Borrowing Flashcards
A trading company has an implied…
Power to borrow unless it is explicitly excluded
Re David Payne & Co Ltd 1904
The power to borrow can be exercised for the purposes of attaining the objects of the company
Re Introductions Ltd 1970
The power to borrow is not an object in its own right
A company with a general commercial company objects clause has the express power to borrow if it is…
Incidental or conducive to carrying on trade or business unless the constitution seeks to restrict the directors’ ability to borrow
A lender will invariably insist that a company to which it lends money has the…
Express power to borrow set out in its constitution
Once it is established that a company has the power to borrow, it is necessary to ascertain what?
Who has the right to exercise that power on behalf of the company
Fixed charges
Charges that attach to a specific asset of the company, most obviously land but also other substantial assets including plant and machinery
Can a fixed charge be created over future assets?
Yes
Floating charges
They are created by specific reference to a generic group of assets such as stock but do not attach to any of the assets in the group until a defined event occurs which causes the floating charge to crystallise into a fixed charge when it attaches to all the assets in the group at that time
Re Yorkshire Woolcombers Association Ltd 1903
Characteristics of a floating charge:
- it is a charge over a class of assets of a company, both present and future
- the composition of the class of assets is one which, in the ordinary course of business, will change from time to time
- until such time as the charge crystallises, the company may deal with the assets in the class without reference to the chargee
It is common for a floating charge to be granted over what?
The whole of the undertaking and the goodwill of a company
The undertaking of a company is…
A class of assets, although they are disparate
Qualifying floating charge
A charge created on or after 15.09.2003, contains a right to appoint an administrator
The floating charge will crystallise on: (5)
- the winding up of the company
- the appointment of an administrative receiver
- possession being taken under another charge
- the sale or disposal by the company of a substantial part of the whole of its assets
- the cessation of business of the company
Who will take priority over a floating charge? (4)
- an execution creditor where the goods are sold by the sheriff before crystallisation of the charge
- a landlord’s distress for rent or a local authority’s distress for unpaid business rates levied before crystallisation
- a preferential creditor such as employees in respect of certain unpaid wages
- a creditor whose debt is secured by a charge which has priority
Floating charges granted to give security for what can be challenged if the company subsequently goes into admin/liquidation?
Preexisting debt
Siebe Gorman and Co Ltd v Barclays Bank Ltd 1979
A fixed charge created over shifting assets which gave the company the express right to deal with the assets charged - since the charge imposed an obligation on the company to deposit the proceeds of the sale into a bank account owned by the chargee, not a floating charge
Royal Trust Bank plc v National Westminster Bank plc 1996
CoA said that the inability to use own bank account inconsistent with a floating charge
National Westminster Bank plc v Spectrum Plus Ltd 2005
An overdrawn bank account a floating, rather than a fixed, charge - it is the substance of the charge that is important
Legal charges rank…
According to the order of creation as long as they are registered within the 21-day period required by s859 CA
Equitable charges rank…
According to their order of creation provided they are also properly registered
Will a registered legal charge created after a registered equitable charge take priority?
Yes
Will a registered uncrystallised floating charge take priority over a registered fixed charge?
No
Once the floating charge has crystallised…
It will take priority over any later fixed equitable charge
Can a company create multiple floating charges over the same asset?
Yes and depending on their nature, subsequent charges may rank in priority to the original charge
The requirement to register a charge is…
Voluntary
Re registration, what will be put on company’s filr?
Form MR01 and the certified copy of the charging document
What does the failure to register do?
Renders the charge void against a liquidator/administrator of the company and also against the company’s other creditors
What steps should a company proposing to give a charge take? (4)
- ensure that the memorandum gives the company an express power to borrow
- check the articles to see who is entitled to exercise the power to borrow
- if the proposed borrowing exceeds any limitation on the directors’ powers, convene the necessary GM to approve the borrowing or otherwise comply with the articles
- convene a board meeting to pass a resolution approving the borrowing and any proposed charge to be entered into
If the directors are giving PGs in relation to the charge, they must…
Declare their interest in the proposed charge pursuant to s177 CA
What conditions is the lender likely to insist be included in the security?
- right to appoint a receiver
- express power of sale
- conditions for crystallisation
- prohibition on the creation of any later charges which will rank in priority to the charge being created
What will a purchaser of an asset subject to a floating charge require?
Evidence that the floating charge has not crystallised and attached to the asset to be purchased - if it has crystallised, a formal release from the floating charge is required, if not, a certificate of non-crystallisation will suffice
What does a PG operate as?
A promise by the guarantor to discharge the liability of the company to the lender if the company defaults
Interest paid by the company on money borrowed for the purpose of the company’s business will be a…
Deductible expense for tax purposes, provided the interest is not excessive and is not payable by reference to the company’s profits
