Borrower's Undertaking creates Equitable Assignment of Investment Proceedings

The High Court (Court) had to determine whether proceeds from two investments in the estate in the bankruptcy of Bernard McNamara (McNamara) were payable to NALM under its security package, or whether they should be retained in the estate in the bankruptcy of McNamara for the benefit of creditors generally (substantive question).

While McNamara was discharged from bankruptcy in March 2014, his estate remained vested in the plaintiff trustees (Bankruptcy Trustees). The defendant, NALM, was the successor in title to Anglo Irish Bank (Anglo), which had loaned sums to McNamara in 2007.  Before his bankruptcy, McNamara had made two separate investments: (i) shares in a UK property fund (UK Property Fund) and (ii) an investment known as the German Geared Commercial Property Investment (GGCP Investment) (collectively “the Investments“).  Signature Capital (or its related entities) managed the Investments.  In January 2014, the Bankruptcy Trustees received two payments from Signature Capital relating to the investments (Investment Proceeds). NALM argued that the Investment Proceeds were captured by its security package.

Jurisdiction & applicable law

Before addressing the substantive question, the Court considered whether it had jurisdiction in the case.

The UK was part of the EU when McNamara was adjudicated bankrupt, so the governing rules were the EU Insolvency Regulation (1346/2000) (Regulation) – since replaced by EIR Recast (Regulation 2015/848) – which applies to insolvency proceedings (including bankruptcies) commenced before June 2017.

The general rule under the Regulation is that insolvency proceedings are governed by the law of the state where the proceedings were opened.  However, certain rights in rem (rights against things) can be the subject of another law where, when the proceedings opened, those rights were situated in another member state. Under the Regulation, rights in rem include the right to dispose of assets and obtain satisfaction of security (e.g., lien/ mortgage) from the proceeds.

The key question, according to the Court, was whether NALM’s alleged security over the Investment Proceeds were rights in rem.  After considering various factors, the determining factor for the Court was that if, as a matter of Irish law, it found there was an assignment/ charge in favour of Anglo over the Investment Proceeds, then NALM had a right a rem.  Ultimately (see below), the Court was satisfied that the rights were rights in rem.

On the jurisdiction point, the Court also noted that a deed of charge upon which NALM was principally relying was expressly governed by Irish law, and there was an exclusive jurisdiction clause selecting the Irish courts.

The security

NALM relied on three forms of security:

  1. Deed of charge between Anglo and McNamara (Deed of Charge).
  2. The deposit of a share certificate and a loan note certificate (Loan Note Cert) relating to the GGCP Investment.
  3. Two letters of undertaking (Undertakings) relating to the Investments signed by McNamara, Signature Capital and SF Capital, undertaking to remit all distributions under the Investments to Anglo.

Court’s ruling on security

  1. Deed of Charge

The Court held that the Deed of Charge did not create security over the income derived from the charged shares, such as dividends or other distributions, because:

  • The charging clause referred to “all shares in the capital of First UK Commercial Property plc…” It did not refer to any rights associated with those shares, such as dividends and other distributions.
  • Signature Capital confirmed that the proceeds received by the Bankruptcy Trustees “were from funds following the sale of the remaining properties held in the fund…” i.e. they were not proceeds from the sale of the shares themselves.
  1. Loan Note Certificate

The Court held that the deposit of the Loan Note Cert did not create an enforceable equitable mortgage over the proceeds of the related loan.  It did not consider the deposit of the share certificate as the proceeds received related to the “repayment of a Loan Note”.  The Court considered whether the deposit of the Loan Note Cert had the same effect as the deposit of a share certificate insofar as the creation of an equitable security interest is concerned.  It found:

  • Unlike a share certificate, the Loan Note Cert did not evidence ownership or impede the transfer of the related loan payment.
  • The Court could not confirm there was, in fact, a loan note in existence.
  1. Undertakings

The Court held that the legal effect of the Undertakings was to create an equitable assignment by McNamara to Anglo over all distributions received in respect of both investments for the following reasons:

  • The assignor (McNamara) directed an obligor (Signature Capital) to pay out distributions to NALM under the Undertakings.
  • The Undertakings contained a written “instruction” to Signature Capital that was “irrevocable”.
  • A prior agreement to grant the Undertakings as “security” was referenced in the relevant facility letter.
  • A right of redemption existed, a classic characteristic of a security interest, pursuant to the Undertakings.
  • The rights assigned by the Undertakings were existing, not future choses in action – the existing right to future payments immediately vested in the assignee.
  • Reliance on UK and Irish case law as authority for the position that where a borrower, or obligor on the borrower’s instructions, undertakes to pay a receivable to a bank, the bank obtains a security interest in that receivable.
  • The creation of equitable assignments is not confined to undertakings given by solicitors.


After concluding that it had jurisdiction under the Regulation, the Court found that NALM had valid security over the Investment Proceeds. Accordingly, the Court ordered that NALM was beneficially entitled to the Investment Proceeds.

The judgment is of note because of the invocation of the rights in rem exception to the general jurisdiction rules in the Regulation.  Its principal significance, however, is that it confirms that undertakings given by a borrower, or parties on its behalf, can be effective in creating an equitable assignment, if they are properly instructed and authorised to give it.  To date, equitable assignments have been found to exist based on solicitors’ undertakings, but this judgment confirms that security interests over receivables are not limited to solicitors’ undertakings.

Originally published by William Fry on 12 June 2023

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