A company can seek a loan without offering security but in such an unsecured
arrangement the lender bears the risk that if the debtor company becomes
insolvent, its own debt will be satisfied after the secured creditors have been paid.11
The unsecured creditor, moreover, has no enforceable interest in the debtor’s
property prior to winding up, only a right to sue for money owed and to enforce a
court judgement against the debtor.
Companies can also enter into a number of legal relationships that, on their face,
appear to be sale arrangements but which operate in practice as security devices.12
The main devices are: reservations of title; hire purchase agreements; sale and
lease back deals; sale and repurchase contracts and discounting of receivables.13
The key aspect of these agreements is that the debtor company is able to raise
funds by allowing ownership to rest with the ‘creditor’ rather than offering security
and the ‘creditor’ avoids having to compete for insolvency assets with other
creditors because he or she holds title, or has not passed title, in the assets at issue
to the insolvent company.14
Finally, a loan can be secured through the ‘guarantee’15 of a third party – which
may be an individual director of the debtor company but might also be a parent or
subsidiary company within a group.16 The guarantor is not liable for any amount in
excess of that recoverable from the principal debtor and, if the guarantee is given at
the request of the debtor, the guarantor has an implied contractual right to be
indemnified by the debtor against all liabilities incurred.17
Turning to the patterns of borrowing that tend to be encountered in companies,
these are liable to vary according to a number of factors such as the company’s
needs, size, commercial sector and plans, but bearing this in mind, some
generalisations can be made. In doing so it is helpful to distinguish the practices of
the small or medium enterprise (SME) from those of larger companies.
11 The priority of payment out in corporate liquidation is as follows: secured creditors with fixed
charges; the costs and expenses of liquidation; preferential creditors; secured creditors with floating
charges; unsecured creditors; shareholders (owed sums in their capacity as shareholders such as
dividends); deferred creditors (such as shareholders with claims for the return of their capital;
directors found liable for wrongful or fraudulent trading) who have debts owed to them by the
company which have been deferred by order of the court).
12 See F. Oditah, Legal Aspects of Receivables Financing (London: Sweet & Maxwell, 1991) 11:
Bridge, ‘Form, Substance and Innovation in Personal Property Law’ (1992) JBL l.
13 See Oditah, ibid 33–34, 50–55; Goode, n 10 above,656–657. See also Goode ibid 646, et seq on the
imposition of conditions on the right to withdraw a deposit and contractual set off. On charges over
credit balances see Re BCCI (No 8)  3 WLR 909; Goode, ‘Charge-Backs and Legal Fictions’,
 114 LQR 178; G. McCormack, ‘Charge Backs and Commercial Certainty in the House of
Lords’ (1998) CFILR 111.
14 On reservations of title, for instance, see S. Wheeler, Reservation of Title Clauses (Oxford: OUP,
1991); G. McCormack, Retention of Title (London: Sweet & Maxwell, 1990); I. Davis, Effective
Retention of Title (London: Fourmat, 1991); S. Worthington, Proprietary Interests in Commercial
Transactions (Oxford: Clarendon, 1996), ch 2.
15 If A owes B a financial obligation then instead of, or in addition to, taking a charge on A’s property, B
may take a contract with a third party, C, under which C promises to meet A’s obligation to B if A
fails to do so (C being the ‘guarantor’). See further R. Goode, Legal Problems of Credit and Security
(London: Sweet & Maxwell, 2nd ed, 1988).
16 The Government itself may also act as a guarantor and the UK offers a good deal of credit
insurance to exporters through the Export Credits Guarantee Department which, inter alia,
guarantees bills of exchange purchased by banks. Guarantees may relate to specific transactions or
operate on a continuing basis and relate to a flow of transactions: see further Goode, n 10 above, ch
17 In an insurance arrangement, in contrast, the insurer protects the covered party and there is no right of
indemnity against the defaulter: see R. Goode, (1988) JBL 87.
September 1999] Security, Insolvency and Risk
ßThe Modern Law Review Limited 1999 635