Ranking of a creditor’s interest against land is crucial to the order of priority of distribution of assets in the event of a debtor’s insolvency. The statutory order of priority shall apply to how the insolvent’s assets are distributed to satisfy its creditors.
The statutory Order of Priority is broadly in the following order:
- 1. Secured creditors
- 2. The expenses of the insolvency process
- 3. Preferential debts (mainly employee claims up to the statutory prescribed amounts)
- 4. Ordinary unsecured creditors
- 5. Interest on preferential and ordinary unsecured debts
- 6. Postponed creditors
- 7. Shareholders
Often by the time distribution reaches down the pecking order, there is not sufficient funds to pay out those entitled. For this reason, a prudent lender will secure its loans against the Borrower’s assets and seek ‘first chargeholder’ status. With the ongoing flurry of activity in the lending market, it is not uncommon to see more than one secured loan against the same asset. In this case, without agreement between lenders to the contrary, the date of registration dictates the order of priority of payments with first registered taking first charge.
This position is well-established and lenders can agree to alternative orders between themselves through a deed of priority if they so choose.
What happens however if there is a first and second chargeholder, and the first chargeholder makes a further advance after the registration of the second chargeholder’s security and seeks to claim priority under its first charge?
In Re Black Ant Company Ltd (in administration) and another case  EWHC 1161 (Ch),  All ER (D) 122 (Apr) the High Court considered the meaning of ‘further advance’ within the meaning of the rules on tacking and further advances contained in the Land Registration Act 2002.
The case concerned a dispute between two companies that had charges over the same property. An issue arose as to which of the charges had priority.
Two secured creditors (A and B) had security over properties owned by companies in administration. A held first legal charge. After B’s charge had been registered at the Land Registry, A asked the debtors to sign a new facility letter replacing the original facility letter to update the lender’s terms and conditions. No new money was lent and there were no accounting entries of any kind showing a notional repayment of the original advances or the making of any further advances. Subsequently, the debtors failed to repay the amounts owing under the facility letter (including interest and fees which had been added to the debtors’ accounts).
B applied for a declaration that its charge would have order of priority. The application was dismissed and the court gave consideration to the fact that the account showed no credit and debit entries, reflecting any repayment or new advance, and suggested that no such repayment and new advance took place. The court also considered that rolling up unpaid interest and fees could not sensibly be regarded as the making of a further advance. The judge noted the position that: ‘the unpaid interest and fees are just amounts secured by the terms of the charge, which are contractually due in respect of the original advance and by the express terms of the facility letter they form part of the indebtedness’.
The court also took opportunity to consider the meaning of ‘further advance’ within the Land Registration Act 2002, s 49 (3) (LRA 2002) and tacking and its effect on a lender’s ranking in the statutory order of priority for pay-outs.
The High Court Judge said that the ordinary meaning of ‘further advance’ is ‘an advance of further or additional funds’. As regards the purpose of the statutory provisions, the judge considered that it was ‘to ensure that priority is not obtained for an advance which a second mortgagee who had received truthful replies to normal enquiries would not know that the first chargee had made or was under an obligation to make’.
‘Tacking’ refers to the process of adding a further advance to an initial advance without creating new security for the further advance. What would the position be if in between the initial advance and the further advance another lender has lent money and registered its security over the same asset?
Leaving aside the existence of any negative pledge contained in the charge given to the first chargeholder (which would effectively put the borrower in an event of default of the first charge and give the chargeholder the option to call in the loan), under the normal rules the second chargeholder’s advance would take priority over any subsequent further advance by the first chargeholder.
The Normal Rule on Tacking
Under the normal rules on priority if a debtor grants security to a lender (A) to secure “all monies lent to it by A from time to time”, and A, on the basis of that security, lends some but not all of the loan, and the borrower subsequently grants security to another lender (B) to secure “all monies lent to it by B from time to time”, then if, with knowledge of B’s security, A continues to advance money to the debtor, B will take priority over A in relation to all those amounts lent by A after it was aware of B’s security. -Hopkinson v Rolt [1861-73] All ER Rep Ext 2380
Therefore priority is only given to the first security insofar as it secures money which is actually owed to A at the time A received notice of B’s security. In such circumstances, A would be well advised to make an agreement expressly dealing with which lender has priority.
Tacking in respect to security over land
The rules on registering security over land are contained in the Land Registration Act 2002 and provide exception to the normal rule.
Section 49 Tacking and further advances
(1)The proprietor of a registered charge may make a further advance on the security of the charge ranking in priority to a subsequent charge if he has not received from the subsequent chargee notice of the creation of the subsequent charge.
(2)Notice given for the purposes of subsection (1) shall be treated as received at the time when, in accordance with rules, it ought to have been received.
(3)The proprietor of a registered charge may also make a further advance on the security of the charge ranking in priority to a subsequent charge if—
(a)the advance is made in pursuance of an obligation, and
(b)at the time of the creation of the subsequent charge the obligation was entered in the register in accordance with rules.
(4)The proprietor of a registered charge may also make a further advance on the security of the charge ranking in priority to a subsequent charge if—
(a)the parties to the prior charge have agreed a maximum amount for which the charge is security, and
(b)at the time of the creation of the subsequent charge the agreement was entered in the register in accordance with rules.
(a)disapply subsection (4) in relation to charges of a description specified in the rules, or
(b)provide for the application of that subsection to be subject, in the case of charges of a description so specified, to compliance with such conditions as may be so specified.
(6)Except as provided by this section, tacking in relation to a charge over registered land is only possible with the agreement of the subsequent chargee.
These provisions enable a secured creditor to tack further advances to existing security, even where it has notice of competing security at the time it makes a further advance. The rules provide that, if the first secured creditor is under an obligation to lend further money, any security which it has over land will rank ahead of a later security interest even if the first secured creditor had notice of the competing security when it lent additional money, provided that either of the following circumstances apply:
- section 49(1) – the further advance is made at a time when the prior secured creditor had received no notice from the subsequent secured creditor of the creation of the subsequent charge
- section 49(3) – the further advance is made pursuant to an obligation to make further advances in the agreement and that obligation was entered in the register in accordance with the LRR 2003 at the time of the creation of the subsequent charge – (Land Registration Rules 2003 SI 2003/1417, r 108) NOTE: in Re Black Ant Company Ltd (in administration) and another case  this point was not held in A’ favour because whilst A had noted an obligation to make further advances on the register, it had not in fact contained such provisions in the agreement itself.
- section 49(4) – the prior secured creditor and the debtor have agreed a maximum amount which the charge secures and that agreement was entered in the register in accordance with the LRR 2003 at the time of the creation of the subsequent charge – (LRR 2003 SI 2003/1417, r 109).
Section 49(6) in summary clarifies that save for those exceptions set out in section 49, tacking in relation to a charge over registered land is only possible with the agreement of the subsequent chargee (i.e. through a Deed of Priority).
The Re Black Ant  case provides useful insight into the meaning of ‘further advance’ and should provide some comfort to secured creditors with first-ranking security that they will not ordinarily lose their priority position if they take steps to vary the terms of an existing transaction to update standard terms or to include rolled up interest and fees in respect of original advances which is common in practice.
The instances in section 49 of the LRA 2002 also sets out the instances when tacking further advances is allowable and will not defeat a lender’s priority, however in situations where a lender wishes to take security over land and there is already a chargee secured on title or where a debtor gives security to a subsequent chargee, it will always be best practice to expressly agree the position on priority of pay-outs before making an advance.
Re Black Ant Company Ltd (in administration) and another case  EWHC 1161 (Ch),  All ER (D) 122 (Apr)
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