Hello and welcome to this sqe One business Law and Practice video on finance. There are many reasons why a business might want to raise finance that could be to launch or grow and expand the business. They may want to fund purchase of an a capital asset such as a property, land machinery. Um They may be experiencing cash flow issues so they might have lots of money tied up in fixed assets but not enough money in the bank to pay their bills as they for you. So throughout this video, we're going to look at the finance options available to businesses. We're going to focus on debt finance and equity finance. By the end of this video, you should understand the different funding options available to businesses. You should be able to advise on the benefits of each type of funding. You should be able to explain the procedure for raising funds and advise on the documentary record keeping and statutory filing requirements. Uh As I said, we're going to look at debt finance. So borrowing and also equity finance, which is raising money by issuing shares in the company. So before we get going, I would like to know if I needed 10,000 pounds to uh buy something for my business. Would you lend it to me? The answer is probably, it depends and it would depend on when you're going to get your money back. If you can afford it. What's in it for you? Are you going to get an interest on it? Am I likely to be able to repay the debt? Why do I want to pay? Uh why do I want to borrow the money? So all the questions you have, when I ask you if I can borrow money from you, these are the questions that lenders have for businesses. So when businesses want to borrow money, lenders have to assess the situation and see if the business is viable as a lender. And if the bank, if the lender is going to get their money back. So there are different types of debt, finance available to businesses. A very flexible um means of finance is an overdraft. So you probably have an overdraft on your personal account. Businesses could have an overdraft on their business bank account and this is an agreed amount of money that um a business can borrow. It's temporary, it's to cover everyday expenses. Um and they call it an uncommitted facility, this means that it's repayable on demand. So as soon as the lender says, I want my money back, the borrower, the business needs to repay the overdraft immediately. Often overdrafts are only advanced or agreed to um in return for the borrower paying interest on the overdraft. And sometimes borrowers have to pay an overdraft fee as well. They're very flexible. There are few formalities but it's a relatively expensive way to borrow money. Another option is to take out a term loan. So this is where a business borrows a fixed amount of money for a fixed amount of time and often the money is borrowed to purchase a capital asset. So maybe by an office or a warehouse or some equipment for the business to use interest is very often payable on the term loan because the lender wants to get a benefit from advancing this money to the business to ensure that the lender is repaid. The lender might insist on the term loan being secured and we'll look at security. Um and what secured debt means in a moment where a term loan is for a really high amount, then it's possible that lots of banks will come together and agree to each give a proportion of the loan. So if I want to take a term loan out for um 3 million pounds, there might be three banks that each agree to lend me a million pounds each. Um and in effect, they reduce the risk. Um Of me not being able to repay the amount in future term loans are often subject to detailed finance agreements. They can be quite lengthy and complicated to negotiate and that means they're quite expensive to negotiate as well. Once a term loan has been repaid, then the borrower can't borrow those mon that money again, that's different to a revolving credit facility. The revolving credit facility is where a bank agrees to make a maximum amount of money available to a borrower and then the borrower can draw down to withdraw any amount um up to the amount advanced and repay it at any time and then borrow it again. So for example, if I have a revolving credit facility for um 1000 pounds, I might draw down withdraw that 1000 pounds. And then the next month, I'll repay 500 of it. The following month, I will borrow 300 and then I will repay that 300 pounds. So basically, as long as I never go above the maximum amount of credit available, I'm free to borrow and repay that money whenever I choose again, interest will be payable on the revolving credit facility. And um the facility is likely going to be subject to a heavily negotiated um finance agreement. So a finance agreement that again may be um quite time consuming and expensive to enter into. But a revolving credit facility is a flexible way of borrowing money. So debt finance is all about borrowing money, you might hear the term gearing and if a company is highly geared, it means it has lots of debt, lots of borrowing. So just as you would have lots of questions for me if I asked you if you could lend me some money for my business. There are lots of questions the bank has or the lender has for the business that is going to lend money to. And these questions are often um dealt with and addressed in the finance documents. So the common contractual terms that a finance document or a loan document might include um are how much is, is the loan when it, which currency is it going to be advanced in and sterling dollars? Euros? When is it going to be available? When does the lender have to? Yeah, when does the lender have to make it available? When does the borrower have to repay it? How many um repayments does it need to make, does the borrower have to pay any interest on the sums borrowed? When's interest? Um at what rate is the interest calculated? When is interest repaid? The borrower will need to make certain representations and warranties about any assets that it is offering a security for the borrowing. And the borrower may need to give certain promises about the state of the business and the ability of the business to repay the debt. In due course, the contract will also set out in events of default. So these are circumstances which trigger an instant repayment of the loan. So for example, if a borrower goes into insolvency, then it's common for the finance agreement to say that the loan is immediately repayable. And we've mentioned that loans so term loans and revolving credit facilities might be secured. What we mean here is that the borrower gives the lender security. So in the form of interest in assets to help give the lender confidence that they will get repaid, um in the event that the borrower goes into insolvency or can't repay its debts, the highest form of security is a mortgage and this is where the legal title in an asset. So in, for example, land or property is transferred to the lender to the bank. Another type to security is a charge. So with charges, there is no transfer of the legal title, but the lender gains an interest in the property. So the types of property that a charge might be given over include fixed assets such as land, buildings, stock or they could be intangible assets such as intellectual property and goodwill in a business charges can be fixed or they can be floating. Floating charges can only be given by companies and limited liability partnerships. So sole traders and part general partnerships can only grant fixed charges. There's slightly um more limited borrowing options for sole traders and partnerships where a company or an L LP grants a charge as security to a lender. It means that in the event the borrower can't repay the loan, the lender can um realize its security by selling the asset to which the charge attaches the lender can recoup its money from the sale of the asset. Um and then any balance, anything left over is returned to the company or the I LP, fixed charges attached to specific assets, floating charges. So these are the ones that can only be granted by companies or L LP S. These float um over the business undertaking or over a variety of assets that change over time. It's not until the floating charge crystallizes that the charge fixes to a specific asset and gives the lender the right to sell that asset and realize its security. So fixed charges, for example, they've granted over land or buildings prevent the borrower from dealing. So from selling that asset floating charges, which might be given over a whole class of assets. So it could be money in the bank stock in a warehouse that changes every ti or ch changes on a regular basis. Um It could be over intellectual property floating charges and the assets subject to that floating charge can be bought and sold and dealt with by the borrower unless and until crystallization. So that means unless there is an event of default in the loan. So the bor unless the borrower fails to make a repayment, then the lender doesn't have any right to restrict the borrower from using those assets when an event of default occurs. The floating charge crystallizes and from that point on the borrower can't deal, can't sell those assets subject to the floating charge. So floating charges give a borrower an element of freedom to continue their business. Um Even though they've granted a charge over those assets and granting charges can be beneficial to both parties. So as we've said, a charge gives a lender comfort that if a borrower can't repay their debt, the lender can realize the asset, sell the asset and keep the proceeds converse. So conversely, the borrower might be able to achieve um better borrowing terms. So a cheaper interest rate if they offer security to the lender, but there are also downsides as we've seen. So a borrower might be restricted in terms of what they can do with the assets subject to the charge. So there are pros and cons of issuing security and the borrower needs to weigh these up before granting them or before granting any security to the lender. It's really important that security is properly registered. So it's registered at company's house following the process on screen, failure to register security renders the charge void against the liquidator or administrator and creditors. So what this means is that the company or the L LP is still obliged to repay the debt immediately, but the lender can't enforce the security. And this is relevant when we're looking at priority of multiple securities over granted over um a business's assets. What we mean by the priority of security is that where a business has granted multiple charges over business assets. If the business can't repay a debt or goes into insolvency, then the security will be realized in order of priority. So certain lenders will be repaid out of the proceeds of the security. First, any remainder will be left to the second creditor and then the third creditor. So for example, if I grant a fixed charge for one lender over my house, and then I grant a subsequent charge to a second lender over my house. If I fail to repay my debts or I go into insolvency, and then the lenders can sell my house. The sale proceeds will be used first to repay the first lender. The one who had the first charge and then any remaining remaining proceeds will go to paying off the second lender. Anything left will come back to me or to my business in terms of the priority of security where charges of the same type have been granted, then the charge that was granted first. So granted and registered first, that one has priority. So if you have two fixed charges, the one that was the first in time has priority. So they get paid first where you have a fixed charge and a floating charge, the fixed charge will take priority even if the fixed charge was granted after the floating charge. The exception to this is where the floating charge is subject to a negative pledge clause and the fixed charge holder knew about the negative pledge clause. It's also possible for lenders to agree different priority um between themselves by entering into a deed of priority. Then let's look at an example. I Lamp Limited granted a fixed charge over its warehouse in 2010, a floating charge over its whole undertaking in 2015 and a fix charged over its shop in 2020 the first cha charge wasn't correctly registered at company's house. Although the other charges were, what is the order of priority? So the first fixed charge is void against the liquidator and the other creditors. That means that the second fixed charge has priority and then the floating charge. So for any um when the assets are sold, the second fixed charge is paid out first and then any remaining proceeds will be put towards paying repaying the floating charge holder. So let's summarize what we've talked about for debt finance. So debt finance is borrowing. It's available to all business structures in one form or another. Debt finance can be in the form of overdrafts term loans or revolving credit facilities providing security for borrowing can be advantageous to all parties. Sole traders and partnerships can't grant floating charges, they can grant fixed charges. So subject to registration charges of the same type rank in order of creation and fixed charges usually have priority over floating charges. Priority is relevant where you have multiple charge holders and multiple charges granted over businesses assets. It's really important to check the constitution that any restrictions on borrowing or granting security. And what we mean here is um the company's articles of association, the memorandum of Association, an L LP agreement or a partnership agreement on screen. We've got some useful terms that relate to debt finance. Pause this video and take a look. Ok? So now we're going to talk about equity finance. So this is raising money for the company through shares through the sale of shares in the company. So equity finance is only available to companies with public companies and private companies. The first thing we need to think about is how do shareholders acquire or dispose of shares in a company? There are various ways. So shares can be transferred from one shareholder to another. This is just where shares change hands to the ownership of the shares that already exist, change hands, air transmission is where as a matter of operation of law shares are transmitted from one person to another. The common situations are on death or on bankruptcy. The shares of the deceased or the bankrupt are automatically by operation of law transmitted to for example, their trustee in bankruptcy or their personal representative share allotment is where the company creates new shares and issues them to shareholders. And a share buyback is where um the company's existing shares are repurchased by the company. So a company will buy back shares from a shareholder and then the company will cancel those shares. Let's have a look at these in more detail. So he said a share transfer is just the transfer of existing shares from one shareholder to another. In the example on screen, Breen Limited has 200 chairs. Janice owns 100 and Christina owns 100 a share transfer will occur if Christina agrees to sell 50 of her shares to Dennis. After the transfer, then Janis owns 100 shares and effectively is a 50% shareholder. And Dennis and Christina will each own 50 shares and be a 25% shareholder each. So the process to transfer shares from one shareholder to another is that the transferal through the selling shareholder completes and signs the stock transfer form and sends it along with the share certificate to the buyer to the transferee. The transferee pays stamp duty for those shares. The stamp duty is paid to HMRC and then the transferee sends the stamped stock transfer form and the share certificate to the company. The director is part of board resolution to approve the transfer. The board has the ability to reject the transfer, but that's uncommon and assuming that the board has approved the transfer, the directors um or the the new shareholder must be registered and the share certificate issued and sent to the new member within two months. The company then needs to update details of the shareholder um and all of its shareholders annually on its confirmation statement that it files um in the form of CS 01 another way that shares change hand and is through transmission of shares. This is the transfer of shares by operation of law though on death to personal representatives or to a trustee in the event of a bankruptcy, the bankruptcy of a shareholder, a third way that shareholders might acquire shares is through share allotment. This is where a company creates new shares and issues them to shareholders. So let's have a look at Brett and limited again, they've got 200 issued um and allotted shares. Yannis owns 100. Christina owns 100 they are 50% shareholding shareholders each if Breen decides to allot to create 100 new shares and issue them to Dennis. This means that Janice Dennis and Christina each own 100 shares. They are each 33.3% shareholders of the company because allotting new shares has the potential to alter the amount of shares that existing shareholders have. It's subject to certain restrictions. So when you're advising a company on whether or not to allot shares or the process of how to allot shares, there are a number of questions you need to ask yourself. Are there any constitutional restrictions on the share numbers? So when we talk about the constitution, we should be looking at the articles of association and for companies incorporated under the 1985 Companies Act also need to have a look at the memorandum of Association. If there are restrictions on um in the constitution. Then it might be that the company decides to amend those constitutional documents. Next thing to ask is do the directors have authority to allot the shares? The basic rule is that where a company only has one class of shares, either before or after the allotment, then the directors can authorize the allotment of those shares. So a board resolution is sufficient to um create and allot those shares. But where a company has more than one class of shares before or after the allotment, then the approval of shareholders is required and the shareholders need to approve the allotment of those shares by ordinary resolution. And that ordinary resolution needs to be filed at company's house within 15 days. So this is an exception, the usual position that ordinary resolutions don't need to be filed at company house. So normally it's only special resolutions that need filing at company's house. This is an exception. So an ordinary resolution of shareholders authorizing allotment of new shares needs to be filed at company's house within 15 days. The next thing to ask is, are there any preemption rights though preemption rights are the right of first refusal, like we said by allotting new shares. And actually, let's have a look at the previous slide by a company allotting new shares. It has the ability to dilute the shareholding of existing shareholders. So here, Janice and Christina were initially 50% shareholders in the company that after the allotment, their shareholding was reduced to 33.3%. So they have a lot less power. Um Now there are only 33.3% shareholders. So what the company's act does to prevent the existing shareholders from potentially being diluted. So from their rights being watered down is to create preemption rights. So where a company allots and creates new shares, there are statutory requirements under the Companies act that those new shares are offered first to existing shareholders. So some a shareholder who owns 50% of shares in the company will have the right of first refusal to 50% of the new shares being allotted. Um And that allows them to maintain their voting percentages, their control um or their respective shareholding in the company statutory preemption rights apply where the shares are allotted wholly in return for cash and the statutory preemption rights can be varied or removed um by the articles or by special resolution of the shareholders of the company. So a sh a special resolution requiring 75% of the shareholders approving that. And finally, it's really important to think about what administrative or filing requirements there are after a share allotment. So this could be filing resolutions at company's house, updating the share register if a shareholder um owns more than 25% of the shares. So there are a person of significant control. If um that's the case, then we need to update the PSC register. Um and one final thing I would just say um or I would just encourage you to check the latest status of the Economic Crime in Corporate Transparency Act because they might have additional or new um requirements when it comes to where the PSC register is kept and the identification I identity verification requirements for PS CS. So it's always good to check back on the current status of that act because it might affect your advice to your client when they're allotting shares, right? What can you remember? So Breen is a private limited company with unamended moral articles. It has five, it has 50,000 ordinary shares and 50,000 preference shares. It wishes to issue 20,000 new ordinary shares for cash payment will shareholder authority be required. Yes. So there's more than one class of share. So that means the directors can't approve the allotment instead, an ordinary resolution of shareholders is required and secondly, do the statutory preemption rights apply. Yes. So these shares are issued wholly for cash. So the statutory rights apply, but they may be dis applied by special resolution or possibly in the articles of association and make sure you check those as well. A final way that shares might change hands is through a share buyback. So this is where the company repurchases um a shareholder's shares and then cancels them. And there there are a couple of reasons why a shareholder might insist or might want a company to buy back their shares. One of those reasons might be that the shareholders have completely fallen out with the other shareholders or the company and they just want to get out of the company, sell their shares, but no one will buy them. So the company buys those shares back just to allow the shareholder to escape. In our example on screen, um Breen still has 200 um shares. Janice holds 100. Christina holds 100. If Christina's shares are bought back by the company, those 100 shares are purchased. So Breen pays Christina for those 100 shares and then cancels them. So after the buyback, Breen only has 100 shares and Janice owns all of them. So Janice is the sole shareholder of the company. The buyback of shares is heavily regulated because it has the potential to reduce the profits of the company. The starting position is that shares can only be bought back from the profits of the company. So this means if a company has distributable profits and a shareholder is insisting or wants the company to buy back their shares, the company must use its profits to finance, to pay for the buyback of those shares for shares to be bought back from profits. There are various questions that the company has to act and has to ask itself first of all. So are the shares fully paid? Are there any restrictions in the articles on share buyback. Um What are the director's duties in this situation? The directors um need to ensure that uh from a financial point of view, there are distributable profits available to um to fund this buyback, the buyback contract. So the contract in which the company agrees to purchase the shares from the shareholders that needs to be approved by a shareholder. Ordinary resolution. The once it's been approved, then the company pays a shareholder and then certain forms need to be filed at company's house. Within 28 days, the shares have been canceled and the company's share register, the PSE register um are all updated and the buyback contract needs to be made available at the company's registered office for inspection for 10 years. So when you're looking at whether or not a company can buy back shares from a shareholder need, the the starting point is looking at whether there are distributable profits available. If the company doesn't have enough profits to be able to buy back the shares either in full or at all, then exceptionally, the company might buy back shares using capital. This is um very heavily regulated. There are more steps that um a company needs to go through because maintaining the share capital or maintaining capital of the company is a fundamental principle of corporate law when a company wants to buy back shares from capital. Um There are certain additional steps that need to um need to take place including the directors producing accounts um and a statement of solvency about the business. Um the shareholders, again, they approve the buyback contract through an ordinary resolution. But because the buyback is coming or is being funded by capital, the shareholders also need to approve the payment out of capital by a shareholder special resolution. So two resolutions are required by the buyback is coming out of capital. Once a special resolution has been passed, there are certain notification requirements. So the company must advertise that this buyback is going to take place and it's going to be funded through capital and it gives the creditors of the company an opportunity to challenge the buyback. Um A board meeting or a board resolution. Um A board meeting is held or a board resolution is passed authorizing the company to enter into the buyback contract. The payment to the shareholders made, the forms are filed at company's house within 28 days. The special resolution of the shareholders is filed at company's house within 15 days. The shares are canceled, the registers are updated and the share buyback document is available for inspection for 10 years for the company's registered office. So buyback of shares from capital is only available where there's not sufficient profits to pay for the buyback. And it's possible for a buyback to be financed partly from profits and partly from capital whenever capital is used to finance a buyback. In addition to an ordinary resolution of the shareholders the shareholders also need to pass a special resolution approving the use of the capital. Let's test your knowledge. Breen is a private limited company with unamended model articles. It has distributable profits of 500,000 and net assets of a million pounds. It wishes to buy back 50,000 pounds of fully paid up shares at their nominal value. Can this be done? And if so which resolutions are required so it can be done through purchase from profits only not from capital. So the company has enough profits to be able to pay for the buyback. So there's no possibility of using capital to finance the buyback and because payment is coming out of profits, you only need a shareholder's ordinary resolution to approve the buyback contract. It's really important to remember that you owe certain professional and ethical obligations as a solicitor. So there may be conduct points that arise when a client is acquiring or selling shares. And what kind of conduct issues do you think might be relevant in this context? Pause the video and have a think. So the kind of conduct issues that might arise or which party are you acting for? So in a buyback situation, you can't act for the company, the directors, the shareholders and the creditors, you can only act for one of those. So really think about who who you're acting for and um make sure you have no conflict of interest with your other clients when it comes to shares. It's possible that you might get asked to advise on um investment issues or dealing with shares and security issues. Now you are restricted under fi a the financial services marketing um Markets Act 2000. You are prohibited from providing investment advice. This is a regulated activity and it's not something that you are authorized to do. So, just be mindful that you um limit your advice to the legal implications of for example, a buyback or a share transfer. You shouldn't be advising clients on whether it's a good idea for them to purchase or sell their shares. So let's summarize everything we just talked about in terms of equity, finance share transfers don't change the percentage shareholding of members not involved in the transaction. What this means is that shares that are already in existence, just change hands, one person sells them to another shareholder share. Transmission occurs through operation of law on death or bankruptcy. Again, you don't have any change in the number of shares in the company share allotment is where the company creates new shares. The directors can issue new shares if the company has unamended model articles and only one class of shares. Otherwise, if there are more than one class of shares, a an ordinary resolution of shareholders is required to approve the issue of those new shares. You should always check the constitution. So the memorandum and articles of association for any restrictions on allotting new shares, you might need to update or amend the constitution. And if so, you might need to file the um relevant special resolutions at company house after you've done that, when shares are allotted wholly for cash, then statutory preemption rights might apply. This means that existing shareholders have the right of first refusal of shares. If those existing shareholders don't want to buy those shares, those new shares, then those new shares can be offered to third parties. It's possible for the statutory preemption rights to be dis applied by special resolution waived by shareholders or varied in the articles of association and finally share buyback. This is where a shareholder sells their shares to the company and then the company cancels those shares. So it reduces the number of shares the company has, it's very heavily re regulated. Buyback must be out of profits where there are profits available where buyback is financed through profits. Then a shareholder, ordinary resolution is required where there aren't sufficient or any profits available to finance the buyback. The buyback can be financed through capital to do this. The company is required to obtain an ordinary resolution from the shareholders and a special resolution from the shareholders, authorizing payment out of capital, very heavily regulated. So make sure you're up to speed with the types of resolutions that are required in each buyback situation. Hopefully, now you're more familiar with the different financing options available to businesses both through debt. So borrowing finance and equity share finance and keep.
Part 1 - Webinar
Part 1 - Slides
1 Users
1 Courses
0 Reviews