Debt finance Flashcards
Fixed charge
A fixed charge is normally taken over assets such as machinery and vehicles. The key element of a fixed charge is that the creditor can control what the security provider can do with the fixed charge assets.
If the charge becomes enforceable, the creditor will have the ability to appoint a receiver of that asset or to exercise a power of sale of the asset.
Floating charge
A floating charge ‘floats’ over the whole of a class of circulating assets. Whatever assets in that class happen to be owned by the security provider at any given time are subject to the floating charge, and the security provider is free to dispose of the assets as it wishes until ‘crystallisation’.
Crystallisation means that the floating charge stops floating and fixes to the assets in the relevant class which are owned by the security provider at the time of crystallisation
Registration for charges
- deadline
- who can register
- effect of failure to register
shall register any security created by a company at Companies House provided that the company or any person interested in the charge (ie the lender) delivers to Companies House (either electronically or by paper filing) within 21 days beginning with the day after the day on which the charge is created
Form MR01 to register a charge
statement of particulars may be delivered either by the company that created the charge or any person interested in that charge (eg the lender)
Effect of failure to register
Under s 859H CA 2006, if the charge is not registered at all, or is not registered within the 21-day period above:
the charge is void against a liquidator, administrator and any creditor of the company; and
the debt becomes immediately payable.
Priority of secured creditors in the same class
The rules of priority are complex but, in general, if more than one creditor has a fixed charge over the same assets, the first fixed charge created has priority (if both duly registered)
Similarly, if more than one creditor has a floating charge over the same assets, the first floating charge created has priority (if properly registered)
this order can be varied by agreement between the creditors through a document known as a Deed of Priority, an Intercreditor Agreement or a Subordination Agreement. Such an arrangement has the benefit that creditors can make specific provision for the order in which they will rank and do not need to rely on the complex and sometimes uncertain rules mentioned above.
Priority among other categories of creditors and shareholders
Shareholders, unsecured and preferential creditors rank equally amongst themselves
gearing
- what is it
- risks
- advantages
the ratio of debt to equity, is an important indicator of the financial health of a company.
Highly geared companies are seen as more of a credit risk by banks and other lenders, so they might find it more difficult to raise further loans in the future. This is because they have less equity to absorb any losses the company might make.
A highly geared company has less equity to protect the creditors and so poses a higher risk.
a highly geared company will need to make more profits before interest and tax (PBIT) in order to meet the demands for interest payments.
By borrowing money, it can make a far bigger investment than a company could have made if it was just using its own resources
Increasing gearing may be more advantageous to shareholders because raising money through debt finance does not require share dilution through the issue of new shares
The high level of loan capital compared to equity in the higher geared company improves the earnings per share of the shareholders
