This blog is the first in a series of posts taking us ‘back to basics’. In the series we will touch on some of the key legal requirements and various key aspects of a banking transaction, highlighting some of the standard clauses and the impact these have on security documents.
This week, Talking Finance reviews the importance of further assurance clauses and powers of attorney. These are essential tools for a lender and give a degree of comfort when it comes to enforcing security, in particular when there has been an event of default and the borrower is unable, or unwilling, to comply.
Including a further assurance clause in security documentation compels the borrower to take whatever action the lender may reasonably require in order to perfect, or protect, the security. This could include steps to remedy any defects in the security created by the security documents.
However, these clauses can have a limited effect and there is no guarantee that the borrower will perform the required obligations. A further assurance clause was scrutinised in Ford v Polymer Vision Ltd, which resulted in the court refusing the argument that a further assurance clause should be satisfied by the borrower executing a power of attorney.
The Ford case is a reminder that further assurance clauses have their limitations and lenders cannot guarantee compliance, particularly if a borrower’s financial situation, or the relationship between the borrower and the lender, is deteriorating. This is particularly relevant where there has been an event of default which requires the lender to act quickly to realise the security.
This is why it is common for security documents to contain a power of attorney as well as a further assurance clause. The lender is appointed as the borrower’s attorney and then has the power, should the borrower fail to comply, to carry out the required actions. This gives the lender more protection if the further assurance clause does not have the desired effect, or if the borrower’s situation changes for the worse.
Power of attorney
Security documents will usually contain undertakings given to the lender by the borrower. These are promises made by the borrower to do something (or not to do something) and could include:
- not doing anything to lower the value of the secured assets;
- only dealing with the security in a certain way; or
- ensuring that any problems with the security can be, and are, rectified efficiently.
Should the borrower fail to comply with these undertakings, or any of its other obligations under the security, the power of attorney gives the lender authority to act as the borrower and carry out any actions required to ensure compliance.
Powers of attorney become important to a lender when a borrower fails to comply with the undertakings given – the lender will require a means of ensuring that the undertakings are satisfied and the security remains intact. A borrower may refuse to play ball if the relationship between the parties has broken down, resulting in the lender being unable to quickly ensure compliance by the borrower. By including a power of attorney in the security documents the lender can ensure that this standoff does not affect the security at a point where time may well be of the essence.
For a power of attorney to be effective the security document containing the relevant clause must have been executed as a deed. The clause will normally include wording such as “this power of attorney is granted by way of security” and ideally it should be irrevocable.
If the power of attorney contains both those elements then it cannot be revoked if obligations are still owed by the borrower to lender. This inability to revoke continues to apply on the death, incapacity or bankruptcy of the borrower or the winding up of a corporate borrower.
From a lender’s perspective it is important to check that the borrower is not restricted from granting a power of attorney by its constitutional documents; ideally a specific enabling provision will be included.