Financing

Question 1

Is debt or equity financing more beneficial tax-wise?

Answer 1

Debt – since interest is paid before tax, it is a DEDUCTIBLE TRADING EXPENSE. Equity financing offers no tax benefit, not even dividends (which are a distribution of net post-tax profits).

Question 2

Regulation-wise, is debt or equity financing easier?

Answer 2

Debt – no statutory procedure but must have one in AoA.

Equity difficult as Board and shareholder resolutions needed for an allotment.

Question 3

Is debt or equity financing safer for Coys in financial trouble?

Answer 3

Equity – dividends discretionary. For debt, poor performance might trigger EoD (breach of covenant or insolvency), loan acceleration and enforcement against security.

Question 4

What are two disadvantages of a floating charge?

Answer 4

Disadvantage is that borrower may not be prevented from dealing with specific asset and floating chargeholders lower in priority.

Question 5

What is the advantage and disadvantage of term loans and overdraft facilities respectively?

Answer 5

Overdraft – flexible, but expensive and payable on demand

Term loan – less flexible and also expensive; however, borrower has certainty over instalment payment sums

Question 6

Three disadvantages of Revolving Credit Facility?

Answer 6

1. May be required to clean down (maintain 0 balance for a specified time)
2. Commitment fee to keep RCF open – even if not drawn upon
3. Less flexible than an overdraft

Question 7

3 ways bank can protect loan sum?

Answer 7

1. ACCELERATE loan on late payment or MAC in borrower’s finances
2. Negative PLEDGE not to grant other lenders security
3. SECURITY (by way of debenture) – either fixed charge, floating charge or guarantee

Question 8

3-step DD by borrower’s solicitors before docs executed? 3 steps by directors to execute the loan?

Answer 8

Check AOA to confirm directors have authority to act in relation to (i) entering into transaction; (ii) executing docs; and (iii) granting security if any.

Directors should (i) convene BM; (ii) resolve to enter into loan agreement and (iii) give someone authority to act on Coy’s behalf

Question 9

What if company acts ultra vires in entering into loan?

Answer 9

Loan may still be enforceable by the lender, but shareholder could seek injunction to prevent borrowing and directors might still be liable for any loss