18/08/2008

Jonothan is buying all the shares in a private company which operates a real estate business from Nabil, but he doesn’t have quite enough money.  

The bank has agreed to lend him funds for this purpose and will take a charge over the assets of the company to secure the loan.  A ‘charge’ is a mortgage over company assets rather than real estate.  But just like a real estate mortgage, a charge over a company has to be registered to be effective and when it is registered it is a matter of public record.

Because Nabil is keen to sell and move on to his next business, Nabil has agreed to give Jonothan some vendor finance.  The term ‘vendor finance’ simply means that Nabil will allow some agreed part of the purchase price to be paid later rather than on settlement of the sale.  Nabil will charge Jonothan interest on the unpaid purchase price amount until it is paid off.

BUT the bank has calculated all their figures and granted their loan approval in the belief that Jonothan is providing the rest of the money on settlement.  The bank does not know about the vendor finance.  So what is the risk for Jonothan?  Mainly it will be that the bank discovers what has happened and will call up the loan immediately which they are entitled to do.  They might also take legal action against him if they lose any money because of his misleading and deceptive conduct.

However, if all of the bank’s loan repayments are made on time then they may never know about the second source of financing.

What about Nabil’s security for the loan?  Nabil will take a mortgage over the shares that Jonothan is purchasing.  If Jonothan defaults in repayment, Nabil can take back the shares.  Of course with the company having granted a charge to the bank for the loan, taking back the shares won’t guarantee Nabil of getting anything of any value because the shares may be worthless if the bank takes all the company’s assets.  But the mortgage is better than nothing and may allow Nabil to negotiate a better position with the bank if things don’t go according to plan.

The beauty about the share mortgage is that it does not require registration on a public record so in this case Jonathan is able to obtain two types of finance to purchase a business.

If you need help with private loan security documents please call us on 02 829 66 222