Can You Explain Company Loan Capital Terminologies and Laws Flashcards

The indebtedness of a company to a creditor is generally acknowledged by way of a debenture.
Where upon incorporation S changed from being a sole trader to a debenture holder and shareholder.
The word originates from the Latin phrase: ‘money owed to me’.

It was stated that 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. However, the problem with this definition is that it is too wide, it encompasses documents such as bank statements where the account in question stands in credit.

The Court of Appeal held that this provision was not a clog on the equity of redemption on these facts because the parties were commercial people who had been properly advised as to the effect of the contract.
s.739 prevents rule of equity from applying that it cannot be left too long before repaying or redeeming a loan

Debenture stock holders are not creditors, the debenture stockholders are beneficiaries not creditors

Substance over form:
that the substance of the documents was that a charge was to be created. Atkin LJ concurred and started his judgment with an outline of what a charge was. It being a matter of the parties’ intentions, a charge had been created.
The first question that arises is whether or not this document does create a mortgage or charge, and to determine that it is necessary to form an idea of what is meant by a “charge”. It is not necessary to give a formal definition of a charge, but I think there can be no doubt that where in a transaction for value both parties evince an intention that property, existing or future, shall be made available as security for the payment of a debt, and that the creditor shall have a present right to have it made available, there is a charge, even though the present legal right which is contemplated can only be enforced at some future date, and though the creditor gets no legal right of property, either absolute or special, or any legal right to possession, but only gets a right to have the security made available by an order of the Court. If those conditions exist I think there is a charge. If, on the other hand, the parties do not intend that there should be a present right to have the security made available, but only that there should be a right in the future by agreement, such as a licence, to seize the goods, there will be no charge.

A charge which purported to be a fixed charge over specified machinery was in law a fixed charge notwithstanding the fact that the company was given limited rights to deal with the machinery without the consent of the chargee
Held, that the debenture created a fixed charge. In any event, even if the debenture allowed the company some limited freedom to deal with the machinery without the consent of D, that was not inconsistent with the creation of a fixed charge

‘floating charge remains unattached to any particular property and leaves the company with a license to deal with, and even sell, the assets falling within its ambit in the ordinary course of business, as if the charge had not been given, until it is said to crystallise’

If a charge has the following characteristics, it is a floating charge:
- if it is a charge on a class of assets of a company present and future;
- if that class is one which, in the ordinary course of the business of the company would be changing from time to time; and
-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 charged.

According to Lord Macnaghton a fixed charge is one which ‘fastens on ascertained and definite property’ or property that is ‘capable of being ascertained and defined’.

On the other hand, a floating charge is ‘ambulatory and shifting in nature, hovering over and so to speak floating with the property which it is intended to affect’ until crystallisation.

A seven member House of Lords overruled Re Bullas and Siebe Gorman, following the line of reasoning in Agnew it was held that although it is possible to create a fixed charge over book debts and their proceeds, the charge in the present case was a floating charge.

Lord Scott stressed that the ability of the chargor to continue to deal with the charged assets characterised it as floating.

For a fixed charge to be created over book debts, the proceeds must be paid into a blocked account:
‘The debenture made no restrictions on the use that could make of the balance on the account available to be drawn. The critical question, is whether the chargor can draw on the account. So long as the charger can draw on the account, and whether the account is in credit or debit, the money paid in is not being appropriated to the repayment of the debt owing to the debenture holder but is beign made available for drawings on the account by the chargor’

The term ‘book debts’ has been defined as ‘debts arising in a business in which it is the proper and usual course to keeo books and which ought to be entered into such books’ by Lord Esher

the controversial and ultimately overruled case, where a fixed charge was created over uncollected book debts, but as soon as the proceeds were collected and credited to the specified bank account, a floating charge took effect. ‘Unless there is some principle of law which prevented them from agreeing what they have agreed, their agreement must prevail’

it was recognised that the validity of automatic crystallisation as necessary of the freedom of parties to contract.

To protect themselves against this risk it is now common for floating charges to insert a so called ‘negative pledge’ clause in the charge. The effect of a negative pledge charge is to prohibit the company creating a subsequent mortgage or charge ranking equally with or in priority to the earlier floating charge. The subsequent charge will not lose his priority unless he had notice of the clause, notice of the earlier floating charge (by its registration) does not impute notice of any restriction it may contain