LAWS2014 Lecture Notes - Lecture 10: Nba Coach Of The Year Award, Promissory Note, Security Interest
1 Loan Capital
1.1 Introduction
A company may adopt a particular capital structure for a range of reasons, with
debt having tax and cost of capital advantages.
1.2 Company’s power to borrow
A company has all the powers of an individual and body corporate (s124 CA),
and therefore borrow, including:
• Issuing debentures
• Giving a security by charging uncalled capital;
• Granting a charge over the company’s property.
The Board has the power to borrow (s 198A), unless limited by the constitution;
[here there is no limit].
Borrowing doesn’t necessarily have to be in the best interests of the company –
s124(2) although is regulated by other directors duties.
1.3 Debentures
At common law, a debenture was a written document acknowledging the
indebtedness of a company (Handevel P/L v Comptroller of Stamps (Vic)).
A debenture is defined in s 9 CA as a chose in action that includes an undertaking
to pay a debt.
Basically a loan to the company by debenture holder. Debenture holder generally
receives payment of interest and eventual full repayment of loan.
A debenture may include a charge over property (s9 CA).
A debenture does not include:
• Borrowings in the course of business or by Authorised Deposit-taking
Institutions;
• An undertaking to pay by cheque, order for payment, or bill of exchange;
• Promissory note at or above $50,000;
• Borrowing from a related body corporate.
(CA s 9).
A debenture is defined as a security (CA s 92(3)), thus issues for disclosure to
the public via prospectus will be subject to Ch6D requirements.
There are other requirements for debentures, such as a trustee and provision of
information (CA ss 313 & 318).
Key advantage: interest paid to debenture holder is tax deductible.
Debenture holders generally have priority over shareholders in winding up.
1.4 Charges – Fixed and Floating Charges
1.4.1 Definition
A charge provides security attaching to property, and includes a charge created
in any way, a mortgage and an agreement to execute a charge{or mortgage} (CA
s 9).
A pledge not to give security to another person does not come within the
definition in s 9 (Pullen v Abalcheck P/L).
Charge - “any contract which by security for the payment of a debt confers an
interest in property, defeasible or destructible upon payment of such debt, or
appropriates such property for the discharge of the debt”: Slade J in Re Bond
Worth [1980] 1 Ch 228
1.4.2 Fixed v Floating
Whether a charge is fixed or floating depends on its nature, not the description:
Agnew v Commissioner of Inland Revenue).
1.4.2.1 Fixed
A fixed charge attaches to specific property, plant or equipment. The company
cannot dispose of the property without the lender’s consent.
1.4.2.2 Floating
A floating charge attaches to a class of items until a future event occurs. The
company is free to deal with the property until then unless it is contrary to the
nature of the charge (Ferrier v Bottomer). {usually over current assets such as
trading stock or book debts}
The floating charge is dormant until it crystallises (becomes fixed) on events
implied by the common law. (i.e. something goes wrong) Government Stock &
Other Securities Investment Co v Manila Railway Co
While floating charge may crystallise in future, it is still a present security that
protects security holders assets: Evans v Rival Granite Quarries Ltd (1910) 2 KB
979.
Here, the crystallising event was:
• The company was wound up/ceases to carry on business; or
• The company defaults and the chargee appoints a receiver; or
Document Summary
A company may adopt a particular capital structure for a range of reasons, with debt having tax and cost of capital advantages. A company has all the powers of an individual and body corporate (s124 ca), and therefore borrow, including: The board has the power to borrow (s 198a), unless limited by the constitution; Borrowing doesn"t necessarily have to be in the best interests of the company s124(2) although is regulated by other directors duties. At common law, a debenture was a written document acknowledging the indebtedness of a company (handevel p/l v comptroller of stamps (vic)). A debenture is defined in s 9 ca as a chose in action that includes an undertaking to pay a debt. Basically a loan to the company by debenture holder. Debenture holder generally receives payment of interest and eventual full repayment of loan. A debenture may include a charge over property (s9 ca). Borrowings in the course of business or by authorised deposit-taking.
