REALWorld Law

Real estate finance

Effect of borrower's insolvency

Are any security interests created by a borrower in favour of a lender made void if the borrower becomes insolvent? Are there any other effects?



Generally, a borrowers insolvency will not affect a lenders security (however a moratorium may be placed on the enforcement of securities in some circumstances where an administrator has been appointed).

There may be some transactions that can be set aside by a liquidator if they have been entered into while the company is insolvent or where the transaction is uncommercial or constitutes an unfair preference to a creditor.

Whether the transaction can be set aside by a liquidator will depend on the time that has elapsed since the security was created or the transaction was entered into. The ‘relation back period’, being the period during which a transaction may be set aside by a liquidator, may be six months, two years or four years prior to the date of liquidation of the company depending on the type of security given or transaction entered into and the circumstances of the company at that time.

If a security over non-real estate assets is not perfected by registration before the latter of six months before either a winding up or an administration began, 20 business days after the security became effective or the date of administration, the security interest may be void as against a liquidator, an administrator of the company, or an administrator of a deed of company arrangement.