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7.2 Loan Capital

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Loan capital Power  Company has powers to— o Same capacities as individual (s124)—including power to take out loans o As well as power to—  To issue debentures s124(1)(b)  To give security by charging its uncalled capital (unpaid shares = asset) s124(1)(e)  Grant a floating charge over the company‘s property s124(1)(f)  Funds can be borrowed from— o Banks o Investing public (debenture issue) o Private lender – may also be a shareholder  Loans can be secured or unsecured Protection for creditors  insolvent trading: s588G and 588V  Regulation of reduction of share capital—not permitted where it would materially prejudice company‘s ability to repay its creditors  Indoor Management Rule & Assumptions which lenders can make to ensure validity of agreement & security: s129  External administration and winding up provisions Debentures  CL—any document which is evidence of a debt. Handevel Pty Ltd v CSD (Vic) o Does not include a bill of exchange o Debt often secured but not necessary o Contract & property law (if secured)  CA—a legally binding undertaking to repay a debt: s9 o Chose in action o Debenture is a ―security‖: s92(1)(a) Does not include— o Undertaking by an ADI to repay money deposited: (b) o Undertaking to pay money under cheque, order for payment of money or bill of exchange: (c) o Undertaking to pay money under promissory note w face value over $50K: (d) o Undertaking to pay money to related body corporate: (e) o Undertaking to pay money prescribed by Regulations: (f) Offering debentures When offering to public—  Prospectus required: Ch 6D o Note exceptions in s708  Debentures must be secured: s283BH  Trustee to be appointed: Ch2L  If debentures to be listed on ASX, meet requirements of ASX Listing Rules Trustee for debentures Where many debentures & impractical for each to be registered and individually enforced—rights held by a corporate trustee  Corporate trustee holds on trust for debenture holders— (s283AB) o The right to enforce the borrower‘s duty to repay Andrew Trotter LWB334 Corporate Law o Any charge or security for repayment o Any right to enforce any other duties that the borrower or any guarantor have under the terms of the debentures, the provisions of the trust deed or Ch 2L: Company charges Fixed & Floating Charges  Whether fixed or floating depends on operation, not on terminology in instrument: Agnew v Commissioner of Inland Revenue [2001]; Re Spectrum Plus plc [2005] o Key consideration—whether lender has power to deal with the property without permission of charge Fixed Charge = attaches to specific property like mortgage  Cannot dispose of property without consent of charge  eg—over specific machinery Floating Charge = covers class of property  Eg—book debts, stock-in-trade  Free to dispose of them in ordinary course of business & to then replace them by acquiring same category of assets in the future  Crystallise → becomes fixed charge on those actual assets → can be enforced o Trigger event  Stated in the instrument creating the charge, eg—  Trying to defeat the charge  Default in interest payments over specified period  Value of charged assets falls below minimum amount  Ceasing to deal with charged assets in ordinary course of business  Procedure  Appointment of liquidator or receiver  Company is wound up  Cessation of business, at least where no longer a going concern o Automatic Crystallisation—upon a particular event rather than act: Fire Nymph v Heating Centre  May occur even if company unaware – causes problems for right to property, on-selling of property etc  Chargee need not appoint receiver  Will be replaced by security charge attaching to circulating asset: PPSA (essentially the same) Registration  ASIC Register of Company Charges shows all chargees (s265) o All deemed to have notice of the register o Establishes  order of priority among registrable charges  validity of charges as against a liquidator or administrator of the company.  Unification of register of securities (mortgages, charges etc): Personal Property Securities Act (commences May 2011) (legislation not examinable)  Company must keep register of its charges itself (as well as ASIC register): s271 Charges that are registrable  Registrable charges— (s262) (a) floating charges over whole or part of company‘s business, property or undertaking (b) charge on uncalled share capital (c) charge on unpaid call on shares (made but not paid) Andrew Trotter LWB334 Corporate Law (d) charge on a personal chattel including those that are unascertained or to be acquired in the future  = article capable of complete transfer by delivery: s262(3) (e) charge on intellectual property—goodwill, patent, trademark, copyright or registered design (f) charge on a book debt  = debt due or to become due to the company at some future time: s262(4) (g) charge on a marketable security  means debentures, stocks, shares or bonds: s9 (h) a lien or charge on a crop, wool or stock mortgage (i) charge on a negotiable instrument other than a marketable security  Exclusions— o charges on land: s262(8) (on land registration system) o charge over property arising by law, charge in relation to a negotiable instrument, transfer of goods in practice of a profession: s262(2) o charge on fixtures under charge of land: s262(9) o charge created on behalf of deceased estate: s262(10) Procedure  Notice of Charge [Form 309] within 45 days after charge created— o Contains—  name of coy,  date of creation of charge,  type of charge etc: s263(1) o Lodged by—  company: s263(1)  Chargee can as an ―interested person‖: s270(1)  ASIC notes time and date to determine priority: s265(2) o Can be provisionally registered where not stamped for stamp duty and will get earlier priority date/time: s265(4) Effect of Failure to Register  Charge not invalid: s262(11)  Void against liquidator or administrator if not registered— (s266(1)) o within 45 days after creation of charge; and  Can apply for extension of time: s266(4) o at least 6 months before ―the critical day‖ that is:  Day winding up began: s266(8)(a)  Section 513C day wrt administration: s266(8)(b)  Section 513C wrt administration ended by deed: s266(8)(c) Void Charges Charge void if—  in favour of— (s267(7)) o an officer of the coy: overcoming situation in Saloman v Saloman o ex-officer of the company in preceding 6 months o person associated with officer  charge recreated within 45 days of an unregistered charge for the same property etc: s266(5) o Unless in good faith & not to evade requirements Enforcement Leave required to enforce within 6 months of creation— (s267(1))  ―enforce charge‖ = appoint receiver or claim property: s9 Andrew Trotter LWB334 Corporate Law  May be granted if— (s267(3)) o Company solvent after charge created o Just & equitable  Otherwise → void: s267(1) Priorities: Pt 2K.3 Earlier over Later  According to time on the register o ie—earlier registered charge has priority over— (priority time def: s278(1)(a))  created earlier but registered later: s280(1)  unregistered charge: s280(2) (created earlier) | s280(3) (created later) o BUT if later chargee has notice of earlier charge → loses priority: s280(1) (created earlier but registered later) | s280(2) (unregistered)  No tacking new debts onto old charge to gain benefit of priority: s282(1) & s268(3) (variation of charges); Octavia o except for certain prospective liabilities secured by a registered charge (where no amount specified) (not examinable) Fixed over Floating  Chargees can agree to vary priority: s279(2)  Priority date of floating charge is when it becomes fixed s279(3) (chargee of registered floating charge held to consent to postponement to subsequent fixed charges (until floating charge becomes fixed)) o Unless— a. Creation of subsequent registered charge contravened a provision of the instrument creating the floating charge: s279(3)(a) b. notice of that provision lodged w ASIC: s279(3)(b) Andrew Trotter LWB334 Corporate Law Receivership Definitions Receiver = independent person appointed to take control of some or all of a company‘s assets: Re Manchester & Milford Railway Co (1880)  Receiver ↔ receiver & manager o Old distinction  Receiver = receives profits of company,  receiver & manager = managed business of company o Now used interchangeably—Generally receiver & manager is appointed  Receiver includes a r&m: s416 o Usually receivers have very broad powers of management – found in charging document and so is deemed to be a manager as well: s90 Controller: s9 Includes—  receiver,  receiver & manager of property,  anyone else who (whether or not as agent for the corporation) is in possession or has control, of that property for the purposes of enforcing a charge o agent of mortgagee in possession Appointment Private Appointment Can be appointed by agreement—contractual right of creditors  Right does not follow just from having security—additional right must be in contract o Can therefore be challenged on normal contractual principles: s52 TPA etc  Directors or other unsecured creditors may challenge: s418A o Method of appointment as per agreement—not prescribed in legislation: s434F  If demand is issued must allow reasonable time to comply: Bunbury Foods v National Bank
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