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SQE 1 (mine) > Business: 5 Company Finance > Flashcards

Business: 5 Company Finance Flashcards

1
Q

What are the 2 ways to finance a company?

A
  1. Equity finance
  2. Debt finance
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2
Q

Types of equity finance?

A
  1. Allotment: creation of new shares for consideration
  2. Transfer: SH sells/gifts existing shares
  3. Transmission: automatic when SH bankrupt/dies
  4. Buyback: co buys back own shares which are reabsorbed
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3
Q

Allotment:
What is the difference between the term ‘allot’ and ‘issue’?

A

-Allots shares-when person acquires unconditional right to be inc in register of members
-Issued-when name of SH entered onto register of members

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4
Q

3 steps to consider when alloting shares?

A
  1. Constitutional restrictions?
  2. Do the directors have authority to allot?
  3. Are there pre-emption rights?
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5
Q

What constitutional restrictions may there be on allotment and how are they dealt with?

A

Incorp before Oct 2009 (Table A co): memorandum contained Authorised share capital (upper limit) = If articles not updated since CA 2006: remove by OR+ file copy of OR at CH

Incorp under CA 2006: MA-no restrictions, check special articles and remove via SR if needed

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6
Q

Do directors have authority to allot shares?

A

Priv co (ltd) with 1 class of share (before and after issue):
-If Inc before CA 2006: need OR to activate s550
-If inc under CA 2006L Dirs can alot via BR without SH permission (s550)
-Both-Check AoA

Public (plc) cos with more than1 class of share
-Need SH consent via OR (s511)
-OR authority may exist in articles

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7
Q

What are the requirements for an ordinary resolution giving directors authority to allot shares (for public cos with more than 1 class of share) under s551

A

OR will state:
*max shares dirs may allot
*Date authority expires (must not be more than 5y from date OR passed
*Once expired, can be renewed via OR for further period not exceeding 5y
*Must file OR at CH (even though its an OR)

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8
Q

How can you tell if a company is public or private from its name

A

Priv =ltd
Public =plc

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9
Q

Allotment:
What are Statutory Pre-emption Rights?

A

If co proposing to allot ‘equity’ securities’ , they must offer them to existing SH first in proportion to their existing shareholdings:
*in same/more favourable terms
*In an amount that will enable SH to preserve % shareholding (as nearly as practicable)
*Offer must state period for acceptance (CANT be withdrawn in this period)

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10
Q

Allotment:
Meaning of ‘equity securities’ for pre-emption rights?

A

ordinary shares in co OR shares that can be converted to ordinary shares

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11
Q

Allotment:
Exceptions when pre-emption rights dont apply

A

a) Consideration is wholly/partly non cash
b) Allotment of bonus shares
c) Shares held under/allotted/transferred pursuant to employee share scheme

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12
Q

Allotment:
How are pre-emption rights disapplied?

A

Priv Co 1 class of share (before and after issue): exclude in articles generally or for particular allotments via special res

Priv/public co with more than 1 class of share:
◊if dirs have general authority to allot-remove via SR and disapplication will last as long as dir authority under s551
◊ If authority was for a specific allotment=disapply via SR BUT:
□ must be recommended by dirs
□ Before proposing, dirs make written statement setting out: 1. Reasons for making rec 2. Amount purchaser will pay 3. Dirs justification of amount
□ Statement must be circulated to SH with notice of GM or sent with WR

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13
Q

Allotment:
What is an offence related to a directors statement reccomending removal of pre emption rights when their power was for a specific allotment?

A

OFFENCE to knowingly/recklessly authorise or permit inc of any matter that’s misleading/false/deceptive in material particular in dirs written statement

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14
Q

Allotment:
How are shares paid for?

A

MA-all co shares must be fully paid when received

Bespoke articles-shares can be issued partly paid and SH pay rest when contractually obliged to do so/if co wound up

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15
Q

What does it mean for shares to be issued at a premium and what must be recorded?

A

*Premium=issued at excess of nominal value if co doing well
*Excess consideration recorded in sep share premium account on balance sheet
*Will be treated as share capital and must be maintained

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16
Q

External admin requirements for allotment?

A

Copies of resolutions to be sent to CH within 15d:
*all SR
*OR removing ASC
*OR activating s550 in pre CA co
*OR granting dirs authority to alloy

Forms to send to CH:
*return of allotment and statement of capital (SH01)
*Possible PSC forms

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17
Q

Internal admin requirements for allotment?

A

*amend register of members within 2mo
*possibly amend PSC register
*prep share certificates within 2mo allotment

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18
Q

What are restrictions on transfer of shares?

A

*CA: doesnt restrict
*Articles :cant restrict SH selling shares/stop particular purchaser buying
*MA: board can refuse to register transfer (so person wont become shareholder)=every share transfer must be approved board

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19
Q

What happens if the board refuse to register a transfer of shares?

A

□ transferee will be beneficial owner, transfer will remain legal owner
□In GM legal owner attends/revives dividends but must vote in accordance with ben owners wishes and pay them dividend

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20
Q

Procedure for transferring shares?

A
  1. Complete + sign stock transfer form and give to transferee with share certificate
  2. If sale price over 1k (and shares NOT a gift), pay stamp duty on stock transfer form. (0.5% rounded to nearest £5, min stamp duty £5)
  3. Send to co who will:
    -send new SH share certif in their name within 2mo
    -enter name on register of members within 2mo
    - notify the Registrar of Companies of the change in ownership of the share when the company files its annual confirmation statement (CS01).
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21
Q

What is transmission?

A

Automatic process whereby:
□ If SH dies, their shares automatically pass to their PRs
□ If SH made bankrupt, their shares automatically vest in their trustee in bankruptcy.

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22
Q

Effect of transmission

A

□Trustee in bankruptcy/ PRs dont become SH of co but entitled to any dividends declared on the shares.
□Can choose to be registered as SH themselves and then sell shares OR sell directly in capacity as rep

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23
Q

What is buyback?

A

*Company buys back some of its own shares
*Shares cancelled/reabsorbed so total no. of shares in co decreases and shares co bought back are cancelled

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24
Q

How does buyback relate to dirs duties?

A

*Board need to make decision to buyback with due skill, care and attention (Often justified on basis will be better fort co in long run to buy out unhappy SH rather than continue to work with them in unproductive way, esp if theyre also dir)

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25
Q

Consequences of buyback?

A

□ Reduced profits available for declaring dividends
□ Reduced capital available for creditors if co cant pay debts
□If co wound up, less money for SH once creditors paid

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26
Q

Procedure of buyback if shares on/not on stock market?

A

Shares on stock market=market purchase
Shares not on stock market=off market purchase

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27
Q

Requirments for an off-market purchase

A
  1. Articles mustn’t forbid
  2. Shares must be fully paid
  3. Co must pay for shares at time of purchase
  4. Shares paid for out of distributable profits or proceeds of fresh issue of shares made for purpose of financing purchase
  5. SH pass OR authorising buyback contract
  6. Copy/summary of buyback contract must be available for inspection for at least 15d before general meeting and at GM (or sent with WR)
  7. Copy of buyback contract/memorandum of its terms must be available for inspection at RO/SAIL as soon as contract concluded for 10y
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28
Q

What are ‘distributable profits’ for the purpose of buyback?

A

Cos accumulated, realised profits less accumulated, realised losses (bottom 1/2 balance sheet)

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29
Q

Practical considerations for buyback ?

A

□ Dirs consider duties
□ Does co have enough cash?: Check what liabilities need to be paid soon to ensure co can pay for both with cash it has

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30
Q

What can a co do if they dont have enough distributable profits for buyback?

A

Priv (NOT public) cos can use capital (unless articles forbid) BUT must exhaust distributable profit first

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31
Q

What are the requirements for buyback out of capital to be lawful?

A

Same conditions as using distributable profits, PLUS:
*Dirs make statement of solvency (stating co solvent & will be for year following)and hold BM to call GM/circulate WR no more than 1w before GM (+annex auditors report)

*General meeting/WR (with copy of SoS and auditors report available):
◊ OR to authorise buyback contract
◊ SR to authorise payment out of capital

*Within 7d SR, co put notice in London Gazette and other paper in their area stating:
◊ SH have approved payment out of capital for buyback
◊ Amount of capital to be used
◊ Date of SR
◊ Where dirs statement/auditors report available for inspection
◊ That creditors may, within 5y apply for order preventing buyback

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32
Q

Admin after the procedure to approve buyback out of captial

A

◊ File copy of dirs statement/auditors report at CH before/at time of newspaper notices
◊ Kept available for inspection at RO for 5w after SR passed
◊ Dirs hold BM and pass BR, deciding to enter buyback contract
◊ Payment made no earlier than 5w and no later than 7w after date of SR

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33
Q

What is a companied share capital?

A

£ provided by SH in return for shares

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34
Q

Explain maintenance of share capital?

A

Share capital CANNOT be reduced as is what creditors look to for payments of debts owed to them
SO:
□ Dividends cant be paid out of capital, just distributable profits
□ Co cant generally purchase own shares

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35
Q

Exceptions to maintenance of share capital

A

□ Co can buyback if correct procedure followed
□ Co can purchase own shares under court order to buy out unfairly prejudiced minority SH
□ Co can return capital to SH after payment of co debts in winding up

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36
Q

What are the 2 ways a shareholder makes money from shares?

A
  1. Value of shares increases as co makes money
  2. Dividends
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37
Q

How/when are dividends paid?

A

□ Only paid profits available for purpose (available profits=accumulated realised profits LESS accumulated realised losses)
□ Can use profit from prev years if made no profit that year
□ Dirs decide if to recommend dividend and how much it should be
□ SH pass OR for it to be approved (aka declared) (Can approve or decrease NOT increase)

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38
Q

Considerations prior to borrowing

A

Check allowed to borrow under constitution/PA (+pass special res to remove):
□ MA priv companies-no restrictions on borrowing
□ If formed before 1/10/09 and not updated articles=important to check memorandum for restrictions

Dirs must have authority to act on behalf of co (comes from MA 3 or check bespoke articles)

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39
Q

2 types of debt finance?

A
  1. Loans
  2. Debt securities
40
Q

What are debt securities?

A

IOUs issued to investors in return for cash
Must be repaid by co at agreed future date

41
Q

Debt finance: 3 main types of loan?

A
  1. Bank overdraft
  2. Term loan
  3. Revolving credit facility
42
Q

Debt finance: What is an overdraft facility?

A

*Contract between business and bank allowing business to go overdrawn on current acc
*Relied on by most small/med size businesses
*Used for everday business expenses

43
Q

Debt finance: Advantages/disadvantages of overdraft

A

Advantages
*flexible source of finance
*relatively few formalities
Disadvantages
*uncommitted facility=payable on demand without notice
*Expensive (fee charged and interest charged on compound basis (on unpaid debt + capital))
*Unsecure

44
Q

Debt finance: What is a term loan?

A

*Borrows fixed amount from bank for specified period (term) which must all be repaid at end
*Borrower must pay interest at regular intervals
*Can be secured or unsecured (usually secured)
*Bilateral (between 2 parties) or syndicated (business and number of diff lenders, risk shared between diff lenders whera amount of loan is high)

45
Q

Debt finance: how long do term loans usually last?

A

Short term loans=1y
Medium term=1-5y
Long term=over 5y

46
Q

What are term loans typically used for

A

purchasing capital asset (eg. Land/building/ machinery)

47
Q

What is a contract for a term loan also known as

A

Loan agreement, credit agreement, facility agreement

48
Q

Advantages and disadvantages of term loan?

A

Advantages:
*greater certainty
*greater control (can only request payment under terms of contract)
Disadvantages:
*time and expense in negotiating
*once repaid cant be re-borrowed

49
Q

What is a revolving credit facility?

A
  • Bank agrees to make available a max amount of money through agreed period of revolving credit facility (can borrow and repay during)
    *Interest payable at regular intervals
    *Can reborrow amounts already repaid so long as it doesn’t exceed overall max figure
    *Bilateral or multilateral
    *Unsecured or secured
50
Q

Advantages/disadvantages of revolving credit facility

A

Advantages:
*v flexible
*possible to reduce total interest by reducing borrowings
*Good for seasonal businesses
Disadvantages:
*time/expense of negotiating legal docs
*high fees charges

51
Q

In facility agreements for term loans/revolving credit facilities what will the initial clauses set out?

A

a) loan amount
b) currency (eg £, $ or €);
c) type of loan
d) the availability period(s) during which the loan can be taken (for a revolving credit facility, this is almost the entire length of the facility)

52
Q

What may facility agreements for term loans/revolving credit facilities provide for in terms of repayment options?

A
  1. repayment of the whole loan in one go at the end of the term (a ‘bullet’ payment)
  2. in equal instalments over the term of the loan (‘amortisation’) (gives lender notice if business struggling to repay)
  3. in unequal instalments, with the final instalment being the largest (‘balloon repayment’)

Revolving credit facility=probs towards end of facility period
Term loan=spread more evenly throughout term of loan

53
Q

Is there statutory control on interest payments for facility agreements for term loans/revolving credit facilities?

A

◊ No statutory control, will be expressly stated in facility agreement
◊ Fixed or variable (floating rate-altered at specified intervals using formula intended to maintain lenders profit on loan as base rate for stealing is reviewed every month)
◊ Default interest if scheduled payments missed (draft carefully bc law on penalty clauses)

54
Q

Common express covenants given by business to bank in a facility agreements for term loans/revolving credit facilities?

A

i) Limitation of dividends/other distributions
ii) Minimum capital requirements (current assets exceed current liabilities by specified amount)
iii) No disposal of assets or change of business
iv) Provision of info on business (ie. Annual accounts)

55
Q

When are covenants are implied into a facility agreement for term loans/revolving credit facilities?

A

◊ Ie by trade usage such as banks right to charge compound interest
◊ Court will imply only if necessary to give business efficacy to contract or term so obvious it goes without saying
◊ CANT imply terms inconsistent with express term

56
Q

What is a debenture?

A

*A loan agreement in writing between borrower and lender registered at CH
* Gives lender security over borrowers assets
*ONLY for companies/LLP

57
Q

‘Charge’ ‘mortgage’ and ‘security’ definitions under different legislation

A
  • CA: ‘Charge’=umbrella term for security inc mortgage
    -LPA 1925: ‘mortgage’=umbrella term for security (Inc mortgage, charge, lien, other security)
    -IA 1986-‘security’=’any mortgage, charge, lien or other security’
58
Q

What secutiry can sole traders grant?

A

CAN grant fixed charges (must be registered at Land Registry if over land)
CANNOT grant floating charges

59
Q

What secutiry can partnerships grant?

A

CAN grant fixed charges (must be registered at Land Registry if over land)
CANNOT grant floating charges

60
Q

What secutiry can LLPs grant?

A

CAN grant fixed AND floating charges and the registration process similar to companies

61
Q

What secutiry can companies grant?

A

CAN grant fixed AND floating charges

62
Q

Do the MA place restrictions on granting security?

A

NO

63
Q

When must you check to see if a company has restrictions on granting security?

A

□ amended articles
□bespoke articles
□ Co formed before 1 oct 2009 and not updated articles to inc CA=check old style memorandum of association must be checked
□ NOT MA

64
Q

What can be done if a companys articles restrict granting security?

A

SH pass special res to amend articles

65
Q

What must a lender check before a co grants it secutiry

A

*No restrictions on co granting security
*dirs have authpority and properly appointed
*CH search to check prior charges, sufficient value of prop
*LR search (if taking security over land)
*Intellectual Property Office to check cos title to pro
*Winding up search by phone at Companies Court to check no insolvency proceedings

66
Q

What assets may be secured?

A

Basically any asset:
* Land (freehold, leasehold, fixtures, fittings)
*Tangible property (machinery, computers, stock)
*Intangible property (money, debts owed, shares owned in other cos, intellectual property rights)

67
Q

What types of security are there?

A
  1. Mortgages
  2. Charges (fixed/floating)
  3. Personal guarantees (dirs/partners)
  4. Pledge-asset physically delivered by debtor to creditor
  5. Lien-gives creditor right to physical possession until debt paid
  6. Retention of title-on sale of goods, buyer doesn’t get full title unitl they pay full price to seller, if buyer defaults, goods repossessed
68
Q

What are mortgages mainly used for?

A

High quality assets (land, buildings, machinery, aircraft, ships, shares in other cos)

69
Q

Must separate mortgages be created over each asset?

A

yes

70
Q

Qualities of mortgage for land and property other than land?

A

□ Land=is a charge by deed expressed to be by way of legal mortgage (rights of mortgagee over land inc right to take possession and sell it)

□ Not land=Involves transfer of legal ownership from mortgagor to mortgagee (lender) Is held in reserve and exercised if borrowed money isnt repaid

70
Q

Do charged transfer legal ownership to chargee?

A

No, DOESN’T transfer legal ownership or give chargee the right to immediate possession
DOES give lender rights over asset if borrower fails to repay money

71
Q

Is a separate fixed charge needed over each asset?

A

Yes

72
Q

Effect of a fixed charge?

A

*Lender has control of asset and restricts borrowers ability to deal with the asset until the loan is repaid or it obtains the consent of the chargee
*Charge holder has right of first claim: If charger has financial difficulties, holder can sell asset and be paid out of proceeds of sale before other claimants

73
Q

Can you create more than 1 floating charge over same group of assets?

A

Yes

74
Q

3 basic features of a floating charge?

A
  1. It is an equitable charge over whole or class of business assets
  2. Assets subject to charge are constantly changing (fluxtuating)
  3. Business retains freedom to deal with assets in ordinary course of business until charge crystallises
75
Q

When will a floating charge automatically crystallise?

A

(a) chargor goes into receivership;
(b) chargor goes into liquidation;
(c) chargor ceases to trade; or
(d) any other event occurs which is specified in charge document

76
Q

What is the effect of crystallisation?

A

Chargor can no longer deal with assets covered by charge (=floating charge turns to fixed charge)

77
Q

What are book debts?

A

*Money owed to co/LLP by debtors
* Vary over time=can be charged via floating charge
*Fixed charge where charge holder has control over both debts and proceeds once they were paid (eg where charge holder allowed co/LLP to collect book debts but then they had to pay money to charge holder to settle debt owed to them)

78
Q

Advantages of floating charges?

A

*Co can deal with assets on day to day basis
*Allows chargor to maximise amount able to borrow
*Can be over whole of business

79
Q

Disadvantaged of floating charges for lenders?

A

*Fixed charge will take priority over floating charge over same
*Chargor can deal with assets so may sell (so may take fixed chrge too)
*Other preferential creditors may have right to claim money from proceeds of sale of assets covered by floating charge if co/llp becomes insolvent before charge holder gets money
* Sometimes an administrator of an insolvent co may apply to have floating charge set aside

80
Q

What is the purpose of covenants in charging document?

A

Seek to ensure value of assets maintained by borrower (inc maintenance and insurance)

81
Q

Is it mandatory to register a charge?

A

*CA-voluntary system of registration by Co or person interested in charge
*BUT consequences of failure to register charge in required time period=big incentvie to register
* Lenders sol will register to ensure charge valid

82
Q

Process to register charges?

A

*within 21d creation, file statement of particulars (MR01) +certified copy of instrument creating charge +fee
*Registrar will register and inc certified copy on reg
*Register gives holder certif of reg
*MR01 and certified copy should be avalaible for public inspection at RO/SAIL (or crim offence)
*if fixed charge over land: register at LR

83
Q

Effect of late delivery of charing doc at CH? (21d period missed)

A

charge void against 3rd party

83
Q

What happens if a charge is not registered?

A

*Still valid and enforceable between the chargor and chargee

*BUT void against liquidator/administrator/other creditors

*charge still valid but will rank as unsecured creditor

84
Q

Can the court extend the 21d deadline for submitting docs to CH for charges?

A

□ Yes, limited power to extend if failure was accidental or due to inadvertence or wouldn’t prejudice position of other creditors/SH

85
Q

What can be done if docs delivered to CH for registration of a charge are incorrect?

A

Court has power to allow rectification if details are inaccurate and to toder the replacement of doc (eg. if defective/wrong doc sent)

86
Q

What should be done on redemption (repayment) of a loan)?

A

□ Person with interest in registration of charge (eg dir) may sign and send Form MR04 to Registrar at CH (done in practice to ensure co file up to date)
□ Registrar will inc statement of satisfaction on co file
□ If enteries against land at LR, should be removed

86
Q

What is the order of priority of charges?

A
  1. Fixed charge/mortgage take priority over floating charge over the same asset, irrespective of date of creation
  2. Several registered fixed charges/mortgage over same asset: priority in order of their date of creation (not registration)
  3. If more than one registered floating charge over the same asset: priority in order of their date of creation
87
Q

What is subordination (aka. a deed of priority)

A

*When creditors to enter agreement between themselves to alter order of priority of their charges (often for consideration)
*Executed by creditors concerned and sometimes co too

88
Q

What is a negative pledge clause?

A

Contractual promise in floating charge doc whereby the co promises not to create a later fixed charge that will take priority over floating charge (without permission)

89
Q

When will subsequent charge holder be bound by a negative pledge clause and what is the effect of this?

A

If they actual knowledge (NOT constructive): will be disclosed in MR01 to CH and clause will be inc in certified copy of charging doc

Effect: their charge is subordinate

90
Q

What should an agreemend for a non first chage contain in to protect charge holder from a possible negative pledge clause?

A

A covenant that there are no earlier charges subject to negative pledge clause (if untrue co in breach and agreement can be terminated)

91
Q

How do companies correctly execute contracts?

A

□ By using co seal
□On behalf of co by person acting under authority (dir/employee if contracts part of their rile)

92
Q

How does a company correctly execute a deed?

A

□ Affixing its seal (MA: +signature of at least 1 authorised person)
□ OR signatures of:
*2 authorised signatories (a director or company secretary); or
*a director of the company in the presence of a witness who attests the signature.
□must be clear on the face its intended to be a deed (delivered as a deed)

93
Q

Timeframe for registering a charge?

A

21days creation

SQE 1 (mine) (30 decks)

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