Debt Finance

Question 1

What are the two ways of raising debt finance?

Answer 1

1. Issuing debt securities ie bonds, medium term notes, or commercial paper;
2. Taking a bank loan ie overdrafts, fixed loans, or revolving facilities.

Question 2

Which method of finance is not available to small companies?

Answer 2

Issuing debt securities.

Question 3

What are the advantages of issuing debt securities over bank loans?

Answer 3

1. Wider investment base;
2. Transferability of securities;
3. Fewer covenants;
4. Fixed interest rates;
5. Securities can be unsecured;
6. Limited disclosure.

Question 4

What are the advantages of loans over debt securities?

Answer 4

1. Flexibility in borrowing, repayment, currency terms;
2. Privacy;
3. Renegotiation of terms if things go bad;
4. More available to smaller companies.

Question 5

Under the old common law (pre Enterprise Act 2002) what limitation could render a debt security or bank loan void?

Answer 5

Lack of capacity for a company to act in a certain business (Re Introductions).

Question 6

What is the definition of a debenture?

Answer 6

Stock, bonds and any other securities of a company, whether or not constituting a charge on the assets of the company (s738 CA 2006 and s29(2) IA 1986). This may include a fixed or floating charge, pledge, or mortgage.

Question 7

What is debenture stock?

Answer 7

Debt that has been consolidated.

Question 8

How are debentures issued?

Answer 8

According to the articles and usually by the board.

Question 9

How did Chitty J define a debenture? What is wrong with his definition?

Answer 9

Chitty J stated in Levy v Abercorris Slate that ‘a debenture means a document which either creates a debt or acknowledges it.’ This definition is too wide and would include overdrafts.

Question 10

What is a fixed charge?

Answer 10

A charge that attaches immediately to the identifiable asset and prevents dealing without consent of the chargee (Re Cosslett and Re Cimex Tissues).

Question 11

What is a floating charge?

Answer 11

A charge over a class of assets, present and future, and changes from time to time in the ordinary course of business, and the company may carry on business in the ordinary way until it is contemplated the holders of the charge take steps to enforce it (per Romer J in Re Yorkshire Woolcombers Association Ltd).

Question 12

Is the label determinative to whether a charge is fixed or floating?

Answer 12

No, the court will look at the nature of the charge and the extent or rights and obligations (Agnew v IRC, Ashborder BV v Green Gas Power Ltd, Re GE Tunbridge Ltd, National Westminster Bank v Spectrum).

Question 13

What is a book debt?

Answer 13

A charge over unpaid goods and services supplied by the company.

Question 14

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

Answer 14

In Siebe Gorman v Barclays Bank a charge over book debts was held to be fixed because the bank required debts to be paid into a specific account and prohibited the bank from assigning or charging its debt without consent.

Question 15

When will a charge over book debts be regarded as floating?

Answer 15

If it was agreed at the time of the creation that the company has the ability to use book debts without the consent of the chargee (Re Brightcliffe, Agnew v IRC, and Re Harmony Care Homes c/f Re Bullas and National Westminster Bank v Spectrum).

Question 16

What is meant by crystallisation?

Answer 16

The conversion of a floating charge into a fixed charge.

Question 17

When might crystallisation occur?

Answer 17

Winding-up (NW Robbie v Witney Warehouse).

Question 18

Which assets are covered by crystallisation?

Answer 18

Any present and future assets which fall within the class in the floating charge (NW Robbie v Witney Warehouse).

Question 19

Which provisions of the Companies Act 2006 requires charges to be registered in the company’s register and registered with the Registrar at Companies House?

Answer 19

Sections 876 and 860.

Question 20

How many days do you have to register a charge?

Answer 20

21 days from the day the charge is created unless you have obtained an extension (s873).

Question 21

What is the penalty for not registering a charge?

Answer 21

Fine or security is unenforceable.

Question 22

Why did the court refuse to give an extension for registering a charge in Re Barrow Borough Transport?

Answer 22

The company was going into administration and the charge would have altered the priority of creditors in insolvency.

Question 23

When will the court allow for an extension to register a charge?

Answer 23

If the deadline is missed accidentally but acted upon promptly (Bramer Investments Ltd).

Question 24

What are the rules regarding the priority of securities?

Answer 24

Security interests rank according to their creation generally, but a fixed charge will rank above an older floating charge (Re Castell and Brown Ltd).

Question 25

When will a floating charge be invalidated or avoided?

Answer 25

If it is created within 12 months of the onset of insolvency (s245 IA 1986) or 2 years if the charge is granted to a connected person (s245(4)). Although if the company was able to pay its debts at the time of creation and did not become unable to do so by creating the charge the charge will still stand unless the charge is held by a connected person ie director, shadow director, associate of the director or company (s249).