law and ethics... · • the value received in excess of its nominal value when a share is sold at...
TRANSCRIPT
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Law and Ethics
Session 2
Company Finance
Online Revision Bridging Course
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1) Definition of ‘share capital’
2) Preference shares and ordinary shares compared
3) Loan capital and debentures
4) Fixed and floating charges
5) 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
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