as a beneficial variation to
the parties involved, meaning the guarantors will not be discharged of their
obligation. Overall, I would conclude that the amendments made will not be
deemed as trivial meaning that the guarantors will not be dismissed.

 

However, I ultimately believe that the personal guarantees
of Alan and Brian will be discharged as security to the loan. The reason why I
say this is due to the fact that the release of Mark as a guarantee was not
authorised. With all the brothers signing an ‘all monies’ joint guarantee. With
the nature of the guarantee being a joint guarantee, all three guarantors must
undertake liability jointly where they are all a single obligation, meaning if
the bank was to release one of the guarantors, the bank must get consent from
all the other guarantors. Failing to do so will mean the guarantors will be
discharged. In reference to the case, the fact that EKB failed inform Brian and
Alan of these changes meant that all the other guarantors will be discharged.
This means that EKB will not be able to look to the personal guarantees of the
brothers as they have all been discharged from their obligations due to EKB
failing to get consent on the other guarantors to approve of Mark being
released as a security to the loan.

 

Liquidation

 

With EKB only being able to acquire £1.9m from the power of
sale and the book debts, EKB is still owed £1.1m. The final resort that EKB can
look is to the liquidation of the company. EKB may go ahead and bring up a law
suit for a breach of contract or by winding up the company for it to be
liquidated. This can be done by EKB applying to court for a compulsory
winding-up order. With this being made by the court, a liquidator will be
appointed, where their duty consists of liquidating and converting the debtor’s
assets into money. The money is then applied to the debtor’s debt and any
surplus will be distributed within the members according to their respective
rights within the company.  

1 Companies Act
2006

2 s.859H ibid

3 s.27 Land
Registration Act 2002

4 Land Charges Act
1972

5 Law or Property
(Miscellaneous Provision) Act 1989

6 Companies Act
2006

7 Law of Property
Act 1925

8 s.103(ii) Law of
Property Act 1925

9 Cuckmere Brick Co
Ltd v Mutual Finance Ltd 1971 2 All ER 633

10 Downsview
Nominees v Fist City Corp 1993 2 WLR 86

11 Re Spectrum Plus
Ltd 2005 4 All ER 209

12 Statute of Frauds
1677

13 Consumer Credit
Act 1974

14 ibid

15 ibid

16 Burns v Trade
Credit 1981 2 All ER 122

17 Lombard Finances
v Bookplain Trading 1991 2 All ER 762

18 ibid