Company and Partnership Law

LA4008

Company Borrowing
Share Capital and Capital Maintenance
Reading
Recommended Reading:
• Callanan, G. An Introduction to Irish Company Law, (4th
edn, Dublin: Gill & MacMillan, 2015), chapters 10 & 15
Additional Reading:
• Thuillier, A. Company Law in Ireland (Dublin: Clarus Press
2013), chapters 13 & 15
Learning Outcomes
• Be able to:
• 1.Discuss the capacity of a company to borrow
• 2. Security for loan capital/Debentures
• 3. Explain fixed charges and floating charges, the differences
between the two and their advantages and disadvantages;
• 4.Explain a retention of title clause
1. Company Borrowing
 For the vast majority of private companies, borrowing is a key
way in which they raise or acquire capital
 A private company limited by shares now has an unlimited
capacity to borrow and give security related to the carrying
out of the business
 The borrowing capacity of all other companies will be set out
in the objects clause in the memorandum
Company Borrowing
• If there are limits on the amount of loan capital set out in the
memorandum, the requirements must be strictly observed.
• It is open to the company to amend the requirements by
special resolution however.
Company Borrowing
• In the case of a PLC, it cannot borrow without first obtaining a
certificate from the Registrar of Companies certifying that the
PLC is entitled to do business and exercise its borrowing
powers
• Usually, the authority to borrow is conferred upon the
directors of the company
2. Security for Loan Capital
 When a company borrows money it will normally be required
to provide security for the repayment of the money borrowed
 Usually loan debentures will be issued for this purpose
 A debenture is a medium/ long-term debt instrument used by
companies to borrow money, at a fixed rate of interest. The
legal term "debenture" refers to a document that either
creates a debt or acknowledges a debt.
Debentures
 A debenture is a written statement acknowledging the debt
which is owed to a creditor
 Usually contains the following:
 an undertaking to repay the debt, subject to the terms and
conditions agreed;
 the giving of security for debt;
 the events of default that will trigger the enforcement of the
security; and
 the methods of enforcing the security.
Debentures
• Where the debenture is secured, the debenture holder can
enforce his debenture in the manner provided for under the
debenture document
• Where the debenture is secured by way of a charge, the
charge must be officially registered with the Registrar of
Companies
• A company is required to maintain a register of debenture
holders
Default
• In the case of an unsecured debt, the unsecured creditor can
sue for the debt or petition to wind-up the company where
the company defaults in repayment
• Where the debenture is secured by a fixed or floating charge,
it is commonly a term of the debenture document that the
secured debenture holder can appoint a receiver over the
assets covered by the charge
3. Charges
 A charge involves the transfer of some proprietary interest in
the company assets to the lending institution in order to
secure the repayment of a debt
 There are two main types of charges:
1. A fixed charge
2. A floating charge
Fixed Charges
• A fixed charge attaches to a specific asset belonging to the
company, for example, something immoveable like a piece of
land or the company premises
• The fixed charge attaches from the moment of its creation to
the property in question
• So, a borrowing company cannot deal with the charged asset
without the consent of the charge holder
Fixed Charges
• If the company is unable to repay the loan and defaults, the
bank has options…
• It can take over the asset and sell it in satisfaction of the debt
owed to it
Advantages of a Fixed Charge
1. The holder of a fixed charge is the first charge to be repaid in
the event of insolvency- i.e. it ranks higher than a floating
charge when it comes to repayment

2. More secure than the floating charge

Floating Charges
• During the 19th century, a new charge was created known as
the floating charge – the idea was to offer lending institutions
charges over assets that can change in the course of business
• This means that a forklift in a fruit and vegetable business or a
fleet of trucks in a removals business are things which the
company can grant a floating charge over
Floating Charges
• The company is free to use the asset in question in the
ordinary course of business
• In the case of the forklift or truck, the company may replace
the current model with a new one without the permission of
the debenture holder
• A floating charge does not attach to a specific asset until the
charge is called in-this process is called crystallisation
Floating Charges
• In Re Yorkshire Woolcombers Association [1903] 2 Ch 284, a
floating charge was described as:
• a charge on a class of assets of a company present and future;
• which class is, in the ordinary course of the company’s
business, changing from time to time; and
• until the holder enforces the charge, the company may carry
on business and deal with the assets charged
Crystallisation
• Once the debt, which the floating charge secures, is paid
the charge ceases to exist
• If the security has to be enforced (i.e. if there is a default
situation), the floating charge crystallises.
• I.e. it becomes a fixed charge.
• It now attaches to specific property and the company can
no longer deal with those assets
Crystallisation
 There are four scenarios which give rise to crystallisation:

1. On the liquidation of the company

2. On the appointment of a receiver
3. When the parties stipulate
4. On the cessation of the company’s business
Crystallisation
• Generally, the holder of the floating charge will appoint a
receiver to collect and realise the assets if there has been a
default on the loan
• However, the receiver must first account to the preferential
creditors for the amounts owed by the company before he can
apply any of the proceeds in discharge of the floating charge
holder’s debts - flaw with floating charges
Negative Pledge Clauses
 In order to protect the holder of the floating charge against
any subsequent security interest, a clause, known as a
negative pledge clause was introduced into the charge
 The effect of such a clause is that the company is restricted
from creating any further security interests which would have
priority over the floating charge
 Clause limits the authority of the company to issue any other
security over the assets such as a fixed charge
Advantages of a Floating
Charge
• Assets can still be dealt with in the ordinary course of business
• Assets may be easier to dispose of
• Appealing to creditors
Disadvantages of a Floating Charge
 Floating charges rank 3rd in priority for payment in winding
up procedures,
 after fixed charges and preferential debts
 The precise value of the security is uncertain until
crystallisation occurs
 The charge cannot take effect over the goods, which the
company does not yet own, e.g. goods held under a hire
purchase agreement
Court Order: Payments
1.Secured creditors/fixed charge holders- After the holders of a
fixed charge (from date of creation) have been paid, the order of
payments to be made by the liquidator is as follows:-
 2.liquidator’s fees and expenses;
 3.Preferential creditors claims (e.g. the Revenue, company
employees)
 4. Floating charge holders- all floating charges crystallise upon
winding up. First in time prevails.
 5. Unsecured creditors claims (pari passu), these creditors have no
security for the debt owed but have proven their debt
 6. Members or contributories to the company.
 7. Members with dividends owed (deferred creditors- pari passu
applies)
 8. Contributory – amount paid on shares returned
Disadvantages of a Floating Charge
• Where a company is being wound up, a floating charge
created within 12 months before the commencement of the
liquidation can be made invalid by the liquidator unless it is
proved that the borrowing company was solvent
immediately after the charge was created
Disadvantages of a Floating Charge
• If the company is affected by unprofitable trading then this
may reduce the value of the assets and a debenture holder
may not be aware of this unless they are closely in touch with
the company
• Fixed charges offer a more secure and certain form of
security
Fixed Charges over Book Debts
• Borrowers like floating charges because they can continue to
deal with their assets in the day-to-day running of the
business
• Banks like fixed charges because they give them priority
• Given the above, it was inevitable that banks would seek to
broaden the definition of what comprises a fixed charge
Fixed Charges over Book Debts
• They succeeded in getting the courts to recognise that a
charge over book debts was a fixed charge, not a floating
charge
• A book debt is a sum of money which is owed to the company
in the ordinary course of business which would be entered in
well-kept books of such a business [money owed]
• So, money owed to the company is an asset that could be
offered as security for a loan
Fixed Charges over Book Debts
 Book debts are constantly changing (new book debts are
created and old ones are discharged routinely) – it is for this
reason that it has always been considered appropriate to issue
a floating charge over them
 The ability of a creditor (e.g. a bank) to create a fixed charge
over book debts has only been accepted for the last thirty
years or so.
 For book debts to qualify as a fixed charge, certain criteria
must be in place
Fixed Charges over Book Debts
• If a charge over book debts is to be considered to be a fixed
charge, it is crucial that the debenture document should
provide that:
• The company is restricted from using the book debts
Fixed Charges over Book Debts
• Siebe Gorman v Barclay’s Bank Ltd [1979] 2 Lloyd’s Reports
142
• Clauses created a fixed charge over the book debts because
they required the debts to be paid into a special bank
account
• This was despite no further restrictions being placed on the
company’s use of those funds
Fixed Charges over Book Debts
• However, in the Irish case of Re Kennan Brothers Ltd [1985] IR
401, the Court held that the clause in question created a fixed
charge over the book debts because they required:

1. the debts to be paid into a special bank account and

2. that no withdrawals could be made from that account
without the permission of the charge holder (bank)
Fixed Charges over Book Debts
• In Re Holidair Ltd [1994] 1 ILRM 481
• The Irish Supreme Court held that the particular clause
created a floating charge because, while the company was
required to place the proceeds into a specific bank account, it
was not restricted from making withdrawals from the account
and that allowed the company to deal with the proceeds in
the ordinary course of business
Fixed Charges over Book Debts
• Re Spectrum Plus Ltd [2005] 2 BCLC 269
• Here again, no restrictions were put on the company’s use of
the bank account which was specifically set up to deal with its
book debts – so found to be a floating charge
• A bank should therefore ensure that all restrictions are put in
place to have a special account and to have access to it
restricted
Fixed Charges over Book Debts
 Example of a well drafted fixed charge over book debts (clause
in Re Keenan Brothers Ltd):
‘The company at all times during the continuance of this
security shall pay all monies received by it from time to time in
respect of book debts into an account with AIB Ltd at 36
Tullow Street, Carlow, designated for that purpose and shall
not without prior consent of the bank in writing make any
withdrawals from the said account nor direct any payments to
be made from the said account.’
Registration of Fixed and Floating Charges

• Registration can be done by a one-stage or two-stage process

(new under 2014 Act)
• The one-stage process requires that all charges must be
registered with the Registrar of Companies within 21 days of
the charge’s creation
• The Registrar of Companies must be given all the details of the
charge, such as the name of the charge holder, the amount of
the charge and the property charged
Registration of Charges
 Using the two-stage process, a charge holder can reserve their
registration date in advance
 This is done by the company:
1. Delivering a notice to the Registrar of Companies that the
company intends to create a charge
2. Then within 21 days of delivering that notice, a further notice
must be delivered stating that the charge referred to in the
first notice has been created

If a company is late registering a charge, it can apply to the Court

to extend the time-frame
Retention of Title Clauses
• The Retention of Title clause (ROT) is an device which has
been invented to ease the position of unsecured creditors in
the case the company they supply goes into liquidation or
receivership
• For example, a distributor to a convenience store is typically
an unsecured creditor so that when a company is wound up,
they would rank behind the preferential creditors, the banks
and the holders of floating changes
• Probably would receive little to nothing in the end
Retention of Title Clauses
• The simple Retention of Title clause: The seller retains title
in specified goods until the buyer pays the purchase price
• If the buyer were to go into liquidation, the buyer’s
creditors would not be able to seize the goods because
they are merely in the possession of the buyer
• Do not have to register such clauses
Borrowing: in brief
• Discussed the capacity of a company to borrow
• Explained fixed charges and floating charges, the differences
between the two and their advantages and disadvantages
• Explained the meaning of a negative pledge clause
• Described fixed charges over book debts
• Explained the meaning of a retention of title clause
Share Capital and Capital
Maintenance
1. Meaning of Share Capital
Ways a company can raise capital to finance itself:
1. It can issue shares to its members and thereby obtain
investment share capital;
2. It can borrow capital from lending institutions;
3. Through government grants;
4. Using its profits to add to its capital base

 Here we will look at the first option- share capital

What is Share Capital?
• Share capital is capital which is acquired through the issue of
shares

• It is generally intended to be permanently invested in the

company
Share Capital
• Flitcoft’s Case (1882)
• The court emphasised the protection needed for creditors and
the creditor’s right to say that the company cannot reduce or
give away its capital to the shareholders and if the directors
improperly pay away the assets to the shareholders then they
must replace these assets.
2. Types: Authorised Share
Capital
Authorised Share Capital

• This is the amount of capital as stated in the company

constitution and it represents the limit or extent of capital
which the company is authorised to raise by issuing and
allotting new shares

• It is not representative of the real capital of the company

Authorised Share Capital
• Note: Private companies limited by shares are no longer
required to have an authorised share capital clause and may
just state the nominal value of their shares
• All other companies limited by shares will have a
memorandum which contains an express authorised share
capital clause
2. Types: Issued Share Capital
Issued Share Capital

• This is the total value of the shares which have actually been
issued to the shareholders
• Represents the true level of capitalisation of the company
• Issued share capital cannot exceed the authorised share
capital
3. Direct Reduction of Capital
• S.84 of the 2014 Act:
• A reduction of liability on unpaid shares
• A reduction of paid-up shares which are lost or
unrepresented by available assets
• Repayment of paid-up share capital in excess of company
wants
3. Direct Reduction of Capital
• Provided:

1. It has the authority do so in it’s Constitution or articles

of association, and,
2. Passes a special resolution, and
3. It obtains Court approval for the reduction
• The court’s role in the reduction is to ensure the
creditors, or any class of shareholders, are not
prejudiced
4. Indirect Reduction of Capital
• Purchase by a company of its own shares
• Prohibited except in accordance with s.102 and 103 of
the 2014 Act: i.e.
• Other than for a “valuable consideration”, i.e. as a gift
• Redemption of redeemable preference shares
• Acquisition of shares in an authorised reduction of
capital
• Under a court order
• Forfeiture or surrender of shares
4. Indirect Reduction of Capital
Charterhouse Investment Trust Ltd v Tempest Diesels Ltd
[1986] BCLC 1

• Hoffman J:‘There is no definition of giving financial

assistance in the section, although some examples are
given. The words have no technical meaning and their
frame of reference is in my judgment the language of
ordinary commerce. One must examine the commercial
realities of the transaction and decide whether it can
properly be described as the giving of financial assistance
by the company.’
Exception to s.82
• Any private Company can lend money for:

1. Employee Share Ownership Schemes

2. In the ordinary course of business
3. To a bona fide, non-director, employee

• Or a Private company can carry out the Summary

Approval Procedure to trigger an exception to the s.82
prohibition (must pass special resolution and make a
statutory declaration of solvency)
Content of Declaration
1. Form of the assistance
2. Name of person given assistance
3. Intended purpose of the assistance, and
4. The fact that the company is solvent
5. Dissenting 10% of shareholders may petition the HC for
cancellation of the assistance within 28 days

• Re Northside Motor Co Ltd. – retrospective compliance

does not validate
Summary Approval Procedure

• But the general rule is that the giving of financial assistance

is one of the restricted activities under the Act

• However, this restricted activity can be allowed if the SAP is

followed (PLCs are not allowed use the SAP procedure)
• S.202 allows for SAP

• The SAP Involves a two step process:

1. A declaration by the directors; and
2. A special resolution by the members.
Contravention of s82
• Where the company provides financial assistance in breach of
the Act, the company and every officer in default, is guilty of
a category 2 offence under the Act, s 82(11)
•  Conviction on indictment can result in a term of
imprisonment of up to five years or a fine of up to €50,000 or
both