Week 7

Question 1

Powers of company to raise money: section 124

Answer 1

Legal capacity and powers of a company (1) A company has the legal capacity and powers of an individual both in and outside this jurisdiction. A company also has all the powers of a body corporate, including the power to:
(a) issue and cancel shares in the company;
(b) issue debentures (despite any rule of law or equity to the contrary, this power includes a power to issue debentures that are irredeemable, redeemable only if a contingency, however remote, occurs, or redeemable only at the end of a period, however long);
(c) grant options over unissued shares in the company;
(d) distribute any of the company’s property among the u members, in kind or otherwise;
(e) give security by charging uncalled capital;
(f) grant a circulating security interest over the company’s property;
(g) arrange for the company to be registered or recognised as a body corporate in any place outside this jurisdiction;
(h) do anything that it is authorised to do by any other law (including a law of a foreign country).

Question 2

Options available to a company to raise funds

Answer 2

Issue shares (Equity):
Different classes
Different entitlements
Payment of dividends
Up side of growth or
Downside of fall in value 

Borrowings (Debt):
May be secured or unsecured.
Examples of securities:
 mortgages
 charges
 guarantees

Question 3

Distinction between raising share capital and borrowings:

Answer 3

Tax deduction for interest
No tax deduction for payment of dividend
Need to have profits to pay dividends
No need to have profits to pay interest
Interest is a fixed obligation
Dividends is discretionary (consider preference shareholders)
No growth in principal of loan
Upside and downside in value of company
Security offered for debt 
Shares at are owners risk
Lender is not a member
The choice is a commercial decision – but with legal implications.

Question 4

Power to issue shares: sections 254A and 254B

Answer 4

SECT 254A
Power to issue bonus, partly-paid, preference and redeemable preference shares
(1) A company’s power under section124 to issue shares includes the power to issue:
(a) bonus shares (shares for whose issue no consideration is payable to the issuing company); and
(b) preference shares (including redeemable preference shares); and
(c) partly-paid shares (whether or not on the same terms for the amount of calls to be paid or the time for paying calls).

SECT 254B
Terms of issue (1) A company may determine:
(a) the terms on which its shares are issued; and
(b) the rights and restrictions attaching to the shares.

Question 5

What is a share?

Answer 5

Section 1070A
Nature of shares and certain other interests in a company or registered scheme
(1) A share, other interest of a member in a company or interest of a person in a registered scheme:
(a) is personal property; and
(b) is transferable or transmissible as provided by:
(i) the company’s, or scheme’s, constitution; or
(ii) the operating rules of a prescribed CS facility if they are applicable; and
(c) is capable of devolution by will or by operation of law.

Question 6

Distinction between “issue” and “sale” of shares:

Answer 6

Shares are issued when first registered
Further shares are issued by the directors (decide the number, terms and price)
The company receives funds from the issue
A sale of shares is normally by an existing shareholder to another and does not involve the company getting funds.

Question 7

Types of issues:

Answer 7

Initial public offering (new float)
Private placement (e.g. issue large parcel of shares to a small number of investors and made at a discount)
Rights issue (made to company’s existing shareholders pro rata at the time of offer)
Renounceable (can sell the rights on market)
Non renounceable ( must exercise or they will lapse i.e. be lost)
Dividend reinvestment plans (existing shareholders get shares instead of dividends)
Bonus issue (do not require payment)

Question 8

Share issues subject to

Answer 8

Directors must act in good faith and for a proper purpose see s 181;
Constitution, s 254D (pre emption clause in proprietary companies);
S 246B if variation, cancellation of class rights involved then must follow the constitution;
Must not exceed maximum membership (50 members for a proprietary company);
Disclosure requirements;
Part 2J.2 (company can not acquire shares in itself);
Shareholders’ approval at general meeting for issue of shares.
Consider Chapter 6 D is this a soliciting of the public? Or are they sophisticated investors? In the latter case, the law allows both parties to agree on what information should be disclosed, because of the relationship, no need to disclosure as in a prospectus.

Question 9

Shares fully v partly paid

Answer 9

Can be fully paid

Partly paid
Unpaid calls:
S 254M company can sue shareholder for amount owing or
Constitution can say forfeit shares and keep amount already paid and sell shares.

Question 10

Examples of classes of shares:

Answer 10

Ordinary shares:
Right to share in dividends
Right to vote
Right to be repaid capital on winding up
Right to surplus assets on winding up

Preference shares:
Right to received fixed dividend
Right to be repaid principal
No voting rights
No right to surplus assets on winding up.
Remember to look at the constitution for the shareholders rights based on types of shares they hold – see s 254A(2).

Question 11

Redeemable preference shares: s 254A(3)

Answer 11

Redeemable preference shares are preference shares that are issued on the terms that they are liable to be redeemed.
They may be redeemable:
(a) at a fixed time or on the happening of a particular event; or
(b) at the company’s option; or
(c) at the shareholder’s option.

Question 12

Participating preference shares

Answer 12

Takes precedence over ordinary shares in liquidation

Question 13

Cumulative preference shares

Answer 13

Cumulative: Has the right to dividends carried forward if no dividend paid in a year
Non-cumulative: Dividends only paid when profits available and no entitlement to prior year if missed out

Question 14

Convertible preference shares.

Answer 14

Right to a preferred or fixed dividend for a period of time and then allow for the conversion to ordinary shares

Question 15

Issuing of shares

Answer 15

S 114 all companies must have at least one member
On registration
On acquisition from another shareholder 
On devolution 
By law
By compulsory acquisition

Process is:
Invited to apply
Accepts application
Board of directors decide to accept application
Once accepted the shares are allotted
After allotment the members name is entered on the register of members and they are a shareholder
Becomes a member when entitled to be entered on register as a member

Question 16

Return to shareholders: payment of dividends

Answer 16

S 124(1)(d) power to distribute property in kind or otherwise to shareholders
Distribution of profits is called dividends
Types of dividends
Interim
Final
Ordinarily paid out of profits
Dividends are decided by the directors
Liability to pay arises when the time to pay arises as determined by the directors
Shareholders can not force the company to pay a dividend (separation of powers)

Question 17

Payment of Dividends

Dividen rights

Answer 17

Section 254WDividend rights Shares in public companies
(1) Each share in a class of shares in a public company has the same dividend rights unless:
(a) the company has a constitution and it provides for the shares to have different dividend rights; or
(b) different dividend rights are provided for by special resolution of the company.
Shares in proprietary companies (Replaceable Rule)
(2) Subject to the terms on which shares in a proprietary company are on issue, the directors may pay dividends as they see fit.

Question 18

Payment of Dividends

Section 245U (RR)Other provisions about paying dividends (replaceable rule–see section 135)

Answer 18

(1) The directors may determine that a dividend is payable and fix:
(a) the amount; and
(b) the time for payment; and
(c) the method of payment.
The methods of payment may include the payment of cash, the issue of shares, the grant of options and the transfer of assets.
(2) Interest is not payable on a dividend.

Question 19

Payment of Dividends

Section 254TCircumstances in which a dividend may be paid

Answer 19

(1) A company must not pay a dividend unless:
(a) the company’s assets exceed its liabilities immediately before the dividend is declared and the excess is sufficient for the payment of the dividend; and
(b) the payment of the dividend is fair and reasonable to the company’s shareholders as a whole; and
(c) the payment of the dividend does not materially prejudice the company’s ability to pay its creditors.

Question 20

Payment of Dividends

Section 254V When does the company incur a debt?

Answer 20

(1) A company does not incur a debt merely by fixing the amount or time for payment of a dividend. The debt arises only when the time fixed for payment arrives and the decision to pay the dividend may be revoked at any time before then.
(2) However, if the company has a constitution and it provides for the declaration of dividends, the company incurs a debt when the dividend is declared.

Question 21

Breach of section 254T

Answer 21

If the company is insolvent when it pays a dividend or becomes insolvent on paying a dividend then the directors can be personally liable under s 588G to the creditors
See Directors Duties Topics

Question 22

Maintenance of Share Capital

Answer 22

Purpose
Company law prevents a company reducing its share capital
But can redeem redeemable preference shares out of profits
Key principle is that a company should maintain its share capital during its life
Rule in Trevor v Whitworth (1887) 12 App Cas 409:
Paid up capital can be lost through trading, but the assumption is that a company is trading with a certain amount of paid up capital and that the share capital has not been paid out other than in the legitimate course of business.

Question 23

Restrictions on:

Answer 23

Paying dividends to members (see section 254T)
Company acquiring its own shares
Company giving financial assistance to a person to acquire shares in the company

Question 24

Not permitted to reduce its share capital except under:

Answer 24

Share buy back

Other methods allowed under Chapter 2J

Question 25

Acquiring own shares

Answer 25

There are restrictions on a company acquiring shares in itself or a company that controls it: s 259A.
This is because it would:
Allow board to entrench control
Allow manipulation of the share price
Create a false sense of value
Exception is in s 259D where company acquires another company that already holds shares in it. In this case:
Company has 12 months to sell the shares
ASIC can extend time period on application

Question 26

Financial Assistance

Answer 26

Company restricted from giving person financial assistance to acquire shares in the company unless it: 
Is approved by members
Will not materially prejudicial to the interest of the company, members  or creditors
Or is Allowed under another part of the Corporations Act.
Financial assistance includes: 
Lending money
Guaranteeing loan
Gift to person
Other exceptions: See s 260C
Commercial dealing
Employee Share Scheme
Court orders

Question 27

Why do companies buy back their own shares?

Answer 27

Excess capital that can not be effectively used in the business
Buy back must not materially affect the company’s ability to pay its creditors
Follow procedures set out in the Act (see table in section 257B)
Most common is on market share buy back by public companies where all shareholders can apply but do not need to take up offer.

Question 28

Reduction of share capital

Answer 28

Members have no choice and share capital can be reduced

Return of all or part of share capital to members

Question 29

Debt Capital

Answer 29

Recall s 124  power to issue debt:
Issue debentures
Give security over uncalled capital
Grant floating charge over company property
Types of Debt Capital
Bank Finance
Trade Finance
Private Debt
Debentures (common law: any document that confirms a debt)

Question 30

Characteristics of debt

Answer 30

Pay interest at the agreed rate for the life of the loan
Repay principal at end of agreed term
Lender has priority over shareholders for repayment of principal on winding up
Lender is not a member
Lender has no right to share in the surplus assets on winding up

Question 31

What is a debenture?

Answer 31

A chose in action (essentially a right to sue) that includes a undertaking to repay money deposited with or lent to the company. It is an intangible personal property right recognised and protected by the law, that has no existence apart from the recognition given by the law, and that confers no present possession of a tangible object.
It is a document that acknowledges the indebtedness of the company.
The debt is often secured by a charge over the property of the company.
Types of debentures:
Secured
Non-circulating (e.g. mortgage debenture – see s 283BH)
Circulating
Unsecured

Question 32

Parties to a debenture

Answer 32

The investor is the lender on the terms set out in the debenture trust deed
The company is the one issuing the debenture and is the borrower
A borrower company’s obligation will be guaranteed by a related party (the guarantor)

Question 33

Requirements in issuing debentures in Chapter 2L

The company wishing to issue a debenture (borrower/debenture holder) must:

Answer 33

Appoint a trustee: s 283AA
Must be a trustee company. Australian authorised deposit taking institution, life insurance company or other approved entity: s 283AC
Have Trust Deed: s 283AB
Meet requirement of the ASX if the debentures are going to be listed

Question 34

Trustees Duties

Answer 34

Trustees hold on trust for the debenture holders:
The right to enforce the borrower’s duty to pay
Any charge or security for repayment
Any right to enforce any other duties that the borrower or guarantor have
Duty is to protect the interest of the debenture holders
Specific statutory duties are in s 283DA
Ensure the property is sufficient to repay the debt,
Ensure the borrower and guarantor have not committed any breach of the deed,
Ensure if there is a breach the borrower or guarantor remedy the breach
Notify ASIC if a breach borrower fails to give notice of charges

Question 35

Borrowers duties

Answer 35

S 282BB
Carry on business in a proper and efficient manner
Provide copy of trust deed to trustee and debenture holder
Make financial records available to trustee, auditor and trustee
Call a meeting of the debenture holders if 10% or more of debenture holders require it
Notify ASIC of name of trustee: S 283BC
If borrower creates charge then must give notice to trustee within 21 days: S 283BE
Provide quarterly reports to ASIC and trustee: s283BF
S 271 the company to maintain a register of charges (not to be confused with ASIC’s database ) Failure to maintain register is an offence.
Other duties and obligations as per the debenture trust deed
Commits offence if intentionally or recklessly breach duties: S 283BI

Question 36

Guarantors Duties

Answer 36

S 283CB:
Carry on business in a proper and efficient manner
Make financial records available to trustee, auditor and trustee
If guarantor creates charge then must give notice to trustee within 21 days: S 283CC
Commits offence if intentionally or recklessly breach duties: S 283CE

Question 37

Debenture Holders

Answer 37

Can call for meetings
Can be called by the borrower (if 10% or more of debenture holders request it)(s 283EA);
Can be called by the trustee (if breach by borrower or guarantor) (s 283EB);
Can be called by the Court (court can order trustee to call a meeting) (s 283EC).

Question 38

The Personal Property Securities Regime

Answer 38

Includes plant, equipment and trading stock and receivables and shares
Security interest
Interest in the security which secures the repayment of the debt
Grantor
Person who owns the security
Secured party
Person who has lent funds
Security agreement
Agreement for the loan (debenture trust deed)
Attachment
Security interest must attach to the personal property
Perfection
Security must be valid to have priority in the event of a dispute where same property is security for 2 lenders. If not then can lose security in insolvency/liquidation
Collateral
Any personal property to which a security interest is attached

Question 39

Perfection (Priority)

Answer 39

This gives priority in the event of a failure by the grantor to pay
Sections 21 to 40 of the PPS Act
Perfection is done by:
REGISTERING an interest
TAKING POSSESSION of the secured property (collateral)
CONTROL of the chattel by the secured party
TEMPORARY PERFECTION as allowed by the Act

Question 40

Circulating and Non-circulating security interests

Answer 40

Previously called fixed or floating charges.
Now called:
Non-circulating = fixed
Circulating = floating

Circulating security interest is a security that attaches to circulating assets:
This is basically inventory and book debts where the lender has given the borrower (grantor) the authority to deal with the property in the ordinary course of business
Non-circulating security interest is an asset that cannot be sold without the consent of the lender.
See s 51 to 51F of the Corporations Act

Question 41

Reason for distinction

Answer 41

If a grantor on a non circulating security defaults then the lender can take possession, sell it and repay debt owed
If it is a circulating security and a receiver or liquidator is appointed to enforce the claim then the receiver must pay certain unsecured creditors (employees) before paying themselves (s 433 and s 561 of Corporations Act)
Therefore a non circulating security interest holder is better

Question 42

Ordinary Course of Business

Answer 42

Sale of circulating security interests e.g. trading stock, debtors

This means what is normally done as part of its day to day activities

See Reynolds Bros(Motors) Pty Ltd v Esanda Ltd
Transaction made for the purpose of carrying on its business provided the transaction is made to maintain the company as a going concern

See Fire Nymph Products Ltd v The Heating Centre Pty Ltd
The transaction was a means that FNP attempted to recover the money from an insolvent debtor and therefore not in the ordinary course of business

Question 43

Other terminology

Answer 43

Negative Pledges
It is a contractual promise by the borrower that it will not grant charges in favour of other lenders without the prior consent of the first lender
If breached then the principal needs to be repaid

Romalpa Clause
This clause means that the title of the goods(ownership) does not pass to the buyer until the goods are paid for.
It protects the seller during the time of delivery of the goods to the buyer on credit until payment is made
As no charge no need for registration
Now under new rules in PPS Act they must be registered

Question 44

Invalidation of circulating security interests

Answer 44

Circulating security interest created within 6 months of insolvency is void against the liquidator unless it secures:
Advance
Interest on advance
Amount under a guarantee
Amount payable for services or property
(See: section 588FJ)

Security interest given to officer by the company is void if the officer tries to enforce within 6 months of giving loan unless leave of court obtained (only if company was solvent) (see section 588FP)

Question 45

Registration of Security Interests

Answer 45

Register of Securities is now maintained by Registrar of Personal Securities (previously ASIC)
Registration is not compulsory, but it is in the interest of the lender to register in order to perfect security interest
Procedure:
Register financing statement on line or hard copy
Financing statement includes:
Details of secured party
Details of grantor
Description of security
Details of security ie when completed

Question 46

Registration Time

Answer 46

If company goes into liquidation then the security vests in the liquidator after the latest of:
6 months before liquidation,
20 days after the agreement came into force
Therefore should register security within 20 days
Lender then loses right to enforce the security

Question 47

When is registration effective?

Answer 47

Registration time is when the security can be searched on the system
If form is defective then no registration until fixed
Time of registration is important as it determines priorities among the security interests when the same property is the collateral.

Question 48

Priority of security interests: section 55

Answer 48

If the security is not perfect then priority is based on the order of attachment
If a security is perfect then it has priority over an unperfect security interest in the same property
If two or more security interest are perfect priority is based on priority time
It is the earliest of
Registration time of collateral
The time the lender perfects the security by taking possession,
A security interest that is perfected by control has priority

Question 49

Super priority of purchase money

Answer 49

A security that secures all monies (including outstanding interest) loaned is the best security

Question 50

New Directions in Corporate Finance

Answer 50

In recent years there has been a high degree of innovation in the financial services sector leading to new product and service offerings through new technology (i.e. Fintech)

New options for corporate finance include:
Crowdfunding
Initial Coin Offerings (ICO)
Peer-to-Peer Lending

Question 51

Crowdfunding finance

Answer 51

Crowdfunding or crowd-sourced funding (CSF) relies on a large number of people to contribute relatively small amounts of money to a particular project.
Two Types:
Rewards – where backers receive incentives such as free merchandise or other products or services in exchange for their support.
Equity – where backers receive securities and the potential for a return on their investment.
The Corporations Amendment (Crowd-sourced Funding) Act 2017 introduced a regulatory regime for crowd-sourced funding.
Key features:
Unlisted public companies and proprietary companies (excluding investment companies) with less than $25 million in consolidated assets and annual revenue that have their principal place of business and a majority of directors in Australia are eligible
A company can raise up to $5 million in funds in this way in any 12 month period.
Retail investors have an investment cap of $10,000 per company in any 12-month period.
Disclosure requirements on companies.
CSF offers can only be made through a licensed platform.

Question 52

Initial Coin Offerings (ICO)

Answer 52

An Initial Coin Offering or Initial Token Offering allow investors to use cryptocurrency (such as Bitcoin or Ethereum) to purchase ‘coins’ during a specified time period.
Currently, there are no specific laws governing ICOs so the general corporate regulation will apply.
ASIC has advised that the legal status of an ICO is dependent of the circumstances including how the ICO is structured and operated and the rights attached to the coin (or token) offered.
The ICO could be:
A managed investment scheme
An offer of shares
A derivative
Many companies launching ICOs will draft a ‘White Paper’ similar to an IPO Prospectus document.

Question 53

Peer-to-Peer Lending

Answer 53

Peer-to-peer or marketplace lending is an arrangement where investors lend to borrowers through an online platform.
Platforms can facilitate lending for consumer-to-consumer, consumer-to-business, business-to-consumer or business-to-business.
Providers of financial services generally require an Australian Financial Services license and an Australian Credit License (if loans are for domestic, personal or household purposes).