More Study Company Finance Flashcards
What is debenture
An agreement where a company gives security to a lender
Difference between a mortgage and a charge
Mortgage is a transfer of legal ownership but a charge isn’t
What is a negative pledge
A clause in a loan agreement with a floating charge to prevent the company creating later charges with priority over the charge without the charge holders permission
Requirements for a negative charge to be valid
The later party seeking to register fixed charge has actual awareness of negative pledge otherwise they jump to top of list
What is equity finance
When shares are issued
Can a company purchase its own shares
No S658 CA 06
Requirement of S542
Shares in a limited company must each have a fixed nominal value of allotment is void
Types of shares
Preference - participating, convertible, cumulative, uncumulative
Ordinary
Redeemable
Redeemable shares
Allowed under S684 CA
Redeemed shares are treated as cancelled
Send notice to registrar within 1 month of being redeemed with amended statement of capital
Form to send to registrar when shares are redeemed
SH02
Rights of ordinary shares
Carry the primary voting rights of the company
The right to a dividend if declared
Participate in surplus on winding up
Participating preference share
Right to participate in profits or assets in addition to fixed preference right
Convertible preference share
Includes an option to convert the shares into a fixed number of common shares after predetermined date
Cumulative preference shares
Must be paid missed dividends as well as current dividends if not paid on previous occasions
This rants before payment of dividends to ordinary shares
Uncumulative preference shares
If dividends not paid one year it won’t be paid in future
Effect of allotment of shares
A new member gains voting rights
Rights of others are diluted
When are shares issued
When the shareholder is entered into the register of members
How many shares can a company issue
Post 2009, as many as they wish unless articles restrict it
How to allot shares
Must be authorised by articles or shareholders
Update register within 2 months and issue share certificate
What to do before shares are allotted
Give existing shareholders prior right to take up shares before they are given to a new person
Must offer shares to new and existing people on same terms
What is a floating charge
Floats over an asset that keeps changing
Company retains some freedom to deal with the asset in its usual course of business until the charge crystallises
When will a floating charge crystallise
Company goes into receivership or liquidation
Company ceases to trade
Event occurs which is specified in the contract between lender and company
What is a fixed charge
Lender has control of asset and company cannot dispose of it without lenders consent
If the company is in financial difficulty the lender can sell the asset and be repaid out of proceeds before any other claimant
Priority between charges
Fixed charge has priority over floating charge even if floating charge was created first
Charges of the same kind have priority in order of registration
How to register a charge
MR01 submit to CH within 21 days
What if a charge is not registered
Void against liquidators and administrators
Lender is unsecured
Loans is still in place
What is share capital
Money provided by S in return for shares (nominal value and excess consideration aka premium)
Can Paid up share capital be returned to S
No - maintain share capital
Can S liability regarding unpaid capital on shares be reduced
No - maintain share capital
How are available profits for dividends calculated and where are the figures found
Accumulated realised profits LESS accumulated realised losses
Shown on bottom half of balance sheet under profit/ loss reserve
How are dividends passed
D recommends it and S passes ordinary res to approve it
2 ways companies get finance
Equity finance
Debt finance
Restrictions on S transferring their shares to another person
No restrictions
Articles cannot stop S selling them or restrict who buys them
When does a person become an S
When they are entered into the register
Can Ds refuse to register transfer of shares
Yes
What happens if D refuses to register transfer of shares
Buyer is beneficial owner and seller is legal owner
If GM held after sale but before registering then who attends
Seller but in line with buyers wishes
Process for transferring shares
Seller completes stock transfer form and gives to buyer with share certificate
Pay stamp duty
Buyer sends share certificate and stock transfer form to company
What company does when it receives a stock transfer form
Send new share certificate
Pass board res to register (this is when share is issued)
Notify registrar of companies when filing annual confirmation statement
How much stamp duty is paid on stocks
0.5% rounded to nearest £5 is transfer is over £1k
Nothing if it is a gift
Min stamp duty is £5
When are shares issued
When S is entered on register of S
Who decides price of shares and how many to issue
Board
Is there an upper limit on number of shares that can be issued
No
Old companies may have one - remove with ordinary S res
If new company have one remove with special S res
Who authorised share allotment
Private company, under CA 2006 with one class of shares - board res Private company with one class of shares but prior to CA 2006 - ordinary S res Multiple classes of shares (private or public) ordinary S res
How long does authorisation to allot shares last
5 years max
Can be renewed for max 5 years
If in articles expires 5 years after incorp
What does pre-emotion rights require
When alloting shares must offer existing S number to enable them to preserve their percentage shareholding on same or more favourable terms
How long does pre-emotion last
Must have at least 14 days
If longer deadline given cannot revoke offer before deadline
What does pre-emption apply to
Equity securities aka ordinary shares
Can pre-emotion rights be excluded
Yes even tho they are statutory not MA
Can be excluded in articles or set aside by special S res
How to initiate a special S Res to remove pre-emption rights
D must recommend special res and make a statement setting out
Reasons for recommendation
Amount purchaser will pay and
Justification for price
Circulate statement to S with notice of GM or written res
Offences regarding Ds special res statement
Offence to knowingly or recklessly authorise or permit false or misleading info in statement
Filing requirements following allotment
Send Res to CH within 15 days
Company forms to be sent to CH
Share certificate within 2 months
What happens to shares once they are bought back
They are cancelled
How much Ds make decisions regarding buy back of shares
Skill, care and attention
Two types of buy back of shares
Market purchase - buy back of shares on stock market
Off market purchase - buy back of shares not on stock market
Process for an off market buy back
Articles must allow it
Shares must be fully paid up
Board meeting to draft terms and call GM
Company must pay for shares at time of purchase (out of distributable profits or shares issued for this purpose)
S pass ordinary res to authorise contract
Contract or summary for inspection 15 days before GM and at GM or sent with written res
Board meeting to enter into contract
Once concluded contract or summary as well as res and minutes at office or SAIL for 10 years from date of buy back
File return of purchase of own shares and notice of cancellation of shares within 28 days
Cancel shares, update S reg and PSC reg
Which companies can use capital to buy back shares
Private companies only after exhausting distributable profits
Not public companies
Requirements to buy back out of capital
Same as buy back out of distributable profits but with additional requirements
D statement of solvency that solvent and will be for 1 year
Auditors report that Ds statement is reasonable
Special S res to authorise capital use
Ordinary S res to authorise contract
Ds statement and auditors report available to S with written res or at GM
Within 7 days of special res put notice in London gazzett (and 1 other paper or notice to every creditors) - creditors have 5 weeks to object
File statement and report at CH before or at same time as newspaper notices
Statement and report at office for inspection from time newspaper notice published until 5 weeks after special res passed
If no creditors object hold board meeting to enter into contract
Payment of capital made no earlier than 5 weeks after date of special res but no later than 7 weeks
2 types of debt finance
Loans and debt securities
What is a debt security
When investor gives money and company pays it back later
Can a partnership agreement be changed
By unanimous consent
Do MAs for private companies restrict borrowing
No
Check articles and partnership agreements
3 types of loans
Overdraft facility
Term loan
Revolving credit facility
An overdraft is an uncommitted facility. What does this mean
It is repayable on demand unless business is in financial difficulty
What type of interest is paid on overdraft
Compound - implied into contract unless it says otherwise
What is a term loan
Business borrows a fixed amount for a specific period and must pay it all back by deadline
Can be Bilateral, syndicate, secured and/ or unsecured
Other names for term loan
Loan agreement
Credit agreement
Facility agreement
When is a term loan repaid
Determined by terms of agreement
What is a revolving credit facility aka facility agreement
Amount is made available and can borrow and pay back and re borrow it within this time
Can be bilateral, syndicate, secured or unsecured
2 ways interest can be calculated on revolving credit facility
Interest rate can be fixed for the period of the loan or variable
Or
Floating rate - rate is altered at specific intervals
Effect of taking out a resolving credit agreement
There will be restrictions on the business eg may be required to pay all debts as they fall due
How are unsecured debts goverened
By pari passu. This means unsecured debts are all reduced to pro rata if there are insufficient funds to pay all business debts
What are debentures
A loan agreement in writing registered at CH
Gives lender security over borrowers assets
What kind of businesses can enter into debentures
LLPs and companies
Not sole traders or general partners
What assets owned by a company can be used as securities
All of them
Do you need separate fixed or floating charges over each asset
Fixed- need separate charge over each asset
Floating- secured a group
Can you have more than one fixed or floating charge over same asset
Yes
Can company deal with an asset subject to fixed or floating charge
Fixed - no
Floating - yes until it crystallises
When does floating charge crystallise
If company goes into receivership, liquidation or an event in a doc
When does a floating charge asset get sold
If company goes into recievorship or liquidation
Searches a lender should do before taking a charge
CH search to check for pre existing charges and of sufficient property to give security
Reg of companies - to see who has charges
Land register
IP office
Winding up search to check for Insolvancy proceedings
Who can’t get a floating charge
Sole trader and Partnerships
Effect of a liquidator or administrator having a floating charge set aside
Removed holders priority over unsecured creditors
What is a pledge
When asset is physically given to creditor to act as security until debt is paid
Can LLP grant fixed and floating charges
Yes can grant both
Can a creditor sell assets held as a pledge
Yes to pay debt provided sufficient notice is given
What is a book debt
Money owed to company or LLP by debtor
Can have floating or fixed charges over these
What is a lien
Gives creditor right to physical possession of debtors goods or assets until the debt is paid
Is there is a right to sell an asset held under a lien
No
What is retention of title
On sale of goods buyer doesn’t get full title until they pay the full price to the seller. If buyer defaults goods are taken by the seller
Order of charges provided they are all registered
Fixed charges and mortgages over floating charges of same asset even if floating charge created first
If several fixed charges or mortgages of the same asset they have priority in order of creation not registration
If more than one floating charges over same assets they have priority in order of creation not registration
Can creditors alter the order of priority
Yes creditors can enter into agreement between themselves to alter the order of their charges
Called subordination agreement using deed of priority
What is a Negative pledge clause
Prohibits company creating later charges with priory without permission
Effect of a negative pledge clause
If later lender takes charge over same asset with actual knowledge of negative pledge then fixed charge is subordinate to floating charge
Who authorises borrowing and security
Board resolution
Is it compulsory to register charges
It was compulsory before 6.04.13 now it is voluntary
Who can register a charge
The person interested in it or company
How long do you have to register a charge
21 days file at CH
Get certificate of registration
Put particulars and docs on file for public inspection - keep at office or sail - failure is criminal offence but charge still valid
Effect of registering charge
Charge is valid against other creditors or administrator or liquidator
Only have priority from date of registration
Must a charge be registered at the land registry
Only if it is over land or won’t apply to buyer even if they knew it existed
Effect of failing to register a charge
Void against creditors administrators or liquidators
Company is obliged to repay debt immediately but lender cannot enforce security
