Chapter 10 - Loan Capital

Question 1

What is a debenture?

Answer 1

There is no precise legal definition. Essentially a document acknowledging or establishing debt, with the company being the borrower and the debenture holder being the lender.

Question 2

Identify 5 characteristics on the basis of which debentures can be categorised.

Answer 2

• secured or unsecured
• bearer or registered debentures
• permanent or redeemable
• convertible or non-convertible

Question 3

What is debenture stock?

Answer 3

AKA Corporate bonds. Loans to the company that can be traded on a regulated market.

Question 4

What are the advantages of using a trust deed to secure debenture stock?

Answer 4

By centralising with a trustee, the company essential creates one charge securing all debentures.

Question 5

Identify two key reasons why it is important to distinguish a fixed charge from a floating charge.

Answer 5

1) Floating charges are subject to statutory deductions (the prescribed part), while fixed are not.
2) A floating charge may be subject to avoidance under s 245 IA 1986, while a fixed charge is not.

Question 6

What is the leading case on fixed and floating charges?

Answer 6

Re Spectrum Plus Ltd.

Question 7

What is the most essential characteristic of a fixed charge?

Answer 7

A fixed charge is an interest in specific property.

Question 8

Explain the tension that exists between the rights of a floating charge holder and a company’s unsecured creditors.

Answer 8

Unsecured creditors may know nothing of the existence of a floating charge, but then find all the good they have supplied be swept up by a floating charge holder who has a charge over all the company’s assets.

Question 9

Which three characteristics of a floating charge were identified in Re Yorkshire Woolcombers Association Ltd?

Answer 9

1) A charge upon all of a certain class of assets present and future
2) Which class is changing from time to time
3) In relation to which charged assets the company can carry on business in the ordinary way including removing a charged assets from the security.

Question 10

Is the description given to a charge in the instrument creating it determinative of the nature of the charge?

Answer 10

No, it is the nature of the charge that determines its type (Re Spectrum Plus Ltd)

Question 11

What is crystallisation of a floating charge?

Answer 11

When a floating charge effectively becomes a fixed charge, and the right of the company to deal with the charged assets ceases.

Question 12

Does the holder of a crystallised floating charge hold the same rights as the holder of a fixed charge?

Answer 12

IA 1986: “ a floating charge is a charge which, as created, was a floating charge.”

Question 13

What is a book debt?

Answer 13

Sums receivable, either immediately or at some date in the future, by a company.

Question 14

Is it possible to have a fixed charge over book debts?

Answer 14

Yes, but the charge holder must be able to control the property, so where a company can continue to use book debts, no fixed charge exists (Re Spectrum Plus Ltd).

Question 15

What are the three stages of control required for a charge over book debts to be fixed, as set out in Re Spectrum Plus Ltd?

Answer 15

1 Company must not be able to buy or sell without permission of the holder
2 The sum must be paid into an account specified by the charge holder
3 The proceeds in the bank account must be usable only with the consent of the charge holder.

Question 16

If an instrument creating a charge states that the company cannot dispose of or otherwise deal with the book debts, is this sufficient to establish the level of control required for a charge to be fixed in nature?

Answer 16

No, as it must be impossible in practice, not just in writing, for the company to use the debts.

Question 17

Who is subject to an obligation to register a charge?

Answer 17

Companies House (there is technically no obligation on the company or the charge holder)

Question 18

What is the time within which a charge must be registered with the Registrar?

Answer 18

Within 21 days, starting with the day after creation of the charge.

Question 19

What are the consequences of failure to register a charge?

Answer 19

There is no criminal consequence, but an unregistered charge is not valid.

Question 20

What steps should a company take when a registered charge is released?

Answer 20

The company should notify the Registrar.

Question 21

When is it necessary to establish the order of priority of charges?

Answer 21

During insolvent liquidation.

Question 22

What are the three basic rules governing the priority of properly registered fixed and floating charges?

Answer 22

• charges rank in order of the time at which they were created, the first in time taking priority over others on the same property
• fixed charges establish stronger right than floating changes, even if registered later.
• a floating charge over specific assets may rank above an earlier charge that is over all the assets.

Question 23

Which section of IA 1986 can the liquidator use to invalid certain floating charges?

Answer 23

s 245. IA

Question 24

What is a negative pledge clause?

Answer 24

A clause in a floating charge expressly prohibiting the company from creating a subsequent charge with priority on the same property.

Question 25

Does registration of a charge give a subsequent charge holder constructive notice of a negative pledge clause in the earlier charge?

Answer 25

Yes, the holder of later charges is deemed to have been given notice where a negative pledge clause has been properly registered.