7. Debt Finance & Security Flashcards
If a company has Model Articles (MA):
(1) Will it need approval to borrow and grant security?
(2) If so, what resolution must be passed?
(1) Yes
(2) Ordinary Resolution (OR)
What are the 3 main types of ‘security’?
(1) Mortgage
(2) Fixed Charge
(3) Floating Charge
Rank the following forms of ‘security’ in terms of their strength:
(1) Mortgage
(2) Fixed Charge
(3) Floating Charge
(1) Mortgage
(2) Fixed Charge
(3) Floating Charge
What is the effect of a ‘mortgage’ on the legal title of the asset?
Legal title is transferred to the lender until the debt is satisfied and then transferred back to the borrower
What is the difference between a ‘mortgage’ and a ‘charge’ in terms of who has the legal title to the asset?
Mortgage - legal title transferred to lender
Charge - legal title remains with borrower
What is the difference between a ‘fixed charge’ and ‘floating charge’ in terms of:
(a) Class of assets
(b) Types of assets normally taken over
(c) Lender’s control of what borrower does with asset
(a) Taken over:
Fixed - specific asset(s)
Floating - class of assets
(b)
Fixed - fixed assets e.g. machinery
Floating - floating assets e.g. stock
(c)
Fixed - Lender has control of what borrower does with asset (e.g. dispose of it)
Floating - Lender NOT have control until ‘crystallisation’
(a) In a ‘fixed charge’ what are 2 examples of activities the borrower CANNOT do with the asset?
(b) What is the exception to the rule in (a)?
(c) What is an example of what the borrower CAN do with the asset?
(a)
(1) Dispose of the asset
(2) Add new charges to the asset
(b) Consent of the lender
(c) Use asset in ordinary course of business
Would a ‘fixed charge’ or ‘floating charge’ be suitable for the following assets?
(a) Machinery
(b) Stock
(c) Vehicles
(d) IP
(e) Goodwill
(f) Cash
(a) Fixed
(b) Floating
(c) Fixed
(d) Fixed
(e) Fixed
(f) Floating
What is the effect of ‘crystallisation’ on a ‘floating charge’?
Charge fixes onto the assets in the class so the borrower is unable to ‘deal’ with the assets (e.g. dispose of them)
What is the common reason that a ‘floating charge’ ‘crystallises’?
Company becomes ‘Insolvent’
Why is a ‘fixed charge’ a more secure form of ‘security’ than a ‘floating charge’?
Fixed charge holders are paid before floating charge holders in the order of priority upon a company’s liquidation
What are 3 advantages of a ‘floating charge’ over a ‘fixed charge’?
(1) Can ‘deal’ (e.g. dispose of) assets on a day-to-day basis
(2) Can be taken over entire company - broad coverage
(3) Maximises borrowing - taken over assets (e.g. stock) not suitable for ‘fixed charges’
What are the 4 disadvantages of a ‘floating charge’ over a ‘fixed charge’?
(1) Priority winding up - Fixed charge holders are paid before floating charge holders in the order of priority upon a company’s liquidation
(2) Priority same asset - Fixed charge holders take priority over floating charge holders on the same asset
(3) Asset depletion - borrower can sell the asset (e.g. stock) reducing value of the ‘floating charge’
(4) Set-aside - risk ‘floating charge’ could be set aside by application by a liquidator / administrator
(1) Must a ‘charge’ be registered at Companies House?
(2) What are the consequences of failing to register the ‘charge’?
(1) No (but recommended)
(2) Charge void against a liquidator, administrator or creditor - holder become an ‘unsecured creditor’
When must a ‘charge’ be registered with Companies House?
Within 21 days beginning DAY AFTER charge created
To register a ‘charge’ at Companies House:
(a) What 2 documents + fee must be filed?
(b) When must this be done by?
(a)
(1) Form MR01 (details of charge)
(2) Certified copy of charge document (e.g debenture, mortgage deed)
(3) Fee
(b) Within 21 days beginning DAY AFTER charge created
Following the registering of a ‘charge’ at Companies House. What step must the company also take?
Update its ‘register of charges’
Following the registering of a ‘charge’ at Companies House. What step must the company also take if it is a FIXED charge over LAND?
Register at Land Registry
Who has priority of ‘security’ for two charges of the same type (e.g. 2 ‘floating charges’)?
Registered first (i.e earliest registered)
(a) Who has priority of ‘security’ between a ‘floating charge’ and a ‘fixed charge’?
(b) What is the exception to the rule in (a)?
(a) Fixed charge (assuming registered)
(b) Document creating floating charge has a ‘negative pledge clause’ (stops creation of later fixed charges without permission)
What ‘security’ has priority between an unregistered fixed charge and a registered floating charge?
Registered floating charge
(unregistered fixed charge = unsecured creditor)
If lenders want to create a different order of priority for ‘security’ than the statutory rules (e.g. want floating charge to take priority over a fixed charge), what can they enter into?
Deed of priority
What is the difference between ‘debt finance’ and ‘equity finance’ in terms of:
(1) Control over company
(2) Repayment
(3) Tax benefits
(4) Degree of paperwork / procedure
(5) Level of regulation
(1)
Equity - give away control of company (shareholders have voting rights)
Debt - maintain control over company
(2)
Equity - Dividends NOT mandatory
Debt - Interest on loan MANDATORY
(3)
Equity - dividends not tax deducible for Corporation Tax
Debt - interest tax deductible for Corporation Tax
(4) Equity procedurally more onerous
(5)
Equity - highly regulated by CA 2006
Debt - less regulated (contract law)
