Enforcing Share Mortgages In The “New Old Fashioned Way”

Because of levels of economic turmoil not seen for nearly a

century, some secured creditors have been taking a slightly fresh

approach in relation to realisation of their security in the event

of a default. One of the common features of secured financing

concerning offshore vehicles involves taking a share mortgage over

the shares issued by the offshore entity, which allows the secured

party to take indirect control of any assets held by the entity. In

normal times, the usual way to enforce such security would be to

appoint a receiver who would vote the shares and put a new board of

directors in who would then monetise the underlying assets and

utilise them to pay the secured debt.

However, in present market conditions asset prices are

frequently so depressed that attempts to monetise those assets

(particularly on a distressed sale basis) frequently result in the

proceeds of realisation being far below the level of the secured

debt. Worse, if the lender is a bank, accelerating the loan means

that the loss can become crystallised on their balance sheet, and

many banks can ill afford further strain on their capital base.

Some lenders have sought a somewhat speculative solution to this

problem from the pages of history: a foreclosure order. Foreclosure

enables the secured party to take beneficial title to the mortgaged

shares, and extinguishes the chargor's equity of redemption.

This leaves the secured party free to sit on the asset until asset

prices recover and they can realise the underlying assets in more

favourable circumstances. Courts remain hostile to applications for

foreclosure because of the potential for abuse. It also involves

something of a gamble; foreclosure extinguishes the underlying

secured debt as...