When applying to a bank or private lender to receive a credit line against a leased bank guarantee (often called ‘monetization’), banks and private lenders alike may also request the applicant (borrower) to offer a pledge over his share holding as security for the repayment of the credit. A bank or lender will not want to call the bank guarantee unless it is absolutely necessary in the event of default of payment of the credit line or loan. By taking a lien or mortgage over the borrower’s shares, the lender will have greater control in events of default.A lien over shares takes on two different forms:
Legal mortgage
The shares are transferred into the name of the mortgagee who is registered as a member of the company. There must be a charging document reciting that the charge is by way of security, providing for a re-transfer on redemption, setting out the mortgagors obligations, the events of default, dealing with dividend and voting rights if these are to be removed from the mortgagee and perhaps containing a topping up clause obliging the mortgagor to mortgage further securities if the value of those charged falls below the outstanding amount of the debt plus a certain margin.
Equitable mortgage of shares
It may be created by:
1) simple deposit of the share certificate in which case the mortgagee will need to apply to the Court for an enforcement order for sale or foreclosure; or
2) a deposit of the share certificate together with a blank transfer form undated but signed by the mortgagor. The mortgagee can insert his name or another’s name as the transferee in the event of default. However if the articles requires transfers to be made by deed then the mortgagee does not have the implied authority to fill up the blanks except if he has a power of attorney under seal to do so; or
3) deposit of the share certificate coupled with a blank transfer and a memorandum of deposit under seal containing an irrevocable power of attorney by way of security pursuant to s.4 of the Powers of Attorney Act 1971. Thus the mortgagee will be able to complete and execute the transfer on behalf of the mortgagor.
Equitable mortgage
(a) Capitalisation issues need to be brought into the charge. This cannot be done of course if there is mere deposit of the share certificate with or without blank stock transfer form or the equivalent.
(b) It is not secure. However, the mortgagee can serve a stop notice on the company by filing an affidavit and a notice in the central office of the Supreme Court or a District Registry and serving them on the company. Whilst the stop notice remains in force the company will be obliged to give him notice of proposed transfers which will enable him to apply for an injunction.
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