agent69
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Post by agent69 on Jan 25, 2015 13:30:01 GMT
Say a company borrows £100k from source A, and offers a first charge over property worth £200k. After a while they borrow £25k from source B and offer them second charge over the property.
If the company defaults on loan B but not loan A, what happens? Is the first charge holder forced to accept liquidation of the asset even though his loan is paid up in full.
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Post by tybalt on Jan 25, 2015 14:09:55 GMT
Broadly the lender of loan B will have to obtain judgement for the debt then seek a winding up order at which point a receiver will be appointed who will liquidate the company's assets and pay loan A then loan B.
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pikestaff
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Post by pikestaff on Jan 25, 2015 16:29:02 GMT
Which is presumably why some first charge holders will not consent to a second charge.
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Post by mrclondon on Jan 25, 2015 16:36:05 GMT
I think I've linked to this pdf from Strettons Chertered Surveyors www.strettons.co.uk/documents/Who%20is%20in%20charge.pdf before, which explains that 2nd charge holders are quite at liberty to appoint a receiver, although the 1st charge holder can object to the choice of receiver.
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Post by tybalt on Jan 25, 2015 17:03:39 GMT
Which is presumably why some first charge holders will not consent to a second charge. They also may feel the business is sufficiently geared as it is. Woops sorry that was when bankers behaved like bankers.
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agent69
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Post by agent69 on Jan 25, 2015 19:11:40 GMT
Which is presumably why some first charge holders will not consent to a second charge. Can the first charge holder veto any subsequent charges against the asset? If so why would they ever allow a second charge
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adrianc
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Post by adrianc on Jan 25, 2015 22:41:42 GMT
Which is presumably why some first charge holders will not consent to a second charge. Can the first charge holder veto any subsequent charges against the asset? If so why would they ever allow a second charge Can't see the problem, tbh. An unsecured creditor can petition for winding up, too. The first charge holder gets first dibs on the asset, no matter whether there's a second charge holder or not. The only difference is that a second charge holder gets to jump the queue for the first charge holder's scraps, ahead of the melee of unsecured creditors.
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sl75
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Post by sl75 on Jan 26, 2015 22:37:32 GMT
Which is presumably why some first charge holders will not consent to a second charge. Can the first charge holder veto any subsequent charges against the asset? If so why would they ever allow a second charge The loan advance for the second charge holder will increase the amount of assets in the business (and if used for property improvement the value of the property) thereby increasing the cover for the first charge holder's loan. e.g. "current situation": £300k first charge loan, £500k property value = 60% LTV (assume negligible other assets) "immediately after new loan" : £300k first charge loan, £100k second charge, £500k property value, £100 cash (still 60% LTV for first charge holder based on the property, but another £100k of liquid cash acting as a "buffer" before the loan needs calling in. "after work completed" : £300k first charge loan, £100k second charge loan, £600k property value, now coverage improved to 50% LTV for first charge holder. This simplified example assumes that £100k of work results in a £100k uplift in property value... of course it's never that simple! Further, if the ongoing income from the original loan is profitable for the first charge holder, the result of refusing a second charge may well be that another lender offers a larger advance in order to take out the first charge holder too... so a lender may accept a second charge as a means to retain their profitable loan...
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