Family Law Hub

Video | Security & Lump Sums in Financial Remedies - Zak Virgin, Mills & Reeve

Recording of talk first given at the At A Glance Conference, October 2019.

  • Zak Virgin, Mills & Reeve, gives a quick flash talk on security & lump sums in financial remedies. This talk was reocrded live at the At A Glance Conference 2019. 


    Agenda

    • What orders can be secured? The Court's jurisdiction and security by agreement (settlement)
    •  Efficacy of security – problem areas with security over land, shares and with guarantees/third party security
    • Security given by a (family) company


    What orders can be secured? The Court's jurisdiction and security by agreement (settlement)

    •  Spousal and child maintenance payments can both be secured, pursuant to MCA 1973 s 23(1)(b) and 23(1)(e).

    •  In addition, MCA 1973 s 23(3)(c) provides "an order under this section for the payment of a lump sum may provide for the payment of that sum by instalments of such amount as may be specified in the order and may require the payment of the instalments to be secured to the satisfaction of the court."

    •  Often in business cases a party will seek security against underlying corporate assets. Unless the company is a party to the proceedings then this will not (usually) prove possible (other than by agreement) and the Court will be limited to granting security over assets owned by the spouse him or herself.

    •  If settlement is reached then better security can be granted than that which the court has the power to order (both as to the orders secured and the security taken). However, be alive to drafting issues if the order goes beyond that which the court has the power to order – relevant provisions may need to be included as undertakings in case a technical point is taken as to jurisdiction at a later date.

    •  Be conscious of other options to ensure payment such as not transferring interests in property or shares prior to receipt of lump sum(s) and/or providing for a default order for sale in the absence of payment and/or adjourning claims for pension sharing pending payment of the lump sum (with the pension member undertaking not to access their pension in the meantime).


    Efficacy of security: Land – form of legal charge

    •  Form CH1 or long(er) form charge document?

    o Form CH1 is comparable to a charging order – it does not contain any additional contractual provisions to protect the interests of the beneficiary. It will therefore generally be preferable from the beneficiary's perspective to enter into a long(er) form of legal charge agreement containing such contractual provisions.

    •  The most significant additional contractual provisions relate to:

       o enforcement powers (including enhanced powers to appoint a receiver and enhanced powers for the receiver)

       o negative pledge

       o maintenance covenants/undertakings

    •  Without a well-thought out and drafted charge:

    o the value of the land could be detrimentally affected or an impediment to realisation of it could arise without recourse to or leverage over the chargor to ameliorate the situation

    o the ability to 'self-help' through enforcement of the charge without the intervention of the court may be limited

    o there could be personal liability for the chargee

    Efficacy of security: Shares in a (family) company

    •  Due diligence is key

    •  Review Companies House records and in particular articles of association of the company concerned:

    o are the shares all, or some only, of the shares in issue

    o if some only, what proportion of the whole are they, not only by number but by reference to the rights and benefits attaching to the shares. Can you get security over the 'right' shares?

    o is the company's PSC (persons of significant control) register up to date in respect of the shares the subject of the charge?

    •  Do the articles of association contain:

    o pre-emption rights in favour of other shareholders on transfer

    o (even in single member companies) a right for the board of directors to refuse to register a transfer (note Table A under CA 1985 and Model Articles under CA 2006 both include such a right as standard)

    o a lien on shares, where the company can control the shares if amounts are owed by the shareholder to the company

    o rights to call for (unpaid) capital on the shares

    •  All of the above should be disapplied in favour of a chargee, otherwise the security can be defeated

    Efficacy of security: Shares in a (family) company

    •  Equitable security (usually)

    • As with land, legal title (and therefore a legal charge) can only vest with registration (in this case of the chargee in the company's register of members)

    •  Capable of being defeated by a bona fide purchaser for value – significant risk in a single-shareholder company

    •  Equitable security:

    o reduces risk of shadow directorship

    o avoids registration as a PSC and related obligations

    o avoids risk of 'contributions notice' from the Pensions Regulator if able to exercise, or control the exercise of, one-third or more of the voting power at a general meeting of that company

    o allows the chargor to retain voting rights/dividends and other distributions generally until the charge is enforced

    •  Form of security document – parallels with legal charge. In both cases consider a power of attorney (and execution as a deed).

    •  Perfection requirements – the chargor's share certificate and a pre-signed stock transfer form.

    Efficacy of security: Guarantees and third party security

    •  Guarantees

    o The courts have traditionally been very protective of guarantors, and many events will reduce or release a guarantor's liability unless the guarantee provides otherwise. As such, the strength of the guarantee will also depend on the deed of guarantee containing 'beneficiary' friendly provisions which override the position at law.

    •  Pure guarantee or a guarantee and indemnity?

    o A guarantee is a promise to ensure that a third party fulfils its obligations and/or a promise to fulfil those obligations if that third party fails to do so. It is a contractual agreement that creates a secondary obligation to support a primary obligation of one party to another. As such, in the case of a guarantee of the spouse's obligation to make payments, the guarantor's obligation will be contingent on the spouse's primary obligation to make payments.

    o Unlike a guarantee, an indemnity is a primary obligation. It is independent to, and not contingent on, the underlying obligation of the guaranteed party. This means that, if the primary obligation of the spouse to make payments is set aside for any reason, the indemnity will remain valid.

    o When including both an indemnity and a guarantee in the same document, it is very important to spell out the terms of the obligation, as the onus will be on the beneficiary to prove that the document is both a primary and secondary obligation. If there is any uncertainty, the courts will presume that the interpretation that is less onerous for the guarantor is correct and the document will be categorised as a guarantee and not an indemnity.

    Efficacy of security: Guarantees and third party security

    •  Formation and termination

    o A guarantee is unenforceable unless it is made or evidenced in writing and signed by the guarantor (Statute of Frauds (1677)).

    o Executed as a deed if no consideration

    o May be capable of termination even if there is no express termination clause – care with drafting

    • What is guaranteed/payable?

    o Principal amounts – i.e. the lump sum(s)

    o Interest – on unpaid amounts following demand

    o Costs (of enforcement) – otherwise more significant litigation risk

    •  Unintended release of the guarantor

    o The courts have traditionally been very protective of guarantors and at law many events will reduce or release a guarantor's liability. In particular, any amendments or changes made to the terms of the underlying payment obligation after the giving of the guarantee (e.g. an increase or variation of the underlying payment obligations or granting time or accommodation for payment), will discharge the guarantor's liability under the guarantee unless the guarantor's consent is obtained

    o As such, the guarantee will typically contain provisions purporting to exclude these rules

    Efficacy of security: Guarantees and third party security

    •  Undue influence and misrepresentation

    o A guarantor could also make a claim for the guarantee to be set aside as a result of undue influence and/or misrepresentation at the time of giving the guarantee. Where the guarantee is being given by an individual, it is common for a beneficiary to insist the guarantor take independent legal advice on the guarantee.

    •  Third party security

    o Third party security is simply described as security given by a person to secure the liabilities of a third party (the principal debtor – here the spouse liable to make the lump sum payments) rather than its own liabilities. o Case law confirms that a third party security provider is acting in a similar capacity to a guarantor (in that it is acting as surety for the payment of a debt or the performance of an obligation by another party) and the courts have held that the rights and duties that apply to a guarantee also apply to third party security

    o If you are acting for the provider of third party security, ensure that recourse under it is appropriately limited

    Security given by a (family) company

    •  If the spouse is the sole or majority shareholder in a (family) company that has significant value (particularly with respect to assets), this can potentially be a useful source of security.

    •  However, if there are other directors/shareholders of the company in addition to the spouse, they may also need to approve the company entering into the security

    •  It is third party security…

    •  Issues to consider:

    o corporate capacity – pre and post 1 October 2009

    o corporate benefit – is the security in the best interests of the company giving it (and/or is shareholder approval required)

    o corporate authority

    o distributions/deemed distributions

    o section 197 Companies Act 2006 – security (given by a company) for 'loans' to directors – requirements for shareholder approval

    o reviewable (antecedent) transactions – Insolvency Act 1986 – and 'hardening' periods where the spouse is a 'connected party':

    ? transactions at an undervalue

    ? preferences

    ? invalidity of floating charges

Webcast, published: 20/02/2020

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Published: 20/02/2020

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