lecture 14 raising finance

8/6/2019 Lecture 14 Raising Finance

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COMPANY LAW

RAISING FINANCE

LECTURE 14

Charles Nicholson


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LEARNING OUTCOMES

What is a share?What is meant by share capital?Describe the different types of shares?Distinguish between share capital and loan/debtcapital?What are debentures?

What are charges? Distinguish between fixedcharge and floating charge.


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SHARES

Investment in a company.M oveable property transferable in accordance with theterms of the articles of the co. S. 98.

It is a piece of personal property that belongs to the SH- it can be bought, sold, mortgaged and bequeathed bywill.Definition: a share is the interest of a shareholder in

the co. measured by a sum of money, for the purpose of liability in the first place, and of interest in the second Borlands T rustee v. S teel Bros & C o L td (1901) 1 Ch279.


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Interest and Liabilitywhen the co. is a going concern, the s/h has the

right to participate in terms of the MA & AA; &when the co. is wound up, he has the right to participate in the assets of the co. remaining after allthe debts of the co. has been paid.

liability to pay calls partly paid-up shares & theliability to contribute to the assets of the co. whenthe co. is wound up.A share may be regarded as a bundle of rights &

obligations.

Co.s capital is divided into:1.Share capital ; and

2.Loan/debt capital.


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SHARE CAPITAL

M embers contribute money to the co. and in return theyare issued shares.The maximum amount of capital which a co. is allowed

to raise by issuing its shares is stated in M /A theauthorised share capital - S. 18(1)(c) .If the co. issue shares in excess of its authorised sharecapital, those shares are considered void

Bank of Hi ndustan, Chi na & J apan Ltd v. A l i son(18 71) LR 6 CP 222.However, the authorised share capital can be increased

by passing an ordinary resolution S.62(1)( a ) .


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TYPES OF SHARE CAPITAL

A uthorised Share Capital - The maximum amount of capital which a co. is authorised to raise by issuing itsshares is stated in M /A .Issued share capital actual number of shares issued.

A co. is not bound to issue all its shares at the sametime.Paid up capital amount of the issued share capitalactually paid by shareholders (SH ).

U ncalled capital or unpaid capital - the remainder of issued capital, not called up. S. 56(1)Called up capital amount a co. calls on the unpaid

portion of the shares. The SH is liable to pay the co.

the portion unpaid when a call is made. A

rt . 13


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ISSUE OF SHARES

A contract is formed when the SH accepts thecompanys offer ANZ N om i nees Ltd v. L ennard Oi l N L [1985] 3A CLC 560Query? What about application form attached to

prospectus?A co. cannot make gratuitous allotment of its shares.

SH must pay for the shares allotted.SH can pay for the shares by kind i.e. transfer of

property.


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ISSUE OF SHARES

A co. cannot issue shares at a discount Ooregum G old Mi n i ng C o . of I nd i a v. R oper (189 2) A .C. 125U nless the co. complies with the following

requirements in S. 59 :

(i) It must be shares of a class already issued ; (ii) A uthorized by a resolution passed in general

meeting of the co. which specify the maximum rateof discount at which the shares are to be issued ;

(iii) This must be confirmed by a court order ;


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(iv) It must be done not less than one year after theco. was entitled to commence its business ;

(v) The shares must be issued within one month of the court order ;

(vi) It must first be offered to the existingshareholders proportionately to the number of

shares held by them S. 59(4) ;(vii ) Prospectus must contain particulars of the

discount - S. 59(3).


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A llotment of shares S. 54

Power is given to directors to allot shares.But BO D must get approval from SH S. 132D .Issue of shares at a premium S. 60

M eaning shares are issued at a price higher thanthe nominal/par value of the share.E .g : nominal/par value is R M 1. Issued for R M 1.50 the R M 0.50 is premium.


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TYPES OF SHARES

A co. can issue various types of shares with differentrights attached to each type of shares A rt . 2Done to accommodate different needs and preferencesof different types of investors.Preference shares S. 4

a. Right to receive a fixed rate of dividend pursuant toA /A or terms of issue provided there are profits and

a dividend is declared by the co. b. Priority of payment of dividends over other SH ;

c. Priority of return of capital/principal in the case of co.s winding up ( priority to ordinary SH ).


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d. No right to attend and vote at general meeting unlessdividends are in arrears ; upon a resolution to vary the

rights attached to such shares ; to reduce the coscapital or to wind up the co. S. 148(2)

Redeemable shares- The A ct allows a co. to issue redeemable preference

shares if authorised by the articles S. 61.- RPS allow a co. to repay the principal at a particular

time or on the occurence of a particular event prior tothe winding up the co.


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O rdinary shares.- do not have any predetermined dividend amount.- payment of dividend is only after preference shares.- return of capital on the winding up of the co. is only

after preference s/h have been repaid paid on a

pro rata share i.e. in proportion of the shares theyhold.- right to share pro rata in any surplus assets on a

winding up of the co.

- the rate of dividend is recommended by the BO D.- holders have the right to vote at the general

meeting.


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Deferred/founders/promoters shares

- usually taken by those who formed the co.- holders are the last to receive dividends and

return of capital when the co. is wound up.- may usually have higher voting power more

than one vote per share.


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LOAN/DEBT CAPITAL

Every co. has the power to borrow from lenders,which is the power to issue debentures and createcharges S. 19(1) and Thi rd Sch edule .Creditors have limited rights over the co. sincethey are not members.The rights they have will depend on the loanagreement entered into with the co.If the debentures are convertible then the DH

becomes a SH.


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DEBENTURE

Loan evidenced by document is called debenture.It is a document, which acknowledges the cosindebtedness. It includes debenture stock, bonds,

notes and any other securities of a corporationwhether constituting a charge on the assets of thecorporation or not - S. 4Debenture holders (DH ) are creditors.

The debenture may be secured by a charge on thecos property in which case the DH is a securedcreditor.


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CHARGESA co. may grant security to protect lenders i.e.

charges. A charge is a security created by a co.(chargor ) in favour of a creditor (chargee ).A ll charges must be registered S. 108(3) .

Fixed chargeon specified and identifiable asset e.g. land,

building.

co. is restricted in dealing with assets subject to thecharge unless with the chargees consent.


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There can be a specific charge over future property.

A ff i n Bank Bh d v. M alayan Bank i ng Bh d [2009] 2 M LJ 74 (CA ) a charge over all sharesnow owned or hereafter acquired by theborrower is a charge that fastens on ascertained

and definite property is a specific fixed charge.

Floating charge

It is an equitable charge over fluctuating assets of a going concern e.g. raw materials, fuel,unfinished goods, stock or spare parts.


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co. is allowed to deal with the assets in itsordinary course of business until some future

event occurs or some act is done when the chargemay crystallise i.e. the charge is converted froma floating charge to a specific/fixed charge.

initially the charge is to float over the present andfuture property it does not fasten on or attach toany particular property or specific property.


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Characteristics of a floating charge:-

1. It is a charge on a class of assets of a co. present andfuture ;

2. Those assets are of a class which in the ordinarycourse of the business of the co. would be changingfrom time to time ; and

3. It is contemplated by the charge that, until somefurther step is taken by those interested in the charge,

the co. may carry on its business so far as concernsthe particular class of assets. R e Y orks hi re W ool combers A sso ci at i on L td [190 3] 2 Ch 2 84; applied in:A ff i n Bank Bh d v. M alayan Bank i ng Bh d [2009] 2M LJ 74 (CA )


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A floating charge would usually crystallise when:a co. is wound up ;

a co. ceases its business ;

the co. defaults in paying interest or principal sum ;

there is a breach of the charge instrument ;

the co. has allowed the value of the assets which arethe subject of the charge to decline below a certainminimum amount provided in the charge instrument ;

the co. does not deal with the assets in its ordinarycourse of business ; or when a liquidator or receiver is appointed.


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DISTINCTION BETWEEN SHARES ANDDEBENTURES

SH is a member of the co. DH is a creditor.SH have right to attend and vote at general meeting

they have membership rights. Not creditors.

SH will rely on S. 33(1) C A to enforce his rights pursuant to the articles. DHs rights are contained inthe debenture.SH only receive dividends if there are distributable

profits. DH are paid interest irrespective of whether the co. has made profits.SH cannot be paid dividends out of capital. DH can

be paid interest out of capital.


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Co. is not obliged to declare dividends even if there are profits. It is obliged to pay interest to DHirrespective of whether co. has made profits.If a co. is wound up, creditors must be paid in full

before any distribution is made to SH.

Return of money to creditors is obligatory if co. iswound up. Return of investment to SH is subjectto availability of capital.

lecture 14 raising finance

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