Chapter 5 - Financing a business - Dept finance Flashcards
What is the first issue when it comes to borrowing and giving security?
To see whether the company has power to borrow and give security
Where to look for a partnership if the company can borrow?
In the partnership agreement
When can a company not borrow money?
When it articles it says so
What happens when the company has unamended MA’s ?
Directors may approve by BR (MA3) .
What do they have to check if the company has unamended MA’s?
Check the memorandum- amend by SR
What happens if the Company does not have unamended MA’s ?
Then it needs to be checked if the Company was formed before 1st October 2009.
What if the Company was not formed before 1st October 2009?
Then check articles, and amend by SR.
What rules apply when a director votes?
The usual rules apply for declaration of interest, and voting counting towards the quorum
What are the borrowing options available for a business?
Loans. (secured, unsecured)
Overdrafts
Revolving Credit Facilities
What is a revolving credit facility?
A hybrid between an overdraft and a loan.
How much can the business borrow revolving credit facility?
Can borrow up to a certain amount, and may re-pay and re-borrow when needed.
What does a lender require for a loan?
Security
What are the lenders carrying out in a secure lending ?
They will carry out a due-dilligence.
What is a charge document (debenture)?
Provides the lender with security for a loan
What does that charge document mean?
That means that in the event of failing to pay, the charge holder will have priority over unsecured creditors and may sell the charged assets to settle sums owned.
What means due diligence?
A process of investigation by the lender to ensure its interests are protected, the security will be validly granted and enforceable, and that title to the assets over the charge will be made will be sound.
What does this process of investigation involce?
The company, Land Registry, bankruptcy and winding up searches, as well as investigation of title.
What is a mortgage?
Is the highest form of security
What does a mortgage involve?
It involves the transfer of legal title,to the mortgagee, the lender, with re-conveyance/transfer back to the mortgagor, the borrower, when the dept is satisfied (paid off in full).
What does a mortgage mean? What does it give to the lender?
It gives the lender an immediate right to possession. What is stage 2 of buyback of shares from capital?
How is a mortgage created in land?
Created by a fixed charges by deed.
What does the charge provide the lender?
A cahrge provides the lender with an interest in the property, but it does not transfer legal title.
What is a floating charge?
A floating charge is a charge taken over a particular class of assets owned from time to time.
Who can grant a floating charge?
A company and a LLP
Does the company/LLP need the consent of the lender for a floating charge?
No, as it floats over
When does the company/LLP need the consent of the lender?
When it crystalises
What happens on crystallisation with the floating charge?
The floating charts fixes on the assets in a particular class at that time.
When does crystallisation happen?
When a company becomes insolvent. ( does not have enough money to pay its debts) or any other event occurs with the charge specifies |(non-payment, ceasing to trade).
What is the advantage of the borrower of a floating charge?
It gives them the flexibility to deal with assets that are constantly changing.
What is common for a floating charge?
To be over the whole undertaking of the business
What else can the borrower do when dealing with a floating charge?
Can charge more assets and will be able to give more security for borrowing, which may give them better terms.
What advantage does the lender when dealing with floating charge?
They have security when it matters on crystalisation.
What is the negative side for the lender when dealing with floating charge?
The lender takes the risk that assests may not be replaced and the security will be postponed to fixed charge holders and preferential creditors, or may even be set aside.
How are companies giving security?
In a form of debenture
What is a debenture?
A debenture is a document which includes security in a form of a floating charge or sometimes both fixed and floating charges.
Who can the debenture be granted by?
The debenture can be granted by a company or LLP.
Who can give personal guarantees for debenture?
Director-shareholders
What is important to know for SQE?
The general rules for priority of security
Which are the rules for priority of security?
Between validly created charges of the same type, the first in time will have priority
Between a validly created fixed charge or mortgage and a floating charge, the fixed charge or mortgage will take priority even if granted later , unless the document creating a floating charge contains a negative pledge clause, and the later fixed charge, has notice of this prohibition at the time when it takes it’s charge
What is a negative pledge clause?
A clause in a debenture which prohibits the creation of later fixed charges without permision
Can lenders agree to a different agreement as to their relative priority? and how?
Yes, they can agree to a different arrangement, by entering into a deed of priority
Where are all charges of a Company registered?
At Companies House
Is registration of charges at Companies House compulsory?
No
Are there consequences of non-registration for a secured lender ?
Yes, there are serious consequences and that is why registration becomes routine
What became routine?
Registration of a secured lender
What are the documents that need to be submitted at Companies House for the registration of charges?
Form MR01
A certified copy of the charge document
The relevant fee
When do you have to submit the 2 documents to the Companies House for the registration of charges?
Within 21 days of the creation of the charge
What happens to a charge that fails to be registered?
Is void against the liquidator, administrator, or any creditor of the company
What happens to the dept if the charge fails to be registered?
The dept will be payable immediately but will be unsecured.
What happens to the solicitor who fails to register a charge?
There is potential for negligence
Where are the fixed charges over land be registered?
At the Land Registry
What happens to the 2 documents of there is a failure to register the charge?
A copy of the charge and MR01 should be made available for inspection, when a charge is re-deemed form MR04 should be completed and sent to Companies House.
What happens if a Company or LLP defaults on repayment of the loan?
The debenture holder may sue as creditor, petition for the winding-up of the company, utlise any powers in the debenture document
How is a fixed charge holder going to exercise their power?
By selling the charged assets
