capital raising and capital management
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DESCRIPTIONCapital raising and capital management. Corporate Law: Law principles and practice. Company capital Companies raise capital by: issuing securities such as shares, creating members; or borrowing from a bank or issuing securities representing a form of borrowing - PowerPoint PPT Presentation
Capital raising and capital management
Corporate Law: Law principles and practiceCompany capital
Companies raise capital by:
issuing securities such as shares, creating members; orborrowing from a bank or issuing securities representing a form of borrowing
The ratio of borrowed money to members funds represents a form of gearing (i.e. greater borrowing = highly geared).
Corporate Law: Law principles and practice
Company capital cont
Members capital in the form of shares gives rights to members to vote and participate in the company as well as receive dividends.
Borrowing funds allows for tax-deductible interest without the costs of looking after members.3
Corporate Law: Law principles and practice
The borrowing powers of companies
The legal capacity of companies includes the power to issue debentures, give security over its uncalled capital and grant floating charges over its property (Corporations Act 2001 (Cth) s 124(1)).
These powers cannot be restricted or prohibited by the companys constitution (s 125(1)).
Corporate Law: Law principles and practice
At common law, a debenture is document that acknowledges a debt (Corporations Act 2001 (Cth) s 9).
This term is broadly defined as a chose in action that includes an undertaking by an entity to repay as a debt deposited with or lent to the company.
Note: this does not apply to authorised deposit-taking institutions, cheques or bills of exchange.
Corporate Law: Law principles and practiceDebentures cont
Descriptions of debentures (Corporations Act 2001 (Cth) s 283BH(2)):
Mortgage debenture: if secured by a first mortgage over the borrowers land, securing up to a maximum of 60% of the value of land (as stated in the disclosure document)
Debenture: by definition it must be secured by a security interest (tangible or intangible) to secure repayment of all monies (s 283BH(3))
Unsecured note or unsecured deposit note: when no security is given.
Corporate Law: Law principles and practiceFundraising
A company can offer debentures to the public if a disclosing document (e.g. a prospectus) is prepared.
A trustee must be appointed to protect the interests of lenders under a trust deed.
The trustee must act with diligence and care to ensure the borrower does not breach the terms of borrowing (Corporations Act 2001 (Cth) s 283DA).
Corporate Law: Law principles and practiceThe trust deedThe trust deed sets out the rights and obligations of the parties, including the scope of borrowing activities that may be carried out by the company.
The deed specifies that the trustee holds the following in trust for the benefit of debenture holders (Corporations Act 2001 (Cth) s 283AB):
the rights of enforcement in relation to repayment, as well as to other duties under the debenture, the trust deed and the Actcharges or securities created under the debenture.
Corporate Law: Law principles and practiceThe duties of the borrowing company
General duties include the duty to:
carry on the business in a proper and efficient mannercomply with certain restrictions such as no further borrowingmake financial and other records available for inspection by the trustee (Corporations Act 2001 (Cth) s 283BB).
Specific duties include the obligation to:
ensure that there is a validly appointed trustee on an ongoing basis (s 283BD)furnish the trustee with details of charges and copies of quarterly reports (ss 283BEBF)maintain a register of debenture holders (ss 168 and 171).
Corporate Law: Law principles and practiceCompany securities A creditor may demand some security for their lending, by taking some claim over the property of the company, which they may seize in the event of a default.
If there are several creditors with claims, then competing claims must be determined according to the priorities set out in legislation.
Corporate Law: Law principles and practiceRegistration schemes
Personal Property Security (PPS) RegisterThis will record all security interests in Australia, including claims on company property in the event of a default by a company in repaying interest or monies.
The PPS counterpart will be an online service and accessible to search and register security interests, but it will be administered by the Insolvency and Trustee Service Australia (ITSA).
Corporate Law: Law principles and practiceRegistration under the Personal Property Securities Act
Secured parties, such as lending institutions and others, can register their security interests on the online PPS Register, which also allows for searches of details of a registration or of security interests registered against a particular grantor.
There are two main benefits of registration for a secured party:
It defines the priority status of the secured interest relative to other security interests over the same collateral.It ensures the security interest survives the insolvency of the grantor.
Corporate Law: Law principles and practicePersonal Property Securities Act 2009 (terminology)
There are similarities between the new legislation and the old system of charges:
security agreement: financing agreement, mortgage, chargesecurity interest: fixed chargesecured party: mortgagee, chargee, lender, retention of title supplier, lessorcollateral: secured propertygrantor: borrower, mortgagor, chargor, lessee, purchaser under retention of title agreementcirculating asset: inventory or accounts receivable purchase money security interest (PMSI)
Corporate Law: Law principles and practiceThe registration process under the PPS Act
Section 149 of the Personal Property Securities Act 2009 (Cth) provides that:
a person may apply to the PPS Registrar to register a financing statement, or a financing change statement, with respect to a security interest or certain personal propertya registration may perfect a security interest, which may give the secured party an advantage under this Act in enforcing the interest
Corporate Law: Law principles and practiceThe registration process under the PPS Actcont
a person must not make an application with respect to a security interest unless the person believes on reasonable grounds that the security interest is, or will be, held by a person stated in the application to be a secured partythe PPS Registrar is responsible for giving verification statements to secured parties, who must give notice of the statements to grantorspublication may be used as an alternative to giving verification statements.
Corporate Law: Law principles and practiceSearching the PPS Register
The Personal Property Securities Act 2009 (Cth) restricts who can search the PPS Register, what may be searched, and the purpose of the search.
Anyone may access the register to search for data with respect to a security interest or personal property.
Searches can only be undertaken by reference to certain criteria (e.g. the details of a grantor or a serial number).
Corporate Law: Law principles and practiceAttachment and creation of enforceable rights
For a security interest to be enforceable against the grantor, the security interest must have attached to collateral.
Attachment occurs pursuant to a contract under which the grantor is given rights in the collateral and accepts money, or does some other act by which the security interest arises (Personal Property Securities Act 2009 (Cth) s 19(2)).
For the secured party to maximise its position under the PPS in relation to the security interest, the interest needs to be perfected.
Corporate Law: Law principles and practicePriorities under the PPS Register
Secured parties, such as lending institutions and others, can register their security interests on the PPS Register, which is a perfection.
Registration on the PPS Register provides two main benefits for a secured party.
It defines the priority status of the secured interest relative to other security interests over the same collateral. It ensures the security interest survives the insolvency of the grantor.
Corporate Law: Law principles and practicePriorities under the PPS Register cont The priority status is determined by general default priority rules that are subject to specific priority rules that apply to the Purchase Money Security Interest (PMSI). The default rules provide that:
a perfected security interest takes priority over an unperfected security interest (Personal Property Securities Act 2009 (Cth) s 55(3))priority between two or more perfected security interests is determined in favour of an earlier perfected security interest over a later one (s 55(5))priority between two or more unperfected security interests is determined in favour of an earlier attached security interest over a later one (s 55(2)).
Corporate Law: Law principles and practiceSpecific priority rules under the PMSI
A secured party with a PMSI may benefit from a super-priority, which defeats all other security interests in the collateral, including those created and registered before the PMSI (Personal Property Securities Act 2009 (Cth) s 63).
Persons such as retention of title (ROT) suppliers and lessors take priority over all other security interests (including earlier ones) in the collateral, provided they have met the registration requirements of the Personal Property Securities Act 2009 (Cth).
Corporate Law: Law principles and practiceSpecific priority rules under the PMSI cont
In order to receive a super-priority, PMSI must be registe