This blog is the first in a series of posts taking us ‘back to basics’. In the series we will touch on some of the key legal requirements and various key aspects of a banking transaction, highlighting some of the standard clauses and the impact these have on security documents.
This week, Talking Finance reviews the importance of further assurance clauses and powers of attorney. These are essential tools for a lender and give a degree of comfort when it comes to enforcing security, in particular when there has been an event of default and the borrower is unable, or unwilling, to comply.
Further assurance
Including a further assurance clause in security documentation compels the borrower to take whatever action the lender may reasonably require in order to perfect, or protect, the security. This could include steps to remedy any defects in the security created by the security documents.
However, these clauses can have a limited effect and there is no guarantee that the borrower will perform the required obligations. A further assurance clause was scrutinised in Ford v Polymer Vision Ltd, which resulted in the court refusing the argument that a further assurance clause should be satisfied by the borrower executing a power of attorney.
The Ford case is a reminder that further assurance clauses have their limitations and lenders cannot guarantee compliance, particularly if a borrower’s financial situation, or the relationship between the borrower and the lender, is deteriorating. This is particularly relevant where there has been an event of default which requires the lender to act quickly to realise the security.
This is why it is common for security documents to contain a power of attorney as well as a further assurance clause. The lender is appointed as the borrower’s attorney and then has the power, should the borrower fail to comply, to carry out the required actions. This gives the lender more protection if the further assurance clause does not have the desired effect, or if the borrower’s situation changes for the worse.
