Topic 2: Financing Techniques (B) Flashcards
Why is financing important?
1) Business is a money game
2) Entrepreneur’s need money to get started
Difference between Guarantor and Indemnity?
Guarantor = Available if debtor is not available
Indemnity = Available even if debtor IS available
What are book debts/receivables?
Debts owed to a company that can be sold off to others for a discount, allows a company to get instant money
What are the main financing options?
1) Equity (Shares in company)
2) Debt
3) Retained Earnings (Using previous year’s earnings as capital)
4) Receivables Financing
5) Retention of Title (Creditor retains title of what is being credited)
6) Leasing
Difference between Debt and Equity?
Debt has; tax deductions, less financial costs, no dilution of ownership, priority in insolvency
Equity has; No constant repayment, prestige, more control
What are Unsecured Creditors?
Creditors that give money, or time, without collateral from the debtor (e.g. employees, lending money without security, consumers that pay for later delivery, taxes, etc.)
(Insolvency Act 1986 s175 & s176(a))
What are Quasi-Secured Creditors? And why choose them?
1) Agreements that perform as security but are not classed as security under English law
2) Creditors want to avoid insolvency, floating charge holders are prioritised over unsecured creditors
What are the types of quasi-secured creditors?
1) Trust (Quistclose Trust & Kayford Trust)
2) Retention of Title (Romalpa case) (Creditor retains title of thing until sold by borrower)
3) Debt (Receivables) Assignments (Selling off debts owed to you)
What are Secured Creditors?
When a creditor has rights exercisable against some property in which the debtor has an interest in
(Bristol Airport v Powdrill) (Any extra money after sale is given to debtor)
What are the types of Security? And how do they work?
1) Possessory Security = Creditor using certain assets to satisfy the debt, creditor has possession (Pledges give right of sale, Liens do not give right of sale)
2) Non-Possessory Security = Mortgages where creditor has title and borrower has ownership, Charges where a promise is made for something to happen if debt is not paid
What is a charge?
A security interest where the creditor does not have ownership nor possession, the creditor has right to USE the property to satisfy debt in case of debtor’s default
Difference between Fixed and Floating Charges?
Fixed = Charge is over a defined or ascertained asset, creditor will receive some control over this asset
Floating = Does not reign over a specific asset, moves over assets of the company (Only on a crystallizing event does the charge zone in on a specific asset, i.e. become a fixed charge)
What case gave the elements of a Floating Charge? And what are these elements?
Re Yorkshire
1) Must be over a class of assets, not too specific
2) Assets must be changing occasionally
3) Company must be able to carry on business irrespective of the charge it has on the assets
What is the key case for distinguishing fixed and floating charges?
Re Spectrum Plus
1) Fixed charge holders get preferential treatment, they are the first to get paid out in insolvency
2) Whatever the parties intended the charge to be then that will be enforced, courts are hesitant to change this
3) WHO HAS CONTROL OF THE ASSET? (Key question in determining whether something is fixed or floating)
What did the case of Agnew v Commissioner of the Inland Revenue decide?
Created a two-stage test
1) Look at the language of the venture
2) Look at the categorisation as a matter of law
