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Introduction To Debt Finance Notes

LPC Law Notes > Business Law and Practice Notes

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A more recent version of these Introduction To Debt Finance notes – written by Cambridge And Oxilp And College Of Law students – is available here.

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Core Module: BLP Paper A

Company Law - Private Limited Companies Introduction to Debt Finance Definition

Lending / borrowing of money on the understanding that is will be repaid on a specif date or contingency, and on the winding up in priority to shareholders.

Capacity to borrow: Implied power / Express powers


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.


Power is within the company Articles - making it part of the company constitution. [NB. This power is NOT in the Model Articles]
Director's authority to exercise power





Protection for persons dealing with the company [i.e. the bank]

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".


1 Art. 3 Model Articles: gives Director's wide powers [e.g. act in the be interests of the company - therefore borrow money to pursue business]
Always consider any Special Articles - do they impose restrictions on borrowing over a certain amount?
Rolled Steel Products v British Steel Corporation (1985): directors h implied power to enter into a guarantee and debenture - BUT they had exceed their powers because it was NOT for the best interest of the company. If the Director's exceed their powers -breach of Fiduciary Duty.

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 th company.
-Therefore, lenders ask for BOARD MINUTES that state (a) Board approval of guarantee (b) Who is authorised to sign for the company (c) Why board considers the guarantee to be in best interest of company
-This will support the contention of good faith!

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