ACCA F4 - Corp and Business Law (ENG)

244 16: Loan capital  Part E Capital and the financing of companies

Study guide

Intellectual level

E Capital and the financing of companies^

2 Loan capital

(a) Define companies' borrowing powers 1

(b) Explain the meaning of loan capital and debenture 2

(c) Distinguish loan capital from share capital and explain the different rights

held by shareholders and debentureholders

2

(d) Explain the concept of a company charge and distinguish between fixed and

floating charges

2

(e) Describe the need and the procedure for registering company charges 2

Exam guide

Loan capital may crop up in questions involving insolvency and corporate finance in general. However, it

is a topic that could also be examined in a scenario question. You may be required to identify instances

where a company has exceeded its borrowing powers or the differences between types of charges.

1 Borrowing

Companies have an implied power to borrow for purposes incidental to their trade or business.

All companies registered under the Companies Act 2006 have an implied power to borrow for purposes

incidental to their trade or business. A company formed under earlier Acts will have an implied power to

borrow if its object is to carry on a trade or business. In delegating the company's power to borrow to the

directors it is usual, and essential in the case of a company whose shares are quoted on the Stock

Exchange, to impose a maximum limit on the borrowing arranged by directors.

A contract to repay borrowed money may in principle be unenforceable if either:

 It is money borrowed for an ultra vires (or restricted) purpose, and this is known to the lender.

 The directors exceed their borrowing powers or have no powers to borrow.

However:

 In both cases the lender will probably be able to enforce the contract.

 If the contract is within the capacity of the company but beyond the delegated powers of the

directors the company may ratify the loan contract.

Case law has determined that if a company has power to borrow, it also has power to create charges over

the company's assets as security for the loan.

1.1 Personal guarantees

Some lenders may require directors and/or members to agree to repay a loan out of their personal wealth

should the company default on the debt. This is known as requesting a personal guarantee, which is a

promise by a person (the directors or shareholders) to assume a debt obligation in the event of non-

payment by the borrower (the company). Personal guarantees are a means of protecting the lender by

preventing the shareholders/members from hiding behind the protection of limited liability. It is

commonly used where the lender is very powerful (such as a bank) and the borrower has no other source

of funds available to it (such as a new or small company).

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