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Company Law > 8) Equity > Flashcards

8) Equity Flashcards

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1
Q

Why is it difficult for private companies to raise money through equity finance?

A

Private companies are unable to offer shares to the public
s755 CA 2006

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2
Q

Do companies have restrictions on borrowing powers?

A
  • Many companies have unrestricted power to borrow.
  • Check company’s articles to ensure no restrictions.
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3
Q

Key method of protection for lender in the event borrowing company cannot repay loan.

A
  • Taking security of assets
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4
Q

Loan Facility

A

Agreement between a borrower and lender which gives the borrower the right to borrow money on the terms set out in the agreement.

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5
Q

Loan facilities examples

A

Overdraft; Term loan; Revolving credit facility

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6
Q

Overdraft

A
  • On demand facility
  • Bank can call for all the money owed at any point in time to be repaid immediately.
  • Makes overdrafts unsuitable as a long term borrowing option.
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7
Q

Term loan

A

Loan of money for a fixed period of time
Repayable on a certain date
Lender receives interest through period.

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8
Q

Revolving credit facility

A

Borrower has flexibility to borrow and repay.
Allows a company to draw down money, repay it and re-draw it down again.
* Borrower has flexibility to choose when it borrows and repays against an aggregate.

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9
Q

The main debt finance documents

A
  • Term sheets
  • Loan agreement
  • Security document
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10
Q

Debt securities

A

In return for finance
Company issues a security acknowledging the investor’s rights.

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11
Q

Security

A

A piece of paper acknowledging debt / investors rights.
* Can be sold
* At maturity date, company pays the value.

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12
Q

Classic example of a debt security

A

Bond

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13
Q

Bond

A

Issuer promises to pay the value of the bond at maturity.
Interest also paid - usually biannually.

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14
Q

Where can bonds be traded?

A

Capital market.

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15
Q

Private companies and issuing bonds

A
  • Private companies can only issue bonds to targeted investors
  • Not to the public
    s755 CA 2006
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16
Q

Term sheet

A
  • Statement of key terms of transactions.
  • Equivalent to the HoT
  • Not intended to be binding = statement of the understanding
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17
Q

Loan agreement

A
  • Sets out the main commercial terms of the loan
  • Interest dates to be paid on dates
  • More detail on the term sheet.
  • Heavily negotiated.
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18
Q

Security Agreement

A

If a loan is secured, a separate security document will be negotiated

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19
Q

Debenture Under 738

A
  • Any form of debt security issued by a company
  • Debenture stock, bonds, any other assets of the company
  • Whether charged or not.
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20
Q

Debenture - security

A
  • Particular doc that creates a security.
  • Debenture is a separate document from a loan agreement.
  • Debenture sets out the details of security.
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21
Q

Important terms in loan agreement

A
  • Representations
  • Undertakings
  • Event of default
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22
Q

Representations

A
  • Representations and warranties
  • Statement of fact as legal and commercial matters
  • Repeated periodically during the life of the loan
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23
Q

Undertakings

A

Undertakings (or covenants) are promises to do (or not do) something.

Or to procure that something is done.

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24
Q

Event of default

A
  • Breach gives the bank contractual remedies where breach constitutes an event of default.
  • Can give the bank the power to call its money early if show a sign of being a credit risk
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25
Q

Forms of security

A
  • Pledge
  • Lien
  • Mortgage
  • Charge
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26
Q

Nature of security

A

Temporary ownership, possession or other proprietary interest in an asset to ensure a debt owed is repaid
(Collateral for a debt)

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27
Q

Benefit of taking security

A

Protects the creditor in the event the borrower enters into insolvency
Prove priority of a debt

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28
Q

Enforcing security

A
  • Normally not necessary to enforce security if borrower is able to pay
  • Enforcing security may be a simpler way of obtaining repayment rather than suing the borrower.
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29
Q

Pledge

A
  • Security provider gives possession of the asset to the creditor until the debt is repaid
    Eg pawning = pledge
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30
Q

Lien

A
  • Creditor retains possession of the asset to the creditor until the debt is paid back.
  • Mechanics lien = allows a mechanic to retain possession of a repaired vehicle until invoice is paid.
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31
Q

Mortgage

A
  • Security provider retains possession of asset, but transfers ownership
  • Right to require creditor to transfer asset back when debt is repaid = equity of redemption
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32
Q

Mortgage over land

A
  • Charge by way of legal mortgage.
  • Unusually ownership remain vested in the security provider usually.
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33
Q

Charge

A
  • Security provider retains possession of the asset.
  • Charge creates an equitable propriety interest in favour of the creditor.
  • Certain contractual rights over the asset.
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34
Q

Two types of charges

A
  • Fixed charges
  • Floating charges
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35
Q

Fixed charge - Define

A
  • Prevents borrower from dealing with the assets subject to the charge
    = the strongest form of security.
  • Lender normally seeks fixed charge.
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36
Q

Floating charge - define

A
  • Floats over a class of assets
  • Does not prevent borrower dealing with the assets
  • Until the floating charge “crystallises” = when defaults.
37
Q

Agnew v IRC 2001

A

Label applied to a charge is not always determinative
* Necessary to look at the terms of the charge itself.

38
Q

When a fixed charge is granted:

A
  • Lender control borrower’s use of the charge asset
  • Company cannot deal with assets without consent of the lender.
39
Q

When might it not be appropriate to have a fixed charge

A
  • eg stock and raw materials
  • Borrower will need to use these assets to generate income to meet liabilities.
40
Q

Fixed charges can be taken over assets such as

A

Plant and machinery

41
Q

If a charge becomes enforceable

A
  • Lender has ability to appoint a receiver
  • Exercise power of sale over that asset.
42
Q

Floating charge is appropriate for

A
  • Over a class of assets - fluctuates
  • Does not five the lender control over the assets
43
Q

Re Yorkshire Woolcombers Association 1904

A

Defined a floating charge as a charge over:
* Class of assets, present and future
* Which is in the ordinary course of company’s business changes
** Until steps taken to enforce; a company may carry on business in a normal way**

44
Q

When a floating charge crystallises

A
  • Ceases to float over an asset class
  • Fixes onto the assets in the class charged
  • Prevents borrower dealing with assets - not treated as fixed charge assets for purposes of winding up
45
Q

If a company receives more assets of the same class after crystallisation

A

These assets are automatically subject to the crystilised charge
NW Robbie and Co v Whitnye Warehouse Co Ltd 1963

46
Q

NW Robbie and Co v Whitnye Warehouse Co Ltd 1963

A
  • If company receives mor assets of the same class after crystallisation
  • Assets are automatically subject to the crystallised charge
47
Q

Crystallisation occurs in the following situations

A
  • Common law - on winding up, appointment of a receiver or cessation of business
  • Specified event - as defined in the loan agreement
48
Q

A book debt

A

An unpaid invoice
* Sum owed to the company in respect of goods or services
* Book debts are a fluctuating asset
* May be a significant asset of a company.`

49
Q

Are book debts fixed or floating assets?

A
  • Muh debate
  • In earlier cases = fixed charge
  • Approach now overuled.
50
Q

Siebe Gorman and Co Ltd v Barclays Bank Ltd 1979

A
  • Court held that a charge over book debts = a fixed charge
  • Degree of control of the bank could stop company withdrawals
  • Even when in credit
51
Q

Re Brightlife Ltd 1987

A

Clarified a company’s bank balance is not a book debt.
Cannot be subject to a fixed charge

52
Q

Re Keenan Bros Ltd 1986

A
  • Fixed charge created by the means of requirement that the funds collected. were to be paid into a blocked account.
  • Prior consent of bank needed to withdraw funds.
    ** Fixed charge as the account was blocked**
53
Q

Re Brumark Investments Ltd 2001

A
  • Company attempted to create a fixed charge over book debts.
  • Book debts excluded from fixed charge, unless bank had ordered payment into an account company could not operate freely.
  • Who had control of the proceeds = key
54
Q

Current position on charges over book debts

A
  • Now very difficult to demonstrate the requisite control over book debts for a fixed charge.
  • Requires a blocked account.
    National Westminster Bank Plc v Spectrum Plust Ltd and Others 2005
55
Q

National Westminster Bank Plc v Spectrum Plust Ltd and Others 2005

A
  • Charge issued was stated to be fixed
  • Company collected book debts, and drew on the account
  • HoL held = Floating charge
  • Approving Brumark
56
Q

Following National Westminster Bank Plc v Spectrum Plust Ltd and Others 2005…

A

It is only possible to have a fixed charge of over book debts if they are paid into blocked account

  • Gives the lender the degree of control required.
57
Q

Are guarantees security

A
  • Not strictly speaking
  • Fo not give rights in assets
  • Similar commercial effect.
58
Q

Guarantee for a loan

A

Guarantor will pay the borrower’s debt if the borrower fails to do s.

59
Q

Why is it important to determine if a charge is fixed or floating>

A

Order of priority on winding up
* When a company is wound up assets are distributed in a specific order.

60
Q

On winding up which charges are paid first….

A
  • Fixed chargers are paid first.
61
Q

Fixed charges on insolvency

A
  • First order of priority on insolvency
  • Entitled to whole of their debt.
  • If shortfall may receive assets from floating charge fund.
62
Q

Insolvency rules requirement for floating charge assets.

A
  • Require a proportion of the floating charge assets to be set aside for the unsecured creditors
63
Q

What are charged out of the floating charge fund before the floating charge holders

A
  • Unsecured creditors.
  • Preferential debts
64
Q

Unsecured creditors are often paid…

A
  • After floating charge holders
65
Q

What type of charge do most banks require…

A
  • A fixed charge & floating charge
  • Greatest chance to recoup money if company goes into liquid`ation
66
Q

Registration of charges

A
  • All charges
  • Created on or after 6th April 2013
  • Must be registered on Companies House
67
Q

Registration formalities for charges

A
  • Charge must be reg within 21 days, beginning day after charge creation
  • Usually done by the lender.
68
Q

Section 859A(4)

A

Registration of charge within 21 days

69
Q

Effect of failure to register

A
  • Charge is void
  • Debt becomes immediately payable
  • Holder of charge reduced to an unsecured creditor
    s859H(3)
70
Q

Records to be kept by the company

A

Certified copies of all charges must be kept at the company’s office

s859P

71
Q

Remedial measures in the case of non registration

A

Court has power to extend period of registration
s 859F

72
Q

Grounds for extension of the option period for registration

A

Failure to deliver documents
* Accidental / inadvertence
* Not of nature to prejudice creditors /shareholders
* Just and equitable to grant relief

73
Q

Barclays Bank plc v Stuart London Ltd 2001

A
  • Court tends to allow register to be rectified
  • Provided this does not prejudice any other chargers created between.
74
Q

Victoria Housing Estates Ltd v Ashpurton Estates Ltd 1982 - summary

A
  • Some cases where court has refused to allow a charge to be registered late
  • Where the time has elapsed too long.
75
Q

Victoria Housing Estates Ltd v Ashpurton Estates Ltd 1982

A
  • Charge was created in 1978, not discovered until 1981 that was not registered
  • Notice of winding up the company - chargeee applied to register.
  • Charge should have been applied for on realisation
    Allowing registration would prejudice other creditors
76
Q

Debt finance

A
  • Raising money by borrowing from a lender
  • Promise to repay the money (usually with interest) at a later date.
77
Q

Equity finance

A
  • Raising money from shareholders v issue of shares
  • Investors may issued preference shares - balanced against no voting rights
78
Q

Equity - Return on investment

A
  • Dividends.
  • Capital growth
79
Q

Debt - Return on investment

A
  • Interest = contractual right
  • Whether or not company is making profit
80
Q

Equity - When does investor receive amount invested?

A
  • On winding up - if sufficient assets
  • On sale of shares (difficult for private companies)
  • If company buys back shares
  • Successful unfair prejudice claim
81
Q

Debt - When does the investor receive back the amount invested?

A
  • Agreed between terms or loan agreement
  • Usually on maturaity or amortising through installments
  • On sale of debt
82
Q

Amortising

A
  • Gradually write off the initial cost of an asset over a period
83
Q

Equity - Priority on winding up

A
  • Shareholders paid back after creditors - unlikely to receive full amount
  • Arrangements may be made between shareholders as to prioritu
84
Q

Debt - Priority on winding up

A
  • Creditors paid before shareholders
  • Creditors improve priority by taking security
  • May contractually agree priority
85
Q

Debt - Control

A
  • Often require undertakings
  • Security may give the lender control over the assets
86
Q

Equity - Control

A
  • Voting rights
  • Existence and extent depends on the rights granted & number of shares
87
Q

Debt - Other factors

A
  • Banks may not be willing to lend on attractive terms
  • Existing loan agreements would need to checked for hindering undertakings
  • Interest is a deductible expense for tax purposes
88
Q

Equity - Other factors

A
  • New shareholders must be found for a share issue to succeed
  • Share market conditions
  • Dividends = allocation of profit; not deductible
89
Q
A

Company Law (8 decks)

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