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Loan Capital - Coggle Diagram
Loan Capital
Security
When a creditor lends money to the company, there is no guarantee that the creditor will be repaid
It is common for creditors to take steps to ensure or to increase the chances of repayment being made
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Security is created where a person to whom an obligation is owed by another by statute or contract, in addition to the personal promise of the debtor to discharge the obligation, obtains rights exercisable against some property in which the debtor has an interest in order to enforce the discharge of the debtor's obligation to the creditor
A creditor who obtains some form of security is known as a secured creditor, whereas a creditor who does not obtain security is known as an unsecured creditor
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Charges
Fixed charge
Taken over a specified, identifiable asset or assets
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Floating charge
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Ranks behind secured debts by fixed charge, liquidation expenses and preferential debts
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A floating charge can be taken over assets covered by an existing floating charge subject to some limitations
The court stated that a company cannot grant a floating charge over all the same assets as a prior floating charge and have the subsequent floating charge rank ahead of the original unless the terms of the original charge allow this. The court also stated that where a floating charge is taken over all the assets and business of the company, a subsequent floating charge may also be taken over all the company's assets and business, but the prior charge will retain priority
A subsequent floating charge can be created over part of the assets subject to a prior floating charge, it is common for the prior charge to contain a negative pledge clause that provides that the company will not create any subsequent floating charges over the assets of the prior floating charge that will rank in priority to the first floating charge
Crystallisation
A floating charge floats over the charged assets until some event occurs at which point it becomes a fixed charge over the charged assets
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Upon rystalliaion the charger will be unable to dispose or deal with the charged assets unless the shareholder consents
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Registration of charges
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They are required to keep a copy of every instrument creating a charge and every instrument effecting any variation or amendment of a charge
These instruments can be inspected by any creditor of the company free of charge and any other person upon payment of a fee
Companies are no longer required to register charges with CH, although the company or any person interested in a the charge may register it with CH
In order to register a charge, the following conditions must be complied with
The person who wishes to register the charge must deliver to CH a certified copy of the instrument that created the charge along with a statement of particulars containing
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The date the charge was created and if applicable, the date of acquisition of the property or undertaking concerned
Where the charge is created or evidenced by an instrument, the information specified in s.858D(2) must be provided or the evidence in s.858D3) must be provided if there is no instrument
The instrument and the statement of particularly must be delivered to Ch within 21 days beginning on the day after the creation of the charge
Effects of registration
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The Registrar will provide a certificate of registration to the person who registered the charge which provides conclusive evidence that the required documents were delivered within the period allowed
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The power to borrow
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The ability of other persons (notably directors) to borrow on behalf of the company will depend on the articles and the authority that has been converted upon them as agents
The articles can limit the directors ability to borrow on behalf of the company but breaching such limitations will not usually invalidate the loan agreement
Sources of loan capital
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Debentures
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Companies can issue corporate bonds or debenture stock which can then be sold to others in a manner similar to shares
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Debentures holders are not shareholders but it is possible for the company to issue convertible debentures that grant the holder the right to covert their debentures into shares
Types of security
Possessory security
The creditor will have physical possession of the secured asset and will return this asset once the loan is paid off
A pledge
The creditor takes possession of the secured asset and keeps possession of it until the debt is repiad
If the borrower breaches the loan agreement, the creditor usually has an implied right to sell the secured asset
A ien
The borrower will deliver the secured asset to the creditor and the creditor can retain possession of this asset until the loan is repaid
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Non-possesory security
The borrower retains possession of the asset and can continue to use it (although the usage may be restricted)
A mortgage under which the creditor obtains title to the secured assets from the borrower. If the borrower defaults the creditor can possess the secured asset and if the loan agreement so provides, sell it
An equitable charge, the creditor has the right to appropriate the charged asset if the borrower defaults on the loan, If the charge so provides, the creditor can then sell the charged asset. Unlike a charge, title in the goods does not pass to the creditor