Legal and Financial Consultant.
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“I am the owner of a small company that usually is referred to as an SME (Small, Medium Enterprise) Company. I enjoy a credit facility from a local bank, covered by security over myproperty.
How can I legally best exploit my property to raise additional funds from a second bank as my current financier has reached a single borrower limit, can therefore not increase my loan limit? Is it possible to offer the same property as security to two different banks?”
Dear Reader, You can enjoy loans from two or more banks for the financing of the same business giving the same property as collateral, as long as the financiers approve it. Your financial needs can be co-financed by both banks or funded differently at separate development stages.
In the case your current lender agrees to co-finance your project/growth with a second bank, it will be called a “Syndicated Loan” that will be covered by the same collateral, both financiers enjoying the same first rank (first legal charge) over the property. In this case they will sign an agreement called Collateral Sharing Agreement (Lenders’ Agreement) in which they agree to co-finance your project. The legal mechanism that will serve as the foundation to this agreement will be “PARI PASSU PRINCIPLE”, which is defined as an “Equal in right of payment”.
The pari passu principle means that all creditors must share equally any available assets of the company, or any proceeds from the sale of any of those assets, in proportion to the debts due to each creditor. It is one of the most fundamental principles of insolvency law.
The first lender can refuse to share the collateral at the same level of privilege than the second one. In this case, the first one will always have a first priority claim against the property for the full amount of its advance. The second lender will have to secure his risk by registering the collateral on the second rank meaning the second priority claim.
In both cases, the registration of the security mortgaged to two different banks is as simple as the one mortgage to as single bank. The registration is done at the Office of the Registrar General of RDB. It is a simple and fast process.