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Drawbacks issues with taking security

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Taking security can be an expensive process, as it typically involves the drafting and negotiation of a number of documents and therefore the involvement of a number of financial advisers. Lenders will therefore not usually take security when lending small amounts. Certain types of security may also not be recognised in other jurisdictions (for instance, security involving trustees), but further consideration of this is outside of the scope of this handbook (and is unlikely to be required of you in an interview).

Some corporate borrowers may also be subject to restrictions that prevent them from granting security over their assets to lenders. These restrictions may be in the corporate borrower’s constitutional documents (the documents that set out what companies can and cannot do) or in agreements with other lenders (such agreements may include, for instance, a negative pledge clause, as discussed above).

Certain types of security must also be registered. Fixed charges for instance must be registered at Companies House within 21 days starting the day after the security was granted. Failure to register may mean that the security is void, which can have dire consequences for lenders (as they will therefore rank beneath secured creditors in the order of priority and may thus not receive back any of the money they are owed).

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By Jake Schogger - City Career Series