Company Law Essay Help : Borrowing and Charges
Cases referred to in this section
General Auction, Estate and Monetary Co v Smith [1891] 3 Ch 432
Re Badger, Mansell v Viscount Cobham [1905] 1 Ch 568
Baroness Wenlock v River Dee Co (1885) 10 App Cas 354 HL
A private company may borrow money as soon as it is incorporated - a public company can borrow once its trading certificate has been issued (Section 117 Companies Act 1985).
There is an implied power that a company may borrow money unless it is expressly excluded (General Auction, Estate and Monetary Co v Smith [1891] 3 Ch 432) for the purposes of its business; no implication arises for other corporations (Re Badger, Mansell v Viscount Cobham [1905] 1 Ch 568) and the question as to their powers in this connection must, except in so far as otherwise provided by statute, be determined by reference to their constitution.
A person contemplating lending money to a company, except in so far as otherwise provided by statute, satisfy himself by looking at the constitution of the corporation whether it has power to borrow or not, but he does not need to go further or inquire whether any private regulations or conditions have been complied with.
The borrowing powers of a corporation may be restricted either by express terms or by necessary implication in its constitution (Baroness Wenlock v River Dee Co (1885) 10 App Cas 354 at 362, HL, per Lord Watson). Where a corporation is created by Act of Parliament which empowers it to borrow a certain sum of money, a restriction against borrowing more will be implied.
Subject to the statutory protection afforded to persons dealing with a company regulated by the Companies Act 1985, persons dealing with a corporation having a limited power of borrowing are put on inquiry whether that limit is being exceeded but not as to how the money borrowed is to be applied. Where however statutory protection does not apply, a borrowing that is ultra vires on behalf of a corporation does not give rise to any indebtedness on its part, the lender is entitled to repayment of the loan as money paid for no consideration.
The corporation does not, however, hold the unlawfully borrowed money on trust for the lender and the lender is not entitled to equitable remedies such as tracing. Nor is the lender entitled to subrogation if the money is used to discharge the debt due to a secured creditor or to a lien if the money is used to buy land.
The document which sets out the terms on which the company has borrowed money is called a debenture which, by Section 744, includes 'debenture stock, bonds and any other securities of the companym whether constituting a charge on the assets of the company or not'. A debenture may be single where a company borrows from an individual or single person such as its bank, or it may be issued as part of a series where the company has borrowed from a number of individuals but all rank equally in terms of priority and in terms of security offered to them for the borrowing.
A company can raise money by inviting the public to subscribe for debentures and take a stake in the loan capital of the company. The difference between these and shares are that the rewards of a shareholder as contributor to the company's share capital are directly linked to the success of the company in generating profits and its solvency whereas the debenture holder as an outsider has only the contractual rights afforded to him by his loan, such as to receive interest and to be repaid even if the company has not made a profit. Debenture holders will therefore have restricted rights to attend meetings and to vote.
Security
A company may offer security for its borrowings by issuing a fixed or floating charge. Fixed charges refer to specific assets of the company such as land, plant and machinery. Charges may be legal or equitable - legal charges require formal creation by deed. Floating charges are equitable charges created by specific reference to a group of assets. It does not refer to any specific asset unless and until a specific event occurs which causes the charge to crystallise into a fixed charge - in which case, the charge fixes itself to all property in the group at that time. As an example, a property company may frequently buy and sell property and may have a floating charge over all of its property. When it sells an asset, it is not necessary to obtain a release of that asset from the floating charge since the charge refers only to the company's property in general (although the buyer will usually require a certificate of non-crystallisation).
There are rules of priority for charges over the same asset which are as follows:
(i) Legal charges rank according to their date of creation provided that they are registered within 21 days of creation. A registered legal charge takes priority over a registered equitable charge irrespective of the date of creation of the equitable charge.
(ii) Equitable charges rank according to their date of creation, provided also that they are properly registered.
(iii) A registered fixed charge takes priority over a registered uncrystallised floating charge. However, once the floating charge has crystallised, it takes priority over any later fixed equitable charge.
A company creating a charge mentioned by section 396 of the Companies Act 1985 must register it by delivering the 'perscribed particulars' to the Registrar of Companies within 21 days of the creation of the charge, issue of the debenture or acquisition of the property (Section 395(1) Companies Act 1985). The Company must keep its own register of the charges it creates (s.407) and copies of all its charges (s.406) whether or not they are registrable.
When a charge is satisfied, the company may file a memorandum of satisfaction at Companies House on Form 403.
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