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Company Law — Lecture 20

Company Law — Lecture 20. Debt finance Company charges “Charge” is defined in s 2 of the Companies Act 1993 , with reference to s 313 (order of claims in liquidation) Key issues are: nature, registration under the PPSA, enforcement, and priority. Nature and types of loan finance.

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Company Law — Lecture 20

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  1. Company Law — Lecture 20 • Debt finance • Company charges • “Charge” is defined in s 2 of the Companies Act1993, with reference to s 313 (order of claims in liquidation) • Key issues are: nature, registration under the PPSA, enforcement, and priority

  2. Nature and types of loan finance • Recall differences between debt and equity finance as discussed in Chapter 18, especially • fixed liability to pay interest • repayment of principal at end of loan • Distinguish the various definitions of debentures • Section 2 definition contemplates a secured loan • Distinguish secured and unsecured loans to a company

  3. Debentures • Companies may choose to raise finance through issuing debentures (debt securities) to the investing public • More common for finance companies • Debentures are debt securities and may be quoted on the NZDX • Law requires a trustee for debenture holders • the trustee must hold a licence under the Securities Trustees and Statutory Supervisors Act 2011 • the FMA may license a person to be a trustee in respect of debt securities

  4. Sources of law governing debt finance • Contract — the loan agreement • Real property — mortgage • Personal property — the Personal Property Securities Act1999 • Company law — priorities under s 313 of the Companies Act 1993

  5. Secured debt • Repayment of debt is secured by a charge over some or all of the company’s assets • Security gives the lender the right to apply the charged property to satisfy the debt in the event of default

  6. Fixed and floating charges • Old terminology — predates the Personal Property Securities Act1999 (the PPSA) • Fixed charge — security over a specific asset such as land • company cannot dispose of asset without consent of lender • Floating charge — “floats” over the assets, allowing the company to dispose of them in the normal course of business and replace them • now governed by the PPSA

  7. Registration of charges • Company charges are no longer required to be registered under the Companies Act 1993 • Under the Personal Property Securities Act1999, a company is not required to register a charge • But in order to obtain priority over other lenders • a lender will register a mortgage of land under the Land Transfer Act 1952 and • a lender will register a security interest over a company’s personal property under the PPSA

  8. Security over land • Normal mortgage rules apply • A registered first mortgage over land means that the mortgagor company cannot dispose of the land without the mortgagee lender’s consent. Registration gives the lender priority over other borrowers • If the mortgage is unregistered, it takes effect as an equitable mortgage • Registered mortgages prevail over unregistered mortgages

  9. Security interests under the PPSA • The Personal Property Securities Act1999 (the PPSA) applies to personal property (ie all property other than land) • A “security interest” under the PPSA is created by a transaction that in substance secures payment for performance of an obligation (s 19(1)(a)) • When personal property is subject to a security interest, the property is called “collateral”

  10. Attachment under the PPSA • Sections 36 and 40 of the Personal Property Securities Act1999 apply • Attachment arises when a security agreement is signed • Also arises when the secured party gives value and has rights in the collateral (eg the lender has possession of the collateral) • In the above examples, the security agreement is enforceable against a third party

  11. Perfection under the PPSA • Perfection is the process that determines priority among competing security interests • Under s 41 of the Personal Property Securities Act, perfection occurs when the security interest has attached and either • a financing statement has been registered, or • the secured party is in possession of the collateral

  12. What is the PPSA Register? • Section 139 of the Personal Property Securities Act1999 • An electronic register • Registration is effected by the registration of a financing statement — the data required to be entered into the register

  13. What is the effect of registration under the PPSA? • Determines priority of security interests • s 66 of the Personal Property Securities Act1999 sets out priority rules. In brief • a perfected security interest prevails over an unperfected security interest • the order of registration or possession determines priority between competing perfected interests • priority between unperfected security interests is determined by order of attachment

  14. Is an unregistered security interest void against a liquidator? • Prior to the Personal Property Securities Act1999, failure to register a company charge rendered the charge void as against a liquidator • An unperfected security interest is not void as against a liquidator, but • s 36(1) requirements must be met (ie collateral in the possession of a secured party or a security agreement must be executed)

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