13 - Loan Capital

• The three principal sources of loan capital are:

  1.       A term loan

  2.       An overdraft

  3.       A debt security
• A debenture is a document which either creates debt or acknowledges it - there is no precise legal definition.
• Debenture holders are not shareholders.
• Debenture holders are creditors of the company.
• The two main types of security are:

  1.       Possessory Security – whereby the creditor has physical possession of the asset

  2.       Non-Possessory Security – whereby the borrower retains possession of the asset
• The two main types of possessory security are:

  1.       A Pledge – the creditor takes possession and keeps until repaid. If borrower breaches, the creditor usually has an implied right to sell.

  2.       A Lien – borrower delivers the asset to the creditor and the creditor can retain possession until repaid. The creditor has no implied power to sell the asset upon default.
• The three key characteristics of floating charges are:

  1.       The charge is taken over a class of assets (present or future).

  2.       The class of assets is one which would be changing from time to time, in the ordinary course of business.

  3.       Until a future step is taken by the chargeholder, the company is free to use the assets.
• A floating charge can be take over assets covered by an existing floating charge, subject to some limitations.
• A Negative Pledge Clause (NPC) provides that the Company will not create any subsequent floating charges over the assets of the prior floating charge that will rank in priority to the first floating charge.
• It is generally implied that crystallisation of a floating charge will result from the following events:

  1.       The company goes into liquidation.

  2.       The company ceases business activities.

  3.       A receiver is appointed.
• Companies are required to keep a copy of every instrument creating a charge and every instrument effecting any variation or amendment of a charge. These instruments can be inspected by any creditor of the company, free of charge, and any other person upon payment of a fee.
• Companies are no longer required to register charges with Companies House, although the company or any person interested in a charge may register it with Companies House.
• Receivership is a mechanism that allows a secured creditor to recover what is owed to them.