Possible new security rights for Banks

On 10 July 2017, the European Commission published a consultation amongst other things on the protection of secured creditors from a borrower’s default. The consultation suggests a new type of contractual security right (called accelerated loan security) which could be granted over certain assets to secure a loan granted by a bank to a business. The accelerated loan security would provide that, once certain conditions are met, a bank could retain the secured assets or transfer ownership of those assets.

This is an important option as, at present a Security Holder is, except in very limited circumstances, permitted to enforce security only by taking possession (either directly or via a receiver) and realising the asset and applying the proceeds towards payment of the debt.  For certain types of asset the Lender is entitled to take possession of the asset in settlement of the debt without having to sell it. This is known as “Forfeiture” where it occurs in relation to mortgages on land and “Appropriation” where it occurs in relation to financial collateral granted under the Financial Collateral regulations.

There are costs and uncertainties associated with realising security, in particular whether and when assets can be sold at a good price, or are better realised with other assets which may be avoided if Banks have wider rights to appropriate assets in satisfaction of a debt. Additionally, it may facilitate the ability of a bank to sell a defaulted loan to a third party if it can effectively sell the security assets with it.

It remains to be seen how such a form of security would operate within the concept of Administration as it would seem to cut across the principle of asset protection and business rescue enshrined in that process.

Also, it is unclear how a Bank would use the right as it may not be attractive for Lenders to bring security assets onto their balance sheets. Presumably security agents, custodians or trustees would take on the role.