Loan Capital Flashcards
What are the 3 principles of loan capital?
- A term loan
• = borrower borrows from the creditor and repayment plus interest is due by a certain date
• Repayment can be made at once or via a series of instalments. - An overdraft
• = borrower withdraws more money from their bank account than they deposited in - A debt security
• = a financial instrument issued by the company stating that the company will pay the holder a specified sum plus interest on a certain date
• Debt securities can be transferred and traded on a stock exchange
What does debenture include?
How are they sold?
Are debenture holders creditors or shareholders?
What are the bonds or stock issued evidence of?
- s. 738 CA2006 = debenture includes debenture stock, bonds and any other securities of the company, whether or not constituting a charge
- Companies can issue corporate bonds or debenture stock = sold to others similarly to shares
- Debenture holders are creditors of the company
- Debenture holders are not shareholders,
- But company can issue convertible debentures granting the holder the right to convert their debentures into shares
• The bonds or stock issued to them are evidence of a loan made to the company
What are 2 limitations on a company’s power to borrow?
Will borrowing in breach invalidate the loan?
Who has the power to borrow on behalf of the company?
What authority do they have?
Can the power be limited?
• A company is free to borrow from others subject to two limitations.
- A public company must first be issued with a trading certificate
- Company’s articles can restrict its ability to borrow
a. e.g. requiring expensive loans need member approval
- S.39 CA2006 = Borrowing in breach of above will not invalidate the loan
- Directors ability to borrow on behalf of company = depends on articles
- Usually have actual authority to enter into loan agreements and by implied authority to grant security over the company’s assets
- S.40 CA2006 = Articles can limit directors’ ability to borrow on behalf of the company but breach doesn’t invalidate the loan agreement
What is a secured creditor?
Why are they in a stronger position than unsecured creditors? (3)
- Secured creditor = a creditor who obtains security
- Secured creditors are in a stronger position than unsecured creditors because:
- If company breaches the loan agreement, the creditor will have rights over the secured company’s assets
- If company is liquidated, secured debts are paid ahead of unsecured debts
- A secured creditor may be able to negotiate other benefits
What are the 2 broad categories of security?
What are 2 types of each?
- Possessory security
• = creditor has physical possession of secured asset and will return it once the loan is paid off
• 2 main types:
a. A pledge
○ If the borrower breaches the loan agreement = creditor can sell the secured asset
b. A lien
○ Creditor has no implied power to sell the asset - Non-possessory security
• = the borrower retains possession of the asset and can continue to use it (although the usage may be restricted).
• 2 main types:
a. A mortgage
○ = the creditor obtains title to the secured assets from the borrower
○ If the borrower defaults = creditor can possess the secured asset and sell it (if loan agreement provides)
○ If borrower pays off the loan = title in the assets is returned
b. An equitable charge
○ If borrower defaults = creditor can appropriate the charged asset and sell (if charge provides)
○ Title in the goods does not pass to the creditor
Who is the chargor?
Who is the charge or chargeholder?
Can a creditor secure a floating and a fixed charge?
- Person who grants the charge (company) = chargor
- The creditor = chargee or chargeholder
- A creditor can secure a loans via both types of charge = obtain a fixed charge over specific assets and a floating charge over all the assets and the business itself = maximum protection
What is a fixed charge?
What rights do the terms usually provide? (3)
What are the advantages? (2)
• = a charge taken over a specific asset of the company
• Rights will depend on the terms, but typically fixed charges provide that:
1. Should the company default on the loan or enters liquidation = the chargeholder can appropriate the charged asset and sell it
2. Company cannot sell or deal with the charged asset (unless first repays the chargeholder or obtains the chargeholder’s consent)
○ Advantage = ensures chargeholder remains in control of the charged assets
○ If the company does sell or deal with = chargeholder can sue for breach of contract
3. No subsequent fixed charges can be granted over the charged assets, unless the chargeholder so agrees
○ If charge instrument doesn’t state this = fixed charges rank in order of when they were created
○ Fixed charge takes priority over a floating charge even if it was created after the floating charge
- Major advantage of a fixed charge = assets secured are not available to the liquidator if the company enters liquidation
- Debts secured by fixed charge rank ahead of all other debts
What is a floating charge?
What are the 3 key characteristics?
What are the 3 limitations regarding a creditor taking a floating charge over assets already secured by a floating charge?
- = a flexible charge that allows the company to continue dealing with the asset
- Re Yorkshire Woolcombers Association Ltd [1903] = 3 key characteristics of a floating charge:
- The charge is taken over a class of assets present or future
- That class of assets is one which changes from time to time
- Until some future step is taken by the chargeholder, the company is free to use the charged assets
• A floating charge can be taken over assets covered by an existing floating charge subject to limitations:
- Cannot grant a floating charge over all the same assets as a prior floating charge a higher rank/priority
- A new floating charge can be created over part of the assets subject to a prior floating charge
- Prior charge may contain a ‘negative pledge clause’ = the company will not create any subsequent floating charges that rank in priority to the first floating charge
What is crystallisation?
What happens onces the charge is crystalised?
When will crystallisation occur? (4)
Can a charge be de-crystallised?
- = the process by which a floating charge becomes fixed
- Once crystalised = chargor unable to dispose of deal with the charged assets unless chargeholder consents
• Usually occurs if company defaults on the loan or if the chargeholder gives notice of crystallisation
• Will occur upon the following events (unless charge instrument provides otherwise):
1. When the company goes into liquidation
2. When the company’s business ceases
3. When a receiver is appointed
• The instrument can include an ‘automatic crystallisation clause’ which provides that crystallisation can occur automatically upon some specified event
• Or include a term that the charge can be de-crystalised by the chargeholder
Why is it vital to distinguish between a floating and a fixed charge? (3)
What is the 2 stage approach to determine?
• Vital to distinguish because:
- A liquidator will distribute company’s assets among creditors in the relevant order and some creditors might not get paid if insufficient assets
- During liquidation, proportion of debt owed to floating shareholders is set aside to pay unsecured creditors. No money set aside to debts owed by fixed chargeholder
- Fixed charges cannot be set aside by a liquidator, floating charges are more vulnerable to being set aside
• Agnew v Inland Revenue Commissioner [2001] = 2 stage approach to determine the type of charge:
1. Court construe the instrument to reveal the intentions of the parties
2. Categorisation = a matter of law
○ If charge doesn’t satisfy the nature of a fixed charge then no matter how the parties have chosen to describe it, it cannot be a fixed charge
• The key factor in determining the type of charge = what rights and obligations the parties intended to grant each other in respect of the charged assets
Can creditors take fixed chargers over changing assets (book debts)?
What are book debts?
- Creditors can take a fixed charge over book debts but ONLY if the chargeholder has the requisite control over the charged assets
- Book debts = ‘sums of money owed to a bankrupt, partnership or company … usually for goods or service supplied or work carried out’
How is the registration of charges prior to 2013 different to the registration of charges post-2013?
What must companies keep a copy of?(2)
Who can inspect these?
• Before 2013 = companies were required to keep a register of charges
○ Failure = criminal offence
• Post 2013 = no longer required to keep a register of charges and not required to register charges
• s.859P(1) CA2006 = companies not required to keep a register of charges, but must keep a copy of:
○ every instrument creating a charge and
○ every instrument effecting any variation or amendment of a charge
• Instruments can be inspected by a creditor free of charge
○ Any other person must pay a fee
How do companies register a charge?
What must creditors do?
• Companies can register a charge with CH via form MR01
○ Creditor must deliver to CH within 21 days of the charge created a certified copy of the instrument that created the charge and a statement of particulars containing:
1. Registered name and number of company
2. Date the charge was created
• s. 859A(2) and (4) CA2006 = the instrument and the statement of particulars must be delivered to CH within 21 days of charge creation
The registrar will register the charge
What are the 3 effects of registering a charge?
- s. 859I(2) CA2006 = Information provided is included in the register of companies, and can be freely accessed online or by visiting CH
- The registrar will provide a certificate of registration
○ Provides conclusive evidence that the required documents were delivered within 21 days - Provides constructive notice of the charge’s existence, but does not provide notice of its terms
What are the effects of not registering a charge?
What if it is not registered in the period allowed for delivery?
What happens if the charge becomes void for non-registration?
○ If a charge is not registered, then it will be void against a liquidator, administrator or creditor
• s.859H(3) CA2006 = If not registered within the period allowed for delivery = charge is void against a liquidator, administrator or creditor of the company
○ Company still owes the money to the creditor, but creditor loses secured status
• s.859H(4) CA2006 = If a charge becomes void for non-registration, the money secured by the charge will become immediately payable
○ ONLY if company is in liquidation or administration.
If company is a going concern = the security will stand and can be enforced
