Advice to Tanya and Boris as to Their Legal Rights - Case Study Example

Problem Based Questions (Student’s Name) (Institutional Affiliation) A. B. Case Study Using case law and statutory law, advice Tanya and Boris as to their legal rights. Before getting into the legal rights side of this case, I find it important to define some relevant terms that will be used as terms of reference. One of the terms used will be the guaranty, which is the arrangement between a creditor and a debtor. It is a contract Tanya and Boris enters into and agrees to satisfy. In this regard, the guarantor agrees to pay the debts of the debtor and only if the debtor defaults and then only if the debtor has with no success attempted to collect from the said debtor (Banking Info., 2004). From the case at hand, Olga took the loan from the bank to be able to acquire a van which she needed to run her flower delivery job. From what it looks and something that the bank did not bring out, they question that business's ability to make enough money for Olga to service the loan she wanted from the bank. In that situation, the bank then required Olga to have a guarantor to sign the loan for in the occasion that Olga the debtor cannot pay and this is when Tanya and Boris are brought into the picture. Advice to Tanya and Boris as to their legal rights From the action that the bank looks to want to take against Tanya and Boris, it is important to remember that the two have their guaranteed rights. There are rights that extends beyond those of the debtor. This will be a discussion of those rights that the guarantors are entitled to. Right of subrogation To start with, Tanya and Boris have the right to subrogation which is a right that allows them to recover from the debtor if they happen to pay anything part of the debt the Olga owes the bank. This basically means that they have the creditor rights if the debtor claims bankruptcy. This again means that they have the entitlement to all the securities which the creditor may have received from Olga being the principle debtor regardless of whether the securities were given before or after the guarantee sip was entered into (Amis, 2007). In essence, Tanya and Boris could enter into Olga shoes and they would therefore be entitled to all the rights, remedies, and securities. This is from the definition of a guarantee which is a promise by one party to assume a debt responsibility for a borrower’s debt when the borrower defaults. This is why the bank is turning to Tanya and Boris to pay the debt that Olga owes them. The two therefore have the surety's contractual rights to be able to recover the cost of making payment. Due to the fact that they are entitled to security, if they end up paying this debt then Olga should submit the car he bought to them. Tanya and Boris as guarantors have the right to obtain copies of the letter of guarantee or contract of guarantee plus any other relevant documents that are related to the loan transaction. This again gives them the right to seek advice from their lawyer but this should be before signing the contract of guarantee (Cox, 2010). After they have signed the contract of guarantee, they have the right to the information on the outstanding balance of the account. The financial institution which in this case is the Eastpac Bank should give Tanya and Boris information regarding the statement of account subject to the borrower's consent. This one will help them exercise their other right of calling upon the borrower who is Olga to pay off the loan so as to release them from the liabilities under the guarantee. This can be done even before the financial institution has called upon the borrower to pay (Banking Info., 2004). Another right that Tanya and Boris have is the right to be indemnified by the borrower who is Olga for any payments made to the financial institution. This can basically mean that they could sue Olga for the amount they pay to the financial institution. On the other hand, there various limitation of action against the guarantors. Depending on the provisions of the contract of guarantee and where the guarantee is made payable on demand, the Eastpac Bank as the financial institution cannot bring an action against Tanya and Boris until the demand has in fact been made (Cox, 2010). This is done under the guarantee against a guarantor. The demand can either be made by hand or it may be done by ordinary post. Finally, the financial institution has six years from the date they made the demand before they can bring legal action against the guarantor (Banking Info., 2004). Discuss the different types of equity and debt instruments that are available in the market place that can be used as a form of investment in a startup company. Most investors are not always aware of the various investing structures that are available aim the market place and also to them when it comes to raising new capital aimed at financing their growth. For those who have a clue that these options are available, they do not understand how their terms are. There are basically three types of investor funding which are equity, loans and convertible debt. Each of these instruments has its advantages and disadvantages which are a very important aspect for an investors to keenly examine before they can decide upon the variety of choices (Zvi Bodie, 2011). This reports aims at exploring the different types of equity and debt instruments available in the market and that can be used as a form of investment in a startup company. Essentially, any financing is needed to start a business and then be able to ramp it up to profitability. With the variety of sources to consider when looking for start-up financing, it is important to consider how much money you need while at the same time considering when you need the money. The financial needs of a business always vary but this has factors such as the size and type to be highly considered. For instance, a processing business which is highly capital intensive require large amounts of capital while the retail business on the other hand require less capital. This means that a small business will have fewer choices when it comes to raising funds than the larger companies. For the financing for start-up business, equity and debt are the two major financing sources. Equity Financing By definition, an equity instrument is a contract of any kind that evidences a residual interest in an entity's assets after the deduction of all its liabilities. Liabilities from this statement can be defined as the present obligations of the entity one has assets interests in usually arising from the past events (MARSH, 1982). This settlement has some expected results such as an outflow from the entity from the resources then embodying to economic benefits that is an outflow of cash or also other assets from the entity (Barry J. Epstein and Eva K. Jermakowicz, 2010, page 820). Equity investments is a type of financing that can help a start-up company acquire financing for their business. The equity investors get the ownership of a given percentage in the company although, from an investor’s point of view, they do not have a guaranteed returns on their investment (McLaney, 2009). The most obvious way of raising the equity funds is issuing stock. On the other hand, retained earnings is the other where the company uses its own earnings to finance its projects, though this may not be applicable when it comes to the start-up companies but they have also an equity investment. The retained earnings sees it use the money they have generated and which they would have returned to the investors/shareholders and then channels the earnings to funding capital projects (Conway, 2010). This is basically using the shareholders money to fund these projects as a result increasing the value of their equity holdings. When we are talking of equity financing, the two examples of retained earnings as well as newly issued shares fit perfectly as examples. When entering into equity instruments, it is important to have the investment to be properly defined and in a formally created business entity. The equity stake in a company may take different forms such as membership units usually in the case of a limited liability company or the form of preferred stock mostly in corporations (Conway, 2010). Below are some of the equity financing that are existing in the market today. Preferred Shares Many financial institutions make investments through preferred shares. This is where through buying a share of a company, they have given the company the money needed to get their business off the ground, but it also means that the investors own a part of the company through the shares they purchased. They can sell these shares as they like at whatever price they like. If a company is doing well, shares can be sold at high prices and still get bought up fairly quickly. The owners of a company also own shares in the company and they can sell these shares as they like. Once a company is doing well, it could buy back the shares from its investors (McLaney, 2009). Venture capital This refers to that financing that comes from individuals or companies usually in the business of investing in the young businesses. They provide capital to the start-up companies in exchange for ownership share in the business. The firms who give this venture capital usually do not want to participate in the initial financing of a start-up company unless in a case where the company has a proven record on its management. They however prefer investing in the companies that have already received significant equity investments for the foundation and are already on track to profitability (McLaney, 2009). Moreover, they also prefer the companies with a competitive advantage or have the strong and valuable proposition when it comes to patent not forgetting a demand for their products that can be proven. Their approach is always a hands-on approach to their investments which will call for representation on the board of directors of the company and to a great extent may want to be involved in the hiring of the managers. Besides the fact that they can provide guidance and valuable business advice, their interest is usually getting substantial returns on the investment that they make and this at times make their interest cross the purposes of the founders. This is because their interest is often a short-term gain focus. Venture capital firms will focus on the creation of a portfolio with potentially high growth businesses that will result in high return rates (McLaney, 2009). Warrants These are special instruments often used for long-term financing and are very useful to the start-up companies. They encourage investment though the minimization of downside risks while on the other side providing upside potential. In this regard, warrants can’t be issued to a start-up company's management as part of the reimbursement package. In essence, a warrant is a form of security that warrants the owner of the right to buy stock in the company issuing the warrants but at a pre-determined price and at a future date but this usually should be before an expiration date. The value of the warrants is usually the relationship of the market price of that stock and the purchase price of the stock but if in an occasion the market price of this stock rises to exceed the warrant price, what the holder can do i to exercise the warrant (MARSH, 1982). This means that they purchase the stock at the warrant price providing for an opportunity to purchase the stock below the current market price. Debt Financing This is a form of financing which simply entails borrowing funds that are to be repaid over a period of time but this is paid with interest. The debt financing can take two options, it can either be short-term where the full repayment should be done in less than a year or it can be a long-term debt which repayment is made over more than one year. The difference from the equity is that the lender does not gain an ownership interest the company that they lend the funds to whose obligation then is just the repayment of the loan. In debt financing, there could be the requirement for guarantees on most of the debt instruments. This makes commercial debt financing synonymous with personal debt financing (McLaney, 2009). Bonds To a start-up company, the bonds may be used to raise financing for a specific activity. They make into the list of a special type of debt financing since this debt instrument is issued by a company. The bonds are different from other debt financing instruments and the difference is in that the company specifies the interest rate as well as when the company with be required to pay back the principal amount. Another difference comes in in that the company does not have to make any payments on the principal amount and also the interest payments until the date specified as the maturity date reaches. Face value is the name given to the price paid for the bond during the time at which it is issued (McLaney, 2009). Relatives and Friends It just happens that the first place the founders of start-up companies look for financing is from private sources and this includes family as well as friends to be able to start their business. This financing maybe in form of debt capital and with low interest rate. it is important to note that when one is borrowing from friends or the family, it should be done with the same formality that would come with borrowing from the commercial lender. This in layman's terms means that you create and execute a formal loan document that includes in it the specific terms of payment, the amount being borrowed, and the interest rates and may also include collateral in case of default. Conclusion In principle, companies that are in search for finance should issue equity if they are above their target debt level and they should opt for the debt instruments if they are below. These adjustments can be made instantaneously and continuously and with no flotation costs (MARSH, 1982). However, the situation in practice requires that companies should plan well so as to minimize the flotation costs because there exists significant flotation costs as well as the cost of deviating from their target ratio. To be able to know the levels for a start-up company, they can simply use observation of the past behavior or they can turn to the theory of capital structure for help. The debate on the choice between equity and debt instruments ranges on and on and it demonstrates that companies are heavily influenced by the market conditions as well as the past security prices history in efforts of making the choice between the equity and debt instruments for financing. On the onset, the equity as a source of financing maybe difficult to obtain especially for the start-up companies for the reason that they do not have the equity built or the track record that would help investors give a judgment regarding the performance of the investment they want to get into with the start-up companies which is still the case for the start-up business when they are applying for a debt financing. However, when they have a good business plan which is backed b a good concept and equity value in the form of an inventory, equipment or building investors are probably not going to shy away and therefore make it easier to obtain a bank debt financing for instance. It is on the other hand important to note that the equity finance companies have a greater competitiveness as well as aggressiveness which puts them on the position to take more chances and because the potential for payoffs are greater. But when one looks at the debt financing, the return on the investment is a set figure-no less and no more than the original contract. Looking at the financial instruments from the financer's point of view, with equity financing when the business gets takes off they stand to reap great rewards which greatly surpasses what a debt financer may reap from their investment. all in all, the best investment in my own opinion is the Debt financing, this is particularly because it offers the business owners the best security and less potential loss over time as well as no possibility of loss of control of the company direction or even operation. This seems to me the best choice in all situations but depending on the understanding of the two forms of financing well know that there are times it makes more sense to opt for the equity financing. Bibliography Amis, R. L. a. N., 2007. Guarantees: Rights Of Subrogation. [Online] Available at: http://www.mondaq.com/x/55562/Insolvency+Bankruptcy/Guarantees+Rights+Of+Subrogation [Accessed 1 May 2015]. Banking Info., 2004. YOUR LOANS; Guarantors, s.l.: Bank Negara Malysia. Conway, M. R., 2010. Debt and Equity and Continuity of Interest. Stanford Journal of Law, Business & Finance, 15(2), pp. 261-311. Cox, K., 2010. Consumer credit. Consumer Credit Legal Centre (NSW) Inc,, Issue 72, pp. 25-5. MARSH, P., 1982. The Choice Between Equity and Debt: An Empirical Study. Journal of Finance, Volume 37, pp. 121-143. McLaney, E., 2009. Business Finance Theory and Practice. Eighth ed. London: Pearson Education Ltd. T. Subramanian, C. P., n.d. Financial Management. New Delhi: New Age International Publishers. Zvi Bodie, A. K. A. J. M., 2011. Investments. Ninth ed. New York: McGraw Hill. Read More