13 - Loan capital Flashcards
Three principal sources of loan capital
- Term loan
- Overdraft
- Debt security (issuance of bonds, debentures)
Two potential restrictions on companies’ ability to borrow
- Public company not issued trading certificate
- Restrictions in the company’s articles
What does security of a loan refer to?
Right of creditor to obtain specified asset of company and sell it to repay loan
3 reasons why creditors prefer secure loans?
- Creditor has rights to assets in breach
- Secured loans paid ahead of unsecured on liquidation
- Secured creditor may be able to negotiate further benefits (such as right to consult with board in certain cases)
Two broad categories of security for a loan
- Possessory security
- Non-possessory security
What is possessory security?
Creditor has physical possession of asset and returns it once loan is paid off
What is non-possessory security?
Borrower retains possession of asset and can use it
Two main types of possessory security
- Pledge - which usually has implied right to sell asset
- Lien - doesn’t typically include power to sell asset
Two main types of non-possessory security
- Mortgage - creditor obtains title to assets, can sell it, but will return it if no default
- Equitable charge - similar to a mortgage but title does not pass to the creditor
Is the company the chargor or chargee?
Chargor
Is the creditor the chargor or chargee?
Chargee/chargeholder
Two main types of charge
- Fixed charge
- Floating charge
Define fixed charge
Charge taken over a specific asset of the company
What is typically provided by fixed charges? (3)
- Chargeholder able to appropriate the charged asset and sell it to recover the money owed
- Company unable to sell or deal with the charged asset unless it first repays the chargeholder
- No further charges can be made over asset unless chargeholder agrees
Key advantage of fixed charge over floating charges (or other debts)
Assets secured are not available to the liquidator, meaning that fixed charge debts rank ahead of all other debts
Why was the floating charge created?
As a more flexible form of charge was required
Case law - Re Yorkshire Woolcombers Association Ltd (1903) - three key characteristics of floating charge
- Charge is taken over a class of assets (typically this is all the assets and business of the company)
- That class of assets will be changing from time to time
- Company is free to use the charged assets
Which of the three characteristics of floating charges really differentiates them from fixed charges?
Company is free to use the charged assets (even to use them for another floating charge)
What is crystallisation?
When an event occurs which deems that a floating charge becomes a fixed charge - chargor can no longer dispose of or deal with the charged assets unless the chargeholder consents
When will a floating charge crystallise?
When an event which the charge instrument states will cause crystallisation occurs
Such as (typically):
Liquidation
Business ceases
Receiver is appointed
3 reasons why it is vital to be able to distinguish between fixed and floating charges
- Assets secured by fixed charge are not available to a liquidator
- On liquidation, portion of debt owed to floating chargeholders is set aside to pay off unsecured creditors
- Certain floating charges are vulnerable to being set aside by liquidator
What is the key factor in determining the type of charge?
The rights and obligations the parties intended to grant each other in respect of the assets - classification is relevant, but not conclusive
What did the supreme court say on taking fixed charges out over a company’s book debts?
& significance
It is possible, but only if the chargeholder has requisite control over the charged assets
For this reason, courts usually find that the purported fixed charge is a floating charge
Define book debts
The sums owed by customers to a company
