Introduction To Debt Finance - Business Law and Practice

IMPLIED:

• S.31 CA 2006: company has unrestricted objects

• Borrowing is a POWER rather than object implies the necessary powers for a company to pursue its objects.

• Re David Payne: Implied power to raise funds by borrowing for the purposes of the company’s business.

• Re Patent File: A company who has power to borrow also has implied power to give security for a loan.

EXPRESS:

• Power is within the company Articles – making it part of the company constitution. [NB. This power is NOT in the Model Articles]

1. S.39 The validity of an act done by the company shall not be called into question on the ground of lack of capacity by reason of anything in the company’s constitution.

2. S.40 S.40(2)(b) good faith issue! “In favor of a person dealing with a company in good faith, the power of the directors to bind the company, or authorise others to do so, is deemed to be free of any limitations under the company’s constitution”.

• If lender knows that there is no benefit to company (or ought to have known) then there is a risk of no good faith and lender cannot rely on S.40. Therefore guarantee may be voidable by the shareholders (or liquidator) of the company.

Therefore, lenders ask for BOARD MINUTES that state

1. Board approval of guarantee

2. Who is authorised to sign for the company

3. Why board considers the guarantee to be in best interest of company

This will support the contention of good faith!

OR

• Lender can request unanimous consent of shareholders to the granting of the guarantee – to show good faith and get protection of S.40.

1. Is the borrowing illegal?

2. Company giving loans to Directors – must comply with S.197 CA 2006. [Re. Loan to Directors]

• Uncommitted facility bank not obliged to lend money.

• Repayable on demand usually bank can ask for money back any time

• Interest at fixed percentage above bank base rate

• Usually subject to an upper limit company pay penalty if they go beyond overdraft.

1. To avoid the disadvantages of unsecured debt.

• Unsecured debt = where no security is given!

• Without security, the lender’s remedies are limited if company goes into default /...