United Kingdom: Lending & Secured Finance

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This country-specific Q&A provides an overview to lending and secured finance laws and regulations that may occur in the United Kingdom.

This Q&A is part of the global guide to Lending & Secured Finance. For a full list of jurisdictional Q&As visit http://www.inhouselawyer.co.uk/practice-areas/lending-and-secured-finance/

  1. Do foreign lenders require a licence/regulatory approval to lend into your jurisdiction or take the benefit of security over assets located in your jurisdiction?

    In the United Kingdom, general corporate lending is not a regulated activity requiring a licence or regulatory approval. Lending is only a regulated activity in relation to residential mortgages and consumer lending. In these circumstances, and assuming none of the available exemptions apply, a Lender will need to be authorised by the UK Financial Conduct Authority and/or the Prudential Regulation Authority) to conduct such business. In addition, deposit taking by banks is a regulated activity which again requires authorisation by the UK regulator.

    Mortgage and consumer loans are subject to a range of regulatory requirements that do not apply to unregulated loans. For example, for regulated mortgage contracts there are particular restrictions around how:

    • the loans are marketed, originated and sold;
    • lenders administer the loans on an on-going basis; and
    • borrowers who fall behind with their payments are dealt with.

    Regulated credit agreements on the other hand have specific requirements around how the agreement is drafted and formatted and what information must be included.

    There are no additional restrictions that apply to foreign lenders.

  2. Are there any laws or regulations limiting the amount of interest that can be charged by lenders?

    Generally, no, there are no anti-usury laws or regulations in England and Wales applicable to corporate (as opposed to consumer) lending transactions. However, there are potential limitations on a lender’s ability to charge interest at an increased rate where the borrower is in default (“Default Interest”) or impose other financial sanctions, where, if the relevant rate charged is considered to be a penalty, it will not be enforceable. Whether Default Interest is considered to be a penalty is not dependent on the amount charged, but on whether the provisions which apply on default represent secondary obligations which impose a detriment on the defaulting party which is out of proportion to the interest of the non-defaulting party in enforcing the primary obligations in respect of the borrowing of the loan.

  3. Are there any laws or regulations relating to the disbursement of foreign currency loan proceeds into, or the repayment of principal, interest or fees in foreign currency from, your jurisdiction?

    No, there are no foreign exchange or currency restrictions in the UK which restrict loans being made or repaid in a foreign currency. The English courts do issue judgments in currencies other than pounds sterling, but they may not necessarily in every case award damages for a breach of a loan document in the relevant foreign currency or enforce the benefit of any currency conversion and indemnity provisions in the loan documents.

  4. Can security be taken over the following types of asset: i. real property (land), plant and machinery; ii. equipment; iii. inventory; iv. receivables; and v. shares in companies incorporated in your jurisdiction. If so, what is the procedure – and can such security be created under a foreign law governed document?

    Yes, security can be taken relatively easily and quickly over all of those assets in England and Wales. What type of security can be taken depends on the type of asset over which it is being taken.

    The main categories of security usually taken by funders under English law are;

    (1) a “mortgage” under which legal or equitable title is taken to the relevant asset and which involves a transfer of some ownership rights. That transfer of ownership is on condition that the asset will be transferred back to the mortgagor upon discharge of the secured obligations. Possession of the asset secured by the mortgage is not required and mortgages can apply to tangible or intangible assets. A mortgage can be either legal or equitable. A legal mortgage will transfer the legal title to the asset to the mortgagee and prevents the borrower dealing with the asset, which may not be commercially viable for some assets. An equitable mortgage will only transfer the beneficial interest in the asset to the mortgagee, the legal title remaining with the mortgagor which means the mortgagee will have less control over the asset than would be the case with a legal mortgage. A legal mortgage and an equitable mortgage are fixed charges and both create a similar type of security. Both entitle the mortgagee to take possession of the asset and dispose of it by private sale with priority over unsecured creditors. Where a mortgage is categorised as a "legal" mortgage it gives certain benefits in terms of enforcement and rights against third parties compared to an "equitable" mortgage;

    (2) a “charge” which can be used for most types of asset. No transfer of title is involved. A charge gives the lender a right to appropriate the charged asset to pay off particular obligations. A charge does not transfer ownership of the asset to the lender and the lender need not take possession of the asset (in contrast to a pledge - see below). There are no general limitations on taking a charge over assets, but it is relevant whether the charge is "fixed" or "floating" at the time it is created as that will determine the priority of the creditor on enforcement (fixed charge creditors ranking ahead of floating charge creditors generally). In order to retain sufficient control over an asset for a fixed charge, the borrower's right to deal with the asset will be severely (if not, totally) restricted. Floating charges "hover" over what can be a changing group of assets. The ability of the chargor to deal with the assets charged by a floating charge provides the chargor with the ability to dispose of the charged assets or acquire further assets of that class in the ordinary course of its business. That is the advantage of a floating charge to the chargor, but it presents a potential problem to the lender in that the chargor could potentially dispose of all the assets within that class unless and until the floating charge has crystallised (following a specified event). For example, a fixed charge over a bank account requires the bank account to be blocked, and in practice only a floating charge can generally be taken over a security provider’s stock in trade.

    Where the security provider is a limited company or a limited liability partnership, a general floating charge will usually be taken over all of the assets of the security provider, in conjunction with fixed charges over selected assets. This gives the lender additional rights on the insolvency of the security provider as, if the lender has a floating charge, or such combined fixed and floating charges, over the whole or substantially the whole of the assets of the security provider, the lender has the right to appoint an administrator over the security provider on insolvency. That can have certain advantages for the lender. See paragraph 22 below for more information on the administration process;

    (3) an “assignment” is the transfer of one person's rights to another person. Assignments can be legal or equitable, the latter only passing an equitable right in the asset (e.g. the rights under a contract) transferred. A legal assignment provides certain enhanced rights to the lender. An "assignment by way of security" is an assignment which has an express or implied right that, if the debt in relation to which the assignment is made is repaid in full, the security provider can require its asset to be transferred back to it.

    It is typically used for an asset which includes future rights, e.g. an assignment of rental income under a lease or of the benefit of a contract: and

    (4) “possessory” security, i.e. a pledge, where a lender takes security over the relevant asset by taking possession of the asset or of the documents of title to the asset, for example, goods in a warehouse. The pledge will include a right to sell the asset on default by the security provider. This is much more rarely used in England and Wales than mortgages and charges.

    In England and Wales mortgages, charges, assignments and floating charges are often incorporated into one overarching security document called a “debenture”, although that can often be supplemented by additional specific security over a specific discrete asset, such as an assignment of a keyman insurance policy.

    While it is possible to take security over certain assets situated in England and Wales under documents governed by the law of another jurisdiction, best practice is always to secure these assets by way of English security documents rather than by way of the law of any other jurisdiction as the lender would usually be seeking to enforce such security before the English courts and would want the judge to apply English law, rather than evidence having to be led on another law. Security over land in England and Wales can only be created by an England and Wales law governed security document, as can security over British ships and aircraft.

    Security over particular asset classes:

    I. Real property (land), plant and machinery

    The most common forms of security over real estate in England and Wales are:

    • a legal mortgage (commonly referred to as a “legal charge”);
    • an equitable mortgage; and
    • a floating charge.

    Most borrowing is secured by a legal mortgage. The difference between a legal mortgage and an equitable mortgage lies largely in the extent to which the mortgage is perfected by registration at the England & Wales Land Registry, and legal and equitable mortgages are treated differently in terms of the rules of priority as against other creditors.

    It is also common for security to be granted over the rental income from a property. This usually takes the form of an assignment whereby the tenants are directed to pay the rental income to the lender (usually via a managing agent) so that the rental income does not pass through the hands of the borrower. This assignment can be created by a separate security document but it is more usually contained within the mortgage (or a debenture if one is granted).

    A corporate security provider can also create a floating charge. This type of charge is sometimes taken with very large and complicated property portfolios where the security provider requires maximum flexibility and the lender is not too concerned over control. However, it is more normal for a lender to take both a floating charge and a legal or equitable mortgage.

    A fixed charge over property can be granted by anyone, including companies, limited liability partnerships, English limited partnerships acting through their General Partners, traditional partnerships and individuals. A floating charge cannot be granted by an individual or a limited partnership.

    In respect of plant and machinery, it is also possible to take security and this is usually done by way of a mortgage or, more usually, a fixed charge as part of an all assets debenture. Care has to be taken with large items of plant and machinery which may become fixtures, attached to the land, and so may instead be covered by a legal charge over the land which may be granted to another creditor. Deciding whether such plant and machinery has become a fixture can be complex.

    II. Equipment

    Again, equipment is ordinarily secured by way of fixed charge under an all assets debenture. However, in order to have a fixed charge over equipment which is moveable property, the lender must be able to identify the equipment as subject to the charge (e.g. by having a list of the serial numbers of items of equipment) and be able to exert sufficient control over it – which can be a challenge. If the lender cannot identify the equipment or have sufficient control over it to ensure where the equipment is located, the lender may, in fact, only have a floating, not a fixed, charge over the equipment.

    III. Inventory

    This again is usually purported to be secured pursuant to an all assets debenture. However, given that the nature of inventory is, in most companies, that it is fluctuating from time to time, it is more difficult to establish a fixed charge than would be the case in relation to assets such as plant and machinery. For this reason, inventory is usually only secured by the floating charge element of an all assets debenture rather than by way of a fixed charge.

    IV. Receivables

    Receivables can be secured by way of an assignment in security granted by the borrower in favour of the lender. The assignment will identify the relevant contracts (or the proceeds of them) being assigned. Assignments can be legal or equitable, but the more significant differentiating factor between the two is whether notification is given by the borrower of that assignment of the counterparty debtor under the relevant contract. Once notice is given to the counterparty debtor, the debtor must pay the lender in accordance with the provisions of the notice in order to satisfy the debt. If the counterparty debtor instead pays the borrower who has provided the security, the debt will not be satisfied and the counterparty debtor will have to pay again to the lender. However, it is often not commercially acceptable to the borrower that notice is given to the counterparty debtor. Both legal and equitable assignments will be enforceable if the borrower becomes insolvent.

    V. Shares

    Shares are usually charged by way of an equitable fixed charge (often referred to as a “share charge”) in terms of which the relevant shares are charged in favour of the lender. The lender would usually receive signed, but undated, stock transfer forms accompanied by original share certificates. This allows the lender to transfer the shares should it ever need to sell the shares in enforcement of its security.

    Another way to obtain security over shares in England is by way of a legal mortgage whereby the lender takes title to the relevant shares when the security is granted (i.e. becomes registered in the share register as the legal owner of the shares), subject to an undertaking to retransfer the shares to the borrower when the secured obligations have been repaid. This method is less prevalent in England and Wales than taking an equitable charge over the shares.

    All security granted by a UK limited company or limited liability partnership must be registered at the relevant Companies House within 21 days of the date of its creation (see paragraph 8 below for further details on registration requirements).

  5. Can a company that is incorporated in your jurisdiction grant security over its future assets or for future obligations?

    The floating charge element of an all assets debenture will ordinarily cover future assets which are acquired by the relevant company or limited liability partnership. It is also possible for a fixed charge or mortgage to cover future assets to the extent that these assets are sufficiently identified in the relevant security document. Such charge will be "equitable" rather than "legal" in nature until the assets come into being and come into the ownership of the borrower.

  6. Can a single security agreement be used to take security over all of a company’s assets or are separate agreements required in relation to each type of asset?

    Yes. In England and Wales mortgages, charges, assignments and floating charges are often incorporated into one overarching security document called a “debenture”, although that can often be supplemented by additional specific security over a specific discrete asset, such as an assignment of a keyman insurance policy.

  7. Are there any notarisation or legalisation requirements in your jurisdiction? If so, what is the process for execution?

    Documents do not need to be notarised or legalised to ensure the legality, validity, enforceability or admissibility in evidence in the English courts.

  8. Are there any security registration requirements in your jurisdiction?

    Security documents granted by UK (i.e. those incorporated in England, Wales, Scotland or Northern Ireland) companies and limited liability partnerships must be registered with the relevant UK Registrar of Companies within 21 days of the date of their delivery. Failure to do so renders the security void against a liquidator or administrator or other creditor of the relevant chargor.

    Security documents which create security over certain classes of assets located in the UK also need to be registered at the relevant asset register. To ensure and protect the priority of the security (i) charges over registered land located in England and Wales must be registered at the relevant office of the Land Registry; (ii) charges over unregistered land located in England and Wales must be registered at the Land Charges Registry; (iii) mortgages over British ships must be in a prescribed form and be registered at the ship's port of registration; and (iv) mortgages over British aircraft must be registered in the UK Aircraft Mortgage Register maintained by the Civil Aviation Authority. Security over registered intellectual property rights (such as trade marks and patents) will be void against a third party unless the relevant security document is registered at the relevant Patents, Trade Marks or Design Registry at the UK Intellectual Property Office and the appropriate fee (if any) is paid within six months of the creation of the charge.

  9. Are there any material costs that lenders should be aware of when structuring deals (for example, stamp duty on security, notarial fees, registration costs or any other charges or duties), either at the outset or upon enforcement? If so, what are the costs and what are the approaches lenders typically take in respect of such costs (e.g. upstamping)?

    Registration fees

    Registration fees are payable in relation to security registrations at Companies House and (where applicable) to the relevant asset register.

    Registration fees at Companies House are not high - currently no more than £23 for each security document entered into by each charging company.

    Land Registry fees are calculated on a sliding scale, There is a fee payable but it does not exceed £250 for registration of the charge alone (if there is a registration involving both a transfer of title e.g. to a purchaser who then grants a charge, the fee will not exceed £910 for registration of the transfer and the charge).

    Other registration fees vary depending on the location of the registry and the value of the asset. The cost of registering the security would be taken into account in structuring the security package on a case by case basis.

    Stamp duty taxes

    There is no stamp duty payable in the UK on creating a security interest.

    Enforcement Costs

    Enforcement costs will vary according to the size and complexity of the enforcement.

  10. Can a company guarantee or secure the obligations of another group company; are there limitations in this regard?

    A company can guarantee and secure the obligations of another group company. The limitations to this are set out in more detail, below, including financial assistance, corporate benefit and capacity.

  11. Are there any issues that lenders should be aware of when requesting guarantees (for example, financial assistance or lack of corporate benefit)?

    (i) Financial assistance
    Please see paragraph 12 below

    (ii) Corporate benefit
    The directors of a company incorporated in the United Kingdom are under a duty to act in what they consider to be the best interests of that company. Where that company is being asked/required to provide security or guarantees in relation to another company's obligations, it will not be enough for them to show that there is a benefit to the group as a whole, such benefit must be in relation to that specific company. The directors of a company being asked to provide security or guarantees in relation to the obligations of another company will have to weigh up the risk of giving that security/guarantee against the actual or potential benefits to the company. The higher the risk, the greater the corporate benefit will need to be. It is considered much easier for the directors of a company being asked to give a downstream security/guarantee (i.e. from any company above the borrowing company in the corporate chain, such as the borrower’s direct parent) to show corporate benefit as the parent company would hope to benefit from higher dividend payments (directly or indirectly), an increased value in the shares of the subsidiary and an increased profitability of the subsidiary company. It is much more difficult for a subsidiary or sister company to show corporate benefit for upstream or cross-stream security or a guarantee i.e. security or a guarantee in relation to its parent's or sister company's obligations (see below).

    The lender's lawyers should ensure that consideration of commercial benefit to the company is covered in its board minutes approving the transaction. In addition, often a resolution of the shareholders of the company giving the guarantee / third party security is sought by lender's counsel to avoid those shareholders later attempting to challenge the guarantee/security on the grounds of lack of corporate benefit. It is considered that security may still be given even where there is insufficient corporate benefit if the shareholders' unanimous approval is obtained, although if the company is insolvent or becomes insolvent because of the transaction such a resolution will not necessarily help the secured creditor against challenge by other creditors of the company granting the security.

    (iii) Capacity
    A guarantee may be void under common law if the guarantor lacked capacity at the time of its entry into the guarantee. In relation to a corporate guarantor, the constitutional documents of the relevant corporate entity should be reviewed to check that it has the power and capacity to give a guarantee or enter into an indemnity. The relevant documents to be reviewed will depend upon the type of corporate entity. In relation to guarantors who are individuals, there is a presumption that all individuals aged 16 or over have capacity to enter into a contract, however, a guarantee would become voidable if the guarantor was to claim and prove that they lacked capacity (which may be for e.g. legal, physical or mental reasons) at the time the guarantee was entered into.

    (iv) Overseas guarantors
    In relation to guarantors who are resident in jurisdictions outside England and Wales, local law advice should always be taken to ensure that the enforcement of an English law guarantee would be recognised in that jurisdiction and also to ensure that any local law issues are taken into account.

    (v) Enforceability
    The English courts have traditionally been protective of guarantors and other sureties and have evolved a number of doctrines to protect them. While it is common in guarantees and third party securities governed by English law to include provisions which counteract the effect of these doctrines (for example, without limitation, by providing that the liability of the guarantor may be more extensive than that of the principal debtor) in the absence of case law authority it is not possible to establish definitively whether or not such clauses are effective although the general approach of the English courts is to uphold such provisions in commercial transactions involving companies.

    (vi) Insolvency of guarantor
    Guarantees may be at risk of being set aside under English insolvency law if the guarantee was granted by a company with a certain period of time prior to the onset of insolvency. This would be the case, for example, if the company giving the guarantee received considerably less consideration, and as such, the transaction was at an undervalue. For such a transaction to be set aside, certain statutory criteria would have to be met, including that the guarantee was given within six months (or two years for connected parties) of the onset of insolvency of the affected party. Guarantees may also be challenged on other grounds relating to insolvency. Note that where a guarantee is given to a related company, the circumstances in which it can be set aside are far wider and, in particular, there is no requirement in these circumstances that the guarantor was insolvent at the time the guarantee was given.

    (vii) Existing contractual restrictions on giving guarantee
    Steps should be taken to ensure that the guarantor has not granted an undertaking to another creditor which restricts that guarantor’s ability to give guarantees in favour of another creditor.

    (viii) Form
    English law guarantees must be in writing and signed by or on behalf of the guarantor. They are normally entered into by way of deed to deal with any potential issues around consideration (the passing of valuable consideration between the parties being one of the elements required to form a valid contract under English law) as consideration is not a requirement where the parties are entering into a formal deed rather than a simple contract.

    (ix) Duty of disclosure of lender to guarantor
    Generally, a lender who is due to become the beneficiary of a guarantee is under no duty to disclose any material facts to the prospective guarantor.

    (x) Undue influence, duress and misrepresentation
    A guarantee is voidable if it is entered into under duress or procured by misrepresentation or undue influence of the beneficiary of the guarantee. To avoid these issues, a lender should direct the guarantor to take independent legal advice and obtain confirmation from the relevant solicitor that such advice has been given to the guarantor.

  12. Are there any restrictions against providing guarantees and/or security to support borrowings incurred for the purposes of acquiring directly or indirectly: (i) shares of the company; (ii) shares of any company which directly or indirectly owns shares in the company; or (iii) shares in a related company?

    (i) Shares of the company
    Public companies (which throughout this paragraph 12 includes all public companies, whether listed or not) - a public company, and any subsidiary of a public company, is prohibited from giving financial assistance, either directly or indirectly, (including by giving a guarantee, indemnity or security) for the purpose of the acquisition of its own shares.
    Private companies – a private company is not prohibited from giving financial assistance (including by giving a guarantee, indemnity or security) for the purpose of the acquisition of its own shares

    (ii) Shares of any company which directly or indirectly owns shares in the company
    Public companies - a public company is prohibited from giving financial assistance, directly or indirectly, (including giving a guarantee, indemnity or security) (i) for the purpose of the acquisition of the shares of its private holding company or (ii) for the purpose of reducing or discharging a liability incurred for the purpose of the acquisition of the shares of its private holding company.
    Private companies – a private company which is a subsidiary of a public company is prohibited from giving financial assistance, directly or indirectly, (including giving a guarantee, indemnity or security) (i) for the purpose of the acquisition of the shares of its public direct or indirect holding company or (ii) for the purpose of reducing or discharging a liability incurred for the purpose of the acquisition of the shares of its public holding company

    (iii) Shares in a related company
    Save in relation to the prohibition in relation to a private company subsidiary in respect of the purchase of shares in a public direct or indirect parent company (as noted, above), there are no restrictions against giving financial assistance to a related company.

  13. Can lenders in a syndicate appoint a trustee or agent to (i) hold security on the syndicate’s behalf, (ii) enforce the syndicate’s rights under the loan documentation and (iii) apply any enforcement proceeds to the claims of all lenders in the syndicate?

    Yes. Such security trusts are recognised and generally given effect to in England and Wales and a security agent/trustee can hold security, enforce the syndicate’s rights under the security documents and apply any proceeds in accordance with the instructions of the lenders as set out either in an intercreditor deed or a separate security trust deed.

  14. If your jurisdiction does not recognise the role of an agent or trustee, are there any other ways to achieve the same effect and avoid individual lenders having to enforce their security separately?


  15. Does withholding tax arise on (i) payments of interest to domestic or foreign lenders, or (ii) the proceeds of enforcing security or claiming under a guarantee?

    (i) Unless an exemption applies or relief is otherwise available (see below), payments of interest to both domestic and foreign lenders are required to be made subject to deduction of United Kingdom ("UK") income tax where such payments arise in the UK (or have a UK source) and are paid in respect of a debt which is intended or expected to have a duration of a year or more (otherwise known as 'yearly interest').

    The most commonly relied on exemptions from the obligation to deduct on account of UK income tax from interest payments include:

    • the exemption for interest paid on an advance from a bank where the person beneficially entitled to such interest payment is within the charge to UK corporation tax in respect of such payment (or would have been within the charge to UK corporation tax in respect of such payment but for the application of the foreign branch exemption);
    • the exemption for interest paid by a bank in the ordinary course of its business; and
    • the exemption for interest paid by a company where the person beneficially entitled to such interest payment is a company within the charge to UK corporation tax.

    Relief may also be available (in whole or in part) from the obligation to deduct UK income tax from interest payments under the terms of a double tax treaty between the UK and the jurisdiction of residence of the lender provided that the conditions for relief under such double tax treaty are met, the procedural requirements have been complied with and a direction has been issued by the UK tax authorities confirming that such interest payments may be made gross (or at a reduced rate of withholding) pursuant to the double tax treaty.

    Another exemption from the obligation to deduct UK income tax from interest payments which is commonly relied upon is the quoted Eurobond exemption (applicable to interest paid on a security issued by a company where that security is listed on a recognised stock exchange).

    (ii) The characterisation of payments made under a guarantee with regard to the application of the obligation to deduct UK income tax is not clear as a matter of UK law. Such payments could be characterised as having the same nature as the underlying obligation guaranteed (i.e. as interest or principal), or as a separate obligation.

  16. If payments of interest to foreign lenders are generally subject to withholding tax, what is the standard rate and what is the minimum rate possible under double taxation treaties?

    Where interest payments are required to be made subject to deduction of UK income tax, the person by or through whom the interest payment is made is required to withhold or deduct from that payment a sum representing UK income tax at the basic rate (currently 20%) and to account for the same to the UK tax authorities.

    The UK has an extensive network of double taxation treaties many of which make provision for full exemption from tax imposed by the UK on interest.

  17. Are there any other tax issues that foreign lenders should be aware of when lending into your jurisdiction (for example, will any income become taxable in your jurisdiction solely because of a loan to or guarantee and/or grant of security from a company in your jurisdiction)?

    The grant of a loan to, or guarantee and/or grant of security by a company in the UK should not, of themselves, bring a foreign lender within the scope of UK tax (although as discussed above, payments to foreign lenders may be subject to deduction of UK income tax).

    However, UK stamp duty could be payable on the transfer of certain loans and UK stamp duty reserve tax could be chargeable in respect of an agreement to transfer certain loans. That said, provided the loan constitutes loan capital and does not have certain equity-like features (such as convertibility, results-dependency and/or an excessive rate of interest), the loan should be exempt from both UK stamp duty and UK stamp duty reserve tax. This is known as the 'loan capital exemption'. There are other exemptions from UK stamp duty and UK stamp duty reserve tax that may be available where the loan capital exemption does not apply.

    No UK stamp duty or UK stamp duty reserve tax should generally be payable on the grant of security over assets. A liability to UK stamp duty, UK stamp duty reserve tax or other UK taxes may arise on enforcement of security over certain assets (e.g. shares or securities of a UK company or UK real estate).

    Note also that results-dependent interest may be characterised as a distribution of a corporate borrower and not deductible for UK corporation tax purposes. Whilst there is an exemption from such treatment, such exemption only applies where the recipient of the payment is within the charge to UK corporation tax. There are, however, exemptions applicable for certain margin ratchets which apply to both domestic and foreign lenders. The deductibility of interest payments may also be impacted by the UK anti-hybrid rules which apply in certain circumstances and may be applicable in a cross-border context.

  18. Are there any tax incentives available for foreign lenders lending into your jurisdiction?

    There are no preferential UK tax incentives specifically available for foreign lenders.

  19. Is there a history in your jurisdiction of financing structures being challenged by tax authorities, and if so, can you give examples.

    The UK tax authorities have not tended to challenge financing structures, as such, outside of a tax avoidance context. Rather, the UK has various specific rules which limit the availability of deductions for interest expense for UK corporation tax purposes, such as the corporate interest restriction rules, the anti-hybrid rules and transfer pricing. The nature and characteristics of a foreign lender and the terms of the loan may affect the availability of deductions for interest expense for UK tax purposes (see question 17 above).

  20. Do the courts in your jurisdiction generally give effect to the choice of other laws (in particular, English law) to govern the terms of any agreement entered into by a company incorporated in your jurisdiction?

    The courts in England generally give effect to the law chosen by parties to govern an agreement, although sometimes that choice of law can be displaced under the Rome I Regulation on the law applicable to contractual obligations. Under Rome I, the parties’ choice of governing law can be displaced where mandatory rules of English law override the choice of law, where public policy in England is manifestly incompatible with the choice of law, and where all other elements relevant to the agreement relate to a country other than the country whose law has been chosen, where the law of that country will be applied. In addition special rules apply to employment, consumer and insurance contracts.

  21. Do the courts in your jurisdiction generally enforce the judgments of courts in other jurisdictions (in particular, English and US courts) and is your country a member of The Convention on the Recognition and Enforcement of Foreign Arbitral Awards (i.e. the New York Arbitration Convention)?

    The courts of England generally enforce judgments of courts in other jurisdictions. Statutory and bilateral arrangements streamline the process in respect of judgments emanating from courts elsewhere in the UK, judgments from countries in the European Union and European Free Trade Area and judgments from Commonwealth countries. Judgments from other countries, including the USA, are subject to the common law regime, where the judgment holder must commence fresh proceedings in England to enforce the judgment and seek summary judgment. In respect of arbitration England, as part of the United Kingdom, is party to The New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards.

  22. What (briefly) is the insolvency process in your jurisdiction?

    England and Wales have three insolvency procedures applicable to companies generally (administration, liquidation and administrative receivership).

    Administration is the main rescue procedure for insolvent companies. It provides a stay on all action against the company (including the enforcement of security) and facilitates pre-packaged sales.

    Administration may be commenced by the company, its directors or one of its creditors. It must be shown that the company is insolvent, or likely soon to be insolvent. The directors, company or a 'qualifying floating charge holder' may appoint an administrator either by applying to court for an administration order or by simply completing prescribed forms and filing them at court. Most floating charge holders satisfy the criteria to be a 'qualifying floating charge holder'. Other creditors seeking an administration appointment must apply to court for an administration order. Directors or the company must inform any qualifying floating charge holders of their intention to appoint an administrator, in order to give the charge holder an opportunity to appoint his preferred administrator. For the same reason, subordinated qualifying floating charge holders must inform priority charge holders of their intention to appoint an administrator.

    Once appointed, the administrator (who must be a qualified insolvency practitioner and is usually an accountant) takes over the management of the company. The directors’ powers effectively cease.

    The administrator’s costs and expenses are paid out of the proceeds of floating charge assets. He has full powers to run and manage the company, including a power to borrow money and grant security over the company’s assets.

    Before accepting his appointment the administrator must form the view that he will be able either to rescue the company (the focus is on the company itself rather than the business carried on by the company) as a going concern or, (if that is not reasonably practicable) to procure a better result for the company’s creditors as a whole than would be likely if the company were wound up (without first being in administration), or, if neither of these options are reasonably practicable, he may be appointed to perform his functions in order to realise some or all of the company’s property for the benefit of one or more secured or preferential creditors. However he is only allowed to pursue this objective if he can do so without unnecessarily harming the interests of the company’s unsecured creditors. There is no need for the administrator (or the party who appoints him) to identify in advance which of the objectives the administration will achieve, and indeed, the objective may change throughout the course of the administration. Regardless of who appointed him or her, the administrator owes his duties to the company’s creditors as a whole.

    Liquidation (or 'winding up') is a terminal process and can be entered either by court order (at the instigation of the company, its directors or a creditor) or by the company voluntarily resolving to put itself into liquidation by resolution of its members and (in the case of a creditor voluntary liquidation) nomination of a liquidator by the creditors.

    On appointment, the liquidator, who must be a qualified insolvency practitioner, becomes the agent of the company and the directors’ powers cease (though in a voluntary liquidation the directors may retain some powers if the liquidator or company, or the creditors, so choose). It is unusual for a company in liquidation to continue to trade. The objective of the process is to realise as many of the company’s assets as possible and distribute the proceeds to the appropriate creditors. The liquidator owes his duty to the creditors as a whole. Once all distributions have been made, the company will be dissolved.

    A provisional liquidator (in relation to compulsory liquidation) can be appointed at any time after presentation of a winding-up petition to court and before the winding-up order is made. Provisional liquidators are usually appointed by creditors in order to preserve the assets of the company until the hearing.

    The circumstances under which an administrative receiver may be appointed to a company were severely restricted in 2003, when the process was largely superseded by administration. Administrative receivership is therefore beyond the scope of this guide.

    England and Wales also have two formal restructuring tools which are schemes of arrangement and company voluntary arrangements.

  23. What impact does the insolvency process have on the ability of a lender to enforce its rights as a secured party over the security?

    In respect of administration, as soon as the appointment process is commenced, the company becomes subject to a statutory moratorium which stays all litigation against the company and prevents the enforcement (without the administrator’s consent or the court’s permission) of any security or quasi-security.

    In a compulsory liquidation, or where a provisional liquidator is appointed, the company becomes subject to a statutory moratorium, preventing actions or proceedings continuing or being raised without the leave of the court. This moratorium does not, however, prevent the enforcement of security. No automatic moratorium arises in voluntary liquidations, however the court may, on request, make an order to restrict the commencement or continuation of actions.

  24. Please comment on transactions voidable upon insolvency.

    Certain transactions entered into by a company prior to its entering administration or liquidation may be challenged under the provisions of the Insolvency Act 1986.

    The time from which transactions may be challenged is usually measured from the 'onset of insolvency' which means the commencement of the administration or liquidation.

    Up to two years before the onset of insolvency: any transaction entered into in the two years before the onset of insolvency may be subject to challenge by a liquidator or administrator if it was carried out at an undervalue or for no valuable consideration and if the company can be shown to have been insolvent at the time of the transaction, or to have been rendered insolvent as a result of it. Where the counterparty to the transaction was connected to the company, there is a rebuttable presumption that the company was insolvent at the time of, or became so as a result of, the transaction.

    Up to 12 months before insolvency: any floating charge entered into in the 12 months prior to the onset of insolvency will be void to the extent it secured any existing indebtedness provided the company can be shown to have been insolvent at the time or become insolvent as a consequence of the transaction under which the charge is created. Where the counterparty to the transaction was connected to the company the time period is extended to two years prior to the onset of insolvency, and the charge will be void whether or not the company was insolvent at the time of, or became so as a result of, the transaction.

    Up to six months before insolvency: any transaction entered into by a company in the six months before the onset of insolvency may be vulnerable to challenge as a preference if the other party to the transaction was a creditor or surety of the company and was put in a better position than would otherwise have been the case in an insolvent liquidation. A challenge will only be successful if the company was insolvent at the time or became insolvent as a result of the transaction and if there is evidence of a desire by the company to prefer that creditor. Where the counterparty to the transaction was connected to the company, the time period is extended to two years prior to the onset of insolvency and there is a rebuttable presumption that there was desire to prefer that party on the part of the company.

    When a winding-up petition has been presented: Any disposition of a company's property after the presentation of a winding-up petition in respect of that company, and not made by the liquidator once appointed, will be void unless court order is obtained to validate that transaction.

    For completeness, transaction entered into by a company at an undervalue for the purpose of prejudicing creditors may be set aside by the court even if the company is not in a formal insolvency process.

    It is also possible for an administrator or liquidator to challenge transactions providing credit to the company, where the terms require grossly exorbitant payments or where the transaction otherwise grossly contravenes ordinary principles of fair dealing. Challenges of this type are relatively rare.

  25. Is set off recognised on insolvency?

    Mutual debts can and must be set off in the event of insolvency or administration. Contractual set-off arrangements are generally enforceable on insolvency insofar as they are consistent with the mandatory set-off regime but not further or otherwise.

    The Insolvency Rules 2016 impose a mandatory insolvency set-off regime when a company goes into liquidation, or is in administration once the administrator has given notice of an intention to make a distribution to creditors.

    Specifically, Rule 14.25 stipulates that account shall be taken of what is due from each party to the other in respect of the mutual dealings (e.g. mutual credits and mutual debts) and sums due from one party shall be set off against those sums due from the other.

  26. Can you comment generally on the success of foreign creditors in enforcing their security and successfully recovering their outstandings on insolvency?

    There are no restrictions on granting security or guarantees to foreign lenders, or on the making of loans by foreign lenders. Similarly, there are no exchange controls restricting payments to a foreign lender under a security document, guarantee or loan agreement.

    As a matter of principle it is possible for foreign creditors to enforce and/or make claims in relation to securities that are recognised as conferring a valid security interest under English law subject to specific rules in particular types of insolvency process (e.g. administration) that place fetters on creditor enforcement action without consent or leave of the court.

  27. Are there any impending reforms in your jurisdiction which will make lending into your jurisdiction easier or harder for foreign lenders?

    It is worth noting some law, e.g. as to choice of law and recognition of judgments may change and there are other areas of potential reform which may arise as a result of changes in UK legislation and regulation in preparation for or as a result of the UK's withdrawal from the European Union.

    For instance, in the event of a “no deal” EU exit scenario, the government is considering plans to remove EU regulations from insolvency proceedings in the UK, by which the UK will not, automatically recognise EU insolvency proceedings and judgments.

    Separately, a new all-company moratorium is being considered, by which companies that are not yet insolvent (but in financial difficulty) may apply for a 28-day moratorium.

  28. What proportion of the lending provided to companies consists of traditional bank debt versus alternative credit providers (including credit funds) and/or capital markets, and do you see any trends emerging in your jurisdiction?

    Alternative credit providers and credit funds have a significant market share. Capital markets are strong and available at relatively low levels of debt. Traditional bank lending is though still an important and material component in the UK market and the international market funded through the UK. The proportions change with time and depending on the market (in particular between mid market and more liquid markets) but a key feature is increasingly hybrid funding, e.g. combining a credit fund backed unitranche with some syndicated term debt. There is also continuing fluidity in between markets and funding products in respect of the terms which are applied, e.g. the approach to EBITDA add backs.