Contract Law - Essay Example

? COMPANY LAW Institute The question requires a discussion on the general advantages and the disadvantages that would flow for Green Books Plc if they use loan capital instead of share capital. One of the fundamental advantage that would accrue for Green Books plc is the fact that in respect of share capital there has been strict control that has been placed by the Companies Act 2006 contrary to loan capital which has been controlled in a very minimal way by legislation and the majority of loan capital issue are decided upon the principles laid down in the contract or in other words by the mechanisms of contract law. If Green Books Plc uses loan capital, the advantage would be that the cost of the debt can be easily evaluated upon by analyzing the interest rate that is being charged for such loan. The interest rate is dependent upon the commercial factors which tend to include the security that has been offered, the total amount that is being borrowed, the time duration of the loan as well as the creditworthiness of Green Books Plc. Another important factor which would be discussed later is the fact that debt financing is favoured by the tax system. Contrary to that in respect of share capital the cost is difficult to ascertain as no fixed schedule is provided for whereby a determination of the amount to be paid to the shareholders can be made and the tax system does not favour share capital as it is distributed after deduction of tax and subsequent taxation again. Another disadvantage in respect of raising share capital is the fact that the person who is given shares acquires a right or in other words becomes a member of the company and is granted rights in accordance with his class whereby he can exercise a certain degree of influence in matters related to the running of the company. The position remains the same even if a person is a minority shareholder. However, in loan capital the lender gets his loan and interest and cannot exercise any control over the running of the company as long as the company in this situation Green Books Plc is in compliance with the terms and conditions that have been agreed upon to raise such loan capital thus no action in respect of running of company can be undertaken or claimed. An advantage of raising share capital is the fact that the dividend which is received for such shares would be paid only if there is a profit and that also is a discretionary measure which can be exercised by the directors who decide as to whether such dividends should be paid or not. As far as loan capital is concerned, the interest and repayment of loan has to be made in accordance with what had been agreed upon between the parties and so is not dependent upon the profit of the company. Therefore, even if profits are not made, the capital or retained earnings or any other method has be used so as to make the repayment otherwise legal action can be initiated by the lender whereby he can file for insolvency or appoint an administrator or exercise any other right which had been agreed upon by way of the agreement. Dividend is not a deductible expense because it is a distributions profit and corporation tax has already been deducted. As for interest it is a trading expense and is used for determining profit and tax is deductible. Another advantage is that the capital invested by share capital is normally not paid back if the company is wound up. However, for loan capital, it has to be returned on a date, or on demand and has to be taken into account by directors so as ensure availability of funds when such falls due. (ii) As far as charges are concerned under s.860 of the Companies Act 2006 most of them must be register and would be void otherwise against any liquidator, administrator or creditor (s.874). It is important to note that the contract that is existent between the lender and the company would be held valid. If a fixed charge in respect of land has been created it must be register with the HM Land Registry. The securities that are considered to be important are that of buildings, plant and machinery etc. and fixed charges over such assets can be created, the result of which is that the company becomes unable to deal with such assets that is it cannot sell the said asset without the permission of the holder of the charge. Therefore if a charge has been registered then any purchaser of that asset would take the said asset subject to the charge. Furthermore, if the company is in possession of the asset and goes into liquidation the asset is sold and the proceeds of sale are used to pay up the charge holder. The rule in respect of fixed charge is that it tends to prevail over any floating charge that is created over the asset. The facts at hand show that the mortgage that has been created by Green Books Plc is a fixed charge which has been created in favour of the lender and therefore registration in such respect needs to be carried out by the lender. As far as floating charges are concerned, the concept evolved in the case before the Court of Chancery in In re Panama, New Zealand and Australian Royal Mail Company1 wherein a charge against the undertaking of company as well as the stock in trade was created. Furthermore In Re Yorkshire Woolcombers Association Ltd; Houldsworth v Yorkshire Woolcombers Association Ltd2 the courts analysed the feature of a floating charges (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’. Upon evaluation of the points it is evident that the company can deal with assets on which a floating charge is created till the point crystalisation occurs which happens 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 were problems that used to occur whereby a floating charge over an asset which already had a similar charge being created, however, the problem was resolved by the introduction of a negative pledge clause whereby the company is prohibited to create any further charges on the asset and states that the charge would have priority over any other floating charge. It is important to mention here that the registration has to be undertaken. On the facts it is evident that a floating charged has been created over the assets of the company. The fixed charge would have priority however, the negative pledge clause ensures priority and prevention of further charges being created and therefore a problem arises in respect of the second floating charge that has been created over the same assets. (iii) The issue in this question requires an analysis of the position of what is to happen if the series is 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, the points that have been raised above, then if the series is lost to Australia, payment in accordance with the charge document need to be made and if the payment is not made then the floating charge would crystalise and Pressing can make an application whereby a liquidator or an administrator can be appointed whereupon the payments can be recovered. The registration of the floating charge in this respect is also important. One important that needs to be raised is that actual knowledge of the first charge must be present in respect of the subsequent charge holder. Actual knowledge means and clearly does no include constructive knowledge whereby knowledge by filing of charge is attained and this clearly will not be sufficient. Therefore the notice that is sent in accordance with s.869 CA 2006 to the Companies House must have in it the negative pledge clause. In respect of the covenant of the negative pledge it is arguable that the subsequent lender or any third party is bound by it by way of the equitable principle in de Mattos v Gibson (1858), however, the requirement of actual knowledge still remains and the fact must be that the third is wishing to deal with the property in a manner which is inconsistent and contradictory with what had been agreed amongst the first charge holder and the company and by exercising such rights the subsequent charge holder is trying to deprive the earlier charge holder of his rights. There is also the possibility of the lender suing the third party for inducing a breach of contract.(Swiss Bank Corp v Lloyds Bank Ltd)3 Therefore if Australia wins the series and the charge crystalises there is the argument that the negative pledge had existed between the Supplier and Green Books Plc and so the subsequent charge was not possible to have been created by Pressing. The issue that needs to be determined is that of actual knowledge and the fact of registration, plus the formalities of the negative pledge clause and it being clearly illustrated need to be present. Therefore if such a situation is present then if an action is brought about by Pressing, then the Supplier has the possibility of bringing an action for breach of contract and claim what is owed by way of its floating charge. However, it becomes evident that there had been no actual knowledge of the earlier charge to the Supplier, due to inadequate registration or any other problem, then there is a possibility of Pressing arguing on that and claiming that the subsequent charge was valid and has crystalised thereby entitling him to claim the amount due, however, such an amount would be given after the fixed charge is paid off in respect of the assets. Thus an application for an administrator can be made by Pressing who has to act in the interest of all the creditors and apportion the amount accordingly. (iv) The problem requires an analysis on the fixed charge. If the fixed charge which had been created by the lender against the land, had been properly registered, the company was not entitled to deal with the land and so any subsequent purchaser would take the land subject to the charge. In the event of default, the Lender can apply for the appointment of a receiver and by the selling of the land recover the amount due to him from such sale. It is important to mention that as pointed out earlier the fixed charge holder would be paid from the assets first so as to keep the principle of fixed charge being the strongest security intact.\ In respect of the receivership of the fixed charge, it is also called receivership under the Law of Property Act 1925, the provision state that the person who has a fixed charge can appoint a person in line with the loan agreement which had been executed between the parties, so as to take hold of the fixed asset upon which the charge had been created. After seizing the fixed asset, the received would sell the asset and the Lender would be paid from such proceeds and his claim in that respect would be settled. However, if the amount does no completely settle the claim of the Lender he can claim the remaining amount as an unsecured creditor whereupon the floating charge holders would be paid first and then what is left would be divided amongst the unsecured creditors. The Lender can also allow Green Books a certain period of time as a period of grace and then recover the amount after the expiry of the period. If the lender finds that the charge would not completely settle his claim he can put forward the idea of enhancement of loan and take a floating charge over the assets of the company or on the entire company so as to secure himself. Therefore there are a number of possible routes that can be followed by the Lender which need to be closely scrutinized and a decision made after such analysis so as to protect his position and to get the amount out of the Green Books Plc in a manner which benefits him and does not require much expenses and hardship on his side. References (2007). Acca - f4 corporate and business law. [S.l.], Bpp Learning DAVIES, P. L., & GOWER, L. C. B. (2008). Gower & Davies: the principles of modern company law. London, Sweet & Maxwell DIGNAM, A. J., & LOWRY, J. P. (2010). Company law. Oxford, Oxford University Press TAYLOR, C. (2009). Company law. Harlow, Essex, England, Pearson Longman. ROSE, F. D., & ROSE, F. D. (2009). Company law. London, Sweet & Maxwell RIDLEY, A. (2009). Company law. London, Hodder Education. JUDGE, S. (2010). Company law. Oxford, Oxford University Press. HANNIGAN, B. (2009). Company law. Oxford, Oxford university press. Read More