Analysis of the Advantages and Disadvantages of Raising Capital - Essay Example

? COMPANY LAW Institute (i) The issue in respect of this question requires an analysis of the advantages and disadvantages of raising capital rather than share capital. The comparison of each would be discussed, In respect of Green Books plc one of the most important factors is that shares or in other words equity is strictly controlled by the Companies Act 2006. However, debts are minutely covered by legislation and contract law is used. In respect of debt, its cost is easy to establish that the interest rate that is charged for the loan. The rate is determined by commercial factors which include the security offered, the amount that is borrowed, the duration of the loan and the creditworthiness of the borrower. The tax system also favours debt financing. The share capital and its cost is difficult to determine as there is no schedule that determines the amount that is paid to the shareholders. Furthermore, the tax system does not favour share capital. If a share capital is raised, the person who acquires such shares and becomes member of the company and in accordance with his class is granted certain rights. Thus it can be safely said that there would be a degree of influence which he can exercise over the running of the company. This is so even if the person is a minority shareholder. As far as a lender is concerned, he is generally not entitled to interfere in the running of the company and so as long as the company is complying with the terms of the debenture no action can be taken by the lender so as to influence the policy of the company. In respect of a dividend for the shares, it needs to be paid only if there is a profit and that too is discretionary that is the directors decide upon whether it should be paid or not. Contrary to shares, the interest on debt finance must be paid in accordance with what had been agreement upon and is in no way dependent upon the profits of the company. Thus even if there are no profits, the capital has to be used so as to pay the interest failure of which would entitle the lender to appoint an administrator or receiver, in accordance with the terms and conditions of the agreement. As far as dividend is concerned, it is not a deductible expense because of the fact that is a distribution of profit and a corporation tax has been deducted from it. However, in respect of the interest for the land and because of the fact that such has been taken as a trading expense and is taken into consideration for computing trading profit, tax is deductible. In respect of share capital a company normally does not have to repay its members the capital which was invested in the company, when company is wound up. Thus the directors do not have to consider this point. However, for loan capital, there is a date in future on which the loan has to be repaid, which can also be on demand, thus the directors have to consider this and ensure the availability of funds whenever the loan falls due. Thus debt financing may increase earnings per share but there might be a reduction in share price. Thus if investors find that too much has been borrowed then they might sell shares resulting in the company to have greater liabilities than its assets. Thus the directors have to take this into account and to maintain the gearing ratios and to raise share capital and debt finance accordingly. Thus the directors of Green Books Plc would benefit from the advantages listed above and suffer from the disadvantages as well. (ii) In respect of charges, most of them need to be registered with the Companies Registry (CA 2006, s 860) and would be void against liquidator, administrator or creditor who has an interest in the secured assets if not registered (s.874). However, it is important to mention that the contract that is existent between the lender and the company would still be held valid. As for fixed charges over land they must be registered in HM Land Registry. As far as securities are concerned the most attractive ones are buildings etc. A number of fixed charges can be created in respect of such assets. If such a charge is created then the company can no longer deal with the asset that is it cannot sell the asset without the consent of the charge holder. Thus if the charge has been registered, then the purchaser would take it subject to such charge. Thus if the company is unable to meet its debts and goes into liquidation then the asset would be sold and the proceeds would be paid to such charge holders. The general rule is that a fixed charge would prevail over any floating charge that is created in respect of the same assets. In respect of the current situation as a result of the legal mortgage the company has granted created a fixed charge in favour of the lender for the land which needs to be registered thereby creating an interest in favour of the Lender. The concept of floating charge was introduced in the decision of the Court of Chancery in In re Panama, New Zealand and Australian Royal Mail Company1. whereby a charge was created in respect of the company’s undertaking and stock in trade. In Re Yorkshire Woolcombers Association Ltd; Houldsworth v Yorkshire Woolcombers Association Ltd2 the three features of a floating charge were analysed which are (a) it is an equitable charge over the whole or a class of the company’s assets, for example over the book debts; (b) the assets subject to the charge are constantly changing; and (c) the company retains the freedom to deal with the assets in the ordinary course of business until the charge ‘crystallises’. Thus the company can deal with the asset and crystalisation occurs only when the company goes into receivership; liquidation; ceases to trade; or any other event which has been put in the charge document occurs. There have been problems which have occurred whereby a later charge is created over the same assets and to prevent this the negative pledge clause which tends to prohibit a company to create further charges and to have priority over the floating charge has been created. In respect of the discussion above a floating charge has been created over the company’s assets whereby even though the fixed charge over the assets that it has been created, will have preference, as subsequent floating charge has been created, with a negative pledge clause that prevents subsequent charges from being created and having preference over these assets. In respect of the second floating charge that has been created the problem that lies is the fact that a negative pledge clause had been incorporated which had been there to prevent another charge being created which in turn have priority to the floating charge. (iii) As far as the series being lost to Australia, it is important to mention that an important aspect is that if the dues are paid to Pressing then even though it would have crystallized there would be no effect. However, on respect of the argument that have been made above, it is important to note that if the series is lost to Australia, then in accordance with the charge document the floating charge would crystallize whereupon if payment is not made then would generally happens is that Pressing can make an application to appoint a liquidator or an administrator so as to to recover the amount. However, an important point in this respect is the fact that the subsequent charge holder must possess actual knowledge of the first charge. Furthermore, constructive knowledge due to filing the charge would not suffice. Thus the form which is sent to the companies House under s.869 must have notice of the negative pledge clause. In the negative pledge covenant, it is arguable that that the pledge could bind a third party, that is a subsequent lender, under the equitable principle in de Mattos v Gibson (1858) However, it is important to mention that this would require actual knowledge of the earlier charge that had been created and that the third party wishes to deal with the property in an inconsistent manner and contradictory with what has been agreed between the company and the earlier charge holder and therefore the new charge holder wishes to ignore the rights which had been granted to the earlier charge holder. It has also been held possible that the lender may sue the third party for inducing the breach of contract. (Swiss Bank Corp v Lloyds Bank Ltd)3 Thus if the series is lost to Australia even if the charge has crystalised it can be argued Supplier had a negative pledge clause on the first floating charge and so a subsequent charge which would have preference could not have been created which has in fact been created by Pressing. The only uncertain fact that remains is the fact of actual knowledge and whether the earlier charge had been registered. Furthermore, it needs to be ascertained whether the negative pledge clause and its formalities and the fact that it had been clearly illustrated was present. If this is the situation then Pressing if it brings a claim against the company, then Supplier can bring and action for breach of contract and can also claim the value of its floating charge and recover the said amount. However, if it is shown that there was no actual knowledge on the part of Supplier because of inadequate registration, or some other procedural impropriety then Pressing can argue on that and can effectively claim that the floating charge has been validly created and therefore has crystallized. Thus if crystalisation has occurred then he would be entitled to claim for the floating charge however, this would be subject to the fixed charged which has been created. Therefore an administrator can be appointed by Pressing so as to determine the amount that is due to Pressing and he must in collectivity think of the interest of the creditors and therefore apportion the amounts. (iv) In respect of the fixed charge that has been created by the Lender in respect of the land it is important to mention that if the proper registration had been carried out then the company cannot have dealt with the land and thus any purchaser would have taken it subject to the charge. Thus if the company defaults, then the Lender can apply for a receiver to be appointed and from the proceeds of the sale of the land, the Lender would be paid. Another important aspect in respect of this question is the fact that no charge holder would be paid out apart from the Lender. Thus the strong security of a fixed charge is kept intact. The receivership that is undertaken in respect of the fixed charge is known as receivership under the Law of Property Act 1925. Under the provision of such a lender who has a fixed charge over an asset would appoint a person in accordance with the terms of the loan agreement which had been signed between the parties, to seize the fixed assets which has been undertaken to be under a fixed charge. After taking into control the fixed asset, the receive will sell the assets and from that the debt of the Lender would be paid and his claim would be settled. If it is found that the amount does not satisfy the claim of the Lender then the Lender can apply as an unsecured creditor and would be then paid after payment of all the secured creditors. Another way of obtaining relief is the Lender can allow a period of grace to Green Books and can recover the amount of the grace period in entirety after the said duration. Furthermore, if he finds that the asset is not of the same value and his amount would not be recovered from the land then he can put forward a proposal of an enhancement of loan whereby he can ask for a floating charge over the assets of the company or the entity so as to secure himself of being repaid. Thus the possibilities that are open to Lender will have to be carefully considered and the decision would only be taken after an analysis of the position of the company as well as its own security. Therefore an effective curtailing measure needs to be endured before any action in this respect would be undertaken by the lender so as to secure its own position and to avail the best possible way to effectively getting repaid. References (2007). Acca - f4 corporate and business law. [S.l.], Bpp Learning Read More