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Assignment of Accounts Receivable: Meaning, Considerations

Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master's in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem.

Charlene Rhinehart is a CPA , CFE, chair of an Illinois CPA Society committee, and has a degree in accounting and finance from DePaul University.

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What Is Assignment of Accounts Receivable?

Assignment of accounts receivable is a lending agreement whereby the borrower assigns accounts receivable to the lending institution. In exchange for this assignment of accounts receivable, the borrower receives a loan for a percentage, which could be as high as 100%, of the accounts receivable.

The borrower pays interest, a service charge on the loan, and the assigned receivables serve as collateral. If the borrower fails to repay the loan, the agreement allows the lender to collect the assigned receivables.

Key Takeaways

Assignment of accounts receivable is a method of debt financing whereby the lender takes over the borrowing company's receivables.
This form of alternative financing is often seen as less desirable, as it can be quite costly to the borrower, with APRs as high as 100% annualized.
Usually, new and rapidly growing firms or those that cannot find traditional financing elsewhere will seek this method.
Accounts receivable are considered to be liquid assets.
If a borrower doesn't repay their loan, the assignment of accounts agreement protects the lender.

Understanding Assignment of Accounts Receivable

With an assignment of accounts receivable, the borrower retains ownership of the assigned receivables and therefore retains the risk that some accounts receivable will not be repaid. In this case, the lending institution may demand payment directly from the borrower. This arrangement is called an "assignment of accounts receivable with recourse." Assignment of accounts receivable should not be confused with pledging or with accounts receivable financing .

An assignment of accounts receivable has been typically more expensive than other forms of borrowing. Often, companies that use it are unable to obtain less costly options. Sometimes it is used by companies that are growing rapidly or otherwise have too little cash on hand to fund their operations.

New startups in Fintech, like C2FO, are addressing this segment of the supply chain finance by creating marketplaces for account receivables. Liduidx is another Fintech company providing solutions through digitization of this process and connecting funding providers.

Financiers may be willing to structure accounts receivable financing agreements in different ways with various potential provisions.

Special Considerations

Accounts receivable (AR, or simply "receivables") refer to a firm's outstanding balances of invoices billed to customers that haven't been paid yet. Accounts receivables are reported on a company’s balance sheet as an asset, usually a current asset with invoice payments due within one year.

Accounts receivable are considered to be a relatively liquid asset . As such, these funds due are of potential value for lenders and financiers. Some companies may see their accounts receivable as a burden since they are expected to be paid but require collections and cannot be converted to cash immediately. As such, accounts receivable assignment may be attractive to certain firms.

The process of assignment of accounts receivable, along with other forms of financing, is often known as factoring, and the companies that focus on it may be called factoring companies. Factoring companies will usually focus substantially on the business of accounts receivable financing, but factoring, in general, a product of any financier.

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The Difference Between Assignment of Receivables & Factoring of Receivables

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You can raise cash fast by assigning your business accounts receivables or factoring your receivables. Assigning and factoring accounts receivables are popular because they provide off-balance sheet financing. The transaction normally does not appear in your financial statements and your customers may never know their accounts were assigned or factored. However, the differences between assigning and factoring receivables can impact your future cash flows and profits.

How Receivables Assignment Works

Assigning your accounts receivables means that you use them as collateral for a secured loan. The financial institution, such as a bank or loan company, analyzes the accounts receivable aging report. For each invoice that qualifies, you will likely receive 70 to 90 percent of the outstanding balance in cash, according to All Business . Depending on the lender, you may have to assign all your receivables or specific receivables to secure the loan. Once you have repaid the loan, you can use the accounts as collateral for a new loan.

Assignment Strengths and Weaknesses

Using your receivables as collateral lets you retain ownership of the accounts as long as you make your payments on time, says Accounting Coach. Since the lender deals directly with you, your customers never know that you have borrowed against their outstanding accounts. However, lenders charge high fees and interest on an assignment of accounts receivable loan. A loan made with recourse means that you still are responsible for repaying the loan if your customer defaults on their payments. You will lose ownership of your accounts if you do not repay the loan per the agreement terms.

How Factoring Receivables Works

When you factor your accounts receivable, you sell them to a financial institution or a company that specializes in purchasing accounts receivables. The factor analyzes your accounts receivable aging report to see which accounts meet their purchase criteria. Some factors will not purchase receivables that are delinquent 45 days or longer. Factors pay anywhere from 65 percent to 90 percent of an invoice’s value. Once you factor an account, the factor takes ownership of the invoices.

Factoring Strengths and Weaknesses

Factoring your accounts receivables gives you instant cash and puts the burden of collecting payment from slow or non-paying customers on the factor. If you sell the accounts without recourse, the factor cannot look to you for payment should your former customers default on the payments. On the other hand, factoring your receivables could result in your losing customers if they assume you sold their accounts because of financial problems. In addition, factoring receivables is expensive. Factors charge high fees and may retain recourse rights while paying you a fraction of your receivables' full value.

All Business: The Difference Between Factoring and Accounts Receivable Financing

The advantages of selling accounts receivable, buying accounts receivable, difference between payables and receivables in accounting, the role of factoring in modern business finance, the prevention of dilution of ownership, how to remove an empty mailbox in outlook, the importance of factoring in business, how to factor inventory, setting up webmail on mail for the imac, most popular.

1 The Advantages of Selling Accounts Receivable
2 Buying Accounts Receivable
3 Difference Between Payables and Receivables in Accounting
4 The Role of Factoring in Modern Business Finance

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Difference Between Assignment And Charge

INTRODUCTION

The charges are defined under the Companies Act and the government under the Section 77, [1] Section 78, Section 79, [2] Section 89 [3] and the rules 2014. The company has the right to borrow monies by providing the security to the assets and may create a lien on the properties. [4] The company also has the right to issue debentures so that the funds can be raised which can carry right interest in the assets are the properties of the company.

The security which is given to a person for securing the loans and debentures under the mortgage of assets is known as charge. A company has the right to borrow the security for its borrowing. [5] When they both existing and future property is agreed to be available as a security for the repayment of test then the creditors have the right to make it available as there is charge created. According to Section 2(16) of the Act, “charge means an interest or lien created on the property or assets of a company or any of its undertakings or both as security and includes a mortgage”. [6] In the case of Dublin City Distillery Co. v. Deherty , [7] It was stated that charge include any portable charger whether this can be created by an instrument in writing or by the deposit of the title deed. [8]

KINDS OF CHARGES

There are two types of charges-

1. FIXED CHARGE

Fixed charge is a type of charge which is created so that assets can be covered. It is a type of security which is there under the terms of certain specific property. [9] Fixed Charges is a charge fixed or specific when it is made specifically to cover assets which are ascertainable and definite at the time of creating the charge e.g., land, buildings, heavy machinery etc. [10]

2. FLOATING CHARGE

A floating charge is a charge which is totally different to the companies as a type of security. This type of charge is not attached to any definite property. A floating charge includes a charge which is on the class of assets which is present and future in the ordinary course of business and this changing from time to time. [11] “The essence of a floating charge is that the security remains dormant until it is fixed or crystallised”. [12] Floating charge is the present security. Floating charge can affect all the assets of the company. Floating Charge, on the other hand, is not attached to any definite property but covers property which is of a fluctuating nature such as stock in trade. [13] It is an equitable charge on the assets for the time being of a going concern. [14] It attaches to the subject charged in the varying condition in which it happens to be from time to time. It is of this sense of such a charge that it remains dormant until the undertaking charged ceases to be a going concern, or until the person in whose favour the charge is created intervenes. [15]

FORM OF CHARGES

As stated above the charges under the Companies Act or defined under Section 77 [16] , Section 78 [17] and Section 79-

The charges are divided into three categories

FORMS FOR FILING: CHG-1, CHG-4, CHG-6, CHG-8, CHG-9, CHG-10.
CERTIFICATES ISSUED BY ROC: CHG-2, CHG-3, CHG-5.
REGISTER TO BE MAINTAINED.

SATISFACTION OF CHARGE

Within 30 days of treatment satisfaction should be full of any charge which is registered and the company shall get intimation of the same in CHG-4 along with the fee then the ROC will issue of certificate of registration on the satisfaction of a charged under the form number CHG-5.

The principle of assignment is recognized under Indian law and is applied by Indian courts. It derives its origin from English law. The words assignment means the transfer of rights and obligations held by one party to another party. The system of assignment is favoured under the common law such as there is no expressed prohibition against assignment in a contract.

However in India with the absence of specific laws under the transfer of a contract intention of the party has to be taken into the account. In the case of Khared and Co. Ltd v Ramon and Co. Pvt. Ltd , [18] it was stated that “as a rule, obligations under a contract cannot be assigned except with the consent of the promisee. Where such consent is obtained, it will be considered as a deemed novation, resulting in the substitution of liabilities and obligations to the assignee”. Assignment rights are usually limited pertaining to the licence of intellectual property rights and Technology.

[1] Section 77 of Companies Act, 2013 Duty to register charges, etc. 1. It shall be the duty of every company creating a charge within or outside India, on its property or assets or any of its undertakings, whether tangible or otherwise, and situated in or outside India, to register the particulars of the charge signed by the company and the charge-holder together with the instruments, if any, creating such charge in such form, on payment of such fees and in such manner as may be prescribed, with the Registrar within thirty days of its creation: Provided that the Registrar may, on an application by the company, allow such registration to be made within a period of three hundred days of such creation on payment of such additional fees as may be prescribed: Provided further that if registration is not made within a period of three hundred days of such creation, the company shall seek extension of time in accordance with section 87: Provided also that any subsequent registration of a charge(………)

[2] The provisions of section 77 relating to registration of charges shall, so far as may be, apply to—

(a) a company acquiring any property subject to a charge within the meaning of that section; or

(b) any modification in the terms or conditions or the extent or operation of any charge registered under that section.

[3] Declaration in respect of beneficial interest in any share.

Where the name of a person is entered in the register of members of a company as the holder of shares in that company but who does not hold the beneficial interest in such shares, such person shall make a declaration within such time and in such form as may be prescribed to the company specifying the name and other particulars of the person who holds the beneficial interest in such shares.
Every person who holds or acquires a beneficial interest in share of a company shall make a declaration to the company specifying the nature of his interest, particulars of the person in whose name the shares stand(…..)

[4] Vishal Thakkar, “CHARGES” under The New Companies Act, 2013 (2015), https://www.linkedin.com/pulse/charges-under-new-companies-act-2013-vishal-thakkar (last visited Apr 19, 2017).

[5] Charges under companies act, 2013 , http://www.caclubindia.com/articles/charges-under-companies-act-2013-23073.asp (last visited Apr 9, 2017).

[6] Section 2(16) of Companies Act, 2013.

[7] Dublin City Distillery Co. v. Deherty, 1914 AC 823.

[9] Mr. M. Govindarajan, Provisions Relating to ‘Charges’ Under Companies Act, 2013 (2013), https://www.taxmanagementindia.com/visitor/detail_article.asp?ArticleID=5382 (last visited Apr 9, 2017).

[10] Admin, Creation of Charges under Companies Act, 2013 (2016), http://taxguru.in/company-law/creation-charges-companies-act-2013.html (last visited Apr 9, 2017).

[11] Creation of Charges under Companies Act, 2013, (2016), http://taxguru.in/company-law/creation-charges-companies-act-2013.html (last visited Apr 9, 2017).

[12] Supra note 6.

[13] “CHARGES” under The New Companies Act, 2013 (2015).

[14] Government Stock Investment Co. Ltd. V. Manila Rly. Co. Ltd., (1897) AC 81 Per Lord Macnaghten,

[15] Supra note 9.

[16] Supra note 1.

[17] Supra note 11.

[18] Khared and Co. Ltd v Ramon and Co. Pvt. Ltd, 1962 AIR 1810, 1963 SCR (3) 183 .

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Receivables Finance And The Assignment Of Receivables

Tfg legal trade finance hub, receivables finance and the assignment of receivables.

A receivable represents money that is owed to a company and is expected to be paid in the future. Receivables finance, also known as accounts receivable financing, is a form of asset-based financing where a company leverages its outstanding receivables as collateral to secure short-term loans and obtain financing.

In case of default, the lender has a right to collect associated receivables from the company’s debtors. In brief, it is the process by which a company raises cash against its own book’s debts.

The company actually receives an amount equal to a reduced value of the pledged receivables, the age of the receivables impacting the amount of financing received. The company can get up to 90% of the amount of its receivables advanced.

This form of financing assists companies in unlocking funds that would otherwise remain tied up in accounts receivable, providing them with access to capital that is not immediately realised from outstanding debts.

FIG. 1: Accounts receivable financing operates by leveraging a company’s receivables to obtain financing. Source: https://fhcadvisory.com/images/account-receivable-financing.jpg

Restrictions on the assignment of receivables – New legislation

Invoice discounting products under which a company assigns its receivables have been used by small and medium enterprises (SMEs) to raise capital. However, such products depend on the related receivables to be assignable at first.

Businesses have faced provisions that ban or restrict the assignment of receivables in commercial contracts by imposing a condition or other restrictions, which prevents them from being able to use their receivables to raise funds.

In 2015, the UK Government enacted the Small Business, Enterprise and Employment Act (SBEEA) by which raising finance on receivables is facilitated. Pursuant to this Act, regulations can be made to invalidate restrictions on the assignment of receivables in certain types of contract.

In other words, in certain circumstances, clauses which prevent assignment of a receivable in a contract between businesses is unenforceable. Especially, in its section 1(1), the Act provides that the authorised authority can, by regulations “make provision for the purpose of securing that any non-assignment of receivables term of a relevant contract:

has no effect;
has no effect in relation to persons of a prescribed description;
has effect in relation to persons of a prescribed description only for such purposes as may be prescribed.”

The underlying aim is to enable SMEs to use their receivables as financing to raise capital, through the possibility of assigning such receivables to another entity.

The aforementioned regulations, which allow invalidations of such restrictions on the assignment of receivables, are contained in the Business Contract Terms (Assignment of Receivables) Regulations 2018, which will apply to any term in a contract entered into force on or after 31 December 2018.

By virtue of its section 2(1) “Subject to regulations 3 and 4, a term in a contract has no effect to the extent that it prohibits or imposes a condition, or other restriction, on the assignment of a receivable arising under that contract or any other contract between the same parties.”

Such regulations apply to contracts for the supply of goods, services or intangible assets under which the supplier is entitled to be paid money. However, there are several exclusions to this rule.

In section 3, an exception exists where the supplier is a large enterprise or a special purpose vehicle (SPV). In section 4, there are listed exclusions for various contracts such as “for, or entered into in connection with, prescribed financial services”, contracts “where one or more of the parties to the contract is acting for purposes which are outside a trade, business or profession” or contracts “where none of the parties to the contract has entered into it in the course of carrying on a business in the United Kingdom”. Also, specific exclusions relate to contracts in energy, land, share purchase and business purchase.

Effects of the 2018 Regulations

As mentioned above, any contract terms that prevent, set conditions for, or place restrictions on transferring a receivable are considered invalid and cannot be legally enforced.

In light of this, the assignment of the right to be paid under a contract for the supply of goods (receivables) cannot be restricted or prohibited. However, parties are not prevented from restricting other contracts rights.

Non-assignment clauses can have varying forms. Such clauses are covered by the regulations when terms prevent the assignee from determining the validity or value of the receivable or their ability to enforce it.

Overall, these legislations have had an important impact for businesses involved in the financing of receivables, by facilitating such processes for SMEs.

Digital platforms and fintech solutions: The assignment of receivables has been significantly impacted by the digitisation of financial services. Fintech platforms and online marketplaces have been developed to make the financing and assignment of receivables easier.

These platforms employ tech to assess debtor creditworthiness and provide efficient investor and seller matching, including data analytics and artificial intelligence. They provide businesses more autonomy, transparency, and access to a wider range of possible investors.

Securitisation is an essential part of receivables financing. Asset-backed securities (ABS), a type of financial instrument made up of receivables, are then sold to investors.

Businesses are able to turn their receivables into fast cash by transferring the credit risk and cash flow rights to investors. Investors gain from diversification and potentially greater yields through securitisation, while businesses profit from increased liquidity and risk-reduction capabilities.

References:

https://www.tradefinanceglobal.com/finance-products/accounts-receivables-finance/ – 28/10/2018

https://www.legislation.gov.uk/ukpga/2015/26/section/1/enacted – 28/10/2018

https://www.legislation.gov.uk/ukdsi/2018/9780111171080 – 28/10/2018

https://www.bis.org/publ/bppdf/bispap117.pdf – Accessed 14/06/2023

https://www.investopedia.com/terms/a/asset-backedsecurity.asp – Accessed 14/06/2023

https://www.imf.org/external/pubs/ft/fandd/2008/09/pdf/basics.pdf – Accessed 14/06/2023

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Trade Finance Global (TFG) assists companies with raising debt finance. While we can access many traditional forms of finance, we specialise in alternative finance and complex funding solutions related to international trade. We help companies to raise finance in ways that is sometimes out of reach for mainstream lenders.

assignments basic law

Assignments: The Basic Law

The assignment of a right or obligation is a common contractual event under the law and the right to assign (or prohibition against assignments) is found in the majority of agreements, leases and business structural documents created in the United States.

As with many terms commonly used, people are familiar with the term but often are not aware or fully aware of what the terms entail. The concept of assignment of rights and obligations is one of those simple concepts with wide ranging ramifications in the contractual and business context and the law imposes severe restrictions on the validity and effect of assignment in many instances. Clear contractual provisions concerning assignments and rights should be in every document and structure created and this article will outline why such drafting is essential for the creation of appropriate and effective contracts and structures.

The reader should first read the article on Limited Liability Entities in the United States and Contracts since the information in those articles will be assumed in this article.

Basic Definitions and Concepts:

An assignment is the transfer of rights held by one party called the “assignor” to another party called the “assignee.” The legal nature of the assignment and the contractual terms of the agreement between the parties determines some additional rights and liabilities that accompany the assignment. The assignment of rights under a contract usually completely transfers the rights to the assignee to receive the benefits accruing under the contract. Ordinarily, the term assignment is limited to the transfer of rights that are intangible, like contractual rights and rights connected with property. Merchants Service Co. v. Small Claims Court , 35 Cal. 2d 109, 113-114 (Cal. 1950).

An assignment will generally be permitted under the law unless there is an express prohibition against assignment in the underlying contract or lease. Where assignments are permitted, the assignor need not consult the other party to the contract but may merely assign the rights at that time. However, an assignment cannot have any adverse effect on the duties of the other party to the contract, nor can it diminish the chance of the other party receiving complete performance. The assignor normally remains liable unless there is an agreement to the contrary by the other party to the contract.

The effect of a valid assignment is to remove privity between the assignor and the obligor and create privity between the obligor and the assignee. Privity is usually defined as a direct and immediate contractual relationship. See Merchants case above.

Further, for the assignment to be effective in most jurisdictions, it must occur in the present. One does not normally assign a future right; the assignment vests immediate rights and obligations.

No specific language is required to create an assignment so long as the assignor makes clear his/her intent to assign identified contractual rights to the assignee. Since expensive litigation can erupt from ambiguous or vague language, obtaining the correct verbiage is vital. An agreement must manifest the intent to transfer rights and can either be oral or in writing and the rights assigned must be certain.

Note that an assignment of an interest is the transfer of some identifiable property, claim, or right from the assignor to the assignee. The assignment operates to transfer to the assignee all of the rights, title, or interest of the assignor in the thing assigned. A transfer of all rights, title, and interests conveys everything that the assignor owned in the thing assigned and the assignee stands in the shoes of the assignor. Knott v. McDonald’s Corp ., 985 F. Supp. 1222 (N.D. Cal. 1997)

The parties must intend to effectuate an assignment at the time of the transfer, although no particular language or procedure is necessary. As long ago as the case of National Reserve Co. v. Metropolitan Trust Co ., 17 Cal. 2d 827 (Cal. 1941), the court held that in determining what rights or interests pass under an assignment, the intention of the parties as manifested in the instrument is controlling.

The intent of the parties to an assignment is a question of fact to be derived not only from the instrument executed by the parties but also from the surrounding circumstances. When there is no writing to evidence the intention to transfer some identifiable property, claim, or right, it is necessary to scrutinize the surrounding circumstances and parties’ acts to ascertain their intentions. Strosberg v. Brauvin Realty Servs., 295 Ill. App. 3d 17 (Ill. App. Ct. 1st Dist. 1998)

The general rule applicable to assignments of choses in action is that an assignment, unless there is a contract to the contrary, carries with it all securities held by the assignor as collateral to the claim and all rights incidental thereto and vests in the assignee the equitable title to such collateral securities and incidental rights. An unqualified assignment of a contract or chose in action, however, with no indication of the intent of the parties, vests in the assignee the assigned contract or chose and all rights and remedies incidental thereto.

More examples: In Strosberg v. Brauvin Realty Servs ., 295 Ill. App. 3d 17 (Ill. App. Ct. 1st Dist. 1998), the court held that the assignee of a party to a subordination agreement is entitled to the benefits and is subject to the burdens of the agreement. In Florida E. C. R. Co. v. Eno , 99 Fla. 887 (Fla. 1930), the court held that the mere assignment of all sums due in and of itself creates no different or other liability of the owner to the assignee than that which existed from the owner to the assignor.

And note that even though an assignment vests in the assignee all rights, remedies, and contingent benefits which are incidental to the thing assigned, those which are personal to the assignor and for his sole benefit are not assigned. Rasp v. Hidden Valley Lake, Inc ., 519 N.E.2d 153, 158 (Ind. Ct. App. 1988). Thus, if the underlying agreement provides that a service can only be provided to X, X cannot assign that right to Y.

Novation Compared to Assignment:

Although the difference between a novation and an assignment may appear narrow, it is an essential one. “Novation is a act whereby one party transfers all its obligations and benefits under a contract to a third party.” In a novation, a third party successfully substitutes the original party as a party to the contract. “When a contract is novated, the other contracting party must be left in the same position he was in prior to the novation being made.”

A sublease is the transfer when a tenant retains some right of reentry onto the leased premises. However, if the tenant transfers the entire leasehold estate, retaining no right of reentry or other reversionary interest, then the transfer is an assignment. The assignor is normally also removed from liability to the landlord only if the landlord consents or allowed that right in the lease. In a sublease, the original tenant is not released from the obligations of the original lease.

Equitable Assignments:

An equitable assignment is one in which one has a future interest and is not valid at law but valid in a court of equity. In National Bank of Republic v. United Sec. Life Ins. & Trust Co. , 17 App. D.C. 112 (D.C. Cir. 1900), the court held that to constitute an equitable assignment of a chose in action, the following has to occur generally: anything said written or done, in pursuance of an agreement and for valuable consideration, or in consideration of an antecedent debt, to place a chose in action or fund out of the control of the owner, and appropriate it to or in favor of another person, amounts to an equitable assignment. Thus, an agreement, between a debtor and a creditor, that the debt shall be paid out of a specific fund going to the debtor may operate as an equitable assignment.

In Egyptian Navigation Co. v. Baker Invs. Corp. , 2008 U.S. Dist. LEXIS 30804 (S.D.N.Y. Apr. 14, 2008), the court stated that an equitable assignment occurs under English law when an assignor, with an intent to transfer his/her right to a chose in action, informs the assignee about the right so transferred.

An executory agreement or a declaration of trust are also equitable assignments if unenforceable as assignments by a court of law but enforceable by a court of equity exercising sound discretion according to the circumstances of the case. Since California combines courts of equity and courts of law, the same court would hear arguments as to whether an equitable assignment had occurred. Quite often, such relief is granted to avoid fraud or unjust enrichment.

Note that obtaining an assignment through fraudulent means invalidates the assignment. Fraud destroys the validity of everything into which it enters. It vitiates the most solemn contracts, documents, and even judgments. Walker v. Rich , 79 Cal. App. 139 (Cal. App. 1926). If an assignment is made with the fraudulent intent to delay, hinder, and defraud creditors, then it is void as fraudulent in fact. See our article on Transfers to Defraud Creditors .

But note that the motives that prompted an assignor to make the transfer will be considered as immaterial and will constitute no defense to an action by the assignee, if an assignment is considered as valid in all other respects.

Enforceability of Assignments:

Whether a right under a contract is capable of being transferred is determined by the law of the place where the contract was entered into. The validity and effect of an assignment is determined by the law of the place of assignment. The validity of an assignment of a contractual right is governed by the law of the state with the most significant relationship to the assignment and the parties.

In some jurisdictions, the traditional conflict of laws rules governing assignments has been rejected and the law of the place having the most significant contacts with the assignment applies. In Downs v. American Mut. Liability Ins. Co ., 14 N.Y.2d 266 (N.Y. 1964), a wife and her husband separated and the wife obtained a judgment of separation from the husband in New York. The judgment required the husband to pay a certain yearly sum to the wife. The husband assigned 50 percent of his future salary, wages, and earnings to the wife. The agreement authorized the employer to make such payments to the wife.

After the husband moved from New York, the wife learned that he was employed by an employer in Massachusetts. She sent the proper notice and demanded payment under the agreement. The employer refused and the wife brought an action for enforcement. The court observed that Massachusetts did not prohibit assignment of the husband’s wages. Moreover, Massachusetts law was not controlling because New York had the most significant relationship with the assignment. Therefore, the court ruled in favor of the wife.

Therefore, the validity of an assignment is determined by looking to the law of the forum with the most significant relationship to the assignment itself. To determine the applicable law of assignments, the court must look to the law of the state which is most significantly related to the principal issue before it.

Assignment of Contractual Rights:

Generally, the law allows the assignment of a contractual right unless the substitution of rights would materially change the duty of the obligor, materially increase the burden or risk imposed on the obligor by the contract, materially impair the chance of obtaining return performance, or materially reduce the value of the performance to the obligor. Restat 2d of Contracts, § 317(2)(a). This presumes that the underlying agreement is silent on the right to assign.

If the contract specifically precludes assignment, the contractual right is not assignable. Whether a contract is assignable is a matter of contractual intent and one must look to the language used by the parties to discern that intent.

In the absence of an express provision to the contrary, the rights and duties under a bilateral executory contract that does not involve personal skill, trust, or confidence may be assigned without the consent of the other party. But note that an assignment is invalid if it would materially alter the other party’s duties and responsibilities. Once an assignment is effective, the assignee stands in the shoes of the assignor and assumes all of assignor’s rights. Hence, after a valid assignment, the assignor’s right to performance is extinguished, transferred to assignee, and the assignee possesses the same rights, benefits, and remedies assignor once possessed. Robert Lamb Hart Planners & Architects v. Evergreen, Ltd. , 787 F. Supp. 753 (S.D. Ohio 1992).

On the other hand, an assignee’s right against the obligor is subject to “all of the limitations of the assignor’s right, all defenses thereto, and all set-offs and counterclaims which would have been available against the assignor had there been no assignment, provided that these defenses and set-offs are based on facts existing at the time of the assignment.” See Robert Lamb , case, above.

The power of the contract to restrict assignment is broad. Usually, contractual provisions that restrict assignment of the contract without the consent of the obligor are valid and enforceable, even when there is statutory authorization for the assignment. The restriction of the power to assign is often ineffective unless the restriction is expressly and precisely stated. Anti-assignment clauses are effective only if they contain clear, unambiguous language of prohibition. Anti-assignment clauses protect only the obligor and do not affect the transaction between the assignee and assignor.

Usually, a prohibition against the assignment of a contract does not prevent an assignment of the right to receive payments due, unless circumstances indicate the contrary. Moreover, the contracting parties cannot, by a mere non-assignment provision, prevent the effectual alienation of the right to money which becomes due under the contract.

A contract provision prohibiting or restricting an assignment may be waived, or a party may so act as to be estopped from objecting to the assignment, such as by effectively ratifying the assignment. The power to void an assignment made in violation of an anti-assignment clause may be waived either before or after the assignment. See our article on Contracts.

Noncompete Clauses and Assignments:

Of critical import to most buyers of businesses is the ability to ensure that key employees of the business being purchased cannot start a competing company. Some states strictly limit such clauses, some do allow them. California does restrict noncompete clauses, only allowing them under certain circumstances. A common question in those states that do allow them is whether such rights can be assigned to a new party, such as the buyer of the buyer.

A covenant not to compete, also called a non-competitive clause, is a formal agreement prohibiting one party from performing similar work or business within a designated area for a specified amount of time. This type of clause is generally included in contracts between employer and employee and contracts between buyer and seller of a business.

Many workers sign a covenant not to compete as part of the paperwork required for employment. It may be a separate document similar to a non-disclosure agreement, or buried within a number of other clauses in a contract. A covenant not to compete is generally legal and enforceable, although there are some exceptions and restrictions.

Whenever a company recruits skilled employees, it invests a significant amount of time and training. For example, it often takes years before a research chemist or a design engineer develops a workable knowledge of a company’s product line, including trade secrets and highly sensitive information. Once an employee gains this knowledge and experience, however, all sorts of things can happen. The employee could work for the company until retirement, accept a better offer from a competing company or start up his or her own business.

A covenant not to compete may cover a number of potential issues between employers and former employees. Many companies spend years developing a local base of customers or clients. It is important that this customer base not fall into the hands of local competitors. When an employee signs a covenant not to compete, he or she usually agrees not to use insider knowledge of the company’s customer base to disadvantage the company. The covenant not to compete often defines a broad geographical area considered off-limits to former employees, possibly tens or hundreds of miles.

Another area of concern covered by a covenant not to compete is a potential ‘brain drain’. Some high-level former employees may seek to recruit others from the same company to create new competition. Retention of employees, especially those with unique skills or proprietary knowledge, is vital for most companies, so a covenant not to compete may spell out definite restrictions on the hiring or recruiting of employees.

A covenant not to compete may also define a specific amount of time before a former employee can seek employment in a similar field. Many companies offer a substantial severance package to make sure former employees are financially solvent until the terms of the covenant not to compete have been met.

Because the use of a covenant not to compete can be controversial, a handful of states, including California, have largely banned this type of contractual language. The legal enforcement of these agreements falls on individual states, and many have sided with the employee during arbitration or litigation. A covenant not to compete must be reasonable and specific, with defined time periods and coverage areas. If the agreement gives the company too much power over former employees or is ambiguous, state courts may declare it to be overbroad and therefore unenforceable. In such case, the employee would be free to pursue any employment opportunity, including working for a direct competitor or starting up a new company of his or her own.

It has been held that an employee’s covenant not to compete is assignable where one business is transferred to another, that a merger does not constitute an assignment of a covenant not to compete, and that a covenant not to compete is enforceable by a successor to the employer where the assignment does not create an added burden of employment or other disadvantage to the employee. However, in some states such as Hawaii, it has also been held that a covenant not to compete is not assignable and under various statutes for various reasons that such covenants are not enforceable against an employee by a successor to the employer. Hawaii v. Gannett Pac. Corp. , 99 F. Supp. 2d 1241 (D. Haw. 1999)

It is vital to obtain the relevant law of the applicable state before drafting or attempting to enforce assignment rights in this particular area.

Conclusion:

In the current business world of fast changing structures, agreements, employees and projects, the ability to assign rights and obligations is essential to allow flexibility and adjustment to new situations. Conversely, the ability to hold a contracting party into the deal may be essential for the future of a party. Thus, the law of assignments and the restriction on same is a critical aspect of every agreement and every structure. This basic provision is often glanced at by the contracting parties, or scribbled into the deal at the last minute but can easily become the most vital part of the transaction.

As an example, one client of ours came into the office outraged that his co venturer on a sizable exporting agreement, who had excellent connections in Brazil, had elected to pursue another venture instead and assigned the agreement to a party unknown to our client and without the business contacts our client considered vital. When we examined the handwritten agreement our client had drafted in a restaurant in Sao Paolo, we discovered there was no restriction on assignment whatsoever…our client had not even considered that right when drafting the agreement after a full day of work.

One choses who one does business with carefully…to ensure that one’s choice remains the party on the other side of the contract, one must master the ability to negotiate proper assignment provisions.

Founded in 1939, our law firm combines the ability to represent clients in domestic or international matters with the personal interaction with clients that is traditional to a long established law firm.

Assignments by way of security

Published by a lexisnexis banking & finance expert.

Assignments by way of security can take different forms and it is important to understand how they are created and their effect. Security over choses in action such as debts and other contractual rights is often taken by way of an equitable or statutory assignment by way of security.

This Practice Note explains:

what assignments by way of security are

which types of assets they are used for

whether they take legal, statutory or equitable form and the advantages of the statutory form

why it is important to serve notice of an assignment by way of security

What is an assignment by way of security?

Assignments by way of security are a type of mortgage. They involve:

an assignment (ie transfer) of rights by the assignor to the assignee

subject to:

an obligation to reassign those rights back to the assignor upon the discharge of the obligations which have been secured

When the obligations that have been secured have been discharged,

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Related legal acts:

Law of Property Act 1925 (1925 c 20)
Small Business, Enterprise and Employment Act 2015 (2015 c 26)

Key definition:

Assignor definition, what does assignor mean.

The entity disposing of an asset by an assignment .

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Assignments: why you need to serve a notice of assignment

It's the day of completion; security is taken, assignments are completed and funds move. Everyone breathes a sigh of relief. At this point, no-one wants to create unnecessary paperwork - not even the lawyers! Notices of assignment are, in some circumstances, optional. However, in other transactions they could be crucial to a lender's enforcement strategy. In the article below, we have given you the facts you need to consider when deciding whether or not you need to serve notice of assignment.

What issues are there with serving notice of assignment?

Assignments are useful tools for adding flexibility to banking transactions. They enable the transfer of one party's rights under a contract to a new party (for example, the right to receive an income stream or a debt) and allow security to be taken over intangible assets which might be unsuitable targets for a fixed charge. A lender's security net will often include assignments over contracts (such as insurance or material contracts), intellectual property rights, investments or receivables.

An assignment can be a legal assignment or an equitable assignment. If a legal assignment is required, the assignment must comply with a set of formalities set out in s136 of the Law of Property Act 1925, which include the requirement to give notice to the contract counterparty.

The main difference between legal and equitable assignments (other than the formalities required to create them) is that with a legal assignment, the assignee can usually bring an action against the contract counterparty in its own name following assignment. However, with an equitable assignment, the assignee will usually be required to join in proceedings with the assignor (unless the assignee has been granted specific powers to circumvent that). That may be problematic if the assignor is no longer available or interested in participating.

Why should we serve a notice of assignment?

The legal status of the assignment may affect the credit scoring that can be given to a particular class of assets. It may also affect a lender's ability to effect part of its exit strategy if that strategy requires the lender to be able to deal directly with the contract counterparty.

The case of General Nutrition Investment Company (GNIC) v Holland and Barrett International Ltd and another (H&B) provides an example of an equitable assignee being unable to deal directly with a contract counterparty as a result of a failure to provide a notice of assignment.

The case concerned the assignment of a trade mark licence to GNIC . The other party to the licence agreement was H&B. H&B had not received notice of the assignment. GNIC tried to terminate the licence agreement for breach by serving a notice of termination. H&B disputed the termination. By this point in time the original licensor had been dissolved and so was unable to assist.

At a hearing of preliminary issues, the High Court held that the notices of termination served by GNIC , as an equitable assignee, were invalid, because no notice of the assignment had been given to the licensee. Although only a High Court decision, this follows a Court of Appeal decision in the Warner Bros Records Inc v Rollgreen Ltd case, which was decided in the context of the attempt to exercise an option.

In both cases, an equitable assignee attempted to exercise a contractual right that would change the contractual relationship between the parties (i.e. by terminating the contractual relationship or exercising an option to extend the term of a licence). The judge in GNIC felt that "in each case, the counterparty (the recipient of the relevant notice) is entitled to see that the potential change in his contractual position is brought about by a person who is entitled, and whom he can see to be entitled, to bring about that change".

In a security context, this could hamper the ability of a lender to maximise the value of the secured assets but yet is a constraint that, in most transactions, could be easily avoided.

Why not serve notice?

Sometimes it's just not necessary or desirable. For example:

If security is being taken over a large number of low value receivables or contracts, the time and cost involved in giving notice may be disproportionate to the additional value gained by obtaining a legal rather than an equitable assignment.
If enforcement action were required, the equitable assignee typically has the option to join in the assignor to any proceedings (if it could not be waived by the court) and provision could be made in the assignment deed for the assignor to assist in such situations. Powers of attorney are also typically granted so that a lender can bring an action in the assignor's name.
Enforcement is often not considered to be a significant issue given that the vast majority of assignees will never need to bring claims against the contract counterparty.

Care should however, be taken in all circumstances where the underlying contract contains a ban on assignment, as the contract counterparty would not have to recognise an assignment that is made in contravention of that ban. Furthermore, that contravention in itself may trigger termination and/or other rights in the assigned contract, that could affect the value of any underlying security.

What about acknowledgements of notices?

A simple acknowledgement of service of notice is simply evidence of the notice having been received. However, these documents often contain commitments or assurances by the contract counterparty which increase their value to the assignee.

Best practice for serving notice of assignment

Each transaction is different and the weighting given to each element of the security package will depend upon the nature of the debt and the borrower's business. The service of a notice of assignment may be a necessity or an optional extra. In each case, the question of whether to serve notice is best considered with your advisers at the start of a transaction to allow time for the lender's priorities to be highlighted to the borrowers and captured within the documents.

For further advice on serving notice of assignment please contact Kirsty Barnes or Catherine Phillips from our Banking & Finance team.

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Introduction to Security

What is Security

Taking effective security over an asset means that the security holder can, on the insolvency of the borrower, take possession of that asset and use the proceeds to repay the loan. This puts the security holder in a stronger position than the unsecured creditors.

What does the security holder want?

Basically, a security holder has three aims. It wants to ensure that:

The security is effective on the insolvency of the borrower.

The security will take priority over anyone else who obtains a proprietary interest in the asset concerned.

The security can be enforced when required, even if the borrower is in insolvency proceedings.

A creditor may also want to know to what extent security can arise by operation of law and what alternatives there are to taking security.

Categories of Security under English law

There are four primary categories of security under English law as follows:

The term 'mortgage' and 'charge' tend to be used interchangeably but there are some technical differences.

This form of security involves the transfer of title to an asset in order to secure obligations, typically a debt on the condition that it will be re-transferred when the secured obligations are discharged. The assets secured can be tangible or intangible and physical possession of the mortgaged asset is not a requirement.

Depending on whether the necessary formalities have been complied with and whether the borrower has legal title to the asset, a mortgage can be legal or equitable.

Under an equitable mortgage, only a beneficial interest will pass to the mortgagee whereas under a legal mortgage legal title will pass to the mortgagee.

The transfer of title under a legal mortgage operates to prevent the mortgagor from disposing of the asset and assist in the creditor's ability to realise the security if required.

A legal mortgage is the most secure form of security interest and cannot (unlike an equitable mortgage) be taken over future property.

Mortgages over intangible assets such as choses in action (eg. Rights under a contract) are typically taken by an assignment by way of security which can be legal or equitable depending on the formalities complied with. See section 136 Law of Property Act 1925 ( LPA ) for requirements of a legal assignment. An assignment by way of security transfers certain rights from the assignor to the assignee as security for the discharge of the obligations of the assignor or a third party. You cannot have multiple assignments running concurrently.

While under a mortgage title to the asset will pass to the mortgagee, under a charge title does not pass and the chargee instead obtains an equitable proprietary interest in the security provider's assets e.g. the right to appropriate the charged assets in satisfaction of the debt, the right to restrict the security provider from dealing with the asset freely and a right to the proceeds of sale. There is no right to possession.

Charges can be fixed or floating. A fixed charge will attach immediately to the (definite and identifiable) charged asset while a floating charge hovers over a pool of assets (present and /or future) until conversion or 'crystallisation' (when it fastens onto and becomes a fixed charge over assets). The distinguishing feature of a fixed charge is that the chargor is not free to deal with the charged assets in the ordinary course of its business. The key characteristic of a fixed charge is that the lender has control over the charged asset. Control is crucial to the nature of a fixed charge. A floating charge on the other hand is a charge over a shifting class of assets which the chargor is free to deal and so permits the continuation of the business operations of e.g. a trading company.

Over certain assets e.g. stock-in-trade or inventory, only a floating charge can be created. This is because it would be impractical for a debtor not to be able to deal freely with its stock as this would cause cash-flow problems. The floating charge is normally therefore a catch-all provision for assets not specifically charged and will typically be granted over the whole undertaking.

In the case of present and future receivables, a fixed charge can, in practice, only be effectively taken if the proceeds of the receivables are paid into an account which is strictly operated as a blocked account (National Westminster Bank plc v Spectrum Plus Limited and others [2005] UKHL41) .

Liens generally arise by operation of law and are more common in commercial transactions e.g. when goods are being supplied, repaired or transported. They are accordingly more of benefit to trade creditors rather than financial creditors e.g. a creditor has a lien over goods until thay have been paid for by the security provider. However, creditors do need to think about doing due diligence in respect of any existing or future liens affecting assets that they might take security over as some will rank ahead of even prior mortgages e.g. a maritime lien.

In addition, it is possible to take a bill of sale over chattels owned by an individual under the Bills of Sale Acts 1878 and 1882, but rarely used because if you get it wrong you not only have invalid security , but the secured debt is also extinguished.

Quasi-security

Quasi-security applies to methods by which a creditor might try to enhance its position on the insolvency of the borrower without taking a full security interest.

Quasi-security includes:

Guarantees and indemnities from third parties

Comfort Letters from third parties e.g. the parent. Are they legally binding or merely expressions of intent?

Set-off and netting arrangements . Netting is a form of contractual set-off. Set-off is mandatory on insolvency for mutual credits, mutual debits and other mutual dealings. Banker's set-off-the general right of the bank to combine two or more accounts held by the same entity.

Bank guarantees and bonds. This is the bank's paper so bank has to pay absent fraud.

Standby Letters of Credit. Operate like a bank guarantee.

Retention of Title (RoT) - Romalpa clauses. Again, a lender needs to do due diligence to see whether its borrower's stock –in-trade actually belongs to the borrower or a third party supplier.

Flawed asset arrangements. This is a mandate arrangement between the bank and the borrower whereby the borrower agrees that the bank does not have to pay what it owes the borrower until the borrower pays what it owes the bank. It was held to be effective on a liquidation in BCCI No 8 [1997] 3 WLR 909 .

Negative Pledges. This a covenant by the borrower not to encumber its assets. These should preserve unencumbered assets for the general creditors. It is questionable whether they bind third parties and what effect a negative pledge has on a third party.

Hire purchase and finance lease. Title is with the lender not the borrower so no risk to the lender on the insolvency of the 'borrower'. This is an alternative method to the loan and mortgage for funding.

II. TYPES OF ASSET WHICH MAY BE SUBJECT TO SECURITY

Mortgage - includes securities, chattels and rights under a contract (via an assignment by way of security). Note that a legal mortgage can generally not be taken over most types of intangible property with the exception of: (i) documents that transfer title to the intangible property (e.g. bills of exchange) and (ii) intangibles that can be transferred into the name of the mortgagee and registered in that mortgagee's name (e.g. shares).

Charge - includes land (usually expressed to be a charge by way of legal mortgage, but a charge nonetheless), contracts, book debts, plant and machinery, goodwill, IP rights and licences.

Pledge - includes items of tangible property capable of being delivered (including documents of title to property such as bearer securities).

Lien - any asset.

III. TYPE OF OBLIGATIONS THAT MAY BE SECURED

Under English law, security may secure obligations of any kind (i.e. not just monetary obligations), including future obligations.

IV. LEGAL FORMALITIES REQUIRED

A Legal Mortgage or Charge over land must be created by way of deed (section 52(1) LPA).

A charge by way of legal mortgage over land must be executed as a deed i.e. it must state that it is a deed and be signed, witnessed and delivered as a deed.

Any mortgage or charge of land or other property (whether legal or equitable) must be by deed if the mortgagee or chargee is to have the statutory power of sale and the statutory power to appoint a receiver. Also, a power of attorney must be by deed.

A deed is a written instrument that requires more than a simple signature to be enforceable. A deed is distinguishable from a simple contract for two main reasons: (i) the limitation period for actions brought under simple contract is six years from the date of accrual of action whereas the period is generally twelve years for a deed; and (ii) deeds do not have to be supported by consideration to be enforceable.

For assignments by way of security of debts or other choses in action, the assignment must be in writing.

Pledge - in order for a pledge to be valid, the creditor must be in actual or constructive possession of the asset. A pledge can only be granted over a tangible chattel, excluding real property. No documentation is required but it is obviously preferable that the pledgor and pledgee enter into a letter or memorandum of pledge to record the terms of the pledge including the circumstances when the pledgee might sell the pledged asset.

Lien - no validity requirements as these normally arise by operation of law, although some liens depend on retention of the asset over which the lien is claimed.

Quasi-security - guarantees must be in writing and signed by the guarantor (section 4 Statute of Frauds 1667).

V. PUBLICITY/REGISTRATION REQUIREMENTS

Almost all security (other than pledges) created by English companies and LLPs must be registered at Companies House within the strict 21 day (extended to 31 days during covid, but now back to 21 days) time period. Companies House is a central registry for companies in England and Wales and a public registry.

In addition, charges by way of legal mortgage over land must be registered at the Land Registry regardless of whether it is a corporate or individual granting the charge.

Various other types of asset have their own registration requirements under different regimes e.g. IP rights, ships, aircraft and bills of sale over chattels. Art security can also be registered at the Art Loss Registry.

VI. OTHER PERFECTION REQUIREMENTS

An assignment is perfected when notice of assignment is given to and received by the other contracting party ( Dearle v Hall ( 1823-28) 3 Russ1). In the case of an assignment of the general partner's right to make capital calls on limited partners in funds finance, you cannot register security against an English Limited Partnership so the only way to perfect is by giving notice to the limited partners.

For pledges and liens, these are perfected merely by the creditor holding and continuing to hold the secured asset.

VII. COSTS OF SET UP AND REGISTRATION OF SECURITY

Any security registered at Companies House costs £15 to register online and £23 to register a hard copy.

The fee to register a charge at the Land Registry (assuming it is not registered simultaneously with the transfer of land where no fee is charged) is between £40 to £250 for each title charged depending on the amount secured.

VIII. TIMING FOR PUBLICITY/REGISTRATION

Security has to be registered at Companies House within 21 days (temporarily increased to 31days during covid) of its creation counting from the day after creation. Dire consequences if you fail to do so including the charge being void against the company's other creditors including its liquidator and administrator and the secured debt becoming immediately repayable. If you fail to register, you can apply to the court for registration of the charge out of time (unless in the meantime the company has gone into administration or liquidation) or take a new charge (subject to potential set-aside until the relevant ' hardening periods have expired).

No specific deadline for registering at the Land Registry, but for priority purposes, best to do so within the priority period afforded by the pre-completion searches. Registering security within this period will ensure priority over subsequently registered charges.

Timing for submitting registration and obtaining proof of registration is almost simultaneous with online registration at Companies House and between one and two weeks in the case of a paper registration. In the case of the Land Registry the time period is approximately two weeks depending on how busy they are.

XI. LEX SITUS

Generally speaking, any security must be created under, and be in accordance with, the law of the jurisdiction where the asset is located, notwithstanding that this may be different to the jurisdiction in which the security provider is incorporated.

Mortgages -To create a valid mortgage over real property located in England and/or Wales, the mortgage has to be created under the laws of England and Wales.

To create a valid mortgage or charge over a chattel you normally have to have your security document governed by the law of the jurisdiction where the chattel is located.

X. WHAT TYPES OF RIGHTS DOES A SECURED CREDITOR HAVE?

Before enforcing its security, the holder must generally make a formal demand for payment on the borrower. The effect of a demand is to make the sums due under the loan facility payable. This is particularly important in the context of some of the enforcement rights implied under common law and statute which do not arise until the secured liabilities become payable (expressly granted enforcement rights will normally be exercisable on an event of default occurring under the loan agreement).

In relation to each type of security the following enforcement rights are available:

Legal Mortgage- Foreclosure (a court process whereby the mortgagor's rights in the secured asset are extinguished (i.e. the mortgagor's equity of redemption is extinguished) and that asset becomes vested in the mortgagee). This rarely occurs these days, although under the Financial Collateral Regulations there is a foreclosure equivalent which doesn’t involve any court process; Taking possession; Power of sale (provided the security document contains an express power of sale or is made by deed, in which case the power of sale is implied); and Appointment of a receiver (again available if express power to appoint or is made by deed in which case the power is implied).

and Appointment of receiver (same as for legal mortgage above). Note that on a sale an equitable mortgagee cannot transfer more than an equitable interest in the mortgaged asset.

For assignments by way of security where the secured property comprises choses in action (e.g. contractual rights), the assignee may exercise its power of sale (provided as above) and/ or appoint a receiver (provided as above).

Charge -Taking possession (available provided the security document contains an express power to that effect); Power of sale (provided same as for legal mortgage above); Appointment of Administrative Receiver (only available to holder of pre-15 September 2003 floating charge over all or substantially all the chargor's assets); Appointment of Receiver (available provided circumstances relating to legal mortgages exist); Appointment of Administrator (available only to holders of a qualifying floating charges (QFCHs). A qualifying floating charge is a charge created by instrument that states that paragraph 14 of Schedule 18 to the Insolvency Act 1986 applies to it or that it purports to appoint an administrator or administrative receiver. A QFCH is generally a holder of qualifying charge which relates to the whole or substantially the whole of the company's property at the time of appointing the administrator.

Pledge -Power of Sale (available where the power is given either expressly in the security document or impliedly where the pledgor is in default and reasonable notice has been given to him).

Lien -Power of Sale (a lien holder may apply to court for an order of sale where: (i) the lien is equitable or (ii) there is a reason why a quick sale of the assets subject to the lien is preferable (e.g. perishable assets); Appointment of Receiver (available to holders of equitable liens, who may apply to the court for an order to appoint a receiver).

Compulsory Liquidation - a secured creditor can seek to have a company wound up if it has served a statutory demand for a debt in excess of £750 and the debtor fails to pay or if it can show that the debtor is insolvent.

XI. ENFORCEMENT

Foreclosure -This is a lengthy, two-stage court process that is rarely used in practice. First an order for foreclosure nisi must be obtained by the mortgagee and then the mortgagor is given a chance to pay the debt. If payment is not forthcoming, an order for the foreclosure to be made absolute can be sought. Little used because its effect is to deprive the mortgagor of its equity of redemption and it would be a very time-consuming process.

Taking Possession- in most cases a court order is required. Where a secured creditor is entitled to obtain possession of real estate, it can do so by either: i) taking physical possession of the secured property if possession is granted voluntarily; or (more commonly) ii) by bringing an action in the county court for a possession order. This can be a lengthy process e.g. up to two years.

A mortgagee in possession may incur unforeseen liabilities to third parties (e.g. the cost of environmental remediation) and owes certain duties (e.g. to the borrower to account for any income and profit actually received or which should have been received).

Power of Sale -Normally a court order is not required unless the mortgage does not include an express power of sale or is not made by way of deed. Also, a mortgagee may prefer to obtain a court order for sale if there are some issues concerning the consideration for the sale. Otherwise, a mortgagee can sell without a court order, but it does have a duty to get the best price reasonably obtainable and cannot itself buy the mortgaged property without the sanction of a court order.

Appointment of Administrative Receiver and Receiver -These are out of court processes. These can be appointed quickly by notice to and acceptance by, the Administrative Receiver/Receiver.

Appointment of Administrator -Some court involvement is always necessary. Administrators can be appointed in two ways: either simply by filing documents at court (the out of court route); or by making a formal application to the court, and (following a hearing) obtaining a court order (the court route).

Using the court route, the appointing creditor must first issue an application at the court, when a hearing date will be set, the timing of which vary depending on the court calendar. Notice must then be given to a number of interested parties not less than five business days before the hearing. If appointed, the administrator's appointment may commence at the time of the hearing.

The out of court route is only available to QFCHs and the court route is available to all other creditors.

Using the out of court route, if there are no prior-ranking QFCHs, the appointing creditor can simply file the appointment documents at court and the appointment will commence from the time of filing. If there are prior-ranking QFCHs, the appointing creditor must serve notice of intention to appoint on the prior ranking QFCHs two business days before the appointment. If this period expires or the prior ranking QFCH consents, the appointing creditor can then appoint by filing the necessary documents at court. It is important to use the correct documents otherwise your purported administrator could end up being liable for damages as a trespasser.

Financial Collateral Arrangements (FCAs)- The Financial Collateral Regulations 2003 ( FCRs ) were brought into force to implement Directive 2002/47/EC of the European Parliament and Council and modify existing EU insolvency law in relation to FCAs, to give parties to FCAs certain rights in priority to other parties on the insolvency of the collateral giver, to dispense with registration requirements at Companies House and to permit out of court forfeiture. Briefly, an FCA applies where security over financial collateral (i.e. cash, financial instruments including shares or certain types of monetary claims) is provided by an entity (ie. not an individual) to a financial institution which must have possession or control of such financial collateral. It can also apply to stock-lending and repo arrangements.

Under the FCRs, the collateral taker can enforce an FCA even where an administrator is in place, and without having to account to (ordinarily prioritised) preferential creditors and unsecured creditors. The rights of administrators and liquidators in relation to FCAs are much more limited. For example, they have no right to dispose of the collateral, disclaim the FCA, and avoid the FCA even if it occurred after the commencement of the winding-up or to remove an administrative receiver of the financial collateral. In addition, if the FCA allows, the collateral taker can appropriate the collateral without having to obtain a court order for foreclosure.

Compulsory Liquidation -court sanctioned process. The creditor issues a petition at court to commence the process. A date for hearing is fixed at this point. Notice then must be given to the creditor at least five business days before the hearing. It is possible to obtain a winding up order within about six weeks of issuing the petition.

XII. LEGAL CONCERNS/PROHIBITIONS RELATED TO GRANTING/TAKING SECURITY

Corporate Benefit -Where security is given by a company in respect of the obligations of a third party company, the security provider, in its board minutes approving the transaction, must be able to confirm that it is in the company's interests to enter into the transaction. It is common for such third party security to be approved by unanimous ordinary resolution of the shareholders of the company in order to avoid the risk of the shareholders in the company challenging the grant of the security as being ultra vires the directors. In addition, the lender might require the directors to give a certificate of solvency in an effort to avoid the security being attacked as a transaction at an undervalue.

Security for Loans to Directors -Certain restrictions apply to the making of loans, and to related dealings such as the provision of security for loans, by a company, either to its directors, or to directors of its holding company or to persons connected with those directors. Basically a company cannot make a loan to its director or the director of its holding company or give a guarantee or provide security in connection with a loan made to a director unless it is approved by a resolution of the members of the company and (if the director is a director of the company's holding company) a resolution of the members of the holding company as well. There are additional restrictions covering quasi-loans and credit transactions to or for the benefit of directors and their connected persons and guarantees and security for such loans in the case of a public company or a company associated with a public company where, again, approval by resolution of the members of the company and, if applicable, its holding company is required.

Taking Security over Shares in a Publicly Quoted Company

Another point to watch when taking security over shares in publicly quoted companies from its directors are the disclosure and notification requirements involved. For example, the Market Abuse Regulations ( MAR ) (Article 19(1) and (7)) imposes notification obligations on any person discharging managerial responsibilities ( PDMR ) or their closely associated persons, within a company to which MAR applies. If a PDMR, or a person closely associated with a PDMR, grants security over his or her shares he/she must disclose the transaction to the company. The company then has to notify the market.

MAR (Article 19(11)) imposes 'closed periods' on PDMRs , or their closely associated persons, within a company to which MAR applies on dealing with its shares (including the grant of security). Clearance may only be provided in exceptional circumstances (e.g. severe financial difficulty).

The AIM Rules include certain disclosure obligations and restrictions on dealing in the company's shares for directors and their families. The AIM Rules also contain significant shareholder disclosure obligations and dealing restrictions for directors and applicable employees during closed periods.

The Takeover Code may apply to the company. If it does, there are potential disclosure obligations under Rule 8 if a charge is taken over 1% or more shares in the company. Security taken over 30% or more of the voting rights of the company could trigger a mandatory takeover offer when enforced.

Part 22 of the Companies Act 2006 allows a public company to serve notice on those 'interested' in its shares which could include a security holder. The notice can require the security holder to give information not only about its own interest but any concurrent interest of which the security holder has knowledge. Failure to comply with the notice entitles to company to obtain a court order that the shares be subject to restrictions.

Part 28 of the Companies Act 2006 contains 'squeeze out' and 'sell out' rules applying when an offeror has unconditionally agreed to acquire 90% in value of a target's shares giving the offeror the statutory right to buy out the remaining minority shareholders. This right cannot be excluded.

Under the FCA DTA disclosure regime, the holder of shares (or the voting rights in those shares) in UK companies whose shares are listed on the main market or AIM are required to notify the company (using a TR1-notification of major shareholding) once they reach the 3% threshold and each 1% change thereafter. If a lender therefore forecloses on shares under the FCRs or exercises its voting rights in respect of shares held by it as collateral the DTA disclosure regime can apply. For any questions please contact Brad Isaac .

XIII. RIGHTS OF CHALLENGE FOR THE SECURITY PROVIDER/THIRD PARTIES

General- The security provider might contest the debt, or contend that the debt was not due and owing (i.e. that the holder of the security had not made a proper demand) or that the security was invalid or not improperly perfected, or that the relevant appointment documents were invalid, or that the relevant notice requirements were not followed.

Limitation- A limitation period of 12 years from the cause of action applies where the document is executed as a deed. This is reduced to six years where the security document is signed under hand.

Conflicting arrangements- Security may not be enforceable if there is an inter-creditor or standstill deed in place governing the enforcement of the security which prohibits or delays enforcement.

Challengeable transactions- A liquidator and an administrator can, in certain circumstances, challenge and have security arrangements set aside, making the security unenforceable. Reviewable transactions include security arrangements that constitute: i) a preference, ii) a transaction at an undervalue; or iii) a (wholly or partly) invalid floating charge.

Briefly, a preference occurs when a debtor has done something or allowed something to be done which has the effect of putting a creditor into a better position in the liquidation, administration or bankruptcy of the debtor than he would have been if the thing had not been done. Such a transaction is challengeable if it was done within 6 months of the insolvency or two years if the relevant parties were connected with debtor (e.g. in the case of a debtor company, directors, shadow directors, associates of such directors or shadow directors and associates of the company and, in the case of an individual, a relative or life partner of such individual); the debtor was insolvent at the time or as a result of the transaction and the debtor had a desire to put the creditor in a better position than he would have been if the thing had not been done (section 239 Insolvency Act 1986 ( IA )). A classic example of this type of transaction is where the directors of a company have given a guarantee to a bank and then the company gives security for the previously unsecured debt within a short time of the company entering into formal insolvency. From a lender's standpoint, the main point to notice is that the transaction creating the preference has to be done voluntarily so if the lender exerts pressure on the debtor it should never be a preference.

Again briefly, a transaction at an undervalue occurs (section 238 IA) when a debtor enters into a transaction (e.g. a gift or guarantee) for a consideration the value of which, in monetary terms, is significantly less than the value of the consideration provided by the debtor. Such a transaction can be set aside if:

where the debtor is a company, the transaction took place within 2 years before the commencement of its winding-up and the debtor was insolvent or became insolvent as a consequence of entering into the transaction

where the debtor is an individual, the transaction took place within 5 years of the before the commencement of his bankruptcy and , if the bankruptcy occurs in the third, fourth or fifth years, the debtor was insolvent or became insolvent as a consequence of the bankruptcy (i.e. if the bankruptcy occurs within 2 years of the transaction, there is no need for an insolvency practitioner to prove that the debtor was insolvent or became insolvent as a consequence of entering into the transaction).

Where the debtor is a company, there is a defence if it can be shown that :

the debtor entered into the transaction in good faith and for the purpose of carrying out its business; and

when it did so, there were reasonable grounds for believing that the transaction would benefit the company.

When taking a guarantee from a company, it is therefore common practice to do the following:

Detail in the board minutes the benefits to the company in entering into the guarantee (to assist demonstrating that the transaction benefitted the company);

have the entering into the guarantee blessed by a unanimous resolution of the members (to prevent the transaction being ultra vires the directors); and

have the directors make a declaration of solvency (so that , if correct, the transaction could never be a transaction at an undervalue).

The position from the lender's standpoint is more difficult if the debtor is an individual especially if the bankruptcy occurs within the first two years of the transaction.

Under section 245 of the IA a floating charge created by a debtor company will be invalid in its liquidation or administration if it was created in favour of a connected person within 2 years before the commencement of insolvency proceedings or a non-connected person within I year of its administration or liquidation except to the extent of the value of the consideration of the floating charge which comprises money paid, goods or services supplied or debts discharged at the time of or after the creation of such floating charge. The section does not however apply to FCRs (described above).

Undue Influence- Where the security provider can show that he/she entered into the security document whilst under the influence of another, the security will be unenforceable. Undue influence can be implied where there exists a relationship of trust and confidence between the parties to a contract. Certain types of relationship gve rise to a presumption of undue influence and these include parent and child and husbands and wives. The issue for a lender is that if it can be shown that there was undue influence by the debtor on the guarantor even if the lender was unaware of such undue influence, the transaction involving the lender (e.g. a guarantee) can be set aside. If a lender is taking a guarantee in circumstances where there is no commercial relationship between the debtor and the guarantor, a lender needs to protect itself by:

requiring the guarantor take independent legal advice on the guarantee;

providing the guarantor's solicitor with sufficient financial information to be able to advise the guarantor appropriately; and

obtaining confirmation from the solicitor that he/she has advised the guarantor appropriately before the guarantor entered into the guarantee.

(See the leading cases of Barclays Bank v O'Brien [1994] 1 AC 180 and Royal Bank of Scotland v Etridge (No 2) [2002] 2 AC 773)

Lien - Statute provides that liens over the books, papers and records of a borrower are unenforceable to the extent that enforcement would deny their possession to a liquidator and administrator.

XIV. SECURED CREDITORS' POSITION IN INSOLVENCY

Rights to and conditions required to continue/initiate security enforcement in insolvency

Perfection (as previously mentioned) is necessary to ensure that the security has the intended priority over the other creditors of the security provider, although perfection does not always guarantee validity and priority in all circumstances (for example, where a transaction is challengeable by an insolvency practitioner).

Further, when a chargor enters into administration or liquidation, unsecured creditors must lodge formal notice of the debt owed to them, called a proof of debt, to the administrator or liquidator. A secured creditor can rely entirely on its security and not submit a proof or surrender its security and prove for the whole amount of the debt or place a value on its security and prove for the balance of the debt.

Administration- An automatic moratorium is imposed at the start of the administration which prevents creditors from enforcing security without the consent of the administrator or permission of the court, unless the FCRs apply to the security. A secured creditor is however, generally speaking, entitled to be repaid from the proceeds of sale of the secured assets. It may then claim as an unsecured creditor (who will receive a share of the assets proportionate to the size of the company's debt to the unsecured creditors) for any balance. Note that a company cannot enter into administration if an administrative receiver is in office.

Compulsory Liquidation- Compulsory liquidation provides a moratorium preventing creditors from enforcing security without permission of the court. A liquidator acts primarily in the interests of unsecured creditors and shareholders, but must distribute the assets in accordance with the following priority:

First: Fixed charge holders

Second: Administrators and Liquidators (for expenses in administration or winding up) Note that under the moratorium procedure introduced by the Corporate Insolvency and Governance Act 2020 if a company enters into administration or winding-up within 12 weeks of the end of a Part A1 moratorium, any unpaid moratorium debts or pre-moratorium debts (where the company does not have the benefit of a payment holiday for these) will benefit from super-priority (i.e. they will rank before administration or liquidation expenses).

Third: Ordinary Preferential Debts (e.g. employees' wages), Second Preferential Debts (e.g. claims from HMRC such as VAT, PAYE, employee NICs and Construction Industry Scheme deductions) and then the Prescribed Part up to a maximum of £800,000 for floating charges created on or after 6 April 2020).

Fourth: Floating Charge holders

Fifth: Ordinary unsecured creditors including all other taxes e.g. corporation tax (pro rata)

Sixth: Shareholders (receive any surplus).

Secured creditors' rights in influencing decisions in the creditors assembly

Receivership- The receiver only owes duties to the secured creditor who appointed him; there is no meeting of creditors.

Administration- The views of the secured creditor may be taken into consideration by the court when considering the appointment of the administrator. However, an administrator owes a duty to act in the interests of the creditors as a whole.

Compulsory Liquidation- A secured creditor may be able to exert some influence on the choice of liquidator by voting at creditors meetings, or if appointed to the liquidation committee, may take some limited further control over the liquidator's actions. If you have any questions, please contact Andrew Evans or your usual Banking contact.

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Pledge vs Charge: The Lender's Choice

In secured debt financing transactions a fundamental question that arises is which type of security provides the lender with more advantageous options in regard to any other creditors of the obligor. Here, we highlight the main factors that affect a lender’s choice when it comes to taking security in Mauritius, specifically around the differences between a charge and pledge.

T +230 405 4355 E [email protected]

charge vs Pledge

The most common types of security taken in Mauritius are either a charge over the assets of the obligor, that is, the Mauritian entity, or a pledge over either the shares of the Mauritian entity, granted by its shareholders or over the bank accounts of the Mauritian entity.

A charge generally takes the form of either a fixed charge over all assets of the chargor, fully particularised in the instrument of charge; and all related rights thereto, or of a floating charge over all assets, whatsoever and wheresoever of the chargor, both present and future, other than any assets validly and effectively charged by way of fixed charge pursuant to the instrument of charge.

A pledge on the other hand, generally takes the form of a share pledge or account pledge. In terms of creation and validity of the security interests, in accordance with our Civil Code and notwithstanding the contractual date of any fixed and/or floating charge, a fixed and/or floating charge shall only be deemed to be (i) validly created and perfected, and (ii) effective from the time that the charge has been duly registered with the Registrar General ( RG ) and inscribed with the Conservator of Mortgages of Mauritius ( CM ).

Share pledge

A share pledge is deemed to be validly created where a transfer evidencing the pledge is inscribed in the register of pledges of the Mauritian company whose shares are being pledged. For the purposes of the Commercial Code the “gage” is deemed to be constituted where (i) the shares and share certificates (if any) are delivered to the creditor or security agent, along with (ii) a stock transfer form allowing the transfer of the shares to the creditor or security agent or any person of its choice.

Account pledge

An account pledge is validly created and perfected in law immediately upon entry by the parties into the account pledge and subject to the drawing up, execution and delivery of the certain mandatory creation and perfection deliverables at closing.

What affects a lender’s choice?

Ranking and priority.

Any fixed and/or floating charge registered and inscribed pursuant to applicable law will take priority over any other charge which is registered and inscribed subsequently relating to the same assets and/or any unsecured charge at enforcement and in case of insolvency. A pledge cannot be registered and inscribed under Mauritius law, and will therefore be deemed to be unsecured and unranked from a certainty and/or priority perspective, especially upon insolvency of the Mauritian obligor. A pledge can only be registered; however, this does not guarantee priority. Most lenders therefore prefer to take a charge over a pledge in order to acquire priority over any other unsecured creditors of the Mauritian obligor, particularly where the charge has been duly registered and inscribed with the RG and CM in Mauritius.

Enforcement

Mauritius law governed fixed and/or floating charges confer a right on a security holder, in law, to look to (or appropriate), by either a power of sale or the appointment of a receiver, such assets as were existing and specifically designated in the deed of fixed and/or floating charge in the event of a obligor’s default. Once such assets are burdened by way of fixed charge, the obligor is prohibited from dealing with and alienation of such assets, without the consent of the security holder, which would otherwise give rise to a criminal offence under Mauritius law. In relation to floating charges governed under the laws of Mauritius, the assets do not have to be particularised in the deed of charge and the obligor can continue to use/trade the assets until an enforcement event occurs and the floating charge then becomes a fixed charge. In terms of enforcement, in practice, the agreement/instrument creating the charge itself provides for the circumstances in which a charge and the security created shall become enforceable.

In virtue of the enforcement deliverables provided under the share pledge, the pledgee or security agent may exercise any of its rights under the share pledge, including the right to appropriate, transfer all or any part of the pledged assets, in or towards payment or discharge of the liabilities/secured indebtedness pursuant to the share pledge by completing, executing and dating (where applicable) certain mandatory deliverables for the purposes of enforcement and the right to appoint a receiver of the pledged assets pursuant to the terms of the share pledge.

For an account pledge, the pledgee or security agent may exercise any of its rights under the account pledge, including the right to appoint a receiver of the pledged assets pursuant to the terms of the account pledge and/or the right to appropriate, transfer or set off all or any part of the monies in the pledged accounts, in or towards payment or discharge of the liabilities/secured indebtedness pursuant to the account pledge.

Whilst a charge confers priority to the secured lender, enforcement of a pledge is more straight forward than enforcement of a charge, more so when a floating charge is involved, which should be agreed prior to enforcement.

Non-Mauritian entity

Another factor that may affect the lenders’ choice is whether a non-Mauritian entity is granting the security. In the event a non-Mauritian entity is granting a security in favour of its assets in Mauritius, for instance, a bank account in Mauritius, it is recommended that a pledge be taken rather than a charge. As mentioned above, a pledge cannot be inscribed with the CM in Mauritius but can only be registered with the RG and registration only does not confer priority. A charge can be registered and inscribed following which the secured creditor has priority over all claims against the company upon its insolvency (applicable to Mauritian entities) pursuant to the Mauritius Insolvency Act. Where a non-Mauritian chargor is involved, such purpose of registering and inscribing a charge document would be redundant to the secured creditor or security agent.

Corporate , Structured Finance , Banking & Asset Finance , Corporate Finance

Banking & Financial Services

The difference between charge and pledge in Mauritius

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Options Exercise, Assignment, and More: A Beginner's Guide

So your trading account has gotten options approval, and you recently made that first trade—say, a long call in XYZ with a strike price of $105. Then expiration day approaches and, at the time, XYZ is trading at $105.30.

Wait. The stock's above the strike. Is that in the money 1 (ITM) or out of the money 2 (OTM)? Do I need to do something? Do I have enough money in my account? Help!

Don't be that trader. The time to learn the mechanics of options expiration is before you make your first trade.

Here's a guide to help you navigate options exercise 3 and assignment 4 —along with a few other basics.

In the money or out of the money?

The buyer ("owner") of an option has the right, but not the obligation, to exercise the option on or before expiration. A call option 5 gives the owner the right to buy the underlying security; a put option 6 gives the owner the right to sell the underlying security.

Conversely, when you sell an option, you may be assigned—at any time regardless of the ITM amount—if the option owner chooses to exercise. The option seller has no control over assignment and no certainty as to when it could happen. Once the assignment notice is delivered, it's too late to close the position and the option seller must fulfill the terms of the options contract:

A long call exercise results in buying the underlying stock at the strike price.
A short call assignment results in selling the underlying stock at the strike price.
A long put exercise results in selling the underlying stock at the strike price.
A short put assignment results in buying the underlying stock at the strike price.

An option will likely be exercised if it's in the option owner's best interest to do so, meaning it's optimal to take or to close a position in the underlying security at the strike price rather than at the current market price. After the market close on expiration day, ITM options may be automatically exercised, whereas OTM options are not and typically expire worthless (often referred to as being "abandoned"). The table below spells it out.

If the underlying stock price is...
...higher than the strike price
...lower than the strike price
If the underlying stock price is... A long call is... -->
...higher than the strike price ...ITM and typically exercised -->
...lower than the strike price ...OTM and typically abandoned -->
If the underlying stock price is... A short call is... -->
...higher than the strike price ...ITM and typically assigned -->
If the underlying stock price is... A long put is... -->
...higher than the strike price ...OTM and typically abandoned -->
...lower than the strike price ...ITM and typically exercised -->
If the underlying stock price is... A short put is... -->
...lower than the strike price ...ITM and typically assigned -->

The guidelines in the table assume a position is held all the way through expiration. Of course, you typically don't need to do that. And in many cases, the usual strategy is to close out a position ahead of the expiration date. We'll revisit the close-or-hold decision in the next section and look at ways to do that. But assuming you do carry the options position until the end, there are a few things you need to consider:

Know your specs . Each standard equity options contract controls 100 shares of the underlying stock. That's pretty straightforward. Non-standard options may have different deliverables. Non-standard options can represent a different number of shares, shares of more than one company stock, or underlying shares and cash. Other products—such as index options or options on futures—have different contract specs.
Stock and options positions will match and close . Suppose you're long 300 shares of XYZ and short one ITM call that's assigned. Because the call is deliverable into 100 shares, you'll be left with 200 shares of XYZ if the option is assigned, plus the cash from selling 100 shares at the strike price.
It's automatic, for the most part . If an option is ITM by as little as $0.01 at expiration, it will automatically be exercised for the buyer and assigned to a seller. However, there's something called a do not exercise (DNE) request that a long option holder can submit if they want to abandon an option. In such a case, it's possible that a short ITM position might not be assigned. For more, see the note below on pin risk 7 ?
You'd better have enough cash . If an option on XYZ is exercised or assigned and you are "uncovered" (you don't have an existing long or short position in the underlying security), a long or short position in the underlying stock will replace the options. A long call or short put will result in a long position in XYZ; a short call or long put will result in a short position in XYZ. For long stock positions, you need to have enough cash to cover the purchase or else you'll be issued a margin 8 call, which you must meet by adding funds to your account. But that timeline may be short, and the broker, at its discretion, has the right to liquidate positions in your account to meet a margin call 9 . If exercise or assignment involves taking a short stock position, you need a margin account and sufficient funds in the account to cover the margin requirement.
Short equity positions are risky business . An uncovered short call or long put, if assigned or exercised, will result in a short stock position. If you're short a stock, you have potentially unlimited risk because there's theoretically no limit to the potential price increase of the underlying stock. There's also no guarantee the brokerage firm can continue to maintain that short position for an unlimited time period. So, if you're a newbie, it's generally inadvisable to carry an options position into expiration if there's a chance you might end up with a short stock position.

A note on pin risk : It's not common, but occasionally a stock settles right on a strike price at expiration. So, if you were short the 105-strike calls and XYZ settled at exactly $105, there would be no automatic assignment, but depending on the actions taken by the option holder, you may or may not be assigned—and you may not be able to trade out of any unwanted positions until the next business day.

But it goes beyond the exact price issue. What if an option is ITM as of the market close, but news comes out after the close (but before the exercise decision deadline) that sends the stock price up or down through the strike price? Remember: The owner of the option could submit a DNE request.

The uncertainty and potential exposure when a stock price and the strike price are the same at expiration is called pin risk. The best way to avoid it is to close the position before expiration.

The decision tree: How to approach expiration

As expiration approaches, you have three choices. Depending on the circumstances—and your objectives and risk tolerance—any of these might be the best decision for you.

1. Let the chips fall where they may. Some positions may not require as much maintenance. An options position that's deeply OTM will likely go away on its own, but occasionally an option that's been left for dead springs back to life. If it's a long option, the unexpected turn of events might feel like a windfall; if it's a short option that could've been closed out for a penny or two, you might be kicking yourself for not doing so.

Conversely, you might have a covered call (a short call against long stock), and the strike price was your exit target. For example, if you bought XYZ at $100 and sold the 110-strike call against it, and XYZ rallies to $113, you might be content selling the stock at the $110 strike price to monetize the $10 profit (plus the premium you took in when you sold the call but minus any transaction fees). In that case, you can let assignment happen. But remember, assignment is likely in this scenario, but it is not guaranteed.

2. Close it out . If you've met your objectives for a trade, then it might be time to close it out. Otherwise, you might be exposed to risks that aren't commensurate with any added return potential (like the short option that could've been closed out for next to nothing, then suddenly came back into play). Keep in mind, there is no guarantee that there will be an active market for an options contract, so it is possible to end up stuck and unable to close an options position.

The close-it-out category also includes ITM options that could result in an unwanted long or short stock position or the calling away of a stock you didn't want to part with. And remember to watch the dividend calendar. If you're short a call option near the ex-dividend date of a stock, the position might be a candidate for early exercise. If so, you may want to consider getting out of the option position well in advance—perhaps a week or more.

3. Roll it to something else . Rolling, which is essentially two trades executed as a spread, is the third choice. One leg closes out the existing option; the other leg initiates a new position. For example, suppose you're short a covered call on XYZ at the July 105 strike, the stock is at $103, and the call's about to expire. You could attempt to roll it to the August 105 strike. Or, if your strategy is to sell a call that's $5 OTM, you might roll to the August 108 call. Keep in mind that rolling strategies include multiple contract fees, which may impact any potential return.

The bottom line on options expiration

You don't enter an intersection and then check to see if it's clear. You don't jump out of an airplane and then test the rip cord. So do yourself a favor. Get comfortable with the mechanics of options expiration before making your first trade.

1 Describes an option with intrinsic value (not just time value). A call option is in the money (ITM) if the stock price is above the strike price. A put option is ITM if the stock price is below the strike price. For calls, it's any strike lower than the price of the underlying equity. For puts, it's any strike that's higher.

2 Describes an option with no intrinsic value. A call option is out of the money (OTM) if its strike price is above the price of the underlying stock. A put option is OTM if its strike price is below the price of the underlying stock.

3 An options contract gives the owner the right but not the obligation to buy (in the case of a call) or sell (in the case of a put) the underlying security at the strike price, on or before the option's expiration date. When the owner claims the right (i.e. takes a long or short position in the underlying security) that's known as exercising the option.

4 Assignment happens when someone who is short a call or put is forced to sell (in the case of the call) or buy (in the case of a put) the underlying stock. For every option trade there is a buyer and a seller; in other words, for anyone short an option, there is someone out there on the long side who could exercise.

5 A call option gives the owner the right, but not the obligation, to buy shares of stock or other underlying asset at the options contract's strike price within a specific time period. The seller of the call is obligated to deliver, or sell, the underlying stock at the strike price if the owner of the call exercises the option.

6 Gives the owner the right, but not the obligation, to sell shares of stock or other underlying assets at the options contract's strike price within a specific time period. The put seller is obligated to purchase the underlying security at the strike price if the owner of the put exercises the option.

7 When the stock settles right at the strike price at expiration.

8 Margin is borrowed money that's used to buy stocks or other securities. In margin trading, a brokerage firm lends an account owner a portion of the purchase price (typically 30% to 50% of the total price). The loan in the margin account is collateralized by the stock, and if the value of the stock drops below a certain level, the owner will be asked to deposit marginable securities and/or cash into the account or to sell/close out security positions in the account.

9 A margin call is issued when your account value drops below the maintenance requirements on a security or securities due to a drop in the market value of a security or when a customer exceeds their buying power. Margin calls may be met by depositing funds, selling stock, or depositing securities. Charles Schwab may forcibly liquidate all or part of your account without prior notice, regardless of your intent to satisfy a margin call, in the interests of both parties.

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Charge over bank account

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Singapore Prohibition Against Assignment Of Receivables – A Charge As An Alternative?

October 26, 2018 by Conventus Law

26 October, 2018

Jurong Aromatics Corp Pte Ltd (receivers and managers appointed) and others v BP Singapore Pte Ltd and another matter [2018] SGHC 215 (“Jurong Aromatics”)

The Singapore High Court recently considered the effect of a prohibition against assignment clause on assets subject to a charge. The decision confirms that, while such a prohibition is effective to prevent an assignment of assets, it did not restrict a charge on the asset.

The High Court also held that there was no required mutuality of debts for insolvent set- off to occur, if the debt was charged to another party.

Facts of Jurong Aromatics

The joint venture Jurong Aromatics Corporation (“JAC”) was tasked with the development of the Jurong Aromatics Plant on Jurong Island (“Plant”). Glencore Singapore Pte Ltd (“Glencore”) and BP Singapore Pte Ltd (“BP”) were suppliers to JAC under their respective feedstock supply agreements, and also customers of JAC under their respective product offtake agreements. Glencore also entered into an agreement with JAC, to set-off Glencore and JAC’s mutual claims (“Set-Off Agreement”) under their feedstock supply agreement and product offtake agreement.

JAC was financed by a syndicate of banks and financial institutions (“Senior Lenders”), whose loans to JAC were secured by way of a debenture entered between JAC and the Senior Lenders’ security agent, BNP Paribas Singapore Branch (“BNP Paribas”), comprising:

(a) a first fixed charge over JAC’s present and future book debts; and

(b) a first floating charge over all of JAC’s present and future assets.

There was also an assignment between JAC and BNP Paribas, under which receivables payable to JAC under the Glencore feedstock supply agreement and product offtake agreement (among other agreements) were assigned to the Senior Lenders.

Subsequently, when JAC encountered financial difficulties, receivers and managers were appointed by BNP Paribas, who took control of and managed the assets of JAC. Thereafter, JAC entered into a tolling agreement (“Tolling Agreement”) with the defendants, to enable the Plant’s operations to resume while a buyer was sought. When a buyer, ExxonMobil Asia Pacific Pte Ltd, was found, it entered into respective agreements with JAC and the defendants (“Transition Agreement” and “Transitional Supplemental Agreement”) to enable the Plant to be sold without shutting it down. The Tolling Agreement, Transition Agreement and Set-Off Agreement contained prohibition against assignment clauses.

JAC, with its receivers and managers, then sought to claim the charged receivables due from Glencore and BP (collectively the “Defendants”). The Defendants sought to set-off these claimed amounts against debts owed by JAC under their respective feedstock supply agreements with JAC (“feedstock debt”).

Apart from the High Court’s statements on the nature of a charge and decrystallisation, its findings on the following issues are particularly noteworthy:

(a) does a prohibition against assignment clause preclude a charge?;

(b) what is the impact of a prohibition against assignment clause on an encumbrance created before the prohibition, and on an encumbrance created after the prohibition?; and

On the first issue, the High Court confirmed that a contractual prohibition against assignment of assets did not, on its own, prevent a party from taking a charge over these assets, subject to the actual text of the prohibition and contrary intentions of parties in the context of the transaction. As the plain meaning of the prohibitions did not preclude a charge, and there was insufficient evidence that parties intended for charges to fall within the prohibitions, the fixed charge and crystallised floating charge held by the Senior Lenders were not precluded by the prohibitions.

On the second issue, it appears that even if a prohibition were construed to cover a charge, it would only affect encumbrances created after the prohibition, and not the ones already operating against the asset. In Jurong Aromatics, the charges were already operational by the time the prohibition came into being – as soon as the receivables were due to JAC, they were subject to the fixed charge and crystallised floating charge; there was no point at which the prohibition could operate. The receivables which arose out of the Tolling Agreement (“tolling fee debt”), Transitional Supplemental Agreement (“final payment amount debt”) and Set-Off Agreement (“Set- Off Agreement debt”), which were concluded subsequent to the debenture, were already caught by the fixed charge and crystallised floating charge, which were expressed to include future assets of JAC.

On the third issue, the High Court held that there was no required mutuality of debts for insolvent set-off to occur if the debt was charged to another party. The Defendants did not have a right to set-off against the charged assets (ie the tolling fee debt, the final payment amount debt, and the Set-Off Agreement debt) as the mutuality requirement of insolvent set-off was not satisfied – the Defendants’ claims (ie the feedstock debt) were qua JAC, whereas the equitable interest of the charged assets (against which the feedstock debt was sought to be set-off) lay with the Senior Lenders (qua debenture holders of JAC’s assets).

Jurong Aromatics confirms that a prohibition against assignment clause did not, on its own, restrict the creation of security by way of a charge over those assets. While an assignment is a stronger form of security compared to a charge, the charge is still a security interest which will improve the position of the lender, especially in an insolvency.

Further, while Jurong Aromatics suggests that a prohibition against assignment clause affects only encumbrances created after the prohibition, lenders would do well to exercise caution, and give effect to the prohibition whether or not it came before or after creation of the security.

Finally, the High Court did not find that there was the required mutuality of debts for insolvent set-off to occur, as the debt was charged to another party. This is a curious angle, given that the High Court recognised that a charge, unlike an assignment, did not transfer ownership rights in an asset, but vested beneficial interest of the asset to the satisfaction of a debt. Based on the reasoning of Jurong Aromatics, vesting of such equitable interest in the debt by way of a charge (and not transfer of ownership by way of an assignment) was sufficient to destroy mutuality of debts required for insolvent set-off to occur. While this finding would be welcomed by lenders, as a charge may now potentially shield debts from insolvent set-off, it bears noting that this proposition remains to be tested in the Court of Appeal.

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Where to exchange foreign currency
Understanding currency exchange Services

How to exchange foreign currency

Benefits of using local services

15 Banks and Credit Unions that Exchange Foreign Currencies

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Not all banks or credit unions exchange foreign currency.
Our list has options that let you exchange foreign currency at a branch, over the phone, or online.
Most financial institutions require you to be a customer to exchange foreign currency.

If you're looking to exchange currency for a trip abroad, major brick-and-mortar banks or credit unions can help you get different currencies at a fair exchange rate.

You won't want to visit your nearest branch on a whim, though, as some banks do not offer exchanges. Here's everything you need to know about exchanging currency — from where you can go to what you'll need to place an order.

Financial institutions that allow you to exchange foreign currency

The following 15 banks and credit unions exchange foreign currency. These financial institutions are also featured in our guides for the best banks and the best credit unions. Keep in mind most banks or credit unions require you to be a customer to exchange currency.

America First Credit Union : Credit union members may visit select branches to exchange up to $5,000. There's a $10 transaction fee if you exchange more than $300 and a $20 fee for exchanges under $300.
Bank of America : Bank of America customers may exchange up to $10,000 online. You can also place an order over $10,000 at a branch. There isn't a fee for exchanging currency, but if you have your order shipped home, there's a $7.50 fee. If you place an order for $1,000 or more, you must pick up your money at a branch.
Citi : You can call or visit a branch to exchange over 50 types of currency. There's no fee for Citigold or Citi Priority Account Package customers. Citi customers with accounts not mentioned will have to pay a $5 service fee for any transaction under $1,000. If you'd prefer to have money sent to your home, there's a $10 to $20 fee, depending on your shipping priorities.
Citizens Bank : You may exchange currency at a branch. Contact a Citizens Bank branch for information on pricing.
Chase Bank : Chase customers may exchange currency at local branches. You'll have to call your nearest branch to learn about transaction fees.
First Citizens Bank : Customers may exchange over 70 types of currency at branches. There aren't any limits on how much you can exchange, but you'll need to contact your nearest branch to learn more about potential fees.
First Horizon Bank : First Horizon Bank has currency for more than 65 countries. Bank account customers have to visit a branch to exchange currency and learn more about potential fees.
Huntington Bank : Huntington Bank customers can exchange up to $20,000 for an $8 fee at bank branches. The bank has 75 types of currencies.
PNC Bank : PNC Bank lets customers exchange currency at local branches. You'll want to call your PNC branch first so currency can be delivered beforehand. The bank charges zero transaction fees for exchanging currency.
Regions Bank : Regions customers may exchange currency at local branches. You'll have to visit a branch to exchange currency and learn more about potential fees.
Service Federal Credit Union : Service Credit Union has over 60 types of currencies. You may call or visit a local branch to place an order. Orders under $500 may entail a $15 transaction fee.
State Employees Credit Union: Only credit union members can exchange foreign currency at branches. You'll want to call SECU customer service before you visit a branch to ensure the type of currency will be available at your nearest location. The credit union does not charge fees for exchanging currency.
TD Bank : TD Bank has 55 types of currencies. You do not need to have a TD Bank account to place an order. Orders can be done online or at a TD branch. However, keep in mind online orders have $7.50 fee and a maximum order limit of $1,500.
U.S. Bank : US Bank customers may exchange currency at a local branch or online. There's a $10 transaction fee for orders of $250 or less. Orders that exceed this amount do not have a transaction fee.
Wings Financial Credit Union : Wings Financial Credit Union has over 90 different currencies. Only members may place orders. There's a $10 transaction fee for orders under $300. The fee is waived if you make an order over $300.

Understanding currency exchange services

Currency exchange allows you to swap out one denomination of money (for example, U.S. dollars) with another denomination (for example, Euros). There are several reasons you'd exchange currency; the two most common are exchanging money for traveling purposes, such as when you're vacationing in another country, and forex trading, where you exchange currency as an investment in the hopes of making money.

The forex market generally informs what rates you can get when exchanging money at banks and credit unions , although your rates won't be as favorable as the rates the bank is getting. You'll want to compare currency exchange rates locally to see which financial institution offers the best rate.

Not all financial institutions exchange currency. Even if your bank provides this service, your nearest branch may only have certain types of currency available or limited amounts.

To avoid unnecessary trips to a bank, consider taking the following steps for purchasing currency.

Call your bank's customer service

Sandra Jones, senior vice president of member communications at State Employees Credit Union, recommends calling your bank's customer service to see if your location has the type of currency you need to exchange.

If the currency isn't immediately available, a bank representative can place an order.

Some financial institutions may offer to have the money sent to your home for a fee. If your bank requires you to exchange currency in person, you can set up an appointment to visit a branch.

While you can check exchange rates online to get a rough idea of how much money you'll need, Jones says online rates do not accurately represent the rates available at financial institutions. You'll want to ask a banker about exchange rates, instead.

Make sure you have everything to complete the order

When you are exchanging currency, make sure you have the following readily available:

A U.S. ID, like your driver's license or passport
Currency being exchanged
Additional cash or payment option if your bank charges a transaction fee

Banks will usually charge a transaction fee for exchanging currency. You'll either pay a flat fee or a variable fee. It depends on the amount and type of currency.

A bank representative will guide you through the steps of buying currency at your appointment.

When you return from your trip, your financial institution may also be able to buy back the foreign currency.

Benefits of using local currency exchange services

The biggest benefit of using local currency exchange services is that you're almost definitely getting a better rate than you'd get if you waited until you're in the airport or in the country you're visiting.

When you're at the airport or your destination, you might have a time limit; it's either right before or during the time you need the new currency. You'll only be able to use instant currency exchange locations. If you exchange your currency before you leave, you'll have weeks or months to compare rates. You can even use online banks , because you'll have time to wait for the money to get to you.

What's more, the rates at airports and near tourist locations are likely to be worse than the rates you'd find locally, because the people who run those currency exchange services know that you don't have many other choices. The best foreign exchange rates nearby your home won't have that assumption.

Currency exchange services FAQs

Compare rates from multiple providers, check for hidden fees, and stay updated on current market rates to get a good exchange rate. Online currency converters can provide a benchmark for what to expect.

If possible, avoid airport currency exchanges. They tend to have higher fees and offer you a worse rate, because they know you don't have other options. Exchanging currency before the trip will help you get the best rate.

Whether secure currency exchange services near you will allow you to negotiate will depend heavily on where you're getting the service. There are many places that won't let you negotiate, but you can always ask to see if they're willing to give you a better rate.

Online currency exchange services are generally safe, especially if they're at a bank or credit union. However, you should always research the service you're planning to use ahead of time to see if they've had any scandals and read reviews.

Generally, you'll want to exchange currency before arriving in the country you're traveling to. You'll have more time to look for a good rate, you usually know your local area better than the country you're going to, and you're less likely to end up at a currency exchange that targets tourists.

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granting a charge over the receivables (which is quite uncommon), a charge will be effective. As such, where a financier is not undertaking due diligence on all the relevant contracts from which the relevant receivables arise, the financer will take a charge over the receivables (or an assignment by way of security with a back-up charge).
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