Charges Section

9.12 Major Ownership Schemes - Standard Securities by Company nominees
In major ownership schemes it is common practice for the purchaser and the company’s nominee to grant separate standard securities to the same creditor over their respective pro indiviso shares. Since the company’s nominee acts for a limited company, the standard security by the nominee is regarded as if it were granted by the company itself. Therefore the standard security should be registered in the Register of Charges within 21 days of the date of registration in the Land Register.

On occasions staff at Companies House have mistakenly rejected such applications for registration. The Registrar of Companies, however, has confirmed that registration of standard securities by company nominees in the Register of Charges is necessary.

Such standard securities will be dealt with in the same way as any other standard security by a limited company. If, after 60 days, no certificate of registration of charge has been produced, an exclusion of indemnity will be entered in the charges section (see Exclusion of indemnity)
Shared (Major) ownership schemes are dealt with more fully in Shared ownership schemes.

9.13 Exclusion of indemnity
In terms of section 6(1)(f) of the 1979 Act the Keeper may require to exclude indemnity under section 12(2) in respect of a matter entered in the Charges Section (Rule 6(1)(c)). The most likely occasion which will give rise to an exclusion of indemnity in the charges section is the failure to submit evidence of registration of the charge in the Register of Charges. The appropriate style of note will depend on (a) where the company is registered and (b) when the standard security is created.

Companies registered in Scotland
For standard securities registered prior to 1 October 2009:
·  Note: Indemnity is excluded in terms of section 12(2) of the Land Registration (Scotland) Act 1979 in respect of any loss which may result from failure to register the above Standard Security in accordance with section 410(2) of the Companies Act 1985.

For standard securities registered on or after 1 October 2009

·  Note: Indemnity is excluded in terms of section 12(2) of the Land Registration (Scotland) Act 1979 in respect of any loss which may result from failure to register the above Standard Security in accordance with sections 878 and 889 of the Companies Act 2006.

Companies registered in England and Wales
For standard securities registered prior to 1 October 2009, the exclusion of indemnity note should be as follows:

• Note: Indemnity is excluded in terms of section 12(2) of the Land Registration (Scotland) Act 1979 in respect of any loss which may result from failure to register the above Standard Security in accordance with section 395(1) of the Companies Act 1985.

For standard securities registered on or after 1 October 2009, the exclusion of indemnity note should be as follows:

•  Note: Indemnity is excluded in terms of section 12(2) of the Land Registration (Scotland) Act 1979 in respect of any loss which may result from failure to register the above Standard Security in accordance with sections 860 and 874(1) of the Companies Act 2006.

(The above style of exclusion of indemnity should also be used where the company is registered in Northern Ireland and the charge is created on or after 1 October 2009)

Overseas companies – see previous paragraphs for registrations before/on or after 1 Oct. 2009]

Removal of exclusion of indemnity

9.14 Standard securities over standard securities

To take advantage of varying interest rates world-wide, some lenders will seek to raise money abroad and offer in security their interest in standard securities registered inter alia in Scotland. These securities are usually over a few hundred securities and are invariably by a company. Although the Agency cannot refuse such deeds they should not be encouraged.

The registration dates for such securities will not be confirmed, nor will the Agency entertain the examination of draft deeds (whether the agent is willing to pay or not). Agents should be informed that only one charge certificate will be issued and that will only be after the completion of the last application. The agent should also be made aware that each of the individual securities their client's security has been granted over is open to withdrawal, discharge, cancellation or may be extinguished by power of sale procedure or have indemnity excluded prior to registration.

An alternative scenario is for a standard security to be taken over another single standard security. In such instances the entry for the second security in the Charges section should be in the following style:

Standard Security [for £x] by said (creditor in prior standard security) to AB financial institution (designed) over the Standard Security in entry y.

The charge certificate for the standard security over the heritage will be prepared as normal and there will be no mention of the second charge secured against this interest.

The charge certificate for the standard security over a standard security will require the following changes to be made:

The statement on the cover will be amended to read:

The within mentioned Charge has been registered against the Standard Security by (initial debtor) to (initial creditor) over the subjects in the above Title, registered ddmmmyyyy.

The fly sheet will show the title number and the property address.

On the certification page the description of the subjects should be amended to:

Standard Security by (initial debtor) to (initial creditor) over [description of subjects], registered ddmmmyyyy.

The registered proprietor of the subjects will be the initial creditor and AB Financial Institutions will be named as the registered creditor in the heritable security attached.

The first standard security is not noted in a schedule as it is over a different interest (i.e. the heritage), nor should a copy of the first security be bound into the second security's charge certificate. The fact that changes have been made to the format of the charge certificate should be highlighted by means of a "non-public" next application note.

Any problems with such applications should be referred for further guidance.

9.15 Syndicated (Mezzanine) loans

Syndicated loans are a means whereby a number of banks combine to lend to a borrower under a single loan agreement. These are usually encountered in connection with international companies where a single financial institution is either unable or unwilling to lend large sums of high risk money on its own.

Syndicated loans are usually arranged by one financial institution which generally is, but need not be, also the principal lender. Such an institution is usually referred to as the arranger and agent for the syndicate. Given the fluctuating nature of the syndicate membership, individual members are not usually disclosed in any documents other than the unregistered loan agreement itself and any subsequent variations. In standard securities it is therefore usual for the arranger and agent to be named and designed, with the only reference to the syndicate members being as those who were a party to the loan agreement and any variation thereof. On the face of the standard security therefore what is disclosed is a named agent for principals whose identity is undisclosed.

Standard securities in respect of syndicated loans are acceptable in the Land Register, subject to the proviso that the arranger must hold the security in trust for the undisclosed members of the syndicate. Grants in favour of the arranger as agent only for the syndicate are unacceptable. The reason for this is that the effect of registration is to vest the security interest in the grantee. Under the law of agency vesting in an agent is also vesting in the principal. Vesting in the arranger as agent for the undisclosed and changeable syndicate members would be vesting in those members. This would offend one of the cardinal principles of the registers that any person vest in a real right by virtue of registration must be identifiable from the register.

9.16 Ranking of heritable securities - the basic rule

In the absence of explicit ranking provisions, the basic rule is that standard securities granted over the same interest will rank according to their dates of recording or registration (section 7 of the 1979 Act applies). Therefore, generally, securities and charges will rank according to the date order in which they are entered in the charges section.

Ranking is of considerable importance to creditors because it regulates the order in which their loans are paid off in the event of the debtor failing to meet his obligations. If the debtor defaults, the first-ranking creditors will be in a better position to recover their debt, or part of their debt, than later creditors. For example, suppose A had granted the following securities:

1 Standard Security to B, registered 17 May 1992

2 Standard Security to C, registered 7 February 1993

3 Standard Security to D, registered 7 February 1993

B ranks prior to C and D. C and D rank postponed to B. C and D rank pari passu to each other, i.e. they rank equally, the securities being registered on the same day. If A defaults, C and D would only be paid anything after B’s loan has been repaid in full. If there was not enough to repay C and D in full, they would share what funds were available pro rata, i.e. according to the amount of their loans. This applies regardless of which of the creditors exercises a power of sale.

These basic ranking provisions operate automatically, therefore:

• no separate notes are required on the title sheet to explain the situation, as the ranking is apparent from the dates of registration;

• any prior or pari passu securities will however be shown in the schedule to the charge certificate (see Schedule of prior and pari passu charges).

9.16.1 Ranking and withdrawal of standard securities

If a standard security that forms part of an application for registration has to be returned to the presenting agent for amendment, when it is returned to the Agency it still is processed as part of its original application notwithstanding that it may now be dated after the date of registration. Because of this, the returning of securities that form part of Land Register applications to agents does not have the same consequences for the ranking of securities as it did in the Sasine Register. If an application containing a security has to be cancelled and there are subsequent pending security applications, the registration officer dealing with the cancellation must inform the presenting agent that there will be a change to the ranking of the securities as a consequence of the cancellation.

9.16.2 Express ranking provisions

In terms of section 7(1) of the 1979 Act, the basic rule of ranking according to dates of recording or registration can be varied by express agreement between the different creditors, by which they agree amongst themselves the priority of their securities. That agreement will be reflected either by a ranking clause in one or more of the relevant standard securities, conform to Note 5 to Schedule 2 of the 1970 Act, or by an express ranking agreement which it is appropriate to register. Thus, irrespective of the dates on which the deeds are registered, the following may be achieved:

• Each security may contain a ranking clause stating that it is to rank pari passu, i.e. equally, with the other. If each deed contains such a clause there is no need for the creditor in one security to consent in gremio of the other deed. If one of the security deeds has already been registered without such a clause, then the creditor in that security can consent in gremio of the second security which contains the pari passu ranking clause, in order to achieve the desired result.

• A Clause of Postponement contained within the security which is to be postponed will achieve the desired ranking.

• Priority ranking can be achieved either by (a) the insertion of a clause of priority ranking in the prior security and a clause of postponement in reciprocal terms in the postponed security or (b) the consent of the postponed creditor in gremio of the security containing the clause of priority ranking.

9.16.3 Notes to be entered in the charges section

Ranking provisions will be entered in the form of a footnote to the security entry. The procedure and the style of the note will be determined by:

• the date of registration of the other security(ies); and

• which deed(s) contain(s) the ranking provisions.

Example 1

Where two (or more) securities are registered simultaneously and the deeds contain straightforward reciprocal ranking provisions the charges section entry will be in the following terms:

• Entry 1 Standard Security for £40,000 by said AB to CD (desig)
  Note: The above standard security ranks prior to the standard security in entry 2.

• Entry 2 Standard Security for £5,000 by said AB to EF (desig)
  Note: The above standard security ranks postponed to the standard security in entry 1.

Example 2

Where two (or more) securities contain reciprocal ranking provisions as above, but are not registered simultaneously, the entry in respect of the first registered security will remain silent as regards the ranking provisions until the registration of the other security(ies). The footnotes will then be added as above.

Example 3

Where only the first standard security contains a straightforward ranking clause and the second one is silent, the notes will be as follows:

• Entry 1 Standard Security for £40,000 by said AB to CD (desig)
  Note: The above standard security ranks postponed to (or prior to or pari passu with) the standard security in Entry 2

• Entry 2 Standard Security for £5,000 by said AB to EF (desig)
  Note: The above standard security is affected by ranking provisions contained in the standard security in Entry 1

Example 4

Where only the second standard security contains the ranking provisions and the first one is silent, the notes will be reversed:

• Entry 1 Standard Security for £40,000 by said AB to CD (desig)
  Note: The above standard security is affected by ranking provisions contained n the standard security in Entry 2

• Entry 2 Standard Security for £5,000 by said AB to EF (desig)
  Note: The above standard security ranks postponed to (or prior to or pari passu with) the standard security in Entry 1

In examples 3 and 4 above, the notes will only be added on the registration of the second security. All of the above examples presuppose that the provisions of the ranking clause are simple and straightforward. In example 4 the consent of CD would be necessary for the second security to rank prior to the first.

Example 5

It is fairly common for deeds to contain more complex ranking clauses (or ‘dual ranking’), providing that one security should rank prior to another but only to a certain extent, with advances above that amount then ranking pari passu with or postponed to the second security. No attempt shall be made to reflect the exact terms of the ranking in the charges section. Notes in the following general terms will be added.

Where both standard securities contain complicated ranking clauses in reciprocal terms, each will have the following note added after the entry:

Where only one of the securities contains a ranking provision, then the note after that entry will be in the terms above, and the following note will be added after the other entry:

These notes will only be added when the second standard security is registered.

Instructions regarding the notes for the charge certificate and the schedule are set out in Form of a charge certificate.

This topic continues…

Updated February 2007