Module 3 - Share and Loan Capital

Question 1

Debenture

Answer 1

any document that states the terms on which a company has borrowed money

Question 2

Single debenture

Answer 2

A company simply obtains a secured loan or overdraft facility from its bank

Question 3

Debentures issued in a series

Answer 3

Different lenders provide different amounts on different dates. Although all separate loans, lenders should rank equally in their right to repayment and in any security.

Question 4

Ranking if debentures are not issued in a series

Answer 4

rank according to either their date of issue or in numerical order where more than one issues on same day

Question 5

Registered debenture

Answer 5

Has its owner registered with the issuer, the owner’s name and contact info is recorded and kept on file

Question 6

Debenture stock

Answer 6

Used only by a public company to offer debentures to the public. Made by way of prospectus. Each lender has a right to be rapid their capital at a due time and to receive interest until payment. Must maintain register of debenture holders and issue an allotment no later than two months after. certificates must also be completed and delivered within two months

Question 7

Remedies to an unsecured debenture holder

Answer 7

• sue the company for debt and obtain a court order requiring payment (can seize property if unpaid)
• to present petition to court to have company wound up if owed more than 750, if they have asked in writing for payment and company fail to pay within 21 days
• to apply to the court for an administration order

Question 8

Rights for a secure debenture

Answer 8

• the rights for unsecured
• in the case of a fixed charge, taking possession of and/or selling the asset
• in the case of a floating charge, appointing an administrator out of court

Question 9

Charges

Answer 9

a charge or security over a company’s assets gives the creditor prior claim over other creditors to payment of their debt out of the value of these assets

Question 10

Fixed charge

Answer 10

Attaches to a specific asset as soon as the charge is created

can be issued by businesses and individuals

best suited to assets which the company will retain for a long period

ranks first in event of liquidation

Question 11

Floating charge

Answer 11

A floating charge is a charge on a class of assets - both present and future

can only be issued by a company

assets may change in course of business until enforced then it crystalises

good for the company because they can raise loan capital on the strength of all its assets - generates both loan capital and income

Question 12

Registration of charges

Answer 12

Most fixed charges and all floating charges must be registered at companies house within 21 days of creation to be enforceable - failure to register means its void, may allow late register if it doesn’t prejudice the creditors or shareholders of the company

can be registered by the company or any person who has an interest in it

Question 13

Priority of charges

Answer 13

• fixed will take priority over a subsequent fixed charge and any floating charge unless the floating charge was created before the fixed charge and has a negative pledge clause

Question 14

Right of ordinary shareholders

Answer 14

• right to attend GM
• right to vote at GM (unless non-voting)
• right to a dividend if paid
• right to participate in surplus assets on winding up of company
• a right to transfer the shares in accordance with the articles
• rights of membership attached to the shares as defined in the articles

Question 15

Rights of preference share holders

Answer 15

• prior right to receive annual fixed dividend
• no voting rights unless in limited circumstances
• don’t necessarily get a share in surplus assets on winding up
• may be convertible

Question 16

Redeemable shares

Answer 16

Shares which at a future date at the choice of company or the shareholder can be bought back by the company

Can strengthen capital base without diluting interest of OS in long term

Useful exit route for investors

Cannot be entirely redeemable shares and cannot redeem if they aren’t fully paid

Question 17

Treasury shares

Answer 17

company’s own shares which it has bought back but not cancelled (listed public co)

Can reissue these shares without going through usual formalities associated with issuing shares, cannot exercise voting rights or receive dividend

Must keep record in treasury share account

Can be cancelled, sold or transferred to an employee share scheme. If sold must be for cash

Question 18

Called up share capital

Answer 18

A company may not ask shareholder to pay full amount of nominal value at once, therefore the called up cap is the total amount required to pay

Question 19

In a public company on allotment what is the minimum paid up share capital

Answer 19

1/4 nominal value and full premium

Question 20

How can a person become a member of a company

Answer 20

• subscribing to memorandum
• agreeing to become a member
• transmission of shares by operation of law

Question 21

How can membership cease

Answer 21

• member transfers all shares
• member dies
• minor doesn’t accept shares when they get to 18
• company ceases to exist

Question 22

When does the protective variation regime not apply?

Answer 22

when its the enjoyment of rights being varied rather than the rights themselves

Question 23

When can rights be varied

Answer 23

• in accordance with company articles
• where the articles make no provision if the holders of at least 75% in nominal value consent in writing or by special resolution

Question 24

When may shareholders object to the variation

Answer 24

if all of the following are true:

1. objectors must not hold less than 15% of issued shares of class in question
2. they must

Question 25

general rule on transfer of shares

Answer 25

Transferable in accordance with the company’s articles

Question 26

When must refusal of transfer be exercised

Answer 26

within two months after the date of transfer is lodged

Question 27

When must directors obtain authorisation by members or articles

Answer 27

private companies with more than one class of share capital and all public companies

Question 28

authority to allot may not be given for a period of more than what?

Answer 28

five years

Question 29

when must an allotment be registered

Answer 29

within two months and a return to the registrar with a statement of capital within one month

Question 30

What can the money in a share premium account be used for?

Answer 30

• to pay up fully paid bonus shares

- to pay off company preliminary expenses

Question 31

Pre-emption rights

Answer 31

if a company proposes to allot equity securities wholly for cash it has a statutory obligation to first offer those shares to existing holders of the same or similar shares in proportion to their existing holdings

Question 32

Rights issue

Answer 32

Each OS must be offered a part of the new issue pro rata to his or her existing holding

if not taken up within offer period (of 21) the shares may then be offered to outsiders

Question 33

When can pre-emption rights be dis-applied

Answer 33

by special res or in the articles

Question 34

bonus issue

Answer 34

capitalisation of the company’s reserves by issuing additional shares to existing shareholders pro rata

no new money but sum from company’s reserves

Question 35

Shares alloted and any premium may be paid for in what?

Answer 35

money or money’s worth - goodwill ork now-how

Question 36

When can a public company accept work or services as payment for shares?

Answer 36

only if discharging debt in respect of services already rendered

Question 37

When can a public company allot shares for a non-cash consideration?

Answer 37

Provided an independent report on the value of the consideration has been obtained and the transaction has been approved by ordinary res

Question 38

Distributable profits

Answer 38

Accumulated realised profits less accumulated realised losses, and in the case of a public company also unrealised losses

Question 39

When can a public company make distribution?

Answer 39

If its net assets at the time when the distribution is made are not less than the aggregate of its called up share capital and un-distributable reserves

Question 40

What is included in the undistributable reserves?

Answer 40

Share premium account and capital redemption reserve

Question 41

What is the financial assistance rule and who does it apply to

Answer 41

A public company is prohibited from giving financial assistance for the acquisition of its own shares or those of its parent company

Question 42

Criminal sanctions for breach of financial assistance provisions

Answer 42

• fine/imprisonment for directors

- fine for company

Question 43

Exceptions to basic prohibiton of financial assistance

Answer 43

• if not principally to aid acquisition but is part of a larger purpose
• is part of ordinary business
• good faith in interest of company of financial assistance for the purposes of an employees’ share scheme