Last Updated October 08, 2019

Law and Practice

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Winston & Strawn London LLP provides a wide range of legal services through its banking and finance practice, to public and private companies, leading financial institutions, multilateral and development finance institutions, private equity and investment funds, alternative funding sources, investors and emerging companies, on investment grade, leveraged and mezzanine financings. The firm advises on high-profile transactions and matters ranging from cross-border transactions, initial public offerings (IPOs) and project finance matters, to distressed acquisitions and creative “first-of-their-kind” financings. Clients include leading international funding sources which provide senior, subordinated, secured and unsecured debt, and hybrid (equity/debt) products, as well as institutional investors who regularly participate in senior debt markets, equity sponsors, and borrowers in both developed and emerging economies. Additional thanks to partners Ed Denny and Dan Meagher and associate Shaheer Momeni, among others, for their contributions to this chapter.

Priority of security is governed by English common law rules, not by order of registration. Consequently, a lender which advances money to a company in reliance on a clear search of the register of security interests should not assume that it is protected; there may be an earlier charge granted within the preceding 21 days that has not yet been registered.

Competing Security Interests

With respect to competing fixed security or mortgages, priority is generally determined based on which security was created first (as long as such security was registered within the 21-day grace period). The same applies with respect to competing floating charges. A fixed charge or mortgage will rank ahead of a floating charge, except when the fixed charge (or mortgage) is obtained after the floating charge came into existence and the holder of the fixed charge (or mortgage) obtained it knowing that it violated the terms of the existing floating charge. 

The priority of successive assignments of an account receivable is not governed by the general common law rule of first in time but rather by the first to give notice. Consequently, an assignee that is the first to give notice of assignment to a debtor will obtain priority over an earlier assignee that has not yet given notice.

There are, however, a number of exceptions to these rules, including that, where security is granted over an asset requiring registration in a specialist register (eg, real estate or intellectual property), the priority of such security will be determined by the order of registration in the specialist register. With respect to the priority of mortgages and fixed charges over real estate, the rules differ for registered and unregistered land. The basic priority rules for registered land are that legal mortgages rank in priority in the order shown in the relevant Land Registry register and equitable mortgages and charges rank in order of date of creation. The basic priority rules for unregistered land are, firstly, that a lender holding the title deeds to a property subject to a legal or equitable mortgage or charge can rely on the possession for priority. If the title deeds are not held by the lender, the lender can protect its security by registering a Class C land charge with the Land Charges Department where the security is over a legal estate. Registered Class C land charges rank in order of their registration.

Subordination

Depending on the nature of the particular transaction, contractual subordination is recognised by UK courts. It is often used in conjunction with other structuring techniques, such as turnover trust, structural subordination, assignment of junior debt and taking security.

Contractual subordination may be achieved by agreement between creditors, eg, by them entering into a deed of priority or an inter-creditor agreement. In its simplest form, contractual subordination not only prevents the junior creditor from being paid until the senior creditor has been paid in full, but also subordinates the junior creditor in an insolvency situation to all other creditors ranking equally with the senior creditor. It is, however, also possible to create arrangements whereby the junior creditor is subordinated to the senior creditor only.

Contractual subordination remains effective on the insolvency of a borrower incorporated in England, subject only to the mandatory statutory pari passu principle that the priority of creditors on insolvency is determined by whether they are preferential, general or deferred creditors.

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Authors



Winston & Strawn London LLP provides a wide range of legal services through its banking and finance practice, to public and private companies, leading financial institutions, multilateral and development finance institutions, private equity and investment funds, alternative funding sources, investors and emerging companies, on investment grade, leveraged and mezzanine financings. The firm advises on high-profile transactions and matters ranging from cross-border transactions, initial public offerings (IPOs) and project finance matters, to distressed acquisitions and creative “first-of-their-kind” financings. Clients include leading international funding sources which provide senior, subordinated, secured and unsecured debt, and hybrid (equity/debt) products, as well as institutional investors who regularly participate in senior debt markets, equity sponsors, and borrowers in both developed and emerging economies. Additional thanks to partners Ed Denny and Dan Meagher and associate Shaheer Momeni, among others, for their contributions to this chapter.

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