8) Debt Flashcards
(89 cards)
1
Q
Why is it difficult for private companies to raise money through equity finance?
A
Private companies are unable to offer shares to the public
s755 CA 2006
2
Q
Do companies have restrictions on borrowing powers?
A
- Many companies have unrestricted power to borrow.
- Check company’s articles to ensure no restrictions.
3
Q
Key method of protection for lender in the event borrowing company cannot repay loan.
A
- Taking security of assets
4
Q
Loan Facility
A
Agreement between a borrower and lender which gives the borrower the right to borrow money on the terms set out in the agreement.
5
Q
Loan facilities examples
A
Overdraft; Term loan; Revolving credit facility
6
Q
Overdraft
A
- On demand facility
- Bank can call for all the money owed at any point in time to be repaid immediately.
- Makes overdrafts unsuitable as a long term borrowing option.
7
Q
Term loan
A
Loan of money for a fixed period of time
Repayable on a certain date
Lender receives interest through period.
8
Q
Revolving credit facility
A
Borrower has flexibility to borrow and repay.
Allows a company to draw down money, repay it and re-draw it down again.
* Borrower has flexibility to choose when it borrows and repays against an aggregate.
9
Q
The main debt finance documents
A
- Term sheets
- Loan agreement
- Security document
10
Q
Debt securities
A
In return for finance
Company issues a security acknowledging the investor’s rights.
11
Q
Security
A
A piece of paper acknowledging debt / investors rights.
* Can be sold
* At maturity date, company pays the value.
12
Q
Classic example of a debt security
A
Bond
13
Q
Bond
A
Issuer promises to pay the value of the bond at maturity.
Interest also paid - usually biannually.
14
Q
Where can bonds be traded?
A
Capital market.
15
Q
Private companies and issuing bonds
A
- Private companies can only issue bonds to targeted investors
- Not to the public
s755 CA 2006
16
Q
Term sheet
A
- Statement of key terms of transactions.
- Equivalent to the HoT
- Not intended to be binding = statement of the understanding
17
Q
Loan agreement
A
- Sets out the main commercial terms of the loan
- Interest dates to be paid on dates
- More detail on the term sheet.
- Heavily negotiated.
18
Q
Security Agreement
A
If a loan is secured, a separate security document will be negotiated
19
Q
Debenture Under 738
A
- Any form of debt security issued by a company
- Debenture stock, bonds, any other assets of the company
- Whether charged or not.
20
Q
Debenture - security
A
- Particular doc that creates a security.
- Debenture is a separate document from a loan agreement.
- Debenture sets out the details of security.
21
Q
Important terms in loan agreement
A
- Representations
- Undertakings
- Event of default
22
Q
Representations
A
- Representations and warranties
- Statement of fact as legal and commercial matters
- Repeated periodically during the life of the loan
23
Q
Undertakings
A
Undertakings (or covenants) are promises to do (or not do) something.
Or to procure that something is done.
24
Q
Event of default
A
- Breach gives the bank contractual remedies where breach constitutes an event of default.
- Can give the bank the power to call its money early if show a sign of being a credit risk
25
Forms of security
* Pledge
* Lien
* Mortgage
* Charge
26
Nature of security
Temporary ownership, possession or other proprietary interest in an asset to ensure a debt owed is repaid
(Collateral for a debt)
27
Benefit of taking security
Protects the creditor in the event the borrower enters into insolvency
**Prove priority of a debt**
28
Enforcing security
* Normally not necessary to enforce security if borrower is able to pay
* Enforcing security may be a simpler way of obtaining repayment rather than suing the borrower.
29
Pledge
* Security provider gives possession of the asset to the creditor until the debt is repaid
**Eg pawning = pledge**
30
Lien
* Creditor retains possession of the asset to the creditor until the debt is paid back.
* Mechanics lien = allows a mechanic to retain possession of a repaired vehicle until invoice is paid.
31
Mortgage
* Security provider retains possession of asset, but transfers ownership
* Right to require creditor to transfer asset back when debt is repaid = **equity of redemption**
32
Mortgage over land
* Charge by way of legal mortgage.
* Unusually ownership remain vested in the security provider usually.
33
Charge
* Security provider retains possession of the asset.
* Charge creates an equitable propriety interest in favour of the creditor.
* Certain contractual rights over the asset.
34
Two types of charges
* Fixed charges
* Floating charges
35
Fixed charge - Define
* Prevents borrower from dealing with the assets subject to the charge
= the strongest form of security.
* Lender normally seeks fixed charge.
36
Floating charge - define
* Floats over a class of assets
* Does not prevent borrower dealing with the assets
* Until the floating charge "crystallises" = when defaults.
37
Agnew v IRC 2001
Label applied to a charge is not always determinative
* Necessary to look at the terms of the charge itself.
38
When a fixed charge is granted:
* Lender control borrower's use of the charge asset
* Company cannot deal with assets without consent of the lender.
39
When might it not be appropriate to have a fixed charge
* eg stock and raw materials
* Borrower will need to use these assets to generate income to meet liabilities.
40
Fixed charges can be taken over assets such as
Plant and machinery
41
If a charge becomes enforceable
* Lender has ability to appoint a receiver
* Exercise power of sale over that asset.
42
Floating charge is appropriate for
* Over a class of assets - fluctuates
* Does not five the lender control over the assets
43
Re Yorkshire Woolcombers Association 1904
**Defined a floating charge as a charge over:**
* Class of assets, present and future
* Which is in the ordinary course of company's business changes
** Until steps taken to enforce; a company may carry on business in a normal way**
44
When a floating charge crystallises
* Ceases to float over an asset class
* Fixes onto the assets in the class charged
* Prevents borrower dealing with assets - not treated as fixed charge assets for purposes of winding up
45
If a company receives more assets of the same class after crystallisation
These assets are automatically subject to the crystilised charge
**NW Robbie and Co v Whitnye Warehouse Co Ltd 1963**
46
NW Robbie and Co v Whitnye Warehouse Co Ltd 1963
* If company receives mor assets of the same class after crystallisation
* Assets are automatically subject to the crystallised charge
47
Crystallisation occurs in the following situations
* **Common law** - on winding up, appointment of a receiver or cessation of business
* **Specified event** - as defined in the loan agreement
48
A book debt
An unpaid invoice
* Sum owed to the company in respect of goods or services
* Book debts are a fluctuating asset
* May be a significant asset of a company.`
49
Are book debts fixed or floating assets?
* Muh debate
* In earlier cases = fixed charge
* Approach now overuled.
50
Siebe Gorman and Co Ltd v Barclays Bank Ltd 1979
* Court held that a charge over book debts = **a fixed charge**
* Degree of control of the bank could stop company withdrawals
* Even when in credit
51
Re Brightlife Ltd 1987
Clarified a company's bank balance is not a book debt.
**Cannot be subject to a fixed charge**
52
Re Keenan Bros Ltd 1986
* Fixed charge created by the means of requirement that the funds collected. were to be paid into a blocked account.
* Prior consent of bank needed to withdraw funds.
** Fixed charge as the account was blocked**
53
Re Brumark Investments Ltd 2001
* Company attempted to create a fixed charge over book debts.
* Book debts excluded from fixed charge, unless bank had ordered payment into an account company could not operate freely.
* Who had control of the proceeds = key
54
Current position on charges over book debts
* Now very difficult to demonstrate the requisite control over book debts for a fixed charge.
* Requires a blocked account.
**National Westminster Bank Plc v Spectrum Plust Ltd and Others 2005**
55
National Westminster Bank Plc v Spectrum Plust Ltd and Others 2005
* Charge issued was stated to be fixed
* Company collected book debts, and drew on the account
* HoL held = **Floating charge**
* Approving Brumark
56
Following National Westminster Bank Plc v Spectrum Plust Ltd and Others 2005...
It is only possible to have a fixed charge of over book debts if they are paid into **blocked account**
* Gives the lender the degree of control required.
57
Are guarantees security
* Not strictly speaking
* Do not give rights in assets
* Similar commercial effect.
58
Guarantee for a loan
Guarantor will pay the borrower's debt if the borrower fails to do s.
59
Why is it important to determine if a charge is fixed or floating>
**Order of priority on winding up**
* When a company is wound up assets are distributed in a specific order.
60
On winding up which charges are paid first....
* Fixed chargers are paid first.
61
Fixed charges on insolvency
* First order of priority on insolvency
* Entitled to whole of their debt.
* If shortfall may receive assets from floating charge fund.
62
Insolvency rules requirement for floating charge assets.
* Require a proportion of the floating charge assets to be set aside for the unsecured creditors
63
What are charged out of the floating charge fund before the floating charge holders
* Unsecured creditors.
* Preferential debts
64
Unsecured creditors are often paid...
* After floating charge holders
65
What type of charge do most banks require...
* A fixed charge & floating charge
* Greatest chance to recoup money if company goes into liquid`ation
66
Registration of charges
* All charges
* Created on or after **6th April 2013**
* Must be registered on Companies House
67
Registration formalities for charges
* Charge must be reg within **21 days**, beginning **day after charge creation**
* Usually done by the lender.
68
Section 859A(4)
Registration of charge within 21 days
69
Effect of failure to register
* Charge is void
* Debt becomes immediately payable
* Holder of charge reduced to an **unsecured creditor**
**s859H(3)**
70
Records to be kept by the company
Certified copies of all charges must be kept at the company's office
**s859P**
71
Remedial measures in the case of non registration
Court has power to extend period of registration
**s 859F**
72
Grounds for extension of the option period for registration
Failure to deliver documents
* Accidental / inadvertence
* Not of nature to prejudice creditors /shareholders
* Just and equitable to grant relief
73
Barclays Bank plc v Stuart London Ltd 2001
* Court tends to allow register to be rectified
* Provided this does not prejudice any other chargers created between.
74
Victoria Housing Estates Ltd v Ashpurton Estates Ltd 1982 - summary
* Some cases where court has refused to allow a charge to be registered late
* Where the time has elapsed too long.
75
Victoria Housing Estates Ltd v Ashpurton Estates Ltd 1982
* Charge was created in 1978, not discovered until 1981 that was not registered
* Notice of winding up the company - chargeee applied to register.
* Charge should have been applied for on realisation
**Allowing registration would prejudice other creditors**
76
Debt finance
* Raising money by borrowing from a lender
* Promise to repay the money (usually with interest) at a later date.
77
Equity finance
* Raising money from shareholders v issue of shares
* Investors may issued preference shares - balanced against no voting rights
78
**Equity** - Return on investment
* Dividends.
* Capital growth
79
**Debt** - Return on investment
* Interest = contractual right
* Whether or not company is making profit
80
**Equity** - When does investor receive amount invested?
* On winding up - if sufficient assets
* On sale of shares (difficult for private companies)
* If company buys back shares
* Successful unfair prejudice claim
81
**Debt** - When does the investor receive back the amount invested?
* Agreed between terms or loan agreement
* Usually on maturaity or amortising through installments
* On sale of debt
82
Amortising
* Gradually write off the initial cost of an asset over a period
83
**Equity** - Priority on winding up
* Shareholders paid back after creditors - unlikely to receive full amount
* Arrangements may be made between shareholders as to prioritu
84
**Debt** - Priority on winding up
* Creditors paid before shareholders
* Creditors improve priority by taking security
* May contractually agree priority
85
**Debt** - Control
* Often require undertakings
* Security may give the lender control over the assets
86
**Equity** - Control
* Voting rights
* Existence and extent depends on the rights granted & number of shares
87
**Debt** - Other factors
* Banks may not be willing to lend on attractive terms
* Existing loan agreements would need to checked for hindering undertakings
* Interest is a deductible expense for tax purposes
88
**Equity** - Other factors
* New shareholders must be found for a share issue to succeed
* Share market conditions
* Dividends = allocation of profit; not deductible
89
