Borrowing

Question 1

A trading company has an implied…

Answer 1

Power to borrow unless it is explicitly excluded

Question 2

Re David Payne & Co Ltd 1904

Answer 2

The power to borrow can be exercised for the purposes of attaining the objects of the company

Question 3

Re Introductions Ltd 1970

Answer 3

The power to borrow is not an object in its own right

Question 4

A company with a general commercial company objects clause has the express power to borrow if it is…

Answer 4

Incidental or conducive to carrying on trade or business unless the constitution seeks to restrict the directors’ ability to borrow

Question 5

A lender will invariably insist that a company to which it lends money has the…

Answer 5

Express power to borrow set out in its constitution

Question 6

Once it is established that a company has the power to borrow, it is necessary to ascertain what?

Answer 6

Who has the right to exercise that power on behalf of the company

Question 7

Fixed charges

Answer 7

Charges that attach to a specific asset of the company, most obviously land but also other substantial assets including plant and machinery

Question 8

Can a fixed charge be created over future assets?

Answer 8

Yes

Question 9

Floating charges

Answer 9

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

Question 10

Re Yorkshire Woolcombers Association Ltd 1903

Answer 10

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

Question 11

It is common for a floating charge to be granted over what?

Answer 11

The whole of the undertaking and the goodwill of a company

Question 12

The undertaking of a company is…

Answer 12

A class of assets, although they are disparate

Question 13

Qualifying floating charge

Answer 13

A charge created on or after 15.09.2003, contains a right to appoint an administrator

Question 14

The floating charge will crystallise on: (5)

Answer 14

• 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

Question 15

Who will take priority over a floating charge? (4)

Answer 15

• 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

Question 16

Floating charges granted to give security for what can be challenged if the company subsequently goes into admin/liquidation?

Answer 16

Preexisting debt

Question 17

Siebe Gorman and Co Ltd v Barclays Bank Ltd 1979

Answer 17

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

Question 18

Royal Trust Bank plc v National Westminster Bank plc 1996

Answer 18

CoA said that the inability to use own bank account inconsistent with a floating charge

Question 19

National Westminster Bank plc v Spectrum Plus Ltd 2005

Answer 19

An overdrawn bank account a floating, rather than a fixed, charge - it is the substance of the charge that is important

Question 20

Legal charges rank…

Answer 20

According to the order of creation as long as they are registered within the 21-day period required by s859 CA

Question 21

Equitable charges rank…

Answer 21

According to their order of creation provided they are also properly registered

Question 22

Will a registered legal charge created after a registered equitable charge take priority?

Answer 22

Yes

Question 23

Will a registered uncrystallised floating charge take priority over a registered fixed charge?

Answer 23

No

Question 24

Once the floating charge has crystallised…

Answer 24

It will take priority over any later fixed equitable charge

Question 25

Can a company create multiple floating charges over the same asset?

Answer 25

Yes and depending on their nature, subsequent charges may rank in priority to the original charge

Question 26

The requirement to register a charge is…

Answer 26

Voluntary

Question 27

Re registration, what will be put on company’s filr?

Answer 27

Form MR01 and the certified copy of the charging document

Question 28

What does the failure to register do?

Answer 28

Renders the charge void against a liquidator/administrator of the company and also against the company’s other creditors

Question 29

What steps should a company proposing to give a charge take? (4)

Answer 29

• 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

Question 30

If the directors are giving PGs in relation to the charge, they must…

Answer 30

Declare their interest in the proposed charge pursuant to s177 CA

Question 31

What conditions is the lender likely to insist be included in the security?

Answer 31

• 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

Question 32

What will a purchaser of an asset subject to a floating charge require?

Answer 32

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

Question 33

What does a PG operate as?

Answer 33

A promise by the guarantor to discharge the liability of the company to the lender if the company defaults

Question 34

Interest paid by the company on money borrowed for the purpose of the company’s business will be a…

Answer 34

Deductible expense for tax purposes, provided the interest is not excessive and is not payable by reference to the company’s profits