shares and debentures Flashcards
1
Q
How companies borrow
A
- A company’s power to borrow is typically set out in its constitution, specifically in the objects clause of the memorandum or in the articles of association.
- Section 158(3) – unless restricted by the constitution or the Act, directors may exercise all company powers to borrow money and to mortgage or charge the company’s assets.
- A charge is where the company retains legal title to the asset and the bank acquires the equitable title to the asset.
- The terms of a loan, such as repayment and default, depend on the specific agreement. Generally, an event of default turns a not-on-demand loan into an on-demand one, allowing the lender to terminate the agreement, accelerate repayments, cancel further lending, and appoint a receiver over secured assets.
2
Q
Security
A
- “Security” refers to protection against financial risk, primarily to reduce credit risk and gain priority over other creditors if the debtor becomes bankrupt or is liquidated. For large loans, banks typically require security. According to Goode, security can be:
o Real security: An interest in an asset (tangible or intangible) of the debtor or a third party.
o Personal security: A personal promise to pay, often from a third party, such as a guarantor or surety. Even the debtor may offer personal security in a more enforceable form, like a negotiable instrument. - A guarantee is a personal undertaking where one party agrees to be liable for another’s debt or failure to perform a legal obligation. It is commonly defined as a promise to answer for the debt of another, often in writing.
- While lenders typically seek real security (e.g., a fixed charge over assets), they often also require a personal guarantee, such as from a managing director. This provides extra protection, for instance, if property values fall and the real security is insufficient, the guarantor covers the shortfall.
- As the Supreme Court of Canada explained, a guarantee is a contract where the guarantor agrees to repay a lender if the debtor defaults. The guarantor’s liability usually mirrors that of the debtor, and if the principal debt is invalid, the guarantee is also invalid.
- Proprietary security allows a lender to take an interest over any type of property: tangible or intangible, present or future. The most common form is a first legal mortgage or fixed charge over land, as land is often easily sold to recover the debt.
- Legally, a lender has no claim over a borrower’s assets unless security is formally taken. Loan agreements typically require borrowers to provide such security. If a company has the power to borrow (express or implied), it also has the implied power to grant security. These powers are usually set out in the company’s constitution.
3
Q
Debentures
A
- A debenture is essentially a loan agreement between a company and a lender. It may or may not be secured by a charge, but banks almost always seek security.
o Section 64(1), the term includes bonds, debenture stock, and other debt instruments. - In practical terms, a debenture is: a document executed by a company (not an individual), acknowledging a debt, with an obligation to repay with interest, often secured over the company’s assets, enforceable on default through the appointment of a Receiver.
- The lender holding the debenture is the debenture holder, a secured creditor, not a shareholder.
4
Q
Mortgages
A
i. Legal mortgage – the borrower transfers title to the lender, who becomes the legal owner, subject to the borrower’s right to reclaim the property upon repayment.
ii. Equitable mortgage – the company keeps legal ownership of the asset, while the bank gains equitable interest—security without transferring title.
5
Q
Charges
A
- A charge is an equitable right, not involving a transfer of title. It gives the lender (bank) the equitable right to look to the charged property for repayment of the debt in case of default. Essentially, it grants the lender an equitable interest in the property without changing legal ownership.
- National Provincial and Union Bank of England – a charge arises when both parties in a transaction intend for property (existing or future) to serve as security for a debt. Even if the creditor doesn’t immediately have legal rights to the property or possession, if the intention is clear that the creditor can access the security at a future date through a court order, it constitutes a charge. However, if the agreement only provides a future right to seize the property (like a license), there is no charge.
- Re Chargecars Services Ltd – The essence of an equitable charge is that the property remains with the borrower (chargor), but is specifically earmarked to secure the debt. The lender (chargee) does not have legal ownership but has the right to use the property to realize the debt. Equitable remedies give the lender a proprietary interest in the property for security, allowing them to access the asset for repayment, even though the company retains legal ownership.
- Murray v Wilken – Finlay Geoghegan J. affirmed that the definition of an equitable charge is appropriate for Irish law. An equitable charge is a common security for companies and can be applied to various assets, including land, stock, machinery, book debts, and intellectual property. A charge provides several advantages for a lender:
It grants the lender control over the business through restrictive conditions and events of default.
In the event of default, the lender can enforce the charge.
The lender gains priority over unsecured creditors in insolvency situations.
If the charge is fixed, the lender generally has priority over preferential creditors, such as employees and the Revenue, who must be paid before other creditors in cases of limited funds.
6
Q
Liens and pledges
A
- A lien is a possessory security that gives a party the right to retain possession of goods until a debt owed to them is paid. It can be conferred by law or created consensually through a contract. For instance, a lending bank may seek security in the form of a lien over proceeds in an account held by the borrower with the bank, where the bank retains control until the debt is settled.
- A pledge is a consensual security where the borrower hands over possession of an asset (typically movable property, like a vehicle) to the lender. The lender has the right to sell the pledged asset if the borrower defaults.
- In contrast, a lien involves the lender taking possession of the asset, but the borrower may not have initially handed over the property with the intention of securing a debt.
- The key difference is that a pledge is specifically for securing a debt, while a lien can arise from other reasons, with possession retained by the lender until the debt is paid.
7
Q
Fixed and floating charges - fixed
A
- A fixed charge is a type of security that attaches to specific, identifiable property, such as a building, and remains constant over time.
- Welch v Bowmaker (Ireland) Ltd – a fixed charge was defined as one that “fastens on ascertained or definite property” or property that can be clearly identified or defined.
8
Q
floating
A
- A floating charge is a charge on assets that are continuously changing, like stock-in-trade, debts, or plant and machinery. Traditionally, a fixed charge was placed on business premises, while a floating charge covered other fluctuating assets.
- Re Yorkshire Wollcomers’ Association Ltd – is the foundational case on the nature of a floating charge, where Romer LJ outlined its three key characteristics:
1. It is a charge on a class of assets, both present and future.
2. The assets in question are those that change regularly in the course of the company’s business (e.g., stock).
3. The company can continue using those assets in the normal course of its business until some future event causes the charge to crystallize. - The third characteristic of a floating charge means that the charge “floats” over assets that change over time, like stock or inventory, and does not attach to any specific asset until it is triggered by a future event. This allows the company to use and sell its assets freely in the course of business without needing the bank’s consent, which is a major advantage of the floating charge.
- The floating charge remains flexible, letting the company operate normally. However, once an event occurs, such as the company defaulting on its loan, the charge “crystallizes” – this is when the floating charge becomes fixed and attaches to specific assets, giving the lender control.
- Welch v Bowmaker (Ireland) and Bank of Ireland – While all three features identified by Romer LJ are traditionally essential, this case clarified that a company may create a floating charge over real property, not just assets changing over time. The bank can choose which assets to charge, though in practice banks prefer fixed charges due to their priority.
o A debenture was issued in favour of Bowmaker creating a fixed charge over three of four pieces of land and a floating charge over the rest. It prohibited creating any later security that would take priority. The company then gave title deeds of the fourth land to the Bank of Ireland, unaware of the debenture, and later failed.
o The fourth land was deemed subject to a floating charge, and since BOI’s fixed charge came later, it took priority. Thus, BOI got the fourth piece of land ahead of Bowmaker’s floating charge.
9
Q
Differences between Fixed & Floating Charges - general policy advantage
A
- Fixed charges take priority over floating charges
- Fixed –> preferential creditors (Revenue) -> floating –> unsecured (usually have no surplus remaining)
- J.D. Brian Ltd t/a East Coast Print and Publicity and Re East Coast Car Parts Ltd – the issue was whether a bank’s crystallisation notice converted a floating charge into a fixed charge. The High Court had ruled no, but the Supreme Court disagreed.
o The bank sent a registered letter to the company, triggering crystallisation before liquidation began. The Supreme Court held this was valid, and the floating charge became a fixed charge, giving the bank priority over preferential creditors.
o Floating charges usually rank below preferential creditors, but once crystallised, they become fixed and take priority. In this case, Bank of Ireland, owed €16.2 million, got priority over Revenue, which was owed €600,000. - Effects of JD Brian – amended by ss 92 and 98(d) of the Companies (Amendment) Act 2017 – in the context of winding up or receivership, a preferential creditor ranks ahead of the holder of any charge created as a floating charge and thereby crystalisation of a floating charge no longer affords a secured creditor to leapfrog the claims of presential creditors.
o It is hard to see how in practice a bank can put a fixed charge over assets like stock which change in the course of business because in theory a company would need the consent of the bank each time it sold its stock.
10
Q
no dealing advantage
A
- An asset under a fixed charge can’t be sold without the lender’s consent. So, during a sale, searches must be done in the Land Registry/Registry of Deeds and CRO to check for registered charges. If a charge exists, the buyer will need a release letter from the bank confirming the loan is paid and the charge is removed. Solicitors must carry out these checks as part of their due diligence.
- In contrast, assets under a floating charge can be sold freely without consent—unless the loan agreement says otherwise. This allows companies to sell stock, plant, or debts in the normal course of business.
11
Q
Crystalisation of floating charges
A
- Floating charges are said to float or hover over the assets until certain events occur – on the occurrence of these events, the floating charge crystallises into a fixed charge:
Receiver appointed
Liquidation of the company
Company ceases to trade
Notice – giving of notice by the debenture-holder where debenture provides that giving of notice will have this effect
Automatic crystalisation – it can be provided in the debenture that the charge will crystallise on certain events (other than the four above which are recognised by law). In England this is no longer recognised– a floating charge remains a floating charge for the purposes of deciding its position in the insolvency queue. There is no Irish case law on whether automatic crystallisation clauses would be recognised.
12
Q
Negative pledge clause
A
- Debentures often include a negative pledge clause, preventing the company from creating new charges over an already charged asset without the lender’s permission. This aims to stop other charges from taking priority.
- However, just having a negative pledge doesn’t guarantee priority over a later fixed charge. If a company uses an asset under a floating charge to secure a new fixed charge, priority depends on the new lender’s knowledge.
- The second lender is considered to have constructive notice of the floating charge (if it’s registered in the CRO), but not of the negative pledge clause in it. Only if the second lender has actual knowledge of that clause will the earlier floating charge take priority.
- Wilson v Kelland – a fixed charge holder failed to search the Companies Office and didn’t know about an earlier floating charge. The court held he had constructive notice of the floating charge (as it was registered), but not of the negative pledge clause, since such clauses aren’t required by law to be registered. So, he wasn’t bound by it.
- Re Holidair – SC ruled that a negative pledge clause does not stop an examiner from borrowing money. Under the law, a second lender creating a fixed charge over an asset already under a floating charge is deemed to have constructive notice of the earlier charge but not of the negative pledge clause, unless they had actual knowledge of it.
o As a result, the later fixed charge can take priority over the earlier floating charge, even if a negative pledge was in place, an outcome often viewed as unfair.
13
Q
Fixed charges and book debts
A
- A book debt is a debt owed to a company from its business activities and is typically recorded in the company’s accounts. Since it’s considered an asset, it can be used as security for a loan. Book debts have become more popular as fixed charges can be placed over them, especially as floating charges have declined in importance.
- Response Engineering Ltd v Caercolish Treatment Plant Ltd – Hogan J defined book debts as ‘future income which will accrue to the company by reason of the provision of goods and services to third parties by that company in the coirse of its trade business.’
- In business, it’s common to sell goods or services on credit. When this happens, the customer owes money to the company and becomes a debtor. This debt is called a book debt, and it’s an asset the company owns. The company can use it as security for a loan.
- As floating charges have become less reliable for lenders, banks started looking for better options. One major alternative is putting a fixed charge on book debts instead of just on land or buildings. Today, for many companies, book debts are one of their main assets for getting loans.
- Banks often prefer fixed charges on book debts over floating charges on things like stock, because they offer better security. However, there’s been some concern over whether book debts can be clearly identified as a specific asset class to allow a fixed charge.
14
Q
fixed charge recignised
A
- Siebe Gorman v Barclays Bank – the court upheld a fixed charge over book debts for the first time. The company’s debenture stated that all book debts owed to it were subject to a first fixed charge.
o The debts had to be paid into a specific account with the bank, and the company couldn’t assign or charge those debts without the bank’s consent.
o The court ruled this was a fixed charge because of the strict control the bank had — especially the restrictions on how the company could use the debts. Control is a key element of a fixed charge, and that persuaded the court.
15
Q
no restrictions - floating
A
- Re Armagh Shoes – no restriction on book debts – floating charge.
16
Q
the dillema between cases
A
- Re Brightlife Ltd – In a later case, the debenture restricted the company from selling, factoring, or discounting its book debts. However, it didn’t require the debts to be paid into a separate bank account.
o Because the company was still free to use the money from the debts, the court held that this was only a floating charge, not a fixed one. The key reason was that the company could still deal with the proceeds of the debts – a typical feature of a floating charge.
o So, even with restrictions on dealing with the debts themselves, if the company can freely use the money once it’s paid, the charge is likely to be floating. - Re Keenan Bros Ltd – first Irish case – the debenture stated ‘the company shall pay into an account with the Bank designated for that purpose all monies which it may receive in respect of the book debts and other debts hereby charged and shall not without the prior consent of the Bank in writing make any withdrawals or direct any payment from the said account.’
o This was a clear example of creating a fixed charge over book debts, with the debenture using the phrase “fixed charge over the debts.”
o Revenue argued it was actually a floating charge because the bank allowed the company to withdraw funds from the account – a feature of floating charges.
o SC accepted the substance over form approach but still held the charge was fixed. The key was that the company needed the bank’s permission to use the funds, and the assets were under the bank’s control, showing the charge had immediate attachment – a feature of fixed charges.
o This decision appeared to establish that the requirement of a separate account was essential – it was the only way to maintain control over the assets. - Re Wogans (Drogheda) Ltd – the SC held that not setting up a special account doesn’t prevent a fixed charge from existing. Finlay CJ said a delay or failure to operate the account doesn’t remove the lender’s rights under the charge.
o What mattered was that the debenture gave the lender the right to require such an account and control it. This developed Irish law – the charge remains fixed if the restrictions are written in, even if not enforced in practice.
o However, one key feature of a fixed charge is removal of control from the company, and in Wogan, control didn’t seem to be fully removed. - According to Courtney, Wogan is inconsistent with the SC later decision in Re Holidair.
o In Holidair, although the charge was described as fixed and allowed for a separate account, the company could still use the proceeds in its business. The Court held it was a floating charge, applying Romer J’s three criteria from Re Yorkshire Woolcombers. These cases show that the law became inconsistent, with some judgments contradicting each other.
o Blayney J distinguished the clauses in Wogan and Keenan, noting that Wogan had an express prohibition on withdrawing funds, while the instant case did not. The Supreme Court in Wogan justified its decision based on this wording difference. However, Courtney disagrees, arguing that the distinction was too minor to justify the inconsistency in the case law. - Westminster Bank v Spectrum Plus – the debenture required book debts to be paid into the company’s account, which was always overdrawn. Though there were restrictions on selling or factoring debts, the company freely used the proceeds.
o At first instance, it was deemed a floating charge, but the HoL later held it was fixed, stating that the decisive factor is whether the company can withdraw proceeds without the lender’s permission.
o HoL followed the Irish approach in Wogan: it’s enough if restrictions are in the debenture, even if not enforced in practice – written control matters.
17
Q
hybrid charges
A
- Banks sometimes create a hybrid charge over a company’s book debts (amounts owed by customers).
Initially, the charge is fixed over uncollected debts, meaning the bank has control over these debts if the company defaults. This ensures the bank can access the uncollected debts as security.
However, once the debts are paid (collected), the charge becomes floating, allowing the company to use the cash in the normal course of business.
The fixed charge restricts the company from using uncollected debts freely, while the floating charge gives flexibility once the debts are collected. This structure balances the bank’s need for security with the company’s ability to operate. - Re Bullas Trading Ltd – CoA confirmed that a charge can switch from fixed to floating over a company’s book debts. It upheld the validity of a hybrid charge, with a fixed charge on uncollected debts and a floating charge on collected debts.
- Re Brumark Investments Ltd; Commissioner of Inland Revenue v Agnew – the New Zealand Court of Appeal and the Privy Council rejected the hybrid charge concept from Bullas and ruled that a charge over book debts must be either fixed or floating, not both.
o Millet LJ explained that the debenture in Bullas attempted to distinguish between uncollected debts (fixed charge) and their proceeds (floating charge). However, the court found that such a distinction couldn’t be made, as once debts are collected, they become a different asset and should be subject only to a floating charge.
o Millett LJ criticized the Bullas decision, arguing that the intention of the parties should not be the sole determinant of whether a charge is fixed or floating. Instead, the court must
1. Assess what restrictions are placed on the debt by the words of the debenture.
2. Assess whether these restrictions are sufficient to create a fixed charge or are merely a floating charge.
o A fixed charge requires the chargee to have control over the asset. In this case, the company was allowed to collect the debts and use the proceeds freely, which was inconsistent with the nature of a fixed charge.
o The Privy Council concluded that because the company retained control over the collection and use of the proceeds, the charge over the book debts was a floating charge, not a fixed one. This decision, reinforced by the later Spectrum case, effectively ended the use of hybrid charges in England, confirming that a charge over book debts must be either fixed or floating, but never a combination of both.
18
Q
Reform of priority rules re fixed charges on book debts
A
- Under Section 1001 of the Taxes Consolidation Act 1997, banks with a fixed charge on book debts must use some of the proceeds to pay certain taxes, like VAT and PAYE, owed by the company. This ensures that the Revenue Commissioners have priority over the bank for these tax amounts, even though the bank retains priority for the book debts themselves.
19
Q
Enforcement of security
A
- If a company defaults on repaying capital or interest, the debenture holder can sue to recover the money and seek judgment and execution.
o Section 569 – they may also petition to wind up the company. - More commonly, the debenture holder appoints a receiver, either through a power in the debenture or by court order. Once appointed, the receiver takes control of the charged property, and the company’s directors lose authority over it unless the receiver agrees. Often acting as both receiver and manager, the receiver can continue running the business to protect the interests of the debenture holder.
20
Q
priority
A
- S. 412(3) – the priority of company charges is based on the date of filing, not the date of creation, unless another specialist registry applies. This change was recommended by the Company Law Review Group to prevent lenders from being misled about a company’s existing charges.
- However, s. 412 is subject to other registration rules. For example:
o Charges over unregistered land must be registered under the Registration of Deeds and Title Act 2006.
o Charges over registered land must be registered in the Land Registry under the Registration of Title Act 1964. - The priority of charges over land is determined by the order of registration in the Land Registry or Registry of Deeds, not the CRO. In contrast, charges over other property, such as book debts, stock, business undertakings, and chattels (excluding aircraft and agricultural stock) are governed by s. 412, unless another specific rule applies.
- There is some uncertainty under s. 412(1)(b) about whether the doctrine protecting equity’s darling (a good faith purchaser without notice) still applies. The section suggests that a lack of notice may still impact charge priority, but it’s not entirely clear.
- Previously, cases like Welch v Bowmaker (Ireland) Ltd and Bank of Ireland held that the public does not have constructive notice of negative pledges. This aligns with s. 414, which states the Registrar is not required to register negative pledge clauses, meaning they may remain undisclosed to third parties.
21
Q
Registration of charges
A
- Section 408 – a charge as any mortgage or charge, in any agreement (whether written or oral), that is created over an interest in property (including any assets or undertaking) of the company and includes a judgment mortgage.
- However, under section 408, excluded from the definition of a charge are those mortgages or charges created over an interest in, for example: Cash; Money credited to an account of a financial institution or any other deposits; Shares, bonds or debt instruments; Claims and rights related, for example, to shares or debt instruments (such as dividends and interest).
- S. 408 – all charges, except those specifically excluded, must now be registered. The cases in the notes involve charges falling under this requirement.
- S. 409(1) – If a charge is not registered within 21 days of its creation, it becomes void against a liquidator and creditors. However, the debt itself remains enforceable against the company. The creditor simply loses their secured status and is treated as an unsecured creditor.
- S. 409(6) – If registration fails, the loan becomes immediately repayable by the company.
- If a charge isn’t registered and the money isn’t immediately repaid, the creditor is left exposed. In the event of liquidation or receivership, a later-registered charge will take priority over an earlier unregistered one, meaning the registered creditor gets paid first.
- This strict registration rule protects not just secured creditors but also future lenders, shareholders, and suppliers, who can check the CRO to see how much of the company’s assets are already secured. If the company is heavily indebted and its assets are fully charged, it may signal financial instability, potentially discouraging investment or credit from others.
22
Q
registration methods - one stage
A
- Section 409(3) – It requires that the particulars of the charge are registered in the prescribed (correct) form with the Registrar (CRO) not later than 21 days after the date of the creation of the charge
23
Q
two stage
A
- Notice given to CRO of intention to create a charge.
- Second notice given within 21 days stating that the charge was created – date at which this charge is considered to be effective is the date of the first notice – backdates effectiveness.
- Section 410 – it is primarily the company’s duty to ensure that a charge it creates is properly registered. However, to reflect real-world commercial practices, s. 410(2) allows any person with an interest in the charge, such as a lender or creditor, to carry out the registration themselves. This helps protect their security interest if the company fails to register the charge.
- If another interested party, such as a bank, registers the charge, the registration is treated as if the company had done it: s. 410(3). This protects the validity and priority of the charge. The registering party can also recover the registration fees from the company.
24
Q
Late registration of particulars of a charge
A
- S. 417(3) – the High Court has a discretionary power to extend the time to register a charge.
- S. 417(1) – late registration may be allowed where:
1. The failure to register was accidental or due to inadvertence;
2. The delay does not prejudice creditors or shareholders;
3. It is otherwise just and equitable to allow it. - This discretion is limited by the ‘Joplin proviso’ (from Re Joplin Brewery Co), which means that late registration cannot affect the rights of third parties who acquired interests in the company’s assets between the charge’s creation and its late registration.
- Re Manning Furniture – the court upheld this principle. Although an earlier unregistered charge existed in favor of a building society, it was ignored in priority because it wasn’t registered. Instead, the registered charges and preferential creditors (like the Revenue) took priority when the company went into receivership.
