Priority of security is important where a borrower becomes insolvent and its assets are insufficient to discharge all its liabilities. Many funders will require a priority deed or intercreditor agreement to be entered into where there are two or more secured creditors – this will set out the order of repayment and entitlement to proceeds following enforcement of the security. In the absence of such a document, the general rule is that registered charges rank by the order in which they are entered on the register.
A lender who is first in time will want its security to keep its priority in respect of all advances, whether made at the outset or subsequently. “Tacking” is the ability of a funder to secure (tack) further advances under its security so that they rank ahead of sums advanced by (and secured in favour of) another funder. However, the priority given by the general rule is limited to further advances which the funder is obliged to make at the time of the charge.
Further advances = new money
In a recent High Court decision*, the main focus was on what was meant by “further advances”. X and Y held a first and a second legal charge respectively over properties owned by two companies. After Y’s charge had been registered, the borrower signed new facility letters with X in respect of the existing loans – no new money was lent and there was no loan repayment. The companies went into administration.
The court rejected a claim by Y that the new facility letters meant that the original advances were to be treated as having been repaid and new advances then made – ‘further advances’ should have the ordinary meaning of advances of further or additional funds. Therefore, X’s advances remained secured by the first legal charge in its favour. Other factors influencing the decision were:
1. the new facility letters did not state that they gave rise to a deemed repayment and further advance, as might have been expected if that was the proposal;
2. there was no commercial reason for a deemed repayment and further advance – the sole effect would have been to set aside X’s priority, which was unlikely to have been the intention;
3. there were no accounting entries showing a notional repayment of the original advances and the making of further advances.
As indicated above, such arguments could be pre-empted by the use of a priority deed or intercreditor agreement at the outset. Alternatively, the litigation in this particular case might have been avoided by signing an amendment and restatement agreement, rather than issuing new facility letters.
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*Black Ant Co Ltd (in administration)  EWHC 1161