Transcript CHAPTER 20 LOAN CAPITAL At the end of this topic you should know: • the distinction between share capital and loan capital; • the.

CHAPTER 20
LOAN CAPITAL
At the end of this topic you should know:
• the distinction between share capital and loan capital;
• the distinction between “debenture” and the conditions under
which a company may borrow money from the public;
• how personal property securities are now regulated;
• what is a “security interest” over a company’s property;
• the difference between a circulating and non-circulating
security interest; and
• why security interests over company property should be
registered.
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PowerPoint slides to accompany Corporations Law: In Principle, 8 th Edition. Ciro & Symes.
Introduction
This topic discusses how the Corporations Act
regulates the relationship between a company and
suppliers of loan capital to the company.
It is one of many relationships in which a company
plays the role of debtor.
Others include the company’s relationship with its
bank (for overdraft facilities supplied to the company),
employees (for unpaid wages) and trade creditors (for
goods and services supplied to the corporation on
credit).
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PowerPoint slides to accompany Corporations Law: In Principle, 8 th Edition. Ciro & Symes.
Authority to Borrow Money
Companies have the power to borrow money: s 124(1).
Where a company has a constitution, the constitution may
include provisions which otherwise restrict the borrowing
powers given to the company by the Corporations Act.
Despite such restrictions, the Corporations Act permits
creditors to make a number of assumptions about the
company’s authority to incur debts and give security for
loans.
Public companies may borrow money from the public
provided they comply with the disclosure requirements in
the Corporations Act.
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PowerPoint slides to accompany Corporations Law: In Principle, 8 th Edition. Ciro & Symes.
Debt vs Equity
Finance obtained from lenders (for example, a bank
overdraft or a loan) is known as debt finance or “loan
capital”.
Capital provided by shareholders is known as “equity
capital”.
Gearing is the ratio of funds borrowed by a company
compared to the share capital.
As a general rule, the higher the gearing, the greater
the risk for investors.
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PowerPoint slides to accompany Corporations Law: In Principle, 8 th Edition. Ciro & Symes.
Debt vs Equity
Factors to consider in deciding whether to raise funds
in the form of loan capital or equity capital include:
• legal capacity of person providing funds to company;
• return on investment;
• amount of return;
• deductibility of expenses;
• deductibility of interim payments; and
• effect of liquidation on repayment: see [20.40].
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Debentures
A “debenture” was traditionally thought of as a
document under which a company acknowledges that
it has borrowed money for some length of time.
The definition of debenture for the purposes of the
Corporations Act is in broader terms: s 9.
It defines a debenture as a chose in action (a legal
right) that includes an undertaking by a company to
repay, as a debt, money deposited or lent to it. There
are a number of exclusions to the definition: see
[20.50].
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PowerPoint slides to accompany Corporations Law: In Principle, 8 th Edition. Ciro & Symes.
Debentures
A public company can raise loan finance from the
investing public by way of debentures. The usual
method is by way of offering debenture stock.
The best security is that provided by a mortgage
debenture, which is secured by a registered or
registrable first mortgage given to the trustee (for
debenture-holders) over land, where the amount
borrowed is not more than 60% of the land value
according to a qualified valuer: s 283BH(2).
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PowerPoint slides to accompany Corporations Law: In Principle, 8 th Edition. Ciro & Symes.
Debentures
If these requirements are not satisfied – namely, if the
lender is not given adequate security, the terms
‘unsecured note’ or ‘unsecured deposit note’ must be
used: s 283BH(1).
A company may also issue debentures or notes
which allow the holder to convert these into shares at
a later date, known as convertible debentures or
convertible notes.
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PowerPoint slides to accompany Corporations Law: In Principle, 8 th Edition. Ciro & Symes.
Trustee for Debenture-holders
The Corporations Act provides that, before a
borrowing corporation offers debentures to the public,
a trustee must be appointed who acts for and on
behalf of the many debenture-holders pursuant to the
terms of a trust deed: s 283AA.
The obligations of borrowers and guarantors are set
out in the covenants which form part of the trust
deed.
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Personal Property Securities
In January 2012, the Personal Property Securities
(PPS) legislative regime came into effect.
The PPS regime introduced a new functional
approach to the regulation and registration of
personal securities.
It established a single harmonised national law
designed to regulate the registration of security
interests in personal property.
A security interest can be attached to either a
circulating or non-circulating asset.
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PowerPoint slides to accompany Corporations Law: In Principle, 8 th Edition. Ciro & Symes.
Personal Property Securities
All the rights and obligations attached to the security
interest are now governed by the terms of the
security agreement.
Sometimes a seller will provide that transfer of title
will not take place until the goods have been paid for.
Such provisions are known as a “Romalpa clause”.
A “security interest” is defined under s 12 of the PPS
Act: see [20.170].
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Personal Property Securities
Charges are now registered in the PPS Register (those
charges registered on the previous ASIC register have
migrated to the PPS Register) which has been established
by the PPS Act.
The general rule is that registration is deemed to be effective
from the time the description of the item is searchable on the
PPS register.
It is the secured party’s responsibility to ensure that the
information that is contained on the PPS Register is accurate
and complete.
If registration is effective, it may effect the order or priority of
payment of debt.
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PowerPoint slides to accompany Corporations Law: In Principle, 8 th Edition. Ciro & Symes.