International Finance

Fixed v. Floating Charge

● Floating Charge and Fixed Charge
● Risks associated with floating charge
● Characteristics that the court uses to determine the nature of the charge: whether the security
is determined, ambulatory nature
● Banks and FIs give floating charges because it gives a higher rate of interest.

Cases:

Illingworth v. Houldsworth

Defines floating charge –

Crystallization of Charge - Events of default clause – once the event happens, the floating charge converts
into a fixed charge and the debtor can no longer deal with the charged assets.

What will you put in an EOD clause:

● If the value of assets secured diminishes beyond a certain limit.

● Bankruptcy of the borrower
● Default on payment

Hollywood v. Marshall – Creating a charge over a property after it is acquired. Can you create a charge
on future property? Held - As long as you are allowed to deal with the property it’s a floating charge even
if you will acquire it in the future.

Yorkshire Woolcombers Association:

● Over class of assets present or future

● Assets will be changing from time to time
● The charger may carry on business till the charge crystallizes

Agnew v Commissioner of Inland Revenue

Facts: Debentures were issued and deposited into an account. Interest from debentures was put into another
account. Both accounts were usable in ordinary course of business.

If I have bought debentures then I can use those debentures as assets (as I have loaned some amount to / I
am owed some amount). I can use that debenture as an asset as collateral for a loan. If the debenture is paid
back, then the debt is extinguished. Then, what happens to the collateral?

Debentures are repaid in one go. They are not dealt with in ordinary course of business. So is there a fixed
charge or a floating charge?

The court says that it’s all about control. If chargee has control then fixed charge and if charger has
control then it is floating charge. Whether the chargee can ensure that the amount stays assured.

Spectrum Case v. National Westminster Bank – Messy drafting.

They said they are creating a fixed charge.

Spectrum is a paint company which opened an overdraft facility in National Bank. When they used the
overdraw facility. The bank was given charge over book debts of the company for the overdraft. National
Bank imposed the condition that you cannot assign book debts further (create further charge) but you can
deal with it.

Spectrum faced insolvency.

Is this a fixed charge or a floating charge? (The implication is that fixed charge holders have a priority
during insolvency)

*Facility Agreement – Covers different aspects of financing for a certain project. There are different
tranches (different disbursement streams).

Securitization –

Repackaging of debts – the SPV gets the rights to the loan, and sells bonds based off those loans to the
investors.

Short-selling

Mortgage backed security v. Asset backed security

Can you override the IBC waterfall mechanism through a private contract? No

Pari Passu within creditors – all of them in the same class must be treated equally

The way mortgage backed securities are enforced are by taking hold of the assets of the debtor and trying
to liquidate them.

Netting – Claims are set off against each other before the process of insolvency begins.

Role of Lawyers in Securitization

To perfect the security interest – register the conveyance deed

Priority of charges – it is chronological or as per the date of registration

Three characteristics of true sale that you would not find it in a mortgage: (*Note – you are trying to
prove sale of loan in order to prevent the loan from being traced to the bank i.e. to protect the bank from
claims)

1. Absolute cessation of ownership

2. The buyer has to do due diligence – cannot sue the seller if the value is less than how it was sold (caveat
emptor)

3. If assets prove to be more than the price, then seller has no recourse

March
● True Sale Elements – Welsh Development Agency vs. Export Finance Corporation Ltd
(1992) BCLC 148 CA
 ● Whether it is a sale or mortgage? – Court will look at intention of parties as well as wording.
● Property Due Diligence – Look at correct title to property – is the title good, is the debtor
actually the owner? Check this with the local administration.
● The title you pass is the title you have (if it has encumbrances, the same will pass onto the
next person).
● The title must be investigated if the asset has been securitized once already.
● Originator (bank) will ask the obligor for implied warranties as to title. It may also ask for
extra warranties from the obligor – such as the asset being up to a certain value level. This
gives added protection to the bank.
● Certain credit card loans can be rendered unenforceable – bankruptcy of the creditor.
Generally, credit card loans do not have recourse like security assets. Thus, they can be risky
but the risk is mitigated by the fact that the loans are smaller in amount.
● Securitization can happen a number of times – unless a non-assignment clause is put in place.
– Linden Gardens Trust v. Lenesta Sludge Disposals (1994) 1 AC 85
● Don King Productions Ltd. v. Warren (1998) 2 Lyods Rep 176 – What exactly is happening
when you are securitizing a loan? Banks are assigning the right to sue the defaulters to the
SPV.
● Role of Security Trustee – Has a beneficial interest in the debt, but they do not have the right
to sue the debtor.
● Set Off – adjust the deposits against the default
o What effect does the set off have on the SPV? The loan amount is getting reduced.
● Equitable Assignment
o You can have reps and warranties that set off wont exist.

14th March
Additional Info - 2008 crisis – sub-prime assets – secondary loans were given on the assets that are already
mortgaged. Housing bubble burst. People started willfully defaulting.

Loan Market Association Website

20th March 19, 2023

Executory Contracts – Certain covenants still left to performed.

To accommodate for newer tranches in the transactions. What you need at the beginning of the process is
different from the requirements (security etc.) when one tranche is fulfilled. If tranche one obligations are
not done, then tranche two cannot take place. Fulfillment of tranche one obligations may be a condition
precedent for tranche two obligations to take effect.

Executory Contracts cannot work in securitization otherwise the enforcement will be impossible. Eg.
Building of Highway – it is given as security interest – if there is a default – if the bank is taking over the
highway, then the borrower will not agree to build the rest of the highway. I.e. Securitization can only take
place over assets wherein the borrower has nothing left to do wrt the asset.

According to ma’am, syndicated loan is better for projects that are yet to be executed such as public-
private partnerships/infrastructure projects.
*Syndicated Loans – Banks can enter and exit the syndicate and sell their tranches to other banks. Here,
the syndicate bank is taking lead and acting on behalf of all the other banks. This is different from
consortium lending wherein all banks act together.

Less chance of SPV crashing because there is over-collateralization (it is assumed that the security asset
increases in value over and above the bond/loan amount.) -Monoline Insurers for securitizations – they
only provide insurance for one line of business.