- Finance provided to a company at start and during its life = Capital
Capital has several meanings e.g. working capital = net worth of company seen in the balance sheet
Generally, capital = money to do something with = funding divided into share capital and loan capital.
- SHARE CAPITAL = finance derived from shares.
A share represents an investment in a company that has capital growth potential and income potential.
Shares give you % of company ownership but not over the company assets themselves.
Classes of Share Capital
→ Ordinary Shares
→ Preference Shares
→ Other less known share types
~ Ordinary Shares = owners of company
- Ordinary Shareholder greatest risk as last to be paid upon liquidation
- Share Certificate votes; dividends; meetings
On liquidation entitled to any surplus and nothing if there is a deficit.
~ Preference Shares = – preferential treatment on payment of dividend or upon liquidation
- can be fixed interest or paid p.a. and must be paid out of profits ahead of ordinary shares
- generally cumulative
- no voting rights and if enough funds in liquidation, then paid ahead of ordinary shares; and, if after everyone is paid in a liquidation, they have a right to participate in the surplus.
~ Definitions relating to Share Capital =
- Nominal or Par Value
- Authorised Share Capital
- Issued Share Capital
- Called up/uncalled capital (=paid up/unpaid capital) → such shares are partly paid shares
- Reserve Capital
- Share Premium and Share Premium Account
~ Companies Act has rules aimed at protecting the Share Capital of the Company and that the Capital is used for the benefit of the Company [why is share capital seen as a liability in the balance sheet?]
- Prohibition Sale of Shares @ a discount
- LOAN CAPITAL = funding coming from loans e.g. overdrafts, short term loans, long term loans etc.
Loan document in Company Law = Debenture, which is a document that acknowledges a debt; within it, it includes amount of loan; interest to be paid; security taken; default procedure.
- Single Debenture.
- Series of Debenture with one/more lenders.
- Debenture stock = by public companies; fund set up and lenders buy shares in the fund
Debenture Holder = Lender = Creditor of Company
Debenture itself is only a document – Lender will want more security as otherwise it’s an unsecured loan = rare. Lender looks for security by way of a mortgage on assets; called (in Company Law) a charge → can be fixed or/and floating.
Fixed Charge = mortgage on a specific asset e.g. No. 1 Hebron Road, can’t sell it unless lender says ok.
Floating Charge = mortgage over assets in general but not specific identified ones. Floating charge generally would be phrased as “over the goodwill, stock, cash, debtors and fixed assets of company”.
Suits if assets will be traded e.g. stock as no need to get bank consent each sale!
Generally it’s a charge over current assets.
Upon default floating charge becomes a fixed charge. The floating charge crystallises and then fixes to the assets at that time and date i.e. stock that’s left; debtors as of 10/02/2011 etc.
Debenture sets out default events e.g. liquidation, receiver
Company could have a number of fixed and floating charges.
Priority of Charges: (who gets paid first)
Fixed v Fixed = date of creation
Fixed v Floating = fixed
Floating v Floating = date of creation/date of crystallisation.
~ Registration of Charges
NB If a charge is not registered within 21 days it is void and so the debt is unsecured and has no priority.
Whilst it’s the Company’s responsibility to register, the banks generally do it. Lessons of past failures!
Compare Fixed Charge v Floating Charge
Compare Shares v Debentures
Compare Shareholders v Debenture Holders
Draw a Company Finance/Capital Summary Chart
– Holland Condon Solicitors