Professional, Practical, Proven

Academy 2019/20Law and Ethics

Lecture 15Company Finance

1) Definition of ‘share capital’2) Preference shares and ordinary shares compared3) Loan capital and debentures4) Fixed and floating charges5) Registration of charges

Contents

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Company Finance

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• Borland’s trustees v Steel Bros & CO Ltd (1901)

“......the interest of the shareholder in the company, measured for the purposes of liability and dividend by a sum of money”

Definition of a Share

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• Ordinary Shares• Standard shares, Most common type• The biggest risk takers (last to be paid on liquidation)

• Rights• Variable dividend• Return of capital (on liquidation)• Attend and vote at company meetings

Types of Shares

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• Preference Shares• Carry more rights than attach to ordinary shares, usually more

expensive. Don’t usually have voting rights.

• Rights• Fixed dividend• Return of capital on liquidation• Paid before ordinary shareholders

Types of a Shares

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• Deferred Shares• Have special rights or restrictions attaching to them but are

deferred for a period of time or on the occurrence of a specified event e.g dividend rights may be deferred.

• Redeemable Shares• Maybe be ‘bought back’ by the company

Types of a Shares

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• Nominal Value – lowest value a share can be issued at

• Market Value – price at which the share actually sells

• Authorised Share Capital – Total maximum amount of capital a company can issue

• Issued Share Capital – total amount of capital that a company has issued

• Called up/uncalled Capital – amount paid/amount outstanding• Partly paid Capital – shares that have not been paid in full

• Reserve Capital –unpaid amount reserved exclusively for liquidation

Share Capital -Definitions

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• The value received in excess of its nominal value when a share is sold at a price above its nominal value

• Must be held in the share premium account as undistributablecapital (un-denominated capital)• Exceptions

• Mergers• Group reconstructions• Acquisition of Shares of a Body Corporate

Share Premium

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• A share cannot be issued at a price below its nominal value. (category 3 Offence – Class A fine and /or imprisonment for up to 6 months on summary conviction)

• Company must pay the difference plus interest.

• A shareholder who knowingly buys a share at a discount may be liable to repay the deficit

Issuing Shares at a Discount

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• Raised by borrowing. A company's borrowing power must be exercised in accordance with the provisions of it’s constitution

• Examples, • Overdrafts, Secured loans, unsecured loans

Loan Capital

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• Defined in Levy v Abercorris Slate & Slab Co (1887) as a document that creates a debt or acknowledges it. It states the terms and is issued by the company to the lender (debenture holder)

It states:• the obligation to repay principal plus interest• the specified security (charge) provided for the loan• the events that will allow enforcement by the lender• the role and powers of the debenture holder

Debentures

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• Types• Single Debenture – a single loan• Series of Debentures – different loans by different lenders

on different dates, all part of an overall loan• Debenture Stock (Public Companies) – creates “debenture

stock” a loan fund which a number lenders invest in on exactly the same terms. Administered by trustees (protects lenders interest)

Debentures

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• Security on borrowings usually takes the form of a charge over a asset of the company

• In the event of default on repayments the debenture holder has the right to take over the asset

• The most common charges are fixed and floating

Fixed and Floating Charges

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• Most powerful type of charge• The charge attached to a physical asset of the company e.g.,

buildings, plant• The company cannot sell or create another charge on that

asset without the lender’s permission• Only discharged when the debt is fully repaid

Fixed Charges

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• Floats over all or part of a current asset e.g., stock, book debts• Company can transfer freely the current assets without the

permission of the lender• Floating charges only attaches to an asset when it crystallised.

This may be due to • Default on repayment.• Liquidation• Receivership• Cessation of business • Notice (agreed future date for crystallisation)

• Once the charge attaches to an asset (crystallisation) the company loses the benefit of dealing with the asset in the ordinary course of business without the lender’s permission

Floating Charges

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• Company must register the charge with the CRO within 21 days of creation (CRO MAINTAINS A REGISTER OF CHARGES)

• Date of creation, description of the charge, amount of debt it relates to, property to which it applies, names and details of person(s) entitled to it.

• Court extends the time to register if:• Failure to register was accidental• Failure has not prejudiced the creditors or shareholders of

the company• Its just and equitable

• FAILURE TO REGISTER• Charge becomes void and company is liable to a fine• Must repay the loan in full

Registration of Charges

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Shares and Debentures Compared

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Shareholders and Debenture Holders Compared

QUESTION 3 2018 – TYPES OF SHARES AND CAPITAL Ripley is a chef and he owns and operates a successful vegan restaurant in Cork city. Customers of the restaurant regularly compliment him on the quality of his food, and over the years many of them have told him that they have difficulty sourcing good vegan food options, especially for snacks and lunch. In the last year Ripley has been considering opening a shop selling vegan cakes, sandwiches, soups and snacks. Last month he noticed that a coffee shop and snack bar based in Patrick Street in Cork was up for sale and following negotiations with the owner he agreed to purchase the business, due to its ideal location regarding passing trade. The coffee shop is a registered private company limited by shares, and the owner agreed to transfer all the issued shares in this company to Ripley in return for the agreed purchase price. Following this transfer Ripley discovered that the nominal value of the shares in the company is €2, there are 100,000 shares in circulation which are partly paid in the amount of €1, the authorised share capital of the company is 500,000 shares, and the reserve capital is €100,000. Ripley knows nothing about corporate finance, as he operates his restaurant business as a partnership. He has contacted you for advice.

Required: A. Define the meaning of the term share and the term nominal value. (2.5 marks) B. Outline the characteristics of a partly-paid share, and advise Ripley of his liability in relation to these shares if the shop is not successful and the business is placed into liquidation. (3 marks)C. Explain the distinction between the authorised, issued and reserve capital of a company. (4.5 marks)

QUESTION 3 – Summer 2017 TYPES OF CHARGES AND REGISTRATIONDoyle has recently been appointed as an executive director to Westmore Aviation Ltd. The company has been experiencing some cash flow problems in recent months and Doyle has been assigned the task of obtaining loan finance for the company, in order for them to replace and upgrade some of their existing aircrafts. Potter Prudential Investments is willing to lend money to Westmore Aviation Ltd provided the loan is created in the form of a debenture and secured by a fixed charge over the aircrafts of the company and a floating charge over the goodwill of the company. Doyle is unsure as to the distinction between these charges and has contacted you for advice.Required:A. Draw a Table outlining any THREE distinctions between a fixed charge and a floating charge. (7 Marks)B. State the time period within which a charge must be registered, in accordance with Section 409 of the Companies Act 2014 (1 mark). Comment also on the impact of non-registration of a charge within the required period (2 Marks).(3 Marks)Total 10 Marks

QUESTION 3 – Summer 2016 FLOATING CHARGES AND PREFERENTIAL DEBTS

Victoria is a director and majority shareholder in a jewellery design company, Rubies and Riches Ltd. She has recently been given the opportunity to design a range of jewellery for a European wide chain of department stores. To finance this project she contacted the Prudential Bank of Sligo to borrow €150,000. The bank agreed to this loan on condition that in return for the loan a floating charge of €150,000 was created over Rubies and Riches Ltd’s stock. Victoria is unsure as to the meaning of a floating charge – in fact, the only thing she knows about a floating charge is that preference debt ranks in priority to it. She seeks your advice.Required:A. Discuss any THREE characteristics of a floating charge. (4.5 marks)B. Explain any THREE circumstances in which a floating charge will crystallise, and outline the effect of crystallisation upon the charge. (4 marks)C. List any THREE preference debts that rank in priority to a floating charge. (1.5 marks)Total 10 Marks

Solution Three – Summer 2015 PRIORITY OF DEBTS ON LIQUIDATION Kidson Graphics Ltd has recently been placed into insolvent liquidation. Kennedy has been appointed as the creditor’s liquidator. Following a review of the accounts she discovers that the following debts are outstanding:(1) €10,000 due in respect of employee redundancies;(2) €3,000 due to Pandemonium Paints, secured by a floating charge on the company’s stock

created on the 1st June 2010 and registered on the 15th June 2010;(3) Two months arrears of salary due to the company’s financial controller;(4) €4,500 in refuse charges, due to the Local Authority; (5) €2,500 due to Dungston Technologies, secured by a floating charge on the company’s stock

created on the 5th June 2010 and registered on the 12th June 2010; (6) €8,000 overdraft due to Potters Bank; and(7) €97,500 due to Coronation Bank, secured by a fixed charge on the company’s business

premises in 2004 – the original loan was for €150,000, but €52,500 of this loan amount has since been repaid. Unfortunately, Kennedy has discovered that due to an error at the time the charge was created it was inadvertently registered as a fixed charge for €15,000 not €150,000. Kennedy plans on charging a fee of €3,000 to complete the liquidation of the company.

A. State the priority of payment of liquidation, and rank all of the aforementioned debt for priority of payment on liquidation. (9 marks)

B. Define the meaning of the term fixed charge. (1 mark) Total 10 Marks

QUESTION 3 – SHARES, SHAREHOLDERS AND DEBENTURE HOLDERS

(a) Regan has just purchased shares in Candy Cane Catering Plc. These shares have a nominal value of €1.50, but the company issued 500,000 of these shares onto the market at a premium of €1. Explain how this premium will be accounted for in the company’s accounts and outline any TWO purposes for which this premium can be used by Candy Cane Catering Plc. (4 marks)

(b) Regan is also considering purchasing debenture stock in Candy Cane Catering Plc. She has requested your advice regarding the distinction between being a company shareholder compared to a debenture-holder. Draw a table outlining any THREE differences between shareholders and debenture-holders. (6 marks)Total 10 Marks

QUESTION 3Serendipity Publishing Ltd recently contacted their bank, the People’s Bank of Dublin requesting a €500,000 loan in order to replace some of their printing machinery. The Bank has agreed to this loan on condition that the company give them a fixed charge over the new machinery and a floating charge over their stock. In this regarddiscuss the following:A. Draw a Table outlining any THREE differences between a fixed charge and a floating

charge. (6 marks)

B. List any TWO pieces of information that must be provided to the Companies Registration Office in order to register these charges. (2 marks)

C. Outline the consequences of non-registration of a charge. (2 marks)

Total 10 Marks