Banking & Finance 2019 Comparisons

Last Updated November 12, 2018

Law and Practice


Winston & Strawn London LLP (London) 's banking and finance practice provide a wide range of legal services 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. The firm advises on a broad range of high-profile transactions and matters for their clients - 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 domestic and international funding sources who provide senior, subordinated, secured and unsecured debt and hybrid (equity/debt) products, as well as institutional investors who regularly participate in the senior debt markets, equity sponsors, and borrowers in both developed and emerging economies. The London practice focuses on complex cross-border deals, assisting domestic and international commercial banks and investment banks, finance companies, multilateral and development finance institutions, public and private companies, and private equity funds, and portfolio companies, on investment grade, leveraged, and mezzanine financings.

There have been significant headwinds in certain sectors of the economy unrelated to the Brexit vote.  In particular, the 'bricks v clicks' debate continues as retailers are increasingly affected by the growth in online shopping and increases in rates payable on the real estate they occupy. Casual dining is suffering from a growth in input prices coupled with a reduction in demand.  All areas dependent on migrant workers are reporting difficulty obtaining staff and rising staff costs, which includes agriculture, food preparation, adult social care, casual dining and construction. 

Business associated with government funding have also been hit, with reductions in UK Government spending hitting a diverse range of areas such as adult social care, outsourcing and certain businesses reliant, for instance, on legal aid contracts.

The economic development has shaped lending decisions. However, there have been few recent regulatory changes directly affecting lending.  One key change with an international impact has been the announced withdrawal of the requirement on London banks to contribute to LIBOR rate setting, which will affect how interest rates are fixed from 2021 and has set the market grappling with finding alternative rate-setting mechanics.    

Banks have been implementing the complex reorganisations required by ring-fencing plans, which they have been preparing for some time as well as preparing for Brexit. Regulation has driven bank lenders to carefully consider their business lines and withdraw from some areas (notably sectors of individual, SME and asset-based lending). However, having ‘right–sized’ the leveraged lending portion of their balance sheets and benefiting from the re-emergence of CLOs, banks have expanded their leverage loan origination both for their own balance sheet and syndication. At the same time, the banks’ concern with compliance issues has led to stronger sanctions policies and delays and difficulties in signing off KYC checks and opening new bank accounts.

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 on the fall-out of the Brexit decision and expanding changes in bank regulation towards the insurance industry.

There are signs that markets are pushing back on tight pricing and terms, to some extent reflecting the increased likelihood of increases in interest rates. This is beginning to show in both primary pricing and secondary loan prices.

Whereas for a significant period high yield out-competed bank lending for larger transactions, high yield has seen a marked reduction in the face of completion from non-bank lenders with ever increasing fund sizes able to fund all but the largest loan sizes and the strong re-emergence of CLO funds, which are enabling banks to originate to distribute jumbo leverage loans. The acceptance of covenant-lite terms by both non-bank lenders and the CLOs in large and, increasingly, mid-sized transactions and the absence of a listing requirement (and need to produce a prospectus and rating) means that high yield lacks the competitive edge it previously had. The majority of high yield being raised is for existing issuers with new issuers generally able to choose between private placement, a debt fund or bank underwriting to CLO, depending on the particular characteristic of the transaction.

The alternative credit provider market is showing signs of increasing maturity 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 very substantial loan sizes. Non-bank lenders have in many cases become the lender of choice and driver of pricing and structures. Intense competition in the market and the ability of debt funds to fund the whole debt requirement in all but the largest transactions means that bank lenders pitching a syndicated loan or to originate a loan for distribution to CLO funds cannot demand strong flex provisions which they used to command.

In addition, private placement has been increasingly documented either as a privately placed bond or loan structure. Private placement is operating in interesting markets, particularly infrastructure. Private placements may be documented under New York or English law, but typically reflecting institutional terms.

Alongside this we are seeing peer-to-peer platforms 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.

Institutional lenders have for a long time demonstrated that they are more focused on the credit quality of their creditor and the liquidity of the interest they hold than financial covenant protection or amortisation (hence the structure of high yield bonds). Whereas banks were previously the intermediary through which practically all loans were made, terms now more closely reflect the requirements of institutional investors. Banks are often involved in these structures providing working capital, cash settlement, hedging and letter of credit/bank guarantee products on a super-senior basis. However, debt funds increasingly are able to provide at least revolving facilities and simple letter of credit lines, often backed off to fund financing lines provided by banks.

Institutional investors are now becoming focused on being more efficient in their portfolios. This is leading to shorter investment periods for debt funds and more interest in managed co-investments where the investor controls disbursement rather than needing to commit capital upfront and the use of leverage either as a bridge or permanent feature. Debt funds are more often offering fund investors bespoke options for leveraged and un-leveraged funds, with banks providing warehousing and leveraging for debt funds, which are perceived by banks as involving less risk and require less regulatory capital.

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, previous proposed regulations and regulations that can be seen worldwide (eg, universal lender licensing) could have 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.

It remains to be seen whether UK regulators feel the need to respond to the removal of risk retention requirements in the USA on CLO issuance, although anecdotal evidence suggests not for a range of reasons.

Requirements and Procedures

In the UK, authorisation requirements vary by level and type of activity. Whilst 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 authorising bodies (the Financial Conduct Authority ('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 fall within 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 European Economic Area ('EEA') where such firms also seek to 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 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 in the UK each permitted activity 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 as part of Brexit, passporting rights will no longer be available.

There are no specific restrictions on the making of loans by foreign lenders 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 down from them are not used in breach of the anti-corruption and sanctions regimes. This means lenders are required by law to actively seek and identify bribery and corruption risks and maintain processes to mitigate these risks. Financial institutions are also subject to regulatory obligations 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. The practical impact of this is likely to be limited, with the exception of recent US unilateral action, as sanctions lists generally have similar contents. Sanctions typically apply to citizens, companies and persons resident, operating or incorporated in the relevant jurisdiction, and prohibit them from dealing with funds or economic resources belonging to, owned, held or controlled by a sanctioned person, and directly or indirectly making funds or economic resources available to, or for the benefit of, a sanctioned person, in each case with knowledge of or reasonable cause to suspect that result or without obtaining appropriate authorisation or a licence exemption from the relevant authorities.

Whilst specific contractual assurances were traditionally required only from borrowers operating in sectors or countries that were perceived as being higher risk, and these provisions were typically more common in emerging markets and certain project financing transactions, as a consequence of increasingly aggressive enforcement action (especially by the US sanction authorities) lenders now seek specific contractual assurances on these topics which go beyond the 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. In addition, changes to the sanctions definitions and provisions often require all lender consent.

The risks to the borrower of agreeing to contractual provisions, which extend beyond the laws the borrower is obliged to comply with, can result in challenging discussions. Lenders typically want borrowers to comply with US sanction rules which have increasingly become less harmonised with other sanctions regimes.

Both the agent 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).

The establishment of a security trust by a security trustee is used generally to hold any English law security on trust for the benefit of the lenders from time to time. The establishment of a trust account is used to deliver the proceeds of payment 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: a novation 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. In a syndicated loan, this does not generally affect the relations of the other parties. 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.
  • 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 transfer or other 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 often require the borrower or guarantor to be consulted or notified or trigger pre-emption or other rights for the other lenders in the syndicate. 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. Increasingly lenders are seeking an absolute restriction on sponsors or other shareholders acquiring a portion of the debt which allows 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 finance any cash consideration fully, or implement any other type of consideration, offered for an acquisition of a public company before its offer is publicly announced. Financing conditions are normally not permitted to be invoked except in narrowly defined pre-conditional offers where a necessary material authorisation or regulatory clearance is required for the offer to proceed.

The responsibility to comply with this certain funds requirement rests not only with the potential buyer but also with its financial adviser, who must provide in the offer document a confirmation (referred to as the 'cash confirmation') that the bidder has the necessary financial resources available to consummate the offer. For this reason, the bid will usually not be launched without the financial adviser having received a representation letter from the bidder and a comfort letter from the lenders. The bidder will also be required to give a working capital statement. If a new loan financing is required to fund the bid, the facility agreement (or a suitable interim facility) will need to be fully negotiated and executed prior to the offer announcement. Bidders seeking to acquire a public target with bid financing will require a certain funds bridge, usually provided by a bank.

Private acquisition finance

In the last few years, the trend has continued for private equity sponsors to seek certain funds financings for private M&A transactions (whether in an auction context or otherwise) to remove or reduce the extent of conditionality both in loan and acquisition documents, to minimise execution risk and to appear competitive in auction situations. The Loan Market Association standard leveraged loan documents now include optional wording for certain funds.

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%). There are a number of circumstances when application for an exemption from this requirement may be made, 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 and certain US disregarded LLC or US S-Corporations.

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 of 19%) 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 transfer of syndicated loans depending on their terms.

Other than the costs set out in 5.1 Assets Typically Available 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 constitutes a penalty clause. Whether a particular provision is penal will depend on the facts of the case.

In addition, whilst there is no mandatory limit on interest rates, extortionate credit transactions can be set aside.

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 the English law. 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 chargor’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.

The composition of a security package will of course 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. For example, in respect of bank accounts, a charge will only constitute a fixed security interest so far as the lender is able to control dealings with the account balance. If the degree of control exercisable is not sufficient then the security will operate as a floating security regardless of how it is described in the documentation. 

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 documents (eg, share certificates) 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 UK company or limited liability partnership must be registered at Companies House in the 21-day period beginning with 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.

Whilst there are exceptions for security over certain leasehold interests, 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 a 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 on the appropriate register at the UK Intellectual Property Office ('IPO').

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

Security interests over a particular asset or asset class can either be created in a stand-alone document or incorporated in a debenture or similar security agreement that covers a number of different assets, asset classes or types of security interests. An initial security document is simple to produce from existing standard forms and the main documentation costs are normally incurred in negotiating its terms, for example so as to be consistent with any existing loan covenants and to reflect the grantor’s particular business.

Due diligence costs may be incurred in carrying out a due diligence exercise on whether the assets to be charged are transferable and commercially valuable, in particular where real estate is involved.

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 and ranges between GBP40 and GBP250 per property (or GBP20 and GBP125 per property, if filed electronically) although where a charge affects more than 20 properties, special rules apply to the calculation of fees. 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 ("SDLT") and there are no other notarisation or stamp fees payable when security is created. 

A floating charge granted over the assets and undertaking 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 occurring 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. Whilst, following crystallisation, a floating charge will have the characteristics of a fixed charge, 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, not for instance in the interests of its associated companies or the group of which it is a member 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 can 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 standard of the test to be applied is whether "an intelligent and honest man in the position of a director in the company concerned" could, in the whole of the existing circumstances, have reasonably believed that the transactions are for the benefit of the company.

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 an insolvency of the guarantor.

Restrictions on charging assets

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 the shares in that public company or for the acquisition of its English holding company's shares by another person, whilst 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 constructs 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 led to them being stalled in the UK for the moment.

No response provided.

Security is usually released by a deed of release.

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. 

With respect to competing fixed security or mortgages, priority generally is determined based on which security was created first (as long as such security was registered within the 21-day grace period noted above). 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 existence of a floating charge 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 who takes without notice of an earlier assignment and is the first to give notice of assignment to the debtor will obtain priority over the earlier assignee.

There are however a number of exceptions and qualifications to these rules, including that where the security is granted over an asset requiring registration in a specialist register (such as for real estate, intellectual property, ships and aircraft) 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 are particularly complex and differ for registered and unregistered land. The basic priority rules for registered land are that between themselves 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 the 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 the 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 by, for example, them entering into a deed of priority or an inter-creditor agreement. In its simplest form, contractual subordination not only prevents the junior creditor 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 will remain 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 application of proceeds upon insolvency is considered below.

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. Insolvency procedures in English law are considered below.

The 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.

As to submission to a foreign jurisdiction, the starting point is that the 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 the English common law.

Where a ‘foreign’ jurisiction, chosen by the parties, is within the European regime, it will have jurisdiction (save in certain exceptions set out in the Convention and Regulations, for example 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, the English courts have been willing to stay English proceedings in favour of the foreign proceedings, usually so long as the European regime does not expressly reserve jurisdiction to itself in the particular case, although such an approach may depend on whether the foreign court was first ‘seised’.

In future, the legal framework relating to choices of law and jurisdiction will change as a result of the United Kingdom’s withdrawal from the European Union (‘Brexit’), which is currently timetabled to take effect in April 2019. However, in the short term, there is unlikely to be any substantive change to the position under English law. This is because the UK Government has confirmed its intention to pass legislation which would convert all directly applicable EU laws (ie, EU laws, such as the Recast Brussels Regulation, which take effect in England without any need to pass specific domestic implementing legislation) into domestic law, and to preserve existing English laws which implement EU legislation. As a result, English law in this area will remain the same in the period immediately following the UK’s withdrawal from the EU.

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 cause 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 which provides a simplified method of enforcement, in which the enforcing party applies for a certificate from the originating court. Following issue of the certificate, the judgment is treated as if it were a 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: (i) final and conclusive, and (ii) 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 (for example, that the judgment would be contrary to public policy, or that the judgment was obtained by fraud).
  • Finally, foreign judgments not covered by the above instruments can be enforced at common law by suing on 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 the 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, the 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 being enforced against 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. However, as noted above, it is the UK Government’s intention (at the time of publication) for all existing EU legislation to be incorporated into domestic law. Therefore there is unlikely to be any substantive changes in the process of enforcing a judgment of a foreign court.

There are no restrictions applicable to foreign lenders specifically.

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 an insolvent company’s directors or creditors and insist on its own appointee.

If the company has been put into administration rather than a 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, he returns 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. There are various criteria set for 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. He can distribute to unsecured creditors with leave of the court. More usually, he 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 ('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 who possess 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 the CVA is only binding upon creditors who were eligible to vote, or who would have been eligible to vote, if they had notice of a creditors’ meeting.

In the enforcement section of this note, reference has been made to the fact that 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.

As to the commencement of an insolvency process, it should be noted that a lender which wishes to start such 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 (or its 'COMI'). Under the EC Insolvency Regulation, which is incorporated into English law, there is a rebuttable presumption that the COMI will be the place of the company’s registered office. However, there may be occasions in which a borrower’s COMI is held to be located in a different EU member state, despite the registered office being located in England and Wales.

In insolvency, 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 that was entered in reliance in the reasonable belief 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 a 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 as a financing technique 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 Co'), with the repayment of the financing dependent on the internally generated cash-flows of the project.

The project financing structure includes the equity investor(s) and owner(s) of Project Co and the lenders (usually composed of a consortium of financiers, including commercial banks and, often, export credit agencies). In the wake of the financial crisis, continuing pressure on commercial banks’ liquidity saw many players exiting the industry. Tightened regulatory requirements under the Basel III rules have also placed a greater burden on commercial lenders, leaving a gap in the market for institutional investors. In recent years infrastructure projects in the UK have proven an attractive safe haven for institutional investors through the use of project bonds, filling the gap left by commercial banks.

Project finance in the UK is not subject to a specific legal framework. Rather, the applicable rules will often depend on the sector and location of the project falls. In addition to UK legislation, namely the laws of England and Wales, the laws of Scotland and the laws of Northern Ireland, a number of European law issues should also be taken into consideration when structuring a project, such as the state aid rules under articles 107 and 108 of the Treaty on the Functioning of the European Union (State Aid Rules) and the various applicable EU environmental regulations. As further described below, the planning and licensing regime in the UK will also be a prime consideration for project sponsors.   

The UK has long been at the forefront of public-private partnership ('PPP') transactions. PPP is a form of project financing where, typically, a public service or asset is funded and operated by the private sector under a long-term concession granted by a public authority. There is considerable precedent for this type of financing in the UK.

If, under the PPP arrangement, the government or public authority grants any advantage to the project company, such as a guarantee, public grant, offtake by a public authority above market price, tax break or use of a state asset for free or at less than market price, the State Aid Rules may prohibit such an arrangement.    

To support the development of PPPs in the UK the government established Infrastructure UK ('IUK') in 2010, a unit that is part of Her Majesty’s Treasury. The role of IUK is to co-ordinate and simplify the planning and prioritisation of long-term infrastructure projects and to secure private sector infrastructure investments. Such security provided by the government has led some projects supported by IUK to be challenged on State Aid Rules ground. Further, the UK National Infrastructure Commission was established in October 2015 to provide impartial, expert advice to Her Majesty’s Government on major long-term infrastructure challenges facing the UK. In particular, the National Infrastructure Commission is responsible for undertaking a National Infrastructure Assessment each parliament, making recommendations to the Government and holding the Government to account with respect to the implementation of 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 such as this are typically viewed positively in the market, thereby facilitating the financing of infrastructure projects. 

Private finance initiative ('PFI'), traditionally used for capital intensive projects, is the dominant PPP model in the UK. PFI is a government policy under which private sector companies, usually through a special-purpose vehicle, finance, build, operate and maintain the project. Under the PFI arrangement, the public authority will in return pay for the use of the project and usually, at the end of a fixed period of time, the ownership of the project will be transferred to the public authority. In 2012 the UK government adopted a new approach to PFI known as Private Finance 2 ('PF2') and all PPP documents must now follow the standard wording and guidance set out in the Standardisation of PF2 Contracts published by Her Majesty’s Treasury.

The relevant government approvals, licences and statutory controls required for a project will depend on the specific nature of each project. For example, as further described below, many commercial and industrial activities in the UK require a permit governed by the Environmental Permitting (England and Wales) Regulations 2010 (as amended). Further, 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 inter-connector, 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 in 4 Tax, above. In addition, there are a number of tax incentives in the UK to attract investments in energy and infrastructure projects, such as those brought in by the Energy Act 2013 for low-carbon generation and enhanced capital allowance for specific energy-saving plant and machinery.  

The transaction documents do not need to be registered or filed with a governmental 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, additional to registration at the Land Registry where the security interest relates to land.

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, such as the Ministry of Defence for defence sector projects, Department for Transport for transport projects, Department of Health for projects in the health sector and the Department of Energy and Climate Change for oil and gas exploration or production activities. In addition to these government bodies, PPP and PFI policies are driven from within Her Majesty’s Revenue and the Cabinet Office. Further, 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 industries). 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; however, presently most of the energy and infrastructure industries have been privatised in the UK.      

The first issue to be considered when structuring a project is the bankability of the contractual arrangement. During this process, once identified, the various risks should be appropriately allocated in the transaction documents to the parties which are 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 special-purpose vehicles incorporated as a limited liability company.

Funding techniques available to project companies include commercial lenders, export credit agencies, international institutions such as the European Investment Bank and project bonds investors. As indicated above, project bonds have become increasingly popular in recent years for infrastructure projects in the UK, such as motorways, and attracting 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 generally 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 the generation from 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 of the EEA, Ofgem is required to notify the Secretary of State of the UK Government and the European Commission of such an application. The Secretary of State and the European Commission 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 reflect measures imposed by resolutions adopted by the UN Security Council or may be autonomous. These restrictive measures may prohibit such foreign investors from being involved in project financing in the UK.                  

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 in Scotland, Natural Resources Wales in Wales and the Northern Ireland Environment Agency in Northern Ireland together with the Health and Safety Executive and the Department of Energy and Climate Change ("DECC").

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, who 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 trade 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.    

The environmental impact of natural resources extraction should be a prime consideration of project sponsors. The main source of environmental controls in the UK is derived from the planning permission regime. Most planning permissions will 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. 

No response provided.

As highlighted above, 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 in Scotland, Natural Resources Wales in Wales and the Northern Ireland Environment Agency in Northern Ireland. 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 new EIA Directive was transposed into UK legislation in May 2017. The EIA Directive 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 and enforcing the Health and Safety at Work etc Act 1974 (as amended) (the 'HSW Act') and a large number of sector-specific acts and regulations, such as the Offshore Installations (Offshore Safety Directive) (Safety Case etc) Regulations 2015, which applies to offshore oil and gas activities. Project companies (and their management team) breaching 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 2017 the UK was ranked 17th globally by the Islamic Finance Country Index (2017). In June 2014 the UK became the first country outside the Muslim world to issue sukuk (Islamic bonds). The GBP200 million sukuk issued by Her Majesty’s Treasury attracted interest from investors in the UK and other major centres for Islamic finance around the world.

Currently six stand-alone Islamic banks and more than 20 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 currently approximately USD50 billion, with more than 65 sukuk listed on the London Stock Exchange.

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 further 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 the former Chancellor’s (George Osborne) remarks that the development of the Islamic finance industry is essential to make Britain the “undisputed centre of the global financial system”. In order to support such development, the Government established an Islamic Finance Task Force in 2013 to promote the UK’s Islamic finance sector, facilitate inward investment and strengthen the UK economy.

There are a myriad of Islamic financial products available in the UK and each must be analysed independently for tax and regulatory compliance. 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'.

English law does not concern itself with whether a specific arrangement is Shari’a compliant and is solely concerned with the legal form of such an arrangement. The UK Government does not employ a separate framework for regulating Islamic financial products and transactions, preferring instead to categorise these 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 - one that is focused solely on the 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 any responsibility for the Shari’a compliance (or the lack thereof) of Islamic financial products. Instead, the responsibility for ensuring 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, therefore, regulated by the FCA and the PRA. However, as discussed above, the vast majority of financial institutions in the UK elect to establish 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. Further, the Accounting and Auditing Organization for Islamic Financial Institutions ('AAOIFI'), a not-for-profit organisation, seeks to maintain and promote Shari’a standards for Islamic financial institutions, participants and the industry generally.

Tax legislation in the UK has developed to ensure that the tax treatment of Islamic financial products, which fall within the scope of 'alternative finance arrangements', is neither more or 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 on alternative finance arrangements for the purposes of income tax and corporation tax was first introduced in Chapter 5, Part 2 of the Finance Act 2005. The tax treatment of some of the most commonly used Islamic financial products is now 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, which include requirements that the return generated does not exceed a reasonable commercial return, that the sukuk is listed on a recognised stock exchange and that the arrangement has a fixed term or maturity date. 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. The tax treatment of sukuk under the CTA and the issuance of sukuk by the government in 2014 are likely to increase the popularity and the 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, which includes the requirement that the difference between the purchase price and the resale price be equivalent to the return on an investment of money at interest on arm’s-length terms. 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.

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 Bank and Takaful Operator Regulation

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 Shari’a supervisory board ('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 are considered haram, ie, prohibited under Shari’a.  

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 increasing adopted for financing projects, particularly power, petrochemical and industrial projects.

Further, 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). A possible structure involves the investment agent (representing the Islamic facility participants) making funds available to the project company under the terms of a procurement agreement based on an Istisna'a structure. This allows the use of the concession right granted to the project company for the purposes of the financing arrangements.


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 amongst Islamic finance market participants – and prospects for developments this area (particularly in the Islamic peer-to-peer financing and crowd-funding space) appear positive in the UK.


Consistent with its long perception as a Western hub for Islamic finance, the UK has taken noteworthy steps to encourage the growth of Islamic finance through the implementation of amendments to legislation and government policy. The UK’s commitment towards the development of the Islamic finance market is expected to continue post-Brexit and the potential for the further development of the Islamic finance industry in the UK remains positive.

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Winston & Strawn London LLP (London) 's banking and finance practice provide a wide range of legal services 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. The firm advises on a broad range of high-profile transactions and matters for their clients - 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 domestic and international funding sources who provide senior, subordinated, secured and unsecured debt and hybrid (equity/debt) products, as well as institutional investors who regularly participate in the senior debt markets, equity sponsors, and borrowers in both developed and emerging economies. The London practice focuses on complex cross-border deals, assisting domestic and international commercial banks and investment banks, finance companies, multilateral and development finance institutions, public and private companies, and private equity funds, and portfolio companies, on investment grade, leveraged, and mezzanine financings.


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