Business Law And Practice: debt finance Flashcards
What are the 2 types of debt finance a company can have?
- loans (borrowing money from bank or other finance provider)
- debt securities (IOUs in exchange for cash payment to be returned on a future date)
Are there any automatic restrictions placed on companies looking to borrow money?
- no for companies incorporated after 1st October 2009, there are no automatic restrictions within model articles or memorand to restrict companies from borrowing money
What are term loans?
- these are loans taken out by a business for specified period at the end of the terms these loans must be repaid
What is a Revolving credit facility?
A Revolving Credit Facility (RCF) is a flexible loan that allows a business to borrow, repay, and borrow again up to a set limit, similar to a credit card. Interest is only charged on the amount used.
What does the term facility agreement mean?
- a loan agreement
What are debentures?
- it is a loan agreement that is registered with companies house giving the lender security over the borrowers assets
What kind of businesses can enter into debentures?
- only companies and llps can enter into such agreements
Are there any restrictions on a company to grant security to lenders?
- no for companies incorporated after CA 2006 there is an implied power that companies can grant security (unless articles have been amended) (s30(1))
If there are restrictions on a company granting security how can the commaies articles be amended?
- shareholders passing a special resolution (s 21 ca)
What are book debts?
- Money owed to a business by its customers for goods or services sold on credit, recorded as accounts receivable in the books.
What is a fixed charge?
- A security interest over a specific asset (e.g., property, machinery) that the borrower cannot sell or dispose of without the lender’s permission.
What is a floating charge?
A security interest over a group of assets (e.g., inventory, stock) that can change over time. The borrower can use or sell the assets until the charge “crystallizes” (becomes fixed).
Which kind of charge takes priority a fixed or floating charge?
- fixed charge
Does a charge need to be registered?
- no but as best practice it should be
What is a charge in company law terms?
*A charge is a legal right or claim a lender (creditor) has over a company’s assets as security for a debt. If the debt isn’t repaid, the lender can take the assets.
Types: Fixed charge (specific asset) or floating charge (changing assets).
Example: A mortgage on a company property is a fixed charge.
What are debentures in UK debt finance?
Long-term secured loans secured but the companies assets that are registered with companies house on llps and companies can enter into these
Main difference between equity and debt finance?
Equity gives ownership in the company; debt is a loan repaid with interest, no ownership transfer.
If there are restrictions on a companies ability to grant security over assets how can this be removed?
- shareholders passing special resolution to amend the companies articles
What checks must a UK lender ensure a company has authority to grant security over assets?
- Check Articles of Association for any restrictions.
- Verify Companies House for existing charges (Form MR01).
- Confirm no negative pledge in existing loan agreements.
- Assess directors’ powers under the company’s constitution.
- Check for financial distress or insolvency risks.
- Check Articles of Association for any restrictions.
- Verify Companies House for existing charges (Form MR01).
- Confirm no negative pledge in existing loan agreements.
- Assess directors’ powers under the company’s constitution.
- Check for financial distress or insolvency risks.
What is a lien?
A legal right or claim over an asset (e.g., property, goods) held physically by a creditor as security for a debt or obligation until it is repaid.
How long after creating a charge must it be filed at Companies House (UK)?
21 days from the date of creation, as per the Companies Act 2006 (s.860) . Failure can render the charge void.
Impact of not registering a charge at Companies House (UK)?
The charge becomes void against liquidators, administrators, and creditors, and the debt may be treated as unsecured, risking the lender’s priority.
What is subordination?
agreement between creditors where one agrees to rank below another, ensuring senior lenders are paid first in case of default.
What is a negative pledge?
- A clause in a loan agreement where the borrower agrees not to create security over assets for other lenders without the original lender’s consent.
