Company Law: Loan Capital

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1 Loan Capital

• a trading company has an implied power to borrow for its business and to give security

• a debenture is ‘the written acknowledgement of a debt by a company’

• may be secured or unsecured

• may be a single debenture or a series of debentures

• if issued as a series, debenture holders rank ‘pari passu inter se‘

• security / the charge may be fixed or floating

• to be valid, the charge must be registered within 21 days of its creation

• an unregistered registrable charge is void against the liquidator, administrator and creditors; the debt remains payable but unsecured

• priority generally follows creation, subject to registration; over the same assets a fixed charge takes priority over a floating charge

• debenture holders are creditors of the company, not members

2 Fixed Charges

• attaches to specific assets

• company is not free to deal / dispose of those charged assets

• a liquidator will try to prove invalidity

• a receiver may prove validity if

  • the charge was granted in exchange for new ‘money’ or

  • the company was solvent at the date of creation of the charge

• in the event of a liquidation, the fixed charge debenture holder ranks number one in the sequence of asset distribution

• where a floating charge exists over an asset, there may be a negative pledge clause

• the effect is to ensure that a floating charge debenture holder has to be notified of any proposed fixed charge over the same asset

3 Floating Charges

• unlike fixed charges, floating charges do not attach to specific assets

• defined in the case re Yorkshire Woolcombers as:-

  • a charge on a class of assets of a company, present and future

  • where the class changes from time to time in the ordinary course of business

  • and the company may deal with these assets until the charge crystallises

• typically applies to the current assets of inventory and accounts receivable

• whether a charge is fixed or floating is a matter of commercial reality rather than how it has been named

• in re Tunbridge a ‘fixed’ charge was held by the court to be floating because all three Yorkshire criteria were met

• in re Cimex a ‘floating’ charge was held to be fixed because the assets did not change from time to time in the ordinary course of business

4 Debentures Compared with Shares

• fixed rate of interest

• payable even though no profits

• no votes

• security (not always)

• preferential entitlement to return of money

• on default, the secured debenture holder may enforce the security; a debenture holder is a creditor, not a member

• rights when company defaults

  • apply to court for liquidation order

  • apply to court for administration order

  • appoint a receiver (provided no administration order is in effect)