tractual promise of the borrower to repay the loan, can
be given.
As regards loan capital, a company has a great advant-
age in that it can give a floating charge over its assets to
a substantial lender, e.g. a bank. Partnerships and sole
traders cannot do this because they are subject to bills of
sale legislation which in effect stops it (see p 81 );
however, the Law Commission has issued a consultation
paper prepared at the request of the then Department
of Trade and Industry (now Department for Business,
Enterprise & Regulatory Reform) in which it invites
views from business as to whether partnerships should
be allowed to grant floating charges by making changes
in the law. (See Partnership Law, Law Commission,
Autumn 2000; and see later in this chapter.) No changes
in the law have as yet been brought forward by
Parliament.
Limited liability partnerships can give a floating
charge over their assets in the same way as a company
can. Bills of sale legislation does not apply.
A sole trader or a firm can only mortgage its business
premises and fixed plant and give personal guarantees
from the sole proprietor or the partners. Sole traders and
partners can also mortgage their own private property.
These forms of security are also quite common in the
private limited company where directors will normally
be asked to give guarantees of the company’s major
debts and mortgage their private property to secure, for
example, bank lending to the company. All of this makes
something of a mockery of limited liability so far as
directors of private companies are concerned.
We shall now consider these securities in more detail.Charges
A charge is a type of security by which a person who
borrows money gives the lender rights over his (the
borrower’s) assets to support the duty of the borrower
to repay what is owed under the contract of loan. The
lender thus has two rights:1 to sue the borrower on the contract of loan; and
2 to sell the assets which the borrower has charged in
order to recover what is owed to him but no more.
Any surplus on sale, less the costs of selling the prop-
erty, must be returned to the borrower. The charge
may be fixed or floating (see below).Part 2Business organisations
80
The Companies Act 2006 abolishes the concept of auth-
orised capital and the company can issue further shares
of an unlimited number provided that, after issue, it files
with the Registrar of Companies a Statement of Share
Capital which shows, among other things, the current
number of shares in the company.
A company may also raise money by borrowing,
often from a bank, either by way of a loan at fixed inter-
est or, more commonly, by the granting of an overdraft
facility.
The lender does not become a member of the company
and if the company falls on hard times and is wound up
the lender, being a creditor, is entitled to recover his loan
before the shareholders get anything for their shares.
A lending bank will take a security (called a debenture)
over the company’s assets for its loan and will usually
ask the directors to give another security by guarantee-
ing the loan so that if the company does not repay it they
will have to. This takes away some of the advantages of
limited liability.
Once again, the bank will not advance the full value of
the property offered as a security by the company for the
reasons stated above.
There is no limit on the number of shareholders
which a company may have and so it can raise as much
capital as it wishes if it can sell its shares to outsiders. A
public company can offer its shares to the public, but a
private company must negotiate personally with out-
siders who might buy its shares.
Raising business finance
- securities
We have already given some consideration to the meth-
ods of financing business organisations (see above). We
have noted the advantage of forming a limited company
because of the ability within the company structure to
issue share capital. If required, share capital can be issued
with a variety of different rights in terms, for example, of
voting. It can be preference with a fixed dividend and/or
ordinary on which dividend will be paid only if and when
distributable profits are made.
However, in other forms of business organisation, for
example the sole trader and the partnership, it is also
necessary, as it is in the company structure, to consider
in more detail the raising of loan capitaland the method
by which some sort of security, over and above the con-