Unit 5 – Debt Finance Flashcards

1
Q

How is interest paid on an overdraft?

A

1) Compound basis – Any unpaid interest is added to the capital (amount borrowed) and interest is charged on the whole amount.

2) Implied into the overdraft

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1
Q

Is an overdraft an ‘uncommitted facility’ and what does this mean?

A

Yes – that it will be payable on demand. The bank can demand immediate repayment by the business at any time without giving notice.

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2
Q

Advantages / disadvantages of overdraft as debt finance?

A
  • Advantages = Flexible source of finance with few formalities to arrange it.
  • Disadvantages = Overdrafts are an expensive way to borrow as it is usually unsecured, and the banks charge high interest rates in return for offering flexibility to the borrower.
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3
Q

What is a term loan?

A
  • In a term loan, the business borrows a fixed amount of money for a specified time (i.e., term) at the end of which it must all be repaid.
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4
Q

When is a term loan considered long-term?

A

Over 5 years.

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5
Q

What is a bilateral loan?

A

Between two parties (e.g., business and a bank)

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6
Q

What is a syndicated loan?

A

Between business and multiple lenders – spreads the risk when the amount of the loan is high.

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7
Q

What does “draw down” mean?

A

Take out the loan.

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8
Q

Advantages / disadvantages – term loans

A
  • Advantages = Gives greater certainty than an overdraft (which is repayable on demand) and the borrower has greater control because the bank can only request repayment under the terms of the contract.
  • Disadvantages = Time and expense in negotiating and agreeing all the legal documentation. Once the loan is repaid, the money cannot then be re-borrowed by the business.
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9
Q

Revolving credit facility is …

A
  • The bank agrees to make available a maximum amount of money to the business throughout the agreed period of the revolving credit facility.
  • During the lifetime of the facility, the business can borrow and repay money. Interest is payable at regular intervals.
  • The business can also reborrow amounts that it has already repaid, so long as it does not exceed the overall maximum figure (i.e., like a revolving door).
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10
Q

When are revolving credit facilities used?

A

Businesses whose income is not evenly distributed throughout the year.

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11
Q

Advantages / disadvantages revolving credit facility

A
  • Advantages = Flexible and possible to reduce the total amount of interest payable by reducing borrowings.
  • Disadvantages = Time & expense in negotiating legal documentation.
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12
Q

What is a committed facility?

A

once the loan agreement has been signed, the bank must provide the business with the loan monies when it requests them.

E.g., revolving credit facility and term loans.

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13
Q

What are the different types or re-payment of a loan?

A

The facility agreement will set out the agreed repayment schedule for the loan. It may provide for repayment:

(a) of the whole loan in one go at the end of the term (a ‘bullet’ payment); or

(b) in equal instalments over the term of the loan (‘amortisation’); or

(c) in unequal instalments, with the final instalment being the largest (‘balloon repayment’).

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14
Q

When are revolving credit facilities paid back?

A

towards the end of the period. Term loans are likely to be spread out.

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15
Q

How is interest dealt with in a loan? Is there statutory control?

A

No statutory control – always dealt with in the agreement.

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16
Q

When can a covenant be implied into the loan agreement?

A
  • A contractual term would only be implied if:

1) It were necessary to give business efficacy to the contract; or

2) if the term is so obvious that ‘it goes without saying’.

The court could not imply a term that was inconsistent with an express term of the contract.
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17
Q

Who can enter into a debenture?

A

ONLY companies and LLPS.

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18
Q

Can general partnerships and sole traders enter into a debenture?

A

no.

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19
Q

What constitutes ‘security’?

A

any mortgage, charge, lien or other.

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20
Q

Can sole traders & general partnerships grant floating charges over their assets?

A

No. Only fixed charges.

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21
Q

Can LLPs grant floating charges as well as fixed charges ?

A

Yes.

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22
Q

Before the lender agrees to a secured loan, what should they check?

A

No prior charges on the assets.

– Companies House
– Value the asset

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23
Q

For a charge over an asset what is the Registrar of Companies required to do?

A

Registrar of Companies must include a certified copy of the instrument creating the charge in the register, which is open to inspection by any person.

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24
Q

What must be listed abouta charge on the register?

A

(a) The date of creation of any existing charge
(b) The amount secured
(c) Which property is the subject of the charge and
(d) Who holds that charge (i.e., who can enforce it).

25
Q

What assets can be secured?

A

(a) Land, fixtures and fittings
(b) Tangible property, like machinery, computers and stock
(c) Intangible property, like money, debts owed, shares and IP (e.g., like book debts – money owed to the company, can be fixed or floating charge).

26
Q

What is the highest form of security?

A

Mortgages

27
Q

How does giving security in the form of a mortgage work? (except for land)

A

Involves the transfer of LEGAL ownership from the mortgagor (the company/LLP) to the mortgagee (the lender);

– although the mortgage gives the lender the right to immediate possession of the property, this is held in reserve and exercised only if the borrowed money is not repaid (i.e.., if the borrower defaults).

28
Q

How does giving security in the form of a mortgage of land work?

A
  • A mortgage over land is actually a charge by deed expressed to be by way of legal mortgage. The rights of the mortgage over land include the rights to take possession of the land and to sell
29
Q

How does giving a CHARGE over an asset work?

A

Doe NOT transfer legal ownership from the chargor (borrower) to the chargee (lender).

30
Q

What is a fixed charge?

A

A fixed charge may be taken over property and shares owned by the company.

It gives the lender control of the asset (although legal title remains with the borrower).

31
Q

Can the borrower sell or dispose of the asset which has a fixed charge over it?

A

Not without the lender’s consent.

32
Q

Does a fixed charge give right of first claim over an asset?

A

Yes.

33
Q

What is a floating charge and when is it used?

A
  • A floating charge secures a group of assets, like stock, which is constantly changing. It is possible to create more than one floating charge over the same group of assets.
34
Q

What are the key features of a floating charge?

A
  1. Equitable charge = They consist of an equitable charge over the whole or a class of the company/LLP’s assets, like stock;
  2. Changeable assets = The assets subject to the charge are constantly changing; and
  3. Lender has right to deal with asset only upon crystallisation = The company/LLP retains the freedom to deal with the assets in the ordinary course of business until the charge ‘crystallises’.
  • The assets subject to the floating charge are therefore identified generically, such as ‘stock’ or ‘the undertaking’, rather than specifying individual items as with a fixed charge, such as a particular building.
35
Q

When does the floating charge crystallise?

A

The floating charge will automatically crystallise over the assets charged where:

(a) the chargor goes into receivership;

(b) the chargor goes into liquidation;

(c) the chargor ceases to trade; or

(d) any other event occurs which is specified in the charge document (the contract for the floating charge made between the chargor and the lender).

36
Q

What is the effect of a personal guarantee?

A

Personal guarantees: sometimes directors or partners in an LLP will give a personal guarantee for a loan, in case the lender is unable to recover the loan in full from the company/LLP. The individuals who give personal guarantees risk losing their personal assets if the business fails.

37
Q

What is a pledge?

A

arises where an asset is physically delivered by the debtor to the creditor to serve as security until the debtor has paid their debt. The creditor has the right to sell the asset to settle the debt owed, provided they give sufficient notice.

Possessory interest.

38
Q

What is a lien?

A

gives a creditor the right to physical possession of the debtor’s goods or assets until the debt is paid. For example, a garage mechanic has the right to retain a business’s van until any repairs have been paid for. There is no right to sell the assets to settle the debt owed.

39
Q

What is the time frame of registering a charge at Companies House?

A

21 days within creation of the charge – filed at Companies House.

40
Q

What should be sent to Companies House within 21 days?

A

1) Statement of particulars (MR01)

2) Certified copy of instrument

3) fee

41
Q

When the charge is registered, what does the registrar of companies provide?

A

1) Certificate of registration

42
Q

What does the certificate of registration act as?

A

Conclusive evidence that the charge is properly registered.

43
Q

What should be kept available for inspection at the companies’ registered office or SAIL?

A

1) Statement of particulars (MR01)

2) Copy of charging document.

44
Q

If the fixed charge is over land what else should be done?

A

Register it at Land Registry.

45
Q

What is the effect of failure to register at companies house?

A

The creditor becomes an unsecured creditor for the purposes of the liquidation / administration.

46
Q

Is a lender who has failed to register a fixed charge still entitled to the debt?

A

Yes. The company will still need to pay the debt immediately, but the lender cannot enforce the security.

They become an unsecured creditor.

47
Q

What is the effect of late or inaccurate registration?

A

The charge is void against a liquidator / administrator and the debt becomes unsecured (as for failure to register).

48
Q

Does the court have power to extend the 21 day period?

A

Yes – If failure to deliver was accidental or if it would not prejudice other creditors.

49
Q

What is the effect of the court’s extension?

A

The charge will have priority from the date of ACTUAL registration. I.e., if in the delay, other charges have been registered, the late charge will have lost priority.

50
Q

When the lender redeems the loan, are they obliged to send form MR04 to the registrar at companies house?

A

No. They can elect to do so.

51
Q

What is the order of priority for charges?

A

(a) A fixed charge or mortgage will take priority over a floating charge over the same asset, even if the floating charge was created before the fixed charge or mortgage.

(b) If there is more than one registered fixed charge or mortgage over the same asset, they have priority in order of their date of creation, not their date of registration.

(c) If there is more than one registered floating charge over the same asset, they have priority in order of their date of creation, not their date of registration.

52
Q

If there is more than 1 registered fixed charge / mortgage over the same asset, from when do they have priority?

A

In order of CREATION and not registration.

53
Q

If there is more than 1 registered floating charge over the same asset, from when do they have priority?

A

in order of CREATION not registration.

54
Q

What is a negative pledge?

A

A clause which prohibits the company from creating later charges with priority to the floating charge without the floating charge holder’s permission.

55
Q

When does a subsequent lender have ‘actual knowledge’ of a negative pledge?

A

If the subsequent lender conducts a search of the company’s records at Companies House, then they have actual knowledge of the negative pledge.

56
Q

When does a subsequent lender have ‘constructive knowledge’ of e negative pledge?

A
57
Q

What is the effect of having actual knowledge of the negative pledge?

A

If a later lender takes a charge over the same asset and has actual knowledge of the negative pledge clause, then the subsequent lender’s fixed charge will be subordinate to the original floating charge.

58
Q

Where should a negative pledge be recorded?

A

MR01 and sent to companies house. Should also be included in the charging document.

59
Q

How can a company execute a deed?

A

Under s 44 CA 2006, a company can execute a deed by:
* Affixing its seal; or

  • By the signatures of:

a) two authorised signatories (a director or company secretary); or

b) a director of the company in the presence of a witness who attests the signature.

  • the document must be delivered as a deed, which means that it must be clear on the face of it that it is intended to be a deed.
60
Q

What are the formalities for using a company seal?

A

if a company wishes to use its seal to execute a document, the document must also be signed by at least one authorised person (director, company secretary or other authorised person) in the presence of a witness who attests the signature.