13 - Loan capital

Question 1

Three principal sources of loan capital

Answer 1

• Term loan
• Overdraft
• Debt security (issuance of bonds, debentures)

Question 2

Two potential restrictions on companies’ ability to borrow

Answer 2

• Public company not issued trading certificate
• Restrictions in the company’s articles

Question 3

What does security of a loan refer to?

Answer 3

Right of creditor to obtain specified asset of company and sell it to repay loan

Question 4

3 reasons why creditors prefer secure loans?

Answer 4

• 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)

Question 5

Two broad categories of security for a loan

Answer 5

• Possessory security
• Non-possessory security

Question 6

What is possessory security?

Answer 6

Creditor has physical possession of asset and returns it once loan is paid off

Question 7

What is non-possessory security?

Answer 7

Borrower retains possession of asset and can use it

Question 8

Two main types of possessory security

Answer 8

• Pledge - which usually has implied right to sell asset
• Lien - doesn’t typically include power to sell asset

Question 9

Two main types of non-possessory security

Answer 9

• 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

Question 10

Is the company the chargor or chargee?

Answer 10

Chargor

Question 11

Is the creditor the chargor or chargee?

Answer 11

Chargee/chargeholder

Question 12

Two main types of charge

Answer 12

• Fixed charge
• Floating charge

Question 13

Define fixed charge

Answer 13

Charge taken over a specific asset of the company

Question 14

What is typically provided by fixed charges? (3)

Answer 14

• 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

Question 15

Key advantage of fixed charge over floating charges (or other debts)

Answer 15

Assets secured are not available to the liquidator, meaning that fixed charge debts rank ahead of all other debts

Question 16

Why was the floating charge created?

Answer 16

As a more flexible form of charge was required

Question 17

Case law - Re Yorkshire Woolcombers Association Ltd (1903) - three key characteristics of floating charge

Answer 17

• 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

Question 18

Which of the three characteristics of floating charges really differentiates them from fixed charges?

Answer 18

Company is free to use the charged assets (even to use them for another floating charge)

Question 19

What is crystallisation?

Answer 19

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

Question 20

When will a floating charge crystallise?

Answer 20

When an event which the charge instrument states will cause crystallisation occurs
Such as (typically):
Liquidation
Business ceases
Receiver is appointed

Question 21

3 reasons why it is vital to be able to distinguish between fixed and floating charges

Answer 21

• 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

Question 22

What is the key factor in determining the type of charge?

Answer 22

The rights and obligations the parties intended to grant each other in respect of the assets - classification is relevant, but not conclusive

Question 23

What did the supreme court say on taking fixed charges out over a company’s book debts?
& significance

Answer 23

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

Question 24

Define book debts

Answer 24

The sums owed by customers to a company

Question 25

When did system for registration of charges change?

Answer 25

April 2013

Question 26

Re. charges, what are companies required to keep post-2013?

Answer 26

A copy of every instrument creating a charge
&
A copy of every instrument effecting any variation or amendment of a charge

Question 27

Who can inspect documents co’s are required to keep re. charges

Answer 27

Any creditor, free of charge

Question 28

Do charges have to be registered with CH?

Answer 28

No

Question 29

Who can register a charge?

Answer 29

Any person interested in it, such as creditor

Question 30

2 conditions that must be satisfied to file MR01

Answer 30

• Certified copy of instrument creating the charge along with statement of particulars
• Must be delivered within 21 days beginning on day after creation of charge

Question 31

Which form to register charge?

Answer 31

MR01

Question 32

2 effects of registering a charge

Answer 32

• Information is now publicly available
• Certificate of registration given to the person registering the charge

Question 33

Key effect of non-registration

Answer 33

Charge will still exist insofar as the debt will still exist, but it will lose its secured status in liquidation/administration

Question 34

What is receivership?

Answer 34

A mechanism that allows a secured creditor to recover what is owed to them

Question 35

2 ways for a secured creditor to appoint receiver

Answer 35

• By right given in the loan/charge agreement - receiver’s duty is to the creditor
• Through applying to the court - receiver’s duty is to the court

Question 36

What is the principal role of the receiver?

Answer 36

Seize secured assets, sell them and use proceeds to satisfy the debt