This website uses cookies to ensure you get the best experience on our website. Learn more

LPC Law Notes Business Law and Practice Notes

Equity Debt Finance Notes

Updated Equity Debt Finance Notes

Business Law and Practice Notes

Business Law and Practice

Approximately 649 pages

A collection of the best LPC BLP notes the director of Oxbridge Notes (an Oxford law graduate) could find after combing through dozens of LPC samples from outstanding students with the highest results in England and carefully evaluating each on accuracy, formatting, logical structure, spelling/grammar, conciseness and "wow-factor".

In short these are what we believe to be the strongest set of Business Law and Practice notes available in the UK this year. This collection of notes is fully updat...

The following is a more accessible plain text extract of the PDF sample above, taken from our Business Law and Practice Notes. Due to the challenges of extracting text from PDFs, it will have odd formatting:

Equity Debt
P.190Equity Finance= allotment of new shares for which Co. receives money (property) in return, which is used in the Co.’s business. P.190Debt Finance = borrowing money (3 main types = overdraft, term loan and revolving credit facility)
Tightly controlled by CA 2006 Contract law (not much legislation). Lightly controlled = flexible
Equity Debt



  • Buying Shares is more risky than lending to a Co

  • Dividends might not be issued

  • Payment of dividends is discretionary

  • If insolvent, investor loses the capital value on the shares

  • Might be hard to sell shares

  • Interest payments are a contractual liability which the Co must pay and thus Interests are paid before dividends are paid to investors

  • Loan can be secured over property or personal guarantees from the directors

  • Security = lender gets paid 1st& investors 2nd

Involvement in Co. P.227
  • Member has the right to attend and vote at a GM + influence the Ds’ decisions

  • S’holders have liability ltd to their $ of shares

  • Lender is merely a creditor with not say in how the company is to be run



  • Members have no guaranteed income

  • Dividends are discretionary and only payable out of distributable profits

  • Agreed interest must be paid to the lender

  • If not, lender can demand repayment and enforce their security

Repayment of Capital
  • Generally, not repaid unless Co. is wound-up

  • Recoup capital by selling shares to 3rd P

  • An agreed repayment date will be set

Restrictions on Sale
  • Transfer of shares is governed by Articles

  • MA26(5) gives Ds absolute freedom to refuse any member they don’t want

  • Lender may syndicate or sell his debenture to whomever he wishes

Capital Value of Investment
  • Value fluctuates depending on Co.’s or/and Market conditions etc…

  • Value usually remains constant

Equity Debt
Payment of Income
  • Dividends might not be issued

  • Payment of dividends is discretionary and only out of distributable profits

  • Interest payments are a contractual liability which the company must pay

  • If no profits, company must use capital

Tax Treatment of Income
  • Payment of dividends is not a deductible expense and is payable after Co. has paid Corp. Tax

  • Payment of a debenture interest is a deductible expense and deductible before Corp. Tax is assessed.

Involvement of investor
  • Member whose name is entered on the register has certain rights and can yield some influence over Ds’ decisions

  • Has no say in how the company is run

Repayment of Capital
  • Generally, not repaid unless Co is wound-up

  • Recoup capital by selling shares to 3rd P

  • An agreed repayment date will be set

  • Company must set aside money to ensure they can meet their obligations under debt

  • Cost of equity is difficult to establish

  • There are likely returns to members (dividends; capital; share buybacks)

  • More members will decrease return on shares for each member

  • Dividends are not tax deductible unlike debt interests

  • Low i rate = debt is better

  • Cost of debt is easy to establish (interest)

  • Interest rate is charged by the lender

  • Vary from lender to lender, economic climate, length of loan, how much borrowed, credit status of the company

  • Tax system favours debt finance because interests unlike dividends are tax deductible

  • High i rate = equity is better

Who Provides It?
  • Whoever buys the shares

  • Banks, venture capitalists, Ds or members

Why Take It?
  • Difficult to get loans in current climate

  • Interest on loans is high

  • If already highly geared (have a lot of debts), you may not be able to get any more loans

  • Do Articles restrict ability to borrow?

  • When interest rates are low, this is cheaper than equity

  • Less regulated than equity finance

  • Do existing loan agreements apply a negative pledge? P.243(for negative pledge)

Type of Debt Finance

There are two main types of debt finance: Loans (bank overdraft, a term loan and a revolving credit facility) and Debt Securities to investors in return for a cash payment (IOUs). IOUs have to be redeemed (i.e. repaid) by the Co. at an agreed future.

Type Advantages Disadvantages

Term LoansP.222

  • Specific sum for a specific period

  • Repayment date is set (“term”)

  • Used to purchase a capital asset

  • Can be bilateral or syndicated

  • May be secured or unsecured

  • Allows financial planning

  • Certainty of term as not repayable on demand as with overdrafts

  • Cash can be tied up by the borrower without worry

  • Borrower has more control

  • Once capital has been repaid, it can’t be re-borrowed by the Co.

  • Time and expense of agreeing contract + all the legal documentation

Revolving Credit FacilityP.222

  • A working capital facility but much larger than an overdraft

  • Good for seasonal Co.s whose income fluctuates thru the year.

  • Maximum aggregate amount can be borrowed over a set period

  • Usually subject to a ‘clean down’ provision to stop borrower misusing the facility

  • Flexibility of overdraft

  • Certainty of term as not repayable on demand as with overdrafts

  • Borrower can draw down and then repay funds to reduce interest payments

  • May be secured or unsecured

  • bilateral or syndicated

  • Often subject to more restrictions than overdrafts (such as notice periods to draw or repay, max or min amounts, frequencies)

  • A commitment fee is normally payable

  • Need to ‘clean down’


  • Aids cash flow on day to day basis

  • Shows as a current liability on the balance sheet

  • Given on lender’s standard terms with a maximum limit

  • Very flexible

  • Few formalities required

  • Easy instant access to funds

  • Easily supply daily needs

  • “Uncommitted” (a Co.’s attempt to withdraw money in excess of its funds is regarded as an offer, which the bank accepts by providing the money)

  • Payable on demand

  • Expensive form of borrowing

  • Usually unsecured (bad for bank)

  • Fee and interest payable by Co.

Debt Securities P.226

  • Issued to investors by a Co. to raise money. Investors give cash to Co. & Co. promises repayment +...

Buy the full version of these notes or essay plans and more in our Business Law and Practice Notes.

More Business Law And Practice Samples