Lending Money and Securing Loans free essay sample

Money and Securing Loans A company can finance its activities by selling shares or by raising money from banks or other money-lending institutions. If the company is granted a loan, the lender may become a debenture-holder. A debenture has never been satisfactorily defined. In Levy v. Abercorris Slate and Slab Co. (1883) 37 Ch D 260, Chitty J said â€Å"In my opinion a debenture means a document which either creates a debt or acknowledges it, and any document which fulfils either of these conditions is a debenture. Shareholders are members of the company and their rights have been described elsewhere in this book. Debenture-holders are creditors of the company and their rights are normally defined in the contract made between them and the company. It is interesting to note that, unlike shares, debentures can be issued at a discount unless they are convertible into shares, when such an issue at a discount would be an invitation to evade the rule that shares may not be issued at a dis count (Mosly v. We will write a custom essay sample on Lending Money and Securing Loans or any similar topic specifically for you Do Not WasteYour Time HIRE WRITER Only 13.90 / page Koffyfontein [1904] 2 Ch 108). The lender may wish to secure his position by taking a charge over the property of the company, that is, creating a legal relationship between himself and the company which will ensure he is paid in priority at least to some of the other claimants against the company. 15. 1 Debenture-holder’s Receiver The power of a debenture-holder to appoint a receiver will be determined by the terms of the debenture itself. In the circumstances in which a receiver may be appointed, he will be appointed to collect the assets of the company with a view to the repayment of the debt due to the debenture-holder. He must, however, pay creditors whose claim should be paid before his, for example a preferential reditor under s. 196 Companies Act 1985 (CIR v. Goldblatt [1972] Ch 498). 15. 2 Fixed and Floating Charges It may be important for the purposes of determining the priority of charges to decide whether a particular charge is a ‘fixed’ or ‘floating’ charge. Essentially a fixed charge gives the holder the right to have a particular asset sold in order to repay the loan that he has given the company. This means that the company may not deal with the property subject to the fixed charge without the consent of the holder of the charge. A floating charge gives the holder the right to be paid in priority to others after the sale of the assets subject to the charge, but in this case the assets over which the charge floats are not specified. The company may continue to deal with them without the permission of the holder of the charge and it is only on the happening of certain events (such as non-payment of an instalment of interest or repayment of capital) that the charge will become fixed. On the happening of the event in question (which will be specified in the contract for the loan) the charge is said to ‘crystallise’ and will become fixed on the particular assets that the company holds at that moment which answer to the general description of the property over which the charge originally ‘floated’. It then becomes indistinguishable in form from a fixed charge. Thus, if the original charge ‘floated’ over all stock-in-trade and a crystallisation event occurred, the goods subject to the crystallised charge would be the stock the company owned on that particular day. After the crystallisation, the company would not be able to sall these assets without the permission of the debenture-holder. The court in Re Yorkshire Woolcombers Association Ltd [1903] 2 Ch 284 (see Casenote, page 328) grappled with the definition of floating charges. In the Court of Appeal, Romer J said: I certainly do not intend to attempt to give an exact definition of the term â€Å"floating charge† nor am I prepared to say that there will not be a floating charge within the meaning of the Act, which does not certain all the three characteristics that I am about to mention, but I certainly think that if the charge has three characteristics that I am about to mention it is a floating charge: (1 ) if it is a charge on a class of assets of a company present and future; (2) if that class is one which, in the ordinary course of the business of the company, would be changing from time to time; and (3) if you find that by the charge it is contemplated that, until some future step is taken by or on behalf of those interested in the charge, the company may carry on its business in the ordinary way as far as concerns the particular class of assets I am dealing with. ’ Thus, the idea of a ‘floating’ charge is that the company is unhindered from dealing with its assets despite the fact that an outsider has a legal interest in those assets.