Major Security/Charges problem at UK Companies House

This issue has now been resolved – please read our update here for more information.

On 22 February 2024 we became aware of a problem at UK Companies House whereby various charges (security) previously registered against corporate UK borrowers were showing as discharged, even though neither the chargor/borrower nor the chargee/lender/security trustee had filed a release. On investigation it appears that on 19 & 20 February 2024 numerous MR04 release forms purporting to be filed by a person who gave an address in Northern Ireland and who is unknown to any of the lenders or borrowers concerned were registered at Companies House. There appears to be no pattern to this, other than involving that individual, as the “released” charges range in date from recent charges to much older ones and secure both bilateral and syndicated facilities. Anyone inspecting the Register of Charges for a particular UK company or LLP may think, wrongly, that there is no security over the assets of that entity and that the debt and other obligations secured by that security has been repaid or no longer exists. While Companies House have been made aware of this problem, at the moment they are saying that they will only rectify the Register on receipt of a court order – a process which is both expensive and slow. We, other law firms and our clients will be considering how to best to move this forward more quickly with Companies House. We’ve mentioned below the risks as we see them and some steps for you to consider and we will keep you updated as we learn more.

What are the risks?

While this does not affect the validity of the facility agreement or the security contract between the lender and the borrower the risks include:

• A bona fide purchaser from or (new) lender to that chargor would not be aware the supposedly released security, or the debt secured by, it still exists and may then acquire a greater right to the security assets – but note this does not affect any legal charge registered at the UK land registries which have different and tighter release process
• If insolvency proceedings are begun against one of the affected chargors, the lenders might not know about it or receive the usual notice which must be given to the holder of a prior ranking floating charge and may not become aware of those proceedings at all. The insolvency practitioner may also not be aware the debt is still outstanding
• The borrowers will inadvertently be in breach of the representations and covenants in the facilities agreement
• New security may be required by the lender. That will be subject to new “hardening periods” as no new money will be passing from the lender, but this would be effective to give third parties notice of the secured creditor’s existence
• While new security should be able to be taken fairly easily as it will be based on the existing security that will need co-operation from the borrower, though there are workarounds if the borrower is not prepared to co-operate

What should you do now?

Lenders

• Check your portfolios and your usual borrower monitors/trackers if you have them and contact us if you see any unexpected release of charges. As mentioned, so far there seems to be no pattern to these releases – we’ve seen older and new charges, bilateral and syndicated charges and single chargors from full group security all being released. The good news is that some clients seem not to have been affected at all.
• Consider whether new security should be taken – we think this is advisable if possible
• Consider writing to any junior creditors to make it clear to them that your charges have not, in fact, been satisfied and the provisions of any intercreditor agreement/deed of priority still apply
• Speak to us if you have any concerns, we have already considered some potential workarounds

Borrowers

• If you become aware of any charges you have granted being inadvertently released, speak to your lenders immediately to ensure a solution can be found and you are not in breach of your facility agreement obligations through no fault of your own

Please don’t hesitate to speak to your usual DLA Piper contact if you have any questions or concerns on this.