Shares - Part 2 Flashcards
What is a member?
A member is:
–An original subscriber to memorandum; or
– Has agreed to be a member and is entered on Register of Members
What does “Estoppel” mean in the context of membership?
– Estoppel: A person may be estopped from denying agreement if they fail to object to the entry of their name in the Register of Members:
• Linz v. Electric Wire Co of Palestine [1948] – sale of shares by allottee was inconsistent with denial of membership.
“Any member of a company who complains that the affairs of the company are being conducted or that the powers of the directors of the company are being exercised – “ in what 2 circumstances?
(a) In a manner oppressive to him or her or to any of the members (including himself or herself), or
(b) In disregard of his or her or their interests as members, may apply to the court for an order under this section.”
Given that oppressive behaviour is considered by objective standards and on a case-by-case basis the following should be noted:
The oppression in question need not be suffered by a member as member. This is seen in what case?
Murph’s Restaurant Ltd [1979]
- The company had three shareholder directors involved in the restaurant business.
- The two brothers decided to remove their friend as a director after personal relations soured. The friend sought to have the company wound up.
- Mr Justice Gannon observed that evidence clearly showed that the members were “equal partners in a joint enterprise and that the company was no more than a vehicle to secure limited liability for possible losses and to provide a means of earning and distributing profits to their best advantage and minimum disclosure.”
- The court went on to hold that the actions of the two directors in removing the third constituted a “deliberate and calculated repudiation….of that relationship of equality, trust and confidence between the three which constituted the very essence of the company.” Held: It was just an equitable to wind up the company in the circumstances.
- Exclusion from management is also oppression : The case in Re Murph’s is also the relevant authority for exclusion from management.
The provision of financial assistance by the company to a party for the purchase of the company’s own shares is permitted if such financial assistance is what?
- in accordance with the summary approval procedure;
- In accordance with an employee share schemes;
- In its ordinary course of business;
- In accordance with lending money to non-director employees; or
- In accordance with a re-financing or re-arrangement of the company
What is loan capital?
Where capital relates to borrowing, it is called loan capital.
What is meant by placing a charge on an asset?
Companies often use their assets to secure these loans and this is known as placing a charge on the asset.
What is a debenture?
A ‘debenture’ is a type of loan defined as a written document acknowledging the debt owed by the company.
Most debentures contain a security or a charge that improves the lender’s prospects of being repaid, if the company becomes insolvent.
What are the 3 types of debentures?
Single debenture - An individual loan to a company and the most common type of debenture in Ireland.
Series of debentures - A group of separate loans, which rank equally, used to raise a total amount.
Debenture stock - Used by PLCs to raise money from the public at large. A large number of lenders subscribe for debentures and the loan is treated as part of an overall stock figure.
What is a Debenture Trust Deed?
A debenture trust deed appoints a trustee to act on behalf of all debenture holders to regulate administrative matters in relation to the debenture, where necessary to enforce the security and, in default, to appoint a receiver
What is a charge?
A charge is an acknowledgement, either in a written or oral form, that is created over any interest in any property of the company.
What is specifically excluded from the definition of a charge?
- a mortgage or charge created over cash;
- money credited to an account of a financial institution or any other deposits;
- shares, bonds or debt instruments;
- units in collective investment undertakings or money market instruments; or
- claims and rights, such as dividends or interest, in respect of any of the foregoing, except for cash
What is a fixed charge?
A fixed charge attaches to a specific asset and restricts the borrower’s ability to deal with the charged asset. This does not mean that the company cannot use the asset that is the subject of a fixed charge, but that the company cannot sell this asset or use it as collateral for future borrowing, without the permission of the charge holder.
What is a floating charge?
A floating charge does not attach to specific assets – the borrower is free to deal with them ( sell them, replenish them etc) as the charge hovers/floats over them until the moment of crystallisation (eg winding up of the company). Upon crystallisation, the charge attaches to the assets over which it previously floated.
What are the 3 characteristics of a floating charge?
[Yorkshire Woolcombers Association Ltd]
- it is a charge on a class of assets present and future;
- that class is one which, in the ordinary course of the business of the company, would change from time to time; and
- that until some future step is taken by or on behalf of those interested in the charge, the company may carry on its business in the ordinary way so far as concerns the particular class of assets being dealt with
What is meant by the crystallization of floating charges?
Crystallisation is the occurrence of a special event that causes the floating charge to cease floating and become attached to the class of assets that it affects. The rights of the charge holder are dormant until the moment of crystallisation, which confers tangible equitable rights on the asset within the ambit of the charges.
When do floating charges crystallise?
- a receiver is appointed;
- the company is being wound up;
- there is a cessation of business;
- there is automatic crystallisation (a clause may state that the charge will crystallise automatically upon the occurrence of some specified event); or
- the giving of notice by the debenture holder can cause crystallisation where the debenture provided for this
Give an example of a case where there was a fixed charge and a floating charge.
Brightlife Ltd [1987]
- the debenture provided that there was a fixed charge over the book debts and a floating charge over all the undertakings of the company, present and future. There was also a provision that the floating charge could be converted into a fixed charge at any time before the liquidation of the company, if the debenture holder gave notice of crystallisation to the company. Held: On the facts there was no reason the debenture holder should not be capable of crystallising the charge by giving notice.
What is a negative pledge clause?
A ‘negative pledge clause’ is a clause to protect the holder of a floating charge against any subsequent charges that may have priority of payment over the floating charge.`
This clause now appears in most standard charges and it binds both parties, as well as any subsequent secured creditors, provided that they have actual notice of the clause.
For example, if a floating charge containing a negative pledge clause was created by X Ltd in December 20X4 and a fixed charge was subsequently created by X Ltd in June 20X5, the fixed charge would be in breach of the negative pledge due to its priority of payment and all parties who are aware of the negative pledge and those who acted in contravention of it would be liable.
The key issue regarding liability is knowing of the existence of the clause.
Example of a case involving a Negative Pledge Clause?
In Welch v Bowmaker and Bank of Ireland [1987] WJSC-SC3929 a company issued a debenture in favour of Bowmaker that created a fixed charge over three of the four parcels of land owned by the company and a floating charge over its remaining assets, which included the fourth parcel known as ‘Ivy Lawn.’ The floating charge over the remaining assets contained a negative pledge clause. A month later, the company deposited the title deeds of ‘Ivy Lawn’ as security with Bank of Ireland, which was aware of the earlier floating charge but unaware of the terms of the debenture. The company subsequently went into liquidation and Bowmaker argued that the Bank of Ireland should have had constructive notice of the negative pledge clause. Held: the court found that although unusual, it is possible to create a floating charge over land. The bank did not have actual knowledge of the negative pledge clause, so the court ruled that the fixed charge created by the depositing of the deeds with the bank took priority over the earlier floating charge.
What is a legal mortgage?
Legal mortgage: The mortgagee has the legal title of the property in return for lending, subject to an equitable right of the mortgagor to recover the legal title by fulfilling the terms of redemption (by repaying the mortgage).
If the mortgagor defaults in repayment, the mortgagee may be entitled to sell the property to recoup any unpaid loan amount.
What is an equitable mortgage?
Equitable Mortgage: The mortgagor transfers the equitable interest in the property to the mortgagee (e.g. by depositing the title deeds of the property with the lender).
If the mortgagor defaults in repayment, the mortgagee may be entitled to sell the property to recoup any outstanding debt.
What happens to charges not registered with the CRO?
All charges that are not registered with the Companies Registration Office (CRO) become void against any liquidator or creditor of the company. When the charge becomes void, the money secured becomes payable immediately and may be ranked as an unsecured debt.
The company, as the borrower, has the legal obligation to register the charge. This duty is usually assigned to the company secretary.
What are the 2 methods by which a charge can be registered?
- the one-stage procedure involves the CRO receiving an application for registration of the charge, not later than 21 days after the date of the creation of the charge, in its prescribed form.
- the two-stage procedure involves the CRO receiving a notice stating the company’s intention to create the charge in two separate forms:
- the first form is a notice of intention by the company to create a charge, which must be submitted to the CRO in advance of the charge being created;
- the second form, which includes details of the charge to be registered, must be delivered to the CRO within 21 days of the submission of the notice of intention
