Creditor Right System of Company Law - Coursework Example

Creditor Right System of Company Law Legal analysis of relevant company law issues and advises as to whether Mrs. Crystal can successfully enforce her security against the company: Under Company Law, the unsecured creditors of any business enterprise could only lay claim for their dues after the preferential and secured creditors have been paid their dues. In this case, the secured creditors are (a) debenture holders and (b) floating charge which has been taken by Ms.Crystal against loan of £5,000 that was secured by floating charge on all assets. However, it is necessary for the charge to be registered to have legal significance. “Companies registered in England and Wales sometimes create a mortgage or charge that must be registered.”(Company charges, 2009, p.2). The UK Companies Act 2006 has laid down certain laws under which public monies could be used by corporates, especially directors and managers who have powers to preside over the financial and economic destinies of companies. If the total administrative powers are left in the hands of managers, it is quite possible that they may misuse such powers for personal gains. In order to avoid such misuse, the Companies House lays down specific laws in the Companies Act which deal with such kind of situations, affecting not only the company but also people who deal with them, like creditors, vendors, employees, etc. In this case, it is necessary that the charge on debenture issue and also the loan of £5,000 advanced by Mrs. Crystal to the company towards working capital must be registered with companies within a period of 21 days. “If a registrable charge is not registered in time, then it is void against the liquidator or administrator and any creditor of the company. This means that the debt for which the charge was given will remain payable, but it will be unsecured.” (Company charges, 2009, p.7). Thus, in this case it is assumed that the charges on debentures and debts have been registered and, therefore, they need to be paid first before setting the claims of the unsecured creditors and the equity shareholders of the company. It is common knowledge that the corporate entity, Crystal Chandeliers Ltd, is a limited company and thus, except under exceptional circumstances, the shareholders, Ms.Crystal and her sons would be liable only for the value of unpaid shares payable by them, or in other words, the shares which they hold. Crystal Chandeliers Ltd being a limited liability company the personal assets of the owners are usually protected from business creditors as a matter of law. Shareholders and LLC members have a kind of asset protection called limited personal liability under which it would be difficult to attach personal assets and belongings of the company’s owners for satisfaction of business debts. “Shareholders are not personally responsible for the company’s debts, but directors may be asked to give personal guarantees of loans to the company.” (Limited liability companies, n.d). Under law, it is imperative that all preferential and secured creditors are paid first before the unsecured creditors are paid off. This is because they have a fixed or floating charge on assets. A fixed charge is a charge on one particular asset or class or assets. For instance if a company borrows money from a bank on hypothecation of its fixed assets, in the event the charge is not cleared on maturity and presentation, the bank would proceed to sell off the fixed assets and realise its dues. But if this is a floating charge on all assets, the bank would proceed to sell all the assets named in the hypothecation deed and realise its dues. Thus, the established order of preference of asset listing and priority of debt settlement will form according to which payments are to be made, as follows: "(1) secured creditors holding fixed charges such as a bank lending money backed by a mortgage on land and buildings; (2) preferential creditors, who can include government/crown departments who are statutorily preferred in the order of payment; (3) floating charge holders; and (4) general creditors, such as suppliers of goods and services, and other lenders who have a higher priority for recovering their losses than shareholders.” (Effective insolvency and creditor right system, 2009). Part B: The circumstances under which the court might accept the creditors’ arguments. In particular, Mrs. Crystal has heard that the liquidator might ignore the charges she took if they were not registered and would like your advice on this matter. Normally unsecured creditors would rank the last after all preferential and secured creditors are paid off. But in the event, the charge on the assets are not registered with the Companies House within the prescribed time, it is possible that these would also rank only as unsecured creditors, along with other kinds of unsecured debt holders. Under the normal circumstances, in the event the debentures and debts to company are registered the repayment rankings would be as follows: Registered Charges: Preferential creditors - Nil Secured creditors - 1. Debentures (Secured against a registered floating charge) 2. Secured Loan of £ 5,000 ((Secured against a regd.floating charge) Unsecured Creditors: 1. £10,000 from Easy Finance Ltd 2. £10,000 from Bridge Finance Ltd. Balance, if any available for distribution to equity shareholders parri passu Unregistered Charges: Unsecured creditors: 1. £10,000 from Easy Finance Ltd 2. £10,000 from Bridge Finance Ltd. 3. Debentures 4. Secured Loan of £ 5,000 In other words, in the event the charges are not secured, all these debts would be treated as unsecured. Thus, it is most likely that in he event of non registration of charges, there would be no priority repayment attached to the debenture holders and debts to company made by the director and main shareholder, Ms. Crystal. However, according to the law, it is possible for the unsecured creditors to voice their concerns over the allotment of the residues available after selling of assets and even challenge that some assets may not have been sold, etc or a higher value can be realised. However, their contention that the company and Ms. Crystal are one and the same is unsustainable.” When companies become insolvent and cease to trade, they often owe enormous sums which they cannot repay. But the owner's liability is strictly limited by law to the amount he agreed to pay for the shares when he bought them. The owner is protected by law; his personal possessions cannot be used to repay the company's debts.” (Davidmann 1996). Reference List Company charges, 2009. [Online] Companies House, p.2. Available at: http://www.companieshouse.gov.uk/about/pdf/gba8.pdf [Accessed 23 November 2010]. Davidmann, M., 1996. Ownership and limited liability. [Online] Community Economics. Available at: http://www.solhaam.org/articles/clm504.html [Accessed 23 November 2010]. Effective insolvency and creditor right system, 2009. [Online] eStandardsForum. Available at: http://www.estandardsforum.org/united-kingdom/standards/effective-insolvency-and-creditor-rights-systems [Accessed 23 November 2010]. Limited liability companies, n.d. [Online] Business Link. Available at: http://www.businesslink.gov.uk/bdotg/action/detail?r.s=sc&r.l1=1073858805&r.lc=en&r.l3=1073865730&r.l2=1085161962&r.i=1073789614&type=RESOURCES&itemId=1073789612&r.t=RESOURCES [Accessed 23 November 2010]. Read More