Topic 1 - Corporate Borrowing

Question 1

What is a creditor?

Answer 1

Someone the company owes money to

Question 2

Name the two main types of creditors and explain the difference between them.

Answer 2

• Two types = Secured creditors and unsecured creditors
• Difference
  -Secure creditors have a way of getting their money back or some of it if the party fails to pay back the debt
  -Unsecured creditors have no legal means to ensure they get paid and they rank below secured creditors in a winding up.
  -Enforcement options available to creditors also depends on the type of creditor they are.

Question 3

Explain the priority order in a liquidation.

Answer 3

1. RC and liquidator’s fees/legal/accounting fees
2. Secured creditors
3. Unsecured creditors
   - Bottom of the hierarchy is shareholders

Question 4

Explain the remedies for unsecured creditors.

Answer 4

1. Sue company for debt - seek enforcement of this judgment
2. Petition to wind up company

Question 5

Explain the remedies for secured creditors.

Answer 5

1. Sue company for debt - seek enforcement of this judgment
2. Petition to wind up company
3. to take possession of the charged property (property that has been given security for a debt) and, subsequently, sell it without the assistance of the court;
4. to apply for a court order to sell the charged property in their possession;
5. to receive and apply the income from the possessed property to discharge the loan; or
6. to appoint a receiver under the terms of the debenture, or apply to the court to appoint one

Question 6

Name the two types of mortgages

Answer 6

1. Legal mortgage
2. Equitable mortgage

Question 7

Explain a legal mortgage

Answer 7

• Legal mortgage = conditional transfer of property to a lending institution which can become absolute if default is made on the loan.
• Executed once company executes deed transferring ownership.
• Company retains equitable right to property and can recover property once loan is fully repaid.

Question 8

Explain an equitable mortgage.

Answer 8

• Equitable mortgage – deposit of title deeds with the mortgagor.
• Bank has title deeds in its office
• Legal mortgage document messed up and not legally valid but get deeds as equitable mortgage but now rarer
• Just equitable interest in property
• Interest can be defeated by subsequent bona fide purchaser.

Question 9

Explain charges.

Answer 9

• A form of security for the repayment of a debt which endows the lending institution with the right to receive payment out of a particular fund or out of the proceeds of the realisation of a particular item of property (selling the thing).
• Guarantee or security for a loan – specific company assets security.
• Equitable in nature. Legal title doesn’t pass to the lending institution.
• Re Clare Textiles Ltd [1993] 2 IR 213. – Costello J defined a charge (not defined in CA 2014 Act) as a contract under the terms of which certain property is available as security to meet the performance of a liability, usually the payment of money and its creation is dependent on a contract.
• Crucial thing is has to be a contract setting out the terms e.g. money in exchange for security on some assets
• All mortgages are charges but some charges are broader than mortgages

Question 10

Differentiate between mortgages and charges.

Answer 10

• Courtney = Difference between charge and mortgage = title to the asset does not pass to lending institution for charges. Only equitable right passes with a charge.
• Re Charge Card Services Ltd [1986] 3 All ER 289 – Where a property is being charged, there is no conveyance

Question 11

Explain debentures.

Answer 11

• Levy v Abercorris Slate and Slab Co – Chitty J = Debenture is a document that creates or acknowledges a loan
• Modern context – Debenture acknowledges obligation to repay and terms in contract used to enforce obligation