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Faculty of Economics and Business The University of Sydney

Faculty of Economics and Business The University of Sydney. Corporations Law Postgraduate Studies Semester 1, 2007 Week 11 Lecture Topic Outline. DEBENTURES. Definition

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Faculty of Economics and Business The University of Sydney

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  1. Faculty of Economics and BusinessThe University of Sydney Corporations Law Postgraduate Studies Semester 1, 2007 Week 11 Lecture Topic Outline

  2. DEBENTURES Definition • s9: a chose in action that includes an undertaking by a body to repay as a debt money deposited or lent to the body. The chose in action may (but need not) include a charge over the property of the body to secure repayment of the money • s283BH: the term 'debenture' may only be used in relation to a secured loan; if the loan is unsecured, the term "unsecured note" must be used

  3. DEBENTURES Definition • convertible debentures/notes may be converted into shares • s92: definition of "securities" for the purposes of the fundraising provisions includes debentures

  4. DEBENTURES Trust Deed and Trustee • s283AA: a body must enter into a trust deed and appoint a trustee before making an offer of debentures which requires disclosure under Ch 6D • s283AB: trust deed must state that the trustee may on behalf of the lenders enforce the borrower's duty to repay, enforce any charge or security or any other obligations the borrower has

  5. DEBENTURES Trust Deed and Trustee • s283AC: restricts the entities that may act as trustees • s283GB: ASIC may approve a body to act as a trustee

  6. DEBENTURES Borrower's Duties • s283BB: borrower must carry on and conduct business in a proper and efficient manner and make all its financial and other records available for inspection • s283BC-BF: borrower must notify ASIC of trustee, replace the trustee if necessary, inform the trustee of any changes and give the trustee quarterly reports

  7. DEBENTURES Borrower's Duties • s283CB-CC: guarantor must carry on and conduct business in a proper and efficient manner, make all records available and notify trustee of any changes • s283BI-CE: borrower and guarantor subject to criminal sanctions for contravention of duties

  8. DEBENTURES Trustee's Duties • s283DA: trustee duties include exercising reasonable diligence to ascertain whether the property of the borrower and of each guarantor will be sufficient to repay the amount deposited or lent when it becomes due and to monitor breaches of the trust deed

  9. DEBENTURES Rights of Debenture Holders • s318: borrower to give trustee financial, directors' and auditors reports • s313: borrower's auditor must provide to trustee a copy of borrower's audit report and a report on any other matters prejudicial to the debenture holders interests within 7 days of the auditor becoming aware of the matter

  10. DEBENTURES Rights of Debenture Holders • s283EA: debenture holders with 10% or more of nominal value of the issued debentures may direct the borrower to call a meeting of debenture holders • s283EB(1): trustee may call a meeting of debenture holders

  11. CHARGES Fixed and Floating • Fixed: over specific existing or future property; the company may not dispose of that property without the lender's consent • Floating: does not fix to specific items of property, but specific categories of assets which can be dealt with in the ordinary course of business • Event of default: floating charge crystalises and becomes a fixed charge, whereupon the chargee may appoint a receiver

  12. CHARGES Fixed and Floating • a floating charge is a present security affecting all of the assets in the class to which it applies, but not a specific security - rf: Evans v Rival Granite Quarries Ltd (1910) 2 KB 979 • the holder of a floating charge has no legal or equitable interest in any specific assets of the company until crystalisation

  13. CHARGES Distinction between Fixed/Floating • the character of the charge will depend on the intention of the parties - rf: United Builders Pty Ltd v Mutual Acceptance Ltd (1980) 144 CLR 673 - held that if the company is able to deal with the assets in a particular class in the ordinary course of business without consulting the lender, the charge is floating • distinction between fixed and floating is important to the determination of priorities (s433) and registration requirements (s262(1))

  14. CHARGES Distinction between Fixed/Floating • difficulties arise in relation certain classes of assets such as book debts - rf: Whitton v ACN 003 266 886 (1996) 14 ACLC 1799 - held that charge over book debts was fixed because company was prohibited from dealing with book debts • cf: Agnew v Commissioner of Inland Revenue (2002) 20 ACLC 3051 - held that a charge over book debts was floating even though described as fixed

  15. CHARGES Disposal in the Ordinary Course of Business • transaction is in the ordinary course of business if made for the purpose of carrying on the business - Reynolds Bros (Motors) Pty Ltd v Esanda Ltd (1983) 1 ACLC 1333 - held that transfer of tractors to another lender to satisfy a breached lien was in the ordinary course of business

  16. CHARGES Disposal in the Ordinary Course of Business • cf: Fire Nymph Products Ltd v The Heating Centre Pty Ltd (1992) 10 ACLC 629 - an agreement between a supplier and distributor of heaters pursuant to which the supplier sought to recover ownership of the heaters and then appointed the distributor to sell them as an agent at cost price • granting a fixed charge over assets subject to a floating charge is in the company's ordinary course of business

  17. CHARGES Crystallisation • a floating charge crystallises on winding up or cessation of business or on default in payment • deeds of charge normally provide for the appointment of a receiver

  18. CHARGES Crystallisation • deeds of charge normally provide for automatic crystallisation on the happening of enumerated events of default • automatic crystallisation can cause problems if no action is taken by the lender

  19. CHARGES Priorities of Charges • fixed charges take priority over floating charges • most floating charge deeds prohibit the creation of subsequent fixed charges • legal charges take priority over equitable charges

  20. CHARGES Priorities of Charges • s263(1)(a)(iii): after granting a floating charge, a company must lodge a notice with ASIC which includes restrictions on the creation of later charges

  21. CHARGES Negative Pledge • contractual promise given by a borrowing company that it will not grant further charges • if contained in a registered floating charge, third party is taken to have notice of the negative pledge in accordance with s130(2) • if the charge is not registered, it may lose priority to a subsequent fixed charge if the lender did not otherwise have notice of its existence

  22. FUNDRAISING Disclosure Documents • s9: defines a disclosure document to include a prospectus, profile statement or an offer information statement • s705 sets out 4 types of disclosure documents

  23. FUNDRAISING Disclosure Requirements • s727: a person must not make an offer of securities or distribute an application form for an offer of securities that needs disclosure to investors under Part 6D.2 unless a disclosure document has been lodged with ASIC • "securities" include shares and debentures • s113: a proprietary company must not engage in any activity which would require disclosure under Ch 6D

  24. FUNDRAISING Disclosure Requirements • distinguish issue offers and sale offers made by public companies • s706: an offer of securities for issue needs disclosure to investors unless s708 says otherwise • s708: sets out offers of securities which do not need disclosure

  25. FUNDRAISING Small Scale Offerings • s708(1) - (7): 20 investors or $2M within 12 months • applies to personal offerings (to prevent offers to investors at large) • applies to issues of securities (not offers of securities) • other offers exempt under s708 are not counted

  26. FUNDRAISING Sophisticated Investors • s708(8) - (10): experienced or wealthy investors • s708(8)(a)(b): minimum amount payable $500,000 on acceptance or in instalments • s708(8)(c): gross income in excess of $250,000 pa or net assets of at least $2.5M certified by a qualified accountant

  27. FUNDRAISING Executive Officers • s708(12): executive officer or a related body, spouse, parent, child, brother or sister Existing Shareholders • s708(13): fully paid shares under a dividend reinvestment plan • s708(14): debentures to existing debenture holders

  28. FUNDRAISING Lodgement • s718: a disclosure document must be lodged with ASIC • s727(3): 7 day waiting period for non-listed securiities; listed securities subject to ASX disclosure requirements • ASIC may apply for injunctions to halt the fundraising • ASIC maintains an "OFFERlist"

  29. FUNDRAISING Contents • s710(1): a prospectus must contain all the information that investors and their professional advisers would reasonably require to make an informed assessment of the matters set out in the table in that section • information need be included only to the extent to which it is reasonable for investors and their professional advisers to expect to find the information in a prospectus and only if the information is actually known or in the circumstances ought reasonably to have been obtained by making enquiries

  30. FUNDRAISING Contents • s728(1): creates an offence for omissions or misleading or deceptive statements • s728(3): criminal offence if the omission is materially adverse to the investor • s729: an investor who has suffered loss or damage may claim compensation

  31. FUNDRAISING Forecasts • s728(2): a forward-looking statement is deemed to be misleading if the person making it did not have reasonable grounds for doing so • ASIC PS 170 sets out guidelines

  32. FUNDRAISING Misstatements and Omissions • s739(1): ASIC empowered to make a stop order in relation to a disclosure document which breaches s728 • s739(2): hearing at which any interested person may make representations about whether a stop order should be made • s739(3): ASIC may make an interim stop order for 21 days

  33. FUNDRAISING Liability • s728(3): criminal liability • s729: compensation for loss or damage may be claimed from a range of persons including the issuer, its directors and underwriters, as well as any experts who have been named in the document • s730: person must notify the person making the offer as soon as they become aware of a problem

  34. FUNDRAISING Liability • s731: defence if a person made all reasonable enquiries and believed on reasonable grounds that the statement in a prospectus was not misleading or deceptive or contained an omission • s732: defence if a person did not know that a statement in an OIS or PS was misleading or deceptive or that there was an omission • s733(1): general defence where reasonable reliance placed on information provided by someone else, not being a director, employee or agent

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