CS Professional · Strategic Management and Corporate Finance · Raising of Funds - Private Funding
A manufacturing company has a term loan from a bank secured by a first charge over its plant. Later it wants a second lender to also lend against the same plant. Which statement is correct?
The second lender can take a subsequent charge that ranks after the first lender's charge on the plant. Ranking is not automatically equal, and a later charge does not rank ahead. Equal sharing needs a pari passu arrangement agreed with the first lender.
- AThe second lender can take a subsequent (second) charge, ranking after the first charge on the plantCorrect
- BThe second lender automatically ranks equally with the first lender
- CThe company cannot create any further charge on the plant under any circumstances
- DThe second lender's charge ranks ahead because it was created later
Explanation
A charge on the same asset can be created in favour of another lender, and it ranks after the earlier charge as a second or subsequent charge, unless the first lender agrees to pari passu sharing. Ranking is not reversed by later creation. Equal ranking requires an agreement and is not automatic.
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