The Society believes that a definition of a commercial security transaction is helpful:
"A commercial security transaction relates to the secured lending to a customer of a bank or other lending institution where the purpose of the loan is clearly for the customer's business purposes".
Scottish banks have policies whereby in commercial security transactions the banks instruct separate practice units to represent them. Borrowers instruct their own solicitors. The banks' solicitors will usually recover their fees and outlays from the borrowers. Other banks operating in Scotland and members of the British Bankers Association adopt similar policies.
Notwithstanding this general policy, Scottish banks wish to reserve the right to instruct the borrowers' solicitors to act for them, in what the banks describe as de minimis cases. Each bank may adopt a different policy on what constitutes a de minimis case. De minimis cases are currently commonly understood (from the lenders' viewpoint) to include loans not exceeding £250,000.
Regardless of the banks' views or internal policies regarding what is or is not "de minimis", solicitors must consider each case on its own merits having regard to the particular facts and circumstances.
We remind you that, should you receive instructions to act for a lender and a borrower in any transaction, including a commercial security transaction, you must exercise your judgment having regard to the provisions of rule B2.1 as to whether you can act properly for both parties. In exercising that judgment you should take account of the whole facts and circumstances. There follow a number of examples of conflicts of interest which can arise. The list is not exhaustive but may assist you in exercising your professional judgment.
Remember that, should you decide to act for both lender and borrower (even in what purports to be a de minimis case) and a claim arises, you may have exposed yourself and your firm to the risk of bearing a double excess/deductible and the possibility of a loading on your firm's Master Policy premium.
Please do not hesitate to contact the Professional Practice Team if you require further advice or guidance.
Examples of conflicts of interest in commercial security transactions
The following illustrate some of the instances where lenders and borrowers have separate interests in commercial security transactions.
1. Disclosure of all relevant circumstances
(i) the solicitor may know more of the borrower's position than has been communicated to the lender or vice versa; or (ii) there may have been a reluctance by the borrower or lender fully to disclose their respective positions because of dual representation.
These circumstances may affect the extent to which impartial "best advice" can be given.
2. Ongoing negotiations
Negotiations between the borrower and lender may have only reached the "Outline Terms" stage. Further detailed consideration or negotiation of covenants, undertakings or events of default may be required. In such negotiations the borrower and lender may have different negotiating strengths and so there may be competing pressures on the solicitor as to whose interests are to be promoted.
3. Defects in title/Due diligence package
A borrower may be prepared to "live with" a minor defect in title or some lack of planning or building consent whereas a lender may take an entirely different stance.
4. Security by companies
Apart from the complexities and time restraints affecting registration of security granted by companies, companies may well be subject to negative or restrictive covenants or powers affecting the security on which the borrower, but not necessarily the lender, may be prepared to take a commercial view. In these circumstances separate advice may be required.
5. Competing creditors' ranking agreements
The circumstances as to the inter-relationship/enforcement of security between lenders may merit separate advice. A solicitor may be involved in preparing a ranking agreement and negotiating its terms on points which have a bearing on the borrower's position.
6. Security over commercial property
The permitted use, associated licences/quotas and specific standard conditions may merit separate advice. Particular risks arise on the transfer of a licence where the lender's interests may conflict with the borrower's commercial ambitions.
7. Leased property as security
The circumstances in which a lender requires protection in the event of irritancy may merit separate advice. Invariably the borrower is trying to strike the best deal while for his occupancy while the lender needs protection in the event of the borrower's failure through insolvency or otherwise.
8. Enforcement of security
The solicitor acting for both borrower and lender may be placed in difficulty in the event of subsequent enforcement of a security. For whom does the solicitor act in such circumstances? Do both clients know and understand their respective positions?
9. Powerful clients
A major business client may bring subtle or even open pressures to bear on a solicitor to follow a particular course or to turn a blind eye to a matter which could prejudice a lender's position, for example, discrepancies between a valuation and the purchase price.
10. "All sums due" securities
Solicitors should advise fully joint obligants (for example, husbands and wives) of the nature of an "all sums due" security. In particular it should be drawn to their attention that additional loans, for example in respect of one obligant's business, may give rise to further secured borrowings without the other obligant requiring to sign the documentation. In such circumstances there is also a conflict of interest between the joint obligants.