Chapter 10 Company Charges - PowerPoint Presentation

Slide1

Chapter 10 Company Charges

Borrowing

is an important means by which

a company

can finance its

activities.

Every trading company,

unless prohibited

by its memorandum or articles, has an implied power to

borrow money

for the purpose of its business, and to give security for the loan

by creating

a mortgage or charge on its

property.

The borrowing power is exercised by the board of

directors subject

to the provisions in the memorandum and articles of the

company.

The company may exercise its borrowing power only upon the commencement of its business. Slide2

Ultra vires Borrowings

A company that borrows beyond the authority conferred by the memorandum or articles of the company becomes null and void. The company cannot ratify such contract.

The lender cannot sue the company for the return of the money but has the following remedies:

Injunction and recovery

Subrogation

Sue the directors of the company for breach of warrant authority.

When the borrowing of the company is intra vires but outside the scope of the directors; it would need the ratification of the share holders and then relation between principle and agent would apply. Slide3

Debentures

A debenture is a document given by a company under its seal as an evidence of a debt by the holder usually arising out of a loan secured by a charge.

T

he

contract will include provisions

for repayment

of the

loan and

the

ability (generally

none) of the creditor to attend company meetings

or otherwise influence

company policy

.

A debenture is transferable document by delivery or the completion of transfer Slide4

Kinds of Debentures

Debentures are classified into different categories on the basis of the following:

Convertibility

of the

instrument

Non convertible debentures

Partly convertible debentures

Fully convertible debentures

Optionally convertible debentures

Security

of the instrument

Secured debentures

Unsecured debentures Slide5

Kinds of Debentures

c. Redeemability of the Instrument

Redeemable debentures

Irredeemable debentures

d. Registration of instrument

Registered debenture

Bearer debentures Slide6

Secured Debentures

A

lender

may insist on

having some

claim upon the assets of the company if the loan is not repaid or if

other terms

of the contract are broken by the company, for example, if interest

on the

loan is not paid, or to ensure re-payment of the principal if the

company goes into

insolvent

liquidation.

Any of the assets of a company, for example, real

property, machinery

, goods in the course of production or book debts, can be charged

to provide

security for a loan but its uncalled capital can be used as security

only if

this is expressly

authorized

by the

memorandum. Slide7

Charges Securing Debentures

A company can issue debentures either secured or

by

a charge on its property. Such charge may :

Fixed

charge (or specific charge

)

Floating

charge

A

fixed charge or specific charge is one which is created

on some

ascertained and definite property of the company such

as

building

or machinery

, etc

.

The effect of such a charge is that the company cannot

deal with

such property freely, i.e. it cannot sell without the consent of the

holder.

Again

in the winding up of the company, the holder of a debenture

secured by

a fixed charge ranks as a secured creditor in respect of debt due to

him on

the debenture.Slide8

Charges Securing Debentures

Floating

charge

is a charge by which a

company

could create over

a type or class of asset rather than a specified asset

.

A floating charge confers no ownership rights in respect of the

charged class

of

assets.

Hence, a floating charge would be

valueless until it converted

it into a specific or fixed charge

.

Until the

charge crystallises

, the company can usually deal with the charged asset in

the ordinary

course of

business. Slide9

Distinction between fixed and floating charge

A

fixed charge generally prevents the company dealing with the

charged asset

without the consent of the charge holder and is, thus, an

inappropriate form

of security for assets which are constantly changing.

A

floating charge is that it leaves the company free to deal

with the

charged asset in the ordinary course of business without consulting

the charge

holder (although the security contract may restrict this freedom).

Since a

floating charge is over a class of assets, the

chargee

is uncertain as to

the value

of his security at any moment before the charge ‘crystallises

’.Slide10

Crystallization of Floating Charge

Crystallization,

when a floating charge becomes a fixed charge over the assets

currently comprising the relevant class, occurs automatically on the

happening of certain events, namely:

(a) if a receiver is appointed by the court or any

chargee

;

(b) when winding up commences (even a member’s voluntary winding up

); or

(c) when the company ceases to carry on its business as a going concern.Slide11

Conversion and Amalgamation of Companies

The conversion of a company is an operation by which its legal form is changed without being creating new legal personality. For example, private limited company may be changed into Share Company and vice versa.

Conversion does not result in the creation of a new legal person, but is treated for all purpose as a continuation of the original company.

Conversion must conform to the rules contained in the company law specially those rules that govern conversions and rules of Article of Association.Slide12

Procedure and effect of conversion

Procedure of Conversion

The decision of conversion of

a company into

another form may pass by unanimous or majority required by the law or articles of association.

A

resolution or agreement for conversion of one

company into

another has to be notified through publication.

Conversion

neither increases any liabilities upon member nor deprives the right of members partially or wholly.Slide13

Procedure and effect of conversion

Effect of Conversion

A conversion takes effect from the date of

its registration.

It does not affect the continued existence of the original

company,

and therefore causes no interruption of its activities.

The

assets of the former business organization transfers to the new

company from

the date of registration

.

The creditors of the former

company retain

all their rights, as regards the new business organization. They may also object and demand their debt to be paid before conversion takes place

.

The conversion does not effect the rights and liabilities of the members towards the former company.Slide14

Amalgamation of A company

An amalgamation is the operation by which two or more of companies into only one company and by which the members of the amalgamated companies receive shares issued

by the

company benefiting

from the

amalgamation.

It

may either result in the creation of a new business organization to which one or more business organization contribute their assets and debts or in the contribution of the assets and debts of one or more business organization to another existing business organization to another existing business

organization. Slide15

Amalgamation of A company

In

amalgamation, all property and rights forming the assets of the amalgamated business organization are transferred to the beneficiary business organization.

The

beneficiary business organization must comply with the undertakings and agreements entered into by the amalgamated business origination and all claims and liabilities of amalgamated business organization will be transferred to the beneficiary business organization.Slide16

Procedure of Amalgamation

The decision of amalgamation is taken by each business organization.

Such

decisions have to be approved by

Share holders and also the creditors of amalgamated company.

The

terms of amalgamation is drawn up which transfers all assets and liabilities to

the

amalgamated

company.

End.