Releasing security at Companies House by mistake – what to do?

In this article Megan Kirby discusses the options available if you accidently file a form with Companies House to release a security charge.

But what happens if a form is filed by mistake?

Firstly, do not panic – even though Companies House may remove the relevant charge from the register, the security itself will not be released^[1].  Also, if the security is taken over a property and registered at the Land Registry, filing a MR04 or MR05 will not remove the charge from the register at the Land Registry.

As a reminder, the formal way to release English security granted by an English company is by a deed of release (and, if the security is a legal charge over land registered at the Land Registry, by a form DS1).

Secondly, consider whether you need to rectify the incorrect filing at Companies House.

Do you need to rectify the mistake?

While filing a form MR04 or MR05 at Companies House will not release the security in question, the charges register provides notice to third parties of any security granted by a company. An incorrect register therefore makes it difficult for creditors to confirm whether they will be first ranking on insolvency, or whether there is prior ranking security in place before they make available facilities or extend credit. The more accurate the register, the clearer the position is for everyone concerned.

Where a secured lender is aware of the mistake, there is also a risk that a borrower or other creditor could argue that the secured lender has consented to the release of security, i.e. by not seeking to address the issue. Regardless of how strong that argument may be in court, this is likely to be something that a secured lender would prefer to avoid.

How to rectify the mistake?

Court application

The best (and clearest) approach is for the company that created the security (or other interested party) to apply to the court for an order to rectify the register^[2]. As long as the court is satisfied that the filing was accidental or due to an oversight and that it should not prejudice the position of creditors or shareholders of the company, it is likely that the court would grant an order to rectify. Once the court has made an order for rectification, a copy must be sent to the registrar at Companies House, who will then rectify the mistake. This route does, however, involve a formal court process and so could be relatively expensive.

Re-execute security

Alternatively, the company and the lender could execute ‘new’ security, while also leaving the ‘old’ security in place. Both charges should be legally valid and so, if required (for example, due to hardening periods) the lender could rely on the ‘old’ security that was incorrectly released at Companies House. The advantage of having the new security in addition to the old is that it can be registered at Companies House, therefore notifying other creditors of the lender’s secured position.

The lender would need to re-issue the security documents for signing by the company and may require a side letter, confirming that the lender will not seek rectification of the register as long as the company:

• acknowledges and agrees that it has filed the form MR04/MR05 by mistake; and
• agrees that it will apply to court for rectification of the charges register at the lenders request.

While this approach may be cheaper than court proceedings, it will not directly address the mistake at Companies House and, if there is any insolvency risk in relation to the company, this approach is not recommended.

^[1] Re OC Realisations 2011 (in liquidation) – unreported, 4 July 2012.

^[2] Under section 859M Companies Act 2006 if the charge was created on or after 6 April 2013 or section 873 Companies Act 2006 if the charge was created before 6 April 2013.