Warranties and Guarantees in English Law

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Warranties and
Guarantees in English
Law
Presented by Francis Wallace
Rix & Kay Solicitors LLP
October 2012
© Rix & Kay Solicitors LLP 2012
Types of Warranties and Guarantees
 Mortgage (or charge) over land
 Mortgage of movable property (chattels)
 Charge or assignment of choses in action, E.g. Book debts, life
policies, company shares
 Fixed charges and floating charges
 Charges created by court orders
 Personal Guarantees
© Rix & Kay Solicitors LLP 2012
Legal Formalities for all Charges / Mortgages
 Contracts creating a security must comply with requirements
common to other contracts:
 There must be monetary consideration for the security, or the
security document must be by deed. That is, in a document stated to
be a deed: formerly, the seals of the parties had to be attached to
the deed
© Rix & Kay Solicitors LLP 2012
Personal Guarantees
 A common form of security
 Often required by banks, from company Directors, in respect of
loans to the company
 The Guarantor assumes the same responsibility for payment of the
debt as the Debtor himself, and can be sued by the Creditor as well
as, or instead of, the Debtor
 Guarantee should be in writing and Guarantor should take
independent legal advice, particularly if lender is a bank
 No requirement for registration
© Rix & Kay Solicitors LLP 2012
Mortgages of Land
 Mortgages or charges of land must be in writing
 Mortgage must be registered against the land at H M Land Registry
 Mortgage gives Creditor the right to sell the land and to use the
proceeds towards payment of the debt
 If Debtor refuses to give up possession of the land, the Creditor is
entitled to seek a possession order from the court
© Rix & Kay Solicitors LLP 2012
Mortgages of Land
 Order of registration decides priority of mortgages
 So check before accepting security, what prior mortgages are
registered?
 Land Register is open to public inspection
 Note: Prior mortgages often contain restrictions prohibiting
registration of later mortgages without prior lender’s consent. Banks
often refuse consent
© Rix & Kay Solicitors LLP 2012
Charging Orders
 Creditor who has a judgment can apply to court to register a charge
against land: Charging Orders Act 1979
 A charging order under 1979 Act does not require consent of prior
lenders
 Charging orders should be protected by registering a notice at the
Land Registry
 Charging Orders have priority according to date of registration of
notice. No priority over earlier mortgages on the land
© Rix & Kay Solicitors LLP 2012
Charging Orders
 The Debtor is notified of the interim charging order as soon as this
has been made by the court. He can then raise objections to the
order being made final
 Prior mortgage holders must be notified of the application for the
final charging order. However it is unlikely that the court will refuse
registration if they object
 Charging orders can also be made against personal property, E.g.
Bank accounts, life assurance policies and company shares
 The bank / life company / company itself must be notified of the
application for the final order
© Rix & Kay Solicitors LLP 2012
Mortgages of Movable Property (Chattels)
 Archaic and technical branch of English Law
 If security is given over personal chattels for payment of a debt, and
that security is contained in a document, it must be in the proper
form. It must contain an Affidavit sworn before a solicitor and must
be registered at the High Court: Bills of Sale Act (1878) Amendment
Act 1882
 This applies where the goods will remain in the Debtor’s possession
 Chattel mortgages are rarely used due to these technicalities
 1882 Act does not apply to mortgage created by companies
© Rix & Kay Solicitors LLP 2012
Hire Purchase Agreements
 In order to avoid technicalities of the Bills of Sale Acts, security for
loans made for purchase of many types of movable property, E.g.
Vehicles, office equipment, furniture is granted via a hire purchase
agreement between Debtor and Creditor
 Creditor remains the owner and Debtor is the hirer, typically until all
the instalments are paid
 Consumer HP transactions are heavily regulated by the Consumer
Credit Act 1975
© Rix & Kay Solicitors LLP 2012
Hire Purchase Agreements
 When buying a used vehicle, or being offered it as security, it is
important to carry out a search with a credit reference agency to
check whether the vehicle is subject to a hire purchase agreement.
 If so it does not belong to the Debtor and cannot validly be sold or
charged
© Rix & Kay Solicitors LLP 2012
Ships and Aircraft
 These have their own specialised schemes requiring registration of
mortgages granted over ships or aircraft:
 Merchant Shipping Act 1995
 Civil Aviation Act 1982
© Rix & Kay Solicitors LLP 2012
Charge Over Choses in Action
 These are common forms of security, and are easy to create
 Examples: Assignment of life policy, charge over book debts, charge
over company shares
 Notice of the charge must be given to the life company, Debtor who
owes the book debt, or the company which issued the shares. They
then hold the asset for the benefit of the Creditor
© Rix & Kay Solicitors LLP 2012
Assignment of Choses in Action
 Factoring is a common situation in which businesses raise finance
by assigning book debts to banks
 Notice must be given to the customers of the business, generally on
each invoice raised by the business: this states that the debt created
by the invoice has been assigned to the bank
 The customer must then make the payment to the bank direct
© Rix & Kay Solicitors LLP 2012
Floating charges
 A fixed charge may be taken over land or over movable property
which is static or fixed in nature. E.g. Land or plant & machinery
 A floating charge may be taken over property which is not fixed and
which changes and fluctuates over time: E.g. Stock in trade, book
debts
 Debtor remains free to deal with the property subject to the floating
charge, until the charge crystallises
© Rix & Kay Solicitors LLP 2012
Floating Charges
 Crystallisation: the floating charge document will state that the
charge crystallises, that is, becomes fixed, when certain events
happen
 Examples: Debtor stops trading or suspends payment of debts,
other Creditors execute against Debtor’s goods, Debtor enters an
insolvency procedure
 Floating charges apply almost exclusively to company Debtors, not
individuals
© Rix & Kay Solicitors LLP 2012
Mortgages by Companies
 Company mortgages or debentures must be registered by the
company in its records. They must also be registered with the
Registrar of Companies within 21 days of creation
 Failure to register within 21 days normally means the mortgage is
void against a Liquidator of the company
© Rix & Kay Solicitors LLP 2012
Impact of Insolvency Legislation
 Creditor should not assume Debtor can give valid security over his
assets if he is approaching insolvency
 Creditor can search to enquire whether there is a pending
bankruptcy petition against an individual, or a pending winding-up
petition against a company
 This is not a complete answer as securities given a considerable
time before formal insolvency may be invalid
© Rix & Kay Solicitors LLP 2012
Impact of Insolvency Legislation
 Insolvency Act 1986, S.340, 240 allow insolvency office holders
(Trustee in bankruptcy for individuals, Liquidator for companies) to
apply to court to set aside preferences given to Creditors by the
insolvent person or company
 A preference is something which puts the Creditor in a better
position than he would otherwise have been in, in the event of the
insolvency of the individual or company
© Rix & Kay Solicitors LLP 2012
Insolvency Legislation
 Time limits: Office holder can apply if the preference was given
within 6 months of the onset of the insolvency procedure
 Within 2 years if the preference was given to a connected person,
E.g. Director or Associate of a Director
 If preference is also a transaction at an undervalue (no monetary
consideration for it, or inadequate consideration): 5 year time limit
applies
© Rix & Kay Solicitors LLP 2012
Conclusions & Suggestions
 Effective and simple forms of guarantee / security available to
Creditors, who are already owed money, include:
 Mortgage over land: but only effective if there are no prior
mortgages or these do not prohibit creation of subsequent
mortgages
 Mortgage or assignment of life assurance policy
 Personal Guarantee given by a third party who is known to have
assets
 Debenture (mortgage) over company’s assets
© Rix & Kay Solicitors LLP 2012
Conclusions & Suggestions
 Undertakings by solicitors:
 The Debtor may be in a position to deposit money with his solicitor,
or the solicitor may be selling an asset for him. It is common in those
situations for the solicitor to be asked to give an undertaking to pay
the Creditor a certain sum of money at a specified future time
 Solicitors are careful to ensure that the undertaking only becomes
effective when the property is sold or when certain conditions are
met
© Rix & Kay Solicitors LLP 2012
Solicitors’ Undertakings
 A solicitor’s undertaking is a formal promise to pay the funds
concerned to the Creditor. It is quite commonly used in debt litigation
where the Debtor has an asset and is in the process of liquidating or
disposing of it
 Breach of an undertaking by a solicitor is regarded as a serious
disciplinary offence by the Solicitors Regulation Authority
© Rix & Kay Solicitors LLP 2012
Any questions?
Contact:
Telephone: (+ 44)1825 744 421
Rix & Kay Solicitors LLP
[email protected]
Further information available on our Website
www.rixandkay.co.uk
© Rix & Kay Solicitors LLP 2012
Important Notice
 These notes are a brief introduction to a
complex and wide subject. They should not be
used as the basis for giving legal advice. Whilst
they are believed to be correct, neither the
author nor Rix & Kay Solicitors LLP can accept
responsibility for any accidental errors
Francis Wallace
October 2012
© Rix & Kay Solicitors LLP 2012
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