Commercial property lenders beware: Companies House fraud is on the rise

UK Finance, the trade association for big financial institutions, told its members last week that there was a surge in January of unauthorised security discharge forms. They say that 190 companies are involved with a total of 800 filings. There are over 5 million companies registered in the UK so it seems likely that there will be many more cases like this in the SME lending sector yet to be identified.

At present this is an open issue, with Companies House making the not so helpful comment “We are aware of this matter and we are looking into it” and UK Finance declining to comment.

Whilst it is possible for security to be discharged by mistake, the most obvious reason for this to happen is fraud. The good news for lenders with registered security is that, even if discharge forms have been registered at Companies House without their knowledge, the underlying legal position takes precedence over the register. So, barring any other factors, the 800 security documents will still be valid in law.

The more troubling aspect is that, until this issue is resolved, the uncertainty makes it harder for lenders intending to provide new finance to UK companies. There is a real risk that lenders will think they have a first ranking charge when in law they rank second. In the commercial property sector that could be the difference between getting repaid and losing your money.

For property lenders there is also HM Land Registry which can be checked for registered charges, but only on land. Two issues arise here. First, since the pandemic, it has taken much longer for HM Land Registry to complete their applications, to the extent that they are many months out of date, so cross-checking is not necessarily going to give an accurate picture. Secondly, for lawyers who like to register legal charges separately from debentures, there is no cross-check available for the debenture at HM Land Registry.

While this issue remains live, we offer the following thoughts for SME commercial property lenders:

1. In commercial property the vast majority of properties have debt secured on them; unencumbered properties are rare. Tread carefully when the register shows no current registered charges.
2. When checking the charges register, contact any lenders with registered charges and lenders with recently discharged security. Check with them whether discharges are genuine and check their records of company indebtedness match yours.
3. The commercial real estate industry has had an unprecedented set of shocks over the last few years, resulting in an interest rate hike that has made it very hard for anyone, however experienced, to navigate the consequences. When their back’s against the wall, people you thought you knew well can behave differently, so proceed with caution.