Topic 10: Debt Finance

Question 1

What is debt finance?

Answer 1

Borrowing money which is usually an unrestricted power however it depends on the Articles

Question 2

What are the two categories of debt finance?

Answer 2

Loans or debt securities

Question 3

How does a typical loan work?

Answer 3

An agreement (terms) between the borrower and the lender which sets out the term loan

Question 4

What is the difference between a bullet repayment and amortising payments?

Answer 4

A bullet repayment is repaying the complete loan in a single lump sum at the end of the agreement whereas amortising payments are payments in instalments

Question 5

What is a revolving credit facility?

Answer 5

Loan where the borrower can repeatedly borrow and repay up to the agreed maximum

Question 6

What is a debt security?

Answer 6

Investor provides finance and in return, the company issues a security acknowledging the investor’s rights. When the security matures (expires), the company repays the value of the security

Question 7

Give an example of a debt security

Answer 7

Bonds held on capital markets: the company promises to pay the value of the bond (plus interest) to the holder at maturity. For private companies, these can only be issued to targeted investors

Question 8

What is a debunture?

Answer 8

It is a type of security document which sets out the details of the security which is then registered at Companies House

Question 9

What is a security and why are they important for the creditor?

Answer 9

Temporary ownership, possession or proprietary interest in an asset which improves the priority of a debt

Question 10

What are the four types of security?

Answer 10

• Pledge: right of possession to an asset until debt is repaid
• Lien: right to retain possession of the asset (arises by operation of law)
• Mortgage: borrower retains possession but transfers ownership to creditor. Borrowers has the right of equity of redemption
• Charge: creation of an equitable proprietary interest in the asset with the terms in the charging document

Question 11

What are the two types of charge?

Answer 11

A fixed charge which is taken over assets and the creditor has the power to control what the security provider does with the assets in terms of disposal and further charges. A floating charge is one which floats over a class of circulating/fluctuating assets at any given time

Question 12

What is crystallisation and when does it occur?

Answer 12

The time at which the floating charge stops floating and fixes to the assets in that class. It can occur by operation of law or triggered by events as contractually agreed

Question 13

What happens in the event that there is a floating charge and a fixed charge over the same assets?

Answer 13

If the floating charge is created first and it contains a negative pledge clause (prohibiting the creation of a later fixed charge), if the fixed charge holder had notice of the restriction, then the floating charge prevails

Question 14

What are the requirements to register a charge at Companies House?

Answer 14

The company or any person interested in the charge delivers to the CH (electronically or paper filing) within 21 days beginning with the day after the day on which the charge was created: a section 859D statement of particulars set out on Form MR01, a certified copy of the charge and the relevant fee

Question 15

What is conclusive evidence that the charge has been registered?

Answer 15

The Registrar allocates to the charge a unique reference code then issues a signed certificate of registration

Question 16

What is the effect of non-registration?

Answer 16

The charge is void and the debt becomes payable immediately

Question 17

What are the records which must be kept by a company?

Answer 17

A certified copy of every charge (and every instrument that amends or varies the charge) must be kept at the company’s registered office or any other permitted location (CH must be informed of the current place). It must be available for inspection by any creditor or member of the company FOC and by any other person on payment of a fee.

Question 18

What happens in the event that a company refuses to allow inspection?

Answer 18

Refusal is an offence and the company and every officer of the company in default is liable to a fine

Question 19

What is the order of priority between creditors?

Answer 19

Creditors with fixed charges, preferential creditors which includes employees wages up to £800 pp, occupational pensions and sums owed to HMRC, creditors with floating charges, unsecured creditors then shareholders

Question 20

What is the order of priority among secured creditors?

Answer 20

If more than one creditor has a fixed charge over the same assets, priority is given to the one created first and properly registered. However this can be varied by agreement between the creditors (Deed of Priority/Intercreditor agreement/Subordination agreement)