DOCSLIB.ORG

Unfair Preferences and How to Avoid Them – Part 3

Total Page：16

File Type：pdf, Size：1020Kb

Download full-text PDF Read full-text
Unfair Preferences and How to Avoid Them – Part 3 Legal Unfair preferences and how to avoid them – Part 3 This is the third part of a 3-part series on a practical summary of the law concerning unfair preference claims. In this part, I will: • discuss how you can reduce your chances of receiving a preference claim; and • provide a checklist on what to consider if a preference claim is made against you. By Nick Cooper* Nick Cooper How can you reduce the chances of a preference? c) Take security – register on the PPSR. Payments to a) Encourage the debtor company to pay its creditors secured creditors cannot be deemed as preferences proportionately. The Corporations Act encourages (subject to the value of the creditor’s security). insolvent companies to pay all their creditors If security is taken over a company’s assets at the proportionately – by penalising those that have received same time as advancing credit, then the payments a preference. cannot be preferences. However, if a security was The best way to avoid a preference is for the debtor granted over a pre-existing debt within the six months, company to adhere to this objective. This may require the security may be void as against a Liquidator. the company to appoint a Voluntary Administrator Furthermore, in some circumstances the granting of and creditors agreeing to a Deed of Company security itself can be a preference if the security was Arrangement. given within the relation-back period. Payments made to creditors under a Deed of If you supply goods, registering your security Company Arrangement are not liable to be repaid interest over the customer on the PPSR is a cost- as preferences – even if the Deed is terminated and effective way of preventing preference claims (and the company enters liquidation, as suggested by the reducing bad debts). reasoning in case Cresvale Far East Ltd v Cresvale However, the law relating to PPSR is still developing. Securities Ltd (2001) 19 ACLC 659. It may not be a complete answer to a preference claim, depending how the Courts will treat the value of the b) Trade on a COD basis. As mentioned above, where security against the value of the preference claim. trading is on a cash-on-delivery basis there is no debtor/ creditor relationship. Therefore COD payments are not d) Exercise a lien. In the case Bennett and Co v CLC liable to be repaid as preferences. Corporation (2001) 37 ACSR 96 – it was held that the However, it is common for credit managers to place holder of a lien is effectively a secured creditor for the customer accounts on stop credit until a pre-existing purposes of an insolvency administration. Whilst that debt is repaid. Whilst the COD payments are protected, case did not concern a preference claim, it has the any payments towards the pre-existing debt can be potential to suggest that payments to holders of liens liable to be repaid as preferences. cannot be preferences, on the basis that the creditor 22 CREDIT MANAGEMENT IN AUSTRALIA • December 2016 Legal has security. Once again, there is some uncertainty as Liquidator. Payments to suppliers with similar names can to when this form of defence might apply. For example, create confusion. the defence is likely to apply where a creditor has a right to enforce a lien and then has enforced that right 3. Verify that the payments were within the permitted and then receives payment. It may not apply where a timeframe – the “relation-back” period. creditor has a right to enforce a lien but hands back the property over which it could have exercised the lien and 4. If you are in doubt whether the debtor company was then receives payment. insolvent at the time of the payments, ask the Liquidator for evidence of the company’s insolvency – such as the e) Request personal guarantees. When your suspicion financial records of the company or a Report on Insolvency. about a debtor company’s insolvency arises, a further Consider seeking your own opinion or report from another form of protection is to request that the directors (or insolvency practitioner if you are still in doubt. the individuals behind the company) guarantee your debt. Whilst payments from the company are at risk of 5. Consider whether you have a running account defence. being preferences, you will have some recourse against This will involve determining the balance of the debtor the guarantors (provided they have sufficient assets). company’s account over the relation-back period. If, after Usually, there is a high degree of reluctance by this analysis, you believe you have a partial or complete directors to give guarantees to trade supplies. However, running account defence, write to the Liquidator asking you may have greater bargaining power to request that the claim be amended or withdrawn. guarantees if the company needs your goods/services to continue trading. 6. Consider whether you have a defence of no reasonable The guarantee ought to be worded as a “personal” grounds to suspect insolvency [s. 588FG(2)]. Has the guarantee rather than a “director’s” guarantee to avoid Liquidator provided reasons why they believe this defence the claim by a director who resigns that the guarantee is is not applicable to you? If you believe that this defence no longer binding on him or her. applies, write to the Liquidator and explain why you consider this defence applies. f) Take the risk. It is human nature to want a customer to It is useful if you can state that you continued to give repay the whole of its debt even though you suspect credit to the debtor company after you received the that by receiving payment you might be subjected to a payments (and therefore did not suspect insolvency) – preference claim at a later date. although this will not always be a defence as further credit It might be that even if the company is insolvent, may be given to an insolvent company to induce payments it will enter Voluntary Administration and then enter for an old debt. a Deed of Company Arrangement (“DOCA”) in which case you would not have to repay the preference unless 7. Consider of you are a secured creditor (PPSR the DOCA fails. registration), whether you exercised a lien before the But if the debtor company does enter liquidation payment, or can claim a set-off. within the six months, and you are confronted with a preference claim, there is often the opportunity to 8. If you consider that the defences may not apply, or wish settle the Liquidator’s claim for less than the full amount to avoid the risks of litigation, attempt to settle the claim claimed. for an amount less than the claim. Sometimes Liquidators The earlier in time that a preference claim is settled, will settle preference claims at a discount, before legal the greater discount the Liquidator may be prepared proceedings are issued, to save their own legal fees. to take. The longer a preference claim takes to resolve, higher legal costs will be incurred and a Liquidator may 9. If you are in doubt at any stage, seek legal advice. be unwilling to offer a discount on the claim. *Nick Cooper is a Partner of the Adelaide office of Worrells Solvency & Action plan if you receive a preference claim Forensic Accountants. He is qualified as a Chartered Account and hold from a Liquidator a Bachelor of Laws. He is an Official Liquidator and a Registered Trustee in Bankruptcy. Nick has worked in the insolvency practice for 20 years. 1. Check that the Liquidator is not out of time (statute He has acted as an Administrator, Liquidator and Receiver of companies barred) from issuing the claim – 3 years from the relation- in a diverse range of industries. back day, or 1 year from termination of a DOCA. He has acted on behalf of major banks and in respect of clients of many accounting firms. In his role as a Liquidator and as a Trustee in Bankruptcy, Nick is often involved in litigation to recover assets for the 2. Check that you did receive the payments claimed by the benefit of creditors. December 2016 • CREDIT MANAGEMENT IN AUSTRALIA 23.
Load more

Recommended publications
  • Clawbacks in Insolvency 9 September 2019 Fraudulent Preferences and Conveyances Under the Bermuda Companies Act 1981
    Global Legal and Professional Services ADVISORY Industry Information Clawbacks in Insolvency 9 September 2019 Fraudulent Preferences and Conveyances under the Bermuda Companies Act 1981 Creditors should exercise caution when negotiating payment terms, asset transfers or securitisation transactions with companies which are in the zone of insolvency. Such transactions are vulnerable to being set aside by liquidators or by other creditors in the event of the insolvency of the company. The purpose of Bermuda’s reviewable transactions law is to uphold the pari passu basis for the distribution of a company’s assets amongst its unsecured creditors in an insolvency context. Zone of Insolvency In normal circumstances, when a company is in good financial health, a director’s primary duty is to act in the best interests of the company by promoting shareholder value in the company. However, when a company is insolvent, or is in the “zone of insolvency”, this duty shifts such that a director is obliged to instead have primary regard to the interests of the creditors. This is because in an insolvency context, it is the creditors who have an economic interest in the company, rather than the shareholders. So how does one determine when a company is in the “zone of insolvency”? There is no simple answer to this question and there is no bright line test which can be applied to ascertain whether a company is or is not in the zone of insolvency. As a general proposition, the “zone of insolvency” can be thought of as the period where there has been a serious deterioration of a company’s financial position, to the point where there is a reasonable expectation that insolvency has become imminent.
    [Show full text]
  • Restructuring Review Restructuring Review
    the Restructuring Review Restructuring Restructuring Review Twelfth Edition Editor Christopher Mallon Twelfth Edition lawreviews © 2019 Law Business Research Ltd Restructuring Review Twelfth Edition Reproduced with permission from Law Business Research Ltd This article was first published in August 2019 For further information please contact [email protected] Editor Christopher Mallon lawreviews © 2019 Law Business Research Ltd PUBLISHER Tom Barnes SENIOR BUSINESS DEVELOPMENT MANAGER Nick Barette BUSINESS DEVELOPMENT MANAGER Joel Woods SENIOR ACCOUNT MANAGERS Pere Aspinall, Jack Bagnall ACCOUNT MANAGERS Olivia Budd, Katie Hodgetts, Reece Whelan PRODUCT MARKETING EXECUTIVE Rebecca Mogridge RESEARCH LEAD Kieran Hansen EDITORIAL COORDINATOR Gavin Jordan HEAD OF PRODUCTION Adam Myers PRODUCTION EDITOR Anna Andreoli SUBEDITOR Claire Ancell CHIEF EXECUTIVE OFFICER Nick Brailey Published in the United Kingdom by Law Business Research Ltd, London 87 Lancaster Road, London, W11 1QQ, UK © 2019 Law Business Research Ltd www.TheLawReviews.co.uk No photocopying: copyright licences do not apply. The information provided in this publication is general and may not apply in a specific situation, nor does it necessarily represent the views of authors’ firms or their clients. Legal advice should always be sought before taking any legal action based on the information provided. The publishers accept no responsibility for any acts or omissions contained herein. Although the information provided is accurate as at July 2019, be advised that this
    [Show full text]
  • Report of the Insolvency Law Review Committee
    __________________________________ REPORT OF THE INSOLVENCY LAW REVIEW COMMITTEE __________________________________ FINAL REPORT 2013 Mr. Lee Eng Beng, S.C. Managing Partner of Rajah & Tann LLP (Chairman of the Committee) �L- Ms Sia Aik Kor Official Assignee and Public Trustee, Insolvency <;vr�v�. and Public Trustee's Office (Vice-Chair) Ms Joan Janssen Director-General of the Legal Group, Ministry of Law (Vice-Chair) ()WW Mr. Ng Wai King Joint Managing Partner, WongPartnership LLP Mr. Manoj Sandrasegara Partner, WongPartnership LLP M· Mr. Edwin Tong Partner, Allen & Gledhill LLP �- Mr. Ong Yew Huat Formerly of Ernst & Young LLP �lPV Mr. Sushi! Nair Director, Drew & Napier LLC Mr. Don Ho Don Ho & Associates representing the Insolvency Practitioners Association of Singapore Contents CHAPTER 1: INTRODUCTION ......................................................................................................... 1 (A) The Committee ................................................................................................................... 1 (B) The Current Framework And The Need For Reform ............................................................ 4 (C) The Committee’s Approach ................................................................................................. 7 CHAPTER 2: A NEW INSOLVENCY ACT......................................................................................... 9 (A) Reasons For Consolidation ................................................................................................. 9 (B)
    [Show full text]
  • Application Judgment
    Equity Division Supreme Court New South Wales Case Name: In the matter of Force Corp Pty Ltd (in liq) Medium Neutral Citation: [2020] NSWSC 1842 Hearing Date(s): 24 November 2020 Date of Orders: 17 December 2020 Date of Decision: 17 December 2020 Jurisdiction: Equity – Corporations List Before: Gleeson J Decision: Directions given to liquidators in relation to proposed distributions to priority creditors in the liquidation of Force Corp Pty Ltd (in liq): see [133] Catchwords: CORPORATIONS – winding up – where company in liquidation – where assets available in liquidation sufficient to declare dividend to priority creditors – application by liquidators for directions concerning proposed distributions to priority creditors – Insolvency Practice Schedule (Corporations), Corporations Act 2001 (Cth), Sch 2 – Corporations Act s 556(1) CORPORATIONS – where secured creditor advanced moneys to administrators – whether administrators entitled to indemnity for monies borrowed – Corporations Act ss 443A(1) and 443D – whether administrators liability to the secured creditor is a priority claim – Corporations Act s 556(1)(c) CORPORATIONS – where receivers made payments to former employees after commencement of winding up – whether secured creditor entitled to be subrogated to priority position of employee creditors – Corporations Act s 556(1)(e) – where receivers failed to pay amounts owing to other employees under s 556(1)(e) – Corporations Act, s 433(3) – where secured creditor acknowledged liability to company for amounts not paid by receivers to
    [Show full text]
  • Global Restructuring & Insolvency Guide
    Global Restructuring & Insolvency Guide Hong Kong Overview and Introduction In Hong Kong, the main objectives of the insolvency and bankruptcy law are to protect and maximise the value of the insolvent company and to collect and realise the assets of the bankrupt individual for the benefit of all creditors. Generally, the term “insolvency” applies to companies, whereas the term “bankruptcy” applies to individuals. The bankruptcy legislation was substantially overhauled and culminated in what was perceived to be a more modern bankruptcy regime which came into operation on 1 April 1998. The legislation was further amended on 1 November 2016 to introduce new arrangements to encourage bankrupts to fulfil their obligations in respect of the administration of the estate. The insolvency legislation was also recently amended on 13 February 2017 to increase protection offered to creditors against asset depletion primarily by including a new provision on transactions at an undervalue. Applicable Legislation The principal legislation governing insolvency and bankruptcy in Hong Kong consists of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap 32) (“CWUMPO”), the Companies (Winding Up) Rules (Cap 32H), the Bankruptcy Ordinance (Cap 6) and the Bankruptcy Rules (Cap 6A). Personal Bankruptcy Hong Kong’s bankruptcy system is governed by the Bankruptcy Ordinance and the Bankruptcy Rules. Jurisdiction of the Bankruptcy Court A creditor may file a bankruptcy petition against a debtor if: • The debtor is domiciled in Hong Kong; • The debtor is personally present in Hong Kong on the day on which the petition is presented; or • At any time within a period of three years ending with the day of the presentation of the petition, the debtor has been ordinarily resident or has had a place of residence in Hong Kong, or has carried on business in Hong Kong.
    [Show full text]
  • Retention of Title, the PPSA and Unfair Preferences: Something for Everyone?
    Retention of title, the PPSA and unfair preferences: something for everyone? Scott Guthrie DENTONS Australia’s insolvency regime elevates secured credi- entirely fatal to a defence to an unfair preference claim tors to an exalted position. Instead of being left to by a liquidator in respect of payments made by an participate in any available return with other unsecured insolvent customer prior to liquidation. creditors on a pari passu basis, secured creditors have the advantage of resorting to their security in the hope of Elkerton — a prologue using it to recover most, if not all, of their debt. Since the decision of the Court of Appeal of Victoria Prior to the introduction of the Personal Property in Central Cleaning Supplies (Australia) Pty Ltd v Elkerton (in his capacity as joint and several liquidator Securities Act 2009 (Cth) (PPSA), a retention of title 3 (ROT) creditor was in a particularly advantageous of Swan Services Pty Ltd) (in liq)) (Elkerton), it is likely position. Such a creditor could rely on their contractual that many practitioners assumed that the default legal rights (retaining title to goods delivered until paid) to position in the context of an ROT arrangement under the retrieve identifiable stock upon the insolvency of its PPSA was settled. customer and resell it elsewhere. The facts in Elkerton can be briefly stated. Prior to The PPSA inexorably altered this position by requir- the commencement of the PPSA, the ROT creditor’s ing an ROT creditor to also register its interest in customer had executed a credit application which pro- personal property so as to maintain its secured status in vided that any future supply of goods would be on terms an insolvency context.
    [Show full text]
  • DBS Bank Ltd V Tam Chee Chong and Another
    DBS Bank Ltd v Tam Chee Chong and another (judicial managers of Jurong Hi-Tech Industries Pte Ltd (under judicial management)) [2011] SGCA 47 Case Number : Civil Appeal No 230 of 2010 Decision Date : 16 September 2011 Tribunal/Court : Court of Appeal Coram : Chan Sek Keong CJ; Andrew Phang Boon Leong JA; V K Rajah JA Counsel Name(s) : Tan Chuan Thye, Kevin Kwek and Linda Esther Foo (Stamford Law Corporation) for the appellant; Sarjit Singh Gill SC, Pradeep Pillai and Zhang Xiaowei (Shook Lin & Bok LLP) for the respondents. Parties : DBS Bank Ltd — Tam Chee Chong and another (judicial managers of Jurong Hi- Tech Industries Pte Ltd (under judicial management)) Insolvency Law [LawNet Editorial Note: The decision from which this appeal arose is reported at [2011] 2 SLR 310.] 16 September 2011 Judgment reserved. Chan Sek Keong CJ (delivering the judgment of the court): Introduction 1 This is an appeal by DBS Bank Ltd (“DBS”) against the decision of the trial judge (“the Judge”) in setting aside a charge (“the Charge”) granted by Jurong Hi-Tech Industries Pte Ltd (under judicial management) (“JHTI”) over 74,411,620 shares in MAP Technology Holdings Limited (“MAP”) on the ground that the Charge was an unfair preference under s 227T of the Companies Act (Cap 50, 2006 Rev Ed) (“CA”), read with s 99 of the Bankruptcy Act (Cap 20, 2000 Rev Ed) (“BA”) (see Tam Chee Chong and another v DBS Bank Ltd [2011] 2 SLR 310 (“the GD”)). Background 2 The background facts in these proceedings are as follows. JHTI was a wholly-owned subsidiary of Jurong Technologies Industrial Corporation Ltd (under judicial management) (“JTIC”), a public company whose shares were listed on the Singapore Exchange (“SGX”).
    [Show full text]
  • Macdonald and Another (Respondents) V Carnbroe Estates Ltd (Appellant) (Scotland)
    Michaelmas Term [2019] UKSC 57 On appeal from: [2018] CSIH 7 JUDGMENT MacDonald and another (Respondents) v Carnbroe Estates Ltd (Appellant) (Scotland) before Lord Reed, Deputy President Lord Wilson Lord Hodge Lord Briggs Lord Sales JUDGMENT GIVEN ON 4 December 2019 Heard on 2 May 2019 Appellant Respondents Lord Davidson of Glen Clova QC Kenneth McBrearty QC Jonathan Brown Susan Ower (Instructed by Levy & McRae (Instructed by Harper Solicitors LLP (Glasgow)) Macleod LLP (Glasgow)) LORD HODGE: (with whom Lord Reed, Lord Wilson, Lord Briggs and Lord Sales agree) 1. This appeal concerns the Scots law of gratuitous alienations on insolvency. It raises three principal questions. First, there is a question as to the interpretation of the term “adequate consideration” in section 242(4)(b) of the Insolvency Act 1986 (“the 1986 Act”). Secondly, there is the question whether the Inner House was entitled to interfere with the Lord Ordinary’s evaluation that the consideration given by Carnbroe Estates Ltd (“Carnbroe”) amounted to adequate consideration under that statutory provision. Thirdly, a question arose during the hearing as to the interpretation of the words in section 242(4) that empower the court to grant a remedy. The court invited and received written submissions from counsel for both parties. The question is whether the court has any discretion as to the remedy it may give. Factual background 2. Grampian MacLennan’s Distribution Services Ltd (“Grampian”) was, as its name suggests, a distribution services company. It carried on business from a site at 9 Stroud Road, Kelvin Industrial Estate, East Kilbride (“the Property”). The Property, which was Grampian’s principal asset and centre of operations, consisted of a warehouse, a vehicle workshop and a yard with a gatehouse.
    [Show full text]
  • Section 588FA of the Corporations Act – Change of Wording but No Change to Meaning? Tina Hoyer*
    Section 588FA of the Corporations Act – change of wording but no change to meaning? Tina Hoyer* One of the main elements to be established by a liquidator in order to successfully challenge a pre-liquidation transaction known as an unfair preference is contained in s 588FA(1)(b) of the Corporations Act 2001 (Cth). This subsection provides that the transaction must result in the creditor receiving from the company more than the creditor would receive from the company if the transaction was set aside and the creditor was to prove for the debt in a winding up of the company. This wording is substantially different from that of the subsection’s statutory predecessor. It was foreshadowed that despite the differences in the wording, the enactment of s 588FA would cause no fundamental change to the law with respect to unfair preferences. However, this article will demonstrate that there have been subtle, yet significant, changes to the way the court deals with unfair preferences since the enactment of s 588FA. INTRODUCTION One of the primary functions of a liquidator is to recover property that has been transferred to others prior to liquidation so as to recoup moneys for the benefit of the liquidated company’s creditors.1 To carry out this function, liquidators most frequently utilise2 s 588FA of the Corporations Act 2001 (Cth) (the Act) which deals with unfair preferences.3 The ability to recover unfair preferences reflects one of the main aims of insolvency law, that is, to ensure that the assets of an insolvent are distributed equally among an insolvent’s creditors and that no one creditor receives preferential treatment unless permitted by law.4 Section 588FA was introduced by the Corporate Law Reform Act 1992 and replaced the previous regime under the bankruptcy legislation.5 It was foreshadowed that despite the differences in the wording of its statutory predecessor, the enactment of s 588FA would cause no fundamental change to the law with respect to unfair preferences.6 However, it is argued here that there has been change as a result of the different wording.
    [Show full text]
  • Restructuring Across Borders
    Restructuring Across Borders Singapore: Corporate restructuring and insolvency procedures | September 2020 allenovery.com Contents 3 4 4 5 Introduction 5 6 Judicial management by order of court 8 Judicial management by creditors’ resolution 9 10 Stay on the use of ipso facto clauses 11 12 12 13 14 15 16 2 Restructuring across borders: Singapore – Corporate restructuring and insolvency procedures | September 2020 allenovery.com Introduction When a corporate borrower in Singapore faces financial difficulties, the main restructuring and insolvency options are: − scheme of arrangement − judicial management − liquidation Under Singapore’s restructuring and insolvency laws, is the Insolvency, Restructuring and Dissolution Act 2018 in general, creditors with the benefit of security may elect (the IRDA), which came into force on 30 July 2020. The IRDA to enforce their security. Security enforcement is essentially consolidated provisions on insolvency from the Companies a self-help remedy rather than a collective restructuring or Act and the Bankruptcy Act into one omnibus statute. insolvency procedure and, if available to a creditor, may The implementation of the IRDA is the final part of a legislative represent the best method of recovery. push to make the legal framework more amenable to corporate rescues, and to make Singapore a more attractive Where restructuring is to be considered, the choice of venue for cross-border restructuring. procedure will depend largely on whether there is a business to be rescued. If there is, an informal bank rescue or workout The first part of the legislative push saw the Companies Act outside of any of the formal insolvency procedures (ie a amended in May 2017 to enhance the three options set restructuring of the company on an informal, consensual out above for restructuring and insolvency.
    [Show full text]
  • Unfair Preference and Related Claims
    A Closer Look at Unfair Preference and Related Claims Ludwig NG Partner, ONC Lawyers 26 Feb 2018 2 Unfair Preference Unfair preference is a most commonly used instrument in the Insolvency Practitioners’ toolkit. Yet its application is wrought with difficulties and uncertainties, as is illustrated by some recent cases in which the IP’s claims were dismissed with costs. The difficulty arises from a fundamental policy choice between:- 1. Ensuring “fair” treatment of all creditors and pari passu distribution 2. Protecting legitimate commercial transactions from being upset (which may create uncertainties over validity of completed transactions) 3. Promoting a rescue culture 3 The policy choice was made by a rather elaborate set of rules contained in the BO and CWUMPO, which is centered around the concept of “desire to prefer”: - Transactions undertaken within the twilight period (6 months for all and 2 years for associates, when the company is insolvent) putting a creditor in a preferred position will be set aside if it’s entered into by the debtor with a “desire to prefer” that creditor. 4 Note: 1. In some jurisdictions (US and Australia), all transactions within the twilight period will be set aside irrespective of the debtor’s mental state. 2. It’s arguable if the policy choice has been rightly made. Since ‘desire to prefer’ could be negated by positive pressure applied by the creditor on the debtor, the law as it stands now encourages creditors to apply pressure and get paid at the first sight of trouble, which is not conducive to corporate rescue (or IVA).
    [Show full text]
  • The Legal 500 Country Comparative Guides
    Contributing Firm Campbells The Legal 500 Country Authors Comparative Guides Brian Child Partner [email protected] British Virgin Islands: m Restructuring & Insolvency Matthew Freeman Senior Associate This country-specific Q&A provides an overview to [email protected] restructuring & insolvency laws and regulations that may occur in British Virgin Islands. Rachael Stitt For a full list of jurisdictional Q&As visit here Associate [email protected] 1. What forms of security can be granted over immovable and movable property? What formalities are required and what is the impact if such formalities are not complied with? In the British Virgin Islands (“BVI”) the following forms of security can be granted over immovable property: a. Mortgage (legal or equitable) Both legal and equitable mortgages are recognised in the BVI. A legal mortgage requires the transfer of title from the mortgagor to the mortgagee. The most common asset held by BVI incorporated companies is shares. A legal mortgage over shares will necessitate a transfer of ownership of the share from the shareholder (mortgagor) to the mortgagee, which will in turn require a change to the Register of Members of the company. This will enable the mortgagee, for instance, to receive a dividend. Due to the impracticality of this, legal mortgages are not often utilised forms of security over shares. An equitable mortgage, on the other hand, enables the mortgagor to stay as named shareholder as there is no requirement for a transfer of ownership. An equitable mortgage can arise where a legal mortgage has failed or where an agreement has been made to create a legal mortgage.
    [Show full text]