Loan capital: formula sheet

Key formulas

Shareholder status

Shareholder = member = owner; return = dividend (if declared); repayment not guaranteed

Shareholders usually vote, and rank last in a liquidation.

Debenture holder status

Debenture holder = creditor; return = interest + repayment of capital

Interest is due whether or not the company makes a profit.

Debenture definition

Debenture = document acknowledging a company's debt (secured or unsecured)

It may be a single loan document or one of a series of stock issued to many lenders.

Order of risk on liquidation

Secured creditors, then unsecured creditors, then shareholders

A simplified order. The detailed order is a separate topic.

Capacity rule

Company capacity = unrestricted, unless the constitution expressly restricts it

A restriction in the constitution does not usually make the contract void against outsiders. It limits the directors.

Authority test

Binding loan = capacity + authority (actual, or protected by good faith)

Check each part in order. A gap in authority can be cured by ratification or by outsider protection.

Outsider protection

Lender in good faith → company bound, even if the directors exceeded a constitutional limit

Good faith is presumed. Knowing of the limit does not by itself defeat good faith. Protection is lost only if the lender is not in good faith, for example where it colludes with a director to defraud the company. Where the question states a different rule, apply that rule.

Exception for director or connected lenders

Lender is a director or connected party → usual outsider protection may not apply

This is jurisdiction-dependent. In some jurisdictions the transaction may then be voidable. Follow the rule given in the exam.

Director liability

Directors exceed limit → breach of duty owed to the company

The company may sue the directors, or the members may ratify by resolution.

Security pair

Secured = fixed and/or floating charge; Unsecured = no charge

Unsecured holders rank as ordinary unsecured creditors on insolvency.

Repayment pair

Redeemable = repayable on a date or event; Irredeemable = no fixed date

Irredeemable debentures are usually repayable only on winding up or default.

Ownership pair

Registered = holder named in register, transfer by instrument; Bearer = holder of document is owner, transfer by delivery

Bearer instruments are restricted in many jurisdictions.

Debenture stock structure

Company ↔ Trustee (trust deed) → Holders

The trustee holds security on trust for all holders and enforces it if needed.

Typical trust deed contents

Terms of loan + security + covenants + events of default + trustee powers

Use as a checklist when asked what a trust deed contains.

Fixed charge

Specific identifiable asset + company cannot dispose without lender's consent

Typical assets: land, buildings, plant. Gives the lender the stronger security.

Floating charge

Class of present and future assets + changes over time + company deals freely in ordinary course

Typical assets: inventory, receivables, cash. Gives flexibility to the company.

Crystallisation

Floating charge → fixed charge over the assets in the pool at that moment

Occurs on events such as liquidation, appointment of a receiver or administrator, cessation of business, or an event stated in the debenture.

Substance over label

Nature of the rights given decides fixed or floating, not the name used

Freedom to dispose of assets in the ordinary course points to a floating charge.

Priority on insolvency (general principle)

Fixed charge holder generally ranks ahead of floating charge holder over the secured assets

Floating charge holders are often exposed to other claims, such as preferential creditors and costs. Details vary by jurisdiction.

Time limit for registration

Register within 21 days (UK model), counting from the day after the charge is created

The 21 days and the day-counting convention follow the UK model. The Global syllabus tests the principle of registering within a set time, and exam questions normally give clear dates. If the question gives a different period, use it. Count from creation of the charge, not from the date of the loan if they differ.

Effect of non-registration

Unregistered charge = void against liquidator, administrator and creditors

The charge cannot be enforced against those parties. It stays valid between the company and the lender, so it is not void against the company itself.

Effect on the debt

Debt remains valid; the lender is an unsecured creditor

In some jurisdictions, such as the UK, the secured money also becomes payable immediately on failure to register. Say this only if your syllabus or the question points to it.

Who may register

Company or any person interested in the charge

The duty is on the company, but the lender usually registers to protect itself.

Consequence for the company

Failure to register can be an offence by the company and its officers

Usually a fine. State this briefly after the main effect.

Ranking of different charges

Fixed charge > Floating charge (over the same asset)

Applies even if the floating charge was created earlier, unless the fixed charge holder had notice of a restriction.

Ranking of same-type charges

Earlier charge ranks before later charge

Use the creation or registration test given in your study text. Registration failure can make a charge void against the liquidator and creditors.

Liquidation payment order (general)

Fixed charge holders → liquidation costs → preferential creditors → floating charge holders → unsecured creditors → members

Fixed charge holders are paid from their own asset. Check whether your text also ring-fences a share for unsecured creditors.

Shortfall rule

Unpaid balance of secured debt = debt − proceeds of the charged asset

The shortfall normally ranks as an unsecured claim. Any surplus goes back to the company.

Quick revision

• A debenture is a document acknowledging a company's debt, usually with interest and often with security.
• Shareholders own the company; debenture holders are creditors and are paid interest whether or not profits exist.
• A company's power to borrow depends on its constitution and the authority of those acting for it.
• A debenture trust deed appoints a trustee to act for a group of lenders.
• A fixed charge attaches to a specific asset, and the company cannot dispose of it without the lender's consent.
• A floating charge covers a class of changing assets and lets the company keep trading with them.
• A floating charge crystallises on certain events, such as insolvency steps, and then becomes fixed on the assets held then.
• Charges created by a company usually need to be registered within the statutory period.
• An unregistered charge is generally not enforceable against a liquidator or other creditors, though the debt itself remains owed.
• Between fixed charges, the usual rule is that the earlier one ranks first.
• A fixed charge normally ranks ahead of a floating charge over the same asset.
• Ask three things: what type of charge, was it registered, who came first.

Common mistakes

• Saying a debenture holder is a member of the company. Fix: Debenture holders are creditors. Only shareholders are members.
• Saying shareholders are always entitled to a dividend. Fix: A dividend needs a declaration and distributable profits. Interest on a debenture is a debt that must be paid.
• Saying a loan is void because it is beyond the objects or limits in the constitution. Fix: State that capacity is unrestricted in the modern approach. A limit mainly restricts the directors, not the company's ability to be bound.
• Mixing up capacity and authority. Fix: Capacity is about the company's own legal power. Authority is about the individual or board acting for the company. Deal with them separately.
• Treating secured and redeemable as the same thing. Fix: Security is about a charge over assets. Redeemable is about repayment timing. Test them separately.
• Saying irredeemable debentures are always invalid. Fix: A debenture can generally be irredeemable or repayable only on a remote event, subject to the rules given in your syllabus.
• Treating a charge as fixed because the document calls it fixed. Fix: Always test the real freedom the company has. If it can deal with the assets in the ordinary course, the charge is floating.
• Saying a floating charge stops the company from selling inventory. Fix: Before crystallisation the company can sell and replace assets freely. Only after crystallisation is that freedom lost.
• Saying the loan is void if the charge is not registered. Fix: Only the charge is void against the liquidator and creditors. The company still owes the money and the lender is an unsecured creditor.
• Saying the charge is void against the company itself. Fix: Remember the list of protected parties: liquidator, administrator and creditors. Learn it as a set. The charge stays valid between the company and the lender.

Exam tips

• In Section A, decide first whether the person is an owner or a lender. Most wrong options swap the rights of the two.
• Watch for absolute words such as always, must and only. Debentures need not be secured, and dividends are not guaranteed.
• In Section B scenarios, underline the words shares, loan, interest and dividend. They show the status of each person.
• Remember that each objective question is marked all or nothing, so read all four options before choosing.
• Link this topic to charges. If a question mentions security over assets, it is moving to debenture and charge rules.
• Read for words like 'limit', 'cap', 'without approval' and 'knew'. They signal the authority and good faith tests.
• In objective options, reject any answer that says the loan is automatically void because of a constitutional limit.
• In a constructed answer, use three headings in your own layout: capacity, authority, and effect on the lender and directors.