Lending Money and Securing Loans

15 Lending Money and Securing Loans A company can finance its activities by selling shares or by raising money from banks or other money-lending institutions. If the company is granted a loan, the lender may become a debenture-holder. A debenture has never been satisfactorily defined. In Levy v. Abercorris Slate and Slab Co.(1883) 37 Ch D 260, Chitty J said “In my opinion a debenture means a document which either creates a debt or acknowledges it, and any document which fulfils either of these conditions is a debenture.” Shareholders are members of the company and their rights have been described elsewhere in this book. Debenture-holders are creditors of the company and their rights are normally defined in the contract made between them and the company. It is interesting to note that, unlike shares, debentures can be issued at a discount unless they are convertible into shares, when such an issue at a discount would be an invitation to evade the rule that shares may not be issued at a discount (Mosly v. Koffyfontein [1904] 2 Ch 108). The lender may wish to secure his position by taking a charge over the property of the company, that is, creating a legal relationship between himself and the company which will ensure he is paid in priority at least to some of the other claimants against the company.

15.1 Debenture-holder’s Receiver The power of a debenture-holder to appoint a receiver will be determined by the terms of the debenture itself. In the circumstances in which a receiver may be appointed, he will be appointed to collect the assets of the company with a view to the repayment of the debt due to the debenture-holder. He must, however, pay creditors whose claim should be paid before his, for example a preferential reditor under s.196 Companies Act 1985 (CIR v. Goldblatt [1972] Ch 498).

15.2 Fixed and Floating Charges It may be important for the purposes of determining the priority of charges to decide whether a particular charge is a ‘fixed’