Finance

November 2015

Briefing

The importance of
conducting a Security
Review for both
lenders and borrowers
In this months banking update, we look at the
importance of carrying out legal due diligence in
respect of a companys existing security package.
Security in finance transactions
When a borrower is granted a debt facility from a bank or any other financial
institution (Lender), the Lender will often want security over assets of the
borrower and frequently as we are now seeing in the Tanzanian market, of
other members of the borrowers group of companies (Borrower) as collateral
for the performance by the Borrower of its payment and other obligations to
the Lender.
Taking effective security over an asset means that the Lender can, on the
insolvency of the Borrower, take possession of that asset, sell it and use the
proceeds to repay any outstanding debt. Subject to the type of security taken,
this puts the Lender in a much stronger position than creditors who do not
have security.

Purpose of a Security Review

Once a Lender has taken security, in certain circumstances they may
commission a security review to check the effectiveness of that security
(Security Review). A Security Review is the name given to a report, prepared by
the lawyers acting for a Lender and/or Borrower which outlines the scope and
effectiveness of any security held by a Lender over the assets of a Borrower.
It is also a useful audit exercise to undertake for a Borrower that has a number
of outstanding debt facilities in place with various Lenders since it provides a
detailed overview of the specific assets owned by the Borrower that are subject
to a security interest in favour of a Lender, including any conditions governing
the use and disposal of those particular assets.

Security Review: A useful tool for the Lender if a Borrower begins to

experience financial difficulties
Most Lenders will become aware that a Borrower is in difficulty through the early
warning mechanics that are drafted into the principal loan documentation in the
form of representations and covenants. Covenants may be:
Informational for instance the delivery of the annual accounts of the
Borrower each year
Financial for instance a measurement of the tangible net worth of
the Borrower
General for instance a prohibition on the granting of security to a third party

Compliance with these obligations is usually tested by a review of financial

information delivered on a regular basis by the Borrower. Any breach of the
representations and covenants usually constitutes an event of default, which
will entitle the Lender to exercise certain rights, including the right to demand
payment or repayment of the amount of the debt facilities that are outstanding
and to enforce guarantees and security granted in respect of the Borrowers
obligations and liabilities.
For this reason, the Security Review is usually recommended in order to provide
the Lender with the requisite comfort that its security is valid and enforceable,
and that it is entitled to enforce the security in the particular circumstances.
The lawyers carrying out the Security Review will typically also comment on
the range of enforcement options available to the Lender, so that the Lender can
begin to consider the practicalities of enforcement.

Security Review: A beneficial tool for the Borrower to audit its

security position

Further information
If you would like further information
about carrying out a Security Review
or, if you have any other queries
about security relating to finance
transactions please feel free to contact:

Peter Kasanda

Similarly, a Borrower may decide to take a proactive approach by instructing its

own lawyers to undertake a Security Review in order to pre-empt any potential
enforcement action by the Lender and to gain a better understanding of all
the options available. This Security Review will have the added advantage
of ensuring that the Borrower and its lawyers are fully up-to-speed with the
current financial position of the company, allowing for a more meaningful
discussion to take place between all parties concerned with a view to
addressing what course of action needs to be taken going forward.

Practical issues to consider when carrying out a Security Review

E: peter.kasanda@clydeco.com
T: +255 767 850 056

Below is a summary of some of the key commercial and legal questions lawyers
will need to review and address when carrying out a Security Review for a
Lender or Borrower:

Salim Bharwani

Has the security been properly registered?

Associate, Dar es Salaam

Are there any priority arrangements in place in respect of potential

enforcement of the security?

Partner, Dar es Salaam

E: salim.bharwani@clydeco.com
T: +255 767 850 007

Michaela Marandu
Associate, Dar es Salaam
E: michaela.marandu@clydeco.com
T: +255 767 850 094

Clyde & Co Tanzania

11th Floor, Golden Jubilee Towers
Ohio Street, PO Box 80512
Dar es Salaam, Tanzania
T: +255 768 983 000/022
F: +255 222 103 004
Further advice should be taken before relying on
the contents of this summary.
Clyde & Co Tanzania accepts no responsibility
for loss occasioned to any person acting or
refraining from acting as a result of material
contained in this summary.
No part of this summary may be used,
reproduced, stored in a retrieval system or
transmitted in any form or by any means,
electronic, mechanical, photocopying, reading
or otherwise without the prior permission of
Clyde & Co Tanzania.
Clyde & Co LLP is a limited liability partnership
registered in England and Wales. Authorised and
regulated by the Solicitors Regulation Authority.
Clyde & Co LLP 2015
CC008767 - November 2015

What does the Borrower owe to other secured creditors?

Has the security been properly executed?
Did the directors have authority to execute the security at first instance?
Is the security vulnerable to legal challenge (i.e. corporate benefit issues or
financial assistance)?
What is the nature of the security (i.e. whilst purporting to be a fixed charge,
can the security actually be deemed to be a floating charge in practice due to
insufficient control exercised by the Lender over that particular asset)?
What (if any) are the enforcement options available to the Lender?