Debentures are a form of transferable security issued by companies that wish to raise finance in the form of loan capital. Debentures could also be considered as a peculiar loan with certain contractual rights. Those rights could be similar to those acquired by shareholders, but it has to be noted that shareholders have a right in the company, while debenture holders have rights against the company.
A debenture usually includes a charge on all or part of the company’s property. There are two relevant forms of charges that we are interested in: fixed and floating.
A fixed charge gives the holder the right to have a particular asset sold in order to repay the load he has given the company. The company will not be allowed to deal with the asset without the consent of the holder of the charge.
A floating charge on the other hand gives the holder the right to a particular class of assets instead of a specific asset, the company is allowed to deal with this specific class of assets in its normal course of trade and the holder will be entitled to whatever remains of that class of assets upon the crystallisation of the charge. Floating charges were defined in the case of Re Yorkshire Woolcombers Association [1903]. The court said that (1) a charge on a class of assets of a company either present or in the future, will be a floating charge if that class is (2) one which would be changing from time to time and (3) until the charge is contemplated the company would carry its normal business in relation to that class of assets.
A floating charge will automatically crystallise at any of the following events:
- The making of a winding up order
- The appointment of a receiver
- The ceasing of the business by the company
- The taking of possession of debenture holder
- The occurrence of the event expressly provided for in the debenture
A fixed charge and a floating charge are required to be registered within 21 days for them to be effective against other creditors. Failure to register will render both creditors unsecured.
The nature of a floating charge in that it lets the company deal with it in the normal course of business means that the company might be able to create another change over some or all of the assets covered by the floating charge. A fixed charge will be will take priority over a floating charge unless if the floating charge contained a restrictive clause (negative pledge) and the holder of the fixed charge had actual knowledge of the existence of such a clause. (Case: Wheatley v. Silkstone and Haigh Moor Coal Co. )
Insolvency Proceedings
There are two types of insolvency proceedings, non-terminal proceedings (receivership and administration) and terminal proceedings (winding up).
Administration: The idea behind this is to encourage the identification of financial problems at an early stage so that a company which has a sound financial base, but has encountered cash-flow difficulties on aided liquidation. The Admin is an insolvency practitioner who will have overall control of the process and who has wide powers to assist him achieve his aims.
Objectives of the admin: ( IA Sch B1, (3))
- rescue the company as a going concern
- achieving a better result for creditors as a whole that would be likely if the company were wound up, or
- realising the company’s property in order to make a distribution to one or more secured or preferential creditors.
Who can apply for a admin? The company, the directors, and a creditor.
Receivership: this is a process by which corporate assets are realised to pay off a particular creditor who has obtained the right to appoint a receiver. Receivers have powers that are specified in the load agreement granting the right to appoint the receiver. Usually have the power to take possession of property and sell it. However, Enterprise Act 2002 has reduced the importance of receivership as it largely abolished the right of debenture holders to appoint receivers.
Liquidation: The process by which a company is struck off a the register of companies and may be wound up by the court or voluntarily by the members.
Voluntary winding up: Special resolution of the GM, then the directors must within five weeks make a ’statutory’ solvency declaration. This becomes a ‘members voluntary winging up’ and lets the members have the right to appoint the liquidator. If no solvency declaration is made the winding up becomes creditors voluntary winding up.
Compulsory winding up, the court issues an order following a petition based on one of the grounds in s122(1), eg, the company is unable to pay its debts. An order for compulsory winding up leads to the automatic dismissal of directors.
All transactions of property between the presentation of a petition and the granting of a winding up order are void. Section 127.
Liquidator
The liquidator must be an insolvency practitioner – his aim will be to pay the costs of the winding up, pay the debts of the company and distribute any surplus among the members. (Wide set of powers).
The order of distribution:
- Fixed charge holders,
- Liquidator’s expenses
- Preferential creditor (employees)
- Floating charge holders
- Unsecured Creditors
- Deferred creditors
- Members of the company
The liquidator may be able to avoid certain transaction entered into a company in order to increases the fund available to the general body of creditors:
Transactions at an undervalue:
s238, gift or unreasonable consideration, but D can avoid liability of he can show he had reasonable grounds for the transaction. Must be within 6 months for unconnected persons, or 2 years for connected persons.
Preference:
Made an action so that a creditor acquires a benefit that he would have not received had the company not taken that action and the company is now insolvent. Test here is subjective, case is Re Bacon Ltd [1990], D’s actual desire must be to benefit the creditor.
Transactions for Defrauding Creditors
s423.
Avoidance of a floating charge.
Section 245. Re Destore Fabric
Fraudulent Trading
Actionable as a civil offence, criminal offence, section 213, MUST PROVE INTENTION.
Wrongful Trading
Continuing to trade when the company is known to be insolvent. R v Farmizen.
Standard, objective and subjective case: Produce Marketing Consortium Ltd [1989]
