Banking & Finance 2019 Second Edition

Last Updated September 10, 2019


Law and Practice


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.

The economic picture in 2019 remains complex. 

In the UK, as the political process and negotiations surrounding the UK's proposed withdrawal from the European Union (so-called "Brexit") have dragged on, businesses have increased their preparedness for a hard Brexit, while adopting a wait-and-see approach to transactions and investment. One significant aspect of Brexit has been the continued weakness in sterling, which has prompted opportunist approaches to larger businesses in defensible sectors, but this has not spread to more mid-market targets.

Business associated with government funding received a boost with the spending review announced by the government in mid-2019. This has yet to be felt, but austerity-ending increases have been announced across large parts of government business. 

Corporate lending (as opposed to deposit taking) remains an unregulated activity in the UK. There has been discussion of introducing regulation of non-bank lenders but, for the moment, regulators seem to be focused elsewhere.

More widely, international markets are still grappling to find alternative rate-setting mechanics following the announced withdrawal of the requirement that London banks contribute to LIBOR rate setting, which will affect how interest rates are fixed from 2021. While a lot of work has been done, no replacement with equivalent functionality has emerged, and it seems that changes in interest rates are set to be far more volatile as a result. 

Following a prolonged period where the high-yield market saw net outflows, the position reversed in 2019, with the market beginning to experience inflows. Despite the all-time highs in the stock market, the potential for a US recession caused investors to start re-balancing their portfolios of stocks and bonds. 2019 has also seen an element of quantitative easing return, with liquidity principally being taken out of the bond markets.

The alternative credit provider market is a mature market in the UK. There are debt funds covering not only loans of all sizes but, increasingly, a full suite of lending products, including many types of specialist property finance, infrastructure lending, asset-backed lending and receivable finance, as well as leveraged loans. These funds typically can call on managed accounts to top up fund commitments and provide substantial loan sizes. 

Alongside this, peer-to-peer platforms are growing and expanding into areas such as SME lending and receivables financing, often backed by current edge credit assessment technology rather than traditional underwriting, which reduces cost and increases efficiency, in some cases challenging the traditional bank approach.

There are several emerging trends in the UK banking industry. 

In the UK leveraged loan market, banks have been very concerned over how the market has developed. Due to their negotiating power, sponsors have gone from negotiating terms with the arranging banks, to insisting that deals are launched with their preferred terms, leaving the buyers to push back in syndication. Sponsors have agreed flex provisions to protect the arrangers, but buyers routinely can only make a limited number of points or risk not being given an allocation. It is now rare for broadly syndicated leveraged loans to have maintenance covenants at all: last year, 88% of such loans in Europe were covenant-lite. Coupled with a spread of sponsor-designated lender counsel to all areas of the market, this has further weakened terms, with sponsors achieving extremely favourable terms and conditions. 

One area of significant recent growth has been the receivables sale and ABL sector of the market. While by no means only used by companies with limited financing options, increased use of asset-backed structures by companies may indicate difficulties in obtaining finance from other sources. 

The regulation of non-bank lending, if it occurs, has the capacity to significantly affect the market. It is unlikely that regulators would wish to damage the investment which comes from this area and most European jurisdictions have been introducing rules to encourage non-bank lending. However, previously proposed regulations and regulations that can be seen worldwide (eg, universal lender licensing) could have a significant negative impact if introduced to the UK. There are initiatives designed to encourage SME lending and promote fairness in this section of the market, in a similar way to consumer protection.

Grumbles about the tax benefits of highly leveraged structures seem to be growing once more, with the potential for limits to be imposed on interest deductibility.

Following regulatory and academic recommendations for LIBOR reform, the UK Financial Conduct Authority (FCA) announced in 2017 that LIBOR would be replaced by alternative risk-free benchmark rates by 2021. Currently, work continues on developing alternative measures of short-term bank funding costs which would reform and replace the survey-based LIBOR with suitable reference rates for a range of currencies and tenors: SONIA for sterling, SOFR for US dollars, STR for euros, SARON for Swiss francs, and TONAR for Japanese yen.

Requirements and Procedures

In the UK, authorisation requirements vary by level and type of activity. While there are licence requirements for providers of consumer credit, wholesale lending activity is generally unregulated and, provided that the lender will not be accepting deposits or conducting investment business within the UK, it will not require authorisation from the FCA and the Prudential Regulation Authority (PRA).

However, the position is different in relation to transactions or arrangements involving bonds, securities, debentures and other instruments creating or acknowledging indebtedness. Persons carrying out certain activities in relation to these types of instruments must be authorised under the Financial Services and Markets Act 2000, unless they have an exemption. Similarly, persons intending to carry out regulated consumer credit activities will have to apply for authorisation. 

Passporting Rights

Subject to fulfilment of various conditions under the relevant EU directive, certain rights currently apply to credit institutions and other authorised financial services firms headquartered in a member state of the EEA where such firms seek to also carry on permitted activities in another EEA member state on the basis of its home state authorisation. This is done by the credit institution or firm exercising the right of establishment (of a branch and/or agents) or providing cross-border services and is referred to in the Financial Services and Markets Act 2000, as amended (FSMA) as an EEA right, the exercise of such right being known as "passporting".

A credit institution or firm headquartered in the EEA which qualifies for authorisation will have permission to carry on each permitted activity in the UK which the credit institution or firm is authorised to carry on in its home state that is also a regulated activity under FSMA. 

If the UK leaves the EEA pursuant to the government’s Brexit plans, unless specific arrangements are negotiated, passporting rights will no longer be available.

There are no specific restrictions on foreign lenders' granting of loans to corporate borrowers. Restrictions apply to loans for individuals and mortgage lending.

There are no specific restrictions on the granting of security or guarantees to foreign lenders.

There are no exchange controls regarding foreign currency exchange. 

Banks and other regulated lenders are obliged by law and regulation to ensure that funds drawn from them are not used in breach of anti-corruption and sanctions regimes. Lenders are required by law to actively seek and identify bribery and corruption risks and maintain processes to mitigate these risks, and to identify and implement controls regarding money laundering. 

The UK is currently required to adhere to UN and EU sanctions and it also has an autonomous terrorist sanctions regime. It is expected that the EU sanctions regime will cease to apply to the UK following Brexit, however, in the case of a no-deal Brexit, the UK will look to carry over all EU sanctions at the time of its departure pursuant to the Sanctions and Anti-Money Laundering Act 2018 (the Sanctions Act) or the EU (Withdrawal) Act 2018. 

As a consequence of increasingly aggressive enforcement action (especially by the US sanction authorities), lenders now seek specific contractual assurances in these areas which go beyond general compliance with applicable laws, representations and undertakings and the illegality mandatory prepayment provision. In relation to anti-corruption laws, lenders’ proposals are often less wide-ranging than those relating to sanctions. 

In the pre-contract due diligence stage, investigations into the borrower group’s compliance with sanctions law have become customary. Non-compliance with sanctions laws will customarily constitute an event of default under the facilities, or trigger automatic prepayment and cancellation of the loans, restricting the borrower’s use of proceeds and entitling the lender to accelerate the loan and to take enforcement action against the borrower.

Both the agency and trust concepts were created by and are recognised under English law. 

Loan Market Association standard documents are generally adopted by lenders. Under these, the agent bank is specifically authorised to act for the syndicate members in respect of the administration and servicing of the loan under a contract of agency constituted under the syndicate management clauses of the loan agreement. The agent bank is regarded as an agent of the syndicate members with fiduciary duty for the duration of the loan contract (subject to exclusion clauses). 

Historically, most facility agents and security trustees in English syndicated acquisition finance structures were departments within banks, but there are now a significant number of other providers in the market who offer agency and trustee services.

The establishment of a security trust by a security trustee is generally used to hold any English law security on trust for the benefit of the lenders from time to time. Through the establishment of a trust account, the proceeds of payment can be delivered to and from the borrower and the syndicate members on receipt from the syndicate members and the borrower respectively. The security trustee bank is regarded as security trustee of the syndicate members with fiduciary duty for the duration of the loan contract (subject to exclusion clauses).

The transfer of loans to new parties is governed by the terms of the facility agreement. Trading of syndicated debt is common and active, with the most prevalent structures for trading debt being the following:

  • novation: this extinguishes the original contract between the borrower and the outgoing lender and creates a new contract between the borrower and the new lender on the same terms. Novation is the most widely used form of transfer in the London market, since it protects the transferee from certain acts by the transferor. However, it may have adverse consequences for overseas security, especially in some European jurisdictions. Parallel debt provisions may be needed to mitigate these consequences; 
  • assignment: under English law it is possible to assign the lender’s rights, but not the lender’s obligations to the borrower. Assignments are common, but coupled with assumption of duties as regards the obligations of the lender, eg, lending commitments; and
  • sub-participation and total return swap: these arrangements involve the creation of a new contract between the lender and the participant while the existing contract between the lender and the borrower remains in place. They are not suitable where the lender wants to extinguish all of its involvement in the facility but they are used to transfer commercial risk where restrictions prevent a direct transfer. The participant is exposed to credit risk on the lender as well as the borrower, and does not benefit from security the borrower has granted the lender unless otherwise agreed.

A transfer will, at a minimum, require the borrower or obligor's agent to be consulted or notified, or trigger pre-emption or other rights for the other lenders in the syndicate. Assignment and transfer regimes have become more controversial as lenders in the European market try to reduce secondary market transfer settlement terms. Provisions which require a borrower’s consent, or allow transfers to lenders on a white list or during payment or insolvency-related events of default are resisted. Transferability in relation to competitor restrictions and around loan to own and distressed investors has become a focus as well. All of these entitlements need to be addressed and observed in order to ensure a valid transfer.

The buyer of the debt will usually benefit from any English security following the transfer without compromising the priority of the security, as English law security held under secured syndicated loans will typically be held on trust by a security trustee for the benefit of the lenders from time to time and/or benefit transferors. Different considerations may apply to overseas security for a loan governed by English law.

Lenders and borrowers are free to agree contractual terms. The Loan Market Association syndicated facility agreements include a choice between restricting or permitting debt buy-backs in certain circumstances and include optional provisions which disenfranchise a sponsor that becomes a lender. As well as restrictions on borrowers’ purchases, lenders are increasingly seeking an absolute restriction on sponsors or other shareholders acquiring a portion of the debt which would allow them to block a scheme of arrangement of the debt even when they are disenfranchised.

Where debt buy-backs are not expressly regulated within a facility agreement, a borrower or sponsor seeking to buy back its own outstanding debt will need to consider whether there are any other restrictions in the loan documentation which could prohibit a transfer of debt to it.

The “certain funds” rules are contained in the City Code on Takeovers and Mergers (the Takeover Code) and require that a bidder has sufficient means to fully finance any cash consideration, or implement any other type of consideration, offered for an acquisition of a public company before its offer is publicly announced. Financing conditions may not normally be invoked except in narrowly defined pre-conditional offers where a necessary material authorisation or regulatory clearance is required for the offer to proceed. 

Payments of interest with a UK source to a recipient outside the charge-to-UK corporation tax are generally subject to a UK withholding tax (current rate 20%). Application for an exemption from this requirement may be made in certain circumstances, including interest paid to non-UK residents where authority is obtained from HMRC for the interest to be paid gross (or at a reduced rate) under the terms of a double-tax treaty, or is paid under certain listed securities. HMRC operates a fast-track double-taxation treaty passport scheme for overseas corporate lenders which has recently been extended to certain transparent entities, sovereign wealth funds and pension funds (subject to various conditions).

Principal, discounts and premiums are not generally subject to UK deduction of tax.

Lenders with a permanent establishment in the UK are liable for corporation tax (current rate is 19%, proposed to be reduced to 17% from April 2020) on the income profits of that establishment and gains from the disposal of assets situated in the UK that are used in the trade of the establishment. 

The sale or transfer of certain types of registered loan capital are charged to UK stamp duty at the rate of 0.5% of the amount or value of the consideration for the transfer although this does not typically apply to the transfer of syndicated loans depending on their terms.

Other than the costs set out in 5.1 Assets and Forms of Security, below, there are no UK taxes, duties or charges relevant to lenders taking security or guarantees from English companies. 

A default interest clause may be unenforceable if it is held to be a penalty. A penalty clause is one that obliges the debtor to pay an excessive amount of interest, out of all proportion to any legitimate interest the lender may have in performance. The rule against penalties only applies to default interest; it does not affect interest payable on loans when the paying party is not in breach. Whether a particular provision is penal will depend on the facts of the case, including the interest rate, the market rates at the time of the agreement, whether the agreement is between two commercial parties, the risk involved and the reason for the default rate. 

In addition, while there is no mandatory limit on interest rates, extortionate credit transactions can be set aside during insolvency or administration proceedings. However, the powers to do so are seldom used.

Under the terms of the relevant double-tax treaties with the UK, relief from UK withholding tax on interest payments may be denied to the extent that such interest exceeds an arm's length rate.


While the law summarised below relates to England and Wales only, the rules of Scots law and the laws of Northern Ireland do not differ materially from this. However, local counsel in the non-English jurisdictions of the UK should always be consulted to determine any differences in matters of detail.

In England, lenders will typically look to take security over all of a corporate obligor’s present and future assets, property and undertaking by means of a debenture (a form of security agreement). The debenture will generally include the following types and forms of security interests: 

  • a legal mortgage over real property; 
  • an assignment by way of security of bank accounts, any insurance policies and any material contracts; 
  • fixed charges over certain assets of the chargor’s (including its shares and investments, intellectual property rights, plant and machinery, cash deposit accounts and book debts/receivables); and 
  • a floating charge to cover the balance of the chargor’s assets. 

Where the English obligor owns assets outside of England and Wales, local law security is generally also taken. Where security is being taken from an English individual, that is granted on an asset-specific basis. Both fixed and floating security can be taken from an English corporate obligor, but an individual cannot grant floating security and charges over chattel are complicated. The composition of a security package will be a matter of negotiation between the borrower and the lender. 

The ranking on insolvency of fixed and floating security in England is different, with fixed security ranking ahead of certain preferential creditors, who rank ahead of floating security. However, to ensure an effective fixed security interest, the security holder must have control over security assets, both contractually and in practice. 

Perfection Requirements

The requirements for the formalisation of security interests are limited, and are confined to registering the security interest at a public register of security interests, delivery of applicable title and transfer documents (eg, share certificates and signed but undated stock transfer forms) and serving a notice of security to any relevant third party (in each case, if required). 

Specifically, pursuant to Section 859A of the Companies Act 2006 any mortgage or charge granted by a company or limited liability partnership registered in England and Wales must be registered at Companies House in the 21-day period beginning the day after the date of creation of the charge, or it will be void against a liquidator, administrator and any creditor of the company. Security interests created over UK registered land, intellectual property, ships or aircraft will also need registering on specialist registers for these asset types. Overseas companies are not required to register at Companies House any charge created by them on or after 1 October 2011.

While there are exceptions, a security interest over freehold and leasehold property located in England and Wales should generally be registered as soon as possible after the transaction at the Land Registry (registered land) or the Land Charges Department (unregistered land). Such registration is binding on a future lender or purchaser of the property. Although the security interest will not be void due to failure to register, if the security is not registered, an acquirer in good faith of the property can acquire title.

Security over UK patents, registered trade marks and registered designs should be registered at the UK Intellectual Property Office (IPO). Where security is taken over intellectual property registered in the European Union Intellectual Property Office (EUIPO), the security must be registered in the EUIPO as well.

Where security is taken over shares, it is usual for the chargee or security trustee to request changes to the constitutional documents of the company whose shares are being charged, to remove the directors’ right to veto a transfer of shares.

Searches for pre-existing security interests can generally be made electronically on the relevant online registry. As long as the secured creditor registers its security at the relevant register within the prescribed time, the security will be effective against other creditors, a liquidator or administrator with effect from the date of creation. 

Financial Collateral Regulations

The Financial Collateral Arrangements (No 2) Regulations 2003 exempt certain security over financial collateral, such as cash, financial instruments and credit claims (claims under loans made by credit institutions) from registration requirements. In practice, however, security documents creating these types of security interests are commonly still registered on the basis that if a purported fixed charge over such collateral is re-characterised as a floating charge, it may be deemed to have required registration and be void if registration was not made.

Costs Involved

In addition to legal and financial and other professional costs relating to due diligence and documentation, all registrations of security at Companies House will incur a fee of GBP23 (or GBP15, if filed electronically) in respect of each security document filed. The fee payable on registrations of security at the Land Registry will be assessed on the amount the mortgage or charge secures (between GBP40 and GBP250 per property, or GBP20 and GBP125 per property, if filed electronically), although special rules apply to the calculation of fees for more than 20 properties. All registrations of security at the IPO will incur a fee of GBP50 in respect of each registered patent, trade mark or design. 

Security over property is not liable to stamp duty land tax and there are no other notarisation or stamp fees payable when security is created.

A floating charge granted over the assets and undertakings of a chargor is one of the most common forms of security taken by lenders in the UK. A floating charge can be created without restricting the chargor's right to deal with the charged assets without the prior consent of the lender until crystallisation (usually, upon the occurrence of an event of default), at which point the charge attaches specifically to each individual asset. Only a company or an LLP, but not individuals, can create a floating charge.

An important distinction between a fixed and a floating charge is that a floating charge is subject to various preferred claims and the prescribed part, as discussed below, while a priority fixed charge has priority over all other creditors and survives the insolvency of the borrower. Following crystallisation, a floating charge will have the characteristics of a fixed charge, but it will not have the priority enjoyed by a fixed charge. In effect, crystallisation does not itself affect priorities.

Under English law, the board of directors of an English company must act in the best interests of the company of which they are directors, rather than in the interests of its associated companies or the group as a whole.

Issues of corporate benefit often arise in the context of upstream and cross-stream guarantees. 

In essence, an upstream guarantee will be acceptable if the guarantor company’s board of directors reaches the conclusion that the giving of the guarantee will bring real benefit to the company or their actions are ratified by a resolution of all the shareholders of the company. Such benefit could consist of the group as a whole receiving financing that would otherwise not be available to it on favourable terms and the parent or other group member agreeing to share the benefit of that financing to the guarantor company in consideration of the guarantee given by it. Transfer pricing rules may lead to guarantee fees being payable between members of the group. In all circumstances, the question of whether there is sufficient corporate benefit will depend on the specific facts of the transaction which the directors must carefully consider.

The position is more complicated if there is a risk that the proposed guarantor is insolvent and a shareholder resolution will be insufficient to protect against creditors seeking to set the guarantee aside on the insolvency of the guarantor.

The Companies Act 2006 includes prohibitions on the giving of "unlawful" financial assistance by a public company or its subsidiaries in connection with the acquisition of shares in that public company or acquisition of its English holding company's shares by another person, while there is no whitewash procedure to follow which would enable the provision of financial assistance, and only limited exceptions are available.

Financial assistance includes giving guarantees or security for any acquisition funding. On a debt-financed acquisition of a public company, the target will therefore often be re-registered as a private company and give guarantees or security once it has re-registered. However, to be re-registered it is necessary to acquire a sufficient percentage to de-list and resolve on registration.

Breach of the restriction against unlawful financial assistance can result in criminal sanctions, including fines and possibly imprisonment of directors and officers of the offending company. Security taken from a company in contravention of the financial assistance restrictions will be void. 

The statutory financial assistance rules do not apply to the acquisition of private companies.

Restrictions on assignment are common in a range of contracts, such as intellectual property licences, leases and ordinary book debts. Where these apply, third-party consents will be required to create some types of security over certain assets, which may be challenging to obtain. As in other jurisdictions, there are proposals to introduce legislation to override restrictions on assignment of debts to allow for factoring and receivables financing, but the complexity of these proposals has stalled proceedings in the UK for the moment. 

The grant of a guarantee or security by an English obligor should be approved by the obligor’s board of directors. A shareholders’ resolution is usually required as well, in particular in connection with the grant of upstream or cross-stream guarantees or where the provision of the guarantee or security could otherwise breach the prohibition on financial assistance.

Security is usually released by a deed of release upon discharge of the secured liabilities, or on permitted disposal of a charged asset. 

When security granted by an English-registered company or limited liability partnership is released, the security provider will usually require the release to be recorded at Companies House. However, a failure to do so does not affect the effectiveness of the release. When a legal mortgage over registered real estate is released, the lender must also execute and file the appropriate Land Registry or Land Charges Department form. 

When an asset subject to a floating charge is sold, a release of the charge is usually not necessary. However, the buyer may request a letter of non-crystallisation from the charge holder. This is to ensure the buyer takes the asset free from any fixed charges. 

Any security arrangements which have been notified to other parties will require notice of the release and re-assignment.

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.


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.

The "self-help" principle applies in relation to the enforcement of security. The security holder may take steps (either itself, or by the appointment of an agent or receiver) to enforce its security over the asset encumbered in its favour by its borrower without recourse to the courts or the realisation of the asset by means of a public auction or other court-administered sale process. Although a court order is not required for enforcement, in the context of security over real property, in order to realise (eg, to sell) the property, it may be necessary to evict the chargor, which requires a court order.

Typically, the relevant security document will set out when and how a lender may enforce its security. The enforcement method to be used, once a lender’s entitlement to enforce security has arisen, will depend upon the nature and terms of the security package. The main methods of enforcing security in England are:

  • taking possession;
  • selling the collateral;
  • appointing a receiver who realises the collateral; and
  • foreclosure and appropriation. 

Where the security provider is solvent, the lender will normally be able to appoint a receiver to realise any assets subject to fixed security. Where a lender holds security over assets subject to a floating charge, the lender will be able to appoint a receiver once the charge has crystallised. The events which trigger crystallisation will be set out in the security agreement and will normally include the taking of steps in relation to enforcement, such as the appointment of a receiver. 

If the security was created prior to 15 September 2003, an administrative receiver may be appointed. The role of the receiver in this case is to identify the charged assets and realise them in the same way as with fixed security. However, if the security was created after 15 September 2003, the lender can only appoint an administrator who, in contrast to an administrative receiver, must act in the interests of all creditors to achieve the purposes of the administration.

Where the security provider is insolvent, it is still possible that enforcement can take place through the appointment of a receiver, but it is also possible, particularly where the security package is more comprehensive and includes more of the security provider’s assets, that the security provider could be subject to a formal insolvency procedure such as an administration.

English courts will uphold the parties’ express choice of law as the governing law of the contract save for certain circumstances in which the parties’ choice of law may be modified by law (in respect of contractual obligations under the Rome Convention or the Rome I Regulation, or non-contractual obligations under the Rome II Regulation). For example, where the choice of forum is England and Wales, English mandatory rules will apply irrespective of the parties’ choice of law in respect of both contractual and non-contractual obligations. Expert evidence as to non-English law must be adduced at trial where English courts consider disputes based on foreign law.

Submission to a Foreign Jurisdiction

As to submission to a foreign jurisdiction, English courts look to uphold exclusive jurisdiction clauses (including where in favour of non-English jurisdiction) subject to the application of the European regime (which comprises the 2001 Brussels Regulation, the 2007 Lugano Convention and the Recast Brussels Regulation) and English common law.

Where a "foreign" jurisdiction, chosen by the parties, is within the European regime, it will have jurisdiction (save in certain cases set out in the Convention and Regulations, eg, where the proceedings relate to rights in rem). The European regime provides for a mechanism to address competing claims to jurisdiction which is broadly based on which jurisdiction was first "seised" of the claim and (from January 2015) whether an exclusive jurisdiction agreement exists between the parties. Where the foreign jurisdiction is not within the European regime, English courts have been willing to stay English proceedings in favour of foreign proceedings, usually as long as the European regime does not expressly reserve jurisdiction to itself in the particular case, although this may depend on whether the foreign court was first "seised".

In future, the legal framework relating to choices of law and jurisdiction may change as a result of Brexit. In particular, in the case of a “no-deal” Brexit, and following the UK's independent accession to The Hague Convention on Choice of Court Agreements (the Hague Convention), the Hague Convention will apply to mutual recognition between the UK and EU member states of exclusive jurisdiction clauses. The Hague Convention is discussed below in 6.3 A Judgment Given by a Foreign Court. Any foreign or Commonwealth state may waive its right to sovereign immunity by submitting to the jurisdiction of the English courts. 

English courts will generally give effect to a foreign judgment without a retrial of the underlying merits of a case. Broadly, foreign judgments will be enforced using one of four principal avenues:

  • judgments of the courts of EU member states and other European countries will be enforced via the European regime, which consists primarily of the 2001 Brussels Regulation and the Recast Brussels Regulation (the Brussels Regime). In order to enforce a judgment pursuant to the Brussels Regime, the enforcing party must apply to the English court by filing the judgment (and a certified translation). There is very limited scope for defending an enforcement action under the Brussels Regime. Such grounds include arguing that the judgment is irreconcilable with an earlier judgment in a third member state covering the same course of action, or fundamentally contrary to public policy in the enforcing member state (only in exceptional circumstances). Certain “uncontested claims” brought in the courts of EU member states can be enforced using the EEO Regulation, in which the enforcing party applies for a certificate from the originating court. Following issuance of the certificate, the judgment is treated as if it were the judgment of an English court;
  • judgments of the courts of Norway, Switzerland and Iceland (European Free Trade Association countries) will be enforced pursuant to the 2007 Lugano Convention. The process of enforcement and the grounds for resisting enforcement are similar to the Brussels Regime;
  • judgments of certain Commonwealth countries (such as Australia, India and New Zealand) will be enforced pursuant to the Foreign Judgments (Reciprocal Enforcement) Act 1933 and the Administration of Justice Act 1920. In order to enforce pursuant to the above acts, the relevant judgment must be:
    1. final and conclusive; and
    2. for a sum of money (but not for a tax, fine or other penalty).

A defendant may resist enforcement if it can prove that the original court did not have jurisdiction (according to English conflicts of law rules), or if it can establish certain matters (eg, that the judgment would be contrary to public policy, or that the judgment was obtained by fraud); and

  • foreign judgments not covered by the above instruments can be enforced at common law by suing the foreign judgment as a debt. This typically involves applying for summary judgment which, except in very limited circumstances (such as fraud), will not require retrial of the merits of the case. However, there are additional grounds under common law for defending an enforcement action than with other mechanisms. For example, a defendant may seek to argue that the original proceedings breached the rules of natural justice, that enforcement would be contrary to public policy or the Human Rights Act 1998, or that the judgment is for multiple damages and is, therefore, unenforceable pursuant to the Protection of Trading Interests Act 1980.

Similarly, pursuant to the Arbitration Act 1996, English courts will give effect to arbitral awards, without re-examination of the merits of an underlying case. In particular, Part III of the Arbitration Act gives effect to the New York Convention, meaning that arbitral awards made abroad are enforceable in England and Wales (with limited scope for the party against which the enforcement applies, to object).

The prevalence of directly-applicable EU law within English law means that, following Brexit, the English law framework regarding the enforcement of foreign judgments will change. As a result, in a “no-deal” scenario, the enforcement of EU judgments in England will continue under the existing regime for any judgments obtained on or before exit day, and similarly, for any EU judgment obtained where the relevant EU court was seised of the proceedings on or before exit day. However, that same regime will not apply within the EU for English proceedings already underway as of exit day nor for English court judgments obtained prior to exit day. Any later proceedings, and enforcements of English court judgments in the EU will be governed by a different regime under the Hague Convention, which envisages mutual recognition of exclusive jurisdiction clauses and a judgment enforcement regime. However, in the case of a no-deal Brexit there will be no substantial change to the enforcement of arbitral awards, as that is governed by the New York Convention, to which the UK is a separate signatory and which convention therefore exists entirely outside the EU legal structure.

There are no restrictions applicable to foreign lenders specifically.

Appointment of a Receiver

Unless a company is in liquidation or administration, a secured creditor can appoint a receiver to realise the assets over which it has security. The receiver is in an anomalous position in that it is appointed by the secured creditor but acts as agent of the company. The receiver will take control of the relevant assets and realise their value for the security holder.


An alternative procedure is administration. This is a court-supervised process under which the administrator owes duties to the creditors as a whole. The procedure is designed to preserve an insolvent company’s business and requires that an administrator be appointed to manage the affairs of the insolvent company. The aims of administration are set out in paragraph 3(1), Schedule B1 to the Insolvency Act 1986 (IA 1986) and are one or more of the following:

  • a) to rescue the company as a going concern;
  • b) to achieve a better result for creditors than would be achieved on a winding-up; or
  • c) to make a distribution to one or more secured creditors, if neither a) nor b) can be achieved.

In the context of an administration, the holder of a “qualifying floating charge” (as defined in paragraph 14(2) of Schedule B1 to the IA 1986 and in principle meaning a floating charge over all, or substantially all, of a company’s assets) has certain important rights, including the right to effectively veto the appointment of an administrator by the insolvent company’s directors or creditors and insist on its own appointee.

If the company has been put into administration rather than liquidation, the role of the administrator is to act in the interests of all the creditors in achieving the aims set out above. Where the administrator decides that none of the aims can be achieved, they return to court for the discharge of the administration appointment. On an administration, an automatic moratorium is put in place under paragraphs 42, 43 and 44 of Schedule B1 to the IA 1986 that prevents creditors from enforcing their security over the company without leave of the administrator or the court. Various criteria determine when leave should be given. Essentially, it is a balancing exercise between the rights of the secured creditor and the needs/aims of the administration. 

The administrator can distribute funds to the secured and preferential creditors, as well as to unsecured creditors, with leave of the court. More usually, the administrator will collate the unsecured creditors’ claims and will, once there are proceeds for distribution (including the prescribed part described below), cause the company to enter into a voluntary arrangement or liquidation. The supervisor of the arrangement or the liquidator deals with the adjudication of the proofs of debt and distribution of assets according to the statutory order of priority. The administrator can be the supervisor or liquidator if creditors do not object.

To approve the proposals in administration, a majority of creditors must vote in favour of them. A majority in this context means a simple majority of more than 50% (in value) of those creditors voting. However, a vote in favour of the proposals is invalid if more than 50% (by value) of creditors who are unconnected to the company vote against it. The proposals are then binding on all creditors.

Company Voluntary Arrangements and Schemes of Arrangement

Company voluntary arrangements (CVAs) and schemes of arrangement are additional procedures available to assist a corporate reorganisation or debt restructuring. These may form part of, or be separate from, other procedures such as administration or liquidation. 

In order for a CVA to become effective and binding on all unsecured creditors, it needs to be approved by 75% in value of unsecured creditors who vote. CVAs have been used outside of formal restructuring to reduce rent payments in retail businesses.

A scheme of arrangement is a very flexible court-sanctioned process for binding a group of creditors. For voting purposes, creditors with similar interests are grouped together in classes. Of each class, at least 75% in value and more than 50% in number of those who vote must approve the scheme. The court must also approve the scheme and confirm that it is fair and reasonable. For this purpose, the company undergoing the scheme generally produces a very full prospectus explaining the terms of the vote and its consequences. It is, however, not necessary to consult any class of creditors who have no real economic interest in the matter being voted on.

Once a scheme of arrangement becomes binding, it binds all creditors (including dissenting creditors), whereas an agreement reached under a CVA is only binding upon creditors who are eligible to vote, or who would have been eligible to vote, had they had notice of a creditors’ meeting.

As referenced in Section 6 Enforcement, enforcement in the context of an insolvency may occur as part of a formal insolvency procedure. An important exception is that if the debtor company is in administration, then its assets will be subject to a temporary moratorium and the lender will be unable to enforce its security unless that security constitutes a financial collateral arrangement. A further exception where a moratorium applies to suspend creditor action is where the debtor has been put into compulsory liquidation and where an eligible small debtor company has proposed a voluntary arrangement. The insolvency of the principal obligor does not reduce or extinguish the lender’s rights against the guarantor. 

A lender wishing to start insolvency proceedings against a borrower with interests in more than one EU member state, should consider the location of the borrower’s centre of main interest (COMI). Under the EC Insolvency Regulation (which is currently incorporated into English law but its continued effect in the UK is to be determined following Brexit), there is a rebuttable presumption that the COMI will be the place of the company’s registered office. However, there may be occasions where a borrower’s COMI is held to be located in a different EU member state, despite the registered office being located in England or Wales.

On insolvency, creditors' claims generally rank in the following order:

  • administrator’s or liquidator’s costs and expenses in realising fixed security;
  • fixed security;
  • expenses of the insolvent estate;
  • creditors preferred by statute, primarily employee claims and contributions to an occupational pension scheme (in practice, amounts may be fairly limited);
  • floating charges;
  • unsecured creditors; and
  • equity holders.

The Enterprise Act 2002 introduced the concept of a prescribed part, being a "ring-fenced pot" of money (up to a maximum of GBP600,000) which must be set aside for unsecured creditors out of the net floating charge realisations. 

The priority rules relating to the prescribed part do not apply to companies that are subject to a company voluntary arrangement or to floating charges that are financial collateral arrangements under The Financial Collateral Arrangements (No 2) Regulations 2003.

There is no concept of equitable subordination under English law. Generally, shareholders who have debts will be allowed to enforce them, although rules regarding deemed distributions may apply.

Under Section 238 of the IA 1986, a liquidator or administrator has two years from the commencement of the insolvency procedure to commence actions to unwind transactions that are at an undervalue. The term of transaction would include the grant of a guarantee or pledging of assets for security. The court will, however, not avoid a transaction entered into in good faith and with the reasonable belief that it would benefit the company. 

The insolvency practitioner also has the ability (under Section 238 of the IA 1986) to challenge transactions that occurred in the last six months before the onset of insolvency (or two years in the case of connected parties) and that give a creditor preference over other creditors, and were entered into with the desire to prefer that creditor. 

Lastly, any floating charges, other than in support of a new financing, entered into between unconnected parties and granted within one year of the onset of insolvency by an insolvent chargor (or if the chargor became insolvent as a result of it) are invalid (Section 245 of the IA 1986).

Project finance has been used to finance large capital-intensive energy and infrastructure projects in the UK since the 1970s. Project finance entails the raising of finance on a non – or limited – recourse basis by a special purpose vehicle (Project Company), with all repayments payable from the cash-flows generated by the project.

A typical project financing structure includes one or more equity investors as owner(s) of the Project Company and lenders (usually composed of a consortium of financiers, including commercial banks and, often, multilateral agencies or development finance institutions). In the wake of the financial crisis, continuing pressure on commercial banks’ liquidity and the tightening of regulatory requirements under the Basel III rules saw many banks reduce or cease their involvement in project financing transactions. In recent years, institutional investors have increasingly contributed to closing the financing gap in UK infrastructure projects.

Project finance in the UK is not subject to a specific legal framework and the applicable rules will often depend on the sector and location of the relevant project. In addition to UK legislation (ie laws of England and Wales, Scotland and Northern Ireland), the applicability of European law must be taken into consideration when structuring and procuring projects. Relevant European law provisions include the state aid rules under articles 107 and 108 of the Treaty on the Functioning of the European Union (State Aid Rules) and various EU environmental regulations. In addition, the planning and licensing regimes in the UK are also a prime consideration in project financing transactions.

The UK has long been at the forefront of public-private partnership (PPP) transactions. A PPP is a long-term contract between a private party and a government entity to provide a public asset or service in which the private party bears significant risk and management responsibility and remuneration is linked to performance. There is considerable precedent for this type of financing in the UK.

The IPA and NIC

The government established Infrastructure UK (IUK) in 2010 to co-ordinate and simplify the planning and prioritisation of long-term infrastructure projects, including PPP projects, and to promote private sector investment in infrastructure. In 2011 the Major Projects Authority (MPA) was established to oversee and assure the largest government projects, and in 2016 IUK and MPA merged to form the Infrastructure and Projects Authority (IPA), which is the government's centre of expertise for infrastructure and major projects. The core teams comprising the IPA include experts in infrastructure, project delivery and project finance who work with the relevant government departments and the various industry participants. 

The UK National Infrastructure Commission (NIC) was established in October 2015 to provide advice to the government on major, long-term infrastructure challenges in the UK. In particular, the NIC is responsible for undertaking a National Infrastructure Assessment each session of parliament, making recommendations to the government and holding the government to account with respect to the implementation of such recommendations.

The procurement process for PPPs in the UK with a value in excess of the applicable financial threshold set out in the EU Public Sector Procurement Directive 2014/24/EU is governed by the Public Contract Regulations 2015. Formal tender processes (under these regulations) are viewed positively in the market and facilitate the financing of infrastructure projects.

Private Finance

The private finance initiative (PFI), traditionally used for capital-intensive projects, was previously the dominant PPP model in the UK. PFI projects entailed a private sector company, usually through a special purpose vehicle (SPV), financing, building, operating and maintaining a project in return for payment from the relevant public authority for the use of the project. Typically, at the end of a fixed period of time, ownership of the project was transferred to the public authority. In 2012, the government adopted a new approach to PFI known as Private Finance 2 (PF2) and all PPP documents followed the standard wording and guidance set out in the Standardisation of PF2 Contracts. In October 2018, in the wake of the collapse of construction firm Carillion, PFI and PF2 models were abolished as they were considered inflexible and overly complex and a source of significant fiscal risk to the government. Existing contracts under the PFI and PF2 models will be honoured but no new contracts under these models will be entered into. Given the crucial need for private sector investment in UK infrastructure, the market expects a new PPP model to be introduced, but it is not clear at this stage what form this will take. 

The relevant government approvals, licences and statutory controls required for a project will depend on the nature of each project. For example, as described below in 8.8 Environmental , Health and Safety Laws, many commercial and industrial activities in the UK require a permit governed by the Environmental Permitting (England and Wales) Regulations 2010 (as amended). Furthermore, Project Companies involved in the generation, supply, transmission or distribution of electricity; or the supply, shipping, distribution or transmission of gas onshore in the UK; or the operation of an interconnector; require a licence from the Office of Gas and Electricity Markets (Ofgem).

The tax regime governing project finance transactions is generally the same as for other commercial loan transactions as set out above in Section4 Tax. In addition, there are a number of tax incentives in the UK to attract investments in energy and infrastructure projects, such as those under the Energy Act 2013 for low-carbon generation and enhanced capital allowance for specific energy-saving plants and machinery.

The transaction documents do not need to be registered or filed with a government body, with the exception of any document creating a security interest. To be enforceable, any such security documents must be registered with Companies House in exchange for a minimal fee, in addition to being registered at the Land Registry.

The governing law of transaction documents for projects in the UK will generally be the laws of England and Wales. However, depending on the location of the project, Scots law or the laws of Northern Ireland may govern some project documents.

Several government bodies are responsible for projects in the UK. Most central government departments have a private finance unit responsible for overseeing projects in their sector. These include the Ministry of Defence, the Department for Transport, the Department of Health, and the Department of Energy and Climate Change, which deals with oil and gas exploration or production projects. In addition to these government bodies, PPP and PFI (where still applicable) policies are driven from within HM Treasury and the Cabinet Office. Furthermore, PPP and PFI are devolved matters and are regulated by the Strategic Investment Board in Northern Ireland, the Scottish Infrastructure Investment Unit in Scotland and the Welsh Assembly in Wales.

Certain regulated sectors are also administered by government bodies, such as the Water Services Regulation Authority (the economic regulator of the water sector), Ofgem (the regulator of the electricity and gas market) and the Office of Communication (the regulator and competition authority for the communications industry). These bodies are, among their various functions, responsible for issuing licences to operate in their respective sectors.

There has been a history of state ownership in the UK, but most of the energy and infrastructure industries have been privatised in recent years.

The first issue to be considered when structuring a project is the bankability of the project and the related contractual arrangement. As part of the assessment of the bankability of the project, a comprehensive risk analysis will be conducted and the various risks, once identified, should be appropriately allocated in the transaction documents to the parties best placed to bear such risks.

The equity investor(s) and owner(s) of the Project Company can be a single party but are more commonly a consortium of sponsors. Project Companies in the UK are commonly an SPV incorporated as a limited liability company.


Funding sources available to Project Companies include commercial lenders, export credit agencies, international institutions such as the European Investment Bank and project bonds investors. Project bonds have become increasingly popular in recent years for infrastructure projects in the UK, such as motorways, and attract greater investment from institutional investors. The financing is provided on a limited recourse basis which means that the lenders’ only recourse in case of default is to the assets and cash flows of the Project Company. It is, however, not unusual for lenders to require contingent equity and/or some form of completion guarantees from the sponsors. Project financing in the UK is typically highly leveraged with a gearing ratio in the range of 80/20, but it is not uncommon for the gearing ratio to be as high as 90/10.

Restrictions may apply to foreign investors in relation to certain regulated business sectors in the UK, such as energy and defence. For example, the EU Third Energy Package, which aims to separate generation and transmission of gas and electricity, requires Ofgem to certify as independent the holder of electricity transmission and interconnection licences. If the certification application is made by an entity controlled by a person outside the EEA, Ofgem is required to notify the secretary of state of the UK government and the EC of such an application. The secretary of state and the EC may make a recommendation against the grant of such certification if the security of electricity supply in the UK or any EEA state would be put at risk by the certification, in which case Ofgem may follow the recommendation and decline to grant the certification. Ofgem also enforces the Competition Act 1998 and Articles 81 and 82 of the EC Treaty in the electricity and gas sector, which prohibits any prevention, restriction or distortion of competition within the common market.

Investors from outside the EU may also be affected by EU sanctions, which may be autonomous or reflect measures imposed by resolutions adopted by the UN Security Council. These restrictive measures may prohibit such foreign investors from being involved in project financing in the UK.

Typical sources of finance in project finance transactions include long-term limited-course loans from (conventional and/or Islamic) commercial banks, development finance institutions and/or other financial institutions. In addition, project bonds have increasingly been utilised, often in conjunction with limited recourse loans, as an alternative source to meet the financing requirements of large-scale capital-intensive projects.

Projects may be purely private (such as independent power projects), may involve a partnership between the public and private sectors (PPPs), or may be built and operated entirely by the public sector. Generally, PPPs are long-term contracts (eg, 20–30 years) under which the Project Company constructs the project, such as a road, using financing obtained on a project finance basis and, thereafter, operates and maintains the project in return for:

  • availability payments from the relevant public authority (typically referred to as availability-based contracts); or
  • charges/payments from end-users of the asset or service (typically referred to as "user-pay" or concession contracts).

Natural resources in the UK include oil, natural gas, coal and minerals. Ownership of oil and gas within the land area of Great Britain is vested in the Crown by the Petroleum (Production) Act 1934 and the Continental Shelf Act 1964. The ownership of almost all coal in Great Britain resides with the Coal Authority, while ownership of gold and silver is vested in the Crown. Other minerals are in private ownership, with the owner of the land entitled to everything beneath or within it. Details of land ownership are held by the Land Registry. The Minerals Development Act (Northern Ireland) 1969 vested the ownership of most minerals in Northern Ireland in the Department of Enterprise, Trade and Investment.

The natural resources sector in the UK is regulated by a number of statutory bodies, depending on the mining activity and the location, including the Environment Agency in England, the Scottish Environment Protection Agency, Natural Resources Wales and the Northern Ireland Environment Agency, together with the Health and Safety Executive and the Department of Energy and Climate Change (DECC).

Planning Permission and Licences

Planning permission and licences are required from the relevant authority for the extraction of natural resources in the UK in addition to the rights of access granted by the landowner (for onshore natural resources), unless the land is owned by the Project Company. The Oil and Gas Authority (an agency of DECC) is responsible for issuing licences for oil and gas exploration onshore (excluding Northern Ireland which issues its own licences) and on the UK Continental Shelf, for regulating field development and oil and gas pipeline activities and monitoring environmental impact, including decommissioning. The Energy Act 2008 introduced further requirements for licensing, including for the offshore storage of natural gas and carbon dioxide, and additional requirements relating to the funding of the decommissioning of offshore installations. The Coal Authority (sponsored by the DECC) is responsible for issuing licences for coal exploration and extraction. The Crown Estate Mineral Agent is responsible for granting exclusive leases and licences for exploration and development of Royal Mines to mine gold and silver. There is no specific licensing requirement for the exploration and extraction of other non-fuel minerals.

Planning authorities play an important part in the regulation of mining activities in the UK. In England and Wales, planning permission is granted by the mineral planning authority, commonly the county council, and under the Planning Act 2008. The Planning Inspectorate makes recommendations to the DECC, which makes the final decision on applications to develop significant projects. In Scotland, planning permission is granted by the local planning authority and in Northern Ireland, planning permission is granted by the strategic planning unit.

There are no restrictions to trading most natural resources with other EU countries as the EU operates as a single market. Natural-resources exporters may, however, need a licence for the export of a number of strategic controlled goods, such as goods with a potential military use listed in the Export Control Order 2008 (as amended) which applies to certain metal fuels and alloys.

Environmental Impact

The environmental impact of natural resources extraction should be a prime consideration of project sponsors. The main source of environmental control in the UK is the planning permission regime. Most planning permissions impose environmental restrictions and obligations on the permit holder, including upon decommissioning. In addition, the Environmental Permitting (England and Wales) Regulations 2010 (as amended) requires environmental permits for most natural resources-related activities. Any impact on local wildlife may also give rise to the requirement to obtain a licence under various conservation legislation.

As highlighted in 8.7 The Acquisition and Export of Natural Resources, the main sources of environmental laws applicable to projects in the UK are the Environmental Permitting (England and Wales) Regulations 2010 (as amended) and the planning permit obtained by the Project Company. The regulatory bodies overseeing environmental issues in the UK are the Environment Agency in England, the Scottish Environment Protection Agency, Natural Resources Wales and the Northern Ireland Environment Agency. Projects in the UK are also subject to EU environmental laws in many areas, such as air pollution, sustainable development, waste management, water protection, soil protection and noise pollution. On 12 March 2014 the European Parliament adopted the Environmental Impact Assessment Directive 2014/52/EU (EIA Directive), which substantially amended the Environmental Impact Assessment Directive 2011/92/EU (implemented in the UK as the Town and Country Planning (Environmental Impact Assessment) Regulations 2011). The EIA Directive was transposed into UK legislation in May 2017 and imposes, among other things, requirements for the assessment of the impact of projects on biodiversity, climate change, landscape and disaster risks and imposes monitoring obligations during both the implementation and operation of the project.

The Health and Safety Executive (HSE), together with local authorities, is responsible for overseeing health and safety in the UK. Project companies (and their management team) that breach health and safety legislation in the UK risk being prosecuted, with penalties with respect to the HSW Act ranging from a GBP20,000 fine and/or 12 months’ imprisonment to an unlimited fine and/or two years’ imprisonment.

Islamic financial services have been provided in the UK since the 1980s and in June 2014 the UK became the first non-Muslim country to issue sukuk (Islamic bonds). 

Currently, five standalone Islamic banks and more than 15 conventional banks offer Shari’a-compliant Islamic financial products and services in the UK, with the number expected to grow. The value of sukuk listed on the London market to date is over GBP40 billion, with more than 72 sukuk listed on the London Stock Exchange as of January 2019.

In recent years, Islamic finance has been increasingly used for financing major infrastructure projects in the UK, such as The Shard, the Olympic Village and the redevelopment of the Chelsea Barracks and Battersea Power Station. This is likely to grow following Brexit, as the UK takes a greater interest in Islamic finance as part of its goal to broaden its economic ties with non-EU countries.

The development of Islamic finance in the UK is a priority of the British government as highlighted by former Chancellor George Osborne's remarks that the development of the Islamic finance industry is essential to make Britain the “undisputed centre of the global financial system”.

There are a broad range of Islamic financial products available in the UK and each must be analysed independently for tax and regulatory compliance. The UK government does not employ a separate framework for regulating Islamic financial products and transactions; the main legislation governing Islamic finance in the UK is the Finance Act 2005 as amended by the Finance Act 2007. The Finance Act 2005 characterises Islamic finance transactions as "alternative finance arrangements" which must comply with all the laws and regulations applicable to such arrangements. Similarly, from a regulatory perspective, Islamic banks providing Islamic financial products are subject to the same regulations as conventional banks and must be authorised by both the FCA and the PRA.

This approach reflects the UK government’s neutral position as a secular regulator, focused solely on adherence to and enforcement of applicable laws and regulations rather than having deference to faith-based considerations. As such, the UK government does not take responsibility for the Shari’a-compliance (or lack thereof) of Islamic financial products. Instead, the responsibility for ensuring the Shari’a-compliance of such products is borne by private financial institutions and other private sector participants in such financing arrangements.

There is no official supervisory body for Islamic finance in the UK. Islamic banks and takaful operators operate as conventional banks and insurers respectively, and are regulated by the FCA and the PRA. However, the vast majority of financial institutions in the UK elect to establish Shari’a supervisory boards (SSBs) to monitor and regulate Islamic financial products.

The Islamic Financial Services Board (IFSB), an international standard-setting organisation and supervisory agency, publishes prudential standards and guiding principles for institutions offering Islamic financial services; however, membership of the IFSB and compliance with such standards are voluntary. Furthermore, the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), a non-profit organisation, seeks to maintain and promote Shari’a standards for Islamic financial institutions, participants and the industry generally.

Islamic Financial Products

Tax legislation in the UK has developed to ensure that the tax treatment of Islamic financial products, as alternative finance arrangements, is neither more nor less advantageous than their conventional finance alternatives. This has been achieved in respect of some Shari’a-compliant products – such as murabaha (a financing structure based on asset/commodity purchase and resale), musharaka (a structure based on shared ownership), mudaraba (an arrangement in which one party provides the relevant funds and the other provides management expertise), wakala (an agency structure entailing profit sharing) and sukuk (Shari’a-compliant bond) – but not across the full range of available Shari’a-compliant products. Legislation to ensure a level playing field for Islamic finance in the UK was introduced by the government in 2003 and special exemptions were utilised to counter unintentional double-taxation charges caused by structures used by Islamic mortgages.

The tax treatment of some of the most commonly used Islamic financial products is currently set out for income tax purposes in Part 10A of the Income Tax Act 2007 and for corporate tax purposes in Chapter 6 of Part 6 of the Corporate Tax Act 2009 (CTA). For example, under English law, holders of sukuk will be treated like bondholders, provided that they meet the criteria set out in Section 507 of the CTA. If these conditions are satisfied, the returns paid on the sukuk will be treated as interest paid by the sukuk issuer to the sukuk holder and will be deductible or taxable accordingly, which may increase the popularity and development of sukuk in the financial market in the UK.

Under English law, the tax treatment of murabaha is equivalent to the payment or receipt of interest on a loan, provided that the arrangement meets the criteria set out in Section 511 of the CTA. If an asset is bought and sold under an alternative finance arrangement, Section 514 of the CTA excludes the return made on the arrangement for the purposes of capital gain tax under the Taxation of Chargeable Gains Act 1992.

The development of Islamic finance in the UK has entailed a rise in the Shari’a-compliant home finance market, which was facilitated by an amendment to the tax laws in 2003 that removed what had previously been a double charge to stamp duty land tax.

Islamic Insurance

The takaful industry, a Shari’a-compliant form of insurance based on the principle of mutual protection and shared responsibility, is still at an early stage in the UK but is expected to benefit from the general promotion of Islamic finance by the government. The FCA and the PRA will determine on a case-by-case basis whether an arrangement amounts to insurance and some takaful providers have received FCA and PRA authorisation. Under English law, a takaful arrangement will generally be treated as an insurance contract.

Islamic banks and takaful providers are established in the UK as conventional banks and insurance companies respectively and have to be licensed by both the FCA and the PRA under the Financial Services and Markets Act 2000. There is no specific regulatory regime for Islamic banks or for takaful providers. As recommended by AAOIFI, each Islamic bank and takaful provider has its own SSB, which is generally comprised of three Shari’a scholars who oversee takaful operations, supervise the development and operation of takaful, and determine the Shari’a-compliance of Islamic financial products. In addition, SSBs carry out their own independent audit to determine whether any element of the institution’s operations is considered haram, ie, prohibited under Shari’a.

Most Shari’a-compliant products are available in the UK, the main among these being sukuk, murabaha, mudaraba, musharaka and ijara – see 9.2 Regulatory and Tax Framework for more details.

Recent developments in the Islamic finance sector in the UK include an increasing focus on:

  • offering Shari’a-complaint student financing;
  • the adoption of fintech in the Islamic finance sector;
  • the growth of the sukuk market, including the recent GBP250 million mortgage-backed sukuk issuance by Al Rayan Bank; and
  • the development of products to provide short-term Shari’a-compliant funding to SMEs.

In addition, the Bank of England plans to launch a Shari’a-compliant facility through a new subsidiary that will offer a non-interest-based source of liquidity to support the Islamic finance industry in the UK. 

There is significant scope in the UK for the growth of Islamic project finance (IPF), as currently witnessed in the Middle East where istisna’a-ijara and, in some cases in Saudi Arabia, wakala-ijara structures have been increasingly adopted for financing projects, particularly power, petrochemical and industrial projects.

Furthermore, although traditional IPF structures require the transfer of an ownership interest in tangible assets, recent market developments have demonstrated the suitability of IPF to financing PPP projects (where the Project Company does not have an ownership interest in the underlying project assets).

Al Rayan Bank Sukuk

In February 2018, Al Rayan Bank (UK) issued the largest ever sterling sukuk for GBP250 million. Al Rayan Bank became the first bank in the world to issue a public sukuk in a non-Muslim country.


Although still in the early stages of development, there has also been increased focus globally on fintech in Islamic finance, driven by growth in demand and greater awareness among Islamic finance market participants – and prospects for developments in this area (particularly in the Islamic peer-to-peer financing and crowd-funding space) appear positive in the UK.


Consistent with the long-standing perception of it as a Western hub for Islamic finance, the UK is encouraging the growth of Islamic finance through the implementation of amendments to legislation and government policy, and the potential for the further development of its Islamic finance industry remains positive. The UK’s commitment towards the development of the Islamic finance market is expected to continue post-Brexit, particularly because even a no-deal Brexit could incentivise investment from the Gulf if real-estate assets decrease in value.

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Trends and Developments


Milbank LLP is a pre-eminent global law firm which for over 150 years has provided innovative legal solutions in many of the world’s largest, most complex, ‘first-ever’ corporate transactions and disputes. Milbank’s clients are prominent multinational financial, industrial and commercial enterprises, governments, institutions and individuals.

The first half of 2019 saw a number of interesting trends develop in the leveraged finance markets. With overall volumes down in both the European leveraged loan and high yield markets, an increasing number of European syndicated leveraged loan deals saw documentary terms tighten through the exercise of "market flex", where terms were improved in favour of institutional investors during the process of that debt being marketed. With heightened investor scrutiny on terms in European leveraged loans in particular, there have also been some refinements in the way term loan debt is typically sold in the European market – with investor "pre-sounding" now commonplace in relation to an increasingly larger group of potential investors for each loan transaction, and borrowers and underwriters seeking to identify and address key investor concerns early in the distribution process.

At the same time this has been accompanied by the continued convergence of the high yield bond, US term loan and European term loan products as the institutional investor base continues to deepen. US terms, in particular, have featured increasingly in the European markets following a number of large high profile trans-Atlantic deals in 2018 where deals were distributed in both the European and US term loan markets (in some cases in addition to the bond market) but with almost entirely US documentary terms.

Yield Protection

Investors have increasingly focused on the circumstances in which borrowers can reduce the margin component of their interest rate on a floating rate loan. Whereas borrowers sought the ability to reduce the margin as soon as deleveraging occurs, institutional investors have sought guaranteed periods of approximately six months from initial funding. In addition, the number of times the margin on the term debt can be lowered is increasingly being reduced to two (rather than three) in Europe, with all such margin, "step downs" being removed in some US term loan transactions. Conversely, however, the US market which has generally imposed a "floor" on the floating rate element of the interest rate of 1% per annum, has recently been pushed by borrowers to reduce this to 0% (in line with the European term loan "standard").

Where additional debt can be incurred in the future, loan investors have increasingly focused on what happens to their yield if that future debt is more expensive. In particular, investors are looking to ensure that exceptions to these protections are reduced, and those protections remain in place longer (in European six deals month protection periods are being extended, for example, to 12 months (or even longer), and in the US such periods are sometimes extended to the full life of the term loan).

In addition, a trend had been emerging in the European leveraged loan market during 2018 to approach the debt markets without any protection for loan investors in the event the deal is refinanced or repriced (so called "soft call protection"). The first half of 2019 saw far fewer deals launched without any "soft call" protection whatsoever. That does not however mean that there has been significant improvement in the limitations and exceptions to these types of provisions, an area in which borrowers continue to push for increased flexibility.

Calculation of Consolidated EBITDA

Given the inclusion of unlimited debt incurrence and leakage flexibility by reference to financial ratios that are underpinned by the consolidated EBITDA generated by the borrower group, the definition of what constitutes consolidated EBITDA (and how it can be adjusted) is of key importance. In 2017 and 2018 some leveraged loans adopted the high yield bond style construction where add-backs to EBITDA for anticipated synergies, cost savings and the like are uncapped and can be anticipated to occur within any time horizon. Loans in both the US and the European markets have since seen increased loan investor interest in how these adjustments are treated. In the US market some deals have seen these adjustments capped by reference to quantum (typically around 25%). The European market has been more conservative and has seen caps by reference to quantum imposed (typically around 20% to 25% and the period within which they need to be anticipated to occur limited (typically 18 to 24 months).

Debt Capacity

Institutional investors have pushed back on incremental debt capacity relation to future debt issuance and tightening of leveraged-based baskets and ratios.

Investors have been particularly focused on the overall quantum of additional debt capacity itself. This has seen general basket permissions reduced, as well as the unlimited permissions that are based on financial ratios. Whereas it had not been usual for junior debt (including junior secured debt, such as second lien financing) and unsecured debt to be able to be incurred under unlimited bond-style ratios calculated by reference to the fixed charge cover ratio (with such debt incurrence only being regulated by reference to the ability of the borrower group to cover two time interest expense relative to the amount of consolidated EBITDA generated), increasingly investors have focused on the inclusion of more disciplined ratios calculated by reference to leverage-based ratios.

An example of European leveraged loan market terms that has been imported from the US as a consequence of the convergence of transatlantic products is the "inside maturity" basket, which allows incremental debt to mature/amortise ahead of the Day One term debt. This is a basket (generally cash-capped and sometimes with an option of a larger basket calculated by reference to a specified percentage of LTM consolidated EBITDA) that can mature ahead of the Day One term loan. 2019 has seen European investors attempt to pushback on the inclusion of these baskets, with mixed success.


arly, "pick your poison" baskets – where borrowers can used leakage capacity to build other baskets have also faced pushback in Europe. These baskets come in a range of formulations – sometimes specified baskets can be used to create capacity under other specified baskets, however in some deals broader formulations are proposed where any restricted payment or investment capacity can be used to create capacity under any other basket. Pushback in distribution has seen this flexibility removed altogether in some deals.


The impact of well publicised litigation like J Crew and PetSmart continues to play on debt investors’ minds. Under a regular set of high yield or US loan covenants it is possible to designate certain subsidiaries of the borrower group as "unrestricted", which means they sit outside the credit group, which yields a number of consequences. First, disposals of assets to, or investments in, those entities are restricted by the documentary terms of the loan or bond. Second, these "unrestricted" entities are never required to provide credit support to the investors in the loan or bond. Third, as a result of the fact that these subsidiaries are completely outside the credit net, the borrower group has always been allowed to deal with those assets as they wish (including by distributing the shares of the entities themselves or the proceeds of any disposal of the "unrestricted" business out of credit group to the ultimate owners of the business above).

In some documents (as with the J Crew example) two-step tests were introduced whereby an intragroup disposal could be made (for example by an entity that guarantees the term debt to an entity that does not), and then as a second stage, the recipient could then make a disposal to an "unrestricted" entity that would not otherwise have been permitted. Investor focus on this type of permission has sharpened considerably.

The situation nevertheless remains that there is generally flexibility to dispose of assets to (or make investments in) third parties generally, and there are generally no specific protections for "crown jewel" type assets like IP.

Another feature of the US market that has become increasingly prevalent in the European term loan market is the flexibility, where the net proceeds of a certain disposals of assets would otherwise be required to prepay the debt facilities, for such requirement to only apply to a specified percentage of such net disposal proceeds. That level also reduces as the total net leverage ratio of the credit group reduces. These provisions have found disfavour with investors because any such net proceeds not required to be applied in prepayment of the initial debt, can instead generally build available capacity to make dividends and other payments to the ultimate owners of the business. These retained net proceeds are only one aspect of a leakage permission that often builds off 50% of consolidated net income and includes an additional cash capped or consolidated EBITDA based basket permission. In the high yield bond market these types of permission would typically require the credit group to be able to meet its interest requirements twice over. In some particularly borrower-friendly European financing transactions, no ratio governor applies in relation to this type of leakage. More commonly, however, a leveraged-based ratio applies, and there has been some tightening of these leveraged-based ratios during 2019.

Investor Ability to Sell Debt

A key investor protection is the ultimate ability to sell out of the debt in the event investors are unhappy with the performance of the business or the strategy of management. In high yield bonds this is essentially unrestricted, and the market position for US term loans is relatively well-settled. In Europe, however, this continues to be a real area of borrower and investor focus.

The first half of 2019 saw various terms introduced with a view to giving borrowers more control of the composition of groups of lenders, even in circumstances when the borrower group is defaulting under the credit documentation. Some borrowers seek absolute discretion in determining whether a proposed lender can join the lending group, others increase administrative requirements (requiring notification of proposed changes even where no consent is required or proposing particular methods of communication to advise requested transfers), and still others require consent to broadly defined classes of potential loan-to-own investors or investors in distressed debt even where events of default are continuing (in some cases looking to control this at all times).

In addition, instances such as the Windstream chapter 11 bankruptcy filing following its litigation with Aurelius Capital Management have resulted in increasing concerns over "net short debt activism" where creditors, despite holding a borrower’s debt, seem motivated to push the borrower into distress over defaults under the credit documentation. These "net short" positions are generally identified as interests under total return swaps, total rate of return swaps, credit default swaps or other derivative contracts, that could lead to the relevant creditor taking actions that would be uneconomic if they were solely a creditor of the relevant debt. Whilst the concerns of borrowers are understandable, it is worth noting that this is a complex area of the capital markets and so it is difficult to define the instruments precisely and fully gauge the impact of the proposed restrictions.


Overall, the first half of 2019 saw a trend in the European leveraged loan market of generally improved "headline" credit terms. Notwithstanding this however, the increased convergence of loan and bond products has increased the overall complexity of documents. Timescales for deals have also been increasingly compressed, with debt deals being brought to market and sold in shorter timeframes. In reality, this means that institutional investors have tended to focus on a handful of key points, with borrowers being prepared to accommodate some but not all of the key concerns of "anchor" investors during the debt sell-down process. With the continued deepening of the debt investor base however, the convergence of terms looks likely to continue, and with it the complexity of documentation.

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Law and Practice


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.

Trends and Development


Milbank LLP is a pre-eminent global law firm which for over 150 years has provided innovative legal solutions in many of the world’s largest, most complex, ‘first-ever’ corporate transactions and disputes. Milbank’s clients are prominent multinational financial, industrial and commercial enterprises, governments, institutions and individuals.

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