Topic 1 Flashcards
what are the types of debt/loan capital a company may have?
Voluntary:
- Overdraft and fixed term loans
- Advances by assignment of debt
- Trading debt
- Paying for supplies in advance (customers can be creditors)
Involuntary creditors:
become owed money by company without agreement.
1. Tort victims
2. Tax authorities
What is an overdraft/fixed term loan? difference between the 2?
Overdraft is where bank allows company to withdraw X amount over limit. Bank can recall the money at any time.
Fixed-term loan provided by bank to company, but can only be demanded back at fixed time, unless a clause in agreement allows otherwise.
What is an advance by way of assignment of debts?
Money owed to company by creditors is generally termed ‘book debts’ and can be transferred to 3rd parties
- Company assigns rights to debts owed to it to a third party (assignee) in return for cash advance
- 3rd party collects debts itself/ company does it, in which case it remains indebted to assignee for amount of advance
- Any collected funds will not become part of company assets but held ON TRUST for financier
Trade debt
Supplying on credit terms –> Trading partners advance another less transparent form of loan capital to companies
- company orders good/services from others
- terms upon which supplies are made frequently afford recipient company a period of time to make payment
Involuntary creditors: Tax authorities?
VAT of customers used for short time by company until paid to hmrc
Insolvency and “going into liquidation”
s247 IA
Insolvency–> includes the approval of a voluntary arrangement under part I, the appointment of an administrator or administrative receiver
Company goes into liquidation if–> passed a resolution for voluntary winding up or an order for its winding up is made by the court at a time when it has not already gone into liquidation by passing such a resolution
When does corporate insolvency occur?
When a company has incurred more liabilities than it has assets to meet them, owing more than it owns.
How can corporate insolvency be dealt with?
- Individual creditors may go to the court to obtain judgment- eventually seizing the assets to pay the creditor who has obtained the execution order. (Brutal, aggressive, and some creditors prioritised over others)
- Winding up (collective procedure with all creditors participating).
Winding up procedure
A process of collective enforcement of debts for benefit of general body of creditors.
Voluntary procedure: Company passes resolution that it should be wound up, goes into liquidation. If it demonstrates that it cannot pay debts, court issues order.
Involuntary (compulsory): creditors can petition the court for a winding up order
Re Lines Bros 1983 per Brightman J
Winding up may be
A) voluntary, in the sense that company members pass a resolution for its winding up.
B) Compulsory- creditors petition to court for winding up order to be made against company
What are the consequences of a winding up order?
- Directors powers terminated,
- Creation of statutory trust (company no longer beneficial owner of assets, holds them on trust for statutory purposes)
- Retain legal interest
Ayerst v C & K construction Ltd 1976
Suspension of individual rights against company upon winding up
- Principle of collectivity requires that individual action against company may be prohibited.
- s126, 127, 128, 130
although some creditors can exclude themselves from this rule (Re david lloyd)
How did winding up/liquidation work?
Liquidator collects the assets of the company “Warts & All”
He disposes of them to raise pool of £
Creditors all entitled to share this pool
Corporate asset
Property law determines whether or not an asset of company in commercial sense is in fact an asset in legal sense.
(company may be in possession of assets that belong to 3ps under contractual agreement so not in legal sense theirs)
Assets subject to security interests
some corporate creditors will be unwilling to lend money or extend credit solely on basis of the company’s contractual obligation to repay the debt.
They may therefore take advantage of contract/property law to ensure the risk of lending is minimised.
–> Taking security over company assets
As a result, such a creditor has 2 sources of repayment
- Assets over which he has taken security
- company cash flow
security
Bristol Airport v Powdrill 1990 per Lord BW:
Security is created when a person (creditor) to whom the obligation is owed by another (debtor) by statute or contract, in addition to the personal promise of debtor to discharge obligation, obtains right exercisable against some property in which debtor has an interest in order to enforce the discharge of the debtor’s obligation to creditor.
security interest
Interest in personal property or fixtures which secure payment/performance of an obligation.
Types: 1. Real/personal security- in an asset or pool of assets, takes form of mortgage or charge or class of existing and future assets.
- Possessory/non-possessory security
- lien: secured party has possession of asset and can retain possession until discharge of debt
- pledge- sell property in order to discharge debt
- Mortgage/charge
Company charges
Equitable property rights
Re BCCI (no 8): Equitable charge is a charge which is a proprietary interest granted by way of security. it entitles the holder to resort to property only for the purpose of satisfying some liability due to him. A charge is a security interest created without any transfer of title or possession to beneficiary
Company does not grant title but affords lender equitable prop rights.
Fixed charges
Security over SPECIFIC assets such as goodwill, property or shares.
- Close to mortgage, but no conveyance of collateral.
- It is a non-possessory form of security, as debtor retains rights over the asset.
- The contract under which the charge is granted will prohibit the chargor (company) from dealing with or disposing of the collateral without lender (chargees) permission.
Illingsworth v Houldsworth 1904
A fixed charge is a charge that without more fastens on ascertained and defined property capable of being ascertained and defined
Holroyd v Marshall
In fixed charge, debtor remains in possession of collateral. charge can be extended to both existing and future collateral according to contract and property law
Floating charges
equitable charge on property which may CHANGE from time to time in the ordinary course of business (eg stocks)
This can be converted into fixed charge over assets later (crystallised)
Allows company to deal with assets whilst ever the creditor has not intervened.
Re Panama 1870
Re(Floating charge case)
Court confronted with a charge expressed to extend to entire undertaking of the company.
The charge expressed to extend “to the entire undertaking” was held to be valid, and became known as a floating charge.
Re Yorkshire Woolcombers association
Romer LJ listed the 3 characteristics needed for FLOATING CHARGE
- Charge on class of assets of a company present & future
- That class is one which, in ordinary court of business, would be changing from time to time
- If you find that by the charge is contemplated that, until some future step is taken by or on behalf of those interest in the charge, the company may carry on its business in ordinary way as far as concerns that particular class being dealt with.
Why is floating charge good for creditor?
In the event of insolvency, floating charge helps creditor by crystallization process
Crystallization
Process whereby floating charge attaches itself to assets subject to the charge, becoming a fixed charge on those assets.
- Protects lender (chargee) in event of insolvency of chargor company
Triggered by:
- Events specified in debenture
- Onset of liquidation
- Appointment of receiver
Debenture
Document acknowledging a debt or charge
Evans v Rival Granite Quarries
Specifies nature of crystallization: the point at which freedom to deal with assets is removed.