Deft Finance and Securities

Question 1

what is a loan facility? what are the 2 main types of loan facilities?

Answer 1

a loan facility is an agreement between the borrower and lender which gives the borrower a right to borrow on terms set out in the agreement

types:

1- overdraft

2- term loan

Question 2

what is an overdraft

Answer 2

• on demand facility - the bank can recall all the money owed to it at any point
• it is unsuitable for long-term borrowing
• interest is paid on the amount overdrawn

Question 3

what is a term loan

Answer 3

• a loan for a fixed period of time repayable in instalments and the whole amount is payable on a fixed dates
• lender cannot demand repayment earlier than the agreed repayment schedule
• lender receives interest on the loan
• the loan is either repaid as a lump sum (bullet payments) or in instalments (amortisation)

Question 4

What are debt securities?

Answer 4

bonds or loan notes

Question 5

What is a bond?

Answer 5

• A long-term debt instrument in which a borrower agrees to make payments of principal and interest, on specific dates, to the holders of the bond.
• At maturity, the full amount of the bond will be repaid
• private companies can only issue bonds to private investors and not to the public

Question 6

what are convertible bonds?

Answer 6

• bonds which can be converted into shares in the issuer after which the issuer is no longer obliged to pay interest and principal amount
• debt and equity hybrid

Question 7

what is a fixed preference share?

Answer 7

• equity where the SH has a fixed entitlement to dividend ahead of ordinary shareholders (no voting rights)
• has a fixed maturity date on which the company must redeem or purchase the share

Question 8

what is a term sheet?

Answer 8

a statement of the key terms of the loan transaction agreed

it is not binding

Question 9

what is the main document for making a loan? does it need to be registered?

Answer 9

loan agreement - binding

does not need to be registered

Question 10

what is a debenture? what is required for its validity?

Answer 10

• debenture = document creating a security
• must be registered at companies house within 21 days

Question 11

what is the legal nature and purpose of a security? what are main types of securities?

Answer 11

• a security is a proprietary interest in an asset which ensures that a debt owed is repaid
• holding a security over an asset improves the priority of the debt should the debtor become insolvent
• specific creditors also have certain rights to possess the asset and realise it to pay the debt
• types: pledge; lien; mortgage; charge (fixed/floating)

Question 12

what is a pledge?

Answer 12

security over an asset giving possession of the asset to the creditor until the debt is paid back

Question 13

what is a lien?

Answer 13

security arising by operation of law where the creditor keeps possession of an asset until the debt is paid back

Question 14

what is a mortgage?

Answer 14

security provider has possession of the asset but transfers ownership to the creditor subject to the security provider’s right of redeeming the asset when the debt is paid

(charge by way of legal mortgage for land does not transfer ownership to the creditor)

Question 15

what is a charge? what can the holder of a charge do?

Answer 15

• a charge is a type of security taken over the asset which gives the holder an equitable proprietary interest
• but the borrower retains possession and ownership of the asset
• a charge improves the priority of the creditor if the borrower is insolvent and their assets are distributed in winding up
• the holder of a charge has the right to appoint a receiver or administrator to take possession and sell the asset if the debtor fails to repay the debt
• 2 types: fixed and floating

Question 16

what is a fixed charge?

Answer 16

• a fixed charge is a charge granted by the borrower over an asset which restricts the borrower from dealing with the asset without the charge holder’s consent (e.g., selling, creating future charges) –> some element of the lender’s control must exist
• fixed charges rank first in the order of priority
• if the charge becomes enforceable, the lender can appoint a receiver and exercise a power of sale over the asset

Question 17

what assets are suitable for a fixed charge? what assets are not?

Answer 17

• it is normally taken over fixed assets like plant, machinery, goodwill, and IP
• it is not suitable for fluctuating assets like stock because it will be impractical to ask for the chargee’s consent each time such assets are to be disposed of in the ordinary course of business

Question 18

what is a floating charge?

Answer 18

• a floating charge is a security that hovers over a certain class of assets
• the borrower retains possession and ownership of the assets
• the lender does not control how the borrower deals with the assets
• the charge crystallises when the borrower defaults on the loan or becomes insolvent and fixes on the assets currently within the class and the borrower can no longer deal with the assets
• floating charges rank below fixed charges in the order of priority and are subject to the prescribed part fund and preferential creditors

Question 19

what assets are appropriate for a floating charge?

Answer 19

fluctuating assets in the course of business like stock, raw materials, cash at bank

Question 20

what is a negative pledge?

Answer 20

• a term prohibiting the creation of a later charge
• a floating charge holder may want a negative pledge to be included in their security package as this prevents a future fixed charge being created and taking priority over the floating charge holder

Question 21

what are the disadvantages of a floating charge from the creditor’s POV? (4)

Answer 21

1. C will not be sure of the value of the secured assets - they can all be sold before crystallisation
2. floating charge ranks below a fixed charge (even if created after the floating charge if there is no negative pledge)
3. floating charge is subject to the prescribed part fund and preferential creditors in the order of priority (and the administrator / liquidator’s expenses)
4. Floating charges can be avoided as a voidable transaction in insolvency

Question 22

what is a guarantee?

Answer 22

• a contract in which one party guarantees another party’s obligations to someone else (all are party to the agreement)
• allows the creditor to claim against the guarantor under the guarantee if the borrower defaults
• a company or an individual (e.g., director) can guarantee a company / individual’s obligations to the creditor

Question 23

what is required to make securities valid and enforceable?

Answer 23

securities created by a company must be registered at Companies House within 21 days of creation - send:
- form
- certified copy of the charge
- registration fee

Question 24

what is the consequence of failure to register securities? (2)

Answer 24

• makes the charge void against liquidator, administrators, and creditors
• the debt becomes payable immediately

Question 25

what are the record-keeping requirements in relation to debt finance?

Answer 25

company must keep available for inspection at registered office = copy of every charge and every instrument that amends or varies a charge

Question 26

what is the order of priority amongst secured creditors if there is more than 1?

Answer 26

• If there is more than 1 creditor with a fixed charge over the same assets, the first fixed charged that was properly registered has priority
• If there is more than 1 creditor with a floating charge over the same asset, the first floating charged that was properly registered has priority
• if there was a creditor with a floating charge over an asset then another creditor took a fixed charge over the asset, the fixed charge takes priority even though it was registered second

But: this order can be varied by a deed agreement between creditors