Finance and collateral

If a debtor is declared bankrupt or goes into liquidation or if a moratorium is granted on its debts, this will severely affect its lenders. The relationship between an insolvent debtor and a lender usually changes from one in which both parties seek to preserve the financial relationship to one in which the lender seeks to recover its debts by enforcing any security it has been given.

The first step in this process involves cancelling the loan. We know from experience that the cancellation of loans is an increasingly common cause of argument about the reasons for doing so and the term of notice required. This is a complex issue, given that lenders may sometimes be held to be at fault not simply for cancelling a loan without good reason or on unlawful grounds, but even for continuing to lend to the debtor in a situation in which this could be deemed to be wrongful behaviour towards the debtor. There is also a risk that, where a loan contract is extended by the lender granting new loans and the borrower providing additional security, the receiver may subsequently declare the transaction null and void.

In order to prevent a situation from arising in which you as the lender are left with empty hands in the wake of a bankruptcy, you are advised to obtain some form of collateral from the borrower. A right of mortgage or a right of pledge are good examples, others being a guarantee and a right of lien (i.e. the retention of title to goods supplied until payment has been made). Whatever type of right you choose, however, the important thing is to ensure that it is established in a legally correct manner. If you do not act in accordance with the law, you will be unable to exercise the right you have sought to establish.

Our insolvency specialists advise clients and help safeguard their interests as lenders in situations in which borrowers either become insolvent or are on the point of becoming insolvent.

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