Release of security: what company officers need to know

Having valid and effective security in a financing transaction is crucial to both a chargor and a chargeholder – borrower and lender. The directors and secretary of a chargor, (“company officers”), should act carefully when it comes to releasing security registered against their company at Companies House.

This is especially important in light of the recent suspected fraudulent filings releasing security registered against hundreds of companies at Companies House.

How to release security

In the UK, security interests created against a UK-registered company need to be perfected by registering them at Companies House, unless exempt. Failure to register the security at Companies House could make the security void against a liquidator, administrator or any other creditor of a company.

Deeds of release are the primary document used to release security, liabilities and obligations when underlying debt obligations are satisfied. Some large institutional lenders may confirm release of security via email. Whilst this method is valid, it should only be accepted where the lender cannot sign or refuses to sign a deed of release, or where the security has already been released but the charge was never updated at Companies House at the time of release. A deed of release must be signed by the chargeholder where a charge is also registered against an asset on other registers, such as against real property at HM Land Registry.

As most security interests are registered at Companies House, when such security is released, a chargor or their solicitors will often file a form for full release, known as a Form MR04 or a Form MR05 for part release (a “satisfaction form”). However, unlike when registering security, you do not need to file a deed of release signed by the chargeholder in order to effect a satisfaction of charge at Companies House.

As Companies House do not need to approve this request, the security is automatically shown as satisfied soon after the form is submitted. In comparison to registering security, which requires a more stringent process and review from Companies House, satisfying security on the register is fairly simple with minimal checks and balances.

Removing a secured charge when underlying financing still exists

The most important point to note is that filing a satisfaction form at Companies House does not itself release the underlying security. The security is very much still valid as the security can only be fully released by the chargeholder and the chargor by executing a deed of release. There may also be other formalities that need to be adhered to before security can be legally released such as delivering a Form DS1 to HM Land Registry if there is a charge over real property.

Offences

Under s1112 and s1112A of the Companies Act 2006, it is an offence to deliver or cause to be delivered to Companies House, either fraudulently or knowingly in error, a document or statement that is misleading, false or deceptive. This includes the delivery of a satisfaction form at Companies House when the security subject to the satisfaction form has not, in fact, been discharged.

A person guilty of an offence under these provisions is liable to a fine, two years’ imprisonment or both.

Concerns for chargors

Chargors will be concerned that a fraudulent or erroneous release of their security with a chargeholder could mean they are in breach of the underlying security agreement or any intercreditor agreement, if applicable.

Chargors will also be aware that the underlying security agreement usually contains a further assurance and costs and expenses clause. This obliges chargors to do all acts a chargeholder may require under the security agreement to perfect and maintain the security over assets, as well being responsible for any associated costs.

A charge can either be reinstated by Companies House directly – although this is unlikely – or through a court order, which can cost approximately £3,000 for each security agreement.

Actions to take

There are certain actions that company officers can take in order to mitigate or protect themselves and their company in these circumstances.

These may include:

• Instructing a law firm to fully understand the implications of the removal of the security interest, even if this was only done so erroneously, as any impact will be fact-dependent
• Notifying Companies House that the security has been erroneously or fraudulently removed from the register
• Notifying the chargeholder that the security has been erroneously or fraudulently removed from the register. Chargeholders may opt to waive any breaches that such removal may have caused and take new security over the chargor and register this at Companies House
• Rectifying the record with Companies House through either them reinstating the security, which is rarely done by Companies House, or applying for a court order
• Ensuring that the security has not been removed from other applicable registers i.e., the Land Registry or Intellectual Property Office
• Considering any intercreditor issues if there are other secured parties.