Debt finance

Question 1

Three main types of loans

Answer 1

1. Overdraft: contract between bank and business which allow business to go overdrawn on its current account.
2. Term loan: fixed amoun of money and for specified period, may be secured or unsecured, bilateral or syndicated
3. Revolving credit facilities: bank agrees to make available a maximum amount of moeny to business throughout the agreed period of teh revolving credit facility.

Question 2

Pros and cons of overdraft facility

Answer 2

• Pros: flexible source of finance, few formalities
• Cons: repayment may be demanded at any time by the bank, expensive way to borrow, usually insecured/
• The business have to pay a fee for overdraft. Interest charge by reference to base rate, it generally charged on compound basis (unpaid interest added to capital- implied unless agreed otherwise)

Question 3

Pros and cons of term loan

Answer 3

1. Pros: it gives certainty, repayable on demand, borrower has greater control because bank can only request repayment under the terms of contract
2. Cons: time and expense in negotiating legal docs and once repaid money cannot be reborrowed by the business.

Question 4

Pros and cons of revolving loan (facility agreement)

Answer 4

1. Pros: flexible means of borrowing, possible to reduce total amount of interest payable by reducing borrowing
2. Cons: Time and expense, high fees charged.

Question 5

Key contract terms

Answer 5

1. Payment of money to the borrower: committed facilities, availability period
2. Repayment and prepayment:
   a. repay the wholeloan at the end (bullet payment)
   b. in equal instalsment over the term (amortisation)
   c. in unequal instalsment with final being largest (ballon repayment)
3. Interest rate: fixed or floating
4. Express covenants
5. Implied covenants: terms may be implied by courts but power is limited, only if it were necessary to give business efficacy.
6. Event of default

Question 6

Debentures

Answer 6

1. A loan registered at Companies House. It gives lender security over the borrower assets.
2. Only companies and LLPs can enter into debentures.

Question 7

Terminology

Answer 7

• CA2006 uses charges as an umbrella term for most types of security (charges includes mortgage).
• Law of Property Act 1925 uses term mortgage as umbrelly term for security in Act, defining this to “include any charge or lien on any property”.
• IA 1986 defines security as any mortgage, charge, lien or other security.

Question 8

Regimes applicable to sole traders, partnership and LLP

Answer 8

1. Sole traders and partnerships cannot grant floating charges, only fixed charges. They must be registered with HM Land Registry if over land
2. LLP can grant float charges and fixed charges, registration process is similar to the companies.

Question 9

Due diligence before lending

Answer 9

1. Inspecting AoA, search companies records at CH and reques copies of board resolutions:
   * Check any restriction on company granting security
   * Check that directors have authority to act on half of company, and have been properly appointed as directors
2. Search company’s record of CH to see if any charge has been registered:
   * date of creation
   * amount secured
   * property subject to charge
   * who hold the charge
3. Search Land Registry:
   * check land title
   * any preexisting charges
4. Search Intellectual Property office for title to IP
5. Conduct winding up search by phone at the Companies Court.

Question 10

Mortgages

Answer 10

1. Highest form of security
2. Mortgage (exception for land) involves transfer of legal ownership from mortagor to mortgagee, although mortgage gives the lender right to immediate possession of property, this held in reserve and exercised only if borrower defaults. Title will transferred back to borrower when money is repaid
3. A separate mortgage must be created over each asset.
4. A mortgage over land is actually a charge by deed expressed by way of legal mortgage. The rights of mortgagee to land include the rights to take possession of land and to sell it.

Question 11

Charges

Answer 11

1. Form of security that does not transfer legal ownership, and does not give the chargee the right to immediate possession of property.
2. two types of charges that LLP and company can grant: fixed charge and floating charge.

Question 12

Fixed charge

Answer 12

1. Taken over machinery or shares, etc.
2. The lender has control of assets: chargor will not be permitted to dispose of asset without charge holder consent
3. The chargor will have the right to sell asset and be paid out from proceeds of sale before any other claimant.
4. Can create more than one fixed charge over the same asset.

Question 13

Floating charges

Answer 13

1. Secures a group of assets, such as stock which is constantly changing.
2. possible to create more than 1 floating charge over same group of assets
3. Basic features of floating charge:
   a. Consist of an equitable charge over whole or a class of asset of company
   b. Assets constantly changing
   c. Company/LLP retains freedom to deal with assets in the ordinary course of business until charge “crystallises”.
4. Assets subkect to floating charge therefore identified generically such as stock or undertaking (note that it is possible to take floating charge over all of company’s undertaking, which would be all of assets)
5. Floating charge automaticall crystallise when:
   a. Chargor go into receivership
   b. chargor goes into liquidation
   c. charger ceases to trade
   d. any other events specified in the charge document.
6. On cristallisation, chargor can no longer deal with the assets covered by the charge. In effect floating charge turn into fixed assets.

Question 14

Can book debts be charged?

Answer 14

Yes, book debts are money owed to the company/LLP by its debtor.
As an asset book debt may be charged.
Book debts can be charged in both fixed or floating charge:
1. Fixed charge where charge holder has control over both debts and the proceeds once they were paid
2. Floating charge: the company is able to use the proceeds from book debts for its business purpose.

Question 15

Pros and cons of floating charge

Answer 15

Pros:
1. allow chargor to deal with secured assets on day to day basis
2. allow chargor to maximise the amount it is able to borrow
3. floating charge may be taken over the whole of company/LLP
Cons:
1.fixed charge taking priority over a floating charge over the same assets
2.from lender: the chargor allowed to deal with assets
3.from lender: certain other creditors have the right to claim money from the proceeds of sale of the assets covered by floating charge if company becomes insolvent. These include “preferential” creditors, who take priority over the holder of a floating charge but not over fixed charge.
4.In certain circumstances, under s245 IA 1986, liquidator or administrator of an insolvent company may apply to have floating charge set aside

Question 16

Other security

Answer 16

1. Personal guarantee
2. Pledge: arises where an asset is physically delivered by debtor to the creditor to serve as security until the debtor has paid. The creditor has the right to sell the asset to settle the debt owed, provided they give sufficient notice.
3. Lien: gives creditor the right to physical possession of debtor’s goods or assets until the debt is paid but there is no right to sell the assets to settle the debt.
4. Retention of title: on a sale of goods, the buyer does not get full title of goods until they pay full price to seller.

Question 17

Key terms of charging documents

Answer 17

1. Security
2. Representation & warranties
3. Covenants: contractual promises
4. Enforcement and powers: If lender is qualifying floating charge holder, lender is entitled to appoint an administrator without petitioning the court.
5. Procedural matters for companies issuing debentures: board resolution usually suffice
6. Registration
7. Negative pledge
8. Formalities of execution of documents

Question 18

Charge registration

Answer 18

1. Registration: since 6 April 2013 it is voluntary system of registration within **21 day **of charge.
2. Failure to register the charge renders the charge void against liquidator or an administrator of the company, and also against other creditors.
3. Late (after 21 days period) or inaccurate delivery of documents to the Company house - charge is void against third party. Court has limited power to extend 21 day period or rectification of any notice delivered
4. Redemption of loan/Release charge: person with interest may but not obliged to sign and send form MR04 to Registrar of Companies at CH. If any entries in Land Registry must be removed.

Question 19

Priority of charge

Answer 19

1. A fixed charge or mortgage will take priority over a floating charge over same assets (irrespective of date of creation)
2. If there is more than 1 registered fixed charge or mortage over the same asset, they have priority in order their date of creation, not registration.
3. If there is more than 1 registered floating charge over the same asset, they have priority in order their date of creation, not registration

Question 20

Subordination

Answer 20

1. Creditors to enter into an agreement between themselves to alter the order of priority of their charges (subordination - deed of priority)
2. Executed by creditors and sometimes the company.

Question 21

Negative pledge

Answer 21

A floating charge ranks lower than later fixed charge, to prevent this, it is usual to include in the floating charge “negative pledge clause”. This prohibits the company from creating later charges with priority to the floating charge.
Negative pledge is disclosed in MR01 send to CH and clause will be included in the certified copy of charging document which is delivered to Registrar.
If a subsequent lender take charge over same asset and has actual knowledge of negative pledge, than such subsequent fixed charge will be subordinate to original floating charge. Actual knowledge requires that subsequent charge holder conducts a search on CH.
Subsequent charge should contain a covenant by company to the effect that there are no earlier charges which are subject to a negative pledge clause.

Question 22

Form of execution of contract

Answer 22

(a)by a company, by writing under its common seal, or
(b)on behalf of a company, by a person acting under its authority, express or implied.

Question 23

Execution of a deed (a document)

Answer 23

1.by the affixing of its common seal, or
2. by signature of.
(a)by two authorised signatories, or
(b)by a director of the company in the presence of a witness who attests the signature.

If the company adopt MA: MA49 requres that if a company uses a seal to execute document, the doc must also be signed by at lease 1 authorised signatories (in the presence of a witness attests the signatures).