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Capital 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

The ratio of borrowed money to members’ funds represents a form of ‘gearing’ (i.e. greater borrowing = highly geared).


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.


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 company’s constitution (s 125(1)).


Debentures

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.


Debentures cont …

Descriptions of debentures (Corporations Act 2001 (Cth) s 283BH(2)):

Mortgage debenture: if secured by a first mortgage over the borrower’s 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.


Fundraising

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).


The trust deed The 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 Act

• charges or securities created under the debenture.


The duties of the borrowing company

General duties include the duty to:

• carry on the business in a proper and efficient manner• comply with certain restrictions such as no further

borrowing• make 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 283BE–BF)

• maintain a register of debenture holders (ss 168 and 171).


Company 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.


Registration 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).


Registration 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.


Personal Property Securities Act 2009 (terminology)

There are similarities between the new legislation and the old system of ‘charges:

• security agreement: financing agreement, mortgage, charge

• security interest: fixed charge• secured party: mortgagee, chargee, lender, retention of

title supplier, lessor• collateral: secured property• grantor: borrower, mortgagor, chargor, lessee,

purchaser under retention of title agreement• circulating asset: inventory or accounts receivable • purchase money security interest (PMSI)


The 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 property

• a registration may perfect a security interest, which may give the secured party an advantage under this Act in enforcing the interest


The registration process under the PPS Act cont …

• 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 party

• the PPS Registrar is responsible for giving verification statements to secured parties, who must give notice of the statements to grantors

• publication may be used as an alternative to giving verification statements.


Searching 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).


Attachment 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’.


Priorities 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.


Priorities 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)).


Specific 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).


Specific priority rules under the PMSI cont …

In order to receive a super-priority, PMSI must be registered within specific timeframes, which vary according to the type of personal property and depending on:

• whether the collateral falls into the class of inventory or non-inventory

• whether it is tangible or intangible property• its intended use by the grantor (Personal Property

Securities Act 2009 (Cth) s 63).


Enforcement of security interests

Rights and remedies of enforcement of security interests in the event of default are contained in ch 4 of the Personal Property Securities Act 2009 (Cth).

Note other rights might exist under statute, common law and equity (s 110).

Rights might include the seizure and disposal of property, though certain notices must be given before this takes place.


External administration

The Personal Property Securities Act 2009 (Cth) does not alter the underlying rights of various parties in the case of external administration of a company.

ReceivershipA secured party can enforce their rights in the event of a default by the creditor. However, when a receiver is appointed they have superior powers under the Corporations Act 2001 (Cth) when taking possession of the property.


External administration cont …

AdministrationA party holding a security interest in the company has the right to appoint an administrator to the company (s 436C).

The security interest is perfected (i.e. registered) under the Personal Property Securities Act 2009 (Cth).

LiquidationThe Personal Property Securities Act 2009 (Cth) does not affect the procedure for the winding up of a company or the priorities of various parties in insolvency.


Liquidation cont …

Note, however:

• The security interest must be registered, otherwise an unregistered or unperfected security interest, or circulating security interest, will vest in the grantor company upon insolvency (Personal Property Securities Act 2009 (Cth) ss 267, 267A).

• Secured parties with title-based security interests, such as retention of title suppliers or lessors under PPS leases, can enforce their interests over property and the liquidator cannot take these.

• Priority payments and priority of employees’ claims continue to apply (Corporations Act 2001 (Cth) ss 556, 561).

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