CHAPTER 17 BORROWING AND LOAN CAPITAL

CHAPTER 17 BORROWING AND LOAN CAPITAL

INTRODUCTION

In this chapter on borrowing and loan capital, you should note that the

interests and position of a lender is very different from that of a shareholder.

We shall be looking at how loan capital holders protect themselves, specifically

through taking out fixed or floating charges over company assets. Charges

give the lender the right to sell assets which are subject to the charge in order

to recover money owed to them if the borrower does not repay the debt.

You need to understand the differences between fixed and floating charges, and

also how they can protect loan creditors, for example by giving chargeholders

the ability to appoint a receiver.

Study guide

Intellectual level

E Capital and the financing of companies

2 Loan capital

(a) Define companies' borrowing powers 1

(b) Explain the meaning of debenture 2

(c) Distinguish loan capital from share capital 2

(d) Explain the concept of a company charge and distinguish between fixed and

floating charges

2

(e) Describe the need and the procedure for registering company charges 2

Exam guide

Loan capital is most likely to crop up in a knowledge question. Together with insolvency and corporate

finance in general, however, it is a topic that could also be examined in a scenario question.

You may be required to identify instances where a company has exceeded its borrowing powers or to

explain the differences between types of charges.

1 Borrowing

Companies have an implied power to borrow for purposes incidental to their trade or business.

All companies registered under the Companies Act 2006 have an implied power to borrow for purposes

incidental to their trade or business. A company formed under earlier Acts will have an implied power to

borrow if its object is to carry on a trade or business.

In delegating the company's power to borrow to the directors it is usual, and essential in the case of a

company whose shares are quoted on the Stock Exchange, to impose a maximum limit on the borrowing

arranged by directors.

A contract to repay borrowed money may in principle be unenforceable if either:

• It is money borrowed for an ultra vires (or restricted) purpose, and this is known to the lender.

• The directors exceed their borrowing powers or have no powers to borrow.

However:

• In both cases the lender will probably be able to enforce the contract.

• If the contract is within the capacity of the company but beyond the delegated powers of the

directors the company may ratify the loan contract.

Case law has determined that if a company has power to borrow, it also has power to create charges over

the company's assets as security for the loan. Re Patent File Co 1870.

2 Debentures and loan capital

2.1 Loan capital

Loan capital comprises all the longer term borrowing of a company. It is distinguished from share capital

by the fact that, at some point, borrowing must be repaid. Share capital on the other hand is only returned

to shareholders when the company is wound up.

A company's loan capital comprises all amounts which it borrows for the long-term, such as:

(a) Permanent overdrafts at the bank

(b) Unsecured loans, from a bank or other party

(c) Loans secured on assets, from a bank or other party

Companies often issue long-term loans as capital in the form of debentures.

2.2 Debentures 12/07, 6/08, 6/10

A debenture is a document stating the terms on which a company has borrowed money. There are three

main types.

• A single debenture

• Debentures issued as a series and usually registered

• Debenture stock subscribed to by a large number of lenders. Only this form requires a debenture

trust deed, although the others may often incorporate one

A debenture is the written acknowledgement of a debt by a company, normally containing provisions as to

payment of interest and the terms of repayment of principal. A debenture may be secured on some or all

of the assets of the company or its subsidiaries.

A debenture may create a charge over the company's assets as security for the loan. However a document

relating to an unsecured loan is also a debenture in company law.

2.3 Types of debenture

A debenture is usually a formal legal document. Broadly, there are three main types.

(a) A single debenture

If, for example, a company obtains a secured loan or overdraft facility from its bank, the latter is

likely to insist that the company seals the bank's standard form of debenture creating the charge

and giving the bank various safeguards and powers.

(b) Debentures issued as a series and usually registered

Different lenders may provide different amounts on different dates. Although each transaction is

a separate loan, the intention is that the lenders should rank equally (pari passu) in their right to

repayment and in any security given to them. Each lender therefore receives a debenture in

identical form in respect of his loan.

The debentures are transferable securities.

(c) The issue of debenture stock subscribed to by a large number of lenders

Only a public company may use this method to offer its debentures to the public and any such

offer is a prospectus; if it seeks a listing on The Stock Exchange then the rules on listing particulars

must be followed.

Each lender has a right to be repaid his capital at the due time (unless they are perpetual) and to

receive interest on it until repayment. This form of borrowing is treated as a single loan 'stock' in

which each debenture stockholder has a specified fraction (in money terms) which they or some

previous holder contributed when the stock was issued. Debenture stock is transferable in

multiples of, say, £1 or £10.

A company must maintain a register of all debenture holders and register an allotment within 2 months.

One advantage of debenture stock over debentures issued as single and indivisible loan transactions is

that the holder of debenture stock can sell part of his holding, say £1,000 (nominal), out of a larger

amount.

stock must be created using a debenture trust deed, though single and series debentures may

also use a debenture trust deed.

2.4 Debenture trust deed

MAJOR ELEMENTS OF A DEBENTURE TRUST DEED FOR DEBENTURE STOCKstock

The appointment usually of a trustee for prospective debenture stockholders. The trustee is usually a

bank, insurance company or other institution but may be an individual.

The nominal amount of the debenture stock is defined, which is the maximum amount which may be

raised then or later. The date or period of repayment is specified, as is the rate of interest and

half-yearly interest payment dates.

If the debenture stock is secured the deed creates a charge or charges over the assets of the

company.

The trustee is authorised to enforce the security in case of default and, in particular, to appoint a

receiver with suitable powers of management.

The company enters into various covenants, for instance to keep its assets fully insured or to limit its

total borrowings; breach is a default by the company.

There may be elaborate provisions for transfer of stock and meetings of debenture stockholders.

ADVANTAGES OF A DEBENTURE TRUST DEED FOR DEBENTURE STOCK

The trustee with appropriate powers can intervene promptly in case of default.

Security for the debenture stock in the form of charges over property can be given to a single trustee.

The company can contact a representative of the debentureholders with whom it can negotiate.

By calling a meeting of debentureholders, the trustee can consult them and obtain a decision binding

on them all.

The debentureholders will be able to enjoy the benefit of a legal mortgage over the company's land.

2.5 Register of debentureholders

Company law does not specifically require a register of debentureholders be maintained. However, a

company is normally required to maintain a register by the debenture or debenture trust deed when

debentures are issued as a series or when debenture stock is issued.

When there is a register of debentureholders, the following regulations apply.

(a) The company is required by law to keep the register at its registered office, or at an address

notified to the registrar: s 743.

(b) The register must be open to inspection by any person unless the constitution or trust deed

provide otherwise. Any person may obtain a copy of the register or part of it for a fee. A holder of

debentures issued under a trust deed may require the company (on payment) to supply them with

a copy of the deed: s 749.

Under s 745 a company has five days to respond to an inspection request or seek exemption to do

so from the court.

(c) The register should be properly kept in accordance with the requirements of the Companies Act.

2 9

2.6 Rights of debentureholders

The position of debentureholders is best described by comparison with that of shareholders. At first

sight the two appear to have a great deal in common.

• Both own transferable company securities which are usually long-term investments in the

company.

• The issue procedure is much the same. An offer of either shares or debentures to the public is a

prospectus as defined by the Act.

• The procedure for transfer of registered shares and debentures is the same.

But there are significant difference

DIFFERENCES  Shareholder S – Debentureholder D

Role

S  Is a proprietor or owner of the

company

D Is a creditor of the company

Voting rights

S  May vote at general meetings

D  May not vote

Cost of

investment

S  Shares may not be issued at a discount

to nominal value

D  Debentures may be offered at a

discount to nominal value

Return

S  Dividends are only paid

• Out of distributable profits

• When directors declare them

D  Interest must be paid when it is due

Redemption

S  Statutory restrictions on redeeming

shares

D  No restriction on redeeming

debentures

Liquidation

S  Shareholders are the last people to be

paid in a winding up

D  Debentures must be paid back before

shareholders are paid

From the investor's standpoint debenture stock is often preferable to preference shares. Although both

yield a fixed income, debenture stock offers greater security.

2.6.1 Advantages and disadvantages of debentures (for the company)

ADVANTAGES

Easily traded

Terms clear and specific

Assets subject to a floating charge may be traded

Popular due to guaranteed income

Interest tax-deductible

No restrictions on issue or purchase by a

Company

DISADVANTAGES

May have to pay high interest rates to make them

Attractive

Interest payments mandatory

Interest payments may upset shareholders if

dividends fall

Debentureholder's remedies of liquidators or

receivers may be disastrous for the company

Crystallisation of a floating charge can cause

trading difficulties for a company

QUESTION Rights of shareholders and debentureholders

Explain how the rights of the shareholders of a company differ from the rights of its debentureholders.

ANSWER

Rights of shareholders and debentureholders

Shareholders are members of the company. Debentureholders are creditors but not members of the

company. Their relationships with the company differ in the following principal respects.

What governs the relationship

A company's relationship with its shareholders is governed by

(a) Its articles which operate as a contract between them and between the shareholders and each

other, and

(b) The Companies Act

The relationship between a company and its debentureholders is regulated by:

(a) The terms of the trust deed or other formal document, and

(b) (Different) provisions of the Companies Act

The major practical differences are set out below.

Voting

As members of the company, shareholders have the right to attend and vote at meetings.

Debentureholders have no such automatic rights; they may however have votes if the articles and deed

allow.

Income

A shareholder, even if he holds preference shares on which fixed dividends are due on specific days, can

only receive dividends out of distributable profits. In addition he cannot force the company to pay

dividends.

By contrast interest at the agreed rate must be paid on debentures even if that interest has to be paid out

of capital.

Rights on securities

The Companies Act confers pre-emption rights on shareholders, entitling them to first call on any new

shares which are to be issued.

Debentureholders have no right of objection to further loans and debentures being taken out, unless the

trust deed sets out restrictions. However there is no statutory restriction on debentureholders having

debentures redeemed or purchased by the company. By contrast there are detailed rules regulating

redemption or purchase of a company's own shares.

Rights if aggrieved

Shareholders have the right to complain to the court if directors are allowing ultra vires transactions or

acting in a manner unfairly prejudicial to their interests. Shareholders can, by simple majority, remove

directors from the board.

Debentureholders may have rights under the trust deed if the company breaches the agreement. These

include:

(a) The right to appoint a receiver, or

(b) The right to enforce charges and sell the property under the charge to realise their debts.

Their consent may also be required before the company deals with certain assets, when the

debentureholders have secured their loan by means of a fixed charge over those assets.

Rights on liquidation

In liquidation debentureholders must be repaid in full before anything is distributed to shareholders.

3 Charges 6/10

A charge over the assets of a company gives a creditor a prior claim over other creditors to payment of

their debt out of these assets.

Charges may be either fixed, which attach to the relevant asset on creation, or floating, which attach on

'crystallisation'. For this reason it is not possible to identify the assets to which a floating charge relates

(until crystallisation).

3.1 Definition

A charge is an encumbrance upon real or personal property granting the holder certain rights over that

property. They are often used as security for a debt owed to the charge holder. The most common form of

charge is by way of legal mortgage, used to secure the indebtedness of borrowers in-house purchase

transactions. In the case of companies, charges over assets are most frequently granted to persons who

provide loan capital to the business.

A charge secured over a company's assets gives to the creditor (called the 'chargee') a prior claim (over

other creditors) to payment of their debt out of those assets. Charges are of two kinds, fixed and floating.

3.2 Fixed charges 12/07, 6/10

A fixed charge is a form of protection given to secured creditors relating to specific assets of a company.

The charge grants the holder the right of enforcement against the identified asset (in the event of default in

repayment or some other matter) so that the creditor may realise the asset to meet the debt owed. Fixed

charges rank first in order of priority in liquidation.

Fixed (or specific) charges attach to the relevant asset as soon as the charge is created. By its nature a

fixed charge is best suited to assets which the company is likely to retain for a long period. A mortgage is

an example of a fixed charge.

If the company disposes of the charged asset it will either repay the secured debt out of the proceeds of

sale so that the charge is discharged at the time of sale, or pass the asset over to the purchaser still

subject to the charge.

3.3 Floating charges 6/10

A floating charge has been defined, in Re Yorkshire Woolcombers Association Ltd 1903, as:

(a) A charge on a class of assets of a company, present and future …

(b) Which class is, in the ordinary course of the company's business, changing from time to time and …

(c) Until the holders enforce the charge the company may carry on business and deal with the assets

charged.

Floating charges do not attach to the relevant assets until the charge crystallises.

A floating charge is not restricted to assets such as receivables or inventory. A floating charge over 'the

undertaking and assets' of a company (the most common type) applies to future as well as to current

assets.

3.4 Identification of charges as fixed or floating

It is not always immediately apparent whether a charge is fixed or floating. Chargees often do not wish to

identify a charge as being floating as it may get paid later than preferential debts in insolvency

proceedings.

A charge contract may declare the charge as fixed, or fixed and floating, whether it is or not. The label

attached by parties in this way is not a conclusive statement of the charge's legal nature.

The general rule is that a charge over assets will not be registered as fixed if it envisages that the

company will still be able to deal with the charged assets without reference to the chargee.

R in Right of British Columbia v Federal Business Development Bank 1988

The facts: In this Canadian case the Bank had a charge over the company's entire property expressed as 'a

fixed and specific mortgage and charge'. Another term allowed the company to continue making sales

from stock in the ordinary course of business until notified in writing by the bank to stop doing so.

Decision: The charge was created as a floating, not a fixed, charge.

However, the courts have found exceptions to the general rule concerning permission to deal.

(a) In Re GE Tunbridge Ltd 1995 it was held that as the three criteria stated in the Yorkshire

Woolcombers case applied. The charge over certain fixed assets was a floating charge even though

the company was required to obtain the chargee's permission before dealing with the assets.

(b) In Re Cimex Ltd 1994 the court decided that the charge in dispute was a fixed charge. The assets did

not in the ordinary course of business change from time to time. This was despite the company

being able to deal with the assets without the chargee's permission.

3.4.1 Charges over receivables

Charges expressed to be fixed which cover present and future receivables (book debts) are particularly

tricky.

Again the general rule applies. If the company is allowed to deal with money collected from customers

without notifying the chargee, the courts have decided that the charge is floating. If the money collected

must be paid to the chargee, say in reduction of an overdraft, the courts have determined that the charge

is fixed: Siebe Gorman & Co Ltd v Barclays Bank Ltd 1979.

In 2005 the House of Lords held in Re Spectrum Plus that there can be no fixed charge over a company's

book debts.

3.5 Creating a floating charge

A floating charge is often created by express words. However no special form of words is essential. If a

company gives to a chargee rights over its assets while retaining freedom to deal with them in the

ordinary course of business until the charge crystallises, that will be a charge which 'floats'. The particular

assets subject to a floating charge cannot be identified until the charge attaches by crystallisation.

3.6 Crystallisation of a floating charge

Floating charges crystallise or harden (convert into a fixed charge) on the happening of certain relevant

events.

Crystallisation of a floating charge occurs when it is converted into a fixed charge: that is, a fixed charge

on the assets owned by the company at the time of crystallisation.

EVENTS CAUSING CRYSTALLISATION

The liquidation of the company

Cessation of the company's business

Active intervention by the chargee, generally by way of appointing a receiver

If the charge contract so provides, when notice is given by the chargee that the charge is converted into a

fixed charge (on whatever assets of the relevant class are owned by the company at the time of the giving

of notice)

The crystallisation of another floating charge if it causes the company to cease business.

Floating charge contracts sometimes make provision for 'automatic crystallisation'. This is where the

charge is to crystallise when a specified event – such as a breach of some term by the company – occurs,

regardless of whether:

• The chargee learns of the event.

• The chargee wants to enforce the charge as a result of the event.

Such clauses have been accepted by the courts if they state that, on the event happening, the floating

charge is converted to a fixed one. Clauses which provide only that a company is to cease to deal with

charged assets on the occurrence of a particular event have been rejected.

3.7 Comparison of fixed and floating charges

Floating charges rank behind a number of other creditors on liquidation, in particular preferential creditors

such as employees.

A fixed charge is normally the more satisfactory form of security since it confers immediate rights over

identified assets. A floating charge has some advantage in being applicable to current assets which may

be easier to realise than long term assets subject to a fixed charge. If for example a company becomes

insolvent it may be easier to sell its inventory than its empty factory.

THE PRINCIPAL DISADVANTAGES OF FLOATING CHARGES

The holder of a floating charge cannot be certain until the charge crystallises which assets will form his

security.

Even when a floating charge has crystallised over an identified pool of assets the chargeholder may find

themself postponed to the claim of other creditors as follows.

(a) A judgement creditor or landlord who has seized goods and sold them may retain the proceeds if

received before the appointment of the debentureholder's receiver: s 183 IA.

(b) Preferential debts such as wages may be paid out of assets subject to a floating charge unless

there are other uncharged assets available for this purpose: ss 40 and 175 IA.

(c) The holder of a fixed charge over the same assets will usually have priority over a floating charge

on those assets even if that charge was created before the fixed charge.

(d) A creditor may have sold goods and delivered them to the company on condition that he is to

retain legal ownership until he has been paid (a Romalpa clause).

A floating charge may become invalid automatically if the company creates the charge to secure an

existing debt and goes into liquidation within a year thereafter (s 245 IA). The period is only six months

with a fixed charge.

3.8 Priority of charges

If more than one charge exists over the same class of property then legal rules must be applied to see

which takes priority in the event the company goes into liquidation.

Different charges over the same property may be given to different creditors. It will be necessary in such

cases to determine which party's claim has priority.

ILLUSTRATION

If charges are created over the same property to secure a debt of £5,000 to X and £7,000 to Y and the

property is sold yielding only £10,000, either X or Y is paid in full and the other receives only the balance

remaining out of £10,000 realised from the security.

PRIORITY OF  CHARGES

Fixed charges rank according to the order of their creation. If two successive fixed charges over the

same factory are created on 1 January and 1 February the earlier takes priority over the later one.

A floating charge created before a fixed charge will only take priority if, when the latter was created, the

fixed chargee had notice of a clause in the floating charge that prevents a later prior charge.

A fixed charge created before a floating one has priority.

Two floating charges take priority according to the time of creation.

If a floating charge is existing and a fixed charge over the same property is created later the fixed charge

has priority. This is unless the fixed chargeholder knew of the floating charge. The fixed charge ranks first

since it attached to the property at the time of creation but the floating charge attaches at the time of

crystallisation. Once a floating charge has crystallised it becomes a fixed charge and a fixed charge

created subsequently ranks after it.

A floating chargeholder may seek to protect himself against losing his priority by including in the terms of

his floating charge a prohibition against the company creating a fixed charge over the same property

(sometimes called a 'negative pledge clause').

If the company breaks that prohibition the creditor to whom the fixed charge is given nonetheless obtains

priority, unless at the time when his charge is created he has actual knowledge of the prohibition.

If a company sells a charged asset to a third party the following rules apply.

• A chargee with a fixed charge still has recourse to the property in the hands of the third party – the

charge is automatically transferred with the property.

• Property only remains charged by a floating charge if the third party had notice of it when he

acquired the property.

Exam questions in this area often just require a basic explanation of debentures and/or the two types of

charge as in June 2010. However, you should also be prepared to work out the priority of charges in a

scenario.

QUESTION

A floating charge is created on 1 January 20X1. A fixed charge over the same property is created on 1

April 20X1. Assuming both are registered correctly, which ranks first?

ANSWER

The fixed charge attaches to the asset on creation; the floating charge only attaches on crystallisation, and

the effect of crystallisation is not retrospective. Therefore the fixed charge ranks first.

4 Registration of charges

To be valid and enforceable, charges must be registered within 21 days of creation by the Registrar.

Certain types of charge created by a company should be registered within 21 days with the Registrar by

either the company or a person interested in it (eg the debenture trustee). Charges securing a debenture

issue and floating charges are specifically registrable.

Other charges that are registrable include charges on:

• Uncalled share capital or calls made but not paid

• Land or any interest in land, other than a charge for rent

• Receivables (book debts)

• Goodwill or any intellectual property

• Ships or aircraft or any share in a ship

4.1 The registration process

The company is responsible for registering the charge but the charge may also be registered as a result

of an application by another person interested in the charge.

The Registrar should be sent the instrument by which the charge is created or evidenced. The Registrar

also has to be sent prescribed particulars of the charge.

• The date when the charge was created

• The amount of the debt which it secures

• Short particulars of the property to which the charge applies

• The person entitled to it

The Registrar files the particulars in the companies 'charges' register and notes the date of delivery. They

also issue a certificate which is conclusive evidence that the charge had been duly registered.

The 21 day period for registration runs from the creation of the charge, or the acquisition of property

charged, and not from the making of the loan for which the charge is security. Creation of a charge is

usually effected by execution of a document.

4.2 Rectification of register of changes

A mistake or omission in registered particulars can only be rectified by the court ordering an extension of

the period for registration, and with the subsequent rectification of the register. The court will only make

the order if the error or omission was accidental or if it is just and equitable to do so.

4.3 Failure to deliver particulars

The duty to deliver particulars falls upon the company creating the charge and if no one delivers

particulars within 21 days, the company and its officers are liable to a fine: s 860.

Non-delivery in the time period results in the charge being void against an administrator, liquidator or any

creditor of a company: s 874.

Non-delivery of a charge means that the sum secured by it is payable forthwith on demand: s 874.

4.3.1 Late delivery of particulars

The rules governing late delivery are the same as governing registration of further particulars, that is, a

court order is required for registration.

A charge can only be registered late if it does not prejudice the creditors or shareholders of the

company. Therefore a correctly registered fixed charge has priority over a fixed charge created earlier but

registered after it, if that charge is registered late. s 873.

4.4 Register of charges

As you already know, every company is under an obligation to keep a copy of documents creating

charges, and a register of charges, at its registered office or single alternative inspection location.

QUESTION

A company creates a charge over a property in favour of Margaret on 1 May 20X7. It creates a further

charge of the same type in favour of Chris over the same property on 13 May 20X7. The company has

Chris's charge registered on 25 May 20X7, and Margaret's charge on 29 May 20X7.

Whose charge ranks first, and why?

ANSWER

Margaret's charge would have taken precedence because it was created first, had it been registered within

the allowed period of 21 days, up to 22 May. However it was not registered until 29 May, and Chris's

charge was legitimately registered in the period between 22 and 29 May when Margaret's charge was void.

The court would probably have allowed late registration of Margaret's charge but not at the expense of

Chris's rights per s 873.

5 Debentureholders' remedies

5.1 Rights of unsecured debentureholders

A debentureholder without security has the same rights as any other creditor.

Any debentureholder is a creditor of the company with the normal remedies of an unsecured creditor. He

could:

• Sue the company for debt and seize its property if his judgement for debt is unsatisfied

• Present a petition to the court for the compulsory liquidation of the company

• Apply to the court for an administration order, that is, a temporary reprieve to try and rescue a

company

5.2 Rights of secured debentureholders

A secured debentureholder may enforce the security if the company defaults on payment of interest or

repayment of capital. They may take possession of the asset subject to the charge and sell it or apply to

the court for its transfer to their ownership by a foreclosure order. They may also appoint a receiver or

administrator of it. A floating charge holder may place the company into administration.

A secured debentureholder (or the trustee of a debenture trust deed) may enforce the security. They may:

• Take possession of the asset subject to the charge if they have a fixed charge (if they have a

floating charge they may only take possession if the contract allows)

• Sell it (provided the debenture is executed as a deed)

• Apply to the court for its transfer to their ownership by foreclosure order (rarely used and only

available to a legal chargee)

• Appoint a receiver of it, provided an administration order is not in effect or (in the case of floating

charge holders), appoint an administrator without needing to apply to the court.

The last part of a question on charges may well ask what debentureholders can do if a company defaults.

CHAPTER ROUNDUP

• Companies have an implied power to borrow for purposes incidental to their trade or business.

• Loan capital comprises all the longer term borrowing of a company. It is distinguished from share capital

by the fact that, at some point, borrowing must be repaid. Share capital on the other hand is only returned

to shareholders when the company is wound up.

• A debenture is a document stating the terms on which a company has borrowed money. There are three

main types.

– A single debenture

– Debentures issued as a series and usually registered

– Debenture stock subscribed to by a large number of lenders. Only this form requires a debenture

trust deed, although the others may often incorporate one

• A charge over the assets of a company gives a creditor a prior claim over other creditors to payment of

their debt out of these assets.

• Charges may be either fixed, which attach to the relevant asset on creation, or floating, which attach on

'crystallisation'. For this reason it is not possible to identify the assets to which a floating charge relates

(until crystallisation).

• Floating charges crystallise or harden (convert into a fixed charge) on the happening of certain relevant

events.

• Floating charges rank behind a number of other creditors on liquidation, in particular preferential creditors

such as employees.

• If more than one charge exists over the same class of property then legal rules must be applied to see

which takes priority in the event the company goes into liquidation.

• To be valid and enforceable, charges must be registered within 21 days of creation by the Registrar.

• A debentureholder without security has the same rights as any other creditor.

• A secured debentureholder may enforce the security if the company defaults on payment of interest or

repayment of capital. They may take possession of the asset subject to the charge and sell it or apply to

the court for its transfer to their ownership by a foreclosure order. They may also appoint a receiver or

administrator of it. A floating charge holder may place the company into administration.

QUICK QUIZ

1 Which of the following are correct statements about the relationship between a company's ordinary shares

and its debentures?

Select all that apply.

A Debentures do not confer voting rights, whilst ordinary shares do.

B The company's duty is to pay interest on debentures, and to pay dividends on ordinary shares.

C Interest paid on debentures is deducted from pre-tax profits, dividends are paid from net profits.

D A debentureholder takes priority over a member in liquidation.

2 A fixed charge

A Cannot be an informal mortgage

B Can be a legal mortgage

C Can only attach to land, shares or book debts

D Cannot attach to land

3 What are the elements of the definition of a floating charge?

4 Company law requires a company to maintain a register of charges, but not a register of

debentureholders.

True

False

5 In which of the following situations will crystallisation of a floating charge occur?

Select all that apply.

A Liquidation of the company

B Disposal by the company of the charged asset

C Cessation of the company's business

D After the giving of notice by the chargee if the contract so provides

6 Certain types of charges need to be registered within 28 days of creation.

True

False

7 What steps can a fixed debentureholder take to enforce their security? (Max 30 words)

ANSWERS TO QUICK QUIZ

1 A, C and D are correct. Whilst the company has a contractual duty to pay interest on debentures, there is

no duty on it to pay dividends on shares. B is therefore incorrect.

2 B. A mortgage is an example of a fixed charge. It can extend to, for instance, plant and machinery as well

as land.

3 The charge is:

(a) A charge on a class of assets, present and future

(b) Which class is in the ordinary course of the company's business changing from time to time

(c) Until the holders enforce the charge, the company may carry on business and deal with the assets

charged

4 True. A register of charges must be kept, a register of debentureholders is not required to be kept by the

Act.

5 A, C and D are true. As the charge does not attach to the asset until crystallisation, B is untrue.

6 False. Certain charges such as charges securing a debenture issue and floating charges need to be

registered within 21 days.

7 Take possession of the asset subject to the charge

Sell it

Apply to the court for a transfer to his ownership

Appoint a receiver of it