FUNDING COMPANY OPERATIONS
A. Overview of fundraising provisions:
I.
Capital
structure: A co.
can finance its operations through
equity, debt or mixture of both.
|
1)
Share capital
|
2)
Debt capital
|
|
Shareholders
are internal members
|
Lenders are
not
|
|
Maintenance of share capital: once invested money in co. => co. will not give back
unless co. goes bankrupt.
|
The money lent to the co. (the principal) will have to be
repaid at the expiration of an agreed period.
|
|
A
company must not pay dividend unless:
ü Assets
exceeds liabilities of the company s254T(1)(a)
ü Must
be fair to both the shareholders as a whole s254T(1)(b)
ü Must
not materially hurt company ability to pay creditors s254T(1)(c)
·
Shareholders do NOT have the right to force the
company to pay dividend, even if there is money/ profit available Burland v. Earle 1902
ü Broad
of directors is given the power to declare dividends and to determine the
amount, time for payment, and the method of payment. S254U (R.R)
|
The lender is contractually entitled to be paid a return,
in form of interest.
·
The lenders
receive interest regardless of how well the co. performs.
·
Interest is a debt that become due and owing to the lender,
and is enforceable in court.
|
|
Dividends
are not tax deductible
|
The payment of interest is a tax deduction for co.
|
|
If a company becomes “insolvent” and go liquidation:
·
Equity investors rank after all creditors under s556 and are most unlikely to have their investment returned.
|
The lender is a creditor of co., in a liquidation:
·
The lender
will have right to priority repayment of their funds ahead of investors in
shared.
|
|
Equity fundraising: Power to issue shares:
·
S124empowers companies to issue shares
·
Any co. has
the power to issue shares to any person at any time, BUT only public co. can offer to issue shares to the public, and only
if the issue complies with Ch 6Dof the Corporation Act.
·
A proprietary co. can only issue shares to individual
persons known to the co.
|
Debt fundraising: Borrowing money
·
S124empowers companies to issue debentures and to borrow money
through the use of debentures.
|
II.
The
fundraising provisions: apply
to offers of securities of public co.
The
aim of fundraising provisions is to balance:
·
The needs for investor protection:
ensure relevant, accurate information is disclosed to investors so as to
enable them to make an informed decision whether or not to accept an offer of
securities. The information must be disclosed in clear, concise and effective
manner.
·
An efficient and credible capital market: to encourage investment
B. Equity fundraising: The
Corporation Act sets out different disclosure rules for
·
Issue
offers of securities(primary trading) under s706
·
Sales
offers of securities(secondary trading) under s707(2) & (3)
Primary
trading:
I: The legal issue is whether the co. in issuing
shares needs to prepare disclosure document for investors including existing
shareholders, present employees, and … under s706, and whether there are any
exemptions under s708 and s708AA where no requirements for disclosure are
needed.
R: (The
general is that under s706, an “offer of securities” for issue needs disclosure
to investors UNLESS the exemptions in s708 & s708AA say otherwise.
·
S700(2) makes it clear that “offer” is defined as inviting
applications – invite investors to apply for shares (same as invitation to
treat, but still considered as an offer to avoid advertising of co.)
·
S92(4) defines “securities” as shares of a
body, debentures, options)
A: In
this case, the co. issue shares to raise capital of $… to expand the business;
hence, the company makes offer to invite the public to purchase shares and to
make investment in company. Also, “share” falls within the definition of
securities contained in s92 (4).
Therefore, the company must disclose relevant, accurate information to
make informed decisions whether or not to accept offer of securities; and the
information must be disclosed in clear, concise and effective manner.
S727complement
s706: A person is prohibited from offering securities or distributing application forms
UNLESS disclosure document has been lodged
with ASIC. Contravention of s727 is a
criminal offence punishable by a fine or imprisonment or both s1311
1) Offers that do not need disclosure:
|
|
|
|
|
S708(1) – (7)
|
Small scale offerings
|
Personal offers: under s708(2),personal
offer is one that:
·
can only be
accepted by the person to whom is was made
·
is made to a
person being interested in offers (due to previous contract, professional or
other connection with the offeror)
Under s708(1),no requirement for disclosure if none of offers results in
a breach of:
·
No. of issues < 20 investors in 12 –months period
·
Amount of fund raised (including future calls and options)
< $2 million in 12-months period.
S734(1)prohibits
advertising or publicity for offers
covered by the small scale offerings
|
|
S708(8) & (10)
& (11)
|
R: Under
s708 (8) & (10) & (11), offers does not need disclosure to
sophisticated investors including large offer, wealthy investors, experienced
investors, and professional investors.
|
|
|
Sophisticated
investors: have sufficient
means to obtain their own investment advice or have bargaining power over the
issuing body to obtain the necessary information about the merits (advs. & good quality)
of an offers
|
Large offers: under s708(8)(a),no requirements for disclosure are needed if:
·
Minimum amount payable for the securities on acceptance of the offer is $500,000 or more.
ð A:Clearly in this situation, the investor pays the
amount of $... worth of shares in acceptance, which is considered as large
offer. The investor is presumed to have the ability to demand the disclosure
of information necessary to decide whether or not to invest.
|
|
|
Wealthy investors: under s708(8)(c),if “qualified
accountant” – defined in s9 as a member
of professional body that is approved by ASIC (CPA Australia, ICAA and NIA) certifies that the investor had either
·
Gross income over each of previous two financial years of
at least $250,000
OR
·
Net assets of at least $2.5 million
ð A:they have sufficient means to obtain their own
investment advice, and make research themselves
|
||
|
Experienced investors: offer comes within this exemption if it is made through financial services licensee
– on behalf of co. like stock broker talk 1:1 with investors708(10)(a).
·
Under s708(10)(b), the licensee must be satisfied on reasonable grounds that the investors has enough experience to
access merits and risk.
·
The investors must sign a written acknowledgement of no
disclosure given s708(10)(d)
ð A: with its knowledge, and expertise, they can make
judgment whether to invest in a company or get information about the company
through another source without the need of disclosure.
|
||
|
Professional investors: offer does not need disclosure to “professional investors” s708(11)
·
S9 defines “professional
investors” include
ü Financial
services licensee (got training &
license about financial investment),
body regulated by APRA (bank or insurance co.) and trustee (manager) of superannuation fund (pension
fund)
ü Have net assets of at
least $10 million.
ð A: As professional investors, they have skills and
qualifications in financial industry, thus, they can make informed decisions
themselves, and no need for disclosure documents.
|
||
|
S708(12)
|
Senior managers or
their relatives
|
S708(12): no
requirement for the disclosure is needed if it is made to senior management
of the body or related body or their husbands/wives, children, brother,
sister, etc.
·
S9 defines “senior
managers”: a person (other than director or secretary) who makes or
participates in making decisions that affect the whole or substantial part of
the business.
ð A: if the issue of shares are for employees who used
to or currently senior managers, or their relatives, it is not required to
give them information related to such things like the company, the
securities, benefits and fees of investors because they are working for the
company, so they might know everything about the company already.
|
|
S708(13)
|
Offers of fully paid
shares to existing shareholders
|
S708(13)(a): offers of fully paid shares to existing security holders
do not need disclosure to investor under:
·
With dividend reinvestment plan, you receive a dividend that is automatically reinvested
in additional shares. You pay tax on the dividend, so then, when you sell the
stock, your only tax liability is on the gain over the price paid.
·
With a bonus share plan, you receive no dividend but instead receive shares of
stock that are "fully credited". I take this to mean that when you
sell it, you would tax on the full value instead of just the gain.
ð A: the co. issues shares to
raise fund, not to pay dividend, therefore, s708 (13)(a) does not apply under
this circumstance as the company cannot raise any capital.
|
|
S708AA
|
Offers of quoted
securities under a right issue
|
S708AAdisclosure to
investors will not be required in the case of right issues of quoted
securities (shares in ASX listed co.) if certain conditions are satisfied.
S9defines “right
issue” is an offer of securities for issue where the offer is made to existing shareholders in
proportion to their holdings
ð A: If the shares of the co. is listed in ASX and the company raise
funds from giving rights for existing shareholders to buy additional shares
before outside investors can buy to retain ownership, then the company does
not have to disclose information because the disclosure might be disclosed
already in the last offer for existing shareholders.
|
C: in conclusion, under special circumstances “…”
analysed above, the co. might have to/ not to prepare disclosure document in
respect of offers to existing shareholders, employees and...
2) Lodgement of disclosure documents:
·
Must be lodged with ASICs718
·
Directors
must give their consent to the lodgement of the disclosure documents with ASICs720
|
Quoted securities
|
Unquoted securities
|
|
·
Disclosure
documents may be given to potential
investors immediately after they have been lodged with ASIC
Rationale: as it is
quoted, there is already disclosure requirements in place for all co. trading
in stock market => safer => do not have to wait
|
·
S727 (3): 7-days
waiting period after ASIC lodgement
b4 applications for the non-quoted securities can be accepted.
·
The waiting
period gives interested parties to consider the contents of disclosure
document, so if any incorrect information contained in doc., they can apply
for injunction to stop the fundraising.
|
3) Contents
of disclosure document:
General rules for all disc docs: under s715A, the information in a prospectus and other disclosure
documents must be worked and presented in a “clear, concise and effective manner”:
·
Highlight key
information
·
Provides balanced
disclosure of benefits and risks
·
Flows logically
·
Clear messages,
explains concepts and terms that may be confusing
·
Limits unnecessary
repetition of information
Other requirements depend on the types
of disclosure doc.
a)
Prospectus contents: most detailed, regarded as full-disclosure doc.
I: The legal issue here is whether the disclosure
document provided by the co. has to disclose “…” under s710 (1).
v The application
form must be attached to the prospectus
s721
v R: (General
disclosure test: under s710
(1), a prospectus must contain all the information that investors
and professional advisers would reasonably require to make informed
assessment about certain matters.
In
relation to an offer to issue securities:
·
Rights (dividend
rights, voting rights) and liabilities attached to securities
·
Assets and
Liabilities, financial position and performance, profits and losses, prospects
(future possibility of co.)
·
In Fraser v NRMA Holdings Ltd 1995, it was
held that by not including in the prospectus the case against restructuring,
the co. had failed to provide information required by s710,
the advs. and disadvantages of proposed structure has to be included – a well-rounded objective document, not too
biased. )
A: Applying to the case, “…” affects the operation of
company, as shareholders get lots of shares from the company, which in fact
gives them more control over the company than other shareholders. This might
bring advantages for the company if they act in the best interest of the
company and for proper purposes without interest conflict. However, if they
abuse their power for their own benefits, then it will hurt other shareholders
and the creditors. =>Restructure +
relevant information
ð Under s728 (3), criminal
offence if material required by s710is omitted; and materially adverse to from
the point of view of the investors.
v Alternative
disclosure test:
·
Listed companies are
subject to the continuous disclosure requirements of the Corporation Act and
ASX Listing rules.
·
Listed co. are
required to disclose anything which has
material effect on the price of securities if issuing new securities
·
Because the co. is
already listed in the stock market, information that s710(1)
would normally require to be included in prospectus is already known to the market
ð Under S713, there is no need to include them again.
v Under s711,specific
disclosures:
|
Term and conditions of the offer
|
S711(1)
|
|
Disclosure of interests, fees and
benefits of certain people involved in the offer
|
S711(2) – (4)
|
|
Quotation of securities of financial
market: displaying or providing information concerning the history of shares
of the co. – highest bid to buy and lowest bid to sell at any given time
|
S711(5)
|
|
Expiry date
|
S711(6)
|
|
ASIC lodgement: more detailed
document available must be lodged with ASIC
|
S711(7)
|
|
Information decided by the
regulations
|
S711(8)
|
v Forecast:
forecast of future profit, dividend can influence investors’ decisions
·
R: (Forecasts/
forward-looking statements are optional,
i.e. do NOT have to be contained in prospectus. )
A: Moreover, it is optional for the company to
disclose the profit and dividend forecast, so it is up to the company’ decision
whether to include it as part of disclosure. => Forecast
·
Under s728(2),the
contained forward-looking statement is regarded as misleading for the purpose of the liability provisions if the person
making it does not have reasonable
grounds for making the statement.
·
Onus of proof is on the plaintiff to prove maker of
statement did not have reasonable grounds.
C: In conclusion, it is compulsory for the company to
disclose information related to “...”, but is optional to disclose forecast of
future profit and dividend, and as it might affect the decision of investors to
invest in the company, then the company should consider include those
information also.
b)
Short form prospectus:
It
is permitted by s712(1),allows short form prospectus refers to material in documents
lodged with ASIC instead of information being included in the prospectus.
c)
Profile statements:
·
S721(2) allows brief documents
to send to investors instead of prospectus but still need to lodge full prospectus.
·
S714, content
include:
ü Identifying the issuing body, and nature of securities
ü State the nature of risk
ü Details of all amounts payable (fees, commissions)
ü Any other information required
ð It is rarely used in practice, was originally intended to
Management investment skim. (MIS)
d)
Offer information
statements:
lower level of disclosure
·
S709(4),an OIS may be
used instead of a prospectus for small fundraising, amount raised less than $10
million.
·
S715sets out the
contents of OIS:
ü Identify the issuing body and nature of securities
ü Describe body business and what funds are to be used for
ü State nature of risk
ü Details of all amounts payable
ü State that OIS has
lower level of disclosure requirements than a prospectus and that investors
should obtain professional advices
before investing
ü Include a copy
of body’s financial report s715(1)(i)
4) Restrictions
on issue of securities
a)
Minimum subscription:
Under
S723(2),if disc. Doc. states that securities will not be issued
UNLESS applications for a minimum no.
of securities are received/ minimum amount is raised, the person making
the offer must not issue any of shares until that minimum subscription
condition is satisfied.
·
Application money
received must be held in trust until minimum is met and the securities are
issued s722
·
The aim is to protect
early subscribers where co. unable to raise minimum amount.
·
S724, if not met within
4 months of initial doc., the company must: refund money or give
applicant a choice of refund.
b) Stock exchange listing:ASX
listing requirements give additional protection to investors.
·
If stated in disc. Doc. That the co. has applied or will
apply for ASX listing of the securities;
it should take all possible steps to become listed.
·
If the securities are not listed within the decided period, the issue is void and the co. must repay the money received s723
c)
Expiration of
disclosure document:Disc. doc. expire 13 months after their date s711(6)
·
The securities may be
issued if the application received on or
b4 expiry date. Otherwise, the co. must under s725(3):
ü Repay the money received
ü Give choice to refund with supplementary disclosure document
– get information all over again as information is already old.
Secondary trading
·
Secondary trading of
listed securities quoted on the stock exchange does not require disclosure to
investors.
·
Only some sales of
securities need disclosure to investors. S707 specifies
when sales of securities need disc.
I.
Advertising restrictions:
·
Previously, advertising is ONLY allowed AFTER disc doc is
lodged.
·
Before lodgement, advertising is limited by
|
Listed
securities: s734(5)(a)
permits advertising b4 lodgement of a disc. doc if it includes statement
containing information on :
·
The identity of the issuer
·
Disc. doc will be made
available
·
A person should consider disc.
doc in deciding to acquire securities
·
To acquire securities, a
person must use the application form in disc. doc
|
Unlisted
securities: s734(5)(b)Advertising
UNLISTED securities before lodgement is limited to:
·
Statement identifying the
offer or securities
·
Statement of how to receive
disc doc,
·
Statement that disc doc will
be avail, application form attached to disc doc
|
·
After lodgement, s734 (6) requires advertisement to still
mention disc doc.
II.
Misstatements(wrong
& misleading inf. contained in disclosure) and Omissions(lack of important inf.
that investors reasonably expect to know)
There
are misstatements in / omissions in this case, which are …. The legal issue
here is whether the investors have legal rights against … and to claim for
compensation suffered due to misleading/ deceptive statements or omissions
under s728 of the Corporation Act.
R: (The general rule is under s728(1),a
person is prohibited from offering
securities under disc doc if it contains misleading or deceptive statement
or omit information required. The statement is misleading/ deceptive
if
ü ROC investors believe something not true because of the
statement.
ü Forecast: Under
s728(2),the
contained forward-looking statement is regarded as misleading for the purpose of the liability provisions if the person
making it does not have reasonable
grounds for making the statement.
·
Omissions if important inf.
that investors would reasonably require under s710
is omitted. )
A: Geologist: In
this case, the disclosure document of the co. contained the optimistic report
made by …, and according to s728(2), the contained forward-looking statement is
regarded as misleading for the purpose of the liability provisions if the
person making it does not have reasonable grounds for making the statement. Here, the forecast made has no
basis in fact; the geologist did the report without appropriate degree of care
from researching carefully, lack skills & judgments, thus, he does not have
reasonable grounds for making such statements => Forecast
Director: Another
misleading statement is made by director of the co. in prospectus which was
about to “…”. The statement is misleading if a reasonable ordinary careful
investor believe something not true because of the statement. Apply to the
case, director is supposed to have known everything about the company, hence,
the information given by director about “…” are expected to be credible, so ROC
investors trusted that information and make investments in the company.
However, the information in fact was wrong, thus, the statement is considered
misleading. => Other misstatements.
1)
People liable on disc
doc s729(1):
A: Liability
|
These
people
|
Explanation
+ Remedy
|
|
Person
making the offer
|
The co. – legal entity =>liable for contravention of s728(1)
|
|
Each
director of the body making offer if the offer is made by a body
|
liable
for contravention of s728(1)
|
|
A person named in the disclosure document with their consent as a proposed director
of the body whose securities are being offered
|
The proposed director are those not being directors yet
but will be at the time securities are offered
ð liable for contravention of s728(1)
|
|
An
underwriter (but not a sub-underwriter)to the
issue or sale named in the disclosure
document with their consent
|
An underwriter is the person guarantees the fund that co.
is looking 4 – usually investment
banking co. or broker dealer saying if the co. does not get enough fund
=> they will supply the difference => they have reviewed investment
& calling that investment is secure.
ð liable for contravention of s728(1)
|
|
A
person named in the disclosure document with their consent as having made a
statement:
(a)
that is included in the
disclosure document;
(b)
On which a statement made in
the disc document is based
|
Statement is about:
·
Audited financial statements –
made by accountants/ auditors
·
Legal situation of co. – made
by lawyer
·
Written report talking about
how much gold/ silver in place – made by geologist
ð liable for the inclusion of
statement in the disc doc
|
|
a
person who contravenes, or is involved in the contravention of s728(1)
|
ð liable for contravention of s728(1)
|
A: Geologist: Under s729 (1), a person named in the disclosure
document with their consent as having made a statement that is included in the
disclosure document is liable for inclusion of misstatement. As a consequence,
the geologist is responsible for optimistic forecast included in the
prospectus.
Director: Under s729
(1), each director of the body making offer if the offer is made by a body and
a person who contravenes, or is involved in the contravention of s728(1) is liable for contravention of
s728 (1), as a result, the director of Mental Search N.L must be responsible
for all misstatements contained in prospectus.
The company: Due to 2
misstatements contained in the prospectus, under s729 (1), person making the
offer is liable for contravention of s728 (1).In this case, it has the ability
to make offer to raise capital from public. As a consequence, the company is
responsible for all misstatements contained in prospectus.
2)
Defences to
MDS/Omission:
A: Defence
|
S731
|
·
Available for prospectus
·
Mainly for co.
|
Due
diligence defence: A person made all reasonable inquiries and believed the
statements on reasonable grounds.
·
have a proper system of
checking statements are accurate and complete
·
many co set up a “due
diligence committees” to do this
ð The
obligation of co. is to give only inf. they know/ or reasonably find out
=> Co. do not have to predict future/ control what others do.
ð If
co. issue prospectus and have done everything they suppose to do carefully
& still losing money or go liquidation => Investors cannot sue =>
There might be due to other reasons: new competitors, global financial
crisis, change in market circumstances or co. change laws/ pass new
legislation, etc.
|
|
S732
|
Available for OIS
and profile statements
|
Provide
defences if the person proves they did know know/unaware of MDS or Omissions
|
|
S733(1)
|
·
Apply for all disc doc
·
Mainly for directors
|
There is no liability if the person proves that they reasonably relied on information given by
someone else; someone other than a director, employee or agent.
|
|
S733(3)
|
·
Apply for all disc doc
|
If
proposed directors/ maker of statement publicly withdrew their consent to be
named in disc doc.
ð The
director sign names in disc doc but b4 lodging with ASIC for public, they
announce that there was a mistake and they no longer support it.
|
A: Geologist: no
defence
The director: The
director can apply for defences under s733 (1) if he can prove that he
reasonably relied on information given by someone else; someone other than a
director, employee or agent. Here, regarding the optimistic report, it is
reasonable for the directors rely on information provided by the geologist,
because the director believes that geologist has knowledge, expertise and
experience, the geologist makes reliable forecast basing on research and
analysis. Therefore, the director can avoid liability for the misleading
forecast made by geologist but he cannot defence on the statement made by him
as there is no evidence that he relied on outsider to make such statement.
The company: The
company can apply for defences under s733 (1) if it can prove that he
reasonably relied on information given by someone else; someone other than a
director, employee or agent. The co. cannot defence for the statement made by
director but it can avoid liability made by geologist because it is reasonable
for the co. to trust a professional with skills, training and qualifications
like geologists to provide accurate and correct forecast. Consequently, the co.
is only responsible for misleading statement made by its director.
3)
Remedies
A: Criminal offence + Compensation claim
|
Stop
orders
|
S739(1)
|
ASIC has the power to stop further offers, issues, sale or transfer of the securities
if information contained is misleading /deceptive s. 728OR
if is not clear, concise and effective s.715A
|
|
Supplementary
and replacement doc
|
S719
|
·
Once a person becomes aware of
Misstatement Disclosure or omission, must stop making offers, and lodge
a supplementary or replacement document to correct the deficiency (change
misstatements so that it is true & add inf. so no more omission)
·
It
must be lodged with ASIC (make sure all new/changed
inf. available 4 public), and with original disc doc must be provided for
upcoming offers.
|
|
Criminal
offence
|
S728(3)
|
Contravention of s.728(1) is criminal ONLY if M D
statement or omission is materially adverse from the point of view of an
investor(whatever inf. contained, the mistake is sth that makes co.
better => make investors more willing to invest even though the co. is not
as good as it seems)
|
|
Compensation
claim
|
S729
|
Right to recover compensation requires proof that loss or damage was suffered
because of M D statement in or omission from disc doc.
ð As
investors relying on statements & invest money => co. and other people
may be responsible to compensate =>Sue
for negligence => careless in providing MD inf.
|
A: As we
already proved there is failure to commit s728 (1) by the co., the director,
and the geologist, under s729, investor has the right to recover compensation
loss or damage which was suffered because of misleading statements from the
prospectus.
In conclusion, by issuing a prospectus contained misstatements/
omissions, the co. contravene s728 (1), which directly causes damages to the
investors and therefore must compensate to any damages suffered by the
investor.
III.
Debt fundraising:
1)
What is a “debenture” :
·
A “debenture” is the right to enforce a company’s
undertaking to repay a debt, money deposited with or lent to the bodys9
·
Debentures are
intangible personal property, and therefore are readily transferable.
·
Debentures can be
listed on the ASX if complying with the ASX’s listing rules.
If the co.
issues debentures to the public, then the debentures must be secured s283H
·
Collateral/ security interest: property
that agreed to give to bank in case default of payment to secure the debenture.
2)
Issuing debentures:
a) Requirements:Ch6D - A debenture
falls within the definition of “security”
contained in s92(4),
·
Any offer to issue
debentures to the public is governed by the fundraising provisions in Ch6D of the Corporation Act.
ü Under s706, an “offer of securities” for issue needs disclosure
to investors UNLESS the exemptions ins708 & s708AAsay
otherwise
ü S727complement s706: A person is prohibited from offering securities or distributing application forms
UNLESS disclosure document has been lodged
with ASIC. Contravention of s727 is a
criminal offence punishable by a fine or imprisonment or both s1311
b) Requirements:Ch2L
[11.280]
A borrowing co. that
proposes to offer its debentures in circumstances that require disc doc is
required to appoint a trustee for
debenture holders and prepare trust deed (debenture/loan contract).
·
Trust deed: specify that the co. will be in breach of trust deed if it enters into arrangements to borrow funds from another source, or fails to keep the value of security
interest above minimum amount.
·
Trustee: is responsible for looking after benefits of debenture
holders to make sure that co. pay in schedule and distributes assets in case of
default on behalf of debenture holders.
c) Additional requirement: Under s171, each
company issuing debentures is required to establish a register of
debenture-holders.
3)
Reasons
for the lender to take security:
·
In
the event of bankruptcy or liquidation
of the borrower, the lender in the
absence of security, would be an unsecured creditor and would have to
join the queue fora distribution from the realisation (sale) of the
borrower’s assets => less chance to get money back, wait for money left
after paying secured creditors.
·
Without security, the lender will only have a personal right to sue for breach of
contract.
·
Even if the borrower is solvent, lender can recover the debt more quickly and efficiently, (without long delays
and high cost of court proceedings) =>unsecured
creditors must sue, go to court, & wait for judgments.
4)
Property
over which security may be taken:
All
property of the borrower may be given as security.
An
EXCEPTION is contractual rights which are, by their nature, incapable of assignment (transfer) for example contracts for
personal services (employment contracts).
a)
Personal borrower: the property could be
ü
family
home (land is preferred as security by
lenders)
ü
shares
in a company
ü
cash
deposits
ü
car
ü
Life
insurance policy.
b)
Company borrower, the property could be
ü
freehold
title to its factory or office premises
ü
the
lease of premises from which it operates
ü
plant
and equipment
ü
Trading
stock
ü
book debts– accounts receivable
ü
Uncalled capital.
ü
Security given by director to guarantee to pay in the case co. cannot pay. (Rationale: co. and
director are separate legal entity => any contract entered by the co. will
not bind any shareholder/director personally unless the director becomes party
of contract => director is party of contract => will be held liable for
co.’s liability in this case => this is NOT lifting corporate veil)
IV.
PPSA: Personal property
Security Act 2009 (Statutory law)
PPS Act takes “functional approach”
in regulating personal property securities. Functional approach means that all
transactions under which borrower grants a lender an interest in the borrower’s
personal property as security for loan or other obligation are regulated in the
same way regardless of the legal form of transaction.
PPS Act Terminology
1) What is
personal property?
S10 of PPS Actdefines as property other than land. It includes:
·
Tangible property – plant, equipment and inventory
·
Intangible property – shares & receivables
Buildings and fixtures on land are NOT personal property because
they are regarded as part of land.
2) What is
security interest?
‘Security
Interest’ – an interest in personal property provided for by a transaction that, in
substance, secures the payment or
performance of an obligation. S12 (1) of PPS Act
‘Security Interest’ includes charges,
liens, and pledges
3)
Grantor
and secured party
·
“Grantor”: defined by s10 PPS Act as a
person who owns or has the interest
in the personal property to which a security interest it attached.
=> usually BORROWER
·
“Secured party”: is the person to who holds a security interest => usually LENDER
4)
Security
agreement:an
agreement or other act by which a security interest is created. S10 PPS Act. It includes debenture trust deed as well as other loan agreements that create
security interests.
5)
Perfection:is important to obtain priority over competing security interests in the same
collateral
S21 PPS Act sets out the main perfection rule; a
secured party perfects their security interest by:
·
Registration: lender can register online through the online database
personal property registration.
ü
Registration
gives rise to ‘perfection’
ü
Registration
gives notice to all other persons that the company has given the particular
type of security interest over one or more of its assets and thus the amount
and value of assets that would otherwise be available for distribution to
unsecured creditors has been reduced by the amount secured.
ü
Failure
to register does not invalidate the security interest, but can affect priority.
ü Method
of registration: Lodge a financing statement on the PPS Register. s.150 PPS Act
·
Taking possession:
secured party taking property away from grantor and keep it themselves
=> Problem arises: borrower might need assets to make money or continue
doing business (circulating assets)
·
Taking control: appoint 3rd party to
control/manage the property, might be manager of co. => now obey the lender.
6)
Circulating
& Non-circulating security interest:
|
Circulating security interest
|
Non-circulating security interest
|
|
·
Is a security
interest which attaches to a
“circulating asset”.
·
A
“circulating asset” is an asset where the secured party has given the grantor authority for any transfer of the personal
property to be made, in the
ordinary course of business(if they are made for the purpose of
carrying out on the business), free of the security interest. S340PPS Act
·
It includes inventory, accounts receivable
·
A grantor
does NOT have power to dispose of
all assets without replacing them by others and thus to cease to be a
going concern, because this would not be in the ordinary course of business.
ð Level of assets must stay at
certain point
|
·
Assets not disposed/ sold in normal course of business.
·
Grantor is NOT entitled to sell or otherwise dispose of the collateral free of the
security interest WITHOUT the
secured party’s consent.
|
|
Non-circulating
Security Interest is stronger than Circulating Security Interest:
·
Because if
there is default, non-circulating
security interest entitles the
lender to take possession, sell and repay. => creditors do not
have to share with anyone
·
Whereas for
circulating security interest, a receiver(work
for secured party with proper training)
must pay debts to certain unsecured creditors first (such as employees). Liquidator
must also pay certain unsecured
creditors first.
|
|
7)
Retention
(keep) of title (ownership) clauses (term):
This is a term in a contract under which the seller retains the ownership until
the goods are paid for.
Rationale:
supplier are often unsecured
creditors, and when supplying goods, retailers always not pay for goods right
away but delaying for some periods => in order to protect themselves,
suppliers keeps ownership of goods until they are paid for by retailers.
·
Retention
of Title clauses gives rise to a
security interest=> must still perfect by registration to obtain
priority
8)
Priorities
of securities interests:
·
Priority
between unperfected security interests
is determined according to the order
of attachment of the security interests(s 55(2))
·
A
perfected security interest has priority over unperfected security (s 55(3))
·
Priority
between perfected security interests
is determined by the time of
registration or of possession/control or of perfection by the Act(s 55(5))
·
|
·
Perfection:
ü Taking control gets no. 1 priority => Registration => Taking possession
ü Between 2 perfected security interests,
§ One registers and once takes possession => 1st
registration takes property even though the other lender takes possession.
§ Both register => decided by order
§ Both take possession => decided by order.
|
9)
Invalidation
of security interest:
a)
Security Interest in favour of Officers and Associated
Persons: void if enforced within 6 months after it is made without court approval. (S 588FP (1) of Corporations Act)
ð
Director may do sth dishonest to get priority =>
to protect outsider, the security interest cannot be enforced within 6 months.
b)
Circulating Security Interest Created Within 6 Months
of winding up(liquidation – used for co. / bankruptcy – used for
people)S 588FJ - Void against liquidator unless
exceptions apply
ð Circulating
security creditor becomes unsecured creditor, the liquidator is
appointed to sell co.’s assets and try to pay all creditors, especially
unsecured one.
10) Guarantees,
Subrogation and Indemnities:
|
a)
Guarantees: A guarantee is a
promise made by one party (the guarantor or surety) that if another party
(the principal debtor) fail to carry out an agreement made with a
lender; the guarantor will be liable
to the creditor.
·
Liabilities of guarantor: is secondary to that of the principal debtor. A guarantor
is only liable if the principal
debtor is liable. Thus if the contract guaranteed is void or
unenforceable, so is the guarantee.
ü If the lender and the debtor, without the guarantor’s
consent, agree between themselves to alter the nature of the obligation, the
guarantor is discharged unless such circumstances are expressly covered in
the guarantee document.
ü Defences
available to the debtor are available equally to the guarantor.
|
b)
Indemnities: The concept of indemnity is based on a contractual agreement made between two parties, in which one party agrees to pay for potential
losses or damages caused by the other party.
·
A typical
example is an insurance contract,
whereby one party (the insurer) agrees to compensate the other (the insured)
for any damages or losses, in return for premiums paid by the insured to the
insurer.
|
·
Subrogation:
A guarantor who pays to the lender the full amount of the debt owing by the
principal debtor is
normally subrogated to all rights which the creditor has against
the principal debtor. This means the
guarantor “steps into the shoes” of the creditor and has the right to seek payment from the
debtor.
0 comments:
Post a Comment