BACKGROUND

For both facilities, the nancier will also require a qualifying oating charge and

potentially other boot collateral.

Security over receivables is a key feature of many types of receivables nance

transactions. For example:

• for a secured borrowing base facility (BB Facility), the nancier will take

security over the customer’s whole book of receivables and the collection

accounts into which the proceeds from those receivables are paid; and

• for a whole turnover receivables purchase facility (RP Facility), the nancier

arising from contracts and not those evidenced by negotiable instruments.

TYPES OF SECURITY

Receivables are intangible assets due to the fact that they are choses in action

(i.e. an asset that can only be claimed or enforced by action and not by taking

physical possession) and therefore security can only be taken over receivables by

way of a mortgage or a charge. A mortgage of receivables is commonly granted

as an assignment by way of security.

(i) Assignment by way of security

In the case of an assignment by way of security, the customer expresses to

transfer to the nancier its rights, title and interests in the receivables subject to

requirement for a legal assignment), the benets of a legal assignment by way of

security vs an equitable assignment by way of security has been negated in more

recent times due to the requirement to register security at Companies House and

the effects and protections afforded by such registration. Accordingly most

nanciers are very comfortable with an equitable assignment by way of security.

(ii) Charge

In the case of a charge over receivables, the customer’s rights, title and interests

to the receivables remain with the customer and instead the charge affords the

nancier the right to appropriate the monies raised from the charged receivables

towards the payment of the secured liabilities.

SECURITY OVER RECEIVABLES | SERIES: LEGAL

Assuming the Business Contract Terms (Assignment of Receivables) Regulations

2018 do not apply, if the contract from which the relevant receivables arise

prohibits the customer from assigning its receivables to another person, an

assignment by way of security in respect of those receivables will not be

effective. Provided the prohibition is not expressed to restrict the customer from

granting a charge over the receivables (which is quite uncommon), a charge will

be effective.

Under English law, security can be characterised as either:

• xed security; or

• oating security.

The characterisation of security taken over receivables / Non-Vesting Receivables

owned by an English customer is important as it will determine when a nancier

is paid out and how much it receives in the event of that customer’s insolvency.

To obtain a xed charge over receivables / Non-Vesting Receivables, it was

established in National Westminster Bank plc v Spectrum Plus Limited and others

[2005] UKHL 41 that, amongst other things, the security holder must have control

of the receivables / Non-Vesting Receivables and their proceeds at all times.

For BB Facilities, control of the proceeds of receivables is typically demonstrated

by the borrower being required to direct all account debtors to pay receivables

into a collection account secured in favour of, and controlled by, the nancier.

The borrower is not permitted to access the proceeds without the consent of the

nancier. This arrangement is typically documented in a bank account control

agreement between the nancier, the borrower and the account bank.

For RP Facilities, control of the proceeds of Non-Vesting Receivables is typically

demonstrated by the customer being required to direct all account debtors to

pay receivables (which includes Non-Vesting Receivables) into a collection

account owned and controlled by the nancier. Due to the fact that the collection

by an English and Welsh company to be registered at Companies House within

21 days of its creation. Failure to register the security within this time period will

result in the security being void against any liquidator, administrator or creditor

of the company.

Under the CA 2006, the customer is obliged to register the security. However,

given that the nancier’s security could be void if not registered within the

21-day period, it is market practice for the nancier’s legal counsel to deal with

the registration.

SECURITY OVER RECEIVABLES | SERIES: LEGAL

SECURITY NOTICES

In England and Wales it is generally accepted that notice of the creation of the

security (whether by assignment or charge) does not need to be served on

account debtors or account banks in order to create effective security over

receivables / Non-Vesting Receivables / collection accounts.

Service of notice is, however, required to obtain certain protections/rights (see

below) and a nancier will need to decide whether or not it wants the benet of

(i) Protection of the priority of the security

If a nancier does not give notice of its security over the receivables / Non-

Vesting Receivables / collection accounts to the account debtors / account banks

(as applicable) and the customer subsequently grants security over or disposes of

its receivables / Non-Vesting Receivables / collection accounts (as applicable) to

a third party who was acting in good faith and unaware of the nancier’s security,

that third party’s security may take priority over the nancier’s security should the

third party serve notice on the accounts debtors / account banks rst.

constructive notice of the nancier’s security (irrespective of whether or not it did

actually search the register) and therefore it may not be able to claim priority.

(ii) Protection against subsequent set-off rights and defences

be excluded, it would need to obtain an agreement to that effect from the

account debtor / account bank.

instead of the nancier.