by Alex Monk
Lenders often ask their transaction lawyers to advise them if their security is sufficiently robust on a given financing. Is it really necessary on this deal to go to the lengths of taking local security over assets in other jurisdictions? Why can’t we rely on our usual English law security precedent documents? What if we don’t go through all the hoops for perfection requirements in other countries? There are several other variants of these types of question as well.
The technical legal answers to each of these questions have been well reported in other articles and discussions. It is widely understood amongst most banks that the choice of law for security documents should usually follow the jurisdiction of location or constitution of the assets in question. Local law perfection requirements will follow the choice of law and the jurisdiction relevant to the Obligor in question.
Lawyers will be naturally reluctant to give assurances that it is ok to rely on English security and not to follow through on perfection measures. Whether a lender is comfortable in taking a more relaxed approach is after all a commercial view they must take based on all considerations in the transaction. Time and costs must be balanced with the credit and performance risk for the client and transaction at hand.
We prepared the diagram above to help illustrate some of the factors at play in a lender considering the degree to which it will go to in documenting and perfecting its security. Finding the right place on the graph for your transaction will vary from case to case and should involve taking relevant legal advice to evaluate the pros and cons of taking or choosing not to follow through on all legal requirements. Pushing borrower clients towards the top right hand corner will not be appropriate or justified in all cases but equally knowing where you are on the gradient is sensible to understand the strength or weakness of your security from a legal perspective.
If you require advice in relation to the contents of this article or to discuss it further, please contact Alex Monk on the email link below.