Shares - Part 2

Question 1

What is a member?

Answer 1

A member is:

–An original subscriber to memorandum; or

– Has agreed to be a member and is entered on Register of Members

Question 2

What does “Estoppel” mean in the context of membership?

Answer 2

– 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.

Question 3

“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?

Answer 3

(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.”

Question 4

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?

Answer 4

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.

Question 5

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?

Answer 5

• 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

Question 6

What is loan capital?

Answer 6

Where capital relates to borrowing, it is called loan capital.

Question 7

What is meant by placing a charge on an asset?

Answer 7

Companies often use their assets to secure these loans and this is known as placing a charge on the asset.

Question 8

What is a debenture?

Answer 8

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.

Question 9

What are the 3 types of debentures?

Answer 9

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.

Question 10

What is a Debenture Trust Deed?

Answer 10

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

Question 11

What is a charge?

Answer 11

A charge is an acknowledgement, either in a written or oral form, that is created over any interest in any property of the company.

Question 12

What is specifically excluded from the definition of a charge?

Answer 12

• 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

Question 13

What is a fixed charge?

Answer 13

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.

Question 14

What is a floating charge?

Answer 14

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.

Question 15

What are the 3 characteristics of a floating charge?

Answer 15

[Yorkshire Woolcombers Association Ltd]

1. it is a charge on a class of assets present and future;
2. that class is one which, in the ordinary course of the business of the company, would change from time to time; and
3. 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

Question 16

What is meant by the crystallization of floating charges?

Answer 16

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.

Question 17

When do floating charges crystallise?

Answer 17

1. a receiver is appointed;
2. the company is being wound up;
3. there is a cessation of business;
4. there is automatic crystallisation (a clause may state that the charge will crystallise automatically upon the occurrence of some specified event); or
5. the giving of notice by the debenture holder can cause crystallisation where the debenture provided for this

Question 18

Give an example of a case where there was a fixed charge and a floating charge.

Answer 18

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.

Question 19

What is a negative pledge clause?

Answer 19

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.

Question 20

Example of a case involving a Negative Pledge Clause?

Answer 20

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.

Question 21

What is a legal mortgage?

Answer 21

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.

Question 22

What is an equitable mortgage?

Answer 22

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.

Question 23

What happens to charges not registered with the CRO?

Answer 23

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.

Question 24

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?

Answer 24

• 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

Question 25

What must be included in application for the registration of a charge?

Answer 25

(1) the name of the company;
(2) the description of the charge;
(3) the date of creation;
(4) short particulars of the property charged;
(5) the presenter’s details; and
(6) details of the persons entitled to the charge.

Question 26

What happens if a charge is not registered with a twenty-one day timeframe with the CRO?

Answer 26

it becomes void against the liquidator or relevant company creditors.

When this arises, the charge holder may demand repayment and, if the company is unable to do so at the time, the charge holder may demand that the company be wound up.

Question 27

The Companies Act provides for a procedure to apply to the High Court for an extension of time for registration or rectification of the charge.

This will only be granted where the court is satisfied that?

Answer 27

• the omission was accidental or due to inadvertence or is not of a nature to prejudice the position of creditors or shareholders of the company; or
• that on other grounds it is just and equitable to grant that relief in respect of such an omission or misstatement.

Question 28

Charges have to be paid in order of priority.

What is priority for the payment of debts owed by a company?

Answer 28

1. fixed charges (ranked in order of date of registration);
2. preferential debts (ranked pari passu , ie paid equally) under section 621 CA 2014;
3. floating charges (ranked in order of date of registration)

This means that the first fixed charge registered with the CRO is the first charge to be repaid. If, however, there are two charges on an asset, a fixed charge and a floating charge, the fixed charge is always paid first in order of date of registration.

Question 29

What’s a receiver?

Answer 29

A receiver is someone who is appointed when a debenture holder needs to realise his or her security.

This usually arises where the company defaults on its obligation regarding the repayment of the debenture loan.

The receiver takes control of the charged asset, sells the asset, applies the proceeds of the sale and discharges the debt.

Question 30

What are the 2 types of receivers?

Answer 30

1 - Receiver appointed by a Debenture Holder

2 - A Receiver appointed by the Court

Question 31

A court may appoint a receiver on what grounds?

Answer 31

• If the security that is pledged is in jeopardy;
• If the company has begun proceedings to be wound up;
• If the principal sum or interest due on the debenture is in arrears

Question 32

The court has the power to remove a receiver if?

Answer 32

• the company in receivership has gone into liquidation; or
• a cause has been shown, such as where the court believes it to be in the best interest of the creditors or where there has been an act of misconduct by the receiver

Question 33

Subject to the terms of the debenture document or the court order, the receiver has the power to take possession of and control of the company’s property and can?

Answer 33

• lease it, hire it out or dispose of it;
• grant options over the property on such conditions as he thinks fit;
• borrow money, using it as security;
• Insure it;
• Repair, renew or enlarge it; and/or

• Convert it into money

Question 34

A receiver, subject to the terms of the debenture document or the court order, has the power to carry on any business of the company. For example, he/she can:

Answer 34

• take on lease or on hire or otherwise acquire property;
• execute any document, bring or defend any proceedings or do any other act or thing in the name of and on behalf of the company;
• draw, accept, make and endorse a bill of exchange or promissory note;
• use a seal of the company;
• appoint a solicitor:
  • a solicitor or accountant or other professional qualified person to assist him; or
  • an agent to do any business that he is unable to do or that it is unreasonable to expect him to do in person;
• enforce payment of any call on the company’s shares that is due and unpaid;
• make or defend an application for the winding up of the company;
• refer to arbitration or mediation any question affecting the company.

Question 35

If a receiver was appointed under an instrument that created a charge on uncalled share capital of the company, he has the power?

Answer 35

• To make a call in the name of the company for the payment of money unpaid on the company’s shares; or
• on giving a proper indemnity to a liquidator of the company, to make a call in the liquidator’s name for the payment of money unpaid on the company’s shares