BL 2 Flashcards
Two main ways a company can be financed
- EQUITY finance
selling shares (in return for money or property) - DEBT finance
borrowing money
(bank loan/from shareholders etc)
3 ways shares can change hands
- Allotment
- Transfer (or transmission)
- Buy back
What is allotment of shares?
Company enters contract to create new shares
Give to existing shareholder or new shareholder in return for some consideration (usually payment)
Will issue share certificate and reflect shareholding on register of members
nb number of shares INCREASES
What is a share transfer?
Shareholder gives or sells shares to another or new shareholder
nb number of shares stays same
(but transferor’s percentage decreases and transferee’s inc)
What is share buyback?
Company buys back some of its shares from one or more shareholders
reverse of allotment - reabsorbs shares so total number of shares decreases
(shares company buys back are cancelled)
Difference between share allotment and shares being issued?
Allotment = once have unconditional RIGHT to be on register of members
(bcos shares transferred, paid for and board resolution to register transfer)
Issued = once name of shareholder has been ENTERED on register
Three questions to ask when working out which procedure needed to allot shares?
- Any constitutional restrictions on allotment?
- Directors got authority to allot shares?
- Any pre-emption rights?
(CAP - constitution, authority, pre-emption)
(good cos part of it is if there’s a cap
If a company wants to ALLOT shares, what do you need to check and potentially do in terms of CONSTITUTIONAL restrictions?
(for pre and post CA)
What is the name of the thing to remove lo.
- Companies incorporated before 1 Oct 2009
- check if they updated articles since that date
- if not, shareholder ORDINARY resolution to remove ASC
(Authorised share capital = upper limit on number shares company can have)
- All other companies
- CA 2006 model articles no ASC clause
- check articles in case contains
- if does, change articles to remove restriction by ORDINARY resolution
(EXCEPTION to rule on special res for articles)
Explain whether directors will have AUTHORITY to allot in private companies with one class of shares?
Explain the different possible positions and what may need to do.
(nb one class = no preference shares)
Private with one class:
- Incorp under CA (1 Oct 2009):
- No shareholder permission required
- Board resolution - Pre CA:
- Board no automatic authority
- ORDINARY resolution to activate s550 of Companies Act - Amended articles to restrict allotment by Ds:
- special resolution
When will directors need to be given authority to allot shares?
PUBLIC companies
Private companies more than one class of shares before/after allotment
(also
- priv companies: with
- one class of shares pre CA (pre 1 Oct 2009) (via ordinary res to activate)
- p companies with articles restricting allotment) - special res to amend
BUT diff procedure for public and more than one to give authority
If directors don’t have general authority to allot, what must happen?
Give specifics.
(s 551)
(ie public companies/private more than one class)
ORDINARY resolution authorising directors to allot
Resolution must state:
- max number of shares can allot under it
- date authority expires
, which must not be over 5 years from date resolution passed
Alternatively, could include authority to allot in articles of assoc from incorporation.
must state:
- max no shares
- when expires, must not be more than 5 years from INCORPORATION
(so only worth doing if whilst incorporating)
Even though ordinary, need to file with CH - since amending articles
Ordinary even though articles.
Max time shareholder authority to allot shares lasts and how to extend?
5 years
Ordinary resolution for further period not exceeding 5 years
(and stating date expires/max number)
Summarise how shares can be alloted in both types of companies
- Private post CA 2006 one class - board resolution
- Plus and private more than one class:
articles may authorise
if not, shareholder ordinary to allot
What are pre-emption rights? (s561)
Rights of first refusal over shares which are being allotted
Means company cannot allot equity securities (ordinary shares)
without first offering to existing ordinary shareholders on same or more favourable terms
Offer in proportion to their existing shareholdings
e.g. own 55% shares - offer 55% of NEW shares being allotted
Formalities for offering shares in accordance with pre-emption rights?
Deadline to accept?
State deadline to accept
- must be at least 14 days
Can’t withdraw offer until deadline
Can only offer shares to buyers after this / if shareholders not taken up
Exceptions to pre-emption rights
don’t need to offer to SH if:
- consideration for allotment is wholly or PARTLY non-cash
- preference shares
- bonus shares
(done well this year have bonus in forms of shares) - employee share scheme
How can a company EXCLUDE pre-emption rights via articles?
Can remove via special resolution
Either by excluding generally or dis-apply in relation to particular allotments
(disapply special resolution too - sep queue card)
(check articles before advising to dis-apply or advise they can remove via special resolution)
E.g. may tailor so:
SHs have 21 instead of 14 days to consider
or so SH have rights if non-cash
Explain what means to dis-apply vs exclude pre-emption rights and why would want to use it?
Dis-apply = relates to specific allotment
Exclusion = which relates to all and is in articles
For both:
- Special resolution
so don’t have to wait for all shareholders to respond
How can private companies with one class of shares disapply pre-emption rights?
Special resolution only
How can public or private with MORE than ONE class dis-apply pre-emption rights
IF already given general authority to allot shares
How long will it last?
special resolution.
This will last as long as director’s were given authority to allot for.
(e.g. 5 years)
I suppose not loads of point in it lasting longer than the time authority to allot lasts because that is what will need it for.
PUBLIC or priv more than ONE class
How to dis-apply pre-emption rights if
- General authority to allot
- Specific authority to allot
- General
* special resolution.
* will last as long as Ds authority to allot.
(was on prev card) - specific:
* also special resolution
BUT
* dis-application must be recommended by Ds before proposing special res
- Ds must prepare written statement stating:
- reasons for recommending;
- amount purchaser will pay; and
- directors’ justification for that amount
give shareholders along with notification for GM or with the written resolution
criminal offence to include misleading, false or deceptive material
Why does it make sense to give general authority to allot?
Separately, why does it make sense to exclude pre-emtpion rights?
- Pre-emption rights can be excluded by special resolution alone
(instead of Ds written statement)
- Offer each s/h in proportion to existing shareholders
Convoluted process and unnecessary one at that if all agree to allot
When must a buyer pay for shares?
Under model articles: before receive them
if MA excluded: must be partly paid and remainder when contractually obliged or company wound up
When would shares be issued at a premium?
How would this be recorded in accounts?
When market value significantly higher than nominal value.
Separate share premium account on company’s balance sheet.
Filing requirements after allotment of shares
- any CAP resolutions (even if ordinary) to CH in 15 days
(5 letters in allot) - SH01 in 1 month (01 - 1)
- Prepare share certs - 2 months
- Register of members / PSC if required - 2 months
Obligations on shareholder who is transferring their shares?
(at law and - potentially - under articles)
None / pre-emption rights don’t apply
But check articles - can impact remaining SH’s ability to block resolutions etc
E.g.:
- may say need to offer to existing shareholders first
Can articles prevent a shareholder from selling their shares / a particular purchaser buying shares?
Consider what model articles say and beneficial/legal owner.
No
But under MA, board discretion whether to add to register
If never register, new shareholder will only be beneficial owner
(transferor = legal)
Between transfer and registration:
only legal owner can attend GM and receive dividends
HOWEVER :
- at GM vote in accordance with transferee (beneficial’s) interests
- pay dividends
What must transferor and transferee do on share transfer?
(documents and any payments)
Transferor:
- complete and sign stock transfer form and give to transferee
- give transferee share certificate
Transferee:
- sale price over £1k and not a gift, pay stamp duty
- send share cert and stock transfer form to company
What must company do on share transfer, including documents/filing/deadlines?
- send new shareholder new share certificate in their name within 2 months
- enter their name on register of members within 2 months
- notify registrar of change in ownership when files annual confirmation statement (Cs01)
What is transmission of shares and its effect?
- shareholder dies, automatically pass to PRs
- shareholder bankrupt, automatically vest in trustee in bankruptcy
Effect:
- don’t become shareholders but entitled to dividends
- can choose to be registered as shareholders (subject to company agreeing) and sell
- or sell in capacity as PR/trustee
Explain what a company’s share capital is?
Money provided by shareholders in return for shares
Explain what maintenance of share capital is?
Share capital fund (money shareholders have put in in return for shares) cannot be reduced
(cos creditors use this fund for debts)
(there are exceptions)
Effect of maintenance of share capital principle?
(ie rules surrounding share capital)
- can’t return paid-up share capital to shareholders or reduce the amount they owe if not paid all yet
- can’t pay dividends out of capital
- company shouldn’t purchase own shares
(there are defo exceptions)
Exceptions to rules surrounding maintenance of share capital?
- share buyback if:
a) correct procedure followed
b) after court order if unfairly prejudiced minority shareholder - can return capital to shareholders AFTER payment of its debts in a winding up
Why would company buy back own shares?
- shareholder can’t find a purchaser
- not enough shareholders would support special resolution to transfer (if articles required)
Resolutions for share buyback out of profits
Ordinary resolution authorising the contract
Effect of a company share buyback?
Who is it bad for?
Shares are cancelled
And since company pays for shares, financially worse off
Means:
- Less profits available for dividends (bcos spending money on shares)
- Less capital for any creditors if can’t pay debts
- Less capital for shareholders (after payment of debts) if wound up
issues for directors if company buyback shares
how to justify?
duty best interests / duty care skill attention
since financially worse off (pay for it and shares cancelled)
usually justify in long-term interests if disgruntled shareholder
but hard to justify if just cos no one wants to buy
company buyback: what must u check?
Must check if:
- permitted by articles
- shares fully paid
- amount of available profits
what are distributable profits?
accumulated realised profits less accumulated realised losses
what must happen after completion of share buyback and in what time period?
including what must be kept?
inc what form number?
(same for out of capital or not)
Cancel shares
Update register of members and if required PSC register
Within 28 days of completion file with Registrar:
- purchase of own shares - SH03
- notice of cancellation
Keep:
- minutes
- written resolutions
- copy of contract
^ at registered office for 10 years
when must company pay for shares - share buyback
at time of purchase
Is shareholder allowed to vote on company buy back of their shares?
No
- written resolution: can’t vote
- GM: can vote but resolution not passed if their votes made the diff so they should not vote
What must company consider in terms of financing buyback of shares?
- does it have enough distributable profits?
- even if is, consider if will be used for anything else? - if not enough cash, can pay via capital
- check articles
- must have exhausted profits
- and there are conditions (sep queue card)
buyback not out of capital - role of board and shareholders
Board:
- approve draft contract and decide how to finance
Shareholders:
- OR
Board:
- resolve to enter contract
- one or 2 Ds authorised to execute
how long before GM keep share buyback contract available
15 days
Buyback out of capital - in what circumstances can comapny do this?
- public companies not allowed
- private only if:
1. articles don’t forbid
2. priv only if exhausted distributable profits
Procedure for share buyback out of capital?
(up to resolution)
(as well as OR to approve contract / other conditions where not out of capital)
- prep accounts no earlier than 3 months before the s of
s - BM to approve contract / finance / approve s of s and report
- contract available to members (15 days or with WR)
- director’s statement of solvency
- no earlier than 1 week before GM
- that will remain solvent for 1 year following buyback -
auditors report
- D’s report not appear unreasonable - copy D’s and auditor’s statements attached to WR or at GM
- special resolution
(in addition to ordinary resolution to approve buyback contract)
- that shareholder can’t vote if WR and invalid if makes diff in GM
Risks with directors statement of solvency
If company buyback, statement that solvent and will be for year following buyback
If then becomes insolvent, seller of shares and directors may be required to contribute to losses
Directors may face criminal sanctions if statement unreasonable
London Gazette requirements for sharebuyback capital
How long?
What must include?
What else must they do aside from L G to notify?
within 7 days SR passed
London Gazette, stating:
- SH approved payment out of capital
- amount used
- date of SR
- where D/A’s statements avail to inspect
- right of creditors to apply for order preventing buyback within 5 weeks of SR passed
ALSO:
- publish equivalent notice in appropriate national newspaper; OR
- notice to each creditor
how long does board have to pay for share buyback out of capital?
5 - 7 weeks of special resolution
so got a 2 week window by time given notice to creditors
bcos only if no creditors object within 5 weeks to notice can board pass resolution
How long does company have to prepare accounts before buyback share capital?
No earlier than 3 months before directors prepare statement of solvency
(to check available profits / confirm fully paid)
i.e. don’t prepare 4 months before statement, you could prepare 2 months before - makes sense. more accurate reflection.
what must be done before board meeting for capital buyback?
- company’s articles to see if limit on power to buy back shares
- no earlier than 3 months before statement solvency, prepare accounts to check :
a) available profits
b) shares fully paid
What must be done at board meeting for buyback out of capital?
- decide method of finance
- approve statement of solvency and auditors report
- approve terms of purchase
make contract or memorandum available to members
(circulate with WR or available at registered office 15 days before GM)
SS and AR signed no earlier than 1 wk before GM/passing of WR
What docs need to be kept and filed and for how long after GM/WR if approved buyback out of capital?
Include filing.
File SoS and AR at CH before or at same time as Gazette
Gazette 7 days
File SR within 15 days of GM/WR
Keep SS and AR at registered officer 5 weeks from SR
(same as other share buyback requirements)
how long creditors and dissenting members right to object last re buyback shares
5 weeks after SR
how do shareholders make money
- inc in value of company
(eg if got for £1 and company worth £100k, then if company becomes worth £150k, will be worth £1.50 - dividends
if have available profits (ie AR profits less AR losses), company CAN pay them to shareholders
- directors decide whether to recommend and shareholders ordinary resolution to approve
Two types of debt finance
- Loans
- usually from bank or owners/directors/shareholders
- eg bank overdraft - Debt securities
- IOUs
- issued by company to investor in return for cash payment
Both have to be repaid
(different to securities)
What must COMPANY check/potentially do before borrowing?
- authorised under constitution
- nothing to prevent in MA for private companies
- pre Oct 2009: check memorandum
May need special resolution to change articles/memorandum and remove restrictions
- Ds must have authority
(no issues under MAs)
What must PARTNERSHIP check/potentially do before borrowing?
no restrictions in their own partnership agreement
(dont appear to be any PA 1890)
unanimous consent to amend PA
Three main types of loan
- overdraft facility
- term loans
- revolving credit facilities
what is an overdraft facility?
disadvantages?
is it secured?
contract between business and bank
temporary loan to cover business expenses when no other money available
bank may demand payment immediately without notice (aka uncommitted facility)
business will pay fee and bank charge interest
usually unsecured
how will interest be charged on bank overdraft loan?
base rate
generally on compound basis i.e. unpaid interest added to capital (ie amount borrowed) and then interest charged on whole amount
this is implied into contracts unless agree otherwise
What is a term loan?
When is interest paid?
What often used for?
borrows fixed amount, usually from a bank, for a specified period (ie term), at the end of which it must all be repaid.
pay interest at regular intervals
—I—-I—-I—-
Typically used to purchase assets eg machinery
Different categories of term loans and revolving credit facilities ?
Secured or unsecured - usually secured
Bilateral or syndicated
bilateral = two parties
syndicated = multiple lenders - usually where high risk so not just one lender that carries risk
When can businesses take out the money from a term loan and what they should consider?
in one go
or in instalments
instalments means reduced interest payments
(seems diff to revolving where can reborrow and borrow throughout the period - more flexible)
Advantages of term loans compared to overdraft?
greater certainty re when pay back
borrower has greater control - bank can only request repayment under terms
What are revolving credit facilities? When is interest payable on it?
Bank agrees to make a maximum amount available throughout an agreed period
Can borrow and repay during the period
Interest at regular intervals (same as term)
—I—-I—-I–
Can reborrow amounts already repaid (that is why REvolving)
Can businesses reborrow amounts already repaid under
A) revolving credit facilities and
B) term loans?
A) yes - as long as doesn’t exceed overall maximum figure
B) no
(disadvantage of term loans)
Reborrow begings with R so does revolving
advantages and what type of businesses are revolving credit facilities good for?
can reduce interest payable by reducing borrowings
those whose income NOT evenly distributed throughout the year
(because can borrow when low and repay within that term)
Flexibility to draw and repeay - which limits interest payable
disadvantages revolving credit facilities and term loans ?
expensive to negotiate
If funds needed for single acquisiton, use term loan
^ since can access funds when it is ready and loan repayable according to agreed repayment schedule
What type of loans is facility agreement used for?
Revolving credit facility
Term loans
Initial clauses in facililty agreements
- amount of loan
- currency 💰
- type of loan (term or revolving)
-
availability period to take loan
(for revolving, this will be entire length of facility)
What must bank do once loan agreement signed for term loan and revolving credit facilities?
Provide with loan money when business requests
When can bank request repayment for the 3 diff types of loans?
Overdraft - whenever and no notice
Revolving credit facilities and term loans - in accordance with terms.
Typically:
1.Bullet payment = in one go 🥊
2. Amortisation = equal instalments over term o…o….o
3. Ballon = unequal instalments and last is largest o…O…O
Revolving repayments will be towards end
Term will be more evenly spread
How will interest rates apply on loans?
- parties agree
- may be fixed or variable
- lenders will want default interest for missed payment but penalty clause so can cause probs
What covenants will usually be in facility agreement and who between?
(i.e. contract for loans)
Bank and business
- Limitation of dividends
(so don’t exceed certain amount) -
Minimum capital requirements
(current assets exceed liabilities) - No disposal of assets w/o consent
- No change type or nature of business w/o consent
- No further security over assets
- Provision of info on business
e.g. accounts
What covenants may be implied into facility agreements?
(loans)
maybe by trade usage
- eg bank’s right to charge interest
court limited power imply
- just if so obvs goes w/o saying
- can’t be inconsistent with express term
What are ‘events of default’ in facility agreements?
Terms which if breach, lender may terminate agreement
e.g. failure to pay sum due
What are debentures?
Who can enter?
(NOT a separate form of debt finance - its a type of debt finance)
Usually loan agreement that is registered at CH
Which gives lender security over borrowers ASSETS in return for loan
Companies and LLPs only
(so it’s like a registered secured loan)
Secured vs unsecured debts?
Lender with security can claim secured assets of company
If business insolvent, better position that unsecured creditors who generally don’t have rights of priority over business’s assets
Unsecured debts pro rata reduced if insufficient funds to pay all business debts
What is riskier for investor - equity or debt finance?
Debt finance less risky for investor
- loans are a liability so paid before dividends
- often secured over property
- may be personal director guarantees
^ means more likely repay if insolvent
Equity finance riskier for investor
- will lose capital value of shares if insolvent
- no guaranteed right to dividends
Difference between repayment of capital for equity vs debt finance
equity
- don’t repay shareholder’s capital (ie initial investment into company) unless wound up - although may sell shares to make money
debt
- must repay, sometimes on demand
(nb i checked and debt loan is a form of capital)
Difference between restrictions of sale for shareholders vs lenders
Shareholders
- transfers restricted by articles which usually restrict freedom to sell
- under MA, directors can refuse to register
Lender
- can sell its debenture to a TP if wishes (if want repayment of capital earlier than repayment date agreed)
- company cannot restrict right to sell, regardless of articles
debt vs equity finance - how do lenders vs shareholders get income / capital?
Lenders:
- capital value generally remains same (ie value of loan)
- get money from interest payments (income)
Shareholders:
- dividend (income)
- often invest in hope shares increase in value - i.e. capital appreciation
^ rather than relying on income by way of dividend income
how must company pay interest on loans? what if it doesn’t?
according to terms of agreement
even if no profits available, must use capital
if doesn’t, lender may be able to appoint receiver or administrator to enforce terms of the debenture
What is more flexible - debt or equity finance - and why?
Debt
Equity governed tightly by CA 2006
Whereas debt = contract law
Tax treatment of income payments made to shareholders vs lenders?
Which is more tax efficient?
Dividends NOT deductible expense
pay after corporation tax
INTEREST on debentures trading expense since incurred for purposes of trade
(debt better for tax because cost to business is interest, which is tax deductible)
(unlike shares where cost for business is the returns company paid to shareholders - which is not tax deductible)
tbf seems fair because otherwise would just pay yousrelf loads of dividends and no tax would ever get paid lol
If company already has high levels of debt (high ‘gearing’) what may be the only financing option available?
(nb it is specific form of a type of finance)
Equity
By fresh issue of shares
Why would a lender require security in return for loan?
(i.e. security over assets in return for loan)
Because if fail to repay loan as agreed, lender can seize assets, sell them and pay self out of proceeds.
So lowers risk of not being repaid.
Advantages and disadvantages for business wishing to grant security in return for loan?
:) Lender usually allows to borrow at lower rate
:( must accept restrictions on use of assets given as security
Definition of security under
CA
LPA
Insolvency Act
CA 2006 = charge used as umbrella term for most types of security. specifically states that this inc mortgages.
LPA 1925 = mortgage umbrella term for security, defined as charge or lien over PROPERTY
Insolvency Act = any mortgage, charge, lien or other security
(check which legislation you are using at outset since varies)
Registration requirements for charges for sole traders, partnerships
can only be granted fixed charges
and must be registered at Land Registry if over land
When will COMPANY / Directors have/not have authority to grant security loans?
If they do not, what will be required?
CA 2006 / MA =
- no restrictions for private companies
- directors have authority to enter security contract on company’s behalf
(unless amended articles)
Pre 1 Oct 2009 - check that company’s memorandum
If there are restrictions:
- special resolution to amend articles.
What should a LENDER check before offering a loan in return for security with a company?
check no restrictions on company and Ds authority by:
- articles, companies CH records and requesting relevant board resolutions
- sufficient value in property for loan
- charges registered at CH and Land Registry / Intellectual Property Office if apt
- winding-up search by telephone at Companies Court to check no insolvency
3 main types of security for loans and which is highest form and their key features?
(for llp/company)
- mortgages
(highest form)
- legal ownership transferred to lender
- right to immediate possession and sale - fixed charges
- separate over each asset
- keep in good condition and permission to dispose
- right of sale and to proceeds before others
- can have multiple over one asset
- not legal - floating charges
- equitable over whole class of assets (ie stock)
- assets constantly changing
- don’t need permission to deal with unless crystallizes
When does floating charge crystallise and what does that mean?
Automatically crystallises - i.e. turns into a fixed charge over particular assets
Chargor (company) then can’t deal with w/o consent
- if:
- receivership
(charging doc may say when receiver can be appointed, no need to be insolvent) - liquidation
- ceases to trade; or
- any other event specified in charge document
(eg failure to pay)
Disadvantages of floating charges (compared to fixed) for lender)?
- Fixed = priority over sale proceeds
(floating gets any remainder) - company could sell stock and not replace, so wouldn’t have a charge over anything
- preferential creditors take priority
- liquidator/administrator can apply to remove floating charge
what is a lien? 🔑
does it give u right to sell?
form of security
gives creditor right to physical possession of debtor’s goods or assets until they have paid debts
no right to sell
eg right to retain van until repairs paid for
(keep the keys)
what is a personal guarantee?
directors give for loan so if lender can’t recover loan in full from company/LLP may take from their personal assets
what is a pledge (type of security)?
asset physically delivered by debtor to creditor to act as security
right of sale if sufficient notice given
what is retention of title?
(form of security)
on sale of goods, buyer doesn’t get full title to goods until pay full price to seller.
if buyer defaults, goods repossessed by seller.
What are the key terms in a charging document?
(ie contract for secured loan)
- Security
- form (fixed/floating/lien etc)
- over what assets - Representations and warranties
- re the assets
eg warrants that free from other charges - Covenants
- ensure value of assets maintained - Enforcement
- circumstances where security enforceable
-lender’s powers e.g. sale
How can a company authorise debentures and potential issues which may arise?
(i.e. secured, registered loans)
Debentures = loan agreement registered at CH, which gives security over assets (companies/LLPs only)
- Board resolution usually enough to authroise both the borrowing and grant of security
- May be issued with directors counting in quorum - eg giving personal guarantee - check articles and get shareholder decision either suspending (OR) or amend articles (SR)
Do you have to register a charge at CH? Why would you?
Voluntary
But if don’t, may become void against other creditors/liquidators/administerators
Lose priority and treated same as unsecured creditors
But company still liable to repay
Once company has formally entered agreement for a charge,
- who should register it?
- by when?
- how? (including formalities)
Company or any person ‘interested’, including company and CHARGEHOLDER
With CH
21 days
Statement of particulars (form MR01), fee and copy of the agreement
(mr charge)
After charge has been registered, what must Registrar provide and to who?
Certificate of registration, to person who delivered the application
What documents regarding a registered charge will be available for public inspection?
Form MR01 and copy of charging document (eg contract)
If charge has been registered, what must be kept available for inspection, where and implications of not doing?
Form MR01 and copy of charging document
Registered office
Criminal offence, but charge remains valid
Implications of late or inaccurate delivery of documents relating to charge at CH? Any saving grace?
(re-cap: 21 days to register)
Charge is void against TPs
Treated as if unsecured
Court can (rare):
A) extend 21 days if
- accidental; or
- would not prejudice shareholders/other creditors
BUT any other charges registered in mean time would have priority
B) allow rectification or replacement document if incorrect details/doc
What should borrower do when repay registered charge?
Is this compulsory?
sign and complete MR04
registrar will put statement of satisfaction on file
no but good practice
If lender releases registered charge or allows to sell, who must do what?
person with interest in registration of charge (eg director)
sign completed MR04
Register statement at CH that released/no longer belongs
May need to remove from LR too
Order of priority of charges?
If registered:
- Fixed charge or mortgage priority floating of same asset, even if floating was created first
- Multiple fixed or mortgage over same asset, priority in order of date of CREATION (not registration - but assuming were registered in 21 days)
- Multiple floating charges over same asset, date of creation (not registration - but only if both are properly registered)
- If floating charge has negative pledge, same priority levels as fixed charge / if fixed has actual knowledge, will rank behind
- If fixed charge not registered on time, ranked below floating charge holders (even if floating charge created later)
BUT creditors can enter agreement between themselves to alter priority (ie subordination)
(consolidate task 3 unit 5 helps if stuck)
What is subordination and what formalities?
(relates to loans)
Creditors can enter agreement between selves to alter priority
Agreement = deed of priority
e.g. holder of fixed charge allowed bank priority for floating charge because bank not grant without and borrower needs to continue trade
What is a negative pledge clause?
(relates to floating charges)
Clause
Prohibits company from creating later charges with priority (eg fixed/mortgage)
to floating charge without permission
Future lenders with actual knowledge of the clause will not have priority.
How is negative pledge clause disclosed / when will subsequent lenders have notice and risks for them?
(re-cap: notice is required for them to not have priority)
MR01 and clause included in copy of charging document (CH)
Can’t argue had constructive knowledge because was on MR01
Need to have searched CH docs and seen charging doc - then they will have actual knowledge and no priority
Subsequent charge holder may also be liable for** tort of inducing breach **of contract
So should contain covenant that there are no earlier charges subject to negative pledge clause - then otherwise company borrower in breach and can terminate
how can company execute a deed?
- affixing its seal, (if MA I think) signed by at least one authorised person in presence of a witness who attests; or
- signatures of two authorised people (direct/secretary); or
- director in presence of a witness who attests
*if *
contrasts with contracts - no need for witness if seal or 2 signatures if authorised - can be entered into using company seal or on behalf of company by person acting under its express or implied authority - director or could be another employee who enters into contracts as part of role
punishment for not following accounting standards?
disciplinary action
not legally binding !
What is income for a business?
(sounds silly but imp!)
The profits that it earns from trading or offering its services
eg fees for legal services
What are expenses for a business?
Items business paid for and which will benefit from for a short time
e.g. gas, stock bought for resale
What are assets for a business?
What business owns or has right to own
Usually longer-term benefit that expenses
eg business premises if own them, machinery, money owed to business
What are liabilities for a business?
What business owes
e.g. amount unpaid on loans
Which account indicates how well a business is performing financially and what is it made up of?
Final account, which is made up of:
A) the profit and loss account
B) the balance sheet
What does a profit and loss account show and how?
Day-to-day profitability by:
Income - Expenses = Profit
Does not consider assets or liabilities
income = e.g. legal fees. expenses = short-term eg gas.
(would not say CR/DR - just one section for income and one for expenses. see one note for pic)
What does balance sheet show and how?
What business is WORTH, by:
Assets - Liability = Net worth
SPLIT INTO TWO SECTIONS:
- assets and liabilities covered within them:
- Employment of capital - i.e. where £ is
assets - liabilities owed to THIRD PARTIES
e.g. in bank account/premises
Structured as:
FIXED ASSETS
CURRENT ASSETS
LESS CURRENT LIABILITIES
NET CURRENT ASSETS
LESS LONG-TERM LIABILITIES
NET ASSETS - Capital employed i.e. where £ came from
OPENING BALANCE (members initial contribution)
NET PROFIT (cos that is free to spend)
DRAWINGS - in (brackets) - money owner taken out
When are final accounts prepared?
Annually - end of accounting period
What is trial balance?
Contains ALL (!) DR and CR entries for ALL ledgers
(income, expenses, assets, liabilities)
(info from here used for profit/loss and balance sheet)
So like an overall total
Prepare before final accounts
Imp - should be EQUAL
(bcos it is double entry bookkeeping - for every DR entry there should be a CR entry)
E.g.
DR. CR Capital £15,000 Cash £13,450 Wages £750 Rent £800 Profit costs. £600 Debtors (Mrs Jones) £600
** £15,600. £15,600**
^ so it ends the same in DR and CR because (i thinK) it has spent X amount and that is where it has come from.
What is a trading account?
Explain its relation to profit loss account,
For businesses which buy and sell GOODS
(not professional services)
Shows gross profit by:
income from selling goods - cost of buying the goods = gross profit
Then transfer this gross profit to profit loss account
(means don’t need to transfer all the individual sales of goods)
How are assets and liabilities sub-divided on balance sheet?
Explain the the sub-categories.
Assets
- fixed and current
(fixed = used in business to help run eg machinery)
(current = short-term eg debts/cash)
Liabilities:
- current and long-term
Current = repayable 12 months or less (e.g. invoice)
Long-term = over 12 months (e.g. bank loan)
Fixed assets first then current.
Current liabilities first then long-term liabilities.
